INSEAD Knowledge articles INSEAD Knowledge showcases faculty research with an emphasis on practical solutions and features interviews with business leaders http://knowledge.insead.edu/home.cfm INSEAD March 2007, All rights reserved. EN Thu, 23 Aug 2007 12:29:56 +0800 Thu, 23 Aug 2007 12:26:26 +0800 FeedForAll Mac v2.1 (2.1.0.1) unlicensed version; http://www.FeedForAll.com/ http://knowledge.insead.edu/images/favicon.png Latest articles from INSEAD Knowledge http://knowledge.insead.edu/home.cfm 64 64 Innovation: Using externally-oriented or ‘X’ teams can prove a winning strategy
“Good teams often fail because they don’t work consistently and effectively outside their own boundaries,” Bresman says.

“Yes, the team members look outside for information or help when they feel they really need it, but partly as a result of the internal model they’re carrying around in their heads, they just don’t see external activity as a central part of their mission, their mindset, their modus operandi.”

The authors argue that this is why externally-focused or so-called ‘X-teams’ are needed. According to Bresman, X-teams “balance their internal activity with an equal commitment to external activity. They’re different from traditional teams because they go outside from day one. They keep going outside throughout their lifecycle. The actual balance between internal and external activity shifts as work requires but the external mindset is always there, always present.”

“By being so externally focused, X-teams are far better able to identify the forces out there in the world and their own large organization that can affect their success. They’re better able to identify emerging needs and opportunities they can exploit. They’re better able to build connections to management and to other groups within their company to ensure their work is always seen as valuable and to ensure that they get the political, financial and other support that they need to support to succeed.”

“By being so closely attuned to the external environment, X-teams are far less likely to make the classic mistakes other teams often make, like coming up with a solution to a problem that no longer exists, or that customers don’t see as important, or getting themselves so out of sync with management that their work never actually gets implemented.”

Connecting islands of expertise

Whereas internally-focused teams may be somewhat disconnected from their customers, X-teams are constantly ‘scouting’ the marketplace and for what their customers need. “It’s not that ‘traditional’ teams do not go outside, they do but often it is when they need help, they go out as a last resort.”

The authors say X-teams are built by connecting islands of expertise. Bresman says these teams “work very hard on making connections across groups within the large organization and they do that in several ways … They go out scouting for the latest information so that they can incorporate that into their team process. They also have to go out to work with political processes, what we call ‘ambassadorial’ activity. You go out to make sure you have buy in from the right managers and so on, so that your work is valued and implemented.”

It’s in part because organisations are working with relatively flat structures, that X-teams have emerged . “Now to say that organizations have flattened, that might sound like a fad, but it’s arguably true and it’s a response to innovation-driven competition that demands more in terms of a team’s ability to absorb knowledge and so on. That doesn’t mean though that X-teams cannot thrive in hierarchical organizations. It probably makes their work more difficult, but maybe it also means they’re needed more in such an organisation.”

Bresman points to corporations such as Microsoft, BP, Merrill Lynch, Procter & Gamble and Southwest Airlines as examples of companies which have successfully used X-teams “because they work so hard at building linkages with other groups within their own large organization, X-teams also serve as a powerful tool for top management to create a culture of innovation across the wider organization.”

Bresman and Ancona’s book provides a toolkit for firms looking to create their own innovative X-teams. It outlines three elements – external activity, extreme execution and flexible phases – which form the principles by which X-teams guide themselves.

Flexibility is important as X-teams go through phases whereby they ‘explore, exploit and export’ in order to keep rolling out products. During the exploration or discovery phase, X-teams map out and make sense of issues. This phase not only involves ‘scouting’ but also the establishment of relationships with key individuals both inside and outside the organisation.

From trying to determine what’s out there, the X-team will then turn ideas into reality, choosing an option and making it happen. This is the exploitation phase when the team decides what it wants to do and how it will organise itself.

The third phase is implementation or exportation. This involves creating enthusiasm within the team and the marketplace as well as getting feedback from top management and the customer.

Although the three phases follow one another sequentially and are ‘separate modes of activity’, the book points out the ‘process is not always so neat’ in reality. Even so, the authors say, road maps of exploration, exploitation and exportation will help X-teams ‘stay focused and shift gears as needed’.

“The really good news, is that you can train people to work effectively in X-teams,” Bresman says. He adds they have coached X-teams as well as leaders and members of teams and they are now passing on their experiences to others.

But X-teams do require greater levels of coordination as they involve more people inside and outside the company. “But any organisation that confronts important, fast-moving knowledge, which spans the boundaries of the team that works in a flat organisation, will find these tools are very, very useful to get things done.”

“I think what we’re excited about is that this training works. We’ve seen it happen in a number of companies … We’ve trained over 100 X-teams and it really works. That’s why we think X-teams represent a potential revolution in the way companies mobilise their talent to lead, innovate, and succeed.”



‘X-Teams: How to Build Teams That Lead, Innovate, and Succeed’ is published by Harvard Business School Press.
]]> http://knowledge.insead.edu/contents/Bresman.htm 8CDBA63B-5130-11DC-8535-001124CA4A8E-220-0000004411C4E4D0-FFA Thu, 23 Aug 2007 12:26:33 +0800 The Money Illusion
Recent research in economics and in marketing shows that consumers are willing to pay more for a given product when it is priced in a less numerous currency (such as the US dollar) than in a one that is more numerous (the Vietnamese dong).

INSEAD professors Klaus Wertenbroch and Amitava Chattopadhyay have taken a fresh look at this classic economic conundrum in a recent article published in the Journal of Consumer Research, co-authored with Dilip Soman of the University of Toronto.

“We were motivated by the introduction of euro currency in 2002 and the resulting perceptions of high levels of inflation in euro zone countries that had gone from high 'numerosity' national currencies to low numerosity euros (for example, 6.56 French francs or FF is approximately 1 euro), despite a fairly modest real inflation rate as measured by the European Central Bank (ECB),” says Wertenbroch. “Even though the real annual inflation rate for consumer prices in Germany has only been about 2 per cent since 2002, consumers have perceived it to be closer to 9 per cent.”

In other words – contrary to commonly-accepted economic thinking about the ‘money illusion’ – most European consumers were feeling poorer after switching from their own more numerous currency to the less numerous euro. Wertenbroch and his colleagues discovered that previous research about the ‘money illusion’ had failed to account for the budgetary component of a consumer’s decision-making process.

“In a number of experimental studies, we found that consumers evaluate transactions by how many nominal currency units they have left over in their wallet (or budget) after the transaction,” Wertenbroch says. “Imagine going to the bakery with FF65 in your wallet and buying a baguette for FF6.50. You’d have FF58.50 left over after the purchase. Now imagine going with €10 in your wallet and spending €1 on the baguette. You’d have €9 left over.

Psychologically, the 9 euro currency units feel a lot less than the 58.5 French franc currency units. So you end up feeling poorer when both your budget and the price you pay are measured in a low – as opposed to high – numerosity currency. The existing research until now didn’t look at the effect of taking your budget into account and so came up with different results.”

Many of the specific references to the euro were deleted by the American journal which published the research paper. Wertenbroch feels that the implications of his research are vital for policy-makers in Europe, as anti-euro sentiment has been rising sharply in many European countries.

“I believe it is important for European consumers to understand that much of their ill will toward the euro may have been caused by their own psychology rather than economic facts. This psychology, of course, is a powerful driver of what may happen to the euro over time and may thus establish economic and political facts.”

“I am very much concerned that negative perceptions of the euro may undermine the progress toward European integration that has been achieved over the last 50 years, which – in the end – is perhaps the key factor that can help Europe reclaim an important economic and political role in the modern world and ensure the well-being of its citizens.”]]> http://knowledge.insead.edu/contents/Wertenbroch.htm 50635E66-5130-11DC-8535-001124CA4A8E-220-000000434838ABE7-FFA Thu, 23 Aug 2007 12:23:07 +0800 CEO view: Tony Fernandes of AirAsia
AirAsia’s seen by many as a ‘blue ocean’ company as it was based on the Southwest Airlines model of quick turnarounds and low-cost fares. Although Group CEO Tony Fernandes says he hasn’t read the seminal book by INSEAD professors Chan Kim and Renée Mauborgne, he says AirAsia has sought to exploit blue oceans.

“What does the market want? Nine times out of 10, when you go for what the market wants, it’s something that’s different. That’s why invariably everything we’ve done is kind of blue ocean, except for AirAsia X (AirAsia’s new long-haul operations) which is completely blue ocean. But we weren’t the first to invent low-cost travel, we weren’t the first to invent a low-cost hotel. We’ve taken it to another level, but we’ve been a bit Japanese in taking it, and adapting it, and making it better for our part of the world.”

Fernandes says AirAsia X is expected to start long-haul flights to the UK in September. Virgin has just taken a 20 per cent stake in the new carrier.

Branding has been key to AirAsia’s success – along with its low cost operations – and the airline’s CEO has been branching out into budget hotels and online financial services. Often described as Asia’s answer to Richard Branson of Virgin, Fernandes also started in the music industry before moving into the airline sector.

“Many Asian companies don’t value branding as much because they don’t see it in the bottom line straight away,” Fernandes told Knowledge. “It’s something that even I have to explain to my board time and time again, that the fruits of branding are over five years.”

And his advice to would-be entrepreneurs: “Go with your gut, give it your best bet and you may fail, but don’t give up.”

Knowledge spoke to Fernandes about his business ventures and strategy after a recent Bloomberg Forum in Kuala Lumpur.]]> http://knowledge.insead.edu/contents/Fernandes.htm 1707AC75-5130-11DC-8535-001124CA4A8E-220-00000042890B7E6C-FFA Thu, 23 Aug 2007 12:21:12 +0800 Reining in the biggest game in town
“I think both in the UK and the US, there will be some tax legislation proposed which is designed to increase the taxes on PE activity,” says Joe Rice, one of the founders of Clayton, Dubilier and Rice (CD&R), which manages equity capital in excess of US$10 billion.

At the centre of the tax issue is the gentler treatment of capital gains rather than income. The Economist points out that people in private equity firms receive a large part of their pay as “carried interest” – usually 20 per cent of investment gains.

Carried interest is treated as a capital gain on investment rather than as income – this means a 15 per cent capital-gains rate in the US rather than the 35 per cent corporate tax rate, while in the UK the effective tax rate can be as low as 10 per cent compared with the usual 40 per cent on gains and income.

The original intention of this tax treatment had been to reward entrepreneurs for the hard work they have to put in to build up their businesses. Reformers now argue that PE partnerships do not even invest much of their own money and should therefore be taxed at regular income rates.

'A very easy political target'

As to whether the ire of legislators is justified or not, Rice says “it’s simply a fact.” He adds that “it depends on where the votes are, quite frankly.”

“Private equity is a very easy political target … If Congress and Parliament decide that it is in their political interest to have some legislation which disadvantages the existing private equity industry, it’s going to happen. And with the [US] election season upon us, it’s hard to think that they won’t take a run at it.”

Along with a reversal of the conducive tax environment, Rice also sees the economic cycle nears its peak, which he expects will adversely impact future deals. “The deal business is in many respects a function of the stock market. The stock market has historically gone down when economic activity has gone down. And so if you get a significant decline in the stock market, you will undoubtedly cut into the amount of deals that are getting done and the prices at which they’re getting done.”

Nonetheless, Rice says it will still be business as usual at CD&R, as he does not think “the legislation that has been proposed will have an impact on the business qua business.” CD&R will continue to look for low-risk investments, he says, characterized by companies with multiple suppliers, multiple customers, no dominant competitor in their industry and relatively low capital investment requirements.

Furthermore, as these investments tend to come from divestitures by larger companies, CD&R will be seeking operational control by having the ability to replace underperforming management. Even when the large ticket size of the deal requires CD&R has to join forces with other PE firms, Rice says CD&R will try to ensure it can appoint the chairman of the board and also have the right to replace the target firm’s chief executive officer.

Mulling an Asia move


CD&R has offices in New York and London, but currently has no footprint in Asia. Rice says his company “didn’t have an appreciation for a long time of the size of the market that Asia was becoming.” Turning its attention now to the region, CD&R feels that many other players “have been out here for a while who have established their positions … and soaked up most of the available talent.”

Even Japan, whose market characterizes the kind of control investing that CD&R does, seems “a market in which every PE firm of any size from US, Europe or Asia, already has an office … in which experienced PE people are in great demand and therefore in very short supply”.

“All of which says to me that coming out and indiscriminately putting an office somewhere, just so we can say we have an office out in Asia is not a smart thing to do.”

Rice recently took part in a roundtable on alternative investments at INSEAD’s Asia Campus in Singapore. ]]> http://knowledge.insead.edu/contents/Rice.htm C791DA73-512F-11DC-8535-001124CA4A8E-220-0000004180339EE0-FFA Thu, 23 Aug 2007 12:19:50 +0800 Healthcare2020: Combating malaria in the developing world – the funding challenges ahead Dave de Ferranti, Director Global Health Financing, The Brookings Institution
Gina Lagomarsino, Global Health Financing Initiative, The Brookings Institution
Robert Sebbag, Vice President for Accessible Medicines, Sanofi-Aventis
John Tomaro, Director, Health Programme, Aga Khan Foundation

Despite many medical advances, malaria still affects 40 per cent of the world’s population, especially countries with the lowest incomes. Although increased funding has come in from private sources such as the Bill & Melinda Gates Foundation, those most in need are still not getting the help they require.

At the recent healthcare2020.forum held at INSEAD’s Europe campus in Fontainebleau, participants discussed how existing and new resources can be leveraged to promote better health. Taking the case of malaria as an example, the session focused on healthcare financing strategies in developing countries.

Dave de Ferranti of The Brookings Institution, the non-profit organisation which organised this plenary session on malaria, set the issue in context. “There are 6.2 billion people in the world and five-sixths are from developing countries. In the next 25 years another 2 billion people will be added to the globe and almost all will be in developing countries,” de Ferranti explained, pointing out the need to focus on the implications of population increase with the subsequent need for more health products, vaccines and medicines. Issues such as R&D, subsequent delivery and financing are also becoming more urgent, he said.

The important question to address, according to de Ferranti, is how the developed world can help “through philanthropic flows, profit flows, public flows, private flows and for-profit flows.”

Funding from new sources such as the Gates and Clinton foundations helped boost development assistance in health to US$14 billion from US$2.5 billion between 1990 and 2006/07, Tomaro of the Aga Khan Foundation said. But he added, this additional funding from large donor pools can create problems, as much of the new funding is targeted at specific diseases or is inconsistent. For example, the share of health aid devoted to HIV/AIDS more than doubled between 2000 and 2004, while the share of funds for primary care fell by almost 50 per cent, he said. Tomaro also argues that the new development assistance is often short term and may not be sustained.

Highlighting the case of Botswana, a developing country with mineral wealth, he said it had received funding from the Clinton foundation as well as global fund for developing countries, and so had all the funding it needed to tackle the 280,000 cases needing treatment. However, only 82,000 people received the necessary drugs, he said. The reason: there are no health workers there. Most of them are recruited by South Africa and the UK.

Even so, it’s clear that funding from private sources is needed. Governments in developing countries just don’t have the resources. “Currently governments cannot meet the cost of care, even with assistance,” Tomaro says, adding that in India 97 per cent of its health budget goes on administration.

While average life expectancy was 78 in 2002 for wealthy countries, it was only 46 in the least developed countries, Tomaro says. “The infant mortality rate is six out of a thousand compared to 100 out of a thousand. The contrast is dramatic – recently Afghanistan recorded the highest ever infant maternal mortality rate.”

“Per capita health spending is also uneven, with the government funding US$8billion for the least developed countries, compared to US$1,766 billion in high income countries. Interestingly as you begin to move towards being a developed country more public money is spent on healthcare.”

While the poor are unable to afford healthcare or health insurance, Gina Lagomarsino of The Brookings Institution says pharmaceutical companies believe the market for anti-malarial drugs is not profitable enough, even though some 500 million people suffer from the disease. She says not enough money is going into product development. “If you look at the real disease burden there should have been ten times more (money) spent.” In 2004, US$323 million was spent on malaria R&D, but, she says, given the disease burden, the figure should have been around US$3billion. In addition, she points out that while some 1,556 new drugs were approved between 1974 and 2004, only eight were for malaria.

“There are already some potential mechanisms that could create incentive for investment, just as product development partnerships evolve with the creation of new organisations focusing on the disease,” she says. “There are also advanced market commitments – the idea is for donor governments or foundations to attempt to create a market for a traditional product from the developed world by signing a legally binding contract that says they will buy a certain product if it meets certain specifications and at a certain price.”

Another option would be to allow pharmaceutical companies which invest in neglected diseases to be compensated by the extension of a patent on a more profitable drug, she says, adding that credit enhancements could also be used to leverage donor money and attract private capital.

‘Improved malaria management could impact development’

If an effective new vaccine was developed, Lagomarsino says, it would significantly improve the control of the disease. “Improved malaria management could impact development in these countries,” she says. “Not only would mortality rates decrease, but productivity would improve by less absenteeism from illness. There are already existing innovations that can be improved such as the insecticide bed nets that now last up to five years and are more cost effective.”

New treatments are being developed. Lagomarsino points out that artemesinin combination therapies (ACTs) derived from a plant are replacing old treatments as malaria-carrying mosquitoes build up resistance.

She says that even though there has been an increase in spending on disease reduction worldwide, more money is still required to deliver basic malaria interventions. However, she says more money would not mean “the end of the problem – it’s delivering the products that last mile to relatively remote villages.”

‘Impact Malaria’

Sebbag of Sanofi-Aventis agrees that innovation development is important but says “that’s for tomorrow. What we can do today is the burning issue.” He outlined how his company is trying to make a difference through its Access to Medicine department, which is seeking to mobilise the company’s know-how to develop sustainable programmes against diseases.

The department is looking to develop new anti-malaria treatments, Sebbag says. “We have to be on the ball. Currently we use ACT and it is effective as a treatment but it may become resistant within five years and therefore we have to be ready. We are developing a new compound and also working on a vaccine.” The programme also aims to develop affordable drugs but Sebbag is quick to point out that “it is not a pricing competition between the pharmaceutical companies.”

With hundreds of millions of people suffering from malaria and other diseases, “there is room for many players,” he says. “Novartis, for example, is not going to make money with its compound, and neither are we because we sell it (taking a) no-profit-no loss approach.”

Training is also key, Sebbag notes. “There is no point in having an effective drug if there is no one to administer it.” Information, education and communication are also important. “There is a need to supply medical information in the diagnosis, but also to teach families and communities about disease prevention as well as how to take the drugs safely.”

The Aga Khan Development network (AKDN) believes that while finance is important, development must be long term, with a focus on human resource development, management and governance. But the private sector has a role to play in terms of training and governance.

Tomaro believes the current focus on disease control will eventually change and that as communities from poverty to self-reliance, they will build their own funding sources, reduce the impact of cycles in donor funding and build institutions that last.

He concludes that disease-specific programmes in developing countries “will be no more successful than the previous initiatives. Why? Because of the donors – they are unreliable because legislatures respond to voters. Therefore the emphasis should be on systems that will lead to long-term sustained positive change.”


]]> http://knowledge.insead.edu/contents/healthcare2020.htm C7F40766-512E-11DC-8535-001124CA4A8E-220-0000003E2C39789A-FFA Thu, 23 Aug 2007 12:17:36 +0800 Leadership Summit 2007: Is Europe still relevant?
INSEAD has developed into a global institution over the past 50 years, but its roots are European. As Dean Frank Brown (right) pointed out in his opening remarks, the Treaty of Rome which led to the creation of the European Union was signed ‘just a little over 50 years ago.’ It was also back in 1957 that INSEAD was founded.

Indeed it was actually in the school’s main amphitheatre – the same venue for this conference – that, during a European Summit in Fontainebleau in 1984, then French President François Mitterrand presented the new European passport to the media. It was also at this summit that 1992 was fixed as the date for the creation of the single European market.

In an opening keynote address at INSEAD’s Leadership Summit 2007, Greg Case, the CEO of Aon Corporation, said Europe is at the core of his company’s activities. “Well over half of what we do is outside the US and the most dominant piece of that by far is in Europe.” He adds he only sees ‘incredible relevance’ which is increasing.

Case says the global stock of assets today amounts to more than 140 trillion dollars, in terms of equities, corporate/government debt and bank deposits. “It turns out that over the past 10 years that stock has grown twice as fast in Europe than in the Anglo-Saxon countries,” he told Knowledge in an interview.

Cross-border flows amount to around six trillion dollars, double the figure just five years ago, “the highest it’s ever been and 80 pct of those occur between the US, the UK and Europe. So to me the idea is not the relevance of Europe but how does Europe continue to build on its influence on its global basis.”

“The aggregate stock is massive as we all know in Europe and the relevance in terms of continued interaction is also quite relevant and increasing.”

“Europe is central to our success,” Case says. “It’s critical to our success and in fact a focal point for what we will be doing over the coming five years or ten years in terms of how we think about serving our clients in an effective and meaningful manner. It’s absolutely central.”]]> http://knowledge.insead.edu/contents/ILSCase.htm http://knowledge.insead.edu/feedback.cfm?ct=17229 Tue, 07 Aug 2007 10:29:39 +0800 http://knowledge.insead.edu/home.cfm Europe as a power: Financial and economic challenges ahead Thomas Barrett (MBA ’78), director of the European Investment Bank; Jean-Paul Betbèze, chief economist of Crédit Agricole and member of the French Prime Minister’s Economic Analysis Council; Alice Rivlin, director of the Greater Washington Research Program at The Brookings Institution.


There has been so much ‘hype’ about the rise of the BRIC countries – Brazil, Russia, India and China – as the new economic powerhouses of this century, that one begins to wonder about the relevance of Europe as an economic power.

“Is the European economy as relevant as it once was?” asks Alice Rivlin. “Yes, absolutely, the citizens of Europe are better off now in an economically integrated Europe than when each country was going it alone. In the US, for example -- where the economy has been integrated for 200 years -- the economy of the state of Michigan is in dire shape, but no one in Michigan believes that they would be better off if Michigan were not part of the Union.”

However, Rivlin points out that if the European Union has done well in terms of inflation control and monetary policy, and building strong financial markets -- which are both key to having a strong economy -- the third key is, which is missing, is responsible fiscal policy. “EU countries must learn to live within their means. Fiscal challenges have yet to be met in Europe” says Rivlin.

“Yes, Europe is relevant, but relevant for what?” asks Jean-Paul Betbèze. “What are we, as Europeans, supposed to do in a new world where one third of global growth is now coming from China and India? The key is to reform ourselves. But we’ve only just started doing that," adds Betbèze, following the recent election of President Nicolas Sarkozy.
The EU 'Weight Watchers'

Regarding fiscal policy, Betbèze compares the EU to a club of Weight Watchers, “in which the Italians claim they have no scale, and the Germans reply that they’ve been serious about losing weight for four years before everyone else joined the club!”

In Betbèze’s analysis, the process of fiscal discipline – or Weight Watching as he calls it -- is like a J-curve in which it is very painful to get results at the beginning, but then progress happens much faster later on.

“There is a first mover advantage for the person who goes on the diet first, who therefore becomes more competitive first”, says Betbèze (seen far right). “The first dieter – Germany -- reaps all of the benefits from the diet. In France, we must reform our product and labour markets. France and Italy are just at the beginning of the diet. But beware, you have to make reforms for the right reasons in order to be relevant. The EU needs an explicit strategy regarding reform.”

The need for constant reform

Thomas Barrett agrees with Betbèze that the EU “should no longer pursue the policies of the past -- we have a need of constant reform, because of the challenges of globalization.”

But what exactly are the challenges of globalization that could potentially make Europe irrelevant as a macroeconomic power?

“Asia is not just about cheap labour,” argues Rivlin. “Can we compete with an India and a China that now compete with us in the top sectors of the knowledge industry?”

'Is Europe just a cow to be milked?'

Beyond the threat of competition from China and India in high-tech industries tomorrow, Betbèze argues that China already has a strategy today to acquire assets in rich countries. “Because of anti-China protectionism in the US,” says Betbèze, “China will start buying assets in countries where they are less protected -- in Canada and Europe for example -- and then one day the US also. So, is Europe just a cow to be milked?”

According to Rivlin, one of the reasons that the European economy is less dynamic than the ‘BRIC’ countries, or the US, is because of the rigidity of the labour market in Europe. “US companies can just fire people at will and Europeans think that’s cruel. But US companies are less hesitant to hire people. There is a lot to be said for flexible labour markets. The EU is burdened by heavy regulation.”

But how fair is it to use the labour market as a benchmark for comparing economies when many of the jobs in China, for example, are manufacturing jobs which no longer even exist in Europe? And how important is it for Europe to preserve a strong manufacturing base in its economy?

For Rivlin, the manufacturing issue has already settled once and for all: “We will move away from manufacturing in the developed world and to think otherwise is just an illusion.”

Betbèze thinks the opposition between manufacturing jobs and services jobs is the wrong issue: “We should reduce the wall between industry and services, and realize that industry is a source of services.”

'Don't be afraid of change'

The example of the United Kingdom illustrates how a major European economy can transform itself in a matter of decades from a manufacturing economy to a services-oriented economy -- mainly in financial services today.

For Betbèze, “It’s a story about TINA: There Is No Alternative. In the UK they know this, but not in the EU. In the Weight Watchers club, when you gain kilos you do not see it immediately, so it is quite dangerous, and you pay the price much later, but also much harder. We must go on a diet even, if we don’t know it and don’t see it. We must explain the benefits of the EU, but those benefits are never immediate, and it’s easier to blame Brussels in the short term. I say to European citizens: Don’t be afraid of change. We are too frightened of change. What we must start to say is: What’s frightening is not to change. We as economists must sell the story and sell the explanations.”]]> http://knowledge.insead.edu/contents/ILSeconomy.htm http://knowledge.insead.edu/feedback.cfm?ct=17229 Tue, 07 Aug 2007 10:05:40 +0800 http://knowledge.insead.edu/home.cfm The energy 'battlefield' in Europe


Demand for energy around the world is increasing, particularly with the rapid economic growth in China and India, and the issue of ‘energy security’ is becoming increasingly important. But, on the other side of the coin, climate change and global warming have also become political and economic issues. And while the future of nuclear power is still uncertain, it seems we shouldn’t be counting on alternative energy sources to take up the slack from carbon-based fuels just yet.

At a plenary session on energy at the Leadership Summit, the former chairman of BP, Lord Simon, said it’s ‘crucial’ to change usage patterns. That would require incentives and disincentives, he said, but not many politicians would be prepared to implement these. Governments, he adds, should try to encourage investment in environmentally-friendly technologies rather than price subsidies. He told Summit participants to ‘beware biofuels’ even though it’s important to develop cleaner forms of transportation, as sources such as sugarbeet and wheat may face ‘terrific’ price competition from the food industry.

“Don’t get overexcited about alternative energy in the next decade. It’s very important to have it in your strategic plans, but it’s not going to answer very much in the next decade. If it’s seven per cent of our energy requirement in Europe we’re doing quite well,” he says.

“Over the next decade 70-80 per cent of our energy is going to be carbon-based in Europe whether we like it or not, which is why the climate change issue is highly significant both economically and socially.”

Coal will be an important source of energy and Lord Simon called for a carbon trading operation to help cap the amount of carbon we put into the air. ‘In the next decade, the market for carbon should be as vital and as lively as the market for money is now.”

The nuclear debate

Lord Simon told the Summit that although it may take 10 to 15 years to bring on the next generation of nuclear power, the renewal of the nuclear industry, along with efforts to improve the technology and security, will be ‘vital’ in the next decade.

Gerd Leipold said Greenpeace is opposed to nuclear power for a number of reasons, including the risk of accidents, questions about nuclear waste and ethical considerations. While this generation would enjoy the benefits, future generations would face “substantial and unknown costs … and we think that’s unethical,” Leipold said.

In response, Lord Simon said he didn’t ‘believe in the leap’ that this is an ethical problem for future generations. “Every piece of energy we produce has its ethical problems and I’m afraid we’ve got to produce it,” he says. “You can’t differentiate nuclear in ethical terms from other sources of energy. The point is that it doesn’t make a mess in the same way that most of the carbon-based energy (does).”

“Honestly we can’t do without nuclear and stopping it, and not going to the next generation, is going to be an extraordinary error in my view, in terms of the cost to the community.”

Leipold of Greenpeace acknowledged that every form of energy production has side effects and took issue with Lord Simon’s assertion that nuclear power doesn’t make a mess: “If you say nuclear (does) not (make) a mess, you should have travelled in the decaying Soviet Union and looked at nuclear power stations.”

“Then I ask you to look around the world and just imagine if Nigeria and Indonesia would have nuclear power. How much fantasy does it take to imagine that China will be a stable country for the next 150 years and will operate nuclear power stations in a safe way and manage the waste in a safe way? You may have the optimism, I don’t have it.”
During the session, Leipold argued that Europe is well placed to take on climate change as 70 per cent of the whole climate problem is energy related, but added that European leaders are sometimes ‘not fully up to the problem’. They may be high minded about climate change but energy is ‘closer to home’.

“Actually there’s enough energy produced in the world,” Leipold says. “What we have to do is use it much better and redistribute it in a different way.” He says an ‘energy-efficiency revolution’ isn’t a pipedream. “If we are more energy efficient, then we need less energy in Europe, then renewables can play a substantial part, can play 50 per cent of it. That has to be the starting point.”

Doing business with the bear

Russia also loomed large in the Leadership Summit session on energy. Kris Sliger of Anglo-Russian energy venture TNK-BP said the European Union consumes about 15 million barrels of oil a day, almost 20 per cent of the entire world consumption of oil and about 16-17 per cent of global consumption of natural gas. However, the EU only produces about 2.5 million barrels of oil a day, leaving a major shortfall.

Russian oil supplies are helping to cover that deficit. Citing data from BP, Sliger said Russia provides about 28 per cent of Europe’s total gas and about 40 per cent of its total oil supplies.

“When you look at energy globally Russia matters. Russia holds about 6-7 per cent of the world’s supply of liquid hydrocarbons. More importantly, it holds 42 per cent of the non-OPEC (Organisation of the Petroleum Exporting Countries) supply of liquid hydrocarbons and it holds 30 per cent of the world’s natural gas supply.”

Russia’s the second largest oil producer, producing almost 10 million barrels a day, and occasionally produces more than Saudi Arabia, he says. It’s also the second largest energy exporter globally, exporting almost 5 million barrels a day of liquid hydrocarbons. In addition, he says, Russia also exports more than 150 billion cubic metres of gas, “essentially all of it to the European theatre.”

Sliger says he views the relationship between the EU and Russia as an “unfinished story of mutually beneficial dependency and really an opportunity and a cause for more engagement, further economic integration and enhanced growth for all concerned rather than … confrontation or stagnation.”

In economic terms, Russia and Europe are fundamentally connected, Sliger says. The EU is Russia’s largest trading partner, while Russia is the EU’s third largest trading partner after the US and China. “Energy’s at the heart of Russia’s economic relationship with Europe today and I would argue that because of the availability of resources, the supply that Russia has, the geographic proximity … the existing infrastructure and the history of cooperation, Russia and Europe – at least in the energy sphere – are destined to be partners.”

That will require increased benefits for both sides, Sliger says, adding that greater reciprocity and transparency are critical. “If Europe wants continued access to investment opportunities in Russia, I would anticipate that Russia is going to demand equal access to markets (and) to investment opportunities in Europe.”

It’s a relationship fraught with difficulties, however. In recent years, the Russian government has taken back control of large sections of its energy industry from foreign investors. Shell and its Japanese partners sold a controlling stake in the Sakhalin-2 oil and gas project to state-owned gas monopoly Gazprom after Russian regulators threatened to shut down the project. Then, on the day the Leadership Summit was staged, the Wall Street Journal Europe reported that BP, ‘facing regulatory pressure from the Kremlin’, was close to a deal to cede its holdings in the 20 billion dollar Kovykta natural gas project, also to Gazprom. Under the deal, the newspaper said, BP’s Russian venture, TNK-BP – Kris Sliger’s company – would sell its 62.7 per cent stake in the gas field for close to one billion dollars.

Sliger did not comment on the Wall Street Journal report, but said he “would like to dispel the notion that Russia is closing to foreign investment, particularly in energy.” He added that access to strategic sectors, such as oil and gas, will only open up if Russia sees real value “beyond just money.”

On the Sakhalin deal, he said economic circumstances have changed since Shell had reached the agreement in the early 90s. “It was a radically different world,” Sliger says. Russia was bankrupt back then, oil prices were expected to be at 10 dollars forever and some were arguing they could go to five dollars a barrel. “The economic terms and conditions that were in place then were radically different than what are in place today,” Sliger says.

While oil prices are now more than 70 dollars a barrel, Russia is currently sitting on around 400 billion dollars in hard currency. “They don’t need money. What they do need is technology, better governance, better business processes, practices. Where companies can demonstrate that they can provide something other than just money I think they will find the Russian environment completely open, so long as the rest of the world attempts to invite Russia to the benefits of mutual interdependence (and) cooperation.”

Russia should be more than an economy which just produces raw materials, Sliger adds. “It’s in Europe’s interest to have Russia to continue to grow economically.”

]]> http://knowledge.insead.edu/contents/ILSenergy.htm http://knowledge.insead.edu/feedback.cfm?ct=17229 Tue, 07 Aug 2007 10:03:12 +0800 http://knowledge.insead.edu/home.cfm Innovative and responsible leadership: Taking a long-term perspective

Sustainability as a long-term business goal

Swiss pharmaceutical firm Roche is a family-controlled company and, according to vice chairman André Hoffmann, the fact that his family’s name is on the wall of the company’s headquarters allows it to take an approach to sustainability that it may not be able to do otherwise. “Family control is a sensible way of running the business, in particular the long-term future of the business.”

“We don’t have to satisfy only the financial community. We have to satisfy ourselves that the long term is important for us.” And the long term “cannot be envisaged without sustainability,” he adds.

Speaking of sustainability as a management tool, he says Roche commissioned a business school several years ago to look into the issue: “The purpose of the exercise was actually to build a business case for sustainability … not just ‘box ticking’ by complying with the global compact of the United Nations but really introducing sustainability in the way we do business.” This involved looking into which issues have relevance regarding sustainability and then linking sustainability to value creation.

This, he adds, now forms the basis of the company’s business model. “We will not be able to invest in new solutions if we don’t make a profit. So our place in society is based on delivering health at a reasonable price, which allows us to reinvest in the next range of solutions. This is our contract with society: we deliver healthcare and in exchange for that we get the right to operate and I believe very strongly that this licence to operate is based on the transparency of the system we’re engaged in.”

Hoffmann says that after three years of analysis, Roche introduced various sets of key performance indicators and the firm’s middle managers have been implementing the sustainability agenda. “At Roche, in our company, sustainability is now part of the way of doing business. It’s part of our daily business.”

Managing by example

Ulysses Kyriacopoulos also spoke about the advantages a family-controlled business has in terms of implementing sustainable development. He said that when he joined the family firm after studying at INSEAD, he realised it embraced values which went beyond just maximising profits. At a time when the business was undergoing a transition and expanding in a way that made it no longer possible to be managed only be family members, Kyriacopoulos set himself the challenge to institutionalize these values.

“CSR (corporate social responsibility) did not exist when I graduated from INSEAD, but we learnt at that time that ethical behaviour and moral values could go into the company only if they were really believed in by the shareholders and management, and they could manage by example and (incorporate) them into every practical decision on a day-to-day basis.”

He adds that S&B Minerals’ approach to sustainability has had an impact on its business in a number of ways, ranging from the development of more energy-efficient products and establishing a dialogue with those living near the company’s mining operations, to attracting talented, young employees with similar values.

Changing perceptions of accountability

Unlike the previous two speakers who run family-controlled businesses, Simon Zadek is in charge of UK-based non-profit organisation AccountAbility, which aims, in part, to innovate “the way business leaders think about business strategy.”

Highlighting the tensions between accountability to investors and the organisation’s responsibility for the future of the business, Zadek told Knowledge after the roundtable: “I don’t think a CEO who responds purely to the short-term trading interest of hedge funds is fulfilling his or her job to steward the organisation into the future.”

During the panel discussion, Zadek singled out three business leaders who have broken away from the norm of the “classical, narrow view of what investor accountability is today perceived to be: quarterly returns obsession.” These comprise of Lord Browne, former CEO of BP, who spoke at Stanford in April about the oil industry and climate change, saying that firms like BP need to be part of the solution; Nike founder Phil Knight, who responded to global protests by overhauling the company’s labour standards and then lobbied for other firms to be held to the same standards; and Jeff Immelt, CEO of General Electric, who sought to convince shareholders that legislation capping US carbon emissions is a smart business move.

Each of these business leaders broke the rules of what their own organisations would have considered the right thing to do, Zadek argues. He adds, however, that behind these business leaders were individuals who had persuaded the CEOs to take a different direction.

His advice for business schools is therefore: “Don’t concentrate on the (Lord) Brownes; concentrate on the people who advise them. Explore why it is that some companies and some leaders become associated with real change makers and others don’t.” Zadek also observes that the biggest constraint that he sees business leaders facing is their “inability to value new types of knowledge.”

It usually takes NGOs and civil society to tackle major social trends first, whether it’s climate change or obesity, he says. “The business community couldn’t hear, couldn’t listen, couldn’t interpret, couldn’t translate (and) couldn’t create business models on the back of it, until they got – to be frank – hit in the head.”

]]> http://knowledge.insead.edu/contents/ILSsustainability.htm http://knowledge.insead.edu/feedback.cfm?ct=17229 Tue, 07 Aug 2007 10:02:30 +0800 http://knowledge.insead.edu/home.cfm Europe 2020: Views from the outside world Kan Trakulhoon, President and CEO of The Siam Cement Group; Kevin Ryan, CEO and Co-founder ShopWiki



Europe is often perceived as a less attractive place to conduct business compared to the US or Asia and at the INSEAD Leadership Summit, participants heard not just the views of Europeans but also those of non-European business leaders.

In a panel discussion called ‘Europe 2020’, an American and an Asian business leader discussed the relative attractiveness of the European economy in the coming 10-20 years.

The consensus at the table is rather pessimistic: “Europe is not going to grow the way the US and Asia are growing,” says Kevin Ryan. “We’ll see a steady decline in Europe’s market share in the global economy.”

“We view Europe as a declining economy, because of the demographics and ageing population,” adds Kan Trakulhoon. “The key strength of Europe is innovation, so the key issue for Europeans is how to sustain the leadership in innovation.”

Predators become prey

With the European economy struggling to keep pace with Asia, European companies are increasingly seen as prey rather than predators in the global marketplace.

“I expect more and more acquisitions of European companies by Asian companies,” argues Kan. “Take India’s Tata Steel for example. The Asian companies have the money; they now need the brands and the technology.”

Although Asian companies are now capable of competing with the best-in-class worldwide in terms of technological know-how, Asian companies are also seeking to acquire technology in Europe.

“European companies are leaders in terms of research and innovation. That’s why Asian companies – and perhaps Middle Eastern companies later on – will look at buying European companies,” says Kan.

However, in terms of Europe’s technological skills, a lot depends on which sector one is looking at.

“I’m typically looking to hire a 23-year old java programmer, and that person can be based anywhere, including in Asia, not necessarily in Europe,” says Ryan, who in his career has launched several successful internet start-ups.

Therefore, the relevance of Europe as a high-tech leader is more obvious in engineering-based specialties than in the software and internet space.

“Many EU companies are leaders in all sorts of complicated and sophisticated engineering/manufacturing industries,” Ryan says. “Europe is often a real leader in high-tech manufacturing. But in the internet and software space, Europe is not in the forefront and doesn’t have as many companies like Yahoo, Google or Microsoft, or many other smaller companies in that space. That’s where Europe is at a disadvantage.”

Europe is not at a disadvantage, however, when it comes to training and developing a skilled workforce.

“Europe is still the best place for knowledge, with universities here as good as those in the US,” Kan argues. “People will come to study in Europe now more readily because of security and visa problems in the US.”

Indeed, Ryan agrees that “the ridiculously complicated visa system in the US is pushing some foreign students to choose European universities over American universities.”

However, when looking at the composition of the student body at the best European universities, it becomes increasingly apparent that Asian students account for a growing percentage of the students who specialize in high-tech.

“I just visited a chemical engineering classroom at a leading university in London in which 40 per cent of the students were from Asia,” recounts Kan.

“In electrical engineering perhaps 50 per cent were from China, and the next biggest group was from India. Most young European students are studying business and commerce, not the hard subjects like engineering or science. The trend is strong coming from Asia. If the trend continues, something may change in the next 10-20 years. If this pool of talent heads back to their own countries – Asia, India, China – these countries can then build up their own technologies.”]]> http://knowledge.insead.edu/contents/ILSEurope2020.htm http://knowledge.insead.edu/feedback.cfm?ct=17229 Tue, 07 Aug 2007 10:01:45 +0800 http://knowledge.insead.edu/home.cfm Kick-starting growth in Europe in the face of global competition
Bernard Liautaud, Founder and Chairman of Business Objects; Ernest-Antoine Seillière, Chairman of the Supervisory Board of WENDEL, and President of BUSINESSEUROPE



As European growth remains sluggish compared to that posted in Asia, the issue of how Europe can kick-start its economy came under the spotlight at the Leadership Summit.

“Europe is not over,” argues Ernest-Antoine Seillière. “People think it’s over because other parts of the world are doing well – such as Asia, for example. But Europe remains relevant.”

Seillière offers a three-pronged recipe for keeping Europe relevant in a world of global competition: creating an internal market for services in Europe; fighting against protectionism in Europe; and reforming the governance of Europe.

“Keep an eye on the European social model,” he adds. “Social dialogue is the key to economic success.”

'Europe has potential. What's missing is leadership inspiration'

According to Bernard Liautaud, Europeans are often too gloomy in their outlook about their own economic prospects. “We cannot predict too much doom, he adds. There are lots of examples of countries that reinvented themselves after a crash -- think of California, which was as good as dead after the internet crash and which is back now.”

“Europe has lots of potential. What has been missing is leadership inspiration,” Liautaud says. “The Sarkozy example (in France) is very strong. Whether you like his ideas or not, you have to admit that he is showing strong leadership and direction.”

Liautaud -- who founded Business Objects and grew it from a small start-up company to a world leader in its field – is more pessimistic however about the prospects for funding the growth economy of Europe through venture capital. “Venture capital investment in Europe is one billion dollars per quarter, compared to 7 billion dollars per quarter in the US,” he points out, adding “this is a dangerous number for Europe.”

There is arguably a lack of entrepreneurial spirit in Europe compared to Asia or the United States. Recounting a visit to a Chinese business school, Liautaud says he was “amazed in China at how hungry the students are to create companies.”

The fear of failure

During a question and answer session at the INSEAD Leadership Summit, one member of the audience shared his own bitter experience as an entrepreneur: “Before even looking at our business plan, the bankers in Europe were more concerned with questions like: What school did you attend? How many clients do you already have? In the US, the attitude was a lot more open. As a result, we are now probably going to move our company to the US in order to get funding.”

The European -- or more specifically French -- conservatism regarding venture capital funding is mainly attributable to a culturally-entrenched fear of failure. “We need to celebrate failure in France -- as in the US -- as an opportunity to learn, not as a stigma to be bared for life, as it is now looked upon in France,” Liautaud argues.

Seillière agrees, adding that “in French education, you are taught to shun risk. Everyone has to be unsuccessful -- that way everyone is happy because equal.”

Both roundtable panellists agree that the fault lies with the French education system. “The notion of acceptance of failure and acceptance of risk needs to be taught at an early age,” concludes Liautaud.

Another part of the problem has to do with how researchers and business people are kept separate from each other, seldom interacting. “In Europe, we separate the specialities -- the engineers in one school and the business people in another,” Liautaud points out. “In Silicon Valley, at Stanford, you have the best business minds and the most innovative scientific thinkers working hand in hand, producing great results and giving birth together to innovative companies. Take Google for example: an innovative algorithm for raking web pages on the one hand and a great advertising business model on the other hand. Your need both the innovation and the business model to make a real success story.”

For Seillière, the future economic success of Europe depends on greater European integration. “If EU construction stops, then it’ll be over for Europe,” he argues. “But I don’t think that will happen, because I don’t think people have a taste for suicide.”

Adding a touch of irony to the debate, he concludes that “what gives hope for Europe is the incredibly bad management of the place -- thereby allowing a great potential for improvement in the future!”]]> http://knowledge.insead.edu/contents/ILScompetition.htm http://knowledge.insead.edu/feedback.cfm?ct=17229 Tue, 07 Aug 2007 10:00:34 +0800 http://knowledge.insead.edu/home.cfm