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The global magazine for decision-makers Issue 15

ROLAND BERGER STRATEGY CONSULTANTS

Jürgen Hambrechton European management culture

Martin Walseron justice andinjustice, moneyand independence

Philip Kotler reinvents himself. The world of finance in upheaval.The art of productive conflicts.

Mastering complexityIndia and its companies

can do more than just cheap

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… and therefore we would like to congratulate the following winners from the German round of our “Best of European Business” awards for successfully finding this path:

Dr. Jürgen Hambrecht, CEO of BASF SE, as best “European Manager”; Hartmut Ostrowski,CEO of Bertelsmann AG, for winning the “Strong Leadership” prize; and also both HOCHTIEFAktiengesellschaft and Symrise AG as recipients of our “Growth Despite Crisis” award.

We believe that Europe’s companies have both the chance and the potential to make the coming years a European decade.

We think so!Is there a European path to successful management?

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Dr. Burkhard SchwenkerCEO Roland Berger Strategy Consultants

If we want to generate sustainable growth for thefuture, we need to successfully connect the major challenges in theworld—such as climate change and demography—with growth. In thiseffort, industrial expertise plays a decisive role. Why? Because boththe green technologies that can help us address climate change, andthe productivity gains that can enable us to generate growth withfewer employees, are based on superior industrial know-how.

The crisis has been a good reminder that the real economy—namelyindustry and highly-specialized services, especially in combination—plays a crucial role in the economic structure. That puts our prioritiesright back in order! And it places continental Europe, with its high industrial density, in a leading position.

However, the crisis has also revealed clearly that the Asian nationaleconomies saved us from crashing into a depression—and that theywill remain the growth drivers for the next few years, with China as the model for successful Asian economic development. However, a growing number of people are beginning to ask just how long canChina walk the tightrope between communism and capitalism? India,for example, is pursuing alternate roads to growth and prosperity. In this dossier we present our perspective on how real the opportunities for India as a boom region truly are.

One of India’s strengths is diversity, which can be advantageous for competition and progress. Yet oneregion in the world has potential for an even more stimulating environment: Europe. Nowhere else can you find more languages, cultures and countries in a smaller geographic area. This unique mix hasled European businesses to develop a special outlook on management—a topic we present in-depth in many studies and books. For this issue, in an exclusive interview, we spoke with BASF CEO Jürgen Hambrecht for his insights on the opportunities inherent in a “European way of management.”

Have an enjoyable, interesting read.

first views f

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Mission deregulation. Sergey Tigipko is Ukraine’s new vice primeminister. He is prescribing his country a significant reform program—even if it causes some discomfort. Page 8

A new way to new ideas. The easiest source of inspiration for companies is their customers. However, many fail to successfullyrealize these ideas. We reveal some who have. Page 34

The meaning of justice. Renowned German author MartinWalser discusses this and other issues with Alexander Mettenheimer,CEO of private bank Merck Finck & Co. Page 58

Kotler on service marketing. The marketing guru tells think:actthat sustainability and smart communication are the key to successfulmarketing for professional services. 4

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think:act is published in five languages (English, German, Chinese, Russian and Polish)

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food for thought

6 Football: a billion-euro marketThe beautiful game is now abooming global business.

8 Sometimes politics can’t be popular Sergey Tigipko’s fight for reform in Ukraine

10 Locking hornsWhy management conflictsshould not always be avoided

dossier

14 The thrill of complexityas seen by Pietari Posti

16 India innovates differentlyWhy India’s companies cando more than just cheap

20 Waking the giantIndia’s agricultural market is nowattracting international investors.

22 A lot of white shelvesLocal stores still dominate India’s retail trade.

25 Thirst for oilIndia’s role in the global search for crude

28 Trying to fuel the growthIndia’s government looks to domestic oil.

31 Praise to the motherWhy are Indian CEOs so successful in global corporations?

industry report

34 Customer consultingCustomers provide the ideas—howcompanies reap the benefits

42 The big realignmentHow increased banking regulationcould bring new opportunities

44 “All muscle and no fat”Philip Kotler explains how tomarket professional services.

47 Journalism: first draft of historyExclusive: think:act turns five. CNN says congratulations.

48 Future marketsArtificial photosynthesis and microscopes for molecules

business culture

50 Bracing for litigationManagement is a risky business. We investigate D&O insurances.

52 Benefiting from diversityBASF CEO Jürgen Hambrecht on European management

56 Work in progress

58 “Only money grants independence”Exclusive: author Martin Walser in discussion with leading banker Alexander Mettenheimer

61 “Don’t settle”What drives Steve Jobs?

regulars

3 First views62 Service | Credits

The country is booming—this much we know. Butfor some time now, there has been a great dealmore behind India’s growth than just an outsourc-ing destination for the developed world. Compa-nies such as Tata are developing their own identi-ty, while top Indian managers have experiencedsuccess in businesses around the world. AndIndia’s markets offer considerable growth oppor-tunities for American or European firms. In thisdossier, we take a closer look at the dynamics ofa country that is currently changing the world.

MANAGING INDIA.

MANAGING INDIAN?

DOSSIER #15

“The real interest in India is tofind the next practice. To find theunexplored innovative idea—one that can change the game.”

BILL MCDERMOTT, SAP

“India is not just about IT or business processoutsourcing. We see it as an incubator for giantglobal corporations driven by IT strategy.”

F. WARREN MCFARLAN, HARVARD BUSINESS SCHOOL

DossierManaging India. Managing Indian? Starting on page 13

!

Articles that are marked with thissymbol can also be listened to on ouraudio CD (page 63).

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The 2010 FIFA World Cup, to be held in South Africa, shows once again that football has become aworldwide business. The World Cup is a playground for iconic brands such as Adidas and Nike. Top clubs are now run like companies, with the aim of conquering growth markets. But here, just as in the business world, “the result is everything!”

seasons was the average employmentperiod of a team manager in the topEuropean leagues in 2009. England’sPremier League relies the most on long-term collaboration (9.7 years), whichhas proved successful in recent years.The German Bundesliga had the fastestturnover in coaches.

3.46

Mobile professionals: In the last several years, players in Europe’s five top leagues haveincreasingly demonstrated a willingness to switch teams. On average, football stars leave theirclubs 3.47 times over a 10-season period; in 2006, that figure was 3.28. Italians are the mostmobile, averaging 4.24 transfers a decade. With an average of 4.21 moves over the same timeperiod, African players show a similar inclination to seek new challenges.

Source: PFPO – The Professional Football Players’ Observatory

Chelsea FC! 268.9 million

Source: Deloitte

The football clubs with the highest revenuesworldwide in the 2007/2008 season

Growth market Asia With 85 million active players, Asia represents the biggestcontingent within FIFA, football’s global governing body. However, with this figure equivalent to just 2.2 percent ofthe total population, it has the lowest participation ratewithin the FIFA confederations.

Football: a billion-euro market

p food for thought

WORLD OF NUMBERS

FC Bayern München! 295.3 million

FC Barcelona! 308.8 million

Source: PFPO – The Professional Football Players’ Observatory

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Football beats the overall economyThe football business represents a very promising growth environment. Forexample, in 2009 the DFL (the company that governs Germany’s professionalleagues) raised its revenues from the marketing of television rights, income from advertising and player earnings to ! 2.4 billion. This represents an increaseof 5 percent compared with the previous season, and the fifth consecutive year ofrecord sales. In contrast, the European Union posted an economic growth of just0.9 percent. Source: DFL

England’s Premier League generates ! 200 millionfrom overseas marketing, making it a champion in that mar-ket. In comparison, Germany’s Bundesliga takes in only about!20 million abroad. The English clubs do have to work to earntheir money, though: extensive global promotional tours are thenorm, while even the possibility of staging a round of regularseason fixtures in different countries has been discussed.

4 percent of the world population actively plays football Of the 265 million players, 90 percent (239 million) are men. However, the number of female football players isincreasing. From 2000 to 2008 alone, it increased by 19 percent to 26 million.

FIFA is projecting an increased demand in China for football as a con-sumer commodity. By 2020, the number of active players in this countrywill climb from 26 million to more than 40 million. FIFA is expectingthat China will see an increase in the purchasing power geared toward

football-related markets, from $50 billion to $250 billion, as aresult of its per capita income tripling by 2020. Europeanclubs, associations and companies are tapping new sales mar-kets through strategic alliances. Top clubs like Real Madridand Bayern Munich are using training camps, pre-seasongames, exhibition tournaments and youth football acade-mies to enter the Asian market.

China rising rapidly

Source: FIFA

Number of players as a percentage of the population

Costa Rica

27 %

20 %

17 %

16 %

16 %

Germany

Faroe Islands

Guatemala

Chile

Manchester United! 324.8 million Real Madrid

! 365.8 million

Source: FIFA

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When politicians allow themselves to beprofiled in men’s magazines, they are con-

veying a message. That also applies to SergeyTigipko. When the banker decided to run inUkraine’s presidential elections, he wantedto stand out from the established class ofpoliticians, so he did a photo shoot for thecover of Men’s Health.After years of political abstinence, the multi-millionaire re-entered the scene as a presi-dential candidate in the fall of 2009. Withouta party or a parliamentary seat, he stillreceived 13 percent of the vote and came inthird behind the favorites Viktor Yanukovichand Yulia Tymoshenko. After his electoralsuccess, he was courted by all politicalcamps. In March 2010, the new Ukrainiangovernment appointed him to be the VicePrime Minister for Economy. In his presentposition, Tigipko is particularly keen onimplementing reforms that the country hasbeen putting off for two decades.

UKRAINE IS PROMOTING SMALL AND MEDIUM-SIZED BUSINESS—AND TIGIPKOBELIEVES IT’S THE RIGHT THING TO DO

In a meeting with think:act, he makes it can-didly clear why, after leaving the world ofpolitics in 2004, he now wants to use hisprominent position to reshape things. “Oureconomy must be completely deregulated,”opines the 50-year-old. Tigipko believes that control must be quicklyregained over the rampant bureaucracy,widespread corruption and the lack of will-ingness to pay taxes. In the meantime,Ukraine has begun to support small and

medium-sized enterprises. “In my country,many people mistakenly believe that thesetypes of companies will cause the economymore harm than good,” says the vice primeminister. The reason for this misconceptionis that these companies supposedly make upa large percentage of Ukraine’s undergroundeconomy. Yet Tigipko feels that governmentsupport and tax benefits will help to buildup, stabilize and firmly establish this eco-nomic sector, saying, “Without small andmedium-sized businesses, we can forgetabout integrating with Europe.” To date, innumerable Ukrainian govern-ments have sought in vain to enforcereforms. But that is something Tigipko nowwants to change. The man who sold hisinsurance group, TAS, to Swedbank for $1 billion in 2007 is considered a cleverstrategist and tactician. In the fall of 2009, accompanied by consider-able media coverage, Tigipko went into themonth-long election campaign armed with apolitical and economic manifesto that hadbeen carefully tailored by an internationalteam of consultants. Experts estimate thathis campaign may have cost him in theregion of $300 million. With that event now behind him, the viceprime minister prefers to discuss economicgrowth. He wants to help Ukraine reachhigher growth rates—even if painful meas-ures are required. And Tigipko is convincedthat the people will still stay with him: “Onany given day, most Ukrainians experience alot of things that don’t work. It is the job ofpoliticians to push through unpopular

reforms. I’m ready to do that, and I’m con-vinced that this will also be demanded byUkrainian politics,” he says confidently.Immediately after assuming office, he estab-lished a 60-day program that provided forshort-term changes such as doing away withvarious bureaucratic provisions. He also hadthe 2010 national budget prepared with theassistance of the International MonetaryFund (IMF). Many Ukrainians now have tosay goodbye to cherished comforts that thegovernment had once paid for. Next year, for example, the price of gas for privatehouseholds will be scaled according toincome levels.

BANKS THAT DON’T SPECULATE BUT ACTUALLYSERVE THE REAL ECONOMY

In particular the Ukrainian banking sector—which suffered tremendously from the glob-al economic crisis and only survived animminent collapse thanks to assistance fromthe IMF—is facing major changes. “Most ofthe Ukrainian banks cannot be compared inany way to those in Europe or the US,” saysTigipko. The equity ratio of the financialinstitutions is generally much too low andthat is why most of the banks struggled asthe crisis intensified. In the future, the national bank shouldimpose stricter rules and monitor their com-pliance, he says. In addition, the banksshould become partners with the real econo-my and not tie themselves solely to specula-tive activities. “In Ukraine, many banks havedevolved into casinos,” complains Tigipko.Furthermore, the vice prime minister wants

Sometimes politics can’t be popularIt’s the political resurrection of a reformer. Despite knowing he never really stood a chance, SergeyTigipko decided to run in the Ukrainian presidential elections. Now he is vice prime minister, waging a battle against over-regulation and bureaucracy—very much the progressive politician.

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to promote greater involvement from for-eign banks. “Anyone who operates accordingto honest commercial practices is welcometo do business here,” he says. “I support acombination of European, Russian andUkrainian banks. It’s good for the competi-tion and it’s the only way to revive the busi-ness sector,” Tigipko emphasizes. He would also like to see a similar mix inother segments of the Ukrainian economy.“The political realm and other branches of

the economy missed opportunities in thepast to introduce Ukrainian products innewly created markets like China andIndia,” he says, criticizing his predecessors.In the last five years, neither the country’spresident nor any of the heads of state hadconsidered it necessary to visit these coun-tries. While other nations sent trade delega-tions to Asia, the old Ukrainian leadershipignored the emerging world powers to alarge extent. Tigipko sees good prospects in

these sales markets, especially for the metal,chemical, and agricultural industries. The vice prime minister relies on his imageof a successful manager. Wearing an immac-ulately tailored dark suit, he asserts, “Oldpoliticians cannot serve new politics.” Tigipko represents change—and embodiesit, too. Men’s Health readers learned that thespry, athletic-looking man swims and jogson a daily basis.Meanwhile, other media also regularly carrystories about his domestic life with his fam-ily. His wife Viktoria describes her husbandas the “protector of the family.” Not only doeshe chop wood and perform minor repairs onthe house and car, he also packs the picnicbasket for family outings. This kind ofbehavior goes a long way in Ukraine. During the election campaign and the peri-od in which the government was beingformed, various political camps courtedTigipko in an attempt to win him over totheir side. Former Prime Minister YuliaTymoshenko had offered him many lucra-tive positions, even the job of prime minis-ter. All he would have had to do in returnwas support her in the run-off elections.However, Tigipko, ever the tactician, choseto maintain a low profile, which proved tobe a smart move. After Viktor Yanukovichwas elected president, the new leadershipappointed Tigipko as the vice prime minis-ter. In this strategy, Ukrainian experts seeTigipko preparing for another run at thepresidential office the next time around.Under President Yanukovich and Prime Min-ister Asarov, both of whom are over 60 yearsold, his prospects seem better than theywould have been under the ambitious andyounger Yulia Tymoshenko..

“In Ukraine, many banks have devolved into casinos.”Sergey Tigipko

You can also listen to this articleon our audio CD (page 63).

This portrait is based on an interview thatNina Jeglinski, dpa correspondent in Kiev, conducted exclusively for think:act.

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US President Barack Obama has learnedtwo things this year. Firstly, anyone who

wants change must also be able to acceptchange; and secondly, the most painfulblows often come from one’s own camp. As avisionary Democratic, Obama had expectedthe Republicans’ resistance to his healthcare reform plan—but that the stiffest oppo-sition might come from his own party proba-bly came as more of a surprise. Suddenly,the calls of “Yes, we can” rising from theparty faithful were mixed with whistles andeven booing. Several key delegates in hisown party opposed his plan to providehealth insurance for all Americans.Nevertheless, with one show of strength, thepresident ultimately imposed his will on hisopponents, both internally and externally.Obama can live with the fact that he is nolonger loved by every member of the Demo-crat Party. He has demonstrated the strengthof his leadership and, as a result, definitivelystabilized his position in the Americanpower hierarchy.

WHEN CONFLICTS GO UNSTATED,THE RESULT IS OFTEN STALEMATE

Obama’s experience is also played out regu-larly in companies all over the world. One’sown ranks are seldom closed. On the manag-ing boards of large corporations, it is practi-cally unheard of for all the members to be ofone mind. And it is precisely when ground-breaking decisions need to be made that dif-fering opinions and methods frequently collide. This can often be exhausting, but italso has positive effects for the company.

In fact, a difference of opinion at the highestlevel can be most beneficial because itforces everyone involved to strive to find thebest solution.In the past, conflicts of these kinds wereavoided. Management teams often workedside by side in the same company fordecades. The members of these teams kneweach other well enough to know what theycould, and couldn’t, get each of the others toagree to. Friends and enemies alike kneweverything they needed to know about theattitudes, strengths and influence of theirassociates at the top. Topics that might leadto disagreement were simply glossed over,often creating an atmosphere of resignationand stalemate. Of course, these differencesin ideas, approaches, and interests alwaysexisted, they were simply never articulated,meaning that their positive effects werenever realized.These days, managers often spend no longerthan four or five years in the employment ofa single company, which increases thepotential for conflict: executives must strug-gle to get their ideas adopted and establishthemselves in their team’s power structure.This is good for companies because it rousesthem from the unproductive slumber of“business as usual.”Accordingly, one of the most rapidly grow-ing companies in the world deliberatelybuilds conflict into its management culture:even when they are working together in agarage, refining their ideas for a new kind ofsearch engine, Google founders Larry Pageand Sergey Brin would accept no lazy

compromises. Each idea, each step was chal-lenged. No decision was taken until it hadsurvived a process of constructive conflict.This culture has been deliberately carriedover to the behemoth corporation theyfounded. The success of Google vindicatesthe approach of Page and Brin—especiallysince the company is also highly successfulon the employment market. It seems thattalented workers do not want a cossetedexistence at any price.

ANYONE CAN CONTRADICT—EVEN THE SEASONED WARHORSES

Micropolitical sensitivities, born of age dif-ferences, for example, are completely disre-garded. In order to make disagreement pro-ductive, it is important to refrain from treat-ing older employees with kid gloves as well.Google CEO Eric Schmidt has personalexperience of this. He often recounts how heargued with founders Brin and Page abouttechnical questions, even while interview-ing for the job. The founders are in theirmid-30s now, while Schmidt is 20 years theirsenior. But the veteran manager, who hadalready contributed substantially to the suc-cess of Sun and Apple, remembers this inter-view as one of the most entertaining he hadhad in a long time. And Brin and Pagerespected the opposition of this experiencedbusinessman, who never avoids an argu-ment and is even prepared to question hisown views.As CEO, Schmidt continues to propagate thisculture, which is based on questioningeverything and hiring the most widely

Locking hornsAccording to conventional wisdom, conflict in management should be avoided. But is this reallytrue? Can struggles between the top managers of a company also be constructive? They can—provided they are properly managed, as shown in the case of Google, among others.

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diverse people possible to pursue theirobjectives with commitment and passion.He actively promotes a culture of confronta-tion and discussion in the company. Forexample, important decisions must alwaysbe made by at least two people. The result:no solution is reached without prior discus-sion. Managers and employees at Google areexpected to pursue the widest possiblerange of goals, and then defend themagainst opposing objectives. According toSchmidt, this energy through friction is thesource of the dynamism in a growing com-pany like Google.In other corporations, while argument is notexplicitly sought, it is used to generate a con-structive outcome. Take food giant Kraft, forexample. CEO Irene Rosenfeld is combativeby nature. When she took over the job, shepromised that she would create growth.Rosenfeld promptly replaced half of themanagement team, with no regard for loss-es, to ensure support for her strategy, beforeradically restructuring the entire company.Then came the economic crisis and herpromise of growth crumbled. She was forcedto sell the US frozen-pizza business to arch-rival Nestlé.

HOW ROSENFELD WEATHERED THE STORM AS KRAFT CEO

Suddenly, the warrior found herself alone.Rosenfeld’s critics within the company andamong shareholders balked at her growthstrategy in particular: she wanted to buy theBritish chocolate manufacturer Cadbury to

close the gap on Nestlé. Suddenly, no onebelieved she could pull the deal off and hersupport within the company collapsed. Keyinvestor Warren Buffett humiliated her withan open letter calling upon Kraft sharehold-ers to overthrow the single-minded boss.But Rosenfeld was not intimidated, and inthe end, with much diplomacy, she got herway. After six months of takeover poker,Cadbury was hers and Kraft was still in hotpursuit of rival Nestlé. Rosenfeld owed hervictory not only to her persistence, but inequal measure to her ability to fight anapparently overwhelming opponent for asolution that would benefit the company. And this is important, too: good managersmust not only be able to create visions, theymust also be able to realize them, even inthe face of opposition from the managementor supervisory board. They may causeoffense along the way because, at this levelof management, there are losers as well aswinners. Refusing to acknowledge thismeans that all too often unpleasant deci-sions are avoided.With that said, it is inevitable that some dif-ferences of opinion in business will notalways be beneficial for everyone. An inter-nal conflict often ends with a shortannouncement in the finance section of thenewspapers along the lines of “The manage-ment is leaving the company by mutual con-sent.” But this result does not necessarilyhave to be detrimental to the company.When managers disagree, not only is it usu-ally the best solution that wins through, but

also the person who is best able to imple-ment it. Of course, this person also tends tobe someone who does not give up easilyunder pressure.One manager who will be leaving his com-pany in the near future is easyJet boss AndyHarrison. He is one of the main protagonistsin a massive conflict of visions with majorityshareholder and founder of the airline, Ste-lios Haji-Ioannou. He has said publicly thathe wanted the group to grow more slowly.Instead of continuing to invest, he wanted todistribute a dividend. The company man-agers had other ideas.

EVERY SUCCESSFUL CLASH ENHANCES THE PROFILE OF A TOP MANAGER

Harrison and his colleagues on the manage-ment board had previously shied away fromthis change in strategy, and had evidentlyestimated correctly. In 2009, easyJet wasamong the very few airlines in the worldthat posted a profit. But this did not mollifyHaji-Ioannou. He recently resigned his posi-tion as non-executive director under protest.Despite this, Harrison will still leave thecompany. His position in financial circleshas been clearly established through his dif-ference of opinion with the founder of thecompany. Harrison has enhanced his profileas an independent, top-level manager—something he will undoubtedly benefit fromin future disputes, whether at easyJet orelsewhere. One thing his managementboard colleagues now know for sure—he isnot one to avoid a good argument..


The country is booming—this much we know. Butfor some time now, there has been a great dealmore behind India’s growth than just an outsourc-ing destination for the developed world. Compa-nies such as Tata are developing their own identi-ty, while top Indian managers have experiencedsuccess in businesses around the world. AndIndia’s markets offer considerable growth oppor-tunities for American or European firms. In thisdossier, we take a closer look at the dynamics ofa country that is currently changing the world.

MANAGING INDIA.

MANAGING INDIAN?

DOSSIER #15

“The real interest in India is tofind the next practice. To find theunexplored innovative idea—one that can change the game.”

BILL MCDERMOTT, SAP

“India is not just about IT or business processoutsourcing. We see it as an incubator for giantglobal corporations driven by IT strategy.”

F. WARREN MCFARLAN, HARVARD BUSINESS SCHOOL

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D O S S I E R #1 5

The thrill of complexityas seen by Pietari Posti

Pietari Posti may be Finnish, but his illustration that opens our dossier sec-tion is based very much on an Indian aesthetic. Like the goddess Shiva,India’s top managers sometimes seem to have more than one pair of arms—not only are they dealing with the complexities and problems in Indian socie-ty, but they are actually finding clever solutions to them. To do this, they areoperating on an increasingly international scale, while the global players ofthis world have long discovered the attractive markets India has to offer. Thisdossier looks at both their opportunities and restrictions as well as dis-cussing whether there is such a thing as an Indian management model.

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Managing India. Managing Indian? D O S S I E R #1 5

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THEY ARE ASKING THEMSELVES the really bigquestions: how do you invent a reliable mode of trans-port for millions who don’t own a car? How do youconnect a billion people who earn less than $1,500 ayear on average? How do you show people who can’tread how to open a bank account and make wiretransfers—in regions where the nearest bank is 200kilometers away? It is not only the country’s leadingdecision makers who are asking these questions—Indian businesses are, too. And they not only are theyfinding the right answers, but they are also earningmoney with them. “There are no precedents for ourproblems—their sheer scale puts them beyond any-thing in human experience. So let us find our ownsolutions!” India’s leading industrialists have heededthis call to arms from strategy guru C. K. Prahalad,and they are finding solutions that are inconceivablein the West. It is in the emerging nation of India thatthe business models of the future are being config-ured today.

India’s industrial production is growing at anaverage rate of 15 percent a month. Sales of cars byTata Motors or Maruti Suzuki India have risen by 25percent in the last year. Most manufacturing concernsin all sectors of industry are approaching the limits oftheir capacity. India’s major corporations are growingby as much as 40 percent. In almost every industry,managers are struggling to keep up with demand.

At the same time, they are planning a takeoveroffensive. Arcelor and Corus were just the beginning.While the multinationals in the West are weakened,the management teams of Indian companies, likeauto parts supplier Bharat Forge, electrical equipmentmanufacturer Crompton Greaves, engineering firmLarsen & Toubro, or pharmaceutical developer Dr.Reddy’s are gearing up to change not only their coun-try, but also its position in the world, for good. Lead-ing the charge is Ratan Naval Tata, chairman of the

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D O S S I E R #15 Managing India. Managing Indian?

India innovates differentlyThey can do more than just cheap. Indian companies are developing business models fromwhich their Western counterparts might learn a thing or two. In particular, they are thinking innovatively—not so much in terms of technology, more about their customers’ budgets.

Tata Group, India’s economic colossus. No other con-cern has had such a pervasive effect on the Indianeconomy and society as this empire, which wasfounded in 1868 by Jamsetji Tata. Tata products andservices are ubiquitous in India. The businessesowned by this family-held company generatebetween 3 percent and 5 percent of the country’sgross national product.

ALL INDIANS ARE PROUD of Tata’s success. Likeno other business in India, the threads of tradition andthe future, trust and incorruptibility, profit and socialresponsibility, are held firmly in the hands of theunassuming Ratan Tata. He has already unleashedone revolution, when, at the end of the last millenni-um, he transformed the elephant that was Tata into apouncing tiger. The tiger’s first leap took it into the ter-ritory of the world’s biggest steel producers. Now it isgathering itself for an attack on one of the most fero-ciously contested reserves of the old industrializednations—the production of luxury cars.

“The acquisition of Jaguar Land Rover by TataMotors is the expression of a new self-confidence,”says Ralf Kalmbach, head of the Competence CenterAutomotive at Roland Berger Strategy Consultants.“Their unassailable domination of the commercialvehicle sector at home has given them a sense ofbelief that they can compete at the top of the interna-tional automobile business.” After 40 years of resist-ance to change, and having fallen into the wronghands, the British luxury brand Jaguar looked as if itwould follow its venerable, elderly customer base intoextinction. Then came Tata. “With his clear vision,Ratan Tata showed the former colonial power how itsonce revered status symbol can be driven into thefuture,” continues Kalmbach.

The result was revealed at the last GenevaMotor Show in the shape of new flagship model, the

“I expect the Tatas to bemuch larger in 100 yearsthan they are now. Butmore importantly, I hopethe group of companies willbe the most respected inIndia—on the basis of ourprocesses, our productsand our value systems.”R ATA N TATA , C H A IR M A N, TATA S ONS

TATA GROUP, TATA MOTORSTata Motors, a part of the Tata Groupempire, is India’s largest carmaker and amarket leader in the commercial vehiclessector. The company has generated enormous interest, not only with its acquisition of Jaguar Land Rover, but also by producing the cheapest microcarin the world: the Nano.

Commercial vehicle sales from March to April 2010 in comparison withthe same period last year:

+38.31%Midsize and heavy commercial vehicles(M&HCVs) up 33.55 percent; light vehicles up 42.67 percent

Dec.Nov. Jan. Feb. Mar. Apr. May

Stock market price for Tata MotorsThe price per share for Tata Motors has risen in the last few months. Investors evidently appreciate the company’s strategy.


07_15gb_16_19_Dos1_Titelstory 18.06.2010 13:13 Uhr Seite 16

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form of transport for people at the bottom end of theincome scale.

In order to put the vehicle on the road, Tatabroke every convention in the car manufacturing rule-book. “The approach is different in every way fromwhat is typically done in the automobile industry,”explains Kalmbach. “Instead of starting with what wastechnically possible, calculating what it would all costand then overrunning the cost targets by the usual 50percent, Tata established a radical costing frameworkand calculated downward from an immutable endprice, which influenced every aspect of the project.”Everything in the development was subordinate toone magic number: 100,000 rupees, just over$2,000. And cutting costs did not mean cutting qual-ity, but rather redefining what is meant by top quality.How do you build a simple, sturdy axle for a mere frac-tion of the cost of all standard commercial productswithout sacrificing safety and comfort, for example?

To answer questions like this, Tata convincedhigh-end suppliers like Bosch, Continental andFreudenberg to completely rethink the way they

Managing India. Managing Indian? D O S S I E R #15

XJ. It is barely recognizable in comparison to its pred-ecessor. Younger, more aggressive, it expresses arepositioning of the brand—and, at the same time, theconquering spirit of India. Recently, Tata posted a prof-it for the luxury carmaker, which many had alreadywritten off. According to Kalmbach, “This initial suc-cess, unparalleled during the crisis, is an indication ofthe determination and managerial skills that werebrought to bear in India to reinvent the brand.”

NEVERTHELESS: the success with Jaguar isbeing played out in the uppermost segment of theautomotive food chain. But Tata is also involved at theother end of the spectrum, where it has unceremoni-ously reinvented the car itself, with the Nano. The ideato create the first internationally competitive subcom-pact car came to Ratan Tata on a rainy day in Mumbai,when he saw one of the countless tiny motorcyclesweaving through the streets carrying a family of five.“Surely it must be possible to provide this family witha safer, more comfortable means of transportation?”he thought. And so the idea was born: create a new

98 %41 %

78 %41 %

58 %41 %

47 %93 %

31%31 %

28%24%

2 %24 %

1 %17 %

4 %31 %

9 %0 %

11 %17 %

27 %55 %

Source: Harvard Business Review, March 2010

Regulation questions

INDIAN STRATEGIC SENSEWhat are leading Indian and US managers devoting most time to? (Red = US)

Reports to the supervisory board

Shareholder relations

Defining strategy

Media relations

Day-to-day management

MORE TIMELESS TIME


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produced high-value auto parts. “For many parts sup-pliers, the Nano became a test laboratory for a busi-ness model, to discover how it is possible to makemoney with parts for simple, inexpensive, environ-mentally friendly vehicles,” Kalmbach explains. “TheNano was a wake-up call to the automotive industry, awarning to finally change their strategy of expectingcustomers to buy a bigger, and thus more expensive,model every time they changed cars.” Because that isprecisely what is not working any more. “The car man-ufacturers in the US, Europe and Japan will neveragain see absolute growth in their traditional battle-ground of big, expensive vehicles,” says Kalmbach.“The growth of the future is taking place in the emerg-ing nations, with small, affordable cars that allow mil-lions to move around.”

Yet even Tata had to learn that dispensing withtime-honored development structures in the automo-bile industry is a feat of strength that can only bepulled off when pursued utterly without compromise.“Time and again, the development of the Nanoreached a point at which it seemed impossible to holdto the upper price limit of 100,000 rupees,” saysKalmbach. “But Ratan Tata had given his word to theworld. And against this background, he forbade hisorganization to waver from its goal. His maxim: a promise is a promise!”

BHARTI, INDIA’S LARGEST telecommunicationsprovider, has turned the practice of amassing hugerevenues from millions of small transactions into anart form, by enabling an impoverished population tojoin a communications network. India is the fastest-growing mobile telephone market in the world. Thereare currently 500 million cellular phones in use, andby 2013 this figure is expected to top 900 million.More than 120 million current users are supplied byBharti Airtel. No one in the world offers a cheaper priceper minute—currently half a US cent. Revenue per callis minuscule. But Bharti Airtel is making enormousprofits as more and more customers in rural areas arebrought into the fold. At the moment, the company isregistering an impressive 100,000 new customersevery working day.

While India’s current strength has grown out ofits role as a service outsourcing provider for the First

World, Bharti has outsourced almost 90 percent of itscorporate processes to Western providers. Since itsfoundation, the company has been growing so rapidlythat Indian technological capacities have not beenable to keep pace. “We realized that we can capitalizeon the strength of our partners by outsourcing,”explains Jagbir Singh, Group CTO Mobility Networks ofBharti Airtel.

Network development and operation, networkdesign and system optimization, everything is doneby Ericsson. With a constant stream of multi-billion-dollar orders, it has been India’s Bharti that kept thecrisis-wracked European mobile wireless companyafloat. Other contractors, including Nokia SiemensNetworks and IBM, are also dependent on the boomof the Indian model for success.

The profits that this business model generatesare so enormous that Bharti Airtel is preparing toexpand into markets that the conventional telecom-munications providers have studiously avoided untilnow. Most recently, the company paid $9 billion foraccess to the African market. Its acquisition of sharesin Kuwaiti telecom provider Zain is the second-largestin India’s history—and it comes with another 45 mil-lion customers.

Bharti is also currently planning to enter thebanking services sector. An estimated 41 percent ofall Indians do not have their own bank account. Con-ventional big banks have no idea how to manage theenormous number of tiny bank accounts withoutmaking a loss. Bharti does. With its mobile technolo-gy, the company has the access and the capacity toreceive deposits, store the amounts and managewithdrawals made by more than 100 million residentsin the rural reaches of the country—the customerspay by cell phone.

The technology for mobile payment is providedby the company A Little World, which is one of themost creative technology providers in the world.Headquartered in Mumbai, A Little World has alreadyrevolutionized the mobile payment sector severaltimes. The latest phenomenon is the Zero-Platform.This technology converts a smartphone, a lockboxand a fingerprint scanner into a portable bank branch,which enables rural India to connect to the bank net-work and obtain microcredits. Eventually, they expect


“The Indian telecommunica-tions market is currentlygoing through a hypercom-petitive phase, but we arestill making a profit. Simul-taneously, we will continuedeveloping detailed plans toexpand into marketsbeyond the borders of Indiaand southern Asia.”S U NIL BH A R T I MI T TA L , FOU N DE R , C H A IR M A NA N D GROU P C EO, BH A R T I E N T E R P RIS E S

BHARTI AIRTEL was founded in 1985 bySunil Bharti Mittal. Today, it is India’slargest mobile wireless network operatorand one of the fasting-growing telecom-munications companies in the world. It iscurrently expanding massively through-out the African continent. Bharti Airtel wasrecently named in Businessweek as oneof the six most successful technologycompanies in the world.

Sales were up 7% on the previous year, to 396 billion Indianrupees, in fiscal year 2009/2010. The EBITDA rose by 6 percent.

2006 2007 2008 2009

Sales growthThe four-year trendshows Bharti Airtel iscontinually expanding.

116.

2 bi

ll.

185.

2 bi

ll.

270.

2 bi

ll.

369.

6 bi

ll.

Volume in rupees; Source: Businessweek


1 9

to connect 50 million customers in this fashion. Todate, they already have three million.

Smart mobility, cheap telecommunication,mobile banking services—these products are not justuseful, but they also enable people in even theremotest corners of the world to become entrepre-neurs themselves.

According to C. K. Prahalad, this is the key toIndia’s social development. “The poor must be able tojoin forces with others as entrepreneurs. And compa-nies must earn money by providing the poor withentrepreneurial opportunities.” Indian businessesintend to make a profit from precisely this kind ofempowerment. The results are a flourishing entrepre-neurial culture, a rapidly growing middle class and anoptimistic outlook for the poor.

THE MOST INNOVATIVE EXAMPLE: Reliance Indus-tries. You can buy practically anything in the branchstores of India’s largest retailer—from vegetables toan education to gasoline. But what sets the $30 bil-lion company apart from other retail giants is itsastounding degree of vertical integration: not onlydoes Reliance tailor and sell suits under its own brandname, it also produces the fabrics from which suitscan be made, the cotton threads from which the fab-rics can be made and the machines for producing thethreads. In this way, the company offers severalpoints of contact for the business ideas of people asentrepreneurial “prosumers.” This year, Reliance wasthe only retailer included in Fast Company magazine’slist of the world’s most innovative businesses, andthis example shows why.

MORE AND MORE INDIAN banks are providing thenecessary startup capital for those who have no moresecurity to offer than a business idea and the courageof their vision. Since Muhammad Yunus developed theconcept of microcredits, the bank service of grantingthese tiny sums of money is attracting the fastest-growing clientele in the world. Recently, it has alsobeen gaining ground beyond India’s borders: the US,Spain and Germany are all copying this system ofstate aid to the “New Poor” of the First World.

After 300 years of economic stagnation, avibrant nation has awoken and is reinventing itself at

staggering speed, with boundless creativity and commercial energy. There are, of course, many prob-lems in India, for which solutions are still to be found.Take conventional electricity, for example, which isstill twice as expensive as in China, while rail travelcosts three times as much. But these problems areno longer intractable burdens—they have become thenext selling point for the next innovative businessmodel. India is making its own solutions with bothvision and pragmatism, creating business solutionsthat are being gratefully adopted by an increasingnumber of other emerging countries.


DOING WELL BY DOING GOOD How India’s elite social entrepreneurs live

Adulation on the streets, loyalty from theiremployees, respect from their competitors—not many captains of industry around theworld can lay claim to these accolades. ButIndian bosses can. The reason? Many of themare serious about social responsibility. Theircommitment to social causes “goes farbeyond the interests of their companies,”says Peter Cappelli, from the Wharton Schoolof Business. He recently conducted what isprobably the most comprehensive survey ofleading Indian managers ever undertaken:“Every executive we interviewed describedthe most important purpose of his companyin terms of a social mission. And not in orderto make money from it.” According to the sur-vey, shareholder value is ranked fourth ontheir list of priorities.

For example, Bharti Airtel wants to put mobilephones in the hands of people for whom anychance of telecommunication was a pipedream, until now. Indian banks, such as ICICIBank, provide starting capital for people whohave not had access to credit. Pharmaceuti-

cal manufacturer Dr. Reddy’s plans to makehealthcare affordable all over the worldthrough inexpensive medicines. And Infosysintends to show the world India deserves aplace alongside global technology leaders. Inshort: profits are a by-product, not the pri-mary purpose of a company’s activity.Many top companies have put their moneywhere their social ideals are. For example, 65percent of the profits of every company in theTata Group goes to charitable foundations;only 3 percent goes to the family. While thecompany executives live in demonstrablymodest style, their foundations financeIndia’s leading universities and researchinstitutions, campaign for education, health,food and clean drinking water. Dr. Reddy’sfinances healthcare for more than 40,000children. Infosys equips entire hospitals andschools with IT services and has launched anationwide program to develop IT skillsamong young people—a visionary idea thatmight benefit First World countries as well, asthey struggle to replace their declining tech-nical workforce. “Indian companies are notjust successful in addition to doing good forsociety. There is plenty of evidence to sug-gest that they are so successful becausethey do good,” Cappelli states. And the population expresses its appreciationto those who run these companies. Ratan Tatahas not only been awarded the “Padma Vibhushan”—India’s second-highest civilianhonor—he has also been voted the mosttrustworthy man in India.

“India’s large companies dowell because they do good.”Peter Cappelli, Wharton School of Business


2 0

THE ONLY SOUND that travelers hear in the ruralareas of Rajasthan, a state located in northwesternIndia, is the chugging of motorized pumps. The watercanals stemming from the days of the “Green Revolu-tion” that took place shortly after 1965 are old and thepumps don’t look much younger either. Their maincompetition are the oxen that pull long chains to liftbuckets full of water out of the wells. Most of whatgrows on the small plots is destined to feed the own-ers and their families.

Around 730 million Indians lead an existenceas subsistence farmers out in the countryside. Theywork on 120 million farms, with 60 percent of themworking on plots of land that are less than one hectarein size. India’s agricultural sector is still far frommatching the economic growth already achieved byits service and industrial sectors. While automobilesuppliers from around the world have manufacturingoperations in the industrial stronghold of Pune, andmore IT programmers work in Bangalore than in Sili-con Valley, agriculture in some parts of India has notchanged much since pre-industrial times. Millions ofwell-trained engineers, physicists and doctors haveallowed the service sector to now account for morethan half of India’s gross domestic product. In con-trast, Indian agriculture accounts for only 17 percentof the total economy–a trend that has been decreas-ing for years.

DESPITE, OR BECAUSE OF THAT, the Indian marketis highly appealing to agricultural companies theworld over. One reason is the sheer scope of it: afterChina, India is the world’s second-biggest market. “Forour company, India is a key market,” says SekharNatarajan, CEO of Monsanto India, a subsidiary of US-based Monsanto, which is involved in the seed busi-ness. Fertilizer and pesticide producers also haveIndia in their sights. There are more than 1.1 billion

s


Waking the giantIndia is one of the world’s biggest agricultural markets. Until now, small-scale farmersworked the fields, but now farming companies from around the world are increasinglyheading to India, hoping that its agricultural sector will evolve into a growth driver.

Indians to be fed, prosperity is increasing, especiallyin urban centers, and eating habits are adapting toWestern standards. “Urbanization and the demand forhigh-quality food is one of the growth drivers forIndia’s agricultural market,” points out Kapil Mehan,CEO of Tata Chemicals. The subsidiary of India’sbiggest corporate conglomerate focuses solely on thedomestic market in the agricultural business.

WHEN IT COMES TO FERTILIZERS, for example,India is the world’s second-biggest market. Besidesstate-run and local, privately held suppliers, interna-tional companies have had a foothold here for quitesome time. The US-based seed producer Pioneerentered the market more than 30 years ago and sup-plies 1.5 million customers in India. Part of the mar-keting strategy includes public-private partnershipsin which companies and the government work togeth-er with farmers. In February, Pioneer, along with theagricultural authorities in the state of Uttar Pradesh,initiated a collaborative project to train farmers. “Webelieve that new seed types and services associatedwith their use are critical to making India’s agriculturemore productive,” says Pioneer CEO Paul Schickler.

However, the collaboration between the gov-ernment and business does not function as well else-where. “Right now, it’s the government especially thatis stepping on the brakes,” reports Michael Timm, anagriculture expert with Roland Berger Strategy Con-sultants. And that despite the fact that the Indian gov-ernment had made the country an agricultural trend-setter for a while. In the 1960s, the Green Revolutionbrought progress to the fields. After periods of droughtand widespread famine, the socialist governmentstepped up its efforts and pushed ahead with theplanting of high-yield crops that could be harvestedseveral times a year. The massive use of pesticidesand mineral-enriched fertilizers as well as the expan-

“For our company,India is a key market.”Sekhar Natarajan, CEO, Monsanto India

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sion of irrigated land have left behind obvious marks,though. For example, tremendous environmentalproblems related to over-fertilization are an everydayissue in India.

To make matters worse, little has changed interms of technology since the days of the Green Rev-olution. Very little remains of what was once progres-sive technology. The archaic pipe systems are losinghuge amounts of water by today’s standards, and themost prevalent types of towing vehicle in many partsof the country come in the form of water buffalo andzebu cattle. “The utilization of machinery is still verylow,” emphasizes Timm.

WHEN COMPARED INTERNATIONALLY, agriculturalproductivity in India does not measure up well.According to the World Bank, India only grows one-third of China’s volume in rice and only half of theamount produced by much smaller countries like Viet-nam and Indonesia. In addition, the weak infrastruc-ture prevents exports from being successful. Accord-ing to the World Bank, transporting grapes from Indiato the Netherlands is twice as expensive as fromChile, even though India is only half the distance.

That is why improved efficiency is so impor-tant. One rupee invested in agricultural developmentwould generate 9.5 rupees for the economy in termsof economic performance. However, the US-basedInternational Food Policy Research Institute hasdetermined that the additional subsidization of fertil-izer by the same amount would only generate 0.85rupees. Intelligent watering systems that would addfertilizer drop-by-drop directly into the water couldreduce costs while simultaneously protecting theearth from over-fertilization. “Instead, farmers justthrow the nitrogen-based fertilizer on to the fields bythe kilogram and wait for it to rain,” Timm says.

Despite this, the government’s reform-orientedzeal has visibly faltered over the years. It considersitself more as a protective institution that shields thearmy of small-scale farmers from fluctuating marketprices. “They represent millions of critical votes,”explains Timm. These Indian farmers are not part of

the group benefiting from the boom. In fact, they hopethat the subsidies will be enough just to survive. Withmore than 300 million Indians living under the pover-ty line, that’s not always the case.

Climate change is exacerbating the situationand, in 2009, the country saw its strongest monsoonsin almost four decades. To top it off, the population isgrowing; the government estimates that by 2017,there will be almost 1.3 billion people living in India.

Monsanto came to learn that small-scale farm-ers are an absolute necessity. The company is cur-rently working on obtaining the first approval forgenetically engineered vegetables in India. Howeverafter nationwide protests, India’s Minister of the Envi-ronment, Jairam Ramesh, relented. “The public isagainst it,” he realized in early February andannounced a moratorium. However, the head of Monsanto in India is still hopeful that his companycan roll out new seed types on the market some day,as he believes that high-yield seeds are prerequisitesfor agriculture to be more productive in India.

IMPETUS FOR INNOVATION is already coming fromthe private sector, such as in the form of contractfarming. Containing provisions pertaining to qualityand quantity, contracts are being negotiated by glob-ally active food companies on-site with farmers in allmajor sales markets, including in India, too. For exam-ple, McCain Foods, a US-based company, has beenworking with 400 farmers in the state of Gujarat forseveral years. They plant potatoes that McCain thenprocesses into frozen French fries in nearby factoriesto be sold to McDonald’s subsidiaries throughoutIndia. “Urbanization and consumption patterns thatare strongly oriented to Western habits certainly sup-port such models,” says Michael Timm. “But to date,such contracts are rare in India.”

Executing such contracts is no simple mattereither. McDonald’s came to India in the mid-1990s andneeded several years to set up a functioning supplychain. But the effort paid off, and not only for the fast-food chain; in Gujarat, agricultural growth is matchingthe rest of India’s rapidly expanding economy.

“We believe that newseed types and servic-es associated withtheir use are critical tomaking India’s agricul-ture more productive.”Paul Schickler, CEO, Pioneer

Arable land in hectares per person

India as an agriculturalproblem area

Sources: World Development Indicators Database, Datamonitor, Roland Berger

Australia

Canada

Russia

USA

Brazil

Thailand

India

China

0.16

0.28

0.10

0.35

0.61

0.88

1.39

2.52

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07_15gb_22_24_Dos6_Consumergoods 18.06.2010 13:11 Uhr Seite 22



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INDIA IS TRULY A COLORFUL country. But thosewho base their impressions on consumer experiencesin food stores won’t see much of this color—the coun-try’s shelves have a distinct lack of it. Oil is sold intransparent plastic bottles without any labels, whilesugar and rice are available in brown paper bags orburlap sacks. Surprisingly, many products are dis-played entirely without brand names.

For multinationals, this brandlessness repre-sents an opportunity. Innovative sectors such asprocessed foods and personal care, in particular, arestill highly underdeveloped, according to an analysisconducted by Roland Berger Strategy Consultants andits Indian partner company, the Tata Strategic Man-agement Group. When it comes to soaps, detergentsand lotions, Indians spent $8.7 billion in 2008, whichis projected to increase by almost 20 percent annu-ally. Also, the $115 billion processed foods market(2007) is expected to almost triple by 2016.

Forecasts suggest that in 2025, India will bethe world’s fifth-largest consumer goods market—leaping up from 12th place in 2007. “Despite that, Indiais still not high enough on the priority list amongmany international consumer goods manufacturers,”says Andreas Bauer, head of consumer goods andretail at Roland Berger Strategy Consultants. A recentNielsen Global Consumer Confidence Study revealedthat India had already moved into second place in thespring of 2010.

After India’s economy had grown by 9 percentannually between 2007 and 2008, the country stillmanaged to grow by about 7 percent in the crisisyears. However, economists are back to projecting afigure of 8 percent for 2010—and an average growthrate of 6.3 percent annually until 2030. One reasonfor the surprisingly stable trend is that the Indianeconomy is bolstered by rapidly increasing domesticdemand. Domestic consumption already accounts for

s

A lot of white shelvesThe world’s multinationals want to move in on India’s retail trade. Their biggest competitors aren’t Indian companies, but the local mom-and-pop stores that are proving to be masters in logistics and customer focus.

more than two-thirds of the gross national product (in China, it is less than one-third). In other words,Indians are buying their way out of the crisis.

GOVIND SHRIKHANDE, CEO of Shopper’s Stop, oneof India’s biggest retail chains, is also seeing a gradualupswing in consumer behavior after the economiccrisis and the terror attacks in Mumbai. “They (Indianconsumers) are certainly loosening their pursestrings. They were on a shopping diet for a long time.”Shopper’s Stop operates 28 department stores inaddition to several subsidiaries of the stylish Hyper-CITY supermarkets. And these are not just located indowntown Mumbai or in Gurgaon, one of Delhi’s mostmodern suburbs, where almost all Indian and foreigncompanies have their headquarters. In the future,Shrikhande wants to penetrate into new regions and cities, such as Aurangabad, Amritsar and Coimbatore—places that the international businesselite haven’t heard much about to date.

In India, consumer business focused for a longtime on a small, affluent class that formed the cus-tomer base for Gucci boutiques, Armani flagshipstores and Bentley dealerships. Luxury goods manu-facturers should continue making good money fromthis class in the next few years, however the majorbusiness lies in transforming the masses living inrural areas to brand consumers. Ultimately, only 28percent of India’s 1.14 billion people live in cities. “Themarket for luxury goods is largely developed,” opinesAndreas Bauer. “The future focus is on average peopleand high-volume business.”

IN THE LAST DECADE, India’s rural economy grewup to 40 percent faster than in the cities. Now, ruralregions account for more than 50 percent of the GNP.The purchasing and economic power stemming fromthe countryside is increasing steadily, fueled by

“They are certainlyloosening their pursestrings. They were on a shopping diet fora long time.”Govind Shrikhande, CEO, Shopper’s Stop


2 4


tremendous, government-driven economic stimulusand infrastructure programs. It is anticipated that by2025 more than 300 million of the rural poor willbecome members of the lower middle class.

As a result, their consumer behavior maychange, too. To date, most Indians tend to shop in atraditional way. Only 6 percent of the consumer goodsbusiness is handled through modern warehouses andsupermarkets. Instead, the majority of this tradetakes place in “kirana stores”—small shops with nar-row shelves and a limited selection, located on theground floor of almost every Indian apartment build-ing. The kirana stores (also known as mom-and-popstores) are usually family operated. They benefit fromminimal personnel costs, geographic proximity tocustomers and their excellent service (includinghome deliveries). Especially important is the fact thatthey offer competitive prices, in contrast to the sametype of stores in Europe.

THIS EXPLAINS WHY THE TRULY GREAT retail revo-lution has not happened yet. According to estimatesmade by the Retailers Association of India, salesthrough modern retail channels will increase byaround 20 percent in fiscal year 2009/2010. Fasterrestructuring is also being prevented by the fact thatforeign companies are prohibited from making directinvestments. Walmart, Carrefour and other globalplayers can officially hold only a minority stake in joint ventures with Indian partners. Shopper’s Stop CEO Govind Shrikhande also doesn’t expect the investment barriers to be raised in the next sev-eral years, even though the entry of international

companies into the Indian economy could do somegood. Specifically, they would bring with them “inter-national best practices,” he says.

As it is, for the next 20 years, kirana stores arelikely to remain fixtures in India’s consumer reality,believes Bauer. Companies that want to be success-ful on the Indian consumer market can choosebetween a presence as a niche brand and developing“a bona fide Indian business model.” This wouldencompass the entire value chain, from production allthe way to setting up a multi-level distribution sys-tem. For international companies without historicalroots in India, integrating themselves into the kiranastores’ distribution network is no simple matter.According to industry experts, doing retail businessin a city like Mumbai alone would require contractswith several dozen wholesalers and distributors.

Nevertheless, penetrating the market is notimpossible. How a medium-sized European companycan get a foothold in this booming area of growth hasbeen demonstrated by Perfetti Van Melle, the confec-tionery manufacturer and producer of the mint-flavored candy, Mentos. Perfetti Van Melle holds ashare of about 30 percent in India’s candy market.There are two main reasons for the firm’s success:first, its advertising commercials carry a distinctlyBollywood aesthetic; second, Perfetti Van Melle sup-plies more than a million retailers and shops, andinstead of offering candies in large packages, it madethe canny decision to sell its Mentos in small mono-packs that cost just a few cents.

Herein lies one of the main challenges for inter-national companies—designing their products andprocesses in such a manner that they are appealingand affordable to Indians. The mobile phone giantNokia experienced a flop a few years ago when itattempted to sell phones at something approachingthe level of “Western” prices. Then it developed the1100 model that, thanks to its dustproof case andintegrated flashlight, was tailored to the needs ofIndia’s rural population. What’s more it only cost $10.This strategy helped Nokia to acquire an impressivemarket share in India of 60 percent (of a total 800million mobile phone owners) and also gave its inter-national strategy a boost; the Nokia 1100 has becomea global bestseller.

Income distribution of the population by household

Purchasing power of Indian consumers on the rise

Source: World Development Indicators Database, Datamonitor, Roland Berger; figures starting with 2009/10 are based on estimates.

Premium >12

Mass Affluent 2.4–12

Mass 1.1–2.4

Basic >1.1

2005/2006 2009/10

132

53

17

2

114

75

28

4

78

103

47

8

Income measured in 100,000 rupees

2013/14



ON DECEMBER 4 LAST YEAR, when oil baronsaround the world gathered in India’s IT capital Banga-lore for the annual World Oil & Gas Assembly (WOGA),the pressing concern in the minds of the attendeeswas not just whether recoverable supplies willdecrease faster than they can be replaced with alter-native sources. The big issue was the need for analternative business model. “We need evolution in thisbusiness rather than revolution,” said Tony Hayward,CEO of British Petroleum. He was endorsed by KhalidA. Al-Falih, CEO of Saudi Aramco, the world’s largest oilcompany. “Three Ts—technology, talent and team-ing—can do a lot to meet the resource shortfall,” saidAl-Falih. Mukesh Ambani, India’s top oil man and oneof the hosts at the event, couldn’t agree more. Despitethe lack of direct resources, his company—RelianceIndustries Limited (RIL)—has become a major forcein the South Asian oil market.

AMBANI, WHO HAS SET UP a giant 580,000-bar-rels-per-day refinery in the city of Jamnagar in west-ern Indian state of Gujarat, is now aggressivelyimporting crude oil and is looking for overseas acqui-sitions to meet the growing demand. Low productionand logistic costs will drive further expansion of Indi-an refining capacity, says a senior consultant on oiland energy from Roland Berger Strategy Consultants.“Proper investment planning and controlling as wellas cost-conscious global sourcing will be key to fur-ther success of downstream players,” he adds. Indiancrude oil demand of 161 mt per year (2009) has beengrowing at 4.8 percent over the last five years.

Buzz about RIL’s international expansionbecame louder when it raised around $700 million byselling its treasury shares. “RIL is reviewing a numberof global opportunities for growth in its core busi-ness,” says a company spokesperson. “The difficultoperating environment of the past year has madeavailable several interesting opportunities, where an

Thirst for oilIndian oil companies go globetrotting in search for crude, which means that the globalexploration heat is growing. Meanwhile, the Indian home market is still rather restricted.

investment by a strategic operator of industrialassets can add substantial value.” The company’sattempt to acquire assets of LyondellBasell was seenas a brave step by an Indian private company toexpand. Reliance also signed a deal with Colombianstate oil firm Ecopetrol for two deepwater blocks inColombia.

AND IT IS NOT JUST RELIANCE. All major Indian oilcompanies—government and private—have steppedup the exploration heat around the world. Essar, Video-con and ONGC Videsh have been tapping into the glob-al oil pool with some success.

In the absence of resources, the low-costrefineries could become the main attraction for for-eign companies to India. At the moment, Indian com-panies are focusing on upstream activities to secureoilfield assets, says Narendra Taneja, oil expert and acommentator with Upstream, the world’s largest oiland gas newspaper. He calls it a battle for energysecurity, especially as almost 75 percent of India’scrude requirements are met through imports, conser-vatively billed at $124 billion a year. Twenty yearsfrom now—when India is expected to consume morethan double of what it does now—its crude import billis likely to soar to more than $248 billion.

Oil analysts say the fight for world oil is global,but that special attention should be paid to the activ-ities of major Chinese oil companies. China consumesmore than one-third of global oil supplies.

Recent experience has shown that Indian com-panies are often losing out to the Chinese. In August2009, India’s largest public-sector oil company, ONGC,lost its bid to acquire Swiss oil exploration firm AddaxPetroleum. It lost to Sinopec, a subsidiary of ChinaPetrochemical Corporation. China’s second-largest oilcompany shelled out $7.2 billion to seal the deal.Again in December 2009, ONGC lost its bid to developIraq’s giant Halfaya oilfield to a consortium backed by

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China National Petroleum, which easily undercut theIndian company’s offer of $1.76 per barrel.

Despite a war chest of $283.5 billion in theshape of foreign reserves, for years it has been out-bid for overseas energy acquisitions. And what’sworse, says ONGC chairman RS Sharma, India doesnot even have a sovereign wealth fund, which is cru-cial for acquiring global energy assets. It has been reli-ably learned that the Indian Finance Ministry couldeventually agree to set up a $20 billion sovereignfund to help Indian oil and gas explorers compete withtheir international rivals.

EVEN AS THE INDIAN COMPANIES start a global oilshopping tour, the entry of international players inIndia has remained restricted. The retail oil marketcontinues to be subsidized and controlled by the gov-ernment. However in recent times, it has shown signsof loosening its grip. “We do expect a new form of reg-ulation which improves the balance between afford-able fuels for the public competitiveness of Indian oil-cos and necessary subsidization by the Indian state.This should enable state owned companies as well astheir private competitors to succeed,” says WalterPfeiffer, oil expert and partner at Roland Berger Strategy Consultants. “Lower subsidization will drivesignificant efforts to increase efficiency across alldownstream operations.”

Sustainable biofuel is seen as a direct alterna-tive to oil and gas in the country. “India has regionswhich could perfectly profit from investments in sustainable second generation biofuels,” says theexpert. The government has already decided todecrease the dependency on crude oil imports and isencouraging investment in alternative areas that aresustainable in the long run. The country’s bio-dieselprocessing capacity is estimated at 600,000 tons peryear. Bio-diesel in India is virtually a non-starter. Thereare many reasons for that, the main ones being the non-availability of vegetable oil and governmentpolicies. The edible oils are in short supply, and thecountry has to import up to 40 percent of its requirements.

The Indian bio-fuel policy was announced inDecember 2009. The government has set a target of20 percent by 2017 for the blending of bio-fuels—

bio-ethanol and bio-diesel. Addressing concerns, ithas declared that bio-diesel production will be takenup from non-edible oil seeds in waste, degraded andmarginal lands. Bio-ethanol already enjoys a conces-sional excise duty of 16 percent, and bio-diesel isexempted from excise duty.

AS THE INDIAN ECONOMY continues to growquickly, its energy needs are mounting rapidly. It isclear that Indian oil companies will not be able to meetthe requirement, and soon the market will be openedfor international players. The central question is whenand how.

INDIA AND ITS OIL

• Oil India plans to disinvest by selling 11 percent of its equity.

• Essar has projects in Vietnam, Myanmar,Madagascar and Nigeria.

• Videocon and BPCL have oil blocks in Mozambique.

• Reliance is present in Oman, East Timor, Australia, Peru, Columbia, Kurdistan and Yemen.

• A $20 billion sovereign fund is expected tohelp Indian oil and gas explorers compete withtheir Chinese rivals.



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ON APRIL 03, 2010, India’s largest public-sectorcommercial enterprise, Indian Oil Corporation (IndianOil), entered into a joint venture with Taiwan’s TSRCCorporation and Japan’s Marubeni Corporation to setup a state-of-the-art styrene-butadiene rubber (SBR)unit at Panipat, an industrial town around 130 kmfrom New Delhi. The unit, with a capacity of 120,000metric tons per annum, is expected to produce high-quality synthetic rubber used in the manufacture ofautomotive tires, conveyors and fan belts.

This is one of the many projects that haverecently been signed between leading internationalcompanies and India’s public-sector petrochemicalcorporations. The country has a major unexploitedmarket with immense growth potential. India’s cur-rent per capita consumption of polyester is 1.4 kg andit accounts for 3.1 percent of the total world polymerconsumption of 200 million tons per year.

HOWEVER, IN RECENT TIMES, there have beeninstances when these agreements haven’t lastedlong. Some foreign players have withdrawn from keyprojects. In 2009, French petrochemical major Totalpulled out its investment from a venture to set up agreenfield refinery-cum-petrochemical project wortharound $7.1 billion in Vizag in the southeastern stateof Andhra Pradesh. Apart from Indian public-sectorgiants like GAIL, OIL and HPCL, the venture boastedMittal Energy as one of its partners.

“Indian projects are continuously delayed. Itwill be a challenge to make them happen on schedule,within budget,” says Arjen de Leeuw den Bouter ofRoland Berger Strategy Consultants. The Indian petro-chemical sector, which is one of the country’s faster-growing industry segments, at 13 percent per annum,faces a number of challenges as it tries hard to attractforeign partners. High costs of energy and raw mate-rials, and access to basic infrastructure, are amongthe major troubles of this sector. India’s chemical

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Trying to fuel the growthThe government of India is trying hard to change the image of the petrochemical sectorin the country. It is offering sops and tax holidays to attract foreign players.

industry currently operates out of 25 major clusters,with the western states accounting for 65 percent ofthem. The states of Gujarat and Maharashtra are hostto most of the refining, petrochemical and down-stream chemical complexes.

THE PRODUCTS FROM THESE STATES are facingsteep competition from cheap Middle Easternproducts. “The single most importantquestion is how the Indian petro-chemical industry, especially onthe west coast, is able to com-pete with Middle Eastern prod-ucts. This will be extremely dif-ficult, and tariff barriers seemto be India’s only defense,”says de Leeuw den Bouter.

In order to enable Indiato leverage the critical successfactors for the development ofthe chemical industry, the gov-ernment has launched specialeconomic zones (SEZ) calledPetroleum, Chemicals and Petro-chemicals Investment Regions(PCPIR).

IT IS PROVIDING BENEFITS such as better roadand rail linkages and income tax holidays for 10 yearsto attract investment in these clusters. According toTata Strategic Management Group (TSMG), the PCPIRpolicy is expected to open up tremendous businessopportunities in the chemical and petrochemical sec-tor. Both the central and state governments haveannounced incentives such as fast-track clearancefrom respective ministries to induce public-privatepartnerships and continued fiscal benefits. The gov-ernment plans to establish three PCPIRs with a likelyinvestment of $92 billion (as estimated by TSMG). In

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the state of Gujarat, a PCPIR is being set up inBharuch-Dahej with an investment of $10 billion.India’s largest petroleum company, ONGC, and thestate’s Gujarat State Petroleum Corporation (GSPC) arepartnering to establish a petrochemical investmentregion on a core area of 181 square km, on the shoresof the Arabian Sea. In the eastern state of West Ben-gal, the Haldia petrochemicals refinery is being fur-ther expanded to 7.5 million metric tons. The secondPCPIR has been approved here.

INDIAN OIL CORPORATION and Spice Energy planto invest $20 billion over a core area of 108 squarekm, on the shores of the Bay of Bengal. Cals RefineriesLtd. (Spice Energy) plans to set up a crude-oil refin-ery complex in Haldia with a capacity to process 5 mil-lion metric tons per annum of blend crude in the firstphase of the project. The third approved PCPIR is inVizag in the southern state of Andhra Pradesh, whereFrench petrochemical company Total withdrew its

investment from a greenfield project in 2009. Govern-ment-owned petrochemical company HPCL is theanchor tenant of Vizag SEZ and plans to invest awhopping $62 billion on a core area of 270 square km.

IN ORDER TO MAKE THE INVESTMENT regions moreaccessible, the government has also invested heavilyin infrastructure. For example, in Vizag the gov-ernment spent around $440 million to upgrade theport. Similarly in Haldia and Bharuch-Dahej, hugeamounts have been spent to create infrastructurerequirements such as roads, rail networks, watersupply and water treatment plants. Apart from thethree approved PCPIRs, three more are being plannedin the southern states of Karnataka (Mangalore) andTamil Nadu (Cuddalore), and in the eastern state ofOrissa (Paradeep). All SEZs are well connected withthe sea. “We expect such steps to help foreign play-ers to look at the Indian petrochemical industry morepositively,” says a senior official in the Department of


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KUNAL MAJUMDER is a correspondent with the Indian news weekly Tehelka. You can follow Kunal at twitter.com/kunalmajumder and Tehelka atwww.tehelka.com


Chemicals and Petrochemicals. With foreign com-panies allowed to own 100 percent of Indian sub-sidiaries, the government hopes to attract moreforeign players in this growing segment.

AND FOREIGN COMPANIES do not just bring inmoney. They also provide new technology, applicationknowledge and a global client base, says de Leeuw denBouter. In fact, for the private sector, investment is not the main problem, says Tushar Pania of RelianceIndustries Limited. Reliance is one of the major pri-vate players in this field, with a number of refiner-ies in the western states of Gujarat and Maha-rashtra. The most famous of them is Jamna-gar in Gujarat, where Reliance has recentlyadded a giant 580,000-barrels-per-dayrefinery. Though the company failed tobuy assets of bankrupt petrochemicalgiant LyondellBasell, it continues to“review a number of global opportuni-ties for growth in its core business,”says a Reliance spokesperson.

WILL THE IMAGE OF INDIAN petro-chemical sector change after so manysops, so much investment, and such bigambitions? “Only if it delivers,” repliesde Leeuw den Bouter.



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A NEW BREED OF MULTINATIONAL CEO is emerg-ing: charismatic, sleek and eloquent—with an Indianbackground. PepsiCo’s CEO Indra Nooyi; ShantanuNarayen, president and CEO of Adobe Systems; orSanjiv Kakkar, chairman of Unilever in Russia, Ukraineand Belarus: These executives share the experienceof growing up in India.

Apparently, Indian managers bring multination-al companies insight on leadership and managementthat home-grown executives may lack. According toPeter Cappelli, the joint author of the recent book TheIndian Way, Indian managers have a special knack forempowering people by creating a sense of mission.And they’re prone to address critical internal mattersrather than focus too exclusively on external affairs,such as investor relations, M&A and share prices.

BUT PERHAPS IT IS THE CLEAR VISION with whichIndians lead multinational companies that is moststriking. Some 61 percent of Indian leaders said thatarticulating a path to the future, strategic thinking andguiding change were the factors most critical to theirexercise of leadership, according to a study performedby Cappelli. Unilever’s Sanjiv Kakkar says: “It’s not onlyimportant that I have the clarity, it’s important that myentire team and the entire company share that clarityon what we are trying to achieve.”

Cappelli’s research is part of his efforts to for-mulate what is unique about the Indian way of doing

Praise to the motherPepsi, Adobe, Unilever: Indian managers are rising to the top of the world’s biggest companies. What makes them so attractive to foreign employers? Part of their secret: a strong family orientation—and a capacity to deal with complexity.

business. With the US model of capitalism underattack, Western businesses might look to Indian CEOsfor leadership inspiration. “Whereas China’s growth isbased on low-cost labor, the manufacturing sector anda huge government role, India is thriving despite itsadversity,” says Cappelli. Or, as Edward Luce wrote inIn Spite of the Gods: The Strange Rise of Modern India,the slow-moving and fractured Indian government,with its dozens of political parties and messy parlia-mentary democracy, is not getting in the way much.

PERHAPS POLITICIANS HAVE LEARNED a lessonfrom the blind spot that led to the rise of the softwareindustry in India. The government failed to regulatethe industry at the outset because it was new. Thisgave companies a critical chance to flourish in thehands of entrepreneurs.

Scholars have bickered for decades aboutwhich country will rise faster—India or China. Theynow seem to have tired of this debate and are examin-ing the interlocking economies of both countries. Justlook at how many multinationals are using Indian ITservices for their Asian operations—in China.

Indeed, India looked over the border to seeChina’s rising tide at the beginning of the last decade.“Indians took notice that another poor country wasmoving fast,” says Soumitra Dutta, Roland BergerChaired Professor of Business and Technology at INSEAD. Dutta says that he grew up sensing an

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unspoken feeling of failure among Indians who com-pared the situation of their country with others.

“THERE WAS A SENSE OF FRUSTRATION. Peoplesaid, ‘We’re not in great shape because of the colonialhistory.’ It was unspoken and fatalistic.” The self-doubt was compounded in 1967 when the countryhad to devalue its currency and once again in 1991when the government was essentially bankrupt.“From a cultural and emotional point of view, that was very painful. It was an important trigger for thecountry to open up,” says Dutta.

That unspoken fear of inferiority has now beenlargely replaced with entrepreneurial zeal and a ram-pant sense of achievement among much of the popu-lation. Even the poor are becoming owners of smallbusinesses and seem to have internalized the mes-sage that education is a ticket out of poverty, as evi-denced by the sacrifices that parents are willing tomake for their children. “Some parents would ratherskip a meal than not send a kid to the right school,”says Dutta.

CONSEQUENTLY, THE MIND of an Indian CEO ismore likely to have been imprinted with such storiesof overcoming adversity than with lingering regretsabout the past. Since colonial rule ended in 1947,those Indian leaders currently at the helms of multi-nationals didn’t experience British rule personally.But they have benefited from some of its positivelegacies: English is widely spoken, and Indians havea built-in starting point for understanding Anglo-Saxontraditions.

So how have the attitudes of Indian leaders of multinationals been shaped? What makes such

leaders unique? First, one must consider that theseleaders—such as Nandan Nilekani, former CEO ofInfosys, Vikram Pandit, CEO of Citigroup, and ArunSarin, former CEO of Vodafone—are a biased sampleof the elite, says Amlan Roy, the head of Global Demo-graphics and Pensions Research at Credit Suisse inLondon. Roy, an Indian who has spent much of hisworking life abroad, says these managers are well-educated and well-traveled. They are good speakersand teachers, and they have risen to the top of theIndian meritocracy.

HOWEVER, DESPITE THEIR SHELTERED upbringing,such Indian managers are likely to be comfortable withthe masses and in multilingual, multicultural environ-ments, given the hodgepodge of India’s languages, cul-tures and religions. They may possess a sensitivity tonon-Western cultures that Westerners lack and be ableto use that understanding to their advantage to risewithin the hierarchy of a multinational.

Indian managers are typically comfortable amidcomplicated or even chaotic environments, says Roy.Most foreigners are struck by the air of pandemoniumthat is a part of everyday business and interaction. Thewhole country seems to be in motion at one time. How-ever, people who know the country well claim the chaosin India is deceiving. It’s a meta-chaos that masksorchestrated, large-scale endeavors and the creativeuse of limited resources, he says. When Luce recountshis own wedding, he reports he wasn’t sure the cere-mony would actually take place since his wife’s parentshadn’t made any arrangements. But the ceremony wentoff without a hitch. Luce says that what often looks likemadness is actually a complex system, similar to theapparent chaos in a swarm of bees.

Indra Nooyi, CEO of PepsiCo. At a family visit,her mother got compliments for raising sucha good kid.


For Roy, upbringing in this type of environmentis prime training for managers who want to lead large,complex organizations. They can deal with complexi-ty because they are capable of managing people. “Indian managers know how to build relationships toget what they want,” Roy says. Vineet Nayar, chiefexecutive of HCL Technologies, described in a news-paper interview how he took his organization in onedirection and then abruptly changed courses: “I usedto write a blog every week because I thought peoplewanted to know what was going through my head. Butone employee told me, ‘Actually, we want to partici-pate in solving a problem.’ So, the blog got convertedinto me asking a question: ‘This is a problem I’mhaving. How will you solve it?’”

Another explanation for the success of IndianCEOs abroad could be built-in tolerance resulting fromthe country’s multicultural population, which includesbelievers in Hinduism, Islam, Buddhism and Christianity.Dutta: “Those executives who were raised in India andcame to the West may have fewer biases than others.”

SPEAKING OF TRADITION, MANY INDIAN executivesmay have a different understanding of what a familymeans than their non-Indian counterparts. Familyplays an overarching role in Indian society, and it isdefined as far more than the core parent-child rela-tionship. Extended Indian families are likely to beinvolved in critical decisions about young people’seducation and jobs. Consequently, Indian managersmay be accustomed to making decisions in consen-sus or in collaboration, says Dutta, and their successmay be seen as a reflection of the whole clan ratherthan just the individual. For instance, PepsiCo’s Nooyitold an online magazine that at a family visit, relatives

ignored her and went straight to her mother to com-pliment her on raising such a good kid.

AND THEN THERE’S INDIA’S educational systembased on British remnants and Jawaharlal Nehru’slegacy of investing in primary schools and universi-ties. The system fosters a learning culture amongmany strata of society. And today, it’s evident in India’scompanies as well, Cappelli and his co-researchersfound. For instance, a quarter of new hires in the Unit-ed States receive no training of any kind in their firsttwo years of employment, while the Indian IT industryprovides new hires with about 60 days of formal train-ing, according to a study by the Kauffman Foundation.

As India’s culture of educational achievementhas taken root, children have been placed under highpressure to perform. The country trains 1 million engi-neers a year, compared with less than 100,000 in theUnited States and Europe: It is home to an elite univer-sity system that has catapulted India’s scientific andtechnical capacity to third in the world. Hence, whenyoung people arrive in a competitive work environ-ment—at home or abroad—they’re accustomed to thedemands placed on them.

VODAFONE’S FORMER CEO SARIN, now a senioradvisor at the private equity firm KKR, told a TV pro-gram: “Being an immigrant clearly had an influenceon my drive because you want to succeed. You’re inthe new country and you say, I want to do good. Andyou kind of learn discipline and hard work early inyour life and then you apply that with higher educa-tion and in wider circles as it were. So I think clearlybeing an immigrant in America drove me a little bitharder and faster which is a good thing.”


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China was movingfast—and India

took notice of that.


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It is a well known problem: the search forsuccessful product ideas is more difficult

today than ever before. A GfK study revealedthat the flop rate for new product develop-ments in the fast-moving consumer goodssector lies at 70 percent. In some fields, suchas the food industry, it’s over 90 percent. Inmanufacturing branches, 87 percent of allproduct developments never even make it tothe marketplace. The pharmaceuticals indus-try discusses the issue of “innovation deficit,”where rising development costs on one sideare faced by a dwindling number of mar-ketable products on the other. The Interna-tional Innovation Report produced by expertauditors at Grant Thornton also highlightsthat fewer winning ideas are coming fromR&D departments.Software design giant Terry Winograd, whocurrently teaches upcoming inventive hot-shots at Stanford University, captures theessence of the problem: instead of thinking ofusers, companies often just think about tech-nical feasibility and planning. And yet, it is awell-known fact that the only path to innova-tion leads right through a company’s cus-tomers. The goal should be to incorporatethem into the innovation process as much aspossible. The willingness is certainly there onthe customer side. According to C. K. Prahal-ad, customers want to interact with compa-nies, but many businesses have a difficulttime being truly open to their customers’ideas—for the moment. The basis for this type of cooperation—draw-ing innovative drive and good ideas from thecustomer base—is growing steadily.

world. The growing group of consumers withpurchasing power in developing nations areincreasingly willing to provide input them-selves, instead of settling for pared downproducts from industrialized countries. Theygenerate innovations for processes, productsand services. Yet there are very few compa-nies with an R&D department that has beenable to fully exploit the innovation potentialin emerging markets.In order to do this, they first need to knowmore about what is happening in developingcountries. Anil K. Gupta is currently workingon establishing a broader knowledge basewith his Honey Bee Network. Honey Bee hascompiled data on over 150,000 innovationscreated by farmers and grassroots inventors.Gupta’s employees are constantly travelingthroughout the country on the hunt for localinnovations, inventions and traditionalknowledge practices—potential sources forglobally successful innovations. It is precisely this local knowledge that canprovide relevant signals regarding the mosturgent problems facing a population—andideas about how they can be solved. Thesedays, the real trick for businesses lies in find-ing innovative ways to access this enormouspool of human creative and productivepower, and incorporate it into their innova-tion strategies on a broader scale.

Franz Liebl, a professor of strategic market-ing at Berlin University of the Arts, observeshow people tinker with things and adapttheir usage to solve a personal problem orwork around a manufacturer’s lack of imagi-nation. This can often introduce real innova-tions in the process. Liebl calls it “bricolage”or “hacking.” Some figures offer encouragement: accordingto the International Innovation Report, 40 per-cent of all successful innovations today stemfrom customers. It is possible to utilize their

productive power, especially for companiesthat observe how customers grow and devel-op online. “There is an enormous innovativepower that no manager had considered evenjust a few years ago,” states Yochai Benker, alaw professor at Harvard University andvisionary in the open-source movement. Thishas generated growing competition for com-panies that must be taken seriously, not justin the area of software production, but inevery area of information and culture pro-duction—from encyclopedias (Wikipedia), tothe news (Huffington Post), to entertainment(YouTube). Therefore, a company needs to beas well informed as possible about produc-tion processes from the consumer side, inorder to offer options for collaboration thatconsumers will accept. But these efforts don’tjust address target buyers in the developed

p industry report

:

Companies need to open up their innovationprocesses. A few pioneers are already doing thissuccessfully, as we reveal with some excitingexamples over the next few pages

BUSINESS IN FOCUS

Customer consultingCompanies are looking for ways to work more closely with customers during the innovation process.One idea: directly including end-users in product development. This works in both industrializednations and developing markets. The prerequisite: companies need to open up.

“This sudden tilt toward consumerinvolvement is a complete Lazarusmove: we thought that died a longtime ago.” Kevin Kelly

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[Design vision—saving the world]DESIGNERS RETHINK—SOLUTIONS INSTEAD OF PRODUCTS“Design thinking”—it is under this heading that a number of designschools are undergoing a radical shift in their approach. A new gener-ation of designers is coming on the scene, who not only want tomake pretty things prettier, they also want to improve the world. Andat the center of innovation methods stand the people who shouldbenefit from what is being designed. “Don’t concern yourself withthe little things,” is the advice Terry Winograd gives his students atthe d.school in Stanford. “Think about the big things that the world is

concerned about: development, energy, health, education.” Clad inoutdoor gear instead of fancy suits, the designers set forth to solveproblems in developing nations together with the locals there. Theobjective is to create solutions rather than products. A real-worldexample from Stanford: how can you have light in regions withoutelectricity? The exciting idea is not only to create robust lamps withsolar power modules, but also to keep their manufacture and sale inthe most remote regions below a price of $20.


[Juicy discovery]

Untersatz

OPUNTIA—HOT NEW DRINK FROM A CACTUS?Food and drink manufacturers serve taste-testing customers, haveevery ingredient analyzed by experts and send trend scouts out intothe hottest restaurants. But sometimes it still doesn’t taste good tocustomers. Meanwhile, a collective of women in the Indian village ofSaurathra are brewing up what may be the next big drink on thescene. The juice from the Opuntia cactus, a.k.a. the prickly pear cac-tus, became the public favorite at one of India’s booming regionalagricultural trade fairs, the Stavik Food Festival, in late 2009.

The Honey Bee Network’s SRISTI laboratory (Society for Researchand Initiatives for Sustainable Technologies and Institutions) is test-ing the juice and developing it for mass production. They are current-ly negotiating with Indian Railways on serving the cactus drink on itstrains—18 million potential customers a day. The lesson: perhaps itwould be worthwhile for global food producers to take an occasionalglance at provincial tradeshows. Or do you already know what peo-ple eat for breakfast in Mongolia?

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Untersatz

[Climbing equipment for suppliers]MARICO—BETTER PICKINGCoconuts drive people crazy. They are one of the hardest naturalproducts around to harvest. Many competitions have been spon-sored to solve the problem of how to get them out of the trees effi-ciently—without success. Marico, the Indian beauty products com-pany, may have resolved the problem. The company, whose prod-ucts are based on coconut oil, began having issues with supplyshortages and stumbled upon a solution where no one had everthought to look. In a remote area of the southern Indian state of

Kerala, they found a farmer who had invented a simple but cleverpiece of climbing equipment for his own use. It enabled pickers toclimb the palm trees more safely and faster than any device devel-oped by the engineering elite from around the world. Marico’s CEOHarsh Mariwala sat down to collaborate with the Coconut Develop-ment Board on fashioning a commercial version of the climbingequipment based on the farmer’s prototype. Some innovationsrequire the willingness to think outside your own box.

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[The Lagerfeld in us all]THREADLESS—T-SHIRTS THAT DESIGN THEMSELVESJake Nickell and Jeffrey Kalmikoff launched their company, Thread-less, with $1,000 of startup capital. Today, the business brings inover $5 million in revenue with a 30 percent profit margin—all with t-shirts that customers design themselves. The company premieresdozens of new products on the market every month without adver-tising, professional designers, salespeople or merchants. How? They sponsor design competitions in an online social network.Members provide the ideas—more than 800 per week—and also

vote on the designs they like the best. Hundreds of thousands usethe platform to chat, blog, date, pose as models, take catalogue pho-tos and purchase massive quantities of t-shirts. The key question for US-based Threadless: how do you motivate con-sumers to participate and be creative? One key element behind theirsuccess seems to be their strategy to remain entirely in the back-ground as a company. Instead, Threadless manages the creativity ofits customers.


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[World’s largest patient research]PATIENTSLIKEME—MORE KNOWLEDGE FOR BETTER PRODUCTSPharmaceutical companies seek information from the real lives ofpatients—information beyond that found in the artificial conditionsof clinical studies. Now there is a website to help: www.patientslikeme.com. When you click on an illness here, youfind the experiences of thousands of patients—clearly organized,easy to understand and statistically prepared. But why do patients simply give out information about themselves?PatientsLikeMe functions like a global self-help group; the contact

with other patients benefits real-world usage. What’s more, the storyis true: brothers James and Benjamin Heywood founded the compa-ny when they were searching for information about their brotherStephen’s illness. Another secret to success: transparency andmutual clarity among interested parties. PatientsLikeMe sells theaggregated, anonymized data to pharmaceutical companies such asNovartis or UCB—and states it openly. The patients do not mindbecause they will certainly benefit from new medications.


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[Research can happen anywhere]GE—TURNING INNOVATION ON ITS HEADOne of the world’s largest companies has turned its innovationprocesses upside down. For General Electric, the days of developinginnovations on their home turf, to be marketed there first and thenadapted for export, are over. Under the banner of “reverse innova-tion,” promising new products and services are being developeddirectly in emerging markets—at prices that are locally appealing.And what proves successful abroad can always be exported to themarket back home to further benefit from cost advantages arising

from overseas development. Recently, GE built its newest fully-fledged R&D location in Bangalore. As an example of the advantagespossible, this facility developed a portable ECG device for $1,000.That makes it 90 percent cheaper than its predecessor. But the realinnovation is in GE’s thinking: reverse innovation only works if acompany’s R&D locations abroad are taken just as seriously as theformer innovation center in the USA. It would seem that this worksvery well at GE.


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[The doctor as a product developer]ETHICON—INPUT DIRECTLY FROM THE OPERATING ROOMNo one knows what a surgeon needs in the operating room betterthan a surgeon. So what could make more sense than sharing expe-rience and ideas with them before developing new surgical materi-als? That is the thinking of medical supplies manufacturer Ethicon.The company created a global network of 8,500 highly-specializedusers—surgeons, specialists, scientists and nursing care staff—andhas maintained it for years. At its core is a closed online community,where experts working in real-world situations and product develop-

ers constantly analyze opportunities for improvements, test prod-uct innovations and share ideas. If needs change in practical applica-tions, the company can adjust its products quickly to suit thoseneeds. However, to keep its co-developers involved, Ethicon mustalways be fully prepared to rework its product portfolio to meet thechanging requirements of medical professionals. Why? Because ifyou ignore their feedback, doctors will quickly lose interest in thecooperative arrangement.

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The global financial crisis was preciselythat, causing massive upheaval every-

where. It brought the worldwide financialsystem to the brink of ruin. It swept upbanks, companies and even entireeconomies. The consequences for the finan-cial sector were valuation adjustments on ascale never seen before. Political bodies throughout the world havemade it their stated objective to prevent thisfrom ever happening again. For that reason,international task forces such as the BaselCommittee on Banking Supervision (BCBS)are in the process of developing guidelinesto “increase the elasticity of the banking sec-tor, to thereby provide more sustainablegrowth, both over the short and long term,”as Stefan Walter, general secretary of theBCBS says.

PROFITABILIT Y IS UNDER PRESSURE

Consequences for the financial industry areunavoidable. “The requirements draftedwithin the scope of Basel III for banks andSolvency II for the insurance industry arechanging the playing field—they are chang-ing the framework conditions for creditinstitutions and insurance companies,” saysUdo Bröskamp, head of the CompetenceCenter Financial Services at Roland Berger.These are changes that the industry must

: adapt to. For example, in the future, bankswill have to comply with stricter constraintsregarding their assets on deposit and withhigher liquidity requirements. Their prof-itability will decrease as a result because ifadditional equity must be kept on deposit,then this will not be available for the actualbusiness of issuing loans. “In the future, acloser interlinking of capital and liquidityprospects combined with a medium-termtime frame will be a major factor for suc-cess,” says Markus Krall, the partner respon-sible for risk management at Roland Berger.The industry can make adjustments in twoareas: the cost side and strategic orientationover the medium term. Many banking

institutions have already begun with theexpenditure element. They are working onimproving their efficiency and streamliningtheir structures. However, the strategic ori-entation is proving to be more difficult. Afterall, some banks had to be supplied with capi-tal during the financial crisis. If they were topay it back now, they might lack the funds toundertake a strategic realignment.

CORPORATE BANKING BECOMES MORE APPEALING

Where could additional funds come from?One idea is that banks could pull out of non-customer-related investments such as realestate financing. In the coming years, otherbusiness areas could become more interest-ing, such as corporate banking, especiallyfor small and medium-sized companies.According to one rule of thumb, if the grossdomestic product were to climb by 1 per-cent, earnings from corporate bankingwould increase by about 3 percent. Thereare two reasons why this business would beespecially lucrative now. First, the marketgenerally restructures itself during phasesof economic recovery. To make use of thisphenomenon, companies must invest consis-tently. To do so, they require fresh capitalonce the potential of their own working cap-ital is exhausted. Second, some banks need

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FINANCIAL SERVICESThis business area of Roland Berger has 30partners and 250 consultants in more than20 countries around the world. Its key com-petencies lie in risk management–recentlystregthened by Roland Berger’s takeover ofKDB Business Consulting–strategy consult-ing for banks, and in the insurance sector.Specific areas of expertise within risk man-agement include credit and liquidation risksin the banking sector following the discus-sions surrounding Basel III, as well as thenew regulations for the insurance industryunder Solvency II.

The big realignment Following the global crisis, regulation in the financial sector has tightened.The business environment for banks and insurance companies is goingthrough radical changes. As well as new risks there are also ample prospects.

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to withdraw from thisbusiness due to the conse-

quences of the crisis. With aclear focus on this area and a

broad portfolio of high-quality prod-ucts, credit institutions can benefit from

this situation.

RETAIL BUSINESS ON THE RISE

Another segment that could be attractivewithin the scope of a medium-term strategicalignment is the customer-related capitalmarket business, which involves a strategicdecision. In the future, banks that engage inproprietary trading will have to retain con-siderably more equity capital on deposit forthe customer-oriented capital market busi-ness than before. Therefore, banks mustthen decide whether they wish to pursueproprietary trading or not. From a strategicperspective, the retail business could also

hold some appeal. One should note that theprofit margins are under pressure theresince the end customers are increasinglyrequesting simple, less high-margin prod-ucts after their experiences coping with thefinancial crisis. Also, the net interest marginis low due to increasing refinancing costs.Nevertheless, there are attractive opportuni-ties in this business area. “These couldinclude serving customers more efficientlywithout losing customer proximity, forexample,” says Bröskamp. New informationtechnologies also offer new solutions. InSpain, banks have fewer branch offices, withhalf of the transactions in the retail businesshandled online and another 5 percent car-ried out on mobile devices. The retail sectormight also benefit from taking a look at thecore markets. “Given the dynamic growth inmany developing countries, these presenttremendous potential as exemplified by

mobile applications in the area of micro-financing,” adds Bröskamp. However, notevery country can claim the same degree ofpotential. “Those planning to enter suchmarkets must have in-depth knowledgeabout them,” he warns. Ultimately, the insur-ance business is affected, too. Not only doesit have to deal with stricter capital invest-ment regulations but it may also have beenaffected by the debt crisis suffered by coun-tries in southern Europe. Government loansthat used to generate steady and predictablereturns have ultimately turned out to below-margin and very volatile. Insurers arethus faced with the challenge of findingalternatives for their investments. However,there are prospects out there, and asBröskamp points out, “A portfolio consistingof corporate credits can accomplish precise-ly what insurance companies or pensionfunds need.” .

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The Dow Jones Sustainability Indexes arethe conscience of the investment industry.

Companies identified as “supersector lead-ers” not only receive the blessing of criticalcustomers, they will also be among thefavored billion-euro funds that focus on ethi-cal conduct. As a result, sustainability hasbecome a firm part of the marketing strate-gy of global companies. This used to apply especially to manufactur-ers of consumer goods—until now, at least.

: Now, high-end service providers might wantto rethink the situation. At least, that’s whatmarketing guru Philip Kotler is urging. In ameeting with think:act, he recommends thatservice companies change their way ofthinking because what they really do isdeliver trust. However, they first need toearn that trust via responsible conduct. Kotler is at the forefront of the reform move-ment, even though he previously represent-ed more traditional marketing approaches.

In his book Corporate Social Responsibility,he examines how companies perceive theobligation of giving back to society. WhenAmerican Express promotes education andtourism projects in developing countries, orwhen IBM participates in social issues, theseactions contribute to the companies’ authen-ticity, he says. “It’s always better if a compa-ny draws attention to itself through its phil-anthropic projects,” rather than by means oftraditional product advertising.

“All muscle and no fat” Marketing is becoming more important in the professional services industry. But how does one marketnon-visible products? According to expert Philip Kotler, you use credibility. Revealing a previouslyunseen socially conscious side, he recommends combining sustainability and smart communications.

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Professional services in particular need strategicmarketing. The core problem, though, is deciding

what makes service companies truly unique.

You can also listen to this article on our audio CD (page 63).

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In principle, long-term service marketingbegins with a company’s core processes. Thepublic will see right through any “green-wash.” Consumers and customers are nolonger passive participants in the marketingprocess: people will find out if a Europeanlogistics company is marketing itself asgreen while at the same time running poorlymaintained, pollution-spewing trucks in itstransportation operations.On the other hand, a substantial social com-mitment offers more than just externalgains. It makes companies smarter by creat-ing dialogue platforms. They increase in-house expertise and ensure that manage-ment understands not just financial marketsbut also social trends. However, the desire to hold a long-termposition is crucial, especially in this competi-tion for dialogue platforms. And this iswhere marketing, which often pursuesshort-term effects, needs to rethink its game,as exemplified by promoting social initia-tives. Kotler warns about reducing sociallyoriented commitments too quickly in turbu-lent times: “Management does save moneyin the short term, but will lose it again in thelong term once the situation improves.”Companies that abandoned communityorganizations when these needed supportmost desperately will see interest groupsand customers losing trust in them. Kotler is convinced that services require atleast as much marketing substance as tangi-ble products. In fact, the latter are fairly easyto advertise. Things get a little more compli-cated when it comes to corporate consultingor internationally active commercial lawfirms, like the Lovells and Linklaters of the

world. For them, close personal relationswith clients are crucial. This skill can beacquired and it goes by the name of “behav-ioral marketing.” Freshfields Bruckhaus Deringer is one lawfirm that demonstrates how the conceptworks in practice. It draws clients by havingteams that specialize in various industry sec-tors. Team members must not only be rightup-to-date with the latest legal news devel-opments, they must also be proactive inkeeping the client informed. Thus, in abroader sense, every good attorney alsoserves as the client’s counsel.

EX TERNAL AND INTERNAL COMMUNICATIONS BELONG TOGETHER

Behavioral marketing also fosters a world-wide exchange of information internally.Knowledge of global events and issues isonly useful to customers if it is availablearound the world. When it comes to efficient marketing, Fresh-fields combines specialization with theadvantages inherent in a large-scale compa-ny. For example, one of its objectives is torepresent clients who were acquired in thefinance or corporate sectors in the labor lawarea, too. Cross-selling is also used as a mar-keting support tool—if cases span sectors,Freshfields will offer a price discount.Clear positioning is necessary and becomesall the more difficult as more companiesseek it. And this dictum applies to Fresh-fields and its competitors as it does to everyservice industry. “There’s no sense in spruc-ing up a commercial if you’re putting out thesame message as your competitors,” saysKotler. In other words, “focus” will be the

buzzword in future, particularly within theservice sector. Looking at seemingly straightforward serv-ices, two-way communications (preferablydemand-oriented) with the customer arebecoming more significant, and that extendsall the way to complaint management. ThePizza Hut franchise chain, for example,prints its hotline number on every pizza boxto take calls from unsatisfied customers. Thefranchise manager then has 48 hours toresolve the problem. The luxury-hotel chain Hyatt is also knownfor its fast response times to customer com-plaints—you can even send them to manage-ment using the in-room television and itsremote control.

DOES DEMARKETING CREATE A NEW SENSE OF TRUST?

For Kotler, such trust-enhancing measuresare just a small part of the imminent market-ing revolution. “We want to develop meth-ods that will actually reduce an otherwisecontinually increasing demand,” is Kotler’sposition, which is surprising from a market-ing perspective. The essence of thisapproach is to perceive “demarketing” as asource of trust. According to this notion,keeping certain types of customers awayfrom your product may actually be a positivemarketing approach. One might be inclined to think that this atti-tude is naïve. But that’s not necessarily so,says Kotler, although it does have to begrasped properly in-house. “First, one has toidentify values. And then one has to hirepeople who believe in these values andembody them.”

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KOTLER AND POLITICS In the last several years, Kotler has spent more and more time onmarketing for nonprofit organizations. His orientation to social marketing is conveyed in bookssuch as Up and Out of Poverty: The Social Marketing Solution (1999). He is continually striving andhoping for more improvement, as he also conveyed in his interview with think:act. At the end of thediscussion, he offered a statement regarding the political situation in his home country. “I am in acautiously upbeat mood, and I would be even more positive if the political parties in the US wouldfinally work together for the common good. Instead of thinking for themselves, politicians stick onlyto their respective party line. They do that to be re-appointed by their party. I hope the time willsoon come when politicians can be free and independent in their reasoning. And when that hap-pens, I hope that people will have more respect for politicians.”


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Crises always represent crucial tests forKotler’s value-based marketing. For exam-ple, in difficult times, how do companiesdeal with clients that are late with pay-ments? John Deere, the US-based agricultur-al equipment manufacturer, may serve as arole model, he says. “John Deere helpedfarmers, while rival International Harvesterunceremoniously seized its machines.” John Deere’s level of generosity is rarelyfound among service providers, even thoughtimes of crisis are a perfect opportunity tocreate new customer loyalty. Kotler recom-mends to banks and insurance companies inparticular that they fully understand theacute problems some of their customers maybe facing. He also thinks that their advertis-ing requires a different tone. “The financialcrisis compelled many service providers torethink their marketing and advertisingstrategies.” Solidarity is the new mantra, hesays. For example, Morgan Stanley’s Euro-pean advertisements promote their highequity ratio compared with other banks.

“They’re probably doing the right thing,”Kotler explains “Especially if other bankshave to address some rather uncomfortablequestions on this point.”

IT’S EASIER TO SEPARATE THE GOOD GUYS FROM THE BAD GUYS

These questions are certainly being asked,not just in the industry but publicly as well.The growth of social media makes compa-nies an ongoing subject of debate. Internetportals where consumers can discuss theirexperiences make it “easy these days to dif-ferentiate the good guys from the bad guys.” From a marketing perspective, turbulenttimes are actually good times, according tothe tenor of Kotler’s new book Chaotics.“Ryanair is an example that says a fewthings about seizing an opportunity thatarose from the crisis,” he states. During thecrisis, Ryanair ran a massive advertisingcampaign and thereby tapped customers’magnified price consciousness. The outcomewas a substantial gain in market share.

KOTLER’S “KEY” POINTERS FOR SERVICE MARKETING MANAGERS.

“QUALITY IS KING”Nowadays, customers have precise expectations of services they utilize.Social media platforms such as Facebook increase transparency, whichmeans customers now define quality.

“BUILDING THE MARKETING ORGANIZATION” Building up long-term customer relationships is more difficult today thanever before. Customers are fickle. Marketing must quickly adjust to newsituations and therefore needs to have, first and foremost, a very flexibleorganization.

“THE FIRM CAN'T BE ALL THINGS TO ALL PEOPLE” Opportunities for service companies to differentiate themselves from oneanother are on the rise. They can be socially oriented or maintain higherenvironmental standards than their competitors. It’s all about accessibili-ty. The physical presence remains irreplaceable. For example, onlinebanks in Europe are currently setting up “finance lounges” in major cities.

“KNOWLEDGE IS POWER”According to Kotler, the requirements of many customers have changedas a result of the financial crisis. Former knowledge about customers isno longer valid; customers and their needs have to be re-examined.

“YOU CANNOT NOT COMMUNICATE” In these times where social media prevail, everything a company saysmust be true and clear. Many service providers ignore this aspect—andwill get stung. For example, the US website airlinemeals.net, replete withthousands of evaluations and photos of in-flight food, has already repudi-ated a fair number of advertising promises.

“BUILDING MEANINGFUL RELATIONSHIPS”Based in France, Targobank demonstrates that the crisis can be a learn-ing experience. Its bank consultants are subject to pay cuts if they givecustomers investment recommendations outside of a risk category previously set by the customer.

So how does marketing even remain respon-sive during times of never-ending turbu-lence? According to Kotler, having one“script” for bull markets and one for bearmarkets is no longer sufficient. “Companiesoften get into trouble if they don’t have anearly-warning system in place. They see thewarning signs but don’t counter them.” How does one set up an early-warning sys-tem? In Chaotics, Kotler mentions two suit-able methods: scenario planning and flexi-ble budgeting. In other words, smart mar-keting managers create the ability to expectthe unexpected. And they have flexibleresponse systems. Take Regal Entertain-ment, for example, which is the biggestmovie theater chain in the US. It continuallymonitors attendance figures for individualmovies—should the figures decline, it imme-diately stops showing the movie in question.Their reasoning is that an outdated offerwill not draw anyone in and will show that acompany does not know its customers—andthat could result in losing their trust. .


The global magazine for decision-makers 15 issues (so far)


Finance communication for decision-makers? One example is this magazine. Five years ago, Roland Bergerstarted to provide business journalism for key stakeholders. CNN journalist Charles Hodson says congratulations.

Journalism: first draft of historyFIVE YEARS is always a long time in business, and think:actdeserves our congratulations as it celebrates its fifth birthday. It hasbeen our companion throughout what will surely qualify as the toughesthalf-decade most of us will experience in our business lives. We are get-ting used to the breathtaking pace of change in the technical world, andthe powerful devices we now carry around in our pockets and briefcasesare a constant reminder of those achievements. But the speed anddepth of the continuing financial and economic crisis—and its painfulpersistence—have surprised and shocked many of us. Those who werewell informed in 2005 would have spotted the beginnings of three dis-tinct trends that were already reshaping the world. Events since then have turned the steady flow of these changes intoraging floodwaters—and they have washed away many of the assump-tions we made then. First, money, risk and regulation are moving withinnew parameters. It will be a while yet before the financial system andthe global economy recover from the destruction of value and confi-dence that started with the US subprime mortgage crisis. Credit will notbe easy again for a long time, while the severity and extent of new bank-ing regulation remain to be seen. Second, the dynamism of the topemerging economies was recognized in 2005, but what has startled andencouraged many of us has been the way that they are leading the wayout of recession. It is now clear that a fundamental shift in economicpower has taken place, with China, Brazil, Russia and India now sitting atthe top table. We cannot speak of globalization as we did five years ago;it is no longer the G7 nations and their corporate titans who dominate

CHARLES HODSON anchors CNN International’s “World Business Today”

which rounds up the day’s business and financial market news. The show also

includes keynote interviews with major business players and updates on stock

market developments around the world.

that process, but the broader and increasingly important G20. Third, theentire world of communication and marketing is adapting to the develop-ment of new media. Sure, back in 2005 we knew the Web and digital communication weretransforming the way we do business. But few of us foresaw the rapiddevelopment of social media, or the way conventional media like dailynewspapers and even terrestrial television would now be struggling tosurvive. Journalism, famously, is the first rough draft of history. As wechart our daily progress into the unknown through such CNN programsas “World Business Today,” it is best to be humble about the future. Itmay be an exciting place, but as we march unstoppably toward it, peer atit and try to map it out in our minds, it can play us many a trick. We needa dependable guide. And that is where think:act comes in. There is aneed for high-quality writing about the challenges we face today andtomorrow. But if you want disciplined analysis and inspired thinkingfrom some of the best minds in the world, look no further than this exclu-sive publication. I wish think:act well for the next five years, and for many years after that.

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Printing will be faster in the future. Plants are teaching us about energy production, while IBM is revolutionizing the world of electric batteries. And propeller-powered flight is experiencing a revival.

artificial photosynthesisPlants grow thanks to the process of photosynthesis.

With the help of sunlight, water and CO2, they producesugar molecules that form into wood fibers. In otherwords, plants store energy that they release at a laterpoint in time when they are burned in the form of wood,coal or petroleum. Now, researchers are looking for waysin which photosynthesis could be used to store energywithout going through the biomass formation phase.Instead, the plan calls for solar energy, combined withCO2, water and a catalyst, to be transformed directly intosynthetic fuels such as hydrogen in order to produce envi-ronmentally friendly electricity in a fuel cell when need-ed. Experts call the concept “artificial photosynthesis.” Thedifficulty lies in finding the right catalyst.

It would seem that US-based Sun Catalytix has madetremendous progress in this quest. The company wasfounded by Dan Nocera, a professor at the MassachusettsInstitute of Technology (MIT) in Cambridge, near Boston.He and his team claim that they have found a way to gen-erate enough electricity to meet the daily energy require-ment of a family home using around nine liters of waterand some sunlight. The US government also sees promisein the research and pledged $4 million in early 2010 for thecompany to make the process market-ready.

turbo-ink technology Those with a high volume of printing or copying to do

must still rely on the xerographic process that was devel-oped back in the 1930s. The toner is transferred to thepaper by means of a complex interaction of lighting ele-ments and rotating rollers. And because the printingdevice must run like clockwork, procurement and main-tenance of these machines is expensive.

So far, anyone looking to print more than 40 pages aminute was left disappointed as this simply wasn’t possi-ble—until now. Several companies have introduced proto-types that are based on ink technology that enable fasterprinting speeds. For example, the Australian companySilverbrooks Technologies is planning on manufacturing60-page-a-minute printers for around !250 using its“Memjet” technology. The Japanese company Kyocera,though, claims to have set a new world record in full-color, high-speed printing with its KJ4 print head. With aresolution of 600 x 360 dpi, the print head has a printingspeed of 330 meters a minute. In addition, turbo ink technology offers a competitive advantage. Since it doesaway with rotating components, maintenance costs drop substantially. If Memjet keeps its promise, officeprinters might even become disposable.

FUTURE MARKETS

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open rotorRising energy costs and stricter climate regulations are

forcing the aviation industry to develop more efficientpropulsion systems. The “open rotor” concept appears to holdmuch promise, with fuel savings of up to 30 percent. In 2007,the easyJet aviation company introduced its idea for an “eco-jet” based on this concept, and it plans on being able to halveCO2 emissions by 2015. In 2009, a group of suppliers includ-ing Boeing, Rolls-Royce, RUAG Aerospace and Deharde Maschinenbau agreed to conduct joint research in this field.

It has long been known that propeller aircraft are morefuel-efficient than jet-engine airplanes. Back in the 1970s,during the first oil crisis, the aviation industry had tried tofind ways to use this technology for modern wide-body air-craft. Research was soon abandoned when oil prices droppedand the problem of high noise levels appeared unsolvable.However, now equipped with high-tech computers and newhigh-performance materials, the industry is taking anotherrun at the issue.

To a large extent, a propulsion system’s efficiencydepends on what the intake air is used for. Because propeller

engines use air less to drive the rotors and more for thrustpurposes, their efficiency is much higher than that of jets. Inaddition, the open rotor concept benefits from the fact thatbigger rotors can be used because a heavier housing is nolonger needed. One design seems very promising: it has anenclosed engine and two exposed rotors with sickle-shapedblades that turn in opposing directions. This configuration ismeant to decrease the energy loss resulting from vortices. Allin all, one airplane with a capacity of 100 to 200 passengersequipped with such propellers would reduce CO2 emissionsto 10,000 metric tons annually and see fuel savings of around$3 million per year.

of Utrecht, IBM researchers from Zurich have achieved abreakthrough in nano-scale measurement technology. For thefirst time, they were able to measure the charge state of indi-vidual atoms using an atomic force microscope (AFM). Per-forming measurements with the precision of a single electroncharge and nanometer lateral resolution, researchers suc-ceeded in differentiating neutral atoms from positively ornegatively charged ones. An AFM resembles a tuning forkwith a vibration amplitude of about 0.02 nanometers, or one-tenth of an atom’s diameter. If the tip of the AFM is placed inclose proximity to a sample, the resonance frequency willvary depending on the forces occurring between the sampleand the tip. In this way, one can determine the tiniest differ-ences, using this differential to make extremely precise meas-urements. IBM hopes to use this procedure to develop newcomponents for the field of information technology.

microscopes for moleculesElectronic memory storagedevices are based on crys-talline silicon technology.Because they keep gettingsmaller, they will presum-ably soon reach their sys-tem-related limits. What allfuture developments have

in common is a molecular and atomic architecture, in whichelectronic circuits consist of individual molecules, carbonnano-tubes, as well as cluster- and supra-molecules. A prereq-uisite to make this all happen is a measuring technology thatcan deal with such small structures. In collaboration with sci-entists from the University of Regensburg and the University

7.4 µm

Zircon-ceramic surface

An open rotorengine from US

company GE

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The Enron scandal of the last decadetransformed corporate governance. It also

had a lasting effect on the D&O insurancemarket, given CEO Jeffrey Skilling’s legalbills estimated at $23 million: The casepiqued interest in the coverage that protectscompany officers from personal financial lia-bility if they are sued. And, as insurersassessed the riskier business climate, premi-ums began to rise. Like malpractice insurance for high-levelmanagers, the “directors and officers” insur-ance forms a worldwide market today, worth$8.8 billion in 2008, and covers top managersin the event of a breach of duty and a result-ing lawsuit. Usually reserved for companieswith a fair share of assets and managementboard structures, the pricey insurance poli-cies, with premiums that can reach up to sev-

eral hundred thousand euros a year for mil-lions in coverage, essentially let individualshedge the personal financial risks they faceby playing in the top league. At the sametime, the policies are a tool for making corpo-rate entities responsible for the actions oftheir employees and protecting corporateassets.

D&O POLICY HOLDERS ARE MORE LIKELY THAN EVER TO BE SUED

In the aftermath of the subprime financialcrisis, companies as well as their directorsare advised to be even more cautious aboutpotential financial liability for their manage-ment decisions, says attorney Kevin M.LaCroix, the author of the D&O Diary and adirector of OakBridge Insurance Services.That’s because D&O policyholders are now

more likely to be sued, and more likely to besued for larger amounts, than in the pre-subprime era. Whereas class-action lawsuitswere once common only in the US, such law-suits—with their massive potential for finan-cial damage—are gaining popularity outsideNorth America as part of governance reformaimed at securing recourse for shareholders.According to Advisen, an insurance researchfirm, cases settled since 2005 in Europe werefor average settlements of !117 million.Although some anti-corporate activists arguethat the coverage creates an incentive formisbehavior, scholars find no evidence thatthe coverage motivates mismanagement, justas carrying auto liability insurance hardlygives drivers a reason to cause an accident.Suits against managers can come with a hostof punitive effects, including reputational

Bracing for litigationDespite prudent decisions and the best possible advice, corporate directors face an increase in legalactions that can impact their personal assets. think:act examines what top managers should look forin corporate D&O (directors and officers) programs.

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loss, jail time and possible fines in the eventof a scandal. Enron’s Skilling is serving a 24-year term in prison and was fined $45 million. Fines are typically excludedfrom a policy’s benefits.D&O coverage tends to be best advised on bylawyers and specialized insurance brokers.The specialists recommend that policies gofar beyond the basic requirements of beinglarge enough to cover the cost of settlements.They stress that policies must be tailored foreach individual buyer, depending on thearea of business and the risks present. In the US, a large number of D&O claims aremade for a manager’s conduct related tohuman resources, such as hiring and firingdecisions. But an increasing number ofclaims are being filed against directors andofficers for securities-related misconduct.What’s more, American law is known to havea long arm from which managers around theworld might need to defend themselves. Wit-ness the Enron-related case of the NatWestThree. The British bankers involved wereextradited to and tried in the United States,where they also served prison terms for wirefraud committed in the UK.Megan Colwell, an expert in managementliability insurance at Woodruff Sawyer & Co.,a California insurance brokerage, offers herclients a choice of roughly 10 to 15 insurers.Her firm is paid by commission from insur-ance companies or consulting fees from theclient. Colwell recommends that companieswith international operations acquire spe-cialized advice to align their corporate D&Oprogram to the risks in different countries.

THE BIG QUESTIONS FOR MANY MANAGERS:SHOULD YOU GET OFF THE PLANE?

In some cases, these risks can impact the sub-sidiary organization’s directors, officers andmanagers. In others, executives from thehome territory may be at risk: Some haveeven been known to question if they shouldget off the plane in countries in which their

company’s subsidiary may be involved in alegal tangle, she says.To avoid potential problems, Colwell tellsexecutives to consider D&O coverage for off-shore subsidiaries placed by the corporateheadquarters, or as local laws require, placedin the subsidiary’s country. An importantconsideration for buyers is to make sure thecompany’s D&O broker has access to partnerbrokers abroad. “We need insurance policiesand programs that can adapt to variousindemnification scenarios, so that individu-als are protected in all jurisdictions.”Hartmut Mai, the Global Head of FinancialLines at Allianz Global Corporate & Special-ty, a major provider of D&O insurance, sayspolicies used to have global reach but arenow increasingly subject to local regulations.He recommends one-stop shopping for D&Ocoverage at larger insurance providers thatcan meet needs in all territories and adviseon peculiarities. Mai also advises that man-agers who are trying to steer their company’sD&O program insist on close contact withinsurers to foster a mutual understanding ofrisk exposure. “Keeping in constant commu-nication is not just good for underwriters, it’salso good for the client because the clientbegins to understand how the underwriterthinks and what he is looking for in the risk-assessment process,” says Mai. David Walters, who manages the commer-cial D&O business of Chartis Insurance in theUK and Ireland, a part of the former AIG andone of the world’s largest D&O insurers, alsorecommends that companies communicatefrequently with their insurance brokers andinsurers about business developments thatcould potentially change a company’s riskprofile. According to Walters, companiesshould treat their D&O providers just likeone of their stockholders—and for good rea-son: “At the point of crisis, if the communica-tion has been two-way and open, a solid rela-tionship would be in place to back up theclaims process.” .

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D&O COVERAGE: 11 QUESTIONSYOU SHOULD ASK

1. Do my employer’s by-laws and indemni-fication contracts protect me to the fullestextent permitted by law against paying de-fense and other costs of actions against me?For instance, will the company cover eligibledefense costs up to the amount of the policydeductible or advance my legal fees?

2. Under which circumstances can mycompany bring an action against me andlimit the amount of money I receive fordefense and other costs?

3. Does my company receive informationand solid advice on D&O coverage from aninsurance broker and from legal counsel?

4. Does my company regularly review and approve the terms and coverageamount of our D&O policy as part of our risk-management program?

5. How is the “wrongful act” definition inour D&O policy worded? Am I covered if I amacting outside my capacity as a director (i.e., if I am acting as a professional advisoror shareholder)?

6. Does my company’s D&O policy specifythat the exclusions for major personal misconduct must be for “deliberate” orequivalent misconduct? In other words, am I covered for inadvertent misconduct?

7. Will my defense costs be paid even for excluded claims, assuming I am proveninnocent?

8. Does our coverage contain a provisionthat would limit my own exposure in theevent of fraud or misconduct by one of mycolleagues?

9. What is excluded from my employer’sD&O insurance? Which exclusions are typical and which should raise a red flag?

10. Does my coverage apply if I am suedby my own employer or another companyofficer?

11. How does corporate insolvency affectthe D&O policy? What happens to my coverage if the ownership of my companychanges while I’m serving as an officer?

Adapted from a Chartered Accountants of Canada brochure written by Richard J. Berrow in 2008. Title: 20 Questions Directors Should Ask about Directors’ and Officers’ Liability Indemnification and Insurance

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JÜRGEN HAMBRECHT was born in Reutlingen in 1946.He is married and has four children. He earned his doctorate inChemistry from the University of Tübingen in 1975. Hambrechthas been CEO of BASF since 2003. Before that, he served thecompany in various capacities around the world for almost 30 years. He is also chairman of the Asian-Pacific Committee ofGerman Business. In this year’s “Best of European Business”competition run by Roland Berger, Hambrecht was honored withthe prize for best European manager. According to the awardcitation, Hambrecht helped transform BASF into one of thebiggest companies in Europe without losing sight of its origins.

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THINK:ACT Dr. Hambrecht, the effects of theeconomic crisis were felt around the worldand we are still living with its aftermath.How do you think Europe performed duringthe crisis?JÜRGEN HAMBRECHT One of the most impor-tant effects of the crisis was to reveal where theproblems lie and intervention is needed. We inEurope must now learn from this. We are stillfacing the most significant challenge: it is cost-ing us an enormous amount of time and energyto protect the European Economic and Mone-tary Union from erosion. The crisis also showedquite clearly that responsibility and sustain-ability cannot be disregarded. European corpo-rations are undoubtedly among the leaders insustainable economic development, but wemust establish a global economy based on sus-tainability and responsibility. That is the bestprotection against crises. The world of politicscan certainly learn from business, here.

The chemical industry serves as a bell-wether for the economy as a whole. Manychemical companies, including your own as the industry leader, are posting improvedfigures again—is this an indicator of sus-tained recovery? The crisis year of 2009 was stormy. We arelooking forward to better weather now, butthere are still a few dark clouds in the sky. Andwe cannot be sure that 2010 does not hold somesurprises. This has been demonstrated by thecrisis in the Eurozone, which had been foresee-able for some time. Certain risks will still per-sist in 2010 despite the anticipated recovery.Caution is still advisable.

Is there such a thing as a European manage-ment style?With the Societas Europaea (SE) we do have aEuropean corporate form, but in my opinionthere is no uniform European managementstyle. The question is whether it is even desir-able. One of Europe’s greatest strengths is itsenormous cultural diversity. A mix of manage-ment styles and cultures is a competitiveadvantage, not only in the European market,but in the world as a whole. It is no coincidencethat diversity in the workforce and at manage-ment level is being promoted most actively bycompanies with a global presence.

Can you give any examples of this?BASF has created a program dedicated to pre-cisely this end. With “Diversity & Inclusion” weintend to harness the potential of the diversityin our own enterprise more effectively. We areconvinced that heterogeneous teams have anadvantage: they are more creative, better ableto solve complex problems, they comprehend awider range of customer needs and markets,and, importantly, it is exciting and inspiring tobe a part of such a team. I experienced thismyself when I worked as a manager in China.Seeing the world from a perspective that wasnot Eurocentric had a profound effect on me.

One has the impression that the Europeanconcept is largely disregarded in the compo-sition of many boardrooms. Do we needmore pan-European executive boards?The fact that executive boards are becomingincreasingly international is a good thing. Butthis movement needs time to develop; I don’t

think it would help to encourage it artificially.Candidates must fit the company and theirrespective sphere of responsibilities. In our com-pany, all members of the executive board mustbe able to demonstrate substantial internation-al experience. This is also the goal for the man-agement levels below that. Almost 80 percent ofour managers have already worked abroad.

What is your opinion of a “Europe quota” on executive boards, along the lines of thewomen’s quota?It goes without saying, we need more womenand more international representatives in ourexecutive boardrooms—that must be a perma-nent objective in the long-term development ofmanagement staff. But I am completelyopposed to the idea of quotas of any kind. Theprinciple must be that the best person for thejob occupies the position, regardless of nation-ality or gender.

The BASF executive board is dominated byGermans. Do you aim to change this?The composition of our managers of the nextgeneration is becoming more and more interna-tional—at the moment over a third of our can-didates for senior management positions comefrom outside of Germany. This will have a sub-stantial impact on the makeup of the executiveboard in the future.

It sometimes seems as if Europe is success-ful despite policies that are inimical to busi-ness. Do you subscribe to this opinion?No. Policies in Europe are not generallydesigned to obstruct businesses. Of course, there

Benefiting from diversityEurope’s mix of styles and cultures give it a competitive advantage, says BASF boss Jürgen Hambrecht. But to remain competitive on a worldwide scale, the continent’s economy must focus on sustainability, innovative energy and globalism.

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education. Finally, Europe needs a transparent,clear set of rules. Regulations must not arbi-trarily put any individual industries or regionsat a competitive disadvantage .

Some time ago, you stated that you thoughtEurope was obstructive to progress. Hasmuch changed in the last few years? I’ll give you an example: in March 2010, the EUCommission approved commercial cultivationof the genetically optimized starch potato,Amflora, which we created at BASF. We hadrun a marathon lasting 13 years to get thisfar—the potatoes were tested again and againby the authorities. All results clearly indicatedthat the potato is safe. Such a drawn-out anduncompromising procedure can certainly notbe called helpful to progress. In other regions,comparable approval procedures take barely ayear, as shown by the recent approval of a high-yield soya plant in Brazil. The fact is, we canonly maintain our European standard of livingby embracing innovation more actively. In theface of cheap labor in other regions of theworld, we can only compete in the market byproducing a steady stream of great ideas. Ofcourse, all new technologies and products mustbe evaluated thoroughly according to the high-est standards in European industry. But if weconfuse safety with 100 percent risk elimina-tion, then we are standing in the way of ourown future.

You consistently generate 60 percent of yoursales in Europe. Will this remain the case?Europe is our domestic market and our largestmarket. We employ almost 68,000 people in theregion. Europe will continue to represent thehighest priority for BASF in the long term.

About 80 percent of BASF investments aremade in the EU region. What skills do youwant to continue to concentrate in Europe?A major part of our international research

are many difficult issues, particularly for ourindustry: how to proceed with regard to plantbiotechnology, emissions trading and theREACH regulation to name just a few. But onemust also see that the EU Commission hasadopted entirely proper approaches in terms ofits industrial policies in the past. On the otherhand, much greater effort will be required inorder to ready Europe for global competition.In particular, we need a larger pool from whichto draw innovation. We need better educationand research and we need clear, transparentrules for everyone.

As a member of the “European Round Tableof Industrialists” (ERT) you recently helpedto prepare a “Vision 25.” What does thisvision consist of?We want to make sure that in 2025 Europe isan attractive place to live in, offering sufficientjobs and a reasonable standard of living. TheEuropean Union announced similar objectivesten years ago in Lisbon, which were to beachieved by 2010. We can judge for ourselvesthe success of this approach today. This is whywe must learn the lessons of Lisbon 2010 for thenew EU strategy for 2020 and turn these les-sons into tangible steps. The ERT wants to con-tribute to this process.

What are the most important steps?Firstly, Europe must lead the world in terms ofsustainable economic growth. This meansachieving harmony between economy, ecologyand social responsibility. Secondly, Europemust be well integrated in the global markets.Ultimately, Europe will be weakened by protec-tionism of any kind. Thirdly, Europe mustremain a powerhouse of innovation. This factoris particularly important to me. There must beenough money available for research and edu-cation, even in hard financial times. It must beour objective to dedicate at least 10 percent ofour gross domestic product to research and

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“If we confuse safety with 100 percentrisk elimination, then we are stand-ing in the way of our own future.”

BASF SE has its headquarters inLudwigshafen am Rhein, Germany. Interms of both sales and market capitaliza-tion, it is the largest chemical corporationin the world today. BASF currently employsalmost 105,000 staff in 170 countriesworldwide. In 2009, the group posted salesof !50.5 billion and EBIT of !3.7 billion. Thecorporation is listed on the Frankfurt StockExchange, and its shares are also traded inLondon and Zurich.


network is located in Europe. The main sitesare Ludwigshafen and, since the integration of Ciba, Basel. We continue to invest heavily in research and development even during 2009, even increasing the level slightly. We are also investing in our growth markets, such as the European gas market. Here, we are working mainly on expanding the natural gas infrastructure, for example withthe Nord Stream pipeline in the Baltic Sea, a joint venture with Gazprom, E.ON Ruhrgas,and Gasunie. The consortium is investing a total of !7.4 billion in the pipeline, which is over 1,200 km long and will contribute substantially to securing Europe’senergy supply.

Following the acquisition of Ciba, you nowhave to consider the interests of a Swisscompany. Does it help that the nationalcultures of Germany and Switzerland are so similar, or is it only corporate culturesthat matter here?We decided to buy Ciba because their productscomplement our portfolio and they fit with our strategy of becoming more economicallyresilient and competitive through specialistcapabilities. When companies are integrated,the objective is to merge different corporate cultures. Nationalities are somewhat lessimportant, especially as Ciba was also an international organization. Incidentally, the integration went extremely well, morequickly than expected, and is now complete for the most part.

One final question: Do you consider yourself to be first and foremost a German, a European, a resident of Ludwigshafen, or a citizen of the world?I am a Swabian by birth, who feels at home all over the world. At the same time, I am a committed European and have chosen to live in the Pfalz region of Germany. .

Source: Roland Berger Strategy Consultants

WHAT MAKES EUROPE’S LEADING MANAGERS TICK?In a current study, Roland Berger investigates the values of European managers. In comparison with their US counterparts, the results show: Europe’s bosses are almost as profit-oriented as the Americans, but don’t see themselves so much as strategists or motivators

COMPARISON: EUROPEAN VERSUS AMERICAN MANAGEMENT STYLES

ROLES OF THE IDEAL TOP MANAGER

WHICH AIMS ARE MOST IMPORTANT FOR TOP MANAGERS

GOAL CATEGORIES (in %)

Profitability 42 39

Market positioning 21 23

Market performance 18 15

Power and prestige 7 7

Financial goals 5 7

Social goals relating to employees 5 5

Aims relating to society 2 4

EUROPEAN TOP MANAGERS AMERICAN TOP MANAGERS

Profitability most important GOALS Profitability most important

Internal management roles like IDEAL ROLE External management roles like· Strategist · Networker· Motivator

Requirement for more doing ROLE IN PRACTICE Requirement for doing and motivation of employees

Less doing—more time for AIMS Less doing—more time for strategy and people networking

ROLE

Strategist

Doer

Organization shaper

Motivator

Entrepreneur

Representative

Spokesperson

Networker

Philanthropist

INTE

RN

ALE

XTE

RN

AL

IMPORTANCE

1 2 3 4 5 6

Strategist is considered less important

Motivator and entrepreneur are considered less important

Networker and philan-thropist are clearly con-sidered more important

Europe USA

not importantvery important


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WORK IN PROGRESSOne current study explains paths to growth, while another describes the prospects of the aerospaceindustry. In a new book, consultants show why “green” business is a huge topic for Roland Berger. Anda project with the University of Oxford seeks the fundamentals behind good reputation management.

BOOK

Green benchmarking

More and more companies are now seeingthat making money via environmentallysound business is not just a realistic possibili-ty, but actually an alluring way to tap newsources of revenue. As a result, Roland Berg-er has chosen the theme of “Green Business”as one of this year’s five main topics. In addi-tion to a number of individual studies, theconsultants are currently working on a bookthat summarizes both the various aspectsthat make up green growth and the compa-ny’s considerable experience in this field.

The book initially provides an overview ofthe market, outlining the unboweddynamism of green business models in adiverse range of industries. However, it alsoraises the question as to how much differentapproaches to regulation and technologicaldevelopments, in particular, will influencepotential yield in the future. Having high-lighted these questions, the book then turnsits attention to a collection of examples fromindividual sectors and markets in search ofthe answers. Lastly, the authors address thequestion of how individual countries com-pare internationally, thereby providing aninternational green benchmarking index.

RESTRUCTURING

Top issue: growthUpswing in Sight?: Business Development Afterthe 2009 Catastrophe is the title of the currentRoland Berger study on the topic of restruc-turing. The consultants interviewed morethan 500 companies in western Europe, theEEC, Asia, the Middle East and the US. TheCompetence Center Corporate Perfor-mance’s key questions were: Which indus-tries and regions have overcome the crisisand how did they do it?Initial findings are already available for Ger-many. These state that four out of five com-panies pushed ahead with their restructur-ing measures during the crisis. The compa-nies were able to reduce their personnelcosts by 10 to 15 percent—without relying onmore reorganization-related layoffs. Afterfocusing on cost reductions, future growthand sales initiatives are at the top of theagenda, the report says. Most decision-makers consider manage-ment’s commitment and an integrated con-cept as critical factors to success. Rapidimplementation remains important, but issomewhat less of a priority.

STUDY

Challenges in the skyThe European aerospace industry has devel-oped swiftly in the last two decades. Theindustry’s consolidation created variousworld market leaders, on both the OEM andsupply side. Growth, solid profit margins andthe success of key space missions demon-

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strated the industry’s strengths. However,challenges are looming. The demand stem-ming from national governments couldwane as may their support for the industry.Regulatory measures will also likelydecrease. This means that companies’ busi-ness models, product portfolios and opera-tional performance will be headed for thetesting area. A current Roland Berger studybegins its examination at precisely this point,with consultants taking a look at majortrends and the primary factors behind suc-cess in the aerospace industry.

RESEARCH PROJECT

How to manage a brand’s reputation?How does one manage a brand’s reputation?The University of Oxford has chosen RolandBerger as a case study for best practices asso-ciated with international brand manage-ment. Together with experts from the Centrefor Corporate Reputation at the Saïd Busi-ness School, Roland Berger’s marketing con-sultants will analyze the company’s reputa-tion among various target groups. Aim of the

analysis is to provide approaches gearedtoward improved visibility and recognitionof a brand, while generating local and inter-national image effects. The project team isalso preparing a case study pertaining tointernational brand management that itintends to publish anonymously in an inter-national science magazine. Research part-ners include Tim Morris, head of the Centrefor Corporate Reputation, and Will Harvey, aresearch fellow at the center (see the inter-view below).

INTERVIEW

Five minutes to ruin a companyTHINK:ACT Professor Morris, what is the aimof the Oxford/Berger project?TIM MORRIS Our focus is on the reputation ofRoland Berger across different groups, in par-ticular amongst partners, strategists, clientsand non-clients. We are also interested in ana-lyzing its reputation across different countryoffices as well as in a variety of company areassuch as restructuring, corporate finance, mar-keting and information management.

Why is reputation such an important issuethese days?WILL HARVEY Warren Buffett is quoted as once saying: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” Today, reputation is more impor-tant than ever before because firms in most sectors are not only faced with increasing global competition, but also a greater exposureand accountability to the public. Consequently,the most competitive organizations will bethose that have the best reputation across astring of different groups.

What is specific about reputation manage-ment in the services industry?

MORRIS Unlike consumer product sectors,where customers are willing to overlook thequality of employees or focus on the productrather than the people, in the service sector thequality of consulting is the product. Quality isdifficult to determine from an outsider’s per-spective and therefore a company’s reputationis a critical signal of quality.

What is the main mistake companies makein their reputation policy?HARVEY Firms tend to take a scattergunapproach; that is they do a lot of things butwith little focus, and neglect to make a consis-tent investment in their reputation over time.They also fail to understand how clients makea difference in shaping their reputation, nor dothey properly understand how clients makejudgments based on reputation.

What outcomes are you expecting from the project?MORRIS We aim to provide a comprehensiveanalysis of the reputation of Roland Berger andproduce a detailed executive summary andpresentation of our findings. Although it is impossible at this stage to say what our exactoutcomes will be, one of our preliminary observations has been that the decentralizedautonomy of different national offices appearssomewhat at odds with the centralized endeavors of the headquarters. This presentsmajor challenges for achieving a unified andglobal reputation.

TIM MORRIS is professor of managementstudies and program director in the Centre forCorporate Reputation at the Saïd BusinessSchool, University of Oxford. He is also a fel-low of Green Templeton College.

WILL HARVEY is a research fellow in theCentre for Corporate Reputation at the SaïdBusiness School, University of Oxford.

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“Only money grants independence”In his novel Angstblüte (Blossom of Fear), German author Martin Walser portrays a dealmaker. As part of Roland Berger’s “Literature Meets Business” discussions, he met with Alexander Mettenheimer, CEO of the private bank Merck Finck & Co. On the agenda: justice and independence.

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THINK: ACT Gentleman, what do you sponta-neously associate with injustice?ALEX ANDER METTENHEIMER That not every-one can live off of their wealth. MARTIN WALSER I have a confession to make:When I learned that this discussion would beabout justice, I felt deeply incompetent andcould convince myself to participate only if Iwould not speak about justice at all but rather

about injustice. Because that is the only thingthat I have experience with.

You recently said in an interview that you are still a socialist as far as justice is concerned.WALSER Even though I don’t remember sayingthat, it would probably be true. I was raised aCatholic and a rather devout Catholic at that.

And the main impact this religion had on me,and not just on me, of course, was that wewanted the world to be a just place. That was-n’t a theory, it was a feeling. Everything I haveexpressed in a political context could only bean extension of this youthful experience, thatthere should be greater justice out there. I’vegiven up on that by now, however. I merelytalk about injustice these days.

The author Martin Walser often explores the nature of capitalism in his works.

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Because there is no justice?WALSER How can there be justice? We’ve allexperienced that socialism is incapable of creat-ing justice. Now I can even say: There is nosocial order that can possibly create justice. Ifsomeone claims that it can, then it’s always justan ideological promise that can never be keptin reality. You can only make people more sen-sitized about injustice.

Mr. Mettenheimer, you once said in an inter-view that the wider the gap between richand poor, the better. METTENHEIMER It is easier when you think inextremes. If we’re all equal, then we’re living inthe former East Germany. And if we’re some-place completely unequal, perhaps Nicaragua,where the gap between rich and poor is amongthe widest in the world, then we have a mini-mal number of people holding the greatest por-tion of wealth, and everyone else is poor. Andsomewhere in between is where we in Germanyall feel comfortable. The question is: Where dowe place ourselves?

And where could that be? METTENHEIMER The renowned German econo-mist Wilhelm Röpke once said that anyattempt to found an economic order based onmorals that are higher than the social averagewill end in coercion. And we’ve seen that insocialism. Now we want to establish an orderthat enables the greatest possible number ofpeople to take advantage of the benefits with-out taking too much away from them. That willbe different everywhere. Yet statistically speak-ing we can prove one thing: Economy growthrates are the strongest where the gap is widest.That may be unjust from the individual’s per-spective, but better for the collective whole,because a growing economy is better than astagnant one.

Then are such contradictory statementsabout justice self-deceiving? METTENHEIMER We all know this: We are notall equal. The state can only treat people equally,but to claim that we are all equal is simply false.If I demand that the state offers equal opportuni-ties to everyone, then equality is the right princi-ple. But do I expect that everyone will earn thesame afterwards? Then I have to say: No.

METTENHEIMER I do agree with you here. Butthe reality is that money and independence aretwo entirely different things. You can also havemental independence. WALSER It is an ideology to believe that such athing as mental independence existed. METTENHEIMER That is not an ideology. Peoplehave an ability to form an opinion independ-ently. This doesn’t depend on money. I considerit unjust that the state doesn’t give more peoplethe opportunity to build enough wealth toallow them to live off it, that the majority of cit-izens are financial transfer recipients. That is astructural failure of our society. We need to cre-ate a state where each person is responsible fortheir own life first of all. Where everyone alsohas the goal of supporting themselves fromtheir own wealth. If that doesn’t work, then wetruly have an unjust state.

Then how should we understand the title ofyour article “Wealth Is a Flaw?”METTENHEIMER Please don’t overlook the ques-tion mark at the end. It appears in the contextof placing the focus on high earners, thewealthy. Those are just a very few people. If youlook at tax statistics, you’ll see that only 12,500people declare !1 million in income.

Who report it …METTENHEIMER There are 250,000 people whoreport an income of more than !250,000. Con-sidering the size of Germany, that is too few.And they get called on for everything. Extraduties, affluence taxes, high inheritance taxes.The attitude: Take it from the rich.

It is probably understandable when a mem-ber of the precarity says “I’d like to havetheir problems.”METTENHEIMER Yes, but it’s completely irrele-vant to the economic reality. The reality shouldbe that the majority of the people should paythe majority of the taxes. When we have morerecipients than contributors, then you realizethat justice has transformed into injustice. Thecollapse in Greece is unjust to the population.Why? Because more money was spent thanwas available. If we do the same, then that iswhat awaits us. I consider that unjust. Everyhotel owner treats his best-paying guest thebest. Only our government says: Hammer the

Mr. Walser, in your works you express thatinjustice arises from injuries, violationsresulting from dependence. WALSER Of course. We all know this.

So are we all injured, violated?WALSER If we weren’t, we wouldn’t be here. Mymost recently published stage of this develop-ment is Karl von Kahn, an investment consult-ant from Munich, who said: “Because peopleare the way they are, we need to become inde-pendent of them. Theologians and philosopherscan argue about freedom. There aren’t two ver-sions of the word independence. Independenceis the most desirable status.” My Karl von Kahngoes on to say: “Merely money grants independ-ence. Money is the only way.” In that regard he is quite different from anoth-er man, someone whom he has every reason torespect: American investor George Soros, whohas said that he would like to earn enoughmoney that other people are dependent on him.My Karl von Kahn contradicts him in thisregard and says: “I don’t want anyone todepend on me.” He is my mouthpiece and thatis the essential point: You can’t be dependenton anyone. Everybody you depend on will takeadvantage of it. That is called power. Powercan only be abused. There are no philanthrop-ic ways of using power. Power is always some-thing illegitimate. I can’t imagine that there isa person anywhere who does not seek to beindependent from that.

So we are dependent on money, after all …WALSER That’s what you say. I say: Onlymoney makes you independent. That does notmean: I am dependent on money. METTENHEIMER I’d like to contradict you whenit comes to independence. I have seen manyfamilies with plenty of wealth and their mem-bers are terribly dependent. WALSER On what ? METTENHEIMER On a collapse, a total failure ofthe situation they find themselves in. Wheremoney rather harms them. In some cases,wealth is experienced as a burden. People can’tdeal with it, don’t know what to do with it.They sometimes attempt to escape.WALSER But individuals are indeed in control ofthat! You are not actually dependent on othersin that situation.


rich again. The media does it. Politicians do it.But that just can’t be right. Money comes fromthe businesses. No one becomes wealthy fromdoing nothing.WALSER The way you reacted to my word“independence” makes me shiver. I don’t knowif you can imagine the condition of others hav-ing power over you, and not being able to doanything other than accept it. And that isdependence. Dependence deforms people. Andin civilized, meaning non-dictatorial, condi-tions, there is nothing so deforming as beingdependent on this, that and the other. Peoplewould not be so dependent if they had moneyand their only problem was where to put it. METTENHEIMER I agree with you. I started outwith 800 German marks in my pocket … WALSER I’ve never met anybody who didn’t say,“I started out with 500 marks.”

Yet society has learned to deal with inequali-ty, after all. METTENHEIMER What does “just” mean ? Thisis a simplification, but: A police officer wholives in the eastern part of Germany pays atotally different rent than the officer who livesin Munich. Both do the same job, but they willhave quite a difference in net income left overafter paying the rent.

Very well, but what about women? WALSER What women have to say, they shouldsay for themselves. METTENHEIMER I started out at a bank, whichis a real meritocracy. There they always saidthat it’s not a question of age, gender or race. Aperson who is efficient will receive more thanone who does less. And I think that’s absolutelyright. But who decides that? Justice is not some-thing abstract, but rather the total outcome ofour actions. Someone, somewhere said: “Iwould like to offer you this job.” And the otherperson accepted it. These are two parties in acontract who have taken action. WALSER Do you think that justice can be estab-lished in such negotiations, even in a dependentrelationship? METTENHEIMER I have always taken guidancefrom what I read by German philosopher JosefPieper about St. Thomas. He divides justiceinto the principles of just exchange and distrib-utive justice. “I sell my house and receive a cer-tain price for it.” These are decisions thateveryone would like to make. Every personneeds to ask him- or herself: “Have I hiredsomeone after offering that individual anunfair contract, after I have coerced or exploit-ed someone to make them relent?” That wouldbe unjust behavior.

WALSER Let me—please accept my apologies—offer an example from one of my novels. Xaver,a chauffeur, has a wonderful boss, Dr. Gleitze, aMozart lover, musical and cultivated. And nev-ertheless, the relationship between them isunequal, a non-relationship, and Xaver saysthe following about this non-relationship,which also ultimately makes him ill. He says:“He thinks about his boss at night, and heknows that his boss doesn’t think of him atnight.” That’s what makes him unhappy.METTENHEIMER Yes, that’s certainly true. Butno one forced him to stay there. WALSER EVERYTHING forced him to staythere! It’s a wonderful job. There’s none better. METTENHEIMER You see, that is the freedomthat you have as a writer. But in reality, heneeds to make a decision if he feels it’s makinghim ill. I have moved during my life, because Iwanted a job that I found more appealing andbecause it paid better and because I gainedexperience there. .

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MARTIN WALSER is one of Ger-many's most renowned authors. Hehas received many awards for his lit-erary works, including the Georg

Büchner Prize in 1981 and the Peace Prize of the German Book Fair in1998. In his body of work, he often writes about business as well,most recently in his novel Angstblüte (Blossom of Fear) about finan-cial investor Karl von Kahn.

ALEXANDER METTENHEIMER is the CEO and a personallyliable partner with Merck Finck & Co., a private bank. The 57-year-oldmanagement spokesman has been with the bank since October 2001,and is responsible for the Financial Markets department as well as theResearch, Legal, Communications, Auditingand Central Administration departments. Helearned the subtleties of banking withCitibank in London.

This interview was conducted in cooperationwith the magazine Wirtschaftswoche, whereit will also be published. In the “LiteratureMeets Business” discussion series, RolandBerger aims to offer new perspectives oneconomic interdependencies.


“Don’t settle”Soon, think:act will be available on the iPad. The iPad is the lateststroke of genius by Apple CEO Steve Jobs. Jobs is the ultimaterulebreaker. But what drives him? Some personal insights …

JOBS ONDROPPING OUT“I naively chose a college that wasalmost as expensive as Stanford,and all of my working-class par-ents’ savings were being spent onmy college tuition. After sixmonths, I couldn’t see the value init. I had no idea what I wanted todo with my life and no idea howcollege was going to help me fig-ure it out. So I decided to drop outand trust that it would all workout OK. It was pretty scary at thetime, but looking back it was oneof the best decisions I ever made.The minute I dropped out I couldstop taking the required classesthat didn’t interest me, and begindropping in on the ones thatlooked interesting.”

JOBS ONBEING FIRED“Woz and I started Apple in myparents’ garage when I was 20. We worked hard, and in 10 yearsApple had grown from just thetwo of us in a garage into a $2 bil-lion company with over 4,000employees. We had just releasedour finest creation—the Macin-tosh—a year earlier, and I had just

turned 30. And then I got fired.How can you get fired from acompany you started? Well, asApple grew we hired someonewho I thought was very talentedto run the company with me, andfor the first year or so things wentwell. But then our visions of thefuture began to diverge, and even-tually we had a falling out. Whenwe did, our board of directorssided with him. So at 30 I was out—very publicly out. What hadbeen the focus of my entire adultlife was gone; it was devastating.”

JOBS ONSTARTING AGAIN“I really didn’t know what to dofor a few months. I felt that I hadlet the previous generation ofentrepreneurs down—that I haddropped the baton as it was beingpassed to me. I met with DavidPackard and Bob Noyce and triedto apologize for screwing up sobadly. I was a very public failure,and I even thought about runningaway from the valley. But something slowly began todawn on me—I still loved what Idid. The turn of events at Applehad not changed that one bit. I

had been rejected, but I was stillin love. And so I decided to startover.I didn’t see it then, but it turnedout that getting fired from Applewas the best thing that could haveever happened to me. The heavi-ness of being successful wasreplaced by the lightness of beinga beginner again. It freed me to enter one of the most creativeperiods of my life.”

JOBS ONLOVE“I’m convinced that the only thingthat kept me going was that Iloved what I did. You’ve got tofind what you love. And that is astrue for your work as it is for yourlovers. Your work is going to fill alarge part of your life, and theonly way to be truly satisfied is todo what you believe is great work.And the only way to do greatwork is to love what you do. If youhaven’t found it yet, keep looking.Don’t settle. As with all matters ofthe heart, you’ll know when youfind it. And, like any great rela-tionship, it just gets better andbetter. So keep looking until youfind it. Don’t settle.”.

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!Steve Jobs’s rulebreakingaffects think:act, too.

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PUBLISHERProf. Dr. Burkhard Schwenker, CEORoland Berger Strategy ConsultantsAm Sandtorkai 4120457 Hamburg, GermanyTel.: +49 40 37631-40

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EDITORIAL ADVISORY BOARD Roland Berger Strategy ConsultantsDr. Christoph Kleppel †, FelicitasSchneider

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ART DIRECTIONBlasius Thaetter

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EDITORIALTobias Birzer

AUTHORS Nina Jeglinski (Kiev), Frank Gruenberg, Gerd Huebner, Christoph Hus, Kunal Majumder (NewDelhi), Tobias Moorstedt, Marcus Schick, AndréSchmidt-Carré, Guido Walter, Rhea Wessel,Johannes Wiek

CONTRIBUTING AUTHORSCharles Hodson (New York)

ENGLISH EDITIONGeoff Poulton, Patricia Preston, Asa C. Tomash

GRAPHIC DESIGNAndrea Huels, Ngoc Le-Tuemmers, Sabine Skrobek

PRODUCTIONWolfram Goetz (resp.), Franz Kantner, Silvana Mayrthaler, Cornelia Sauer

PHOTO EDITORSBeate Blank (resp.), Michelle Otto, Benno Saenger

PHOTO CREDITSCover: Illustration Pietari Posti, ullstein bild/Lieberenz, imago/Rolf Braun; p. 9: dpa/Vladimir;p. 10: dpa/Patrick P; p. 14–15: Illustration PietariPosti; p. 16: AFP/Manan Vatsyayana; p. 17: gallerys-tock; p. 18: gettyimages/Bloomberg; p. 20–21: pr;p. 22: gallerystock/William Caste Photo; p. 23: getty-images/The India Today Group; p. 26–30: gallery-stock/BIWA, pr; p. 31–33: Illustration Pietari Posti,pr; p. 35: Benno Saenger; p. 36: imago/David Ewing; p. 37: gallerystock/Richard Maxted;p. 38: gallerystock/Geof Kern; p. 39: gallerystock/

Jim Krantz; p. 40: gallerystock/Derek Swalwell; p. 41:gallerystock/Christopher Griffith; p. 43: Illustration:iStockphotos/zubada; p. 44: gallerystock/ChristopherGriffith; p. 45: gettyimages/Bloomberg; p. 47: iStock-photos/blackred, pr; p. 48–49: iStockphotos/ThomasVogel, Memjet; p. 49: Science Foto, General Electric;p. 50: Illustration Sylvia Neuner; p. 52: ullstein bild/Reuters; p. 54: Roland Berger Strategy Consultants;p. 56–57: Illustration Sylvia Neuner; p. 58: Sven Paus-tian; p. 60: Roland Berger Strategy Consultants; p. 61:Apple, corbis/Kim Kulish; p. 62: Harvard UniversityNews Office/Stephanie Mitchell

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COPYRIGHTThe contents of this magazine are protected by copyright law. All rights reserved.

NOTICEOpinions expressed in the articles of this magazinedo not necessarily reflect the views of the publisher.

[email protected] you have any questions for theeditor or the editorial team? Wouldyou be interested in learning moreabout studies by Roland BergerStrategy Consultants? Just send ane-mail to [email protected]

In his new book, Chaotics, mar-keting expert Philip Kotler offersstrategy-related ideas for turbu-lent times. It’s comforting toknow that even though strate-gies are changing fundamental-ly, developing and implementingthem is still possible, accordingto Kotler. Professor Peter Cappel-li outlines the rise of the Indianmanagement model in The IndiaWay—worth reading for anyoneseeking a better understandingof India’s economy and culture.For those seeking more on India,British finance journalistEdward Luce gives an outsider’sviews on the many contradic-tions of the country’s society inIn Spite of the Gods. How impor-tant the Internet has become interms of generating new ideas intoday’s society is addressed inYale professor Yochai Benkler’sweighty The Wealth of Networks.

FOLLOW-UP READING TIPS

Reformer takes over at Harvard Since its founding, think:act has closely followeddiscussions pertaining to management trainingprograms. Issue 4 initiated this coverage with apro/con analysis of whether the MBA is still rele-vant today. One individual may give the debatenew impetus: Nitin Nohria, a professor of businessadministration, will be taking the helm as dean ofthe Harvard Business School. He is an unconven-tional thinker who is critical of the standard con-tents of traditional, elite MBA courses. Harvard’sdecision-makers did not have an easy time with hisappointment, evidenced by the string of regularmeetings held by 12 faculty members over recentmonths. President Drew Faust also felt compelledto solicit external input. It will be exciting to see

where Nohria willtighten the screwsfirst. Observers havehigh expectations—as Financial Timeswriter Stefan Sternput it, “By appointingProf. Nohria, HarvardUniversity has sig-naled that it is notfrightened of debate,or reform.”

MASTHEAD

Pinault may make a moveAs we report in think:act 14, PPR CEO FrançoisPinault wants to create a new concept of luxury.Pinault’s understanding of luxury has a lot to dowith the exclusivity of hand-crafted perfection.One name that would fit nicely into this philoso-phy is luxury designer Hermès, whose patriarchJean-Louis Dumas recently passed away. Nowthere’s speculation that with his passing, PPRcould take over Hermès.

Is the percentage of women relevant?In Issue 12, we covered the debate about the per-centage of women in the ranks of top managers.The University of Michigan has now shrewdlyasked: what has the Norwegian percentage actually changed? Well, the average experience oftop managers dropped; more female CEOs haveMBAs; and more are likely to come from middlemanagement than from other senior positions.

Nitin Nohria—to what extent will hereform Harvard’s MBA program?

PHILIP KOTLER:Chaotics

EDWARD LUCE:In Spite of the Gods

YOCHAI BENKLER:The Wealth of Networks

PETER CAPPELLI: The India Way

07_15gb_62_Followup 18.06.2010 13:06 Uhr Seite 62

kINDIA INNOVATES DIFFERENTLY (P. 16)Why India’s companies can do more than just cheap

kA LOT OF WHITE SHELVES (P. 22)Local stores still dominate India’s retail trade—for how long?

kPRAISE TO THE MOTHER (P. 31)Why are Indian CEOs so successful in global corporations?

kSOMETIMES POLITICS CAN’T BE POPULAR (P. 8)Sergey Tigipko’s fight for reform in Ukraine

kLOCKING HORNS (P. 10)Why management conflicts should not always be avoided

k“ALL MUSCLE AND NO FAT” (P. 44)Philip Kotler explains how to market professional services

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The global magazine for decision-makers Issue 15


Jürgen Hambrechton European management culture

Martin Walseron justice andinjustice, moneyand independence

Philip Kotler reinvents himself. The world of finance in upheaval.The art of productive conflicts.

Mastering complexityIndia and its companies

can do more than just cheap

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