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The Momentum Effect: Mobilising brainpower for efficient growth

Thu, 26 Jun 2008 11:40:42 +0800

INSEAD professor Jean-Claude Larréché reveals the secret to delivering growth that is both efficient and sustainable.

CEOs dream of delivering efficient and sustainable growth - growth that would put serious distance between them and their competitors. Unfortunately, the way most large corporations generate growth is so expensive and inefficient that for most firms, meaningful, market-beating growth has remained just that - a dream. Until now.

Jean-Claude Larréché, the Alfred H. Heineken Chaired Professor of Marketing at INSEAD,spoke with INSEAD Knowledge and shared the results of his ten-year research project into what he calls "The Momentum Effect" a phenomenon that can lead to efficient self-sustaining growth.

His three-pronged approach combines empirical analysis of the performance of Fortune 1000 firms over a twenty-year period, clinical research into more than 150 companies to identify the key drivers of growth, and computerised simulations to test the impact of small improvements in those key drivers. All of which converge on the concept of momentum.

"All of our research showed that when certain conditions were in place, some firms delivered dramatically superior growth using relatively fewer resources," Larréché says. "We use the word ‘momentum’ to describe the way that some products don’t need to be pushed as hard as others and yet still deliver superior results because they have a momentum of their own."

Larréché and his team studied the advertising-to-sales ratios of Fortune 1000 firms over a twenty-year period (1995-2004) and tracked whether changes in those ratios had any impact on revenues, profits and market capitalisation.

On a first reading, the results are counter-intuitive. "We discovered that the companies that delivered the highest growth in market capitalisation - growth which outstripped that of the Dow Jones Index by 80 per cent - were the firms that decreased their relative marketing spend over the period. This is exactly the opposite of what most people would expect.” In his book Larréché calls these firms the "Pioneers". Despite cutting their relative marketing-to-sales ratio by 7 per cent, compared to their bigger spending competitors, the Pioneers massively outperformed the market.

He is quick to point out that this doesn’t show that firms should cut their marketing budget and expect to deliver superior growth. On the contrary. "The Pioneers," he says, "actually increased the amount they spent in absolute terms, but their marketing efficiency was so high that the growth that it produced allowed them to decrease the percentage of their revenues that went to cover the marketing spend."

So why is some marketing spend so much more efficient than others? "Because it is smarter. The reason companies spend so much on marketing is because they are impatient," he says. "It is much faster, and a lot easier, to spend money than to use brains to solve the problems."

At the heart of the momentum effect, he says, is the realisation that "the only form of sustainable efficient growth is customer-based growth." When faced with a growth challenge, Larréché argues, it is essential to take the time to understand the underlying issues, rather than just keep pouring money in to push sales. "Firms first need to divert resources away from downstream marketing (communication and promotion) and turn towards upstream marketing - acquiring customer insights that will lead to superior offerings that generate real customer traction. Once this is done, and the offer is improved, then investments can be renewed in downstream marketing to deliver a new momentum for efficient growth."

His book offers an eight-step process for systematically producing customer-based growth through what he calls a "momentum strategy." This, he says, is a strategy that delivers growth "not only in quantity - that is to say the firm’s revenues grow faster than those of its competitors - but more importantly in quality, by which I mean that it is so efficient that profits as well as revenues increase and so the growth is sustainable."

He cites Microsoft as a company that had momentum and lost it. Larréché says that from the very start Bill Gates was a "customer-focused leader with great insights into the needs of personal computer users."

He says Microsoft remains an excellent company with a lot of resources, many good people and products. But he says somewhere along the line, Microsoft turned its focus from customers to products.

"Microsoft is typical of many companies that give so much importance to self-defined product quality and ignore customers’ feelings," he says. "Obviously Microsoft invests a lot in the quality of products, they invest a lot in the tangible part of the offer, but they miss totally the emotional part. It is insights into the emotional drivers of customer behaviour that produce the most powerful offers."

Compare that with the Wii. Nintendo’s simple but powerful insights into the fun of combining physical movement with relatively simple computer games designed to make those taking part more emotionally engaged - summed up in the line "Wii would like to play" - are behind the powerful momentum the product has enjoyed since its launch.

Larréché relates a story about getting participants at a seminar to play with a Wii as a means of demonstrating the power of insights into human emotions when it comes to designing the sort of offers that produce momentum. "The Wii is a great illustration of many of the elements of the momentum process presented in the book,' he says, "but there are many others. The thing that unites them all is that they produce genuine customer-based growth, the only growth that is both efficient and sustainable."

Jean-Claude Larréché holds an MBA from INSEAD (1970) and has a PhD from Stanford Business School. He is the Alfred H. Heineken Chaired Professor of Marketing at INSEAD, and can be contacted at jean-claude.larreche@insead.edu. His book The Momentum Effect: How to ignite exceptional growth was published in April 2008 by Wharton School Publishing.

Global information technology report: Making progress

Thu, 26 Jun 2008 11:35:59 +0800

Denmark and the Nordic countries again dominate the rankings in the Global Information Technology Report, but this year the United States and South Korea make progress in the Networked Readiness Index (NRI) for 2007-2008, which covers a record number of 127 developed and developing economies around the world.

"Today with the benefit of seven years of data, we have concrete, hard data to support the statement that technology does in fact make a country more competitive," says Soumitra Dutta, the Roland Berger Chaired Professor in Business and Technology at INSEAD, who co-authored the report which is published by the World Economic Forum.

Unchanged in scope since it was first published in 2002, the NRI assesses the presence of an ICT-friendly environment by looking at factors such as the regulatory framework and infocomms technology infrastructure. It also looks at the level of ICT readiness and actual use within specific countries by individuals, businesses and governments. The report focuses on how networked readiness can help to foster innovation.

"A lot of the Scandinavian countries tend to have a historical lead in using technology successfully and certainly Finland has been the leader in that area but other countries like Denmark, Sweden have copied and learnt from Finland and today I think the entire Scandinavian region is at the forefront of tech and competitiveness," Dutta says.

In the NRI for 2007-2008, the US has moved up to fourth place in the rankings from seventh. Dutta says the US stands out from the other countries in the top ten as it’s a large country. "A lot of the other countries in the top rankings are typically smaller countries and one can argue that it’s easier for smaller countries to leverage and benefit from technology,” he says.
The US, he says, has a "number of strengths ... typically linked to the business environment (such as) venture capital availability and other kinds of factors."

South Korea moves up in the NRI rankings to ninth place from nineteenth previously. Dutta says it’s been progressively moving up in the rankings over the last six to seven years from the thirties to the top ten. "That is very much linked to what we know today is the technological sophistication of Korean technology infrastructure, the willingness of Korean population to use new services, for example mobile services, and also the successful growth of home-grown champions like Samsung, LG and other tech global players today."

"The networked readiness index is not just about having a technology provider in your own country. It’s about having the key stakeholders - individuals, business and governments - using technology very effectively. So you don’t need to have global champions like Nokia, or like LG, Samsung and so on," Dutta says. "Clearly it helps if you have that also, but if you have an environment that uses technology very effectively (you can still make progress)."

Citing Singapore, which is ranked fifth in the world for networked readiness, Dutta says "it’s a very smooth service-oriented environment that makes it easy for businesses to come in, invest in technology and work effectively. You can have a society that is very advanced in using technology, even though it’s not a key producer of core technology itself."

While Singapore and Korea are leading the way, Asian economies are continuing to make progress in terms of their networked readiness. Hong Kong was just outside the top ten in eleventh place, with Taiwan ranked seventeenth and Japan nineteenth.

The Middle East, Dutta says, is another region which has been making great strides in terms of its ICT readiness and usage. "We were very surprised, and happily surprised, to see that the Middle East is the part of the world which has dramatically improved its position the most, as compared to any other part of the world over past six years."

In an interview with INSEAD Knowledge, Dutta said that while it helps to have major home-grown tech companies such as Samsung promoting ICT development in specific countries, governments play a key role as leaders and facilitators. "That’s true in Korea where the government has orchestrated many of the key developments in technology. It’s true in Singapore where the government has played a very strong role in pushing its vision for the economy. And it’s also true in the Middle East, especially in the GCC (Gulf Cooperation Council) countries where governments have realised that technology is very crucial for their future success and competitiveness." He adds that in places like the United Arab Emirates, Qatar and Saudi Arabia, governments play "a very important role in pushing technology."

So could the Middle East or another region come to rival the Nordic countries in the next decade? "I think it’s completely feasible," Dutta says. "You see it happening already in Asia. For example, Korea’s moving up rapidly; Singapore has done so in the last five to six years too. And today in the Middle East, Israel is already at position number 18 and the Emirates is in position number 29 (in the NRI rankings). So what you see is these countries, economies are moving up quite rapidly and I would not rule it out that in the next five years some of these economies break into the top 10."

This article was first published in June 2008.

Crisis communications: The emergence of stakeholder media

Thu, 26 Jun 2008 11:32:42 +0800

When Le Monde exclaimed in a front-page headline: "Danone prepares to shed 3,000
jobs in Europe, including 1,700 in France", on January 10, 2001, Danone -- France’s
national ‘champion’ and one of Europe’s biggest food and beverage firms -- faced a major crisis. The announcement led to public and political protests, and a massive boycott of Danone’s products. Mark Hunter, INSEAD Adjunct Professor and a former investigative journalist, says "suddenly Danone, the most respected company in France, found themselves facing not only a social (or labour) crisis but also a societal crisis, unlike any other ... We think they underestimated the extent of the forces that were facing them ... and the impact of certain stakeholder groups on the outcome of the crisis."

As the media reported "rumours" that the boycott had led to a 10-20 per cent drop in sales and a fall in stock value, Danone CEO Franck Riboud stated that global sales had risen seven per cent, and declared that "the storm is over." The media believed him. Journalists did not seek further information about the full effects of the protests. Thus, once Danone declared victory, the crisis was considered over. However, questions in the financial community about the credibility of Danone’s management, which were posed more and more critically in analyst reports, continued to affect the firm.

Says Hunter, "When a crisis ends officially, as was the case here, it doesn’t always end in the real world. There can be a really long tail to a crisis and that long tail can be affected by the people who get involved when the crisis is high."

One of the major debates in France during that time, Hunter explains, was whether a consumer boycott would succeed for the first time ever. While the boycotters did not actually succeed in stopping Danone closing two biscuit plants as planned, the boycott did have an impact on the company’s sales in France, and also encouraged union militants who disrupted Danone’s supply chains. When financial analysts learned this, they began to question the credibility of Danone’s management. Ultimately, Danone’s stock was severely impacted.

Hunter and his co-authors Marc Le Menestrel and Henri-Claude de Bettignies, the Aviva Emeritus Chaired Professor of Leadership and Responsibility at INSEAD, conclude that protest movements against firms succeed to the extent that they create conflict between management and stakeholders. Whether sales decline significantly or not, boycotters and other protestors can inflict major damage on a firm’s valuation, if the company ends up in an adversarial position to other stakeholders. On those terms, the Danone boycott succeeded.
Another important finding is that media owned by stakeholders can have greater impact on a crisis than the news media. "In the news media, you can tell people what’s important," Hunter says. "You can’t tell them what to do about it. In stakeholder media (such as financial analyst reports), you tell people what to do about it. A financial analyst tells people ‘buy, sell, or hold’ ... and that has a completely different impact."

These outcomes suggest that crisis communication strategies must include a stakeholder-centric perspective, meaning crisis communication must aim not merely to diffuse messages, but also to deepen dialogue with key stakeholders. Managing a crisis does not - and cannot - only mean ‘winning’ over the firm’s adversaries in the domain of public opinion.

"What’s happening now is there’s a more dynamic process going on, in which managers are obliged to hear what’s coming in from the environment," Hunter says. "We’re seeing this more and more, not just in the corporate sector, but also in politics, that people just don’t believe what they’re being told."

The economics of climate change

Thu, 26 Jun 2008 11:26:07 +0800

Rich countries have to take the lead in fighting global climate change. Lord Nicholas Stern, an economics professor from the London School of Economics, says that without a commitment from wealthy countries, carbon emissions will become "deeply damaging right across the economy and around the world."

Stern was an advisor to the British government on climate change and published a 700-page report in 2006 now known as the Stern Report. It called for immediate action to reduce the risks of climate change.

Stern told audiences in Asia in April that rich countries have to take the lead regarding efforts to reduce carbon pollution. "Morally the rich countries should take responsibility for the damage they’ve done," he said in Singapore.

The problem also shows a clear failure of markets. Efficient markets charge a higher cost to those who create damage, in other words those who create emissions, he says. That means that the rich countries have a higher burden than developing countries, but so far that hasn’t been true.

In addition, he says it’s unfair of rich countries to turn to China and other developing countries for their manufactured goods and then ask those countries to cut their emissions. He says rich countries have to acknowledge their share of those emissions.

Since market forces are not working, Stern is calling for a global deal on reducing the risks of climate change. "This is about risk and the sharing of risk," he says, and the process "has to be led at the heart of government."

But his prescription will be hard to swallow. Stern believes rich countries will have to cut carbon emissions by 80 per cent and that the cost will be one to two per cent of global GDP annually to succeed.

He admits that in today’s challenging economic climate, getting politicians in rich countries to make decisions that will sacrifice one per cent of GDP isn’t easy, but he says lowering emissions has to become a global priority.

"The costs of strong action are much lower than the costs of inaction or the costs of delay," he says. Each year of delay adds to the costs and by 2050 the cost could be 20 per cent of GDP and a global depression.

A solution will likely require near zero emissions from electricity power generation andsurface transportation in the next 40 years, according to his research. He believes that new technologies will be developed that can meet that requirement and that the world needs an agreement soon that sets credible and enforceable targets, as well as deadlines along the way.

"We have to find alternatives this century. It’s better to do it sooner than later."

Stern says there are many ways to cut emissions right now that would save consumers money. From more efficient appliances, to weatherproofing and cleaner cars, governments need to encourage people to make changes by showing them how to go green and save money. He suggests it is like asking the question: "How can you encourage people to pick up the $20 bill laying on laying on the pavement?"

And he dismisses arguments that the science on global warming is wrong. He notes that the world’s carbon resources are limited so we will have to find alternatives to these energy sources anyway.

Stern believes current estimates on climate change probably overestimate how much carbon is absorbed by forests and oceans, and underestimates the amount of carbon the world is currently producing. If he is right, that means potentially dramatic changes in much of the world much sooner than we expect. And each degree of temperature rise increases the risk exponentially.

"If we do nothing the probability in the next century is 50-50 that temperatures will rise five degrees centigrade," he says. "These kind of changes transform where people live."

Such increases would wipe out agriculture in parts of the world, and rising seas will force millions of people to move to higher ground. "What kind of risks are you as a world going to endure?" he says.

Climate change: How increasing energy consumption in the short term could bring benefits

Thu, 26 Jun 2008 11:20:19 +0800

---- by Saher S. Latif ----

The continued rise in food prices is just one example of the kinds of surprises we will be facing in the years to come. Dr Ashok Khosla, founder of Development Alternatives - a non-governmental organisation devoted to promoting commercially-viable , environmentally-friendly technologies - and a former director of the United Nations Environment Programme , says "there are many surprises coming up. I mean real surprises. Climate change was already a pretty big one."

"Two to three years ago, food was not supposed to be on the agenda at all," Khosla says. "We had lots of surpluses and everyone was producing happily and extolling the virtues of the green revolution and factory farming and everything else. But there were a few of us who were concerned because the model has so many contradictions built into it, that - frankly - the more thoughtful critics of modern agriculture and food production systems were beginning to be concerned maybe five or six years ago."

A combination of factors has brought about this rise in prices, Khosla says. Climate change has caused drought in Australia and problems in North America, while China - "partly because of income, partly because of changed diet"- has seen a rise in demand for meat. The rearing of animals for meat, Khosla says, has in turn as much as quadrupled the demand for grain.

While Khosla is not certain that biofuel crops are taking over land that was previously devoted to food production, he does think that the perception of this being the case has made the food situation even more intense over the past year. "All of these together basically add up to sudden increases in the price of food grains and vegetables the order of 50 per cent in a couple of years."

The modern agricultural system is not the only structure that is breaking down. Khosla, one of the architects of the carbon trading market, finds the speculative nature of the market to be potentially dangerous. "The purpose essentially for setting up many of these [financial markets] is to provide a buffer source of capital to even out the fluctuations. But once they get beyond a certain range, as they did in the subprime area in the last few months... the fluctuations can go wildly out of range. My worry is, first, that the speculation on carbon prices could end up by doing the same thing; and, second, that carbon pricing ought to have some relationship with the cost of saving that carbon, and at the moment there isn’t much of a relationship."

Khosla says carbon trading is not a long-term proposition. "In the long run, it doesn’t really reflect the needs of the planet which is to reduce - greatly reduce - the emission of carbon."
The call to fight climate change by reducing carbon emissions, especially in large developing countries such as India and China, has led to many being concerned about the impact on the continued economic development trajectory of these countries. Development requires energy to improve the lives of those "three billion people in this world whose lives are pretty well limited and constrained because of inadequate energy availability - because, without that, you don’t get water and transport and everything else."

Khosla has a particularly novel approach which aims to reduce carbon emissions through development: increase energy consumption to meet development needs in the short term and increase the quality of life, thus reducing family sizes and reigning in the demand for energy. "You know development is in fact the best contraceptive and, therefore, one way of doing that is, counter-intuitively, to increase the energy availability... until those family sizes comes down."

‘It’s simply good commercial sense’

As for businesses fulfilling their social responsibility, Khosla finds that companies are failing to tackle social issues and, while environmental issues are more likely to be addressed, even this is only superficial.

"Very few businesses are going beyond the environment; they’re not really even heavily into the environment." Efforts that have been made by companies, such as taking action against child labour, tend to be consumer-driven: "They’ve had to, for survival in the market, take care of the more egregious ones, the bad ones, but it’s not because their heart is in it; it’s simply good commercial sense." Whatever the motivations of businesses may be, Khosla says they are a long way from being a true trustee of society, adding that they need to re-examine their business processes.

Khosla says our current mindsets are not going to yield the sustainability outcomes that are required to fight climate change and poverty. He says the media, schools, the family and political leadership need to play the largest role in changing mindsets.

Business, he says, has a limited but important role: "I’m not sure that business will do much of that work, other than when it becomes profitable; and I haven’t figured out many ways in which to make it profitable other than new products which are a good business proposition - like renewables, for example. And then, of course, business goes into action with advertising and PR, and that can also help a lot."

Ashok Khosla spoke to INSEAD Knowledge after making a presentation on The Greening of Business at INSEAD’s Asia campus in Singapore.

Stemming the 'silent tsunami'

Thu, 26 Jun 2008 11:12:41 +0800

---- by Saher S. Latif ----

Over the past two years, approximately 100 million people have been pushed into poverty globally as a result of increased food prices. Gains in poverty reduction efforts in developing countries are at risk if governments fail to protect the poor from rising food prices, says Vikram Nehru, the World Bank’s Director of Poverty Reduction and Economic Management and Acting Chief Economist for East Asia. "It’s like a silent tsunami in the sense that there’s no dramatic footage that can bring home to people the misery and the human suffering that such price increases can exert on the poor."

Nehru says that in countries such as Indonesia, a 10 per cent increase in food prices leads to a further two million people living in poverty. "This is a setback - there’s no question about it and if prices continue to rise, it’ll pose even bigger and bigger problems."

In an interview with INSEAD Knowledge, Nehru said this doubling or tripling of the prices of important food grains is unprecedented. "It’s never happened before and what makes it worse is that on previous occasions when food prices have climbed, they’ve always come down very rapidly. But this time we don’t expect food prices to come down. We, in fact, expect food prices to remain elevated - perhaps not at these high levels but certainly higher than in the past - for at least another 10 years or so."

The World Bank is prescribing a two-pronged approach: an immediate response to enable people to meet their nutritional requirements; and a longer-term investment in agricultural research, something which Nehru says has been neglected in the recent past. "For quite a long time now, the world has not emphasized agricultural production as perhaps it should have and there is a need for increased investment in agricultural research, in irrigation, in new seeds, in new technology." World Bank lending in this area is to be increased to US$ 6 billion next year from the current US$ 4 billion per year - and perhaps more in subsequent years. "This will be part of a broader effort by the international community to invest about $30 billion a year in increased agricultural investment in poor countries," says Nehru.

In the immediate term, however, the World Bank has just approved a US1.2 billion fast-track facility to provide funding quickly to governments which need such assistance in order to put in place programmes to help protect the poor from food price increases. "We would not recommend blanket subsidies because they tend to be very costly but what we do recommend is that governments target transfers of resources from the budget to the poor."

Nehru adds that governments are acting quickly. "We’ve just seen Indonesia introduce an important transfer programme to 19 million households and, given that each household is roughly four-and-a-half people, that’s about a third of the population... I have every confidence that it will be implemented well and similar sorts of programmes are being introduced - not, perhaps, on such a wide scale - but similar sorts of programmes are being introduced in other parts of the world, Africa and Latin America and so forth." Other immediate responses include school feeding programmes and ‘work-for-food’ schemes, to ensure that the most vulnerable sections of the population are able to access daily rations of food.

While increased food prices have dealt a major blow to poverty reduction efforts, Nehru says that this can be overcome with continued economic growth. "The important point, remember, is that one of the most powerful drivers of poverty reduction has been economic growth, and if countries continue to grow as they have - not just in East Asia incidentally - in Africa and other countries, then poverty can continue to come down even as we deal with the high price of food. But the reality is, we’re going to have to try and bring down poverty over the long term by a combination of broad economic growth as well as investments in agriculture production."

Such growth, Nehru notes, needs to be inclusive: "The World Bank’s view is to try and help countries implement policies, programmes, and investments which lead to inclusive growth... growth which does not lead to increases in inequality, but perhaps, in fact, evenly decreases inequality." Historically, countries with rapid growth have faced significant increases in inequality. Nehru says this no longer has to be the case. "More recently we have found various means through fiscal policies and through investment policies of bringing about a pattern of growth, which not only is sustainable and relatively rapid, but also is inclusive; and that is the challenge the Bank is trying to meet with its client countries."

Measures include ensuring the poor have access to education, healthcare, infrastructure, as well as microfinance loans, and"“making sure there are no impediments to the poor for participating in the economic growth process. [These are] the best means for including them, reducing poverty and increasing their incomes."

The business of positive change

Thu, 26 Jun 2008 10:54:35 +0800

"Profit-seeking is consistent with social entrepreneurship," says Pamela Hartigan, the co-founder of the Schwab Foundation for Social Entrepreneurship and author of ‘The Power of Unreasonable People: How Entrepreneurs Create Markets that Change the World.’ Hartigan says social entrepreneurs see the profit motive as a means to the goal of improving society and not as an end in itself.

"Social entrepreneurs identify opportunities for social profit where others see only problems," she explains. "They are able to develop innovative business models that engage stakeholders and bring about social change."

Hartigan made her remarks during the 19th Alumni Sustainability Roundtable devoted this year to the theme of Social Entrepreneurship.

Sharing journeys

Sharing his experiences at the event, Jean-Daniel Muller, co-founder of SIEL Bleu, a Strasbourg-based organisation encouraging tens of thousands of elderly people to stay healthy through physical activity, says it could have been sold to a for-profit organisation for a large sum of money. However, the offer was turned down. "We want to retain our not-for-profit status and reinvest all surplus funds in growing SIEL Bleu to create greater social impact," he says.

Another alumnus of the INSEAD Social Entrepreneurship Programme (ISEP), Majid El Jarroudi, co-founder of Jeunes Entrepreneurs de France (Young Entrepreneurs of France), says that through a growing set of partnerships, his organisation can provide training and support to hundreds of young entrepreneurs living in the suburbs or banlieues of Paris to help them set up their own businesses. "Young Entrepreneurs is not about charity; it is about giving a chance to young people to prove themselves."

Developing new business models

Filipe Santos, INSEAD’s Academic Director for Social Entrepreneurship, says Filipe Santos the key challenge for social entrepreneurs is to develop new business models to address social problems and then grow the ventures beyond their local context to achieve a broader impact in society.

One new business model linked to microfinancing is peer-to-peer lending, where individuals in developed countries lend funds to finance projects in emerging countries.

According to Mads Kjaer, founder of MyC4, this innovative business model allows individuals to invest in entrepreneurial projects of their choice and get good interest rates while facilitating economic development in the target regions. Kjaer, who shares the millennium goal of eradicating extreme poverty and hunger in Africa by 2015, says MyC4 today lends close to two million euros to more than 1,250 entrepreneurs in Africa. The organisation was only set up last year. Although there have been no defaults on loans so far, MyC4 expects a default rate of two to three per cent over time.

"Diversity is the secret of our success - the recipe is to minimise risk," Kjaer says.

Kiva.org takes a different approach. Its lenders do not receive interest and the organisation relies on networks of volunteers, as well as local microfinance institutions to disburse funds. Its default rate is less than one per cent. Jennifer Hamilton, INSEAD MBA alumna (‘04D) and Kiva’s CFO, says the organisation has lent out more than 30 million dollars since it was founded in 2005.

Lorenzo Saa, the head of microfinance at the UniCredit Group and co-founder of MicroRate, a venture which develops ratings for microfinance institutions, says the key issue holding back microfinance is the fragmentation and the small size of current providers. "By engaging individuals and providing a new source of funding, peer-to-peer models can alleviate the constraints of microfinance institutions and democratise the market."

"This will lead to better financing conditions for entrepreneurs," he adds.

Doing business equals doing good

Social entrepreneurs talk about their organisations as businesses - not charities. They’re not profit-maximising but profit-optimising businesses seeking social transformation, with profits being used as a means to an end, says Hartigan. Social entrepreneurs don’t work with the unemployed, the elderly, or the poor to fulfil their ‘corporate social responsibility’. "Working with these groups and providing the kind of goods and services they do, is their core business - not a public relations afterthought."

We can no longer divorce where we do business from where we do good, she argues. Mainstream business, financial and political leaders are having to come to grips with emerging trends in value creation because consumers and voters are increasingly demanding that they do so.

"You are part of a historical transition that will culminate with every business, large or small, having to be a social business," Hartigan says. "There has never been a more urgent time for connecting markets and meaning."

The 19th Alumni Sustainability Roundtable was held at INSEAD’s Europe campus in Fontainebleau on 22 May 2008. The podcast series featuring guest speakers and practitioners can be accessed here.

The ‘learning journey’: Where social responsibility meets its match

Thu, 26 Jun 2008 10:48:39 +0800

---- by Grace Segran ----

An organisation based in the Netherlands is helping firms which want to make their mark in terms of social responsibility but aren’t sure how to go about it in a tangible way. EsteamWork started four years ago when its founder Machiel van Dooren observed that a growing number of companies wanted to take CSR seriously but didn’t know how to get the maximum impact. He also found that non-governmental organisations (NGOs) at times needed outside expertise in areas other than their own, which is primarily in humanitarian aid.

So how does EsteamWork help, say, a coffee cooperative of 50,000 associated farmers in the foothills of Kilimanjaro move from manual financial book-keeping and reporting to a computer-based system?

"We act as an intermediary and create a partnership," says Sophie van Berckel, a project manager with EsteamWork, "and we facilitate the process whereby both sides achieve their goals."

Matching competencies

"Our strength lies in matching corporate competencies and the potential of the organisation, with challenges that NGOs face in the field," says Jop Blom, director of EsteamWork. For example, a few years ago, the Ethiopian government gave a plot of prime land to the Ethiopian Red Cross Society (ERCS). As real estate was not its area of expertise, the ERCS approached the Netherlands Red Cross (NRC) for assistance. The NRC, in collaboration with EsteamWork, took a group of real estate experts on a fact-finding mission to Ethiopia and advised the ERCS on the best way to develop the piece of land.

Learning Journeys

‘EsteamWork’ combines two key elements: ‘esteem’ and ‘team work’. The programme it offers - referred to as a ‘learning journey’ - is designed for professionals working together as a team on real projects at either small- to medium-sized companies or development organisations in a developing country, for a limited period of time. The team usually consists of about eight individuals who work on site with the NGO or local organisation in the developing country and help them find a solution to their problem. The ‘learning journey’ takes eight to 14 days.

"The process brings benefits because of the ‘natural fit of resources and needs,’" says van Berckel. "The private company achieves the social image that it desires and, in the process, develops the management and leadership skills of its employees." She says the host organisation benefits from the expertise of the professionals and, together, they help to improve the lives of those in the local community. "The participant, besides benefitting from professional and personal development, gets to live out his dream of making a difference in the world."

‘A life-changing experience’

"The participants are challenged to deliver solutions using knowledge that they are well-versed in," says van Berckel. However, the circumstances and rules of the ‘game’ in the host country differ greatly from what they are used to back home in the Netherlands. In addition, they have to get to grips with a new culture, learn how to work with the local community and come up with a solution - all in just a couple of days.

"It’s a strange environment with new possibilities and unexpected windfalls and setbacks," muses van Berckel, "which makes for a unique, unforgettable and life-changing experience."

Blom says that after participants return from the programme, they come back transformed and spread the news about CSR, motivating others within their organisations to get involved and even initiating some CSR projects themselves. As more and more employees become interested in CSR, the projects multiply.

‘Bridging the social gap’

Blom’s business card simply says ‘Social Entrepreneur’ under his name. "EsteamWork is pioneering work with a new approach towards bridging the social gap. It supports entrepreneurs and organisations in developing countries through the financing of the programme by private companies," he explains.

The for-profit organisation is proud that it is financially independent. Its turnover last year amounted to 300,000 euros, with an unexpected profit of 40,000 euros. That means they are now at about breakeven as in the previous start-up years they suffered a loss of 30,000 euros.

"Our aim is not to maximise profit but to maximise (our) impact in society," Blom says, adding that he believes EsteamWork will continue to grow because private companies are now proactive about CSR.

Citing the World Food Programme where TNT invested 10 million euros with 18 employees working mostly full time on it, Blom says that smaller companies are not able to do that. Instead, he says they would prefer to outsource their CSR projects to a one-stop organisation such as EsteamWork for, say, 10,000 euros and avoid the hassle of managing it themselves.

EsteamWork started with just two employees and one client four years ago. Today it has four full-time employees and more than 20 clients. Last year, they undertook six learning journeys. This year they are looking to undertake a dozen such programmes and expand their offices into South Africa and other countries.

Van Berckel recently took part in the INSEAD Social Entrepreneurship Programme at the school’s Europe campus in Fontainebleau.

Riding the ‘earning horse’: Indian Railways

Thu, 26 Jun 2008 10:40:20 +0800

Indian Railways is the world’s largest employer and one of the biggest and busiest rail networks in the world, carrying some 17 million people and more than one million tonnes of freight daily. It was, however, until very recently, a loss-making organisation, which was heading for bankruptcy. Starting his term in 2004 with a budget of just $200 million with which to save the national institution, India’s Minister of Railways Lalu Prasad engineered a dramatic turnaround. Last year, Indian Railways’ revenue came to $6 billion.

Indian Railways is one of INSEAD’s biggest executive education clients, and the Minister visited the school’s Asia campus as part of his tour of Singapore and Malaysia. During his visit to INSEAD, he told a gathering of MBA participants, alumni and executives about his strategy for bringing the rail network into the 21st century.

Minister Lalu Prasad Flouting prescriptions to privatise Indian Railways, retrench staff, and increase passenger and freight fares by 20 per cent in every budget, Prasad instead chose to keep on board 1.4 million employees and 1.1 million pensioners, reduced fares by up to 45 per cent, and - while refusing to privatise the core business of Indian Railways - started public-private partnerships in some peripheral areas.

"We have broken the myth that whenever any government organisation runs into losses that you privatise it and retrench the manpower ... My belief is that if we have honesty, vision and commitment to the organisation, there is no possibility of any institution and corporation running into losses."

It’s a strategy based on volume. While output has increased threefold, real operating costs have fallen over the last 25 years. By increasing the capacity of a typical long-distance train to 2000 passengers from 800, unit costs fell by 45 per cent. The practice of taking seven days to load or unload a freight train was reduced to five, and systematic changes have helped to rein in corruption. Garib rath trains, also known as the ‘poor man’s chariot’, now have air-conditioning with cushioned seats and suction toilets.

Bringing down freight fares has greatly benefited local industry, Prasad says. In a country where agriculture is the backbone of the economy, he says there is a huge role for Indian Railways in helping farmers directly connect with markets for their goods.

"There are no markets in the places where production happens and middle men buy the agricultural produce at cheap prices. We are going to open agricultural centres at stations so farmers don’t have to search for markets. Through joint ventures, we will set up cold storage and purchase points in stations, as well as freezer containers, so they can send agricultural produce around the country and beyond. We will charge farmers appropriate and reasonable prices. This will enrich farmers, and this increase in income will mean they can buy the things that everyone else is buying."

With regard to private investment, Prasad says the turnaround has piqued interest in investing in the railways. While the private sector can play a role – in building engines and wheels, and world-class stations, for example - Prasad insists there is absolutely no chance of allowing privatisation of the core business, "rail, running of trains, [and] control of all the trains." Indian Railways’ surplus earnings mean that the organisation does not have to depend on overseas development assistance from bodies such as the Japan International Cooperation Agency to expand. "JICA or no JICA - we are self-sufficient."

In an exclusive interview with INSEAD Knowledge, Prasad said freight trains are Indian Railways’ "earning horse," and he has extensive plans for expanding freight lines, increasing their efficiency, and capturing the 60 per cent of goods that are still transported by road. A third line - a dedicated freight corridor - is also being constructed to connect even the most remote areas with all ports and industrial hubs.

Prasad is also keen to help in India’s water conservation efforts, by building siphons and canals, and - on the wasteland on either side of the 64,000 kilometres of track - pipes with water for drinking and irrigation. He also outlined efforts to reduce fuel consumption by building train carriages from aluminium to reduce their weight. "With the increasing price of fuel, we have to keep an alternative in mind. Therefore, we are going to electrify the main routes in the entire country. The (proposed civil) nuclear deal (with the US which would allow India to develop nuclear technology to meet its growing energy demands) - which should be reached - is also likely to help."

With an eye to the future, Prasad says that as India’s population continues to grow, there will be a need for more trains, more engines and wheels. "Even now, we buy wheels from abroad. We have only two factories, and are building a third. It’s fine that these things come from abroad but we have the skills, unemployment, and youth." Prasad also recommends learning from another country with a "magnanimous population" - China. _China has gotten really far ahead. We will have to learn from them... Instead of jealousy, we should see what our neighbour is doing and copy that."

Indian Railways’ turnaround had required a fundamental shift in mindset. As Prasad’s adviser, Sudhir Kumar, notes: "We are not in the business of railways; we are in the business of transportation - one of several modes of transportation, and the only way to survive and thrive in the marketplace is to offer superior and compelling value to your customers."

The road to nationhood

Thu, 26 Jun 2008 10:34:12 +0800

Building a nation-state "out of the ashes of destruction is not easy," but the President of Timor-Leste (formerly East Timor), José Ramos-Horta, says his country will seek to become a viable nation by eliminating unemployment in the next two to three years by creating new jobs from its investments in infrastructure projects.

The impoverished country, which recently marked its sixth year of independence from Indonesia, should be able to meet its infrastructure needs - such as roads, bridges, new ports and power supplies - within five to ten years, Ramos-Horta says, adding that it plans to spend US$100m annually over 10 years. Much of the funding could come from its state petroleum fund, which is expected to top US$3 billion by the end of this year, he adds.

Additional funding could come from the Middle East in the form of 'soft loans'. Ramos-Horta says Timor-Leste can borrow money from Kuwait at an interest rate of about one per cent, while its investment portfolio can generate interest of four to six per cent.

The investments in infrastructure will complement Timor-Leste's domestic agricultural and fisheries investments to help secure its food supplies and reduce the country’s reliance on rice imports. Climate change and industralisation in rice-producing countries such as China, India and Vietnam, will reduce the amount of agricultural land and consequently decrease rice exports.

"We, Timor-Leste, cannot allow ourselves to be choked to death because of this, so let's invest much more on land and agriculture," says Mr Ramos-Horta, co-recipient of the 1996 Nobel Peace Prize, who survived an assassination attempt in February.

Indeed, to secure the country's food supplies, Timor-Leste has been buying food at "whatever the cost," as even socialist countries which talk about solidarity among developing nations have "gone capitalist" when faced with the current global food shortage crisis.

"One of our ministers went to one of the socialist countries in the region to purchase rice," Ramos-Horta recounts. "We had already paid $600 a tonne, the rice was already in the boat," "These 'comrades' told the minister: ‘If you want the boat to proceed, you have to pay $1,200 more per tonne.’ Well, we paid."

Timor-Leste is able to afford the bill, as it earns up to US$200 million a month from its Bayu-Undan oil field in the Timor Sea. It also has a wholly self-financed budget of US$540 million for this year, up from about US$80 million five years ago. Furthermore, it will receive US$200 million in aid this year, of which Australia, the largest aid donor, will contribute US$90 million. The next largest aid donor is the European Union which has upgraded its mission in Timor-Leste to a full embassy.

While Timor-Leste's oil and gas resources have shored up its treasury, the bulk of its state petroleum fund is invested in US Treasury bonds. Consequently, the fund has been hit the depreciation of the US dollar as well as low interest rates. "Way back five years ago, I was alerting my colleagues to pay attention to the coming devaluation of the US dollar, to the coming increase in oil prices," says Ramos-Horta, who was at that time the foreign minister, and had lobbied his colleagues to diversify the country's investment portfolio.

"Well, no one listened. Today almost 100 per cent of our money is invested in US Treasury bonds." Ramos-Horta adds that the depreciation of the US dollar will drive up oil prices and inflate the cost of living in Timor-Leste and other developing countries.

"In the next few months, we are going to see a lot of instability in many developing countries," he warns. "Poverty levels will increase and there will be serious setbacks in achieving the Millenium Development Goals" set by the United Nations to halve the poverty levels around the world by 2015.

Aside from building Timor-Leste into a viable nation, Ramos-Horta says the government wants Timor-Leste to become a member of the Association of Southeast Asian Nations (ASEAN) by 2012. "We set this target as pressure on ourselves to work harder in order to be eligible to join ASEAN because, obviously, ASEAN countries, with the embarrassing problems of Myanmar (Burma), wouldn't want a basket case, an unstable new member. So we have to work hard."

Timor-Leste has been a full member of the security-focused Asean Regional Forum in the past few years, and all the ASEAN countries have agreed to Timor-Leste's entry into the regional grouping, says Ramos-Horta. Indonesia has also agreed to assign a senior diplomat to assist in the preparations to join ASEAN, he adds.

Timor-Leste President José Ramos-Horta was speaking at a Foreign Correspondents Association gala dinner held recently in Singapore. The event was co-sponsored by INSEAD Knowledge.

The transcultural leader: Carlos Ghosn, CEO of Renault, Nissan

Wed, 14 May 2008 16:00:54 +0800

"I think one of the basics of transcultural leadership is empathy," says Carlos Ghosn, the man who is credited with turning around major Japanese car maker Nissan.

"I would say even though the term today is not very popular, love the country and love the culture in which you are in. And try to learn about its strengths, don’t focus on the weaknesses, and make sure that all the people you are transferring with you are of the same opinion."

The CEO of Renault and Nissan, and the 2008 recipient of the INSEAD Transcultural Leadership Award, Ghosn told INSEAD Knowledge that the fact he had the experience of being raised in different countries - not by choice, but by coincidence because of his family circumstances - had helped him in life a lot.

Ghosn was born in Brazil to Lebanese parents in 1954. Later he moved to Beirut where he completed his studies in a Jesuit school. He then graduated with engineering degrees from the Ecole Polytechnique and the Ecole des Mines de Paris and is a French citizen. He stresses the importance of cultivating a certain mindset or character that truly enjoys the challenge of living in new environments:

"If you have to work and particularly do something significant in a country it is much easier if somehow you connected with the country and you like the country and you respect the people and you are curious about the culture."

He maintains it makes a big difference because people in the country working around you may notice whether or not you are connected to the country and are happy to be there, that you are curious and are listening. "Well, they’re going to forgive you a lot of things," he says.

When Ghosn went to Japan, he had some ideas about the culture, he says, such as the language and the food. But he found there were some concepts that were totally new to him - such as walking into an elevator before a woman. He says that while it would be considered "very gross" in a Western country, not to do so could be deemed to violate the code of Japanese culture.

While his task was to help revive an icon of the Japanese car industry, he says, the experience wasn’t simply about performing a job - it was about discovering a new culture and it was very rewarding. Carlos Ghosn

"When you have a very diverse team - people of different backgrounds, different culture, different gender, different age, you are going to get a more creative team - probably getting better solutions, and enforcing them in a very innovative way and with a very limited number of preconceived ideas."

On gender equality, the CEO says that when he started at Nissan, only one per cent of the top management at Nissan were women. While that was twice as good as his competitors, he was determined to increase the number of women in management still further. Today the number of women in management is five per cent, and the objective is to raise that figure to ten per cent.

Ghosn says that although such targets are good, it’s more important to set a lasting, achievable trend for women that will prove that diversity delivers.

At the INSEAD Leadership Summit, sustainability was the major theme and Ghosn spoke extensively about how the Renault-Nissan alliance is aiming to manufacture electric cars. And the market potential is large, he says, with estimated demand for ten million such vehicles.

He told INSEAD Knowledge that although he likes the concept of vehicles running on hydrogen, for now he’s sticking with the electric car. "It’s not easy to produce hydrogen and it’s not easy to distribute hydrogen today."

"So it’s going to take awhile before you can establish a network for the distribution of hydrogen. In the meantime we are, in a certain way, more ready for electric cars because of the distribution part of it."

As developing countries become increasingly affluent, more and more people will aspire to own a car. The environmental impact though could be minimised if the car industry moves towards zero emission technology, he says.

"All the growth is in the developing market - China, Russia, India, the Middle East, Brazil, that is where the growth is taking place. And it is normal for a car manufacturer to want to put as many people as possible in cars," he says. "Now our duty is to ensure that this is sustainable, and that’s why I believe there is a big future for zero emission cars."

Biofuels have been touted as a possible answer but it’s a solution that may bring its own set of problems as it may require using land to grow crops for biofuels rather than food.

He says no one should have to choose between, say, ethanol for cars and food for people.

"You don’t want to be there," he says "You want to be in a situation where ethanol for cars is a good complement, and not a competitor, to food for people." Asked by INSEAD Knowledge whether Renault will be able to meet its ambitious sales targets for 2009, especially as analysts believe they would involve achieving double-digit growth this year, Ghosn says there’s no point in setting goals that are easily achievable.

"That means your targets are conservative, that’s the only way you can be sure," he says. "So you want to maintain a certain stretch inside the company, and be innovative and be creative and find new products and new solutions in order to hit the targets. So it’s risky, but that’s the price to pay for the development."

CEO view: Ben Verwaayen of BT

Wed, 14 May 2008 15:54:24 +0800

Sustainability is becoming an increasingly hot topic in business circles, but when it comes to grasping the sense of urgency surrounding the issue, many of the current generation of business leaders aren’t very good at ‘getting it’. That’s according to the outgoing CEO of BT plc, Ben Verwaayen.

Business has to play a focal role in sustainability, he says, adding it’s in the interest of businesses to take the issue seriously.

"I think carbon is the new currency. Whether we like it or not, we will get regulation, legislation and taxation, unless we do something ourselves," Verwaayen told INSEAD Knowledge on the sidelines of the INSEAD Leadership Summit 2008 on global citizenship.

He also raises the issue of reputation. Anyone with any doubts should ask Nike how important it is to check their supply chain, he says. "Well, they will tell you it’s make or break, and we have to do the same with carbon."

On a positive note, Verwaayen believes that young people have, intuitively, acquired a much better feel for sustainability. The problem is how to develop their talents and he reckons there are two ways of doing it.

The first is by having a debate about the definitions of success, such as reputation and customers voting with their feet, and change being driven by the environment itself and governments.

The second is through leadership.

"What do leaders do? They can only do three things. Set a tone, choose the agenda and choose the right people."

Before joining BT nearly seven years ago, Verwaayen was vice-chairman of Lucent Technologies Inc. Today, he’s credited with turning around BT from a deeply-troubled organisation into a thriving business with global capability and a clear strategy for the future. The CEO also led BT’s expansion into broadband.

At the Leadership Summit, Verwaayen spoke of the resistance he encountered at BT when trying to set aggressive targets to reduce carbon emissions by 80 per cent by 2016.

He says that when he joined the company, the organisation was already well on its way on sustainability. It was topping the Dow Jones Sustainability Indices. But the task he really wanted to tackle was how to get the organisation to accelerate ahead.

"Many people have an incremental nature in life - we do it a step little bit better than we did yesterday. If you stay incremental, it takes too long to make really a difference and you do not inspire people to think out of the box."

He says in order to really persuade people he uses ‘carrot and stick’ tactics, but also believes in the "power of transparency". At one stage, he read out in public the names of managers who had not done their fair part of the job in diversity.

"And just by naming them, guess what? Something happened in the organisation!"

Verwaayen also expresses strong views on whether it should be left to business leaders to set the direction for green initiatives and sustainable development or whether it was the role for governments and politicians.

Following the ‘fantastically important’ report by the development economist and former chief economist at the World Bank, Sir Nicholas Stern, he says all of a sudden climate change was no longer a set of beliefs - it became the core of everything a business weighs up in terms of risks and mitigation.

"I think business has a big role to play because consumers will drive this whole issue and this issue means we need to enable consumers with the right services and the right products to make the right choices."

Governments have to set targets - civil servants have to make policies and businesses have to execute, he says, adding there’s a triangle between the consumer, the government and business.

Verwaayen is scheduled to step down as CEO of BT at the end of May. It’s been a painful process, he says, but it fits firmly with his own goals of good leadership.

"First of all it broke my heart when I came to the conclusion for myself that freshness in leadership would require now for me to step down."

"It wasn’t that I was losing my passion for the business or losing the passion for our people. It was my firm belief set that if you are not wondering and asking the questions that you understand it and give the answers, then you cannot be a change leader."

Verwaayen told INSEAD Knowledge that diversity within organisations and boards is crucial and in the best interests of businesses as they sell products and services to a very diverse environment and a very diverse set of customers, in a very diverse society.

"How can you understand that if you have a monoculture inside? You can’t!"

"So it is imperative but very uncomfortable. And the fact that you can get out of your comfort zone and choose not what you see in the mirror in the morning what you like so much - but you choose what is intuitively against that to work with you and to make sure you have the different opinions and experiences, and backgrounds around the table will make the debate more intense, will make the passion more immediate, and therefore get, in my view, much better decisions."

The Stern Review on the Economics of Climate Change, published in October 2006, suggests that global warming could shrink the global economy by 20 per cent. But taking action now would cost just one per cent of global gross domestic product.

Responsible leaders and sustainable growth? How do you develop responsible leaders in organisations that deliver growth?

Wed, 14 May 2008 15:38:45 +0800

Are business leaders really buying into sustainable development? According to McKinsey, only 20 per cent of executives feel that sustainability is part of their responsibility.

At the INSEAD Leadership Summit 2008 in Europe, BT plc CEO Ben Verwaayen recounted his experience as chairman of the CBI Task Force on Climate Change in the UK, which consists of 18 CEOs of the largest companies who are responsible for one per cent of the world’s carbon emissions.

Initially there was resistance to change policies, he says, but within 18 months, they made commitments to climate change in the business environment which had never been made in the history of the UK.

"The light bulbs went on when they realised that climate change is about survival; that they do not have to choose between growth and climate change," Verwaayen says.

The plenary session, moderated by CNN anchor Todd Benjamin, explored how leadership can be transformed throughout organisations to optimise opportunities in order to achieve sustainable, long-term growth and maintain a competitive edge.

Another panellist in the plenary session, INSEAD Professor of Ethics and Social Responsibility Craig Smith says it’s not necessarily a matter of whether the leaders get it. He cites an anecdote from his classes: MBA participants tell him that ‘yes, they hear the message from the top that sustainability is important to businesses.’ However, at the end of the day, they are evaluated on bottom-line performance. "There is a basic disconnect there," he says.

In addition, Smith is not so confident about the climate change scenario.

"This is an example where we do have to sacrifice the environment," he says. "The reality here is that if we are going to make the necessary environmental changes, there will be overall economic impact."

That doesn’t mean a lack of opportunities for individual businesses. Companies that understand their own roles and those who are able to identify the opportunities will be the winners, he says.

Challenges to the process

Vineet Nayar, CEO of HCL Technologies, a leading Indian IT services company, says that before we can talk about developing responsible leaders, we need to look first at some areas that challenge the process. These changes threaten to disrupt the business model in the way we create sustainable leaders.

For example, employees today believe in collaboration; not in command and control structures. Customers are increasingly looking for value in the products and services that are being offered. Corporations struggle to cope with the speed at which change takes place. They have to come to terms with global citizenship - multiple nationalities and cultures - and this concerns both employees and customers.

"In order to create sustainable leadership, our own value system needs to change," Nayar says. "We need to destroy the old ways of thinking and adopt new ways."

Culture, environment and definition of success

"When we talk of being global, we mean international. And the opposite of international is national," says Ben Verwaayen, the Dutch national in charge of UK telco BT. "If the heart and soul of the organisation are profoundly national, the organisation needs to shift its paradigm and go global."

The second factor is the environment. "Book-keeping today is not just about finance; it has to do with carbon," he continues. This factor has a profound impact on the third and most important factor - the definition of what constitutes success.

"Employees go to the office everyday trying to do their best; they have a definition of success in their minds. The problem is that the definition of success today is no longer applicable tomorrow," he says.

But if the shareholders are happy, what’s the issue?

"You have the shareholder and you have the stakeholder," Verwaayen explains. "You cannot run for the split-second shareholder; you have to run for the stakeholders. You need to have the character and integrity to stand up and talk about stakeholder issues."

Build the business case and get the right people

There are limits to the business case for sustainability, Smith says. The issue, therefore, is how can you be both responsible and profitable?

"To achieve this there is a need to proactively build the business case," Smith says. "It also helps to have the right leaders and a supportive organisation."

He adds it is getting easier to build the business case. With globalisation, the activities and practices of companies are widely accessible.

"This in turn creates the pressure to do the right thing," he says, "and equally creates opportunities when the organisation gets rewarded for doing the right thing."

Beyond our own interests

For OECD Deputy Secretary-General Aart de Geus, it’s imperative to think and act beyond the borders of our own interests. Aart de Geus, OECD

"You need to reach out to the world and take up challenges such as the economics of climate change, and courses of action for issues such as the ageing population and the problem of migration," he says.

For leaders, this means two things: innovate accountability - for example the private sector needs to publish programmes and input, and the public sector the output; and secondly, take a completely new approach to human capital.

Talk about sustainability in your organisation

We have carbon credits walking around in our offices, Nayar says. And if we change their ways of thinking and give them a voice, there’s a very high possibility of bringing about change.

"Propagate, talk about sustainability in the organisation," Nayar says. "Educate the employees; in little, small steps get the employees and society excited about it."

"Organisations need to give attention to social impact in their activities," Smith says, adding that we’re not talking about corporate philanthropy but what businesses do in their day-to-day activities.

He cites a campaign by Unilever that challenges the idealised notion of female beauty. Millions have watched the YouTube video called ‘Dove - Evolution’ and discussed it. "Likewise, get the employees talking about sustainability in the organisation," he says.

Sustainability: a business opportunity

Wed, 14 May 2008 15:10:59 +0800

By the year 2040, only 15 per cent of the world’s population will be living in what are now called developed countries. It’s therefore essential for today’s business planners to start focusing on the rest of the planet. Fortunately a strategy centred on emerging markets can be both financially profitable and socially responsible, says Barbara Kux of the Dutch multinational Royal Philips Electronics.

"Developing countries are a fantastic source of opportunities for companies," says Kux, who is a member of the electronics giant’s group management committee.

"At Philips we try to position the whole sustainability issue as a business opportunity. Our energy-efficient lighting for example: this is the kind of technology that is key for developing markets, because it cuts the CO2 factor," she told INSEAD Knowledge on the sidelines of INSEAD’s 2008 Leadership Summit on global citizenship.

"What we are doing is living out the mission statement written by the two Philips brothers when they founded the company more than a century ago: apply technology to improve the lives of people."

To give shape to its strategy, Philips drew up a map of the world which highlights two different functions: on the one hand, well-being as measured by the Human Development Index (HDI); and on the other, the ecological footprint - the use of the planet, as Kux puts it.

At one end of the scale are the developed countries with high scores on both counts. Here the aim must be to maintain the HDI scores, but to reduce the ecological footprint through the use of cleaner technologies.

Then come the developing countries - with an estimated 41 per cent of the 2040 population - where the priority will be to minimise the adoption of old technologies and "let them leapfrog straight to new solutions," Kux says.

A third group comprises of emerging countries - with 44 per cent of the future global population - where the urgency is for clean solutions that cost as little as possible.

Under its EcoVision 2012 programme, Philips aims to make 30 per cent of its total revenue from so-called ‘green’ businesses. In 2007, the figure was 20 per cent - or some 5.3 billion euros, which itself was up from four billion euros the year before.

The company also plans to invest one billion euros in green technologies and reduce the company’s own carbon footprint by 25 per cent.

Under ‘green’ business, Philips includes anything from its energy-efficient lighting systems -- which reduce power consumption by some 30 per cent - to new scanners which use 18 per cent less power than conventional models.

"We measure (the green effect) in a very consistent way. And we audit it, which is how we get this impressive figure for green business revenues," Kux says.

Social responsibility also means ensuring that developing countries share in the success of companies that invest there.

Philips’ policy is threefold: to create jobs and opportunities by the mere fact of doing business in these countries; to create research and development projects; and to outsource as much as possible its own purchases.

"Our sourcing from developing countries was 7.2 billion euros last year, and that also has a fantastic effect on the economy in these markets," Kux says.

But is there not a risk that with countries such as Brazil and India leapfrogging to new technologies, Philips might actually be giving a leg-up to future competitors? Only up to a point, Kux says.

"It is true that local competitors are entrepreneurial. They know their countries and their customers, so they do have sometimes a competitive edge," the INSEAD alumna (‘84J) says.

"But if you do come with a technology solution, it’s very hard for them to jump on that wave. A lot of our technology is protected. We have 80,000 patents at Philips. If you really want to develop a complex new technology, it’ s mostly also a patent game."

Scarcity and innovation: Powering the developing world

Wed, 14 May 2008 15:02:15 +0800

Scarcity of resources, scarcity of political consensus and scarcity of financing for innovation. These are some of the major challenges faced by companies in today’s global environment. That’s according to Leif Beck Fallesen, editor-in-chief and CEO of the Danish publication Dagbladet Borsen. Fallesen was the moderator of the first plenary session at the INSEAD Leadership Summit. He said these concerns are highlighted by a Leif Beck Fallesen growing food crisis (wheat prices rose more than oil prices last year), climate change and decreased foreign investment (down by 9 per cent).

The current scarcity of resources, he points out, will be further exacerbated as the energy and resource needs of developing countries increase as their respective economies grow. A resulting concern will be the adverse affects the mounting consumption will have on local environments.

The solution, Fallesen says, is innovation.

Barbara Kux, a member of the group management committee of Royal Philips Electronics, opened the panel discussion with a positive outlook on innovation in the developing world. "The opportunities are great," she says, adding that the potential will only grow with time, because by 2040, developing countries will comprise 85 per cent of the world’s population. "It’s almost incredible to grasp," she says, "but it’s a fact."

A significant opportunity, she says, is Web 2.0, "a technology that enables anybody around the globe to generate content." Web 2.0 will allow developing countries to "hook into our world," she says, "and to profit from all our wisdom and our innovation." But the benefits would be mutually interesting, she adds, "because we can tap into their innovation potential."

Kux says Philip’s approach to opportunities in the developing world focus on sustainability as a "great business opportunity," adding this is not about charity.

Outlining a two-pronged strategy, she says one aim is to maintain the Human Development Index (HDI), which "measures not only the GDP ... (but) measures the well-being of people around the world in terms of education, health and also basically purchasing power." The other aim is linked to the ecological footprint, which compares human demand on the Earth’s ecosystem and natural resources with its ability to regenerate them.

At present, the ecological footprint is at 1.2 planets, Kux says, meaning that "it takes one year and two months to compensate our CO2 emissions, which is, of course, not a sustainable position."

Kux says that part of Philips approach in combating this is through clean technology, including energy-efficient lighting solutions with some 30 per cent lower energy use, and the strategy has paid off. Revenues for its ‘green businesses’ accounted for 20 per cent of the company’s total revenues in 2007, Kux says.

Another panellist, Simon Bennett, an executive vice president of Russian oil venture TNK-BP, comes from a vastly different perspective on scarcity and innovation. "Gas may be unfashionable, but energy demand continues to grow," he says, pointing to forecasts of 50 per cent growth in the next 20 years. "With oil and gas representing 60 per cent of Simon Bennett today’s energy demand," he says, "we’re an important part of the world economy."

Contrary to global trends of declining oil and gas resources (best gauged by measuring the reserve-replacement ratio - the amount of new reserves added every year), Russian reserve-replacement ratios are skyrocketing. "Our own company announced about 170 per cent reserve replacement ratio," he says, adding "so you can see there is enormous potential in Russia."

On the downside, Bennett acknowledges a host of major concerns in Russia: poverty and poor health, corruption, and the greenhouse gas effect. He says that in addition to spending money on combating poverty, TNK-BP spends significantly "in educating our people about the prohibition of bribery and political contributions."

As for the greenhouse gas issue, Bennett says the current situation is far from ideal. At present, he calculates that "about 30 per cent of the useful gas produced with oil … currently goes out the flare stack."

The Russian government is pressing to get those levels down to 5 per cent by the year 2011. Consequently, Bennett says his company plans to spend $2 billion over the next four years as part of that effort, "and I think this will have a huge impact on greenhouse gas emissions allegedly associated with global warming," Bennett says.

Also in the plenary session, INSEAD Professor of Economics and Political Science Ethan Kapstein emphasized that developing and emerging markets represent future growth for a wealth of multinational companies. Companies who are able to have a positive impact on economic development and poverty will be best positioned.

To underscore the impact foreign companies could potentially have in those markets, Kapstein highlights Unilever’s example in South Africa. (Kapstein was asked by Unilever to evaluate the company’s investment there - a rarity, according to Kapstein, given that most companies do not allow research into their operations in the developing world).

In creating 4,000 direct employees, Kapstein found that Unilever supported 100,000 jobs either directly or indirectly. The financial benefit for South Africa was impressive: one per cent of all its tax revenues were generated by Unilever.

Kapstein stresses, however, that if Unilever were to outsource globally, the effects would be catastrophic. "Most of the development impact of a multinational is felt through its supply chain. If you don’t support a local supply chain, you’re not doing anything developmentally," he says.

In the session, Kapstein also voiced concerns about the renewed debate on foreign direct investment (FDI). He cites a Harvard study which likenes FDI to bad cholesterol, concluding that neither development nor growth was impacted by FDI. But Kapstein argues there is a lack of data available to make such a conclusion. He encourages multinationals to change that trend: "My message today is pretty simple: if leadership is partly about looking at the truth clearly and directly, starting out with the facts is pretty important."

Engaging with Africa: Can business leaders afford to ignore this continent?

Wed, 14 May 2008 14:54:49 +0800

After years of stagnation, Africa is finally experiencing economic growth. Are there opportunities in Africa which are not being recognised by the business community outside of Africa?

Africa’s GDP is $710bn which is highly concentrated in South Africa (36 per cent) and Nigeria (16 per cent). Last October, the IMF suggested in a report that Sub-Saharan Africa would grow 6.8 per cent in 2008 compared with growth globally of 4.1 per cent. "Something is happening in Africa," says moderator Geoff Cutmore, Europe Anchor, CNBC. "Are you participating in that energy?"

"The macroeconomics environment is very encouraging," says Imoni Akpofure, regional country manager of the International Finance Corporation (IFC) and INSEAD alumna (‘94D). "The cost of doing business is coming down, the political landscape has improved very much. Governance is still a problem but it is improving."

Oil, gas and minerals are doing well, and so are the property and stock markets.

What are some of the investments that could be made in Africa? Simon Harford, the West Africa head of Actis and INSEAD alumnus (’94D), says that business leaders should think ahead and see where Africa is going, make things happen and have an opinion about Africa.

"How can you not have an opinion about an economy that is approaching a billion people, has a large reservoir of resources and a lot of economic developments in its infrastructure?" he argues. "Don’t look in the rear mirror - the Africa of today and the future is so different from the Africa of the past."

What has been happening in Africa is being driven by the private sector. And that which remains to be done, needs to be done by the private sector, he says. Multinationals are playing an important role in helping business by helping the government understand its position.

"The more businesses develop, the less the government is able to get involved - we have evidence of this," he says. "That drives down corruption and interference, it gets them back rolling out of the economy focusing on basic needs."

Africa remains, in many respects, undiversified. Because of that, many investors prefer to adopt a wait-and-see approach. Joseph Eichenberger, vice president of the African Development Bank, feels the diversification of the African economy presents opportunities and those who are willing to move in now will find the gains quite substantial.

"Never in economic history has a country achieved self-sustaining growth on the basis of foreign policy," he says. "This is the fundamental reason you should be there."

Eichenberger says that 250 years ago, economist Adam Smith got it right when he said that ‘progress requires little else but peace, easy taxes and a tolerable administration of justice.’ Today Africa is making very good progress because governments get it in a way they didn’t get it before.

During the plenary session, panellists were asked if the Western World had missed the boat with Africa, given that the Chinese now have a big footing there.

Harford says that’s not the case. The Chinese are rapidly growing their activity in Africa for one predominant reason - access to resources. However, they are operating within a relatively narrow sphere. "There’s a lot more of the story to play out, around whether the initial deal that they’ve done - perhaps a case of ‘we’ll have your resources and we’ll give you a railway or whatever’ - is going to materialise."

Akpofure agrees with Harford and adds that many African countries are recognising that businesses need to diversify. However, one of their big concerns is that they shouldn’t suddenly be colonised by China.

During the session, panellists also spoke of how China is especially active in environments where the governance is not as good as it could be. For example, Sudan prefers to do business with China which may ask fewer questions than with a multinational company.

Akpofure adds that some countries have pinned their hopes on China, but there are also many countries which say they will use China where it makes sense, and make sure that they retain a geographic spread in terms of who should come in to invest.

The Nigerian Paradox : Is it fading away?

Wed, 14 May 2008 12:26:44 +0800

The Organisation for Economic Co-operation and Development (OECD) referred in 2007 to the Nigerian Paradox: catastrophic poverty in a country brimming with natural and human resources.

The return of democracy in 1999 and the 2003 re-election of President Olusegun Obasanjo ushered in an era of strengthening democracy at the federal level and economic improvement. The World Bank, for example, returned to operate in Nigeria in FY2000 and a crackdown on corruption has led to the seizure of $5 billion in assets for the state.

In 2007 Umaru Yar'Adua was elected president and Nigeria’s record of three elections in a row without a coup d’état became a cause for celebration in sub-Saharan Africa – and perhaps a reason to invest.

"The interest in our economy is rising from the stability that we have achieved from a political and macroeconomic level," says Emeka Onwuka (seen left), the managing director and CEO of Nigeria’s Diamond Bank, one of 25 banks that survived the government’s banking reforms of 2004 aimed at merging Nigeria’s 89 undercapitalised financial institutions.

Onwuka, an accountant who worked at Arthur Anderson before joining Diamond Bank in 1992, was named managing director in 2005.

Nigeria has had more than its share of problems. One of the most populous countries in Africa with at least 140 million residents, it has a wealth of oil, but its record has been one of military dictatorships and economic failure.

In a country assistance evaluation, the OECD spoke of the ‘stagnation’ of the country’s per capita GDP - it had fallen slightly to $430 in 2004 from $444 in 1977. Poverty though had increased substantially.

However, the groundwork laid by federal reforms has begun paying off in the past several years. After his re-election in 2003, President Obasanjo concentrated on economic reforms, breaking a link between oil prices and government spending that had prevented the country from building up reserves. Between 2003 and 2006, the OECD says foreign reserves increased fivefold to about $38 billion.

At the INSEAD Leadership Summit 2008, Onwuka spoke about his country’s economic outlook in a plenary session called ‘Engaging with Africa: can business leaders afford to ignore this continent?’ For him, Nigeria has turned the corner and is now an interesting country for foreign investors.

From 2003 to 2006, Nigeria’s GDP growth averaged 7.1 per cent per year, which included similar growth from the non-oil sectors.

"On the macro level, we have achieved stability in the past five years," says Onwuka. "Currently our foreign reserves are at about $60 billion, enough to fund about 36 months of imports. GDP last year achieved a growth of about 6 per cent, the year before about 5.6 per cent or thereabouts... this year we believe we will achieve about 7 per cent. As a matter of fact, the economy has the capacity to grow at double digits."

Thanks to oil, "we are almost debt free in the country," Onkuwa, says. Non-oil revenue is playing a bigger role. "As a matter of fact," he says, "the major contributor to GDP is agriculture, at about 42 percent of GDP." The challenges to the economy, "are the ones we are used to: the inadequate infrastructure that we have in Africa and in Nigeria," he says. "Power is an issue, road infrastructure is an issue, public transportation... is not adequate."

Other issues are the enforcement of contracts and a national ID system, contributions to the infrastructure required "to enable the banking industry to play the role that is theirs to play: access to capital, access to funds. The challenges are currently being addressed by both the government and the private sector as well."

Onkuwa also knows there’s a market for foreign investment in non-oil industries. His own bank last year offered $100 million of a $500 million capital expansion to foreign investors and in January his bank was listed on the London Stock Exchange.

Targetting Africa: The case for investment

Wed, 14 May 2008 12:23:34 +0800

Africa is so diverse, with its variety of countries and resources, that almost any type of business in the world could take advantage of the continent’s economic growth. That was the view of panellists at the INSEAD Leadership Summit 2008.

Simon Harford, West Africa head for private equity group Actis and INSEAD alumnus (‘94D) says "virtually any business that can talk to the consumer base of Africa is already growing at remarkable rates, 30 to 60 per cent year on year." Outside of the resources sector, the consumer businesses have seen the fastest growth as they tap the population base. For instance, Africa has seen a phenomenal growth in telecoms. Additionally, sectors supporting this consumer demand, such as logistics and financial services, are starting to show interesting growth patterns. "There’s no real shortage of sectors that are benefiting from the growth," Harford says.

Imoni Akpofure, regional country manager of the International Finance Corporation and an INSEAD alumna (‘94D) says annual growth has exceeded five per cent and it‘s projected that several countries will grow at approximately eight per cent, largely driven by high commodity and oil prices, but clearly there is more driving this growth.

The IFC is trying to help the business community by being a one-stop shop where the private sector can deal with all government and bureaucratic matters. Alongside this role of facilitator, the IFC acts as lender of last resort by providing local banks with credit lines that have longer terms than what traditional local banks would normally be able to provide to businesses. Finally, the IFC leverages its relationships with governments to raise concerns that the private sector may have, effectively acting as an intermediary between the two, so that governments can successfully use the private sector to help their economies grow. The IFC is also creating business forums to promote dialogue between the private sector and governments so they can resolve any issues preventing businesses from investing in African countries.

Harford cautions against the idea that Western countries have been an entirely negative influence in Africa. "Generally, many Western companies have played a productive role in many African countries over the years, making goods and services available through distribution."

Interest in Africa is obviously not limited to Europe. Resource-hungry China has taken a greater interest in Africa than India so far, Harford says. This is mostly a result of its well-planned economy with a projected need for resources over the coming years. China has been granted access to Africa’s resources in exchange for some form of infrastructure commitments by China. This is just the beginning, however, as China has yet to deliver on its commitments.

India, on the other hand, is getting involved in Africa fairly late in the game and has a less resource-centric approach to the continent. "India has a diversified economy and has a lot of non-resource activities that it can very usefully set up or transfer to Africa," Harford says. Other countries such as Russia are also showing an increasing appetite for doing business with Africa.

It’s still early to assess the involvement of non-Western countries in Africa, but clearly it will not be limited to China or India, as every major developing country or region will likely target the continent. "What we all hope for, is that it’s a truly reciprocal impact... but secondly, that as much as possible, the African nations will take charge of their destiny and make sure that they get for Africa what’s best for them."

Muhammad Yunus: Helping the less privileged unleash their entrepreneurial skills

Wed, 14 May 2008 12:18:52 +0800

---- by Rahilla Zafar, New York -----

Some thirty years ago, economics professor Muhammad Yunus made his first loan of $27 to a group of 42 women so they could expand their bamboo furniture making business.

After the success of his initial loan, Yunus saw that such a small amount of money could change the lives of the people and thought why not do more? Since then, small collateral-free loans known as microcredit have been provided to 100 million people across all continents. With 94 per cent of the world’s income going to just 40 per cent of the population, Yunus decided it was time to do something for the remaining 60 per cent. Commercial banks did not provide such loans to the poor and women only accounted for one per cent of borrowers in Bangladesh at the time.

Yunus founded the Grameen Bank (Village Bank) with half the borrowers being women. Initially, Yunus says many women were afraid of borrowing and would say they did not understand money. To Yunus, it was not their voice he was hearing, it was the voice of a history of neglect. He was determined to peel away this fear layer by layer and eventually he began to notice something remarkable. When money was lent to women, they were not only better borrowers, but also invested more of their earnings into their households. Today 97 per cent of the 7.5 million borrowers at the Grameen Bank are women. Yunus disagrees with those that say microcredit is good, but only works for those with entrepreneurial instincts. He believes all people are entrepreneurs but societies are created in a way that not everyone gets the opportunity to unleash their talents - everyone has the gift but not everyone is fortunate enough to be able to unwrap it.

In February 2008, Grameen Bank opened a branch in New York City, its first in a developed country. The bank plans to provide $176 million dollars in loans over the next five years, targetting the 28 million Americans who have no bank accounts and another 44.7 million who have limited access to financial institutions.

In business, Yunus says there is only one concept and this is how to make money. But he adds that humans are multi-dimensional, they enjoy making money but also helping others. Yunus’s next big idea is social business and one of his first ventures is to produce yogurt for millions of impoverished people in Bangladesh through the Grameen-Danone partnership formed in 2006. Yunus says a dollar given to charity can be used only once but the beauty of a social business is that it extends the life of the dollar, while creating much needed institutions and efficiency.

Recently while in New York City, the Nobel Peace Prize winner, Fulbright Scholar and author of Creating a World Without Poverty spoke to INSEAD Knowledge.

Have you been surprised by how far microcredit has come, even being successful in places drastically different than Bangladesh?

Yes and no. It has come a long way since we began. At that time my students and I had no idea how far it would grow, it was beyond our imagination. But at the same time, it has not gone far enough. After all, 31 years have gone by and it has been demonstrated that it can be done and is important for people’s lives. It can work in all circumstances, environments, national situations but still has not been institutionalized; it is still done by NGOs (non-governmental organisations) and not as part of a formal financial system. So that has been a very frustrating experience at the same time.

How do you foresee microcredit when practised in a place like New York City?

It is still the same concept: tiny loans for income-generating activity in a sustainable way so that people can get a chance to create self employment and income using their own talents. So those basic things remain no matter where you go, whether it is New York City or a remote village in a poor country, it doesn’t matter. People need money and it brings money to them and provides a service.

With stores such as Wal-Mart, will borrowers in the United States have to produce different kinds of products than those in developing countries?

People do things which have nothing to do with Wal-Mart. For example somebody does fashion design, she knows how to do the designing, people like her so she gets orders. She makes wedding or party dresses. So that has nothing to do with anybody, it is more of personal thing. Someone takes care of flowers, people like their flower setting and want to hire her.

Do you foresee microinsurance becoming more widely available, especially in places where microcredit has been such a success?

Everything is a necessity, whatever the rich person can get, the same service the poor person can get too. There is no distinction between something for the rich and something for the poor. Only the sizes will be different. The rich borrow a million dollars while the poor borrow anywhere from $100 to $1,000 and that’s about it. Insurance is the same, health insurance is the same and whatever programs you can think of. But it has to be brought to poor people since it’s not available to them.

In the future, will we continue to see more ventures like the Grameen-Danone partnership?

Absolutely, this is a whole new world to open so everybody can participate. It can happen anywhere; there are lots of problems you need to address in a business way. For example, 50 million people in the United States don’t have health insurance. So helping them could be a social business.

In Bangladesh, millions are malnourished and the yogurt provides vital nutrients they lack in their everyday diet. Grameen-Danone agreed to take back their investment but receive no dividends. The yogurt is sold at a nominal charge; the goal is about having a large social impact and not making a profit. This can be created all over the world to address issues like poverty, housing, safe drinking water, you name it.

More expensive medication may be more potent

Wed, 14 May 2008 12:15:35 +0800

"Marketing variables not only influence people’s perceptions and expectations, they actually influence the real efficacy of products such as medications." This is according to Ziv Carmon, INSEAD Professor of Marketing, who, along with Rebecca Waber and Dan Ariely from MIT and Baba Shiv from Stanford, tested the effect of price on the efficacy of a medication by administering electric shocks to those taking part in the study to test their resistance to pain.

Participants were told that they were testing a new painkiller similar to codeine with a faster onset time, but were actually given a placebo pill. Half of the participants were informed that the drug was priced at $2.50 per pill, while the other half were informed that the drug had been discounted to $0.10 per pill.

Following an established approach for studying pain, two sets of electric shocks were administered to the participants - one to establish pain threshold before taking the placebo, and one after. The result: those who consumed the more expensive placebo were able to handle more pain.

Commenting on the unusual nature of the experiment, Carmon notes that the pain inflicted was not severe, that the participants were all healthy and well compensated, and that they helped the researchers learn something very valuable that could be used to help people with very real needs.

Carmon says that based on all the research that they´ve done, not just the piece that instigated this interview, they have shown that all marketing mix variables - product, price, promotions and place - "can influence the real efficacy (that is, the real quality) of the product."

Other studies these researchers conducted have shown similar bias. For example, participants who were told that their energy drinks were more expensive were able to solve more puzzles requiring mental agility, and those taking branded cold medication recovered faster than those taking generic versions. This explains why expensive medical treatments continue to be more popular than inexpensive, widely-available alternatives. Carmon adds that this is very good news for companies such as those in the pharmaceutical industry.

Telling participants that the discount is due to circumstances, such as discounts given to educational institutions, not due to poor quality, failed to mitigate the effect of price. However, "if you ask people explicitly ‘is price going to affect you?’ then the effect goes away. Unfortunately, people don’t spontaneously think that way, but we are looking into ways to mitigate it," Carmon says.

Mergers and acquisitions: Reducing the private firm discount

Wed, 14 May 2008 12:12:12 +0800

Owners of private companies normally sell their shares at a 20-30 per cent discount during mergers and acquisitions. The ‘private firm discount’ is one reason the stock market reacts more favorably when companies announce a private acquisition than whenthe target is a publicly-listed firm.

From the buyer’s point of view, says INSEAD Associate Professor of Strategy Laurence Capron, the discount reflects a presumed higher risk associated with the value of private assets due to a lack of information about the target firms, their lack of liquidity and their lack of visibility. From the seller’s point of view, the discount can reflect naivety, a lack of financial advice and the choice of a preferred buyer rather than the highest bidder.

Capron and co-author Assistant Professor of Strategy Jung-Chin Shen of York University, surveyed executives involved in 101 acquisitions of manufacturing companies in Europe and the United States to determine the effect of the acquisitions, and the strategy behind the choice of the target. The subject is important because 60-70 per cent of US acquisitions and even more in Europe are private, yet there has been little research on M&A activity involving private firms. The study, ‘Acquisitions of Private vs. Public Firms: Private Information, Target Selection, and Acquirer Returns’, was published in Strategic Management Journal.

"What we found is that the stock market reacts more positively to the acquisition of private targets, about plus four per cent," says Capron, while the average reaction to the acquisition of publicly-listed targets "tends to be negative or zero." The discrepancy is even more noteworthy because private acquisitions tend to be smaller than the average public acquisition, so the target’s weight in the combined equity is smaller, yet the effect is bigger.

Market reaction is an effect of the choice of target, while acquisition strategy is a cause. When the acquirer is looking within its own industry, its knowledge of the potential target can help to reduce the risks, in spite of the information asymmetry. When companies want to diversify, however, they are more likely to choose public company targets, because there is less information asymmetry. Firms that have gone through an initial public offering (IPO) process must publish financial information that helps acquirers judge their worth, reducing the risk of entering a new industry. In the study, only 8 per cent of private targets were intended to be used for diversification purposes, while 24 per cent of public targets were outside the acquirer’s core business.

Private sellers are free from the pressure of the market to accept the highest bid, which allows them to have other priorities, but nonetheless they can reduce ‘the private firm discount’ by approaching negotiations with a dispassionate attitude.

"Typically private sellers, small family firms, tend to be naïve when they come to the negotiating table," Capron says. They might negotiate for concessions other than financial ones because "they care a lot for employment retention, they care for the community and they will tend to accept a much lower price. And one of the issues is that, most of the time, the acquirers do not live up to their promises after the deal."

While public targets are often bought and sold in an auction atmosphere, private targets are typically bought and sold through negotiations. Private sellers have a smaller pool of potential bidders because of their lower visibility, and, says Capron, "most of the time they stop the search after they find the first bidder. They value... the cultural fit with the bidder, and usually they do not have the resources or the mindset to use financial advisors."

The study argues that the rule of thumb of a 20-30 per cent discount for a private firm should not be taken for granted. Private sellers can reduce the discount by reducing the uncertainty associated with their assets and by promoting competition among bidders. There can come a point at which additional expense in increasing their marketability does not increase the value of their company, Capron says, but in any potential deal, "they should be careful when they negotiate not to accept a sharp discount."

Women and Money

Wed, 14 May 2008 11:42:49 +0800

Are men or women better at investing?

"This is not only a fun question but it is of great practical value," says INSEAD Assistant Professor of Finance Lily Fang, who hosted a Women and Money forum at INSEAD recently.

Some studies suggest that women are better investors than men. Dig a little deeper and the picture isn’t so clear.

What is clear is that too few women take an active role in investing their savings. Since women on average live longer and have lower life-time income than men, it’s important that they learn more about investing, Fang says.

In a large number of academic studies of investment gains, men and women actually come out about the same on a net basis. Women do better in the end because they trade less frequently, so they don’t run up expensive trading costs.

“(Men) take higher risks and higher risk is rewarded with higher returns, but after you take out the transaction costs … men are slightly worse than women,” she says.

In fact, Fang says both men and women tend to under-perform the major market indexes when they trade as individuals. “The more you trade, the more you lose out against a passive index, so compared to men, women might lose out a little less,” she says. Surprisingly, men trade almost 50 per cent more than women.

The statistics are the same if you compare women and men who are professional traders, but the sample size of women professional traders is so small that Fang is reluctant to draw conclusions.

She’s much more confident about the obvious conclusion: “The evidence should give women the confidence that they are perfectly capable of taking advantage of their financial well-being and we need to get that message out there so that people can start doing the planning and then it’s a matter of educating yourself,” says Fang.

Unfortunately, the bad news is that the bigger picture indicates that 80 per cent of women actually don’t actively engage in a financial plan.

Long-term financial planning is a particularly important issue for women, Fang says, because people are living longer and women have longer life expectancy than men, often by 10 years or more, and in old age women tend to be afflicted with long-term illnesses such as osteoporosis and arthritis.

“If you don’t have a financial plan in place that you started thinking ahead of time, once you get (older), a lot of people are quite shocked” by their financial status, she says.

Women should know that it’s never too early to start planning. Fang says women should start saving and investing when they land their first job.

Women shouldn’t fight their instincts. Fang lists some important attributes that women employ when investing their money:
-They trade less frequently to keep costs down
-They tend to hold more diversified portfolios than men
-They're more ready than men to acknowledge that they need to find resources
-They tend to have a longer-term perspective when investing
-They tend to seek personal financial advice, instead of relying on adverts and advice found on the internet

These attributes should serve investors well. But as a lot of women are busy with careers and family, some don’t want to think about their long-term financial future and tend to leave financial planning to their husbands, Fang says.

Fang believes it’s very important for the family, both the man and the woman, to come up with a financial plan together and to invest together. Research evidence shows that as a partnership, men and women together make better decisions. Now it’s up to women to take greater control.

The brand is the business

Wed, 14 May 2008 10:45:31 +0800

"Today more than half of the total stock market value of corporations lies in intangible assets such as brands ... The brand is the business." This statement by Shelly Lazarus, chairman and CEO of Ogilvy & Mather Worldwide at the World Effie Festival 2008, sums up why brand building is important for companies. In this climate of the brand imperative, advertising gurus converged on Singapore for the conference which celebrates advertising effectiveness.

The success of the brand is not always in the hands of the advertising agency or the corporation’s marketing department. Simon Clift, chief marketing officer of Unilever, says that the current marketing environment is more exciting now than it’s ever been. "In the old days we used to choose which brands became famous. Now consumers choose because they can tune in and tune out on their own terms, and so you have to take risks in order to be noticed. If you’re not noticed, you’re dead."

Irreverence and ideals

Conference speakers came up with a variety of approaches as to how best to engage with the consumer through advertising and brand building. Lazarus - whose agency has handled campaigns that have successfully created an emotional connection with consumers - says that Ogilvy & Mather has found that "if you can go from a big idea to a big ideal; if you can tap into a cultural truth; if you can tap into something in which society is wildly interested in at the moment, you have a huge opportunity."

Sir John Hegarty, founder, chairman, and worldwide creative director for BBH, takes engagement with the consumer one step further. "When I look at the history of advertising, and I look at the things that have sustained over time, they have had irreverence at their foundation, because they challenge. I think great communication is about challenging," he says.

"What irreverence offers us is a more stimulating way to create and capture people’s imagination and attention." However, Hegarty warns, irreverence must be constructive. Not only must it lead people to question, but it must also create value. He points to Benetton’s shock advertising as having failed in that regard. "Yes, it shocked me to gain my attention - showing somebody dying of AIDS. It is profoundly irreverent, but, ultimately, I’m left feeling hollow... What are you saying and do you believe it? If not, your vision becomes empty and meaningless."

Hegarty further argues that humour and wit play an important role in advertising as it draws people in, making them relax and listen. "Humour and irreverence are interesting and powerful bedfellows. They feed off each other, creating opportunities to enhance each others thought. When put together, they become somewhat profound."

There is some debate, however, as to whether humour and irreverence are always appropriate. Prasoon Joshi, chairman and regional executive creative director, Asia-Pacific, McCann World Group, told INSEAD Knowledge that while humour has been proven to attract people, there is an overemphasis on it in advertising. "Humour is a very good social lubricant. In many categories, humour can only play the role of breaking the ice. Further down, you’ve got to have an intense relationship to be able to get into [the customer’s] life... You can’t constantly keep cracking jokes and expect the customer to be humoured by you." This is particularly the case for products that require some element of bonding with the consumer in terms of ‘high-involvement’ products, such as cars.

New media

While it was acknowledged that the new media provide many new and exciting avenues through which to engage with the consumer, there’s a general consensus that this sphere is still limited as compared with traditional media. “There are some instances when we’ve overestimated the importance of non-traditional media, and we’ve actually had to step back and go back to the battle on TV,” says Clift of Unilever.

Lazarus questions the value generation of new media: "A million people downloaded this from YouTube. What does that mean? What does that buy us? What is the role that plays in the total brand proposition? I’m sure it plays some role, but it’s not obvious to me yet that because you download a clever film means your relationship with the brand has changed."

There was agreement that while new media opens new fronts for advertising, the fundamentals of communication are still the same. "You’ve still got to break through all these media. You’ve still got to do things that people remember," Hegarty says.

Joshi highlights how little relevance the new media debate has to developing country markets such as India: "Let’s not forget that when the world is talking digital, you’re talking about a country where many people are discovering television for the first time; who are watching or buying TV’s for the first time... in fact they’re finding it fascinating enough to watch for many more years."

Effective advertising

The Effie Awards have been recognising advertising campaigns based on their effectiveness in terms of sales since 1968, and the issue of creativity versus effectiveness continued to be discussed at this event. Many speakers supported the idea of linking advertising agency remuneration to the number of sales made. While Clift says that Unilever already has such a performance-related incentive scheme in place, he told INSEAD Knowledge there are limits to being able to pay for creativity. "If you can find a way for me that measures the value of an idea, then I would be delighted to somehow factor it in to our remuneration because of course, in theory, it’s a brilliant idea. Making it work in practice risks distracting people who should be managing ideas and the advertising development process, [if] they are focusing a disproportionate amount of time on measuring how much we should be paying our agencies."

For the advertising veterans that attended, creativity and effectiveness go hand-in-hand. Ogilvy & Mather’s regional effectiveness director, Tim Broadbent, says the firm builds creativity into the creative brief right from the beginning. Ogilvy’s founding principle of "we sell or else" was perhaps best articulated by Lazarus’ statement: "We think of ourselves as salespeople too and if everything we do does not at the end of the day result in sales, then we have not done our jobs."

On the Branding Edge

Tue, 13 May 2008 16:33:24 +0800

Branding expert Ken Cato is the man that some major companies turn to for help with overhauling their branding. His clients include Taiwan’s BenQ, Germany’s Siemens, Australia’s Commonwealth Bank and most recently, Dubai World Central, the world’s largest planned airport. He believes that building iconic brands require companies to dare to be different and have a clear idea of their corporate identity.

Australian branding and design guru Ken Cato is known for his deep-seated fondness for black-and-white monochrome minimalism. Yet he has a less than black-and-white approach to helping his clients build their own brands, advocating a focus on defining the objectives and being open-minded in achieving them.

"We’ll say ‘that’s what we have to achieve’ and we’ll agree that with our clients. How we get there is totally irrelevant to me after that," says the chairman of Cato Partners.

"I just want to get there the best way with the most impact to achieve what that goal is. I think you don’t need the rules then, because if you try to make the project fit the rules, you’ve automatically placed constraints on the potential of the outcome. For me it’s always about opening up as much as we can."

This philosophy has served him well, winning him and his company numerous international and Australian design awards since he founded Cato Partners in 1970. The design firm, which has 15 offices and representative branches around the world, was recently involved in the branding exercises of consumer electronics giants BenQ and Siemens, New Zealand’s Wellington Airport, and Dubai World Central, the world’s largest planned airport. Its impressive portfolio also includes Australia’s Commonwealth Bank, the Melbourne 2006 Commonwealth Games, health food manufacturer Uncle Toby’s, and biscuit company Arnott’s.

For companies to stand out, Cato says they have to dare to be different rather than just imitate the brand designs of others. "Different doesn’t have to be radical, different can be also very smart. But different is not copying or following others."

Part of the challenge of brand-building comes from companies suggesting ideas that they’ve seen elsewhere around the world which are neither new nor suitably distinctive. "We deal so often with telling the same story that other companies are telling, but we have to find a better way or a different way to tell the story so it has a personality, it has a distinct characteristic, it has its own way of being identified amongst the clones," he says.

To build brand equity effectively, companies need to know what they want to communicate. Consistency in brand communication is also vital as it’s senseless for companies to have different messages for different audiences when information is readily available online. Moreover, the delineation between audiences is blurring as people are wearing ‘multiple hats’ these days, Cato says. By that he means that a company’s customers can also be its employees, shareholders or its critics.

"It’s the consistency of those messages that builds a brand in people’s minds. So we better be pretty careful what we’re saying is consistent, knowing that everybody’s got access to all the information."

While Cato advocates the importance of having distinctive differences in branding, he acknowledges that his recent ‘Wild at Heart’ campaign for New Zealand’s Wellington Airport was based on the city’s reputation for being the ‘Windy City.’

But shouldn’t he have steered away from the obvious to find other branding angles?

"If you’ve got a foundation of things that people know or language that people know, you’ve already got a start. There’s already an affinity," he replies.

"Anybody that’s been to Wellington knows that the wind blows like heck down there and so you don’t get surprised when you talk about the wind and Wellington in the same breath,"

"The thing that is unusual is being able to look at it, if you like, almost poke fun at yourself and to go ‘if that’s what we’re known for, how do we bring that to life?’"

Indeed, the use of the wind as a ‘base language’ is central to the campaign’s expression of the wind’s ‘different personalities’ of fun, freedom, and celebration, Cato says.

"So while it’s got those personality characteristics, if they are put together in the right situations, you have an even chance of delivering all sorts of messages."

But to ensure that messages are successfully communicated, companies should be aware that the organisation of information is as important - if not more so - than the content. People nowadays tend to have very short attention spans and are good at holding conversations while simultaneously thinking about other things. For this reason, Cato says that "organising the information is critical to how much of that message actually gets through or how much of that message you get to deliver, not even what gets through".

Interestingly, Cato believes that advertising is a short-term tool to sell products and services, and is not essential to brand-building.

"Brands are about forever. Brands are about what’s been and what’s coming,"

"What we talk about is companies using their real assets, the things they do everyday, the things they have to purchase to run their business, whatever it is, as being a meaningful part of that communication about what the brand is."

Companies also have to be able to live up to their branding and satisfy customers’ expectations, especially when negative comments can spread easily on the internet. Also, the damage to companies from disappointing their customers could take a long time to repair, says Cato.

"I think companies underestimate the resources they have got to communicate with people and the opportunities they have everyday. And those experiences are never neutral," "They are really positive or they are negative. You don’t sit there and go ‘I really didn’t notice or I didn’t care’, you go ‘no, that was a nice experience’ or ‘no that was a terrible experience’. And each one of those affects how we think of the products and the brands and the things that we live with everyday." Ken Cato was the keynote speaker at the recent brand-building seminar, ‘Building Great Brands Congress 2008’, in Singapore. His company, Cato Partners, organised the event.

Social entrepreneurship: Innovative care for the elderly

Tue, 13 May 2008 16:26:38 +0800

---- by Grace Segran, Strasbourg, France ----

Some ten years ago, when Jean-Daniel Muller and his friend, Jean-Michel Ricard, were studying to become sports teachers - both aged 23 - they felt that not enough was being done to help the elderly. So, they decided to develop a series of exercises for the elderly as part of their 3-month practicum, which would eventually form the basis of an innovative scheme.

Their theory was that physical activity would improve the quality of life of those aged 75 and above, and help them lead independent lives. So they developed gentle exercises that could be performed while being seated.

"At the end of 3 months, the participants’ lives were transformed by these activities and they told us that we cannot stop; we must continue our work with them," Muller says.

Their work with the elderly did continue and now some fifty thousand senior citizens across France each week take part in, and benefit from, hour-long collective exercise routines which encourage mental stimulation and social interaction which, in turn, gives the elderly confidence and a sense of well-being.

But it wasn’t all plain sailing for Muller and Ricard. Although they were convinced of the value of their work, they initially had difficulty in convincing the directors of retirement homes and government officials to provide funding for their proposed programme. However, the authorities in the Alsace region eventually agreed to implement their programme in a dozen retirement homes. But the deal was only for six months and no more.

"At the end of six months, the residents of the homes told us (again) that we had to continue the work because they had benefitted so much from it," Muller recalls. "But what (could) we do? We had no sponsors."

When the managers of the retirement homes heard that the programme was going to be withdrawn, all but one of the twelve homes decided that they would hire Muller and Ricard to continue the work. The twelfth home said it could not participate due to a lack of funds.

The very next day, Muller got a phone call from the superintendent of the twelfth home. "He told me that he was being held hostage by the residents in his office - many of them in their wheelchairs and with their walking sticks - and they would not let him go until he approved the programme for them," Muller relates. "The superintendent then said that he would find the money for it, and so could I please count them in!"

Exponential growth

In just under a decade, Muller and Ricard’s organisation, S.I.E.L. Bleu, grew from the 12 retirement homes to 1,600 across 70 departments in France, and started programmes for individuals who live at home and meet at local gyms for their sessions.

The early years weren’t easy. Muller and Ricard worked hard at selling the idea to potential clients, but they found that the best way was to demonstrate the benefits of their programme, even though it meant providing free sessions. To keep costs low, they did the work themselves and improvised equipment for the participants such as using bottles filled with sand for dumbbells.

Muller and Ricard expanded their work and created tailor-made programs to include people with special needs such as Alzheimer’s disease. The benefits were impressive. "Staff at the homes told us that the Alzheimer patients could recognise us and assimilate what we taught them to do, whereas they themselves remained unrecognisable to the patients," Muller says.

‘S.I.E.L. Bleu’ means ‘blue sky.’ It is made up of the acronym S.I.E.L. which stands for Sport, Initiative Et Loisirs (sports, initiative and leisure) in French, and the word and colour Bleu in France is associated with senior citizens.

"We keep our prices low, so that (the programme) is affordable to everyone. If someone needs our services, but can’t afford to pay for them, we will help them find a solution," Muller says.

S.I.E.L. Bleu currently employs 200 staff. In 2007, its revenue was 6 million euros with a profit of 200,000 euros which is being used to grow the company. Some 80 per cent of the revenue comes from earnings, with the remaining 20 per cent coming from the government and companies whose work involves the elderly. For example, a laundry chain which cleans the laundry of retirement homes contributes towards S.I.E.L. Bleu’s revenue. "These private companies have a great philosophy of channelling some of their profits back to the elderly," Muller explains.

Specialised services

S.I.E.L. Bleu now provides specialised services such as activities designed for the physically-challenged and one-on-one sessions for the elderly who live at home - a programme called DormiSIEL. Since 2000, they have been working with the University of Strasbourg on the certification of a two-year course for those who are looking for training.

"We believe in prevention," Muller says. "In the construction industry, for example, statistics show that accidents happen in the first two hours of work. We work with them by taking their workers through a 15-minute exercise routine at the start of the day that prepares them for the work ahead." They also work with companies to prevent problems that arise from ergonomically-incorrect and repetitive activities.

S.I.E.L. Bleu has come a long way. "My greatest satisfaction is seeing the smile on the faces of the octogenarians, and the fact that we are providing jobs for 200 people," the social entrepreneur says. In spite of his busy schedule managing and developing the company, he sets aside one day a week to work at a retirement home. "No one can take that away from me," he says.

Jean-Daniel Muller recently took part in the INSEAD Social Entrepreneurship Programme at the school’s Europe campus in Fontainebleau.

Sustainable consumption: What incentives?

2008-03-27 05:20:29.0

While most of the topics at this years European Business Summit in Brussels focused on climate change, one roundtable discussion on sustainable consumption had a strong consumer and, therefore, business angle.

Franz Fischler, the former European Commissioner for Agriculture, Rural Development and Fisheries, started the ball rolling by recognising that the consumer is king. Markets are demand driven, he says, hence its important that we devise policies from the consumers point of view.

The market should play its role and incentives should come from the market rather than from the regulators, adds Fischler, whos currently the chairman of the board of the Rural Investment Support for Europe (RISE) Foundation.

Jim Murray, the former director of the consumer organisation BEUC, the European Consumers Organisation, observes that most of the initiatives aimed at promoting sustainable consumption have had rather disappointing results. Take, for example, Heroic Green Consumers where there is very little spillover into the mass market. More information and labelling are provided, but theyre not necessarily better. There is, however, a proliferation of meaningless claims, he says. Campaigns to change consumers behaviour dont work because people dont like to be preached at and they dont want governments telling them what to do.

Those things do work, but in combination, Murray says. The National Consumer Council in the UK calls it a supported framework for collective progress.

He says that one of the advantages that regulation can confer is a common approach among the different actors. If done properly, it brings certainty, a roadmap. Even if businesses dont like the content, at least there is something to work on and they can compete within the framework to try to improve things for consumers.

He says that for sustainable consumption promotion to be successful two things are necessary: a combined approach with different initiatives complementing each other, and a more realistic understanding of consumers as they actually are, and not as we would like them to be.

Carrefour has 25 million customers visiting more than 10,000 stores a day globally. Referring to a survey that reveals the customers explicit and implicit needs, Roland Vexalaire, Quality Responsibility and Risk Management Director of the Carrefour Group, is puzzled that the customer hasnt asked for more green products.

He believes price is one of the reasons why consumers are not jumping on the eco-bandwagon. An example of what might be keeping eco-product prices high, is using third parties to work on the green credentials and labelling in order to satisfy those who want eco-guarantees.

To encourage and support businesses keen on promoting sustainable consumption, it is crucial to enforce financial incentives such as VAT reduction and reduction on corporate and personal taxes that come from investments, Vaxelaire says. Smarter consumption should not be expensive consumption.

Furthermore, its important to support businesses so as to enable them to continue to be innovative in these fields, and also to invest.

Erika Mink, Environment Director, Europe, with Tetra Pak Benelux agrees with Vaxelaire that consumers today are confused by the plethora of information on sustainable consumption. The challenge is how we communicate the environmental performance of products with a certain benchmark to the marketplace. Rules have to be standardised and harmonised, Mink says. We need clear guidelines. This is essential if we want to keep credibility with consumers and to reduce confusion.

Mink and Vaxelaire call for label playing field regulations to be enforced. We would like to see the European Commission support the business community and other stakeholders working on this with regards to sustainable consumption, Mink says.

In summary, Christophe Leclercq, Publisher of media portal EurActiv who moderated the session, notes there is a need for governments, businesses and consumers to be working together on sustainable consumption. While the consumer is king, policies are needed to regulate some of the activities. There has also been a call for clear rules. Businesses are not necessarily asking for less public standards, but more in some cases, while being open to different ways of implementing and communicating the standards.

Climate Change: Taking the temperature 50 years down the road

2008-03-27 05:18:50.0

Even though the issue of climate change has been known for about decades, it has only been in the past five years or so that the topic has been seriously addressed. Governments and businesses have started to adapt their policies and practices, mostly due to pressure from the public.

In a panel discussion at the recent European Business Summit in Brussels, participants considered what politicians and businesses can expect 50 years from now, and how they can prepare for future challenges and opportunities. The panel included experts from the European Commission and private companies.

All the panellists agree that climate change issue is still going to be on the agenda 50 years from now. The general consensus is that there is a need to keep tackling carbon emissions and that there is the technology to do it. In order to keep pressing ahead with initiatives, policies need to be agreed upon and implemented.

Climate change policies will stay with us for the next century, says Arthur Runge-Metzger, DG Environment of the European Commission, Head of Unit dealing with Climate Strategy, International Negotiations and Monitoring of EU Action. In 50 years time, emission reductions will still be necessary and governments will continue to lower the cap. Right now the cap is at 1.76 gigatons. In 2050, the cap might be 0.4 gigatons. Research and innovation in low carbon technologies will remain lucrative investments.

The effects of inevitable climate change will continue to be felt. Runge-Metzger says governments will have to anticipate well in advance adaptation measures for long term public infrastructure e.g where to build bridges. The private sector when making business decisions will have to take into account the effects of climate change e.g. where would you build new power plants and whether you would build the factory near a river.

Joachim Lohse, Executive Director of Oko Institute, a European research and consultancy institution working for a sustainable future, says that everyone has to be involved in the battle against climate change.

The Oko Institute sees the race for resources in full swing, fuelled by the strong economies of densely populated, newly industrialising countries. This race forces up demand for raw materials and threaten to wipe out all gains in sustainable resource efficiency. Industrialised and newly-industrialised countries need to work together to secure resources for all in the long term. The Institute feels that Europe can proactively support the exchange of know-how and innovative technologies.

Miguel Veiga-Pestana, Vice President Global External Relations of Unilever, and Carin Ten Hage, Planet Me Programme Director of TNT, both agree that end-users need to be engaged in the fight against climate change.

Unilevers greenhouse gas footprint is around 400 million tons of CO2. Of this, 80 per cent of the carbon emitted was from using home and personal care products; only 20 per cent was emitted making the products, Veiga-Pestana says. Ultimately, consumers need to change their behaviour.

The issue is climate change but when customers are involved, there are issues of sustainability and sustainable living. The challenge of the next 50 years, says Veiga-Pestana, is managing multiple issues population growth, eco-systems, water shortage and fossil fuel usage - in an integrated way.

Ten Hage discussed the business perspective of climate change; the paradox between a challenge that requires long term investment and significant change, and a business environment that has to deliver results in the short term. She emphasised the need for TNT to work together with other businesses, the European Union and the consumers to achieve its business goals as well as zero emission.

Total: A difficult balancing act

2008-03-27 05:16:36.0

Energy companies are being asked to meet growing world energy demand, but at the same time, theyre expected to cut carbon dioxide emissions. World energy demand is growing at 1.5 per cent a year. Meanwhile, negotiations are underway under the auspices of the United Nations Framework for Climate Change to broker consensus for curbing greenhouse gas emissions. Its something of a conundrum.

Total, the worlds fourth-largest quoted oil company, has a three-pronged investment strategy to reduce emissions, while producing more energy to meet world demand, says Jean-Francois Minster, senior vice president of scientific development at Total: investing in energy efficiency; carbon capture and storage (that is, storing CO2 in geological formation or in oceans, instead of releasing it into the atmosphere); and producing energy from renewable sources. Each area has strong profit potential, but each also has obstacles to scaling up development, Minster says.

Totals number one priority is improving energy efficiency, Minster says. That is where we will get the most reward for the customer and the company at the same time. The company is investing in ways to boost the energy efficiency of its facilities, and in lighter plastics, lighter elastomers, which are used mostly in seals and adhesives, engines that consume less fuel, and better performing lubricants.

The company is increasing its investments in renewable energy sources, focusing on technologies which are already profitable, such as photovoltaics and biofuels. To spur greater investment in greener energy sources, Minster says the EU needs to provide a roadmap of incentives for investment in emerging technologies which are not yet profitable. He adds that public spending on new energy technologies is vital, citing the Stern Review on the Economics of Climate Change released in the UK in 2006 that said public spending levels must double to address global climate change.

Total has already launched a pilot carbon capture and storage project in France. Minster expects the authorities in the future to give carbon credits in relation to this technology, an important stimulus to its development, which at the current cost of up to 100 euros a ton, is much higher than current CO2 market prices in the region of around 20 euros. There is not real incentive to develop this technology at a significant level, he says.

Other ways to make the technology more economical may be to inject carbon dioxide which is 80 per cent pure instead of 100 per cent, and provide policies for industry to develop cheap storage sites. Also key to developing the sector will be to set up a public monitoring authority, he says.

So far, the strategy is fulfilling the double bottom-line objective of meeting energy demand without increasing emissions, Total reckons. We are producing twice as much oil and gas compared to 1990, but our CO2 emissions are the same, Minster says.

That said, Minster points out that fossil fuels will remain the most important source for future energy demand for the next generation at least until 2030.

At the same time, technologies for renewable energy are getting close to industrialisation and economic production. This makes the system for change after 2030 possible, he adds. We must grow the industry now for it to take a significant place later.

Rhodia CEO Clamadieu favours modified auction scheme

2008-03-27 05:14:29.0

As the EU looks to the post-2012 horizon for regulating emissions of greenhouse gases, Rhodia CEO Jean-Pierre Clamadieu has expressed interest in ways of implementing an auction of emission rights, which since 2005 have been issued cost-free based on past emission levels and then traded. He calls for a sector analysis to identify which industries are most energy-intensive and could thus be hardest-hit by a new auction system.

While viewing auctions as the 'most practicable' approach compared to a potentially 'complex' tax scheme (which could trigger a World Trade Organisation inquiry) or requirements on importers to buy credits based on a carbon-content analysis of products coming into the EU, Clamadieu feels Europe shouldnt set up obstacles for its industries that cant easily reduce CO2 emissions. The EU Commission should study all the options to ensure that Europe doesnt create insurmountable challenges for some industries which are the most vulnerable since they are energy-intensive.

His own company, a European leader in specialty chemicals, has been successfully addressing these issues since the 1990s.

The worlds second-largest producer of nylon (a polyamide), Rhodia operates plants that emit N2O, one of six industrial gases targeted by an EU permit trading scheme that took effect in 2005. But it was clear, says Clamadieu, that we couldnt just wait for regulations or incentives to come on line since in France Rhodia was the largest single industrial source of greenhouse gases. So, he continues, we made a decision to invest in these solutions and, as a responsible company, were on track to reach new targets gesturing downwards to show the direction.

The European emission trading scheme, or ETS, has been very successful, according to Clamadieu, resulting in a marketplace with 10 billion euros in annual exchange of carbon-emission allowances. He observes, we can trade the permits, but we dont have to buy them up front. This system has resulted in the cost of a (metric) ton of carbon emitted into the atmosphere floating fairly stably, he indicates at around 20 euros. That price, in turn, enables industry to enter into longer-term investment planning, an immediate requirement, he says, since the ETS is set to expire in 2012. On some basic elements, we lack visibility, he adds. We lack the basic rules of where well be post-2012.

Under the proposed auction system, the permits would be sold. But Clamadieu proposes that the hardest-hit players in the industry could continue to receive free permits within a benchmark set by an international body.

Clamadieu notes that industry in France reduced greenhouse-gas emissions by 20 per cent between 1990 and 2005 while emissions from households (mainly due to poor insulation) and transportation sources rose by the same percentage. This performance indicates where real gains in emission-reduction could also be made and hence where regulators could focus attention.

Another EU tool that Rhodia has been using to collect carbon-emission rights is known as the clean development mechanism, or CDM, where lower-emission technologies are transferred to plants in newly-industrializing countries. Were a leader in using CDM, Clamadieu says, giving as examples new facilities in Brazil and Korea. We receive credits that we can trade in the EU scheme, he explains.

Looking at the post-2012 landscape, Clamadieu believes that some [proposed] changes fit very well with what industry wants. He cautions, however, that some elements lack clarity. We want to make sure that we achieve EU and government goals, but we also want to achieve our own goals as an industrial company.

KLM: Aviation has to become 'more sustainable'

2008-03-27 05:12:56.0

Airlines cannot shirk the responsibility that comes with being major producers of polluting greenhouse gases and must aggressively pursue policies to minimise their environmental damage. Thats the view of Jan Ernst de Groot, managing director of the Dutch company KLM Airlines, which by its own estimate gives off some 10 million tonnes of carbon dioxide a year from its fleet of 194 aircraft.
The Intergovernmental Panel on Climate Change (IPCC) reckons that around three per cent of all man-made global CO2 emissions come from the air transport iindustry, says de Groot. And 99 per cent of our emissions are fuel-related so fuel efficiency really is the key.

KLM whose partnership with Air France makes it the largest airline in the world in terms of operating revenue -- already claims to be in the vanguard of the campaign to reduce carbon gas emissions.

According to the airline, its planes are 25 per cent more fuel efficient than the International Air Transport Association (IATA) average, while its rate of emissions growth has been running at only half its increase in actual air traffic.

Now KLM is promising a carbon-neutral programme for the coming years. In what it calls its CO2 promise, the airline says its carbon footprint will not be allowed to increase, no matter how fast the growth in company activity.

KLMs strategy is threefold: a comprehensive fleet renewal plan that will see older aircraft replaced by up-to-date models that consume less fuel; technical and operational changes to maximise fuel saving; and offset compensation schemes to invest in alternative energy sources.

Under the companys CO2 ZERO offset plan, passengers are offered the chance of contributing to a number of programmes all approved by the World Wide Fund For Nature (WWF) -- for cutting emissions in the developing world.

The aim is for passengers to eliminate their journeys overall impact on climate change by buying into a project that reduces carbon pollution and offsets the aircrafts emissions.

De Groot admits that so far such schemes have had limited success among individual passengers, but he notes a growing interest in the corporate world.

Many big companies these days have their own green agenda, so increasingly these big clients of ours are insisting on (offsetting). This is the way it will get up and running, he says. KLM also supports another major change that is beginning to loom: the introduction in 2012 of a carbon emissions trading system in the aviation industry, similar to those already in existence in other sectors.

According to de Groot, such market incentives are an essential way to encourage operators to improve their fuel efficiency.

But he says regulators both national and international need to do more to create the conditions under which airlines can prepare for a cleaner future.

A recent decision by the Dutch government to impose a green ticket tax on flights leaving the Netherlands may play well politically, de Groot says, but by hitting KLMs competitiveness, it could end up holding back environmental planning.

Measures like this ignore todays reality of an open European market and indeed an open trans-Atlantic market and the fact that we are in global competition in our industry.

We really need to take these economic realities into account, otherwise -- no matter how much we may want to -- we wont be able to take the investment decisions we need to, he says.

Airline chiefs could be tempted to take a less proactive line on climate change. After all, it is not as if the world has any alternative to international air travel, or airlines any alternative -- as yet to carbon fuels.

But for de Groot, the message is clear. Society and the world community count on the aviation industry to make contact all over the world Its no good focusing on the fact that there is no alternative. We have to do everything to become more sustainable.

Ericsson: Aiming to help reduce emissions while 'not shying' away from its own responsibilities

2008-03-27 05:11:15.0

The telecoms sector isnt regarded as a major polluter, but that isnt stopping firms in that industry from doing what they can to help tackle climate change.

One such telecoms firm, Ericsson, took part in the European Business Summit held recently in Brussels -- a summit devoted this year to greening the economy and reducing carbon emissions. One might wonder why a company that is neither a big polluter, nor present in the energy sector, would feel the need to participate in such a summit. Yet, Ericsson believes that information and communications technology (ICT) can help companies in other sectors reduce their carbon footprint.

If you look at the total manmade carbon dioxide footprint in the world, explains Håkan Eriksson , the Senior Vice President and Chief Technology Officer of Ericsson, the ICT sector only contributes 2 per cent. If you look even further, the mobile telecom community contributes only 0.2 per cent, and thats giving a mobile phone to 3.3 billion people in the world -- so half the worldwide population has mobile communication to the carbon cost of 0.2 per cent ... We can do a lot [to reduce the global carbon footprint], and that is one message wed like to bring across, without shying away from our own responsibility of course.

By responsibility, Eriksson means the steps his company has taken to reduce its own carbon footprint. The first generation mobile systems contributed 180 kilos of carbon per subscriber per year, but Ericcson has now reduced it to 25 kilos per year. At the same time, we now have mobile broadband with 15 megabytes per second, so you get a lot more with less of a carbon footprint. Eriksson says.

Eriksson suggests a few ways that other sectors can reduce their carbon footprint. It varies depending on who the player is. First of all, if you are just an enterprise, see what ICT solutions can do for you just to bring down costs travel costs, other energy costs, and so on, and in the end it will also help the environment. Regulators and politicians should also make sure that they have collectivity and that they have the possibility to use these services.

Eriksson would also like to see the 49 billion euros in infrastructural funds that Europe most likely intends for building things like railways be spent instead on building ICT solutions, as they would have a much better payback when it comes to reducing carbon emissions and thereby also making a greener economy.

The most striking example of where information technology can contribute indirectly to reducing the carbon footprint is through the use of video conferencing as a substitute for travel. Travelling from London to New York has a cost of 1300 kilos [of C02]. Compare that to an annual mobile subscription, which is 25 kilos. By replacing travel, you can reduce the carbon footprint a lot.

Eriksson suggests we might at some point be able to use the IT sector in even more innovative ways. For instance, he imagines that it might be possible to schedule the way planes fly by computing power or optimal flight routes and wind resistance, in order to reduce the 1300 kilos of C02 emitted on a Transatlantic flight. That being said, he recognises that while reducing the carbon footprint of planes would be a helpful contribution, it can never be reduced to zero, which would imply never flying at all.

Arcelor Mittal: Lightening up heavy industry

2008-03-27 05:09:27.0

Steel is one of the industrial sectors under intense pressure to cut greenhouse gas emissions. By its very nature, producing steel consumes a lot of energy, which in turn produces a lot of carbon dioxide. But its not as bleak as all that: the steel industry has been trying for decades to find ways to cut CO2 emissions, says Michel Wurth, a member of the management board of ArcelorMittal, the worlds largest steel maker.

A little-known fact about steel is the rate at which it is recycled: at ArcelorMittal, 40 percent of the steel the company produces is recycled. Steel is endlessly recycled throughout the scrap route, Wurth says, speaking at the European Business Summit in Brussels. Its an almost perfect material from an environmental point of view.

One of the major ways a steel company like ArcelorMittal is looking to slash its emissions is to reduce the energy intensity of the production process, something ArcelorMittal has been actively focusing on for a long time. Optimising energy is a major issue in our investment decisions, Wurth says. Since 1990, the company has boosted energy efficiency by 20 per cent.

Having said that, the company notes its has scope to improve the energy efficiency of some of its plants, especially in fast-growing developing markets that represent about half of the companys worldwide production. In some emerging markets where we acquired (facilities), there is still a lot to do to move forward and improve, he says.

The best way forward to making major progress in curbing emissions, Wurth believes, lies in a global agreement for the steel industry. The logic is simple: 90 per cent of all steel produced worldwide comes from 10 EU countries. The major producers would agree to a baseline measurement of emissions, to which companies could benchmark performance. Such a system would provide a powerful incentive for companies to boost efficiency, he reckons.

While ArcelorMittal is a member of the European Union emissions trading scheme, Wurth believes the system- due to start-up problems when the EU doled out too many credits to companies and is now fine-tuning the system- has yet to reap major benefits. The system works this way: a limit is set on the amount of pollution a company can emit, and firms are issued permits, equivalent to credits representing the right to emit a certain amount. These credits can be bought and sold in an open market.

The biggest merit of this policy instrument is to make actors see carbon emissions have a cost when you drive your car, or when you make steel, on a global basis, Wurth says. This will be a global solution, but we are not there yet, he adds.

Looking ahead, ArcelorMittal is looking into how it can make lighter steel and sees this as the boldest way forward to reducing CO2 emissions provided the European Commission creates incentives to develop new processes and new steel grades.

At the same time, the EU is examining ways to ensure energy-intense sectors such as steel remain competitive, while still meeting climate change goals. But more clarity is needed in these policies, to be unveiled by 2010 at the earliest. Otherwise, Wurth warns, companies in Europe will lag behind their competitors in other regions in terms of investment. What is more, the costs could make European cars and machinery more expensive too.

The global view by our company is that we have to be proactive, Wurth says. We believe steel should be part of the solution, not part of the problem.

Alstom: Clean power needed to reduce CO2 emissions

2008-03-27 05:07:32.0

Mankind will keep using fossil fuels to generate electricity for many decades to come, and will need all the help it can get to curb emissions of carbon dioxide, or CO2, that go with burning fossil fuels. Thats according to Alstom, a leading manufacturer of power turbines and a company which sells equipment to make coal power stations cleaner and more efficient. It is also developing techniques to capture and store CO2.

The International Energy Agency (IEA) predicts the need for electricity generation in 2030 will be twice as big as now, says Joan MacNaughton, Alstoms senior vice-president in charge of power and environmental policies. Some 70 per cent of that electricity will come from fossil fuels.

If you dont clean up that generation from fossil fuels, youre actually not tackling climate change, she says.

CO2 is one of the main contributors to the greenhouse effect that is believed to be raising the earths temperature. Developing renewable energies is important -- and Alstom is involved in hydro-power stations such as the Three Gorges dam in China -- but in twenty years time, the bulk of electricity will still come from fossil fuels.

In 2030, 60 per cent of C02 emissions in the power sector will come from stations that are already built or will have been built by 2015, says MacNaughton.

People in the developed world can turn down the heating in their homes, but the developing worlds electricity needs are massive: some 1.6 billion people currently have no access to electricity. To give them electricity at an affordable price means using coal.

So its a no-brainer. If youre going to tackle C02 emissions, youre really going to have to tackle clean power clean power from clean coal and carbon capture and storage, says MacNaughton.

Boosting the efficiency of a fossil fuel power station by one percentage point leads to a reduction of CO2 emissions by more than two percentage points, she says.

Alstom has just inaugurated a C02 capture project at a small-scale pilot power station in Wisconsin, in the US. It uses chilled ammonia to capture carbon dioxide that will be either be used commercially or sequestered underground. Alstom hopes to move on to a large-scale demonstration plant at the start of the next decade, and to market that technology by 2015.

But large-scale demonstration plants may need fiscal incentives, as well as regulatory and carbon pricing framework, to get off the ground and on to the market, MacNaughton says.

A regulatory framework for carbon storage is particularly important to foster public confidence in that technology, she adds. People will need to be reassured that storing CO2 is safe, that it wont escape, and that there will be proper monitoring.

EU regulators are ahead of the game, by currently producing a set of rules for carbon storage, says MacNaughton who, before she joined Alstom in 2007, was a top UK civil servant overseeing energy issues.

While some companies complain that they are not given enough lead time to prepare for those regulations and make the necessary investment decisions, Alstom says it is less dependent on future rules. We are pretty persuaded theres going to be a need for that technology, and we invest quite a lot in research and development, MacNaughton says.

Still, we need a long-term signal about what the framework is going to be. And the sooner we get it, then the more chances weve got to tackle the climate change challenge, MacNaughton adds.

Shell CEO van der Veer: Carbon dioxide regulation necessary to make the markets work

2008-03-27 05:05:16.0

If governments do not intervene, industries will meet the growing demands for energy in the cheapest way possible, and carbon dioxide (CO2) emissions will increase. That puts Jeroen van der Veer, CEO of Royal Dutch Shell plc, one of the worlds leading petroleum companies, in an odd position: a leading capitalist campaigning for more government regulation.

What is the role for government? What is the role for Shell? What is the role for our consumers? asks van der Veer. If you dont specify that, nothing will happen, and in 10 years you will say, We didnt make the goal. And that would be bad news, because I think CO2 is a serious problem.

Van der Veer has made the issue a top priority, working as the Energy Community leader of the World Economic Forum energy industry partnership in 2007-2008, and this year he was chair of the Energy Summit in Davos.

The problem is that the earths population will grow by 50 per cent in the next 40 years, to 9 billion people, and after 2015, easily-accessible supplies of oil and gas will probably no longer keep up with demand. Even if solar power, wind power, biofuels and nuclear energy are fully developed in that time, the demand for energy will be so high that oil, gas and coal a combination of fossil fuels will still grow in absolute terms, says van der Veer. Maybe not in percentage, but people will use more of it.

Reining in CO2 emissions is a complex issue that will require rules that encourage both energy conservation and investment in technology to capture carbon dioxide.

More than half the energy generated every day is wasted, so reduced consumption has a dramatic effect on production. The average car uses about 20 per cent of its petrol to move, and the rest is lost as heat. During an aircrafts take-off, 92 per cent of the energy is wasted as heat. Only 35 per cent of the energy in burning coal becomes electricity in a power plant.

Some conservation initiatives are well established in mature economies, such as fueleconomy standards for cars. Other schemes, such as a cap on carbon dioxide production under which CO2 over-emitters could buy credits from companies that didnt use all their energy allotment, are in early days.

People like myself have to work in close cooperation with Brussels, the government, to get a good trading scheme off the ground, says van der Veer. If companies can count on a reasonable CO2 price for the coming 10-15 years, he says, they will invest capital to reduce energy use.

You can only do that if you start to make policies and have mechanisms in place on how this trading system can work, he says. If we dont get good trading systems off the ground, then our industries will emit more CO2. We will contribute to the problem.

Persuading people to use less energy, and so waste less, wont be enough to stop carbon dioxide from increasing in the atmosphere, says van deer Veer. Carbon capture will be required.

We do research at Shell, he says. If we can find something to do with CO2 which is now unknown, say if we could make building materials of it, that would be great news.

And there are existing technologies, such as storing carbon dioxide in the ground, that are already understood, but they are not economic. Because CO2 capture and storage adds costs and yields no revenues, government support is needed to make it happen on a scale large enough to affect global emissions. At the least, argues van der Veer, companies should earn carbon credits for the CO2 they capture and store.

People always think the market will solve all of it, says van der Veer. That of course is nonsense.

Only governments, he says, have the power to make energy so important that people have to make choices. Companies and non-governmental organisations (NGOs) can make suggestions, but governments make decisions. If they create the right rules and incentives and dont create barriers, argues van der Veer, the global market will direct money and brainpower to the best solutions. The alternative is a global market failure, and future generations would pay the price.

Microsoft's Courtois: Using technology to tackle climate change

2008-03-27 05:03:32.0

Tackling climate change for Europe is an incredible opportunity to innovate and compete with the rest of the world. Thats the view of Microsoft International President Jean-Philippe Courtois, speaking at the recent European Business Summit in Brussels, which was devoted to climate change.

Technology can help by linking entrepreneurs to academics, venture capitalists and big business, Courtois says. He proposes a system that allows entrepreneurs to file patents for ideas across Europe easily and cheaply, with a sort of automated processing that would connect ideas to venture capitalists. Then global companies could use their scale to bring ideas to market faster.

"I think there are a lot of opportunities for Europe to do more of that," Courtois says, "and I think the environment may be the perfect cause to make that happen."

Climate change will affect everyone, but it will have the biggest effect on people who have done the least to cause it, and Microsoft is following founder Bill Gates prescription for creative capitalism.

The company believes that its expertise in supporting innovation can help. And if Microsoft founder Bill Gates wins a following, creative capitalism will begin to solve problems for those people who have not yet benefitted from technological change, "in particular the billion people who live on less than a dollar a day."

"I hope corporations will dedicate a percentage of their top innovators' time to issues that could help people left out of the global economy," Gates said at the World Economic Forum in Davos in February. "This kind of contribution is even more powerful than giving cash or offering employees' time off to volunteer."

At the European Business Summit in Brussels, Courtois wanted to show how Microsoft can help.

"We think about the way we can innovate in our products and our services to actually enable people, government and businesses to make the planet more environmentally friendly," Courtois says.

Many are the possibilities. Microsoft is trying to play its part for the climate, with a mass transportation system for workers near its US headquarters that saves 45,000 kilometres of car traffic a day.

Other ideas are simple, direct and plainly of self-interest. The new Windows Vista operating system can put the computer to sleep at the touch of a function key, which is going to save a lot of money in terms of energy spent and the longevity of your PCs, Courtois says, adding that Microsoft has a partnership with environmental organisation World Wide Fund For Nature to educate millions of consumers on how to do that.

But the greatest impact Microsoft can make on the climate comes not from its direct efforts, but as Gates said at Davos, from "when we show how to use technology to create solutions."

Software technology can run a household, managing the lights, washing machine, and battery rechargers in the most cost-effective manner. Computer-to-computer audio-visual connections allow more face-to-face business meetings without taking trains, planes or cars. Future electric car transportation systems will require new technology.

"We have some incredible scenarios which are not 10 years down the road, they can happen in the next few years at the prototype level," Courtois says. A system of cars using rechargeable batteries has been proposed in which people are going to borrow those cars, "and you are going to deposit those cars where you go, and what you need to do that, is sort of a very smart grid of rechargeable energy to connect drivers and cars themselves with the source of energy."

Training people in IT is also key to solving future problems. Over the last five years Microsoft invested $235 million on training millions of people, says Courtois, because "Microsoft is about setting a long term objective to be sure we supply the skills needed by the next generation of users."

Creating a climate for change

2008-03-27 05:01:35.0

A new INSEAD-European Business Summit report on climate change has highlighted a surge in green activities by US entrepreneurs, backed by venture capital. Until 2005, the amount of VC funds invested in clean technologies such as solar and wind power had been running almost neck and neck in the US and Europe. But then there was a sudden surge of VC interest in the US in 2005, the report says, which resulted in US firms raising $4.5 billion in VC funds to invest in clean technology the following year, while the EU raised $1.5 billion.

In an interview with INSEAD Knowledge, the authors of the report, Benjamin Warr and Renato Orsato, senior research fellows at INSEAD, talk about the issues facing Europe as it tries to tackle carbon emissions and climate change.

In Europe we have a very strong regulatory push in terms of a driver to promote eco-innovations or cleantech, Orsato says. In America, you rely much more on market pull, so this also (has an impact) on the size of investments in venture capital. So although Europe is actually the leader in patents in cleantech, America leads the way in terms of venture capital investment.

Orsato says VC investments in cleantech "mushroomed in 2005, due in part to the ratification of the Kyoto treaty, the impact of Hurricane Katrina in New Orleans, and the environmental crusade of former US Vice President Al Gore.

So we have in America $4.5 billion in 2007 invested in cleantech, higher than the EU (at) about 1.5 (billion). Its still a small quantity when you compare with the total amount of venture capital, but it serves as a good indicator of the market belief that there are opportunities to be tapped into.

The key issue for Europe is to understand that US venture capital in cleantech is three times larger (than in Europe), Warr adds. This is despite the fact that Europe leads regarding patents and technologies in clean energies such as wind, solar, combined heat and power and the like.

The worrying thing for Europe is that the US can move very rapidly. Now the issue is with three times as much investment money in the cleantech energy VC segment, will the US simply buy the patents, buy the technology, buy the brains and make the most of it, as its done in the past with other technologies?, he adds.

The key question for Europe is to say how can we maximise investments in clean energy technologies and that involves the creation of a culture of investment in these types of funds. What happens in the US and pretty much everywhere is that you get a virtuous cycle: someone who invests in that domain makes a profit from that domain and then reinvests further.

We have to generate a culture for that in Europe, Warr says. We have to generate clusters of eco-innovation, regions and centres where people can network (and) where people with technology ideas can meet financing partners and meet businesses who are able to take products from demonstration to deployment and to full commercial maturity.

The report points out that mainstream VC firms normally try to assess environmental issues as risks in terms of their investments. However, cleantech VCs regard these issues as potentially adding value, besides the risk reduction factor. Referring to the tipping point of cleantech VC activity in 2005-2006, the report says the change in attitudes led to more green pragmatism from governments, as well as businesses.

As for the regulatory framework, the EUs is seen as more demanding than that in the US, the authors say, adding that this makes one wonder why cleantech VC investments in the US are substantially higher than in the EU. After all, the US has not ratified the Kyoto protocol, and its unclear at this stage whether the next US president will seek to enforce regulations on carbon emissions.

While in terms of regulation, the EU has managed to get the buy-in of the 27 member states, environmental initiatives in the US are generally dealt with by individual states rather than federal government.

Thats a considerable reality, Warr says, in the sense that Europe has been able to identify and develop the political will to set targets for carbon constraints 20 per cent reduction by 2020 in CO2 emissions, 20 per cent of energy supplies by renewable fuels and 20 per cent improvement in energy efficiency. Now some might say these are not ambitious, that from a scientific perspective we should ask for greater carbon constraints. But Europe has managed to do this whereas the US has taken a different perspective.

But while Europe and the US may be taking different paths, Warr says carbon constraints will remain the major issue of the century. There may be other hot topics such as water, food and energy security, he says, but the issue of carbon constaints will shape global business over the next one hundred years. And if youre not working one step ahead, he says, and receiving the competitive advantage that you can achieve through investments in eco-innovations, then youre working (with) an old business model and youll be out-competed.

The report, Greening the economy: New energy for business, creating a climate for change was written by Benjamin Warr and Renato Orsato, under the supervision of Luk Van Wassenhove, Professor of Technology and Operations Management and academic director of the INSEAD Social Innovation Centre. The report, an initiative of the Federation of Enterprises in Belgium received financial support from Shell and Microsoft.

Intel's Barrett: US needs to improve innovation capacity to maintain lead

2008-03-27 04:59:43.0

The United States will need to improve its capacity to innovate if it wants to maintain its economic position in the world, says Craig Barrett, Chairman of Intel Corporation. Furthermore, government must make R&D more of a priority, as should private industry.

Barrett says both the United States and Europe are facing a problem several years down the road. Rather than comparing the US with Europe, the competition is really outside these two geographic areas. For example, Intel, being one of the biggest hi-tech venture capital investors in the world, used to make 90 per cent of its investments in the United States, whereas today about half is done outside the US, increasingly targetted towards Asia.

Barrett gives this simple advice: Invest in smart minds, invest in smart ideas and then make sure the environment is suitable for investments and innovations. A great deal of this requires the ability to take risk. If you take an intelligent risk and you fail, youve learned something.

With a decline in science-related subjects at university level across Europe and the United States, Barrett attended the European Business Summit on climate change and took part in a roundtable called Education: Managing Europes Pipeline to Drive Education".

With more than half of the advanced degrees in the United States awarded to foreign nationals, Barrett explains why this decline in interest poses a threat to our societys ability to grow. Our standard of living is such that we can only compete with our minds and our ideas and innovating rapidly. You can only do that with education and investment in R&D. So unless Europe and the US excel at that, were going to see standards of living go down, competitiveness go down, and our ranking of our economies in the world go down.

Whos responsible for this? A myriad of environmental factors have an impact on this phenomenon. Barrett adds, If you look at all the emerging economies around the world (they) focus very much on growing which requires well-educated people, typically in the technical areas. So almost the poorer the economy, the greater the interest in the areas important to the future; and the wealthier the economy, its inverse the less the interest in these topics. So its a government issue, its a societal issue, its a media issue, its a parental issue its all of these factors working together.

Intel is active in the field of education, training millions of primary school teachers around the world how to bring technology effectively into the classroom to make education more interesting. It maintains close associations with research institutions and universities, while funding research programmes. Lastly, as the world's largest venture capital institution, Intel involves itself in the entrepreneurial aspects of the university projects it supports.

On the summits topic of climate change, Intel is a manufacturing company that would like to demonstrate to the rest of the world its capacity to become more energy efficient. More importantly, while the information and communications technology (ICT) industry is not a major consumer of energy, responsible for only 2 per cent of the worlds power, it is able to influence the rest of the worlds consumption of energy. Barrett suggests looking at the biggest consumers first: energy generation, transportation, housing, building and manufacturing. Intelligent use of information technology can make each of those sectors more efficient.

But what can the information technology do for our future? Barrett says that in the short term, we can expect more gadgets that work at lower power with access to more information, and the innovation is limitless. Each of these devices is not important. Whats important is what problem you solve with the device. You never quite know whats going to be the outcome of research.

The Experience Trap

2008-03-04 11:47:39.0

When companies look for a manager, they should look for experience, right?

Well, maybe not. INSEAD professors Kishore Sengupta and Luk Van Wassenhove say their research has revealed what they call the ‘experience trap.’

"Conventional wisdom holds that as we do more things more often, we learn from experience and get better and better, and what we found in our research was that actually some of it may not be the case," Sengupta says.

Sengupta is an Associate Professor of Information Systems and Van Wassenhove is Professor of Operations Management and Director of the INSEAD Social Innovation Centre. What they found was that in big complex projects managers tend to draw on experience that doesn’t help, or actually hurts the project.

In their research, they found that experienced managers applied the wrong lessons, didn’t link the right lessons with outcomes or were given erroneous objectives or unhelpful feedback. It all adds up to extra problems in project management.

"Managers tend to learn the wrong lessons and apply them again and again in a way that’s fundamentally counter-productive," Sengupta says. Sengupta and Van Wassenhove used an intriguing simulation that mimics a real project development environment. As managers go through the simulation they have a number of decisions to make.

Many managers ran through the simulation and made errors, then they got feedback and tried the simulation again – and made the same mistakes.

"These things are deeply engrained into their experience," Van Wassenhove says. "You have to help them unlearn what they’ve learnt and give them tools so they can avoid these types of mistakes."

A common mistake is in starting a project with one goal or one budget; and then when some of the variables change, as they always do in projects, managers decide to add staff but they fail to take into account time lags in hiring and training people, and projects end up late and over-budget. This is particularly true in software development, but Sengupta and Van Wassenhove say the lessons are widely applicable.

"Most projects are complex in that the decision you take now, you see the effect later," Van Wassenhove says. "Believing that experience will help you and then trusting that experience blindly without questioning the knowledge in the new situation is very tricky."

It’s not that managers aren’t smart, but projects are very complex, so managers make a lot of decisions over time and often for many projects at the same time. That makes it difficult for them to see the lessons they should be learning and to apply them to future projects.

"If you are running 20 projects and you’re dealing with a couple of hundred people and all these projects are in different stages of completion, it’s very easy to fix something here and something there, and you lose track of action outcomes," Van Wassenhove says.

Estimates, goals and incentives are often unrealistic at the start of a project and as projects progress, things change and become more complex. Often the project managers actually know the goals and estimates are unreliable from the outset. But business culture dictates that managers shouldn’t renegotiate or readjust, even when they have new information.

"It creates a certain dynamic which leads to projects becoming more and more unproductive," Sengupta says.

Instead, companies should look at goals that induce the behavior they want to foster and then constantly review the goals to make sure they are creating the right behavior and outcomes.

And managers don’t get the right feedback either. They get lots of reports and information, but it’s not always very insightful and doesn’t connect actions with outcomes.

Sengupta says it’s not as though companies don’t have the information or they don’t want to give it to managers, but "they don’t give it in a way that the managers can understand what’s going on and draw conclusions that can help them in this and future projects."

Counting the cost

2008-03-04 11:46:49.0

'Rogue traders' are not exactly a new phenomenon, but when their activities eventually come to be uncovered by their bosses, they may have already run up hundreds of millions, or even billions, of dollars in losses.

First came Nick Leeson who brought down Barings Bank in 1995 with trading losses on the futures markets of £860 million or some $1.4 billion.

Now, Société Générale, one of the world's leading banks, is trying to come to terms with how a single rogue trader, named Jerome Kerviel, allegedly managed to lose some five billion euros.

Leeson has been quoted as saying he’s not surprised that rogue trading has happened again as it’s "probably a daily occurrence among the financial markets." However he told the BBC he had been shocked by the size of the alleged fraud at Société Générale.

INSEAD Professor of Banking and Finance Jean Dermine says "Société Générale is one of the world leaders in equity derivatives and therefore would be expected to have the most advanced risk management systems."

But these systems are expensive and do not yield tangible benefits, because under normal conditions, when there is no loss, it’s hard to evaluate the opportunity cost of such systems. Furthermore, there is permanent pressure and temptation to reduce costs across the board at most banks.

The Société Générale case underscores the inadequacy of internal controls within banks, suggesting that central bank regulators should perhaps play a more active role in controlling the trading books of large banking institutions. However, Dermine argues that relying on central banks alone is not the best solution and "pressure should be exercised on financial institutions to do a better job themselves." This may be achieved by increasing disclosure of information and "asking banks to disclose at the end of the year operational losses which could include all such trading losses," Dermine says.

Craig Smith, INSEAD Chaired Professor of Business Ethics and Corporate Responsibility, who has recently published a paper called ‘Why managers fail to do the right thing: an empirical study of unethical & illegal conduct’, is puzzled by the absence of moral constraints on Jerome Kerviel, who took "big bets with somebody else’s money and should have known it was wrong."

Among Kerviel’s alleged excuses for violating the rules of the bank was the claim that ‘others’ were doing the same. "This is a standard way of denying responsibility for one’s own actions," Smith says.

However, had Kerviel made a profit for his bank instead of a loss, would his actions have been rewarded rather than sanctioned?

Dermine is convinced that, irrespective of the potential loss or gain of Kerviel’s positions, the bank would have been under the obligation to dismiss him as soon as they discovered his unauthorised trades. This fact alone makes one wonder then why Kerviel pursued these for so long, since he would not have been able to disclose to his bosses that he had been taking unauthorised positions, even if the trades had made large profits for the bank instead of huge losses.

With the results of the investigation still pending, Craig Smith suggests however that "the huge ambition of an outsider (Kerviel), not having attended a Grande Ecole (one of France’s top schools)," combined with a corporate culture which is perhaps too focused on profits, are potentially factors to be considered when trying to understand what really happened at Société Générale.

Winning with value

2008-03-04 11:46:17.0

Too many companies focus on just the cost of software systems, rather than look at the business value they generate. That may not be surprising given the complexities of trying to assess the value of software assets, but according to a new study by INSEAD professor Soumitra Dutta, companies who do this are taking the easy way out.

In the study called ‘Recognising the True Value of Software Assets’, Dutta argues that this key existing asset represents ‘enormous hidden value for the firm.’

But for organisations to switch their attention to value rather than focus on cost will require a shift in mindset, he says.

"What is important to realise is that as an organisation you not only need to keep costs under control but you also need to focus on value. And value is generated not only by more top line, but also by managing the risks in the system in a much more effective fashion," says Dutta, the Roland Berger Chaired Professor in Business and Technology at INSEAD.

"So you need to understand which of your software systems are critical for your business value generation, either generating new revenues or in protecting your current revenues, and then to be able to decide and make the right choices of limited resources in the right systems. So it’s really a question of being aware, and once you’re aware of the implications, then hopefully management will make the right decisions."

The study, based on a survey of some 250 CIOs and CFOs at companies with revenues of $100 million to more than $1 billion, found that 77 per cent of these C-level executives thought their core software assets were critical or very critical to their business strategy. Yet, that said, some 60 per cent said they did not know the size of these assets. Also, around one in three of these C-level executives (29 per cent) said they didn’t even know how much they spend on these assets each year.

"I sensed a great deal of frustration in the basic question: ‘are we as an organisation getting the right return back from this investment in software?’" Dutta told INSEAD Knowledge.

"What we find is that, as a result of these complexities of the nature of software and the lack of appropriate tools and methodologies, many organisations have taken a very simplistic cost-dominated view to managing software."

"There’s very little discussion and proper management of not the cost side - which is important - but much more important is the value side, to ask the question: ‘how much value did we generate from this investment in software and how can we increase the value from software investments?"

Indeed, only one in ten of the CIOs and CFOs surveyed rated as ‘excellent’ their team’s efforts to communicate the business value of core software assets to their boards.

New software projects tend to get the most attention, the report says, as they are easier to understand. By contrast older software systems are often treated as ‘sunk costs’, even though they probably support ‘the back-bone of the operations of most companies.’

The problem lies in the fact that software systems are difficult to assess in terms of business value. They are rarely traded on the open market, especially if they ‘reflect the DNA of the organisation and are deeply entwined within its core operational processes.’ Instead of taking a market-based approach, the study suggests companies should treat these core assets like other intangibles, such as intellectual property and the company’s brand. It proposes that companies use conjoint analysis, a marketing tool used for deciding between different sets of product attributes.

"How do you measure the value of agility? How do you measure being more innovative?," Dutta says. "Those are not always easy and that I think points to some of the core issues and challenges you see in trying to understand the business value of software." Conjoint analysis, he says, has been widely used for marketing problems, but was never applied to the software world. "So we came to the realisation that this can provide a very good avenue for understanding and addressing the issue of the business value of software."

While there’s still a long way to go before companies shift their mindsets regarding assessing the value of their software systems, some are moving more quickly than others. Notably those in the financial sector are becoming "more sophisticated," Dutta says, due to the regulatory requirements laid down by the Basel II agreement, which makes banks measure their operational risks and put up capital.

"Operational risks in a banking system or financial institution are very intimately tied to software systems, so in some sense the entire sector is now being required to understand and assess the operational risks, which are very closely linked to software risks and then allocate capital to cover for those risks," Dutta explains. "So you’ll see some sectors moving ahead at a faster pace than others."

The next phase of the research will aim to develop a tool that can be used by CIOs and other executives in assessing the business value of core software assets ‘in real business settings.’ The study was conducted in collaboration with Micro Focus.

The value creation imperative

2008-03-04 11:45:41.0

It’s been just over 400 years since a Dutch company became the first organisation to sell shares and became publicly traded. By 2007, more than one billion people owned a stake in the world’s companies worth more than $75 trillion.

Kevin Kaiser, INSEAD Affiliate Professor of Finance, says that’s a dramatic change from the days when monarchs and dictators owned everything and used their country’s resources for their good alone.

Now, we own the companies as shareholders and Kaiser says that has a number of consequences. "One of the key themes is integrity," he says.

As consumers, we demand that these companies work for us, always providing better products and services at cheaper prices. We want safer, more reliable, more feature-rich products and services, and we have the tools to help us get the best deal available.

As shareholders, employees and ‘global citizens’, we want corporate managers to treat our communities and our planet with respect and consideration.

As employees, we want to be treated with respect and be paid fairly for what we contribute, and we want to see that promotions and compensation are fair and based on merit.

"It’s very relevant for people to feel good about what they do in order to feel motivated to do their jobs," he says.

All of this is a revolution in the ownership of the world’s resources, Kaiser says. We are moving towards a world where we all share in the ownership of companies and organisations: it’s almost a form of pure communism called capitalism.

"It’s a process that’s only just beginning - the democratisation of capital," Kaiser says. However, success brings other challenges. Global warming and opportunity for abuse are two big challenges.

"The beauty is also the potential peril. As we’ve introduced the technology for communication, for transportation, for education and for medicine, we’ve created technologies that were unfathomable to the world’s rich 100 years ago or even 15 years ago, but at the same time that brings with it opportunities for abuse as well as positive use," Kaiser says.

For managers this means creating value with every decision. He sets out five important requirements for any manager:

1. Managers need to consider constantly how their decisions will benefit consumers.
2. Managers need know how their decisions will enable the organisation to create, deliver and capture more value.
3. Managers need integrity and they need to ensure that their company is one of integrity or they won’t succeed. They need to maintain integrity to be fair to employees and gain the trust of customers.
4. Managers need to stay focused on the objective of creating value. Other management goals and indicators don’t build organisations, instead executives spend their time managing the indicator rather than creating real value.
5. Managers need to remember that creating value is about expectations. They need to accept that some good ideas will fall flat and some bad ideas will be wildly successful.

In the old world of business, it was more important to know the right people, go to the right school and pull the right strings. Now, Kaiser says the only way to be sure to survive as a company and to keep your job as an employee is to create value.

"Integrity is needed for people to be positive about the company they work for," Kaiser says. "It isn’t about who knows whom and who gets promoted. It isn’t about who lies and cheats the best who gets promoted. And it isn’t about who politics the best to get promoted. Few of us will feel those systems are fair. We’ll feel it’s fair if it’s the guys who create the value who get promoted. All of us are born with a fairness meter inside of us."

This means successful companies become learning organisations designed to understand and create value, and they operate within a system of integrity, he says.

The job of management is to study the consumer’s interests and trends, the employees’ motivation for working, the competitive landscape, technological innovations, as well as industry developments to understand the impact of decisions, Kaiser says.

That’s a lot for any manager. One key is to look at the shareholder value metric, he says. Shareholders are not the most important stakeholders, but this is the metric that reveals whether the manager is really creating value.

Looking at shareholder value requires managers to minimise costs, inefficiencies and waste, to allow the company to deliver higher quality products and services efficiently at lower cost. Kaiser says that tells a manager whether they are creating value.

But getting at shareholder value isn’t easy.

"Even for shareholder value there are many different metrics. Try to think about a way to manage for shareholder value, which is a quite different metric than simply share price," says Kaiser.

Share price is one indicator but it isn’t always accurate. Kaiser offers the example of Enron, where the share price soared as senior managers quietly destroyed value in the company. He suggests a better indicator for internal decision-making is the current value of expected future cash flow.

Kaiser says managers need to know what is reasonable to expect, so they can adopt ideas that create value and reject ideas that destroy it.

Identifying, assessing and mitigating political risk

2008-03-04 11:45:21.0

---- by Bruce Gale ----

Almost all governments say they now welcome foreign investment. But do the governed? And what happens when governments change?

It seems obvious enough that businessmen would prefer to avoid investing in countries or areas of an economy where they face a high probability that their investment returns will be reduced or even eliminated completely by political developments.

Yet while investors the world over are willing to spend considerable time and money employing lawyers and accountants to carry out ‘due diligence’ on planned investments, particularly those in foreign jurisdictions, very few resources - if any - are allocated to examining the political factors that may influence the success of the venture.

Superficial and subjective

It’s true that political risk analysis has been receiving more attention in recent years - particularly in Asia - as a result of increased concern about international terrorism. However, while there are some notable exceptions, most political risk assessment remains both superficial and subjective.

Typically, such analysis is very informal, consisting of little more than a few brief visits to the country concerned by the CEO or his trusted lieutenants, supplemented perhaps by looking at a local newspapers and the purchase of a generic country risk report produced by some well-known international consultancy. The CEO then forms an opinion - influenced perhaps by additional input from local dealmakers - and a decision is made. Written reports and presentations (either in-house or by independent experts) - that might force those involved to think through the issues more systematically - are rare.

Even rarer are institutionalised risk monitoring systems designed to identify changes in the social or political environment which might affect ongoing operations.

Political risk analysis not only needs to be thorough; it also needs to be done early. This helps avoid a situation in which political judgements are rolled out in support of decisions already taken on other grounds. Once a proposed investment reaches a certain stage, few managers are capable of responding positively to dispassionate assessments. This is because no one wants to hear about the risks. Such talk threatens the bonuses of dealmakers, and could potentially embarrass senior managers who are already deeply committed to the project.

Risk mitigation strategies

Companies vary in the level of risk they are prepared to accept. They also vary in the extent to which they are able to deploy cosmopolitan country managers reasonably familiar with the social and cultural environment in which the company operates. That said, there are several strategies that can help reduce a foreign company's risk profile. Here are a few of the more common ones:

- Engage in open, competitive bidding, avoiding ‘fast track’ arrangements. Participation in the latter may invite the accusation that you have bribed local officials.

- Examine the political connections of your local partners carefully. Close association with the current regime may be advantageous now, but once key figures are removed from the political stage you could be in for some nasty surprises.

- Be a good corporate citizen, contributing to the host country's economy and culture with worthwhile public projects.

- Cultivate connections with public officials outside the industry in which the company operates. They may become very useful in a crisis.

- Do not limit your discussions to representatives of the national or local government. They may not necessarily be a good indicator of public opinion. Make a point of establishing an informal dialogue with local journalists, as well as human rights and environmentalist groups. The alternative - keeping a low profile - can make you appear secretive.

- Avoid enlisting home government support if the local authorities threaten to break agreements. Such a tactic is often counter-productive, particularly if it is done publicly.

What to do when asked for a bribe

Bribery is such a common problem in many countries that it merits special attention.

Companies that make under-the-table payments usually argue that they are necessary in order to obtain essential licences or avoid losing valuable contracts. But revelations of bribe payments - often as a result of changes in the political leadership or the development of a free press - can undermine a company's position locally and seriously damage its international reputation.

Most foreign companies try to avoid the problem by using an intermediary, usually the firm's local partner. But this does not always guarantee immunity from either political attack or criminal prosecution. And a company that pays once will almost certainly be approached for more at a later date, particularly if the knowledge of such payments gets around.

Try to find other ways of pleasing local officials. For example, a company faced with demands for protection money from local police could respond instead by donating equipment (such as patrol cars and computers) that help them do their job more efficiently. A similar approach may work with customs officials.

Yet another tactic is for the company to invest in development projects in local communities in ways that ensure that its operations have local support. This will make it difficult for corrupt officials to respond by attempting to undermine the company's position in other ways.

Sadly, many companies that find themselves under political attack have only themselves to blame. Don't let yours be one of them! Identify the risks early, and get an independent consultant (not someone who has a vested interest in seeing the investment proceed) to help you come to a dispassionate assessment about their probability. If the decision is made to go ahead with a project, work with the consultant to draw up risk mitigation strategies. Finally, institutionalised mechanisms for monitoring changes in the business environment, which could alter the company's risk profile, should be put in place.

Bruce Gale, a senior writer with the Straits Times in Singapore and a former political riskanalyst, took part in the Business Journalists Seminar at INSEAD’s Asia campus. He is also the author of a new book called Political Risk & International Business. It is available for purchase at www.mph.com.my.

Islamic microfinance gains popularity in war-torn Afghanistan

2008-03-04 11:45:00.0

---- by Rahilla Zafar, Kabul -----

After spending several years in Iran as a refugee struggling to make a living working in a beauty parlour, Shooperi Sharif never imagined that one day she would have a business of her very own.

Sharif and her family fled Afghanistan during the Taliban regime in 1996. In 2002, shortly after their downfall, the family returned to Kabul.

With war-shattered Afghanistan lacking basic infrastructure and institutions - including schools, Sharif began teaching school-aged children in her home.

Last year, the 34-year old mother of three took a microfinance loan from the Foundation for International Community Assistance (FINCA) to expand her school. After successfully paying off her loan, Sharif’s loan officer encouraged her to use the skills she learned in Iran and open a beauty parlour in her neighbourhood, something which would have been inconceivable under the Taliban.

Sharif immediately saw it as a good opportunity. While many schools have reopened in her neighbourhood, there were not so many beauty parlours.

"I had never taken a loan before; it gave me a lot of confidence to see that I could borrow money in my own name and pay it back. In Iran, as an Afghan, I would never have had an opportunity like this," she says.

Sharif is one of thousands of Afghans who refuse to take interest-bearing loans. Trying to cater to potential clients such as Sharif, FINCA in 2006 became the first microfinance institution (MFI) in Afghanistan to offer non-interest bearing Murabaha Islamic loans (contracts where sellers declare their cost and profit).

Following the guidelines of Murabaha lending, she went along with her loan officer to buy items such as tables, mirrors and chairs for the parlour. The goods were sold to Sharif at a two per cent mark up which she is paying back in monthly installments.

Paul Robinson, FINCA’s country director in Afghanistan, says not only are the products better received than conventional forms of lending, the Murabaha practice is also better for business. "The advantage of Murabaha loans is that 100 per cent of the money goes into the business. When you do small business lending at Bank of America for instance and you are a small business, as a banker, I would give you a cheque with the name of the store, rather than giving the borrower cash to make sure all the money goes into the business," Robinson says.

FINCA began its operations in Afghanistan in 2004. Two years later, following market demand, they switched their products to the Murabaha practice.

One borrower, Gul Khana, has felt the benefits of a Murabaha loan first hand. A widowed mother of four, the 37-year old was one of FINCA’s first clients in 2004, using the money to open a bakery in Kabul. "Now that all the money I am borrowing goes into business supplies, I earn more. Before, when I would receive cash directly, there was always some of the money that I would use to purchase other things not relating to my business," she explains.

Providing Shariah-compliant loans has made it possible for FINCA to expand in areas of Afghanistan where other MFIs have been turned away for charging interest.

There are currently 14 microfinance institutions in Afghanistan that are supported by the Microfinance Investment and Support Facility, Afghanistan (MISFA) - a multi-donor venture established in 2003.

With just over 400,000 borrowers in Afghanistan, the popularity of Islamic loans has enabled FINCA to become Afghanistan’s fastest-growing and second-largest MFI with nearly 60,000 clients. "Many NGOs (non-governmental organisations) are coming to me and asking how we are working in such volatile regions as Kunar and Langahar province in eastern Afghanistan. FINCA is able to do so, because we hire local people to work there that the community knows and trust. You have to learn from the local people and develop a delivery mechanism that goes with the values and norms," Robinson explains.

"Islamic products are not that difficult to develop. Here, in the developing phases, you have to understand the needs of the clients and build delivery systems people are comfortable with," Robinson adds. FINCA employee Zul-fi-Qar Mandozai, who previously worked for a rival MFI, says that from his experience working in the central province of Kapisa, clients are more comfortable with Islamic-compliant products. "At the previous organisation I worked for, so many villagers refused to take the loans because they charged interest," he says.

Joyce Lehman, a microfinance program officer for the Gates Foundation, agrees that more Shariah-compliant products need to be offered. Lehman previously worked as chief of party for Agriculture Rural Investment and Enterprise Strengthening (ARIES), the United States Agency for International Development-funded rural finance projects in Afghanistan and as MISFA’s chief operating officer.

"Out in the field, MFIs are losing clients to other organisations that provide Shariah loans and it’s that type of market competition that is making MFIs look into providing Shariah products," she says. Commercial banks that are offering small- and medium-sized enterprise loans are also finding a strong demand for Shariah-compliant products as they expand in Afghanistan. "ARIES is encouraging commercial banks to lend to SMEs by training staff and providing capital if needed. In the south and east of the country especially, many banks are finding potential borrowers to not be interested because the loans aren’t Shariah-compliant," says Lehman.

With Afghanistan’s financial system being just four years old, switching to a Shariah-compliant system is too difficult a task to fathom for many banks.

MISFA is currently working with ShoreBank International on a project providing technical assistant to commercial banks providing SME loans. "In the context of Afghanistan, in my view, developing Shariah-compliant products are critical. We have received some resistance from pockets here and there, but nothing that would derail the whole sector. However that doesn’t mean we should be complacent. We are bringing people from the Middle East where there is good experience in Islamic banking products to do some training here," says MISFA’s managing director Amjad Arbab.

Recently, the Afghan Research and Evaluation Unit (AREU) released a study on microfinance funded by the UK’s Department for International Development (DFID). In the report ‘Microcredit, Informal Credit and Rural Livelihoods: A Village Case Study in Kabul Province’, researchers Erna Andersen and Paula Kantor found that communities were often divided on their views on interest-bearing loans.

On one of the MFIs examined, the researchers wrote: "For a programme seeking to expand its client base in order to achieve operational sustainability in a Muslim environment, more direct attention to ensuring all staff explain programme costs and charges would be seemingly important."

Andersen and Kantor found that in this particular community, many problems arose from local religious leaders disapproving of interest-bearing loans.

There is little doubt that as the financial sector expands in Afghanistan, both commercial banks and MFIs will have to follow the lead of FINCA and provide more Islamic lending products. As the pioneer organisation in providing such services, FINCA has proved that such a task is not so daunting.

The impact of ageing

2008-03-04 11:44:47.0

"Ageing of populations is often viewed very negatively. Yet we need to constantly keep in mind that it is a sign of success," says Gavin Jones, co-editor of a new book called ‘The Impact of Ageing - A Common Challenge for Europe and Asia’. That’s because ageing populations in Europe and East Asia represent success in terms of lowering unsustainably high birth rates to replacement level, and prolonging life expectancy, he says.

Except for Japan, Asian countries have not yet aged as much as European countries, but that said, they are set to age at a much faster rate. In Singapore, the percentage of the population aged over 65 will treble between 2005 and 2030. The combination of much longer life expectancies and very low fertility rates will result in much smaller, and older, workforces; and societies will have to deal with much larger dependent populations.

‘Asia needs to learn from Europe’s experiences’

Jones says Asia needs to learn from Europe’s experiences and plan ahead. "You can predict ahead quite well how the ageing process is going to go."

A key lesson that Asia can learn is related to pension schemes. Jones says that countries need to consider shifting away from the current pay-as-you-go system that many currently have - where pensions are paid out of current taxes. "As the elderly population gets bigger, that becomes a tougher and tougher burden on the working population. But if, as people go through the workforce, they are contributing ahead for their own expenses - an income contributory approach - then that’s not putting the burden on a particular group in the workforce."

Jones says the ‘crisis’ of pension systems can be dealt with if the labour force participation rate is increased and people work five years longer. "The fact is that the elderly can remain productive. In many countries, the age at retirement tends to be too early," says Jones. Figures from the UK show that, on average, men retiring at 64 spend 31 per cent of their lives in retirement, as opposed to the situation in 1950, when a man retiring at 67 would have spent 18 per cent of his life in retirement.

In order to maintain the quality of the workforce, it will be important to invest in training and retraining of older segments of the working population. Not only can the elderly contribute to the workforce, but, Jones says, "they can also be productive in all sorts of other ways: in the community, through voluntary work, within the family, and through their role in looking after their grandchildren."

Keeping people ‘younger’ for longer

Gabriele Sinigoj, a researcher in diplomatic history who also co-edited this book, notes that biomedical research is an area where little distinction can be found between Asia and Europe. Between the ages of 65 and 95, the prevalence of dementia doubles with every five years of age, giving rise to fears of the increasing numbers of the elderly resulting in ‘an epidemic of dementia.’ Sinigoj says there is a universal approach to dealing with keeping so-called ‘young-olds’ (those below 75) younger for longer, and for finding solutions to the problems which may afflict those above 75. She notes that "we have an immense industry coming up in terms of ... how people could actually look forward to a wonderful final stage in their life under the circumstances that these decisive old age diseases are taken care of in a way that prolongs life in a positive way."

Gabriele Sinigoj of the Institute of East Asian Studies at the University of Vienna took part in the Healthcare2020 forum at INSEAD’s Europe campus last year.

Gavin Jones is a professor at the Asia Research Institute at the National University of Singapore.

Fast Strategy: Staying ahead of the game

2008-03-04 11:43:50.0

How can you make sure your company not only keeps its edge over its competitors, but also seizes new opportunities? In a new book called Fast Strategy: How strategic agility will help you stay ahead of the game, INSEAD professor Yves Doz and co-author Mikko Kosonen, a former senior Nokia executive, say the best way to do this is by making the most of what they call ‘strategic agility’.

Kosonen says he faced the challenges of strategic agility for years in his roles with the Finnish telecoms firm as head of strategy and chief information officer. At Nokia he became familiar with two dimensions of strategic agility, he says, namely strategic sensitivity - that is, the way in which an organisation views the world and whether it is ‘open-minded’ and attentive enough to sense new opportunities and discontinuities- and secondly, ‘resource fluidity’ which relates to whether companies can redeploy resources rapidly enough to quickly exploit emerging opportunities in a complex and fast-changing environment.

"I personally experienced how Nokia, as a leading company, gradually lost some of its strategic sensitivity and resource fluidity as a result of successful growth," Kosonen says. "In the early ‘90s it won over Ericsson and Motorola because of its strategic agility. But then over the years, some of these capabilities began to deteriorate and, when we tried to change, it became really difficult."

Outlining how the study came about, Kosonen says he approached INSEAD Professor of Strategy Yves Doz to find out more about strategic renewal. The two then launched a study into strategic agility involving some 150 interviews with a dozen companies and focusing mainly on six high-tech incumbent firms: IBM, HP, Cisco, SAP, Intel and, of course, Nokia, which had allowed Kosonen to take a sabbatical.

"When Mikko knocked on my door, I was intrigued at first and then I got really interested," Doz says, adding that he’d originally expected to oversee the research project in much the same way as supervising doctoral students. Instead, Doz and Kosonen ended up working together as co-researchers.

"When you look at this work, it’s fuelled, fed by the experience of Mikko and Nokia on the one side, plus all of these other studies we did at IBM, Intel and so on, and the work of other researchers on strategic renewal. It’s been a constant interplay between theoretical contributions - what I bring from the academic side - and what Nokia and these companies we researched - bring from the practical side," Doz says. This led to a series of ‘long and endless’ retreats in northern Finland, Brittany in France and Boston and Palo Alto in the US. "We had these long and soul-searching week-long meetings where we were trying to bring theory and practical evidence together," Doz says.

Among the main findings of the study: companies need to be agile and flexible, both in terms of their thinking and their organisational processes. This calls for specific leadership skills.

"What we’re arguing is that you need mental and cognitive agility, which we call strategic sensitivity, but basically be very open to the world, and very alert, and make sense of developing situations as they occur," Doz says. "I think one of the critical changes is that it used to be that companies could ‘do’ strategy as a periodic planning exercise and then go into implementing strategy for five to ten years and then think again ‘what are we going to do next?’ or wait for a crisis to call their strategy into question. I think today’s very different."

"So you have this constant alertness, awareness of what’s going on around you, this constant mental sensitivity and agility, this constant questioning. At the same time that would remain completely useless unless you also have the ability to redeploy resources fast and that’s where we come into the fluidity of resources as a core capability. It encompasses the ability to invest, divest, to build businesses, provide infrastructure, to have new businesses up and running in a few days and also be able, if it doesn’t work, to withdraw at limited cost and do something else."

Doz says there’s a third key dimension to strategic agility: leadership unity or the collective commitments needed for top management teams to make courageous collective decisions, and to work together to get things done, rather than be pulled apart by the constant tensions of decentralisation and delegation of business units (or functions) on the one hand, and the search for unity of the organisation on the other.

"That’s probably, to me at least, the biggest finding and learning from our research, and certainly one of the main contributions from the book: this whole notion of leadership unity and its critical importance, and how companies really need to pay deep attention to the mechanisms that sustain leadership unity," Kosonen says. The financial markets like companies which have a ‘clear value creation logic’, he adds, but at the same time "they don’t like companies that are only single business companies. So you need to have a portfolio of businesses, but that needs to be integrated, and that’s hard."

Nowadays it’s strategic integration that drives corporate value, Kosonen says, and that’s "very difficult for most business leaders who are trained to be autonomous ‘hero-leaders’ who are running their own fiefdoms and for CEOs who manage them on a one-to-one basis." But if companies are to be able to thrive on integration, they need to work as a team and that’s tough, he adds.

Collective decisions become difficult for two reasons, Doz says. First, when "people take a responsibility and identity of their own... they’re not very receptive to any ideas of change that would force them into participating in a collective process." Second, even if they did, they would remain "very much committed to the success of their subunit."

"So we need to create some form of collegiate responsibility at the top, where the top team is collectively responsible for adding value to what the collection of businesses within the company could achieve on their own," Doz says. But, Kosonen points out, collective responsibility does not mean a lack of accountability.

Fast Strategy does not just look at the political and organisational aspects of building teams, but also explores how leaders use emotions to energize teams. "Managers and researchers are focused on organisational and interpersonal levers," Doz says, "and in some ways they tend to miss the emotional dimension of commitment. I think Nokia - probably because it was led by a team of young, very ambitious people - was a very emotionally-energised organisation in the early ‘90s when the growth in mobile phone exploded. And second what we also found is the real importance of how people think about opportunities and, again, the danger of established companies having blinders put on their ability to perceive the outside world ... and the more challenging and disruptive the cognitive perceptions you can have, the better off you are."

The more successful you become, the co-authors say, the greater the risk of losing your ‘strategic agility.’ "Your vision starts to become more and more tunnel-like," Kosonen says. "You just repeat the success formula and your resources become trapped in different organisational silos, and then your leadership unity also starts deteriorating, everyone is busy with operational growth ... There’s not the cabinet, collective responsibility and commitment for further developing the corporation." That’s a trap the authors hope business leaders will be able to avoid.

While Fast Strategy explores mainly high-tech companies, the authors say strategic agility is also relevant to other industries. "It’s really amazing how widely our findings can be applied, and how applicable they are beyond the ICT (information and communication technology) industry," Kosonen says, "because the same phenomenon that is taking place in the ICT industry is taking place elsewhere. Not only is the speed of change increasing, but the nature of change is also becoming more complex, more systemic, less predictable, (and) that’s where you need strategic agility most."

A world in crisis?

2008-03-04 11:43:14.0

The US Federal Reserve took the unusual step of cutting rates twice in January by a combined 125 basis points to stave off a recession. First, it reduced rates by an unscheduled 75 basis points on January 22, its biggest single-day move for more than 20 years. Then, at the end of the month, it cut the Federal Funds rate by a further 50 basis points to 3 per cent.

Ilian Mihov, INSEAD Professor of Economics, says the Fed’s moves were necessary to bring stability to the markets. "When the financial sector goes down, it starts spiraling in such a way that it’s very difficult to restore confidence and bring back the economy on track," Mihov says.

The Fed’s emergency rate cut was partly prompted by the largest sell-off in the Asian and European equity markets in a single day since the terror attacks on the US in September 2001 and the threat of panic selling in the US markets. The exodus from the equity markets was fuelled by fears of a US recession and concerns about the structural integrity of its financial system.

According to a recent New York Times profile of the 54-year-old Fed chairman, Ben Bernanke has spent much of his career studying the causes of the Great Depression. Yet Bernanke has been widely criticised by leading economists and investors for providing poor economic guidance and for being ‘well behind the curve’ in his management of the US subprime crisis.

"There are many episodes like this we can think about (such as) the Great Depression, which was the biggest banking crisis in the history of the US," Mihov says. "And you can see how one panic after another can not only affect the financial sector but can have very significant real effects."

The January 22nd move by the Federal Open Market Committee, however, drew sharply divided views, with some critics calling the rate cut dangerous and reckless as it fueled the perception that the Fed was reacting to the turmoil in the financial markets rather than actively managing economic imbalances.

The Fed’s credibility took a further drubbing following news that the sharp sell-offs in the equity markets overseas could have been exacerbated by French bank Société Générale’s bid to unwind the positions of a rogue trader, which led to losses of nearly five billion euros.

In any case, 2008 will be a ‘very difficult’ year for the financial sector, Mihov says. That’s because defaults on mortgages in the US are expected to pick up as a significant number of mortgages will be reset from low initial fixed rates of three to five per cent to much higher floating rates of more than 10 per cent, he says.

Mihov adds that starting from this March, US$40-50 billion worth of mortgages will be reset every month for six consecutive months, of which 60 per cent are subprime mortgages.

"To me, the important thing is that if you look at the data, there’ll be new write-offs. There’ll be all these subprime mortgages that will have to be reset. There’ll be defaults for sure."

"The problems will still be there in this market, and one way to alleviate this process of resetting and reducing the defaults is actually to lower interest rates again to a level that refinancing would be relatively easy," he says.

Certainly lowering interest rates would enable US homeowners to refinance their increasingly expensive mortgages, help shore up the housing and banking sectors, as well as bolster the flagging US economy in the short term.

Easing interest rates would, however, also drive up inflation, Mihov says. "One consistent interpretation" of the Fed’s aggressive easing is that "they believe that the recession risks are high enough."

"And if the recession risks are high, it means that demand will go down and inflationary pressures will subside," he says.

In his view, the likelihood of a recession in the US is ‘slightly below 50 per cent’ as there are no clear signals from the economic data. For instance, jobs growth is slowing but remains positive, while industrial production remains flat, Mihov says. However, he notes that many economists believe a recession will occur and that the US may already be in a recession.

Even so, the US economy is ‘very resilient’, he says, having weathered and recovered from major shocks in the past.

"How fast the economy will be able to absorb these shocks and then just recover is clearly unknown," he adds.

But judging by the economic data and the amount of subprime mortgages that will have their mortgage rates reset, the US financial markets will be ‘very volatile’, he says.

"With possibly new interventions from sovereign wealth funds financing banks in the US, it’s clear that it’s only towards the end of 2008 that things will subside and will clear up."

Relationship building: A key driver for securing repeat business

2008-03-04 11:42:36.0

A study of consulting firm Celerant has found that relationship building is key to bringing in repeat business which accounts for up to 70 per cent of its revenues each year.

The study of Celerant Consulting, conducted by INSEAD Professor of Organisational Behaviour Tom D’Aunno, also found that 91 per cent of clients surveyed would like to work with Celerant again.

"We see that there is interest in Celerant for repeat engagements, either because they want Celerant to perform their magic, if you will, in other parts of the company, or because they feel that they can still learn from the Celerant techniques."

‘Same side of the desk working’

D’Aunno says that the major factor for clients deciding to re-hire Celerant is Closework, the ‘same side of the desk working’ approach on which Celerant prides itself. For the company, that means no barriers between its consultants and its clients.

"To put it simply, it’s about relationship building," D’Aunno says. "Did Celerant consultants take time to educate people in the client company? Did they try to motivate them to do their best? Did they also try to understand what was motivating individuals in the client company? Did they spend time understanding what it is that these individuals and teams of people were doing within the company? And did they help these individuals reach their full potential?"

It’s both under these conditions, D’Aunno says, and as a result of the strong relationships built, that client companies choose to work with Celerant again.

Using data to change behaviour

The Financial Times recently referred to Celerant as a consultancy that ‘focuses on operational transition, getting down to the nitty-gritty at all levels in a company and straightening out kinks in the linkages between top and bottom.’

D’Aunno notes two particular ways in which Celerant achieves this: "One of the things that Celerant is good at is helping to build teamwork within the client company which otherwise might be absent or at a low level." Another is its ability to get managers in client companies to "use data to make decisions about how to improve their behaviour."

High-profile Celerant clients include the Honda Formula 1 Racing Team, where consultants worked on changing its culture and processes to optimise Honda’s investment in a 50 million dollar wind tunnel running 24 hours a day, seven days a week; and InBev, the world’s leading global brewer by volume, where consultants worked with the client to optimise performance, reduce costs, share best practices and realise economies of scale across the 30 countries in which the brewer operates.

D’Aunno found that clients identified several key factors contributing to the success of projects on which Celerant worked:

1. The appropriate skill-sets of Celerant consultants

2. The ability of Celerant consultants to mobilise key individuals within the client company to support the change

3. Celerant’s ability to respect the client’s skills and involve the client as a partner in solving the problems identified

4. Flexibility on Celerant’s part and the ability to make adjustments to its intervention, and ways of working with a client over the course of the project

5. Celerant’s long-term planning for the client company to sustain results over time

D’Aunno says that not only does Celerant believe in the importance of focusing on organizational change, but also that "it’s to Celerant’s credit, that they deliver on these things, that they put these into practice and that the majority of clients are satisfied with the results that they deliver."

Corporate responsibility: Are companies responding to social demands?

2008-03-04 11:41:53.0

Only one manager in about six is likely to view her company as a global corporate citizen with a responsibility to help solve social problems, as opposed to one stakeholder in three. This is one of the key findings of RESPONSE: Understanding and Responding to Social Demands on Corporate Responsibility, a study created and funded by the European Commission to study the gap in perceptions of social responsibility among companies and stakeholders.

Managers and stakeholders - including non-governmental organisations (NGOs), shareholders, employees, customers, suppliers, and local government - were also found to have divergent perceptions of what it means to be socially responsible, with an overwhelming majority of some 80 per cent of managers viewing the issues from a passive ‘do no harm’ perspective, as opposed to an proactive ‘do good’ approach. Conversely, stakeholders were evenly divided between the two views of corporate social responsibility (CSR). As the authors note, this lack of ‘cognitive alignment’ means that even though managers and stakeholders may use the same terminology - such as ‘social responsibility’ and ‘sustainable development’ - they may attribute different meanings to these terms.

Mind the gap

Alignment is important because “only when all parties frame their thinking about society’s problems in similar ways can a mechanism for cooperation develop,” the report says. Without this alignment, it is difficult to agree on priorities and a plan of action.

This gap between how companies and stakeholders view the social responsibilities of firms in turn has an impact on how a firm’s actual social performance is perceived; in cases where the gap is narrower, stakeholders are more likely to perceive the firm as doing greater social good.

The project stands out from other CSR research because of its sheer size in terms of funding - some 1.4 million euros - and the amount of data collected. Indeed, more than 300 managers in 20 multinational companies headquartered in Europe and North America took part in the study, as well as representatives of 180 stakeholder organisations. In addition, over 1,000 managers globally completed web-based questionnaires for the project. Maurizio Zollo, formerly INSEAD Associate Professor of Strategy and now Bocconi Dean’s Chaired Professor of Strategy and Corporate Responsibility, led the research team, while several other INSEAD professors and PhD students also took part, including professors Susan Schneider, Lourdes Casanova and Reinhard Angelmar, as well as doctoral student Donal Crilly.

"RESPONSE represents a new way to conduct large-scale research, in which companies are involved throughout the project, from the conceptual development to the tool validation, from the recruitment of participants to the analysis of the data and the dissemination of the results," says Zollo. "The results are very encouraging: the data that we analysed shows clear evidence that the top priority in corporate responsibility is not stakeholder engagement, as is usually assumed and portrayed. CSR is fundamentally an internal change management problem."

"A very interesting feature was to interview both the executives and the stakeholders. We had both the inside and the outside view of CSR issues," Casanova adds.

On the path to alignment

The research team found a range of factors - both external and internal to the firms - which help explain why some companies are much more on a par with their stakeholders, when it comes to perceptions about CSR.

Key external factors:

1. The dynamism of the industry in which the firm operates. It’s in the high-tech and banking sectors that the views of managers and stakeholders on social responsibility are most aligned. While both industries are new to the social responsibility debate, their emphasis on product innovation and customisation means they have the highest degree of dynamic change in their competitive and social environments. On the other hand, the energy and chemicals industries, with low environmental dynamism and a low level of product innovation and customisation, have the lowest levels of alignment.

2. The regional context in which the firms are headquartered. Companies in Anglo-Saxon countries exhibit higher levels of cognitive alignment than those in many other parts of Europe. While this may be due to lower expectations among Anglo-Saxon stakeholders, it may in part be because Anglo-Saxon companies are better able to understand and adapt to the rapid pace of change in the external environment than their European counterparts.

3. The amount of stakeholder pressure/activism. You’re more likely to find higher levels of alignment between managers and stakeholders in their views on social performance among companies which face greater pressure from external stakeholders. This pressure can, therefore, play an important role in the development of managerial awareness of the social implications of their decisions and actions.

Key internal factors:

1. Business strategy. Companies competing on the basis of differentiation rather than cost efficiency are more likely to see greater alignment between managers and stakeholders on CSR.

2. Integration of CSR principles in business operations. The more companies integrate CSR into business operations- whether it be allocation of resources, or hiring personnel, or sales and marketing- the higher the cognitive alignment. This factor is one of the strongest predictors of social performance, and the authors stress the importance of this, vis-à-vis the absence of any impact from efforts to communicate and engage with external stakeholders.

3. Motivation for CSR: the innovation-based business case. In line with the point about differentiation versus cost efficiency, companies in which managers articulate the business case for CSR in terms of the expected enhancement of new product development processes have higher levels of cognitive alignment than companies that motivate on the basis of risk minimisation, cost efficiency or sales.

Training to ‘do good’

The RESPONSE project studied also the effectiveness of different training approaches on the development of social consciousness inmanagers. It found, somewhat unexpectedly, traditional executive education to be ineffective in nurturing socially responsible behaviour.

Conversely, meditation-based coaching, using yoga techniques to try and develop values conducive to socially responsible behaviour, but without the explicit awareness of doing so - in fact with no discussion of CSR - was found to influence the development of social consciousness in managers, making them more likely to strive to ‘do good’, rather than merely ‘do no harm.’

Managers participating in these coaching interventions tended to give social and environmental impacts a higher priority in their day-to-day decision-making. They also base their decisions to adopt socially-responsible initiatives less on ‘self-interest’ - factors such as a firm’s profitability and reputation - and more on emotional and ethical ones, to show caring and compassion, and not breach the implicit social contract.

In order to close the gap in the perceptions of managers and stakeholders regarding social performance, the authors stress that businesses need to frame CSR as a challenge to find the most appropriate ways and means to contribute to the economic and social development - at least - of the communities in which they operate, and to perceive their multinational organisation as a global citizen. To do so, the key is to view CSR as a challenge related to internal business process change, rather than one linked to external stakeholder engagement. With internal changes being key, the report says stakeholders also need to consider their responsibility to learn and understand corporate processes, so they may play a credible role in influencing the company’s change agenda.

INSEAD led a consortium of business schools in the RESPONSE project, including Copenhagen Business School, Bocconi University (Italy) and the Leon Kozminski Academy (Poland), in addition to Impact, an Austrian training company. The project was also actively supported by the European Academy of Business In Society (EABiS), a network of business schools and large multinational companies launched at INSEAD in 2002, as well as founding business partners IBM, Johnson & Johnson, Microsoft, Shell and Unilever.

A more detailed explanation of the RESPONSE project results can be obtained at www.insead.edu/ibis/response_project, where an Executive Briefing document can also be downloaded. A video featuring Guenther Verheugen, Vice-President of the European Union’s Commission in charge of the Enterprise and Industry directorate, can also be downloaded.

Linking team diversity to extreme team performance

2008-03-04 11:41:04.0

During his time working at Vivendi Universal, Fabrice Cavarretta, a PhD candidate in organisational behaviour at INSEAD, says "intuitively it felt that the company would either do extremely well or very badly. But it was not clear whether anyone could have predicted which way it would go. I became fascinated by Vivendi’s top management team’s composition, which was so homogeneous one could feel the situation turn out excessively well, or be a complete fiasco - one extreme or the other."

Drawing on this and other experiences, Cavarretta developed his research on the performance of teams within companies. However, as he explains "the traditional route of studying teams’ performance has been to see how it can be improved with the burning question, ‘do diverse teams improve or reduce performance?’ The findings from research related to that traditional question have been ambiguous. Some research shows that diversity can improve output because it brings different skills to the table. On the other hand, diversity could reduce performance if team members don’t get along. So when measuring the results on average, these two effects combine into a flat and unclear outcome."

Cavarretta says he takes a different approach. "My angle is to make a statement about the range of performance - that diversity in fact influences that range between the highest and lowest outcomes. Conventional thinking explored whether diversity moves that range up or down: I’m trying to figure out whether diversity grows or reduces the breadth of that range." In practical terms, this matters because the range determines exceptional outcomes - both low and high - which often matter more than average outcomes. Cavarretta cites the example of firms searching to make an exceptional public offering, such as Google, a context where exceptional performance is the ultimate goal. Alternatively, from a governance perspective where one is trying to avoid corporate fiascos, such as in the case of Enron, exceptionally low outcomes matter the most. In both instances, average outcomes do not matter much and predicting the range of outcomes may be more suitable.

Cavarretta has three key predictions. Highly diverse teams will be particularly risky, because of what he calls a ‘social’ hazard. "If the team members don’t get along, they will clash, which will lead to low performance," Cavarretta says. "However, if they do all get along, this can lead to outstanding performance." Highly homogeneous teams are also risky since they face another hazard - this time, ‘informational.’ Their performance can be extremely high if they carry out a task in their competence set, where their cohesion will serve them well. Unfortunately, when such teams confront changing or complex conditions, they then dramatically lack the proper information, and perform outstandingly bad." These two ideal cases, highly homogenous and highly diverse teams, are both risky in their own sense, and can be contrasted with mildly diverse teams. Those are not going to be exceptional good in terms of their cohesion, nor the information available to them. Mildly diverse teams are therefore low risk, rarely outperforming but also avoiding fiascos.

This linkage between team composition and extreme performance is of importance for businesses, in particular industries such as aviation where reliability is a key concern and where extremely high or low performance is not acceptable, as this could result in an accident. In airlines, "your prime concern is whether you will hit rock bottom! There’s a saying in the aviation business that ‘there are no good pilots, only old pilots.’ Because that context is driven by risk reduction, it’s essential to find the balance in the composition of the team that will minimise risk, which should be a mild level of diversity." The second example he cites is when it’s important for teams to reach an extremely positive outcome. "Venture capitalist companies invest in many firms, and in a portfolio of ten firms, three die quickly, and two to three are likely to deliver an exceptional exit such as an IPO. In the VC world, the firms in the middle that are only doing average, even if doing a bit better than others, are called ‘zombies,’ reflecting the fact that slight improvements above average are not interesting, compared to the possibility to make it big." In that context, knowing that team composition could influence the range of outcomes is important. Cavarretta’s research may explain why an unusual team composition - for instance very homogeneous or extremely diverse - occurs more in nascent firms, because such a team may be more likely to deliver the exceptional performance often sought in entrepreneurial situations.

To support this research, Cavarretta studied the academic performances of 200 MBA student teams. By observing trainee future executives, Cavarretta says his field work supports his predictions that the team’s composition influences the range of performance by regulating the two hazards of organizational life: whether team members get along (social hazard); and whether they have the right information (informational hazard).

His prediction, he says, shows "there is no ‘one size fits all’ team composition - this depends on the context. When risk is to be avoided, mild diversity is the least problematic and helps to keep outcomes under control. In situations where risk is rewarded, both very homogenous or very diverse teams have a greater chance of achieving exceptional outcomes."

Al Jazeera: Turning up the heat

2008-03-04 11:38:45.0

After celebrating its first year on air, the English service of Qatar-based TV station Al Jazeera - memorably denounced by former US Defence Secretary Donald Rumsfeld as ‘terror TV’ - is aiming to turn up the heat on its rivals in the global 24-hour news broadcasting industry.

Al Jazeera English (AJE), which celebrated its first anniversary last November, is planning a hard relaunch in the second quarter of this year with "new programmes and new people".

Nigel Parsons, AJE’s managing director, says that the broadcaster is in 'pole position' among international broadcasters in Africa, with AJE acknowledged as one of the three leading news channels in the continent. That, he says, is a "tremendous achievement", adding that the TV station is also proving to be popular in Asia.

"We’re well past base camp. We’re not at the top of the mountain yet, and we’ve still got some way to go," says Parsons.

The channel was launched at a time when some were beginning to question the future of the rolling news format of 24-hour TV satellite and cable channels, as many people are now turning to the internet for news. Parsons points out that in addition to its satellite feeds, AJE also streams video over the internet. "I don’t see all these new platforms, new technologies as sitting in separate boxes at all. It’s all part of the same product. Now you might re-version them slightly for different platforms for mobiles and whatever, but for us the television is the core platform, which is the push and pull of all these new technologies.

The broadcaster’s financial model is very much a network model, he says, adding that Al Jazeera’s subscription-based sports channels are its main revenue drivers. "We are only a year old and I wouldn’t even pretend that we are close to breaking even. We’re not. The advertising cake for television in the Middle East is a relatively small cake and so I think it would be very difficult to break even on that. We have an opportunity now to pick up adverts from around the world."

"The philosophy is quite simple: to get enough eyeballs. The commercials will follow the eyeballs. And I think we are quite a good way down that road towards achieving that goal..." He goes on to say: "We’ve always said that really the period of three to five years, if you’re looking at serious commercial revenue or looking at a breakeven, is a standard model. I do believe that we are well on the way to getting the eyeballs. If 100 million people are watching us everyday and you want to sell something, you’re going to advertise with us."

To be sure, AJE’s regional expansion is gaining pace. It has secured landing rights in Singapore and expects to be available on SingTel’s IPTV (internet protocol television) service early in the first quarter of the year. In addition, it’s also in talks with cable TV provider Starhub in Singapore and the news channel is now being offered as one of Cable TV’s channels in Hong Kong. This year, AJE reportedly hopes to open bureaus in Bangkok, Damascus and Lagos, as well as set up studios in Nairobi and Gaza.

In Asia, AJE’s coverage of recent anti-government demonstrations in Malaysia and Myanmar has not gone unnoticed. Parsons says the Malaysian government praised its ‘impartial and accurate’ coverage. In Myanmar, AJE was the sole international broadcaster which stayed to report on the violent government crackdowns on protesters by using undercover reporters with spy cameras, Parsons says.

"That coverage actually ran throughout the United States on (national network station) NBC," says Parsons. "They took every single story and ran it."

While AJE has undoubtedly achieved some success, it is still trying to shake off the ‘terror TV’ tag of its sister Arabic channels, which have been lambasted in the West for airing interviews with Al Qaeda chief Osama bin Laden and the video testimonies of Islamic jihadists.

Indeed, the popular perception of AJE as an outlet for terrorist propaganda and political pressure from conservative organizations have stymied AJE’s efforts to be carried by major cable and satellite companies in the US, which Parson says is AJE’s "most challenging market". This is despite the fact that top US leaders - such as former US president Bill Clinton and Republican senator John McCain - have given interviews to AJE.

Even so, Parsons says AJE, which currently reaches about two million US households, is in currently in negotiations with "a variety of other platforms" and is optimistic about increasing its market share. He adds that an estimated 50-60 per cent of its four to five million weekly web visits and around 50 per cent of YouTube downloads are from the US.

In response to criticisms of AJE as a mouthpiece for Islamic extremists, Parsons says the TV station’s critics are uninformed. "Most of them have never seen us," he says. "They are forming opinions via third-parties. I will say to them ‘watch us’ because they are clearly misinformed and that is a problem."

Indeed, AJE is the top international broadcaster in the Middle East because its sister Arabic channels are helping the budding upstart to better understand the nuances of the stories that it covers in the region, Parsons says. He adds they’ve also got "the best contacts and, by far, the best resources."

For promoting free speech and airing open criticism of governments in a region where information is often censored, Parson notes that "at one time, Al Jazeera has been expelled from every single country in the Middle East - except Israel".

"Arabs were astounded as their governments were openly criticized," he says. "Many Arabs saw an Israeli for the first time as Al Jazeera gave the Israelis the right to reply on stories." "That had never happened before because Israel didn’t even feature on maps and other TV stations."

Still, just how different is AJE compared with the likes of the BBC and CNN? Is it fulfilling its promise of providing a ‘different perspective’?

"I think we’ve shaken up a very tired old broadcast industry," Parsons says. He explains that AJE is doing so by decentralising its newsgathering process - it has more than 30 bureaus and four equal-status broadcasting centres in Washington, London, Doha and Kuala Lumpur - and by having local reporters "telling you about their regions".

"We want Africans to tell us about Africa and Asians to tell us about Asia,"

"We feel that audiences are tired of seeing themselves through foreign eyes, which was what was happening," he says. "We allow viewers to put on a different pair of spectacles, if you like, each time we switch broadcast centre."

And, as AJE and its sister Arabic channels are based in the Middle East and the developing world, "we have completely reversed the flow of information," Parsons says. While the broadcaster’s perspective is ‘different’, it seeks to practice responsible old-fashioned journalism, Parsons says. "It’s actually a return to core values, it’s about calling those in power... to account,"

"It’s representing the interests of the people in the street. It’s not to follow the political agenda that’s set by the politicians,"

"I think too many broadcast organisations got lazy. Whatever the agenda was, it was being set by the politicians and they were blindly following it. They thought they could get into bed with the Third Estate and it was ugly."

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