Tesla Takes Nevada
Lessons from the states’ battle for businesses, p. 32
Additive Navigating Surviving a Manufacturing the Northeast Cyber Attack Get ready for the 3D revolution, p. 40
A state-by-state status report on the region, p. 46
What you can do to mitigate the risks, p. 52
MARCH/APRIL 2015
Dow Chemical’s Andrew Liveris Maps
THE ROAD AHEAD FOR U.S. BUSINESS
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CONTENTS
March/April 2015 No. 275
26
FEATURES 26 Cover Story
Andrew Liveris’ Winning Formula Dow Chemical’s CEO has a message for fellow U.S. manufacturers: Rethink your role in the evolving global supply chains and partner with others in training and developing the workforce you will need for the future.
By J.P. Donlon
32 Manufacturing Revival “Gigafactory” Ripples
Was wooing Tesla worth the huge incentives Nevada made to close the deal—and what, exactly, does that deal mean for the rest of the states vying for business?
32
By Dale Buss
40 Manufacturing Technology 3D Is No Longer the “Next Big Thing.” It’s Here
Are you ready for the additivemanufacturing revolution?
By William J. Holstein
46 Economic Development
Regional Report: The Northeast
In The Northeast, the Recession isn’t over yet.
By Warren Strugatch
52
52 Cyber Security
What CEOs Can Learn from the Sony Cyberattack You may not be able to eliminate risk, but you can mitigate it.
By Tom Pettibone
56 CEO2CEO Summit
Growing Your Business in Uncertain Times
Part II of takeaways and highlights from the 2014 CEO2CEO Summit at the New York Stock Exchange • CEO Roundtable: Why Capabilities are Critical for Successful M&A • CEO Roundtable: Are You Ready for the Internet of Things?
56 02 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015
COVER ILLUSTRATION BY JOHN RIT TER / PHOTOGRAPH BY BEN HIDER
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Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi
68
DEPARTMENTS 08 Editor’s Note
22 Making
Technology Work
10 CEO Watch
• Amway’s Steve Van Andel on what he learned in China • Appian’s Matt Calkins on entrepreneurial adaptation • POV: Author Nicholas Carlson on unraveling Marissa Mayer • CEO Confidence: January marks a nine-year high
Corral That Runaway IT Project! By Tom Pettibone
VP, Associate Publisher Christopher J. Chalk 847/730-3662
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Collector with a Cause John Rivers, passionate about antiques made in Charleston, is on a mission to keep them there.
By George Nicholas
68 Executive Life
Taking it to Extremes
19 Risk Index
How Big Mac Reacts to Attack By Jeffrey Sonnenfeld
65 CEO Passions
The CEO and Power
By Dr. Thomas J. Saporito CEOs Rank Privacy/Data Security Top Personal Risk
20 Mid-Market Report Mid-Market Companies Gain Ground
Here are three ways to escape—or indulge in—winter’s chill.
By Michael Gelfand
71 Flip Side Nut Job
Performance, job growth and economic confidence all improved in the final quarter of 2014.
Online Editor Lynn Russo Whylly
24 Sonnenfeld Signposts
18 Chief Concern Are the two a dynamic duo or an odd couple?
Contributing Editors Michael Gelfand William J. Holstein George Nicholas C.J. Prince Joe Queenan Dr. Thomas J. Saporito Prof. Jeff Sonnenfeld Warren Strugatch
What would a Korean executive’s über tantrum look like stateside?
By Joe Queenan
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72 Final Word
Who’s Afraid of Public Sector Unions?
Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 275, March/April 2015. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306. Subscription Customer Service:
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EDITOR’S NOTE
Time to Push Back
Out of $4.6 trillion in resources allocated by the federal government, 38 percent of that total are for regulation.
AT OUR CEO2CEO Leadership Summit last December, Dow CEO Andrew Liveris got a knowing laugh from the 85 CEOs in the NYSE boardroom when he quipped that when it comes to dealing with Washington, if one “isn’t at the table, you’re on the menu.” (See our cover story, p. 26.) One theme that rankled the normally unflappable Australian was regulatory overreach. “We’re getting diced with multiple agencies’ applying multiple regulations and then not talking to each other,” he said. “The regulatory burden is crippling the country. For example, the EPA is pummeling industry with a new set of ozone rulings” (National Ambient Air Quality Standards for Ozone). But it’s not just the EPA and the chemical industry. JPMorgan Chase’s Jamie Dimon has made similar noises about the multiple and often contradictory regulatory positions affecting financial services as a result of Dodd-Frank. More disturbing to Liveris and to most CEOs in the room is what the Dow CEO observed as “the philosophical position of this administration concerning regulation. [President Obama’s] view is that regulation keeps us all under control. If we didn’t have massive regulation, only bad things would happen—like subverting child-labor laws by hiring 12-yearolds to work in factories. It’s exactly the opposite mindset most business leaders have, which is to bring all parties to the table early to [consider] risk-benefit analysis before something like this becomes a proposal in some agency.” Should it take effect, the new ozone standard, he believes, could force a number of power companies to go off the grid in 2020. “I don’t know where the lights are going to come from, but this is what uncoordinated
08 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015
action is; it’s just costly and bizarre.” The total cost of regulation in the U.S. is difficult to calculate, but one estimate put it at $1.75 trillion in 2008, according to Richard Williams, vice president of policy research at the Mercatus Center at George Mason University. Total expenditures by the U.S. government were about $2.9 trillion in 2008. Thus, out of a total of $4.6 trillion in resources allocated by the government, 38 percent of the total is for regulations. If regulations always produced goods and services valued as highly as market-produced goods and services, this would not be a cause for alarm. But that is precisely what is not known. Agencies often resort to accounting gimmicks to justify costly regulations. They frequently include both direct and indirect benefits but compare them to only direct costs. Regulation also impacts the job market. For example, regulation can create regulatory-compliance jobs at the expense of jobs that are more highly valued by the market. Companies complying with regulations expend time and effort that they could have otherwise invested in growth. Thus, it is not just the cost of complying with regulations but also the foregone economic growth that should be included in agency estimates. Economists refer to this as the misallocation of resources— when capital and labor are directed to less productive or unproductive uses. This situation can have very real consequences for the economy. Liveris urges all business leaders to join whatever associations or lobby groups they can and to enlist the support of their employees to push back. When employees fully realize that jobs are at stake, they can be powerful allies in righting the balance of this predicament.
I LLU ST R AT I O N BY T I M TO M K I N S O N
J.P. Donlon
Business leaders need to challenge regulatory overreach. By J.P. Donlon
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CEO WATCH
CEO INSIGHT / AMWAY’S STEVE VAN ANDEL
Lessons from China How rolling with a regulatory setback turned into a win-win. By Jennifer Pellet 10 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015
BY THE TIME DIRECT-SALES powerhouse Amway decided to expand into China in 1995, the company had an impressive track record at breaking into foreign markets. In fact, 50 percent of its revenues had been coming from overseas sales since the mid-’80s. Amway was not a novice to Asia, having already developed flourishing outposts in Hong Kong, Malaysia and Japan. Its business model—recruiting independent business operators to personally market its health, nutrition, beauty and home-care products to consumers—seemed to translate well wherever the company chose to bring it. Such was also the case, at least at first, in China. Three years into the effort, Amway China was a rapidly growing $200 million operation for the Ada, Michigan-based company. Then, virtually overnight, the government enacted a game-changing ban on direct sales, a move that threatened to derail Amway’s fastest-growing market. Various reasons—ranging from preventing fly-by-night scams to concern that the motivational meetings and door-to-door sales efforts typically employed in direct selling could be used to incite political unrest— were given for the drastic measure. Whatever the true cause, Amway China was now at a crossroads. To continue to operate in China, the company would be forced to overhaul the direct-sales business model that had long been its primary differentiator. Traditionally, Amway’s representatives—or Independent Business Owners (IBOs)— made money not only by selling the company’s products directly to consumers but also by recruiting and mentoring other people to join the IBO team. By squashing that compensation structure, the regulation in China was attacking the company’s very core. “They said, ‘Look, you’ve got to have physical stores if you want to be here,”’ recounts Steve
Van Andel, chairman of the company and the son of one of its founders. Amway was then, and still is today, primarily owned by the families of its two founders, Rich DeVos and Jay Van Andel. After some deliberation, the families decided to persevere, working within the new regulatory requirements to continue to operate in China. The decision proved prescient— and continued to be so even after China gave Amway a license to return to a direct-selling model in 2006. “We opened stores as a requirement of being there, and as a result, we found out something surprising,” says Van Andel. “We discovered that our business owners loved it.” Rather than seeing the stores as competition, Amway’s IBOs embraced them as places where they could bring customers to see the company’s entire line of products in person. “The great thing about the stores is that they’re not so much places where CHINA ACCOUNTS people are going FOR MORE THAN to actually go to buy products— although you can buy products there—as OF AMWAY’S $11.8 they are brand BILLION ANNUAL REVENUE centers,” says Van Andel. “Our business owners take prospects there to see what we have and to show them the opportunity that becoming part of Amway can offer. It gives them credibility.” Today, China is Amway’s largest market, accounting for more than $4 billion of its $11.8 billion annual revenue. What’s more, the company has taken the “experiential store” lesson to heart, literally opening up shops around the world. “We’ve expanded the concept to the point where we have about 1,000 stores,” says Van Andel. “Our business owners love them; they love bringing people there.”
THORNS AND ROSES
Book of Jobless In 2013, observes Investor’s Business Daily, PAUL KRUGMAN critiqued the argument that extending jobless benefits exacerbates joblessness, since people put off looking for work until their benefits run out. He asserted that it was based on dated THORNS research that "has not stood the test of time and is irrelevant... given our current economic situation.” He went on: “Ask yourself how, exactly, ending unemployment benefits would create more jobs.” Turns out it did create more jobs. Lots more. Economists from the University of Oslo, the Institute for International Economic Studies and the University of Pennsylvania looked at how the sudden end to this federal benefit correlated with job growth and found that “1.8 million additional jobs were created in 2014 due to the benefit cut." Finally, a CEO who speaks out about regulatory overreach. JAMIE DIMON, grappling with huge legal costs and rising capital requirements at JPMorgan Chase, said U.S. regulators were putting his bank “under assault.” “In the old days, you dealt with ROSES one regulator when you had an issue, maybe two,” Dimon told analysts. “Now it’s five or six. It makes it very difficult and complicated. You all should ask the question about how American that is. And how fair that is. And how complex that is for companies.” Let’s ask Elizabeth Warren.
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CEO WATCH
CEO CASE STUDY / APPIAN’S MATT CALKINS
Evolving Entrepreneurial Venture By Jennifer Pellet
The Challenge At age 26, you left
WHO
a lucrative and successful career at a fast growing enterprise-software company—sacrificing millions in stock options—to start your own company. You didn’t have a business plan, funding or even a concept. Instead, you had three partners who shared your enthusiasm for taking on an entrepreneurial venture during the heady days of the dot-com boom. Together, you decided to tackle personalization—or the task of using algorithms to analyze data about people and the products and services they consume to enable companies like Netflix to tailor their marketing efforts to consumer preferences.
Matt Calkins, Co-founder and CEO, Appian CO-FOUNDERS
Mike Beckley, Bob Kramer and Marc Wilson WHAT
A leading provider of modern business process management solutions PASTIME
Designing board games (Magnet, an abstract game of strategy, 2008; Sekigahara, a war game based on Japanese medieval history, 2011; Tin Goose, a business game based on commercial air travel, 2015) FAVORITE READS
Titan: The Life of John D. Rockefeller, Sr., by Ron Chernow; The Story of Philosophy: The Lives and Opinions of the World’s Greatest Philosophers by Will Durant
The Context As it happens, your venture launches on the eve of the dotcom economy’s demise. “It got taken out by the bubble burst, even though it was a meaningful industry,” recounts Matt Calkins, CEO of Reston, Virginia-based Appian. Next, the company looked to market its algorithms to web portals like AOL as a way to tailor content to user profiles, but that idea, too, died on the vine. Fortunately, the company’s third effort finally bore fruit. “We jumped into business-process management,” says Calkins. “The idea was that instead of coding it, we would let you draw it like a flowchart and configure roles for people, then, we would automate the flowchart.” The concept addressed a myriad 12
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of frustrations companies using custom software face, from headaches related to integrating the software and training people on it to the likelihood that the pricey and complex software you just purchased and struggled to implement will soon be obsolete. “The typical IT infrastructure right now is a forest of silos, each requiring its own upkeep, which is incredibly expensive,” explains Calkins. “Instead of 100 silos, we want you to have one Appian platform where everyone participates. If you have 10 applications, you log into them as one and you participate with everyone else logged into their applications because they’re
MARCH/APRIL 2015
also logged into the environment, not a silo.” Because Appian continually updates the platform, companies can also run all of their custom applications on every type of device currently in use—a BlackBerry, an Android or an Apple Watch. “Ten years from now, even if we consume applications in a totally different way, everything you wrote on the Appian platform will work in that new environment because we will keep it fresh,” promises Calkins. Finally, when it’s time to update customized software, companies can use Appian’s drag-and-drop tools to change the flow charts on
the manager tips on what is needed to be done better,” explains Calkins. “They used to do all that with pen and paper and drop it off in Seattle to be [tabulated]. Now they have instant scores and can make instant changes. Plus, the people who used to be form jockeys are connected to the conversations happening across the Appian platform inside Starbucks. It turns out that they are a gold mine of information.”
The Endgame Given the company’s
which the customized applications are based and the code automatically reconfigures, he adds.
The Resolution Today, Appian is a $350 million company with an impressive roster of clients, among them UPS, Starbucks, Amazon and the U.S.
government. Starbucks, for example, uses multiple applications on Appian’s platform, one of which involves conducting its North American store inspections on iPad devices. “They have hundreds of people whose job is to go to one Starbucks location after another and fill out forms, take pictures and give
rapid growth rate—sales doubled last year, according to Calkins—and steadily building customer base, an IPO could easily be in the offing. In fact, back when New Enterprise Associates invested $37.5 million in the company a year ago, some speculated that the capital injection was meant to pave the way for a public offering. However, Calkins says he plans to bide his time. “We want to establish the consciousness of our market before we try to sell our shares to the Street,” he says. “Right now, I still have to explain what an application platform is to people. I don’t think that will be the case in a year or two. I want to be at the point where when people hear, ‘Application platform,’ they say, ‘I love that market.’ Then I want to ride that wave.”
CEO CONFIDENCE
January 2015 Marks a Nine-Year High CEOS RESPONDING to Chief Executive’s CEO Confidence Index in January were more positive than they had been in the month of January for nine previous years. Confidence increased 9.2 percent over January 2014, and tripled results in January 2009, the period immediately following the financial crash that launched the Great Recession. Confidence has yet to return to pre-recession highs, however. January 2004 recorded a high of 7.94 points out of a possible 10, while January 2005 recorded 7.55.
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CEO WATCH
YAHOO’S PLAN to spin off its $40 billion stake in Chinese ecommerce firm Alibaba signals that the Internet company has succumbed to investor pressure to split into two, one containing its 15 percent holding in Alibaba, and the other a legacy operating business and its stake in Yahoo Japan. “There is no one in the world like Marissa Mayer,” writes Nicholas Carlson in his book, Marissa Mayer and the Fight to Save Yahoo. In 2012, she was 37, a wife, an expecting mother, an engineer and then, suddenly, the CEO of a $30 billion company. The chief correspondent for Business Insider, Carlson discovered in his reporting that the demand for stories on this Wisconsin-born former Google executive, who once aspired to be a schoolteacher, was almost insatiable. He admits that he is equally fascinated, so he wrote a book about her and the predicament she faces in reviving one of the Internet’s earliest start-ups. Carlson is fascinated by Mayer’s many contradictions. Onstage, in front of thousands, she is warm and charming. Privately, she is socially awkward and describes herself as “painfully shy.” She thinks of herself as a geek but hardly looks the part—with Hollywood actress good looks and a penchant for Oscar de la Renta couture. (She often hangs out with Vogue’s Anna Wintour.) Widely admired by the public, she also has many enemies within the industry, who say she is robotic, arrogant and absurd in her obsession with detail. By all accounts, however, she is very smart, very focused and extremely hard-working, having been known to put in 20-hour days on occasion.
When it went public in 1996, Yahoo co-founders and Stanford graduate students David Filo and Jerry Yang didn’t want to run the company. So the business was run by a series of CEOs with varying abilities and backgrounds. Back in the 1990s, Yahoo was the Internet. It was founded by a kid who hardly had a job and another who grew up in a commune. Neither
CEO POV YAHOO’S MARISSA MAYER
Marissa Mayer started with great momentum. She fixed the culture. Her weekly FYI meetings added transparency. Yahoo revamped its product line-up and even won an award from Apple. She bought Tumblr. She avoided layoffs. Jerry Yang had publicly thanked her for saving the company. But difficulties emerged. There was almost no revenue growth. Yahoo, which essentially invented the online-advertising business, had been overtaken by Google, which devoured the search business. “Despite her early bravado,” Carlson observes in his book, “search market share was shrinking quickly. Yahoo didn’t have any new hit products. Mayer had been blindsided by the size and scale of Yahoo’s media business. Yahoo mail was breaking down.” Then Eric Jackson, a hedge fund manager, went public with a sum-of-the-parts valuation that caught everyone’s attention on Wall Street. At the time, Yahoo had a market value of $33 billion, but that figure, he argued, owed largely to its stake in Alibaba—which the company is now spinning off in a $40 billion transaction. Jackson argued that if you subtracted that position, the entirety of Yahoo’s core business, all its Web products and content sites had a market valuation of negative $4 billion. A company could theoretically buy Yahoo, sell off its Asian assets and absorb its business units free. Disaffected shareholders took notice. Jackson’s sobering calculation seemed to be underscored when Alibaba went public on September 19, 2014. Alibaba’s stock soared, but Yahoo’s dropped, suggesting that Yahoo’s core
Has Marissa Mayer Saved Yahoo?
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By J.P. Donlon
was sure that they wanted their project to become a business. Then, it became a $128 billion company in five years. When Mayer joined Yahoo in July 2012, her timing couldn’t have been better. She came just as Yahoo’s stock price started climbing due to the company’s investment in a booming Chinese start-up called Alibaba. Investors piled in with little care for how well Yahoo’s core business was performing. It was a huge advantage for Mayer. Unlike most turnarounds she had air cover until the IPO of Alibaba, when investors would be forced to view Yahoo’s core business on its own. As Carlson catalogues in his book,
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Q
business was worth less than zero. Last September, Starboard Value Capital CEO Jeffrey Smith took a heavy position in Yahoo, urging management to split the company and merge with AOL. Mayer’s recently announced plan to spin off its Alibaba stake and split the company into an investment holding company and an operating company would appear to give restless investors what they want. However, it isn’t clear that Alibaba would be happy with the spin-off that would create a parallel shadow market of its shares—suggesting the Chinese ecommerce company would prefer to buy it back. Chief Executive asked EVA Dimensions CEO Bennett Stewart to score the company in terms of its EVA/MVA (economic value add/market value add) since July 17, 2012 when Mayer took over as CEO. “Yahoo appears to have squandered the Alibaba value by selling too many shares at the IPO, by subjecting the proceeds to corporate tax and by retaining half the proceeds for investments in which the market has no confidence. The core business is struggling,” Stewart says. “Bottom line, Yahoo is worth more dead than alive.” BY THE BOOK The biggest Can Marissa Mayer criticism Mayer has deliver on her promises? faced is that she didn’t take advantage of the Alibaba air cover by preparing a breakout growth strategy for the core business. For her part, Marissa Mayer likes to remind people that it took Steve Jobs five years to come up with the iPod after his return as CEO of Apple. True enough, but does she have Jobs’ creativity, or better still, will the market give her five years (two and half remaining) to pull something off? Chief Executive’s J.P. Donlon recently spoke with author Carlson about Mayer and her prospects.
➼
:
Given her recent announcement about splitting the company, can Marissa Mayer save Yahoo, assuming it is savable?
Nicholas Carlson: Yes, she can, but it’s still going to be extremely challenging, because now all the scrutiny will be focused on her activities to grow the core business. My book covered the period of time when she had air cover from the Alibaba holdings. Now it’s all on her. She needs to get revenue growing again and deliver on her original promise of turning Yahoo into a growth stock again. This will be a difficult challenge. This will require coming up with one or more products or apps where the company can sell ads against them. This will mean coming up with a compelling story. She hinted at this in a recent earnings call where she talked about targeting “mavens”—active mobile and social media users who she says would give the company 23 percent per quarter growth. If she can do this, then yes, she can save Yahoo in the short term. You write that Yahoo solved a problem that lasted only for a moment—that is, making the Internet easier to use. Apple, with its iPhone and Google, with Android, now occupies this space. So, where can Yahoo fit in, or does it need to place its bets elsewhere? In its early days, when Jeff Mallett was president and COO, his vision was that Yahoo was to be a consumer-friendly interface for the Internet. It's amazing to think that at one point we thought one company could be the interface for the Internet. This made sense for a brief moment. It’s one reason why Yahoo became a $128 billion company. But this was before Google, eBay and Apple’s iPhone, which changed everything.
When Mayer got to Yahoo, she spent weeks examining what Yahoo could do—this is why she was hired. She came up with a plan to take Yahoo back to the future—help ride the transition to mobile, so to speak, to provide tools and products that made the mobile web easy and fun to use in the same way that Yahoo originally made the Internet easy to use. The only problem was that a lot of other people are already doing that and doing that pretty well. Is Yahoo the right company to come up with the next great app? Usually those come from small venture-backed startups. The rank and file at Yahoo respected Mayer’s intelligence and even took pride in her early days as CEO. But after awhile, they began to resent her Quarterly Performance Review (QPR) employee ranking system, which you say hurt company productivity. Yet her QPR system isn’t all that different from similar rank-and-yank systems at GE or P&G. There were senior people inside Yahoo saying [that] the company was getting lazy, fat and slow. Before she got there, it took 18 months to launch a new version of Yahoo email. After she got there, they were doing it in three months. When she came on board, she promised the board that she would cut costs and improve Yahoo’s talent. But for whatever reasons, she did not want to do massive layoffs, and a lot of people think that that was a big mistake. She could have done that really quickly, reset the company, hired up from there and taken advantage of the air cover from Alibaba to relaunch the business.
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CEO WATCH
Instead, she opted for this system, where instead of firing a lot of people at once, she forced managers to put their teams on a curve. No matter how well-performing a team might be, someone on that team was going to have to be in the lower buckets. If one didn’t end up in the top two buckets, it limited one’s ability to get promoted or transfer to a new group. The result was a widespread drop in morale inside the company. It reached a point where about a year in, employees became fed up with the system. I open the book with a scene in November of 2013 where the employees are gathered for a company meeting in the cafeteria. They want to ask her hard questions, submitted anonymously through Yahoo’s internal Internet system. For example, they want to know if Mayer herself is ranking her own executive reports this way, and will these people face being phased out, as well? Instead of answering these questions right away, Mayer sat on stage and read from her favorite children’s’ book, Bobbie Had a Nickel. It was a very odd moment for lots of people in the company. It wasn’t clear what she was trying to say by reading this book. People didn’t get it. Bobbie gets a nickel and he can buy things; or in the end, he goes and spends it on a merry-go-round and has a wonderful experience. She was trying to say that she values experiences above all else in life and that her experience at Yahoo so far had been wonderful. People were saying, “This isn’t about you. Why aren’t you answering our concerns?” Maybe she isn’t the quickest to reflect on some of her decisions and consider that she may have misjudged the situation.
Most CEOs would admit that not all [of] their hires work out, but Mayer’s hiring of Googler Henrique De Castro as COO and his subsequent firing after 14 months at a parting cost of $109 million must be a particularly expensive mistake even by Silicon Valley standards. It was a doozy. While reporting for the book I learned that De Castro asked Mayer, and Mayer asked the board, not to vet De Castro because it would be bad for his career if it didn’t work out. Board directors, who went along with this, later regretted not vetting him more thoroughly. This underscores a greater shortcoming Mayer had when it came to hiring senior executives on her team. Mayer quickly became a global business celebrity. She could easily have used that celebrity power to identify people who she thought were the best in the world and recruit them to join her at Yahoo. Instead, what happened is that people tended to identify Yahoo as a place where they wanted to go, and they approached Mayer directly. These are glitzy people, from Katie Couric to Kathy Savitt, who was hired as a CMO, to Henrique De Castro, to others. Perhaps being an introvert it wasn’t natural for her to leverage herself the same way a Sheryl Sandberg would have. And yet she can get up on stage and really broadcast effectively to people in large groups. It’s interacting with people on a one-on-one basis where her shyness is evident. By contrast, when you meet Sheryl Sandberg, [COO of Facebook], she bores into you with her personality. It’s like meeting the Secretary of State of a large nation. She’s like Bill Clinton. Tim Armstrong, [Chairman and CEO] at AOL, is the same way. But Marissa Mayer is not like that and I find that
What Mayer needs to do is just be forthright AND TELL EVERYONE WHAT’S COMING.” 16
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fascinating. Mark Zuckerberg, Facebook’s CEO, is naturally quiet, but he’s learned to be a bit more extroverted like a politician. [Google’s CEO], Larry Page, is not like that at all, but he’s never even pretended otherwise; he hired people to do it for him. What are the lessons for board directors? The big lesson for boards of directors is being realistic about what your company is and where it is in its lifecycle. At the time Mayer was hired, Yahoo was past the stage where it should have been trying to be a growth company anymore. A less risky, more optimization-oriented approach may have been better. Take what you have, get the most you can out of it and tell shareholders that’s what you’re going to do for them. Unless you are Steve Jobs, it’s very hard to become a young company again. But I even wonder if the ghost of Steve Jobs could have done a better job than Mayer’s done. It’s such a challenge. What are the lessons for CEOs— not just big CEOs, CEOs at all levels? There are two. Mayer was hired by activist investor Dan Loeb and board director Michael Wolf, both of whom wanted her to make the company into a Facebook, a Google or a fast-growing Internet highflier again. Within a year, however, both of those people were off the board, and she found herself reporting to a new board. What really matters is who you work for now, who your shareholders are. Mayer quickly realized that shareholders wanted something different from her than what Loeb and Wolf wanted from her. The people who hire you aren’t always the ones who turn out to be your real bosses. The other lesson from her experience is to be as clear as possible about what your plan is. So, at this point, many shareholders want her to split the company. They want to limit her ability to acquire big companies and merge them into Yahoo. What Mayer needs to do is to just be forthright and tell everyone what’s coming; and if investors don’t agree, they can sell out. Investors like clarity.
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CHIEF CONCERN
The CEO and Power Are the two a dynamic duo or an odd couple? By Thomas J. Saporito
POWER IS A WORD that is often spoken synonymously with the office of CEO—for better or for worse. By dictionary definition, power is “the ability to act or produce an effect.” Simple enough. Yet, when it comes to how power plays out in leadership positions, understanding the dynamics can mean the difference between leading effectively and falling flat. Here are four forces that stand out: 1. Overestimating the power of the office. As we all know, things don’t just happen when you say so. It is humbling to realize that we aren’t as powerful as we think, that the office of CEO itself does not create a rod of power. To get things done, a leader needs levers—an aligned team that owns and collectively drives the agenda. Also critical are key champions throughout the organization who will support the plan. Creating these levers out of the gate can help set up a leader for success. 2. Underestimating the power of the office. While leaders can overestimate their power to drive change, they can also underestimate their power when it comes to communication. When a CEO says something, people tend to hear it at higher decibel levels than what may have been intended—making it even more crucial to choose words and actions carefully. On the flip side, this can make the
case for the CEO who finds his power with a more reflective approach rather than risking saying too much too soon. I see Apple’s Tim Cook displaying this type of leadership. Commenting on Cook’s reflective leadership style in The New York Times article, “Tim Cook: Making Apple his Own,” Jonathan Ive, Apple’s head of design says that Cook projects “quiet consideration.” Cook digests things carefully, with time, which “testifies to the fact [that] he knows it’s important,” says Ive. 3. Understanding how power influences communication. Just as CEOs may underestimate the “volume” of their words or actions, it’s also true that what is said to a leader can be skewed by the position itself. Examples include telling the CEO what he or she wants to hear or assuming that the CEO must know all since he or she has ascended to the top post. Communication to the CEO may also be motivated by fear or conversely, driven by the person’s own agenda. Leaders must sort through what people tell them and why, and then develop trusted resources on their team who
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have a pulse on the organization and can provide perspective. This dynamic can also create another paradox for CEOs: when you most need honest communication and feedback, you are least likely to receive it. And yet, the office requires, in fact, depends upon, authentic dialogue in order to be effective. It can indeed be lonely at the top. This is why it’s so critical to create and nurture a framework in which open conversation is possible. Without this capability, a CEO lacks what he or she desperately needs to lead effectively. 4. Distinguishing between power over and power through. How a CEO uses his or her power has a significant impact on how quickly and effectively he or she produces results. Depending on how it’s used, power can either shut down or accelerate change. On one hand, power over people limits, stifles and stumps initiative. On the other, power through people liberates, invigorates and inspires creativity. The latter is more conducive to enacting change. Like so many things, the dynamics of power and the CEO are at the same time complex and simple. The savvy CEO knows that understanding and leveraging these nuances can go a long way toward being effective at the top. DR. THOMAS J. SAPORITO is chairman and
CEO of the consulting firm RHR International. This article is part of a series on leadership.
RISK INDEX
Privacy/Data Security Remains the No. 1 Personal Risk Concerning CEOs Due to their high profiles, CEOs face heightened risk from credit card and other personal data and privacy breaches. PRIVACY/DATA SECURITY: HIGHEST RISK, LOWEST COMFORT LEVEL
15% MORE CEOS CHOSE PRIVACY/ DATA AS NO. 1 CONCERN
CEOs felt most comfortable with their ability to protect themselves and their families from physical damage and natural disasters, rating their comfort level 7.6 out of 10, compared with 7.3 for liability threats (such as lawsuits) and 6.9 for physical threats to themselves and their families. CEOs rated their comfort with being able to mitigate geopolitical/terrorism risk at 5.9. They were least comfortable with their ability to protect themselves and their families from privacy/security threats, rating their comfort level 5.5 out of 10.
The majority of CEOs responding to the latest “personal risk” survey stated that privacy/data security is their No. 1 risk, rating it 6.6 out of 10. Fifteen percent more CEOs chose this as their chief risk today than did three months ago. Liability threats and geopolitical/terrorism were the next most important concerns (rated 4.3 and 4.2 out of 10, respectively). CEOs expressed the least amount of concern for physical threats (home invasion, kidnapping, etc.) and from risk of physical damage caused by natural disasters, rating them 3.6 and 3.4, respectively. The survey is conducted by Chief Executive, in partnership with PURE Insurance.
CEOs’ Top 5 Personal Risks and Their Level of Comfort With Their Ability to Mitigate Those Risks HIGH
Comfortable with Level of Protection From Privacy/Data Security Threats
Consider Issue a High Risk
UP 8.7%
57.3%
Comfortable with Level of Protection
Liability Threats
66.0%
Physical Physical Security/Family Damage Security and Natural Disasters
UP 18.3%
36.7% 55.0%
LOW
Consider Privacy/ Data Security a High Risk
Today
HIGH
CEOs’ Attitudes About Privacy/Data Security 3 Months Ago
Privacy/ Data
Geo-Political/ Terrorism
LOW
Risk to personal data is a matter of the measured risk versus the cost in dollars, time, inconvenience. Not all data should be evaluated at the same risk level. Tailor your mitigation to the risk.” CEOS TAKE CYBERSECURITY PRECAUTIONS
The majority of CEO respondents take some type of precaution to protect themselves and their families from privacy/data security risk, with “updating security software on computers” (76 percent) the most popular measure taken. Next came “keeping passwords secure and varying them by site,” followed by “having sophisticated passwords” (71.9 percent).
Actions CEOs Take to Protect Their Personal Data Have updated security software on all my family's computers
YES 76.0%
Keep my passwords secure and vary them by site
YES 75.2%
Have sophisticated account passwords
Have insurance coverage for these specific risks
YES 71.9%
YES 57.9%
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/
Utilize an active monitoring service
YES 40.8%
CHIEFEXECUTIVE.NET
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MID-MARKET REPORT
SNAPSHOT
Mid-Market Companies Gain Ground
68
UP 14%
Performance, job growth and economic confidence all improved in the final quarter of 2014.
NEW PRODUCTS &
SERVICES
PERCENTAGE OF COMPANIES THAT WILL EXPAND IN 2015
FIRMS REPORTING POSITIVE REVENUE GROWTH IN 2014
WHAT MOST COMPANIES ARE LIKELY TO INVEST IN
More Firms to Make Capital Investments
MID-MARKET COMPANIES CAPPED OFF A YEAR OF SOLID GROWTH WITH
The number of mid-market leaders who plan to make capital investments has increased for the first time since 4Q 2012.
A STRONG FOURTH QUARTER. Seven-
ty-three percent of firms reported positive revenue growth as compared with 2013, when just 59 percent saw positive growth, according to The Middle Market Indicator, a quarterly business performance and economic outlook survey by the National Center for the Middle Market. Companies were also optimistic about the year to come, with nearly three-quarters expecting revenue increases in 2015, up 10 percent from Q3 2014. Improved prospects brought a corresponding bump in the number of companies planning to make capital expenditures, which rose significantly for the first time since the fourth quarter of 2012. In Q4 2014, more than two-thirds (68 percent) of mid-market leaders reported that they would invest in expansion during 2015. Specifically, 24 percent of firms plan to add a new plant or facility, half intend to introduce a new product or service and 43 percent hope to expand domestically.
ADDITIONAL INVESTMENT ALLOCATION 2% OTHER
HR (TRAINING & DEVELOPMENT) HR (MORE PERSONNEL)
HOLD IT FOR CASH
7% 20%
7%
CAPITAL EXPENDITURES (FACILITIES) 10% 12%
HOLD IT FOR INVESTING
12%
ACQUISITIONS 15% 15%
INFORMATION TECHNOLOGY CAPITAL EXPENDITURES (PLANT OR EQUIPMENT)
Source: National Center for the Middle Market at Ohio State University
Employment Growth Strong and Continuing to Grow
Revenue Growth Over Past 12 Months
Mid-Market Leaders’ Economic Confidence
Mean total year-over-year employment growth jumped to 5 percent, doubling since Q4 2013.
The mid-market sector’s revenue growth significantly outpaced that of the S&P.
Building confidence in local and national economies does not extend to the global economy. 4Q 2013
PAST 12 MONTHS
NEXT 12 MONTHS
7.2%
5.0%
57%
4.0%
65%
NOW
73%
76%
81%
53%
4.9%
3.0% 2.0% 1.0% 3Q '14
4Q '13
4Q '14
20 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015
MID-MARKET COMPANIES
S&P 500
GLOBAL ECONOMY
NATIONAL ECONOMY
LOCAL ECONOMY
IT TAKES EXPERTISE TO STAY AHEAD. To succeed today, you need industry expertise and transformative advice to drive your business forward. Find out what CohnReznick thinks at CohnReznick.com. Forward Thinking Creates Results.
Joe Torre 2014 National Baseball Hall of Fame Inductee
cohnreznick.com CohnReznick is an independent member of Nexia International
025D-CR-14_CEO Magazine.indd 1
9/12/14 11:40 AM
MAKING TECHNOLOGY WORK
Corralling Runaway IT Projects By Tom Pettibone INFORMATION TECHNOLOGY project failures cost companies millions in new technology expenses, manual workarounds, additional customer service and reputational damage. What’s more, failure rates are high. The Standish Group’s latest report reviewed 3,555 technology projects with labor costs of $10 million or more and found that a whopping 41 percent were complete failures (abandoned or started anew). Some 52 percent were assessed as “challenged”—way over budget, behind schedule or failing to meet user expectations. The bottom line? Only 7 percent could be considered successful. A look at three IT undertakings that went massively wrong offers some insights into what CEOs and companies can do to spot runaway projects early and take steps to get them back on track.
McDonald’s Fails to “Innovate” In 2002, McDonald’s pulled the plug on its five-year $1 billion “Innovate” project and wrote off $170 million. Conceived two years earlier, the project intended to allow corporate management to see inventory and sales figures at any of 30,000 stores at any time. It would give them an instantaneous birds-eye view of the entire system—from crew-member scheduling to cooking oil quality and temperature. Management claimed the decision stemmed the need to reduce capital spending for the decision. However, the issue was likely sheer size, a plan to replace virtually every major back-office system. Plus, it was technically unrealistic to attempt to connect 30,000 stores in real-time—many in locations where little or no broadband connectivity existed.
Avon’s Broken “Promise” In late 2013, after four years of devel-
opment, Avon Products cancelled the “Promise” project, writing off $125 million in the process. Using a new SAP back-end system and a tablet-enabled e-commerce front-end ”Promise” intended to allow sales agents to showcase products on tablets, immediately check inventory and place orders online. When piloted in Canada, basic functions, such as logging-in, saving orders and checking inventory did not work. “Promise” performed so poorly that many commission sales agents left the company, prompting management to cancel the entire project.
FoxMeyer Fails at ERP FoxMeyer Drug went from profitability to bankruptcy in one year and was eventually sold to archrival McKesson for $80 million. Many blame its demise on problems with an ambitious $100 million ERP system the company installed. Implementation required extensive SAP modifications and caused real-time integration issues with software from different vendors. When the launch failed, orders were incorrect, some shipping twice and some never shipping at all. There was no fallback plan; management had “bet the company” and lost.
Lessons from Failure CEOs can avoid debacles like these by being wary of: PROJECTS DRIVEN BY IT The project should be steered by a business executive singularly responsible for its success and ROI. Both McDonald’s and FoxMeyer’s business executives seemed detached from the project details. THE LESSON Do not start projects if users don’t have the time or interest to participate. MEGA-PROJECTS McDonald’s $1 billion “Innovate” was so huge, complex and technically unrealistic that failure was nearly inevitable. THE LESSON Projects transforming several busi-
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ness units simultaneously should be broken into smaller chunks so that problems are contained. BIG-BANG PROMISES If nothing will be implemented until “the end,” you are cruising for a disappointment. THE LESSON Break the project into smaller chunks—with tangible mid-project deliverables every 30-60 days—that management can see and touch. LACK OF EXECUTIVE SUPPORT If you or your executive committee is lukewarm about the project, its success will be challenged. THE LESSON Top management must be “sold” and on board to fully support projects. EXCESSIVE OVERTIME The quickest and easiest fix for troubled projects is overtime, which often goes unnoticed. THE LESSON A spike in project overtime is a red flag. LACK OF METRICS Cost and person-hour budget overruns suggest project slippage. THE LESSON Use metrics granular enough to provide monthly budget variances. MISSED MILESTONES Missed milestones are another red flag. THE LESSON Milestones must be clearly defined and weeks apart, rather than months or quarters. SCOPE CHANGES Delaying or canceling features and functions signals issues. THE LESSON If you hear “we removed that function to make this milestone,” dig further. TOM PETTIBONE is the managing partner of
Transition Partners.
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12/1/14 11:28 AM
SIGNPOSTS
Jeffrey Sonnenfeld
New CEO Steve Easterbrook may be a superb choice, having led a triumphant turnaround as a brand steward.
WHEN DON THOMPSON stepped down as CEO of McDonald’s, the company did not cloak the transition in innuendo by waxing on about the character of this beloved, loyal, experienced official. The simple truth was evident: McDonald’s was losing ground and the board was not confident in his ability to fix things. How refreshing that the decision was not concealed by corporate speak, nor was an outside activist’s involvement required. McDonald’s stock price had languished while that of direct competitor Burger King’s was strong and the stocks of new entrants like Shake Shack, Five Guys, Burgers and Fries, In-N-Out Burger and Smashburger soared. In fact, 12 hours after Thompson stepped down Danny Meyer, founder of 14 year-old Shake Shack, fired up his burger chain on the New York Stock exchange with a $1.7 billion value, doubling its IPO price of the day. Meanwhile, in a January 23 earnings report, McDonald’s reported its first dip in same store sales in 12 years and the fifth straight quarter of dropping sales revenues. Plus, profits in the last quarter of 2014 had plummeted by 20 percent compared with the same quarter a year prior. The causes of McDonald’s decline are many, including poor food quality (Consumer Reports recently cited its burgers as the worst in the nation), contaminated processing plants; uneven price positioning and supply-chain problems. Following the culture of notoriously humble CEOs, Thompson did not effectively get out in front of these troubles with an inspiring, new brand image and systemic overhauls. Having invested in great bench strength, McDonald’s was able to turn to a trusted official ready to take control. It’s a path the company has been down seven times in a
dozen years, thanks to similar performance slips by an earlier CEO, the unexpected death of two previous CEOs and unplanned exits of two leading succession candidates. New CEO Steve Easterbrook may be a superb choice, having led a triumphant turnaround as a brand steward and past, top operating executive in Europe. He also engineered the very successful introduction of genuine, organic healthy foods in the core menu, as well as championed modern, attractive store designs and promising digital strategies. Wouldn’t it be great if other firms that made missteps could be this forthright in responding to faults ? In the past two years, we’ve seen disruptive, CEO-succession surprises at GM, Walmart and Oracle presented as business as usual, as well as politically motivated abrupt transitions at Pfizer and Citigroup that were shrouded by misleading rumors about CEO performance. Apple’s investor relations people tried for months to reassure people that Steve Jobs was fine, even as its CEO fought for his life. By contrast, current Ford CEO Mark Fields launched “The Road Ahead” campaign in 2008, where he and executive chairman Bill Ford showed footage of closed Ford plants and devastated towns, admitting that management mistakes were partly to blame. In 2001, Anne Mulcahy, rescued the once-troubled Xerox in part by building trust through candor in acknowledging problems to employee groups. As she put it, “The most uncomfortable feeling, actually, would have been for them to hear something that did not ring true regarding the seriousness of the issues.” Sure, McDonald’s has made missteps. However, they should be saluted for addressing the problems objectively, fairly and directly—with contingency plans.
JEFFREY SONNENFELD is senior associate dean for leadership studies; Lester Crown professor of
leadership practice, Yale School of Management; president of the Yale Chief Executive Leadership Institute, and author of The Hero’s Farewell and Firing Back. 24 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015
I LLU ST R AT I O N BY T I M TO M K I N S O N
How Big Mac Reacts to Attack: Recovering from Missteps By Jeffrey Sonnenfeld
ready for the next big bend in the road? 4
Algorithms 4 Structural Uncertainty 4The Internet of Things
“ Coping with structural uncertainty and radical shifts in business models means executives need the insight to see around corners and the courage to move beyond boundaries. Ram Charan shows what it takes to go on the attack.” — D o m i n i c B a r to n,
Global Managing Director of McKinsey & Company
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COVER STORY
Andrew Liveris’s
Dow Chemical’s CEO has a message for fellow U.S. manufac and partner with others in training and developing the
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ANDREW LIVERIS, 60, has run Dow Chemical, a very large and complex $57 billion company, for more than a decade. It has 201 sites in 36 countries, with six operating divisions making petrochemicals, specialty chemicals and agricultural chemicals. Dow is a company in transition. Two generations ago, Dow had the capital and the R&D to invent products entirely on its own. Products like Saran Wrap, Styrofoam, Ziploc bags and Scrubbing Bubbles were all Dow from start to finish but have been long since sold-off. Today, it’s working on things like self-healing materials and printable batteries. Barron’s Andrew Bary said that “Dow 26 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015
Chemical could be one of the industry’s best growth stories.” The company, which boasts a market cap of $60 billion, has an underappreciated asset base that includes a large petrochemical division that benefits from low domestic costs for natural gas and related liquids. Liveris began implementing a program of divestitures of lower-return operations. Although its shares were up 20 percent in 2014 and over 50 percent from 18 months ago, the company has been under pressure to improve its performance since activist investor Third Point Capital, led by Daniel Loeb, revealed a stake in January of 2014. Resisting Loeb’s criticism
Winning Formula
turers: Rethink your role in the evolving global supply chains workforce you will need for the future. By J.P. Donlon that Dow needs to be broken up in order to realize value, Liveris, nonetheless, has stepped up his program to sell businesses worth between $4.5 billion and $6 billion by the end of 2015. (Liveris also agreed to add two directors chosen by Third Point to Dow’s board.) The Darwin, Australia-born Liveris is a well-established senior CEO statesman and is a familiar figure in the corridors of power in Washington. He is a co-chair of President Obama’s advanced manufacturing partnership and a director of IBM. He was chairman of the U.S. Business Council until he was succeeded by Jeff Bezos at
the end of last year. He is also a big fan of the periodic table of the elements in “that chemistry’s an enabler for human life.” He adds, “chemistry is a personal passion but it is also a wonder. It enables us to sustain 7 billion people on this fragile planet, and it will go to 9 billion. How have we done that? Chemistry provides a solution, whether it’s clean water, affordable medicines, affordable housing—all this comes from chemistry.” Following are excerpts of Liveris’ conversation with Chief Executive Editor-in-Chief J.P. Donlon at the CEO2CEO Summit on restoring American competitiveness. MARCH/APRIL 2015
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Q COVER STORY
:
After you and fellow members of the Business Roundtable recently met with the President, you said you sensed a change in tone since the elections. What exactly is different?
ANDREW LIVERIS: A one-liner I got from another CEO is that “You’ve got to go to Washington because if you’re not at the table, you’re likely on the menu.” Without sounding naïve, I do think there is an opportunity here. We met with John Boehner, Mitch McConnell, the new Senate leader and the President. They were saying much the same thing. Given that this is the President’s last two years, this is his chance to put a stamp on the American economy, which he hasn’t done, really. For their part, the Republicans clearly understand that now that they control Congress and have a presidential run to think about in 2016, they’ve got to show that they can govern. Each side has different motives, but the result may be good for America because we all agree that America must continue to grow the economy. Relatively speaking, ours is the best-performing economy in the world; but we’re still underperforming, given our historic growth rate. Weeks earlier, I was with the President in China and had a private conversation with him there. I think he’s serious about working with the other side. It’s going to be a skill set that he hasn’t shown, but
I am optimistic [that] we might get something done in this Congress. What one thing do you most hope for? Corporate tax reform or something else? Let’s start with the word “certainty.” We all need some degree of certainty in order to plan our businesses. So how does one get certainty in Washington? For starters, we look for more fiscal responsibility and stability, including entitlement reform and government reform, such as some degree of Bowles-Simpson. Maybe all this is unlikely, but we all violently agree with corporate tax reform. The OECD average today is 25 percent. We’re now one of the highest tax jurisdictions in the world. Twenty years ago, we were one of the lowest, but everyone else has zoomed past us. The current tax code is a leaking sieve, to say the least, so if we can plug those loopholes, stay revenue neutral [and] work the S-corporation rate, that will be a great landing spot. Not too long ago, serious people dismissed talk of a manufacturing revolution in the U.S., saying that the sector was headed for extinction;
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40,000 factories shut down between 2000 and 2010, and 5.5 million manufacturing jobs were lost. You’ve said that thanks to entrepreneurs in the natural gas world—the shale-gale phenomenon—manufacturing has revived, and so it has. But what do manufacturing leaders really need to do to make sure this development can be sustained and that it’s not just a will-o’the-wisp? Entrepreneurial action and its ability to pivot, according to the world we face, is one of America’s greatest attributes. Manufacturers, for far too long, did not really display agility when global competition disrupted supply chains. We are in a different world. We’re traveling at the speed of flight. We are so connected to the information age without realizing that we’re still at the dawn of it. The smarter companies have figured out their place in the global supply chain and have adjusted their service and product models accordingly. For example, of the top 20 chemical companies in the world in 1990, 17 of them disappeared by 2010. Dow is one of the survivors because we were able to pivot on a global scale, which is no easy thing. It’s not for the lighthearted.
You have to bet your company, whether it’s small, medium or large, against these global forces. Who has replaced some of these American and European enterprises in the top 20? State-owned enterprises. They have a very different model. Their model is simple—employ people. Jobs are the quintessential issue of our time. As they emerge and globally compete, they don’t use EVA analysis or ROC; they get subsidized capital, subsidized labor, subsidized energy— subsidized everything—because jobs are the greater good. In our industry, we stopped innovating, if you think of innovation as the quintessential aspect of manufacturing in all of its forms, whether it’s making a smart phone or making a chemical product. So, if they’re commoditizing faster than you innovate, they will run over you. Manufacturing today means you’ve got to innovate faster than they commoditize you. This should be an American advantage because we run the intersections of research, universities, start-ups, finance and supply chains of small, medium and large scale better than anyone. Manufacturing now employs 12 million people in this country— almost one million more than it did in 2010. The energy tailwind, shale-gale, has been an enabler, an American entrepreneurial action. We’re in the fourth wave of investment in value and in energy—it’s terrific. In the chemical industry alone, and Dow’s part of this—$130 billion of value-add facilities will create 1 million new jobs in the next five years, and this means
another three-to-five million in the supply chain. The biggest issue we have is training a new skilled workforce to deploy against that value add, and for me, that is the key topic in manufacturing today. We need technically trained people at the German skill level, in automation, robotics and fine-precision manufacturing. This is the world that we’re in today and we’ve got to adjust to it, and frankly that’s what I spend my time on. Considering that there are easily 4.7 million manufacturing jobs going unfilled, what steps should companies take to deal with the skills gap? Create your own supply chains. We have these sites you talk about. A third of them are in the U.S., some of them [are] very large locations. We hub and speak to the community colleges. We work with them on curricula changing, if necessary, to suit the requirement for the modern worker. I use community colleges
because that’s where most of the deficit is, in the trades. It’s in the highly skilled operator of complex chemistry. There’s such a shortage of skilled people, especially in the U.S. Gulf Coast for example, that companies are poaching each other Talk about wage inflation—go to the U.S. Gulf Coast, Houston and Louisiana. So we do our own training. At the President’s Advanced Manufacturing Partnership (AMP), which I co-chair, this was one of the three topics that received attention at the national level. Big companies are involved with AMP, but we will help small companies get into the mix. We’re going to hub-and-spoke this across the country to put in place national training centers where small companies can participate. Through this (concept) we can convince high school kids, and even middle school kids—that the trades are noble professions. Not everyone should be a double Ph.D. in economics. In fact, there’s not much demand for that, except maybe here at the New York Stock Exchange.
✱
WASHING WATER Global Water Technology Center in Tarragona, Spain
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TEXAS TECH Dow’s chlor-alkali facility in Freeport
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In 2013, Booz and Company, now Strategy&, conducted a study of R&D spending and found no discernible link between the amount of spending and financial performance of the spender. How do you measure outcomes against your R&D? And what advice would you give to CEOs for doing a better job at managing the relationship between R&D and outcomes? It seems like you’re spending a lot of time inside our boardroom, J.P., because it is an incredibly difficult thing to achieve. I personally have spent a lot of time with some of the best innovators in the country and in the world. What I learned is that no one has the definitive answer. The common denominator, of course, is always the people quality. Google provides open areas for rollerblading and cafeterias with free food. At Dow, we’ve replenished our facilities around the world, creating similar environments to encourage interaction and spontaneity. In our industry, we’ve got to re-discover creativity. Call it serendipitous research if you like. This is why we find partnerships very
Manufacturing today means you’ve got to innovate faster than they commoditize you.” useful. We made a big decision five years ago to cull down the number of universities we work with in terms of research partnerships. We found we were trying to be everything to everyone and it was not satisfactory. We culled it down to 15 in this country but went deep with all of them. By deep, I mean a quarter of $1 billion for five years. We also helped them rebuild their research engine because many of their chemical-engineering facilities are not very good. Out of this change, we generated a whole new, lightweightmaterials platform. We’ve introduced smart coatings. These are coatings that can literally absorb emissions in a room like this. For example, if the paint used on these walls were “smart” paint, it could absorb harmful emissions in the room
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so you wouldn’t have to breathe it. The next generation of smart coatings will reduce viruses transmitted in the air. Imagine this [technology] applied in hospitals of the future. These research collaborations are generating patents through the roof, but that’s not how we measure it. It’s the percent of margin that comes from new product. This is an investment headwind very few companies can bear. We spend $1.8 billion a year, $200 million of that in serendipitous or creative areas. Then, we grab business ownership. Once it gets through that first part of the pipeline, individual businesses have to sponsor it. So our business operates like a hub of startups. They have to make the case to us why that research is of value to them, but they don’t have to pay for it.
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MANUFACTURING REVIVAL
“GIGAFACTORY” RIPPLES Was wooing TESLA worth the huge incentives Nevada made to close the deal—and what, exactly, does that deal mean for the rest of the states vying for business? By Dale Buss
IT MAY BE DECADES before the world knows whether Tesla and its battery-powered cars comprised a game-changing industrial revolution or more of a pipedream, and if Nevada gave away too much of its economic future to obtain the company’s batterymaking “gigafactory.” However, Tesla’s decision to build a five-million-squarefoot mega-operation near the airport 25 miles east of Reno already has roiled economic-development expectations across the country and reset the arc of American manufacturing. Nevadans are giddy as they watch Tesla move the earth around a 1,000-acre plot in the desert. They’re understandably keen on the economic prospects of thousands of people working at Tesla at promised average wages of around $25 an hour. They’re also hoping for positive economic knock-on effects that they expect to
grow over the decades as the plant turns out up to 500,000 battery packs a year. The amount would be more lithium-ion batteries for electric cars than will be made by the rest of the world combined. For his part, Tesla co-founder and CEO Elon Musk likes the location for several reasons. It’s close to the company’s assembly plant and major customer base in California. It’s near the nation’s only known deposits of lithium. Plus, he got a fantastic deal. Nevada threw open the doors to the state treasury to promise Tesla an astounding incentive package worth $1.3 billion, ranked as the tenth-largest such lure ever used by any state. The final sweetener seemed to be Nevada’s promise to move heaven—as well as earth—to clear any regulatory obstacles. “The gigafactory will mean nearly
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$100 billion in economic impact over the next 20 years,” Governor Brian Sandoval said after a two-day special session of the state legislature in September essentially handed Musk the keys to a Nevada economy that had been wheezing along on gambling, mining and tourism for way too long. At the signing ceremony, Sandoval added, “Isn’t this a great day for Nevada? This is as big as it gets.” But lots of questions remain about a deal that is supposed to grow the Nevada economy by 80 percent during the next few decades. Some question whether Nevada can possibly supply all the skilled labor necessary. Some worry about the coming stresses on Reno-area infrastructure that won’t be met because the necessary public funds have been incentivized away. Others bemoan the inflationary effects on construction costs and operations
for other companies that may want to follow Tesla there as suppliers or retailers that want to tap into a population that is sure to burgeon beyond its current 225,000. Actually, many are saying that Nevada got fleeced. “No matter how you slice it, the deal makes utterly no sense,” says Richard Florida, director of the Martin Prosperity Institute and professor of business and creativity at the Rotman School of Management, University of Toronto. “It is just one more example of a government giveaway for a factory that would have been built anyway.”
Gambling on Growth Even beyond this critique lies the prospect for the ultimate disaster: After Nevada gave away the farm to Tesla, will the world really need all those batteries that are supposed to be streaming out of the gigafactory several years from now? Following a half-century of technological development and almost as many years of promotion by environmentalists, government policymakers and progressive politicians, the market for electrified vehicles (EVs) remains extremely anemic overall. Sandoval and other Nevada government officials placed a huge bet on the technological, economic and social vision of Musk. But is what the industrialist sees ahead clairvoyance—or illusion? “The reality is that there are numerous big gambles occurring here,”
TESLA TECH The new factory will make batteries for vehicles assembled in neighboring California
says Brett Smith, an analyst for the Center of Automotive Research in Ann Arbor, Michigan. “Realistically, the EV is not ready for prime time. The highvolume, battery-powered vehicle is a long way off despite the success of the [Tesla] Model S. For the most part, it isn’t a viable alternative right now.” One thing is for sure: There’s no turning back for Nevada. It beat out four other states—Arizona, New Mexico, Texas and California—to land the Tesla plant after Musk promised it would put the state at the forefront of a new era of manufacturing. Nevada’s desire eclipsed even strong public pushes by Governors Brown and Perry of California and Texas, respectively, to add Tesla to the many economic jewels already on their state belts.
Tesla’s exact commitment is $5 billion in investment in the first four years and then another $5 billion in equipment purchases from 2019 to 2028, plus an attempt to generate “up to” 6,500 jobs eventually. In exchange, Nevada doled out $1.1 billion in sales tax plus real and personal-property tax abatements. It has no individual or corporate income tax—meaning that Tesla essentially will operate tax-free in Nevada for at least a decade. The state threw in $195 million in transferable tax credits that Tesla can sell to other businesses. Musk also wrangled a discounted electricity price even though he claims the factory will generate all of its own power from renewables, meaning that Tesla will be able to tap into the state’s power
Key Takeaways 1 All About Location For Tesla, strong incentives and proximity to California were a draw
2 Growth Gamble Nevada is betting on Tesla’s success—and on burgeoning EV battery demand
3
4 State of the States States are upping the ante on winning site selection wars
Hurdles Ahead The company will need to build an EV market to deliver on its profit potential
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grid, buy electricity at a discount and then sell its self-generated power for a premium. The sheer and mostly successful audacity of Tesla’s demands already promises to up the ante the next time another company wants a big greenfield site, a fairly regular occurrence amid the continuing renaissance in domestic manufacturing. Jaguar Land Rover, for example, has indicated it now plans to set up a U.S. factory to better compete with the many other luxury brands that make cars in America. “This deal, where you’re not going to pay state taxes for an extended period of time, has usually only been on the table in highly economically distressed areas,” says Larry Gigerich, managing director of Ginovus, an Indianapolis-based economicdevelopment consulting firm. “Now we’ll see companies say to states, ‘Give us a tax-free period like Tesla got.’” Questions also lurk about exactly how much the gigafactory can expect to expand the Nevada industrial economy. Clearly, as Musk has noted, the diamond-shaped complex will become a tourist attraction. It will spark surrounding hotels and restaurants, set off a boom in house construction in Reno and fuel local service businesses to support the rising Tesla workforce. But no matter how large, the complex isn’t likely to
tr
NEVADA’S GAINS
$100 BILLION ECONOMIC IMPACT OVER THE NEXT 20 YEARS
6,500 NEW JOBS GENERATED
$5 BILLION EQUIPMENT PURCHASES FROM 2019 TO 2028
serve as the platform for concentric circles of new supplier factories in the area because a battery plant is much more self-contained than an auto-assembly operation, which forms the hub of an extensive supply chain, Florida noted. Moreover, early in his hyping of the gigafactory, Musk talked about it as the home for a research facility
THE “IT” CAR Tesla’s making headlines for its $70,000+ Model S, which appeals to celebrities
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as well as a manufacturing plant. However, the likelihood is that most of Tesla’s technological development will still occur at its headquarters in Palo Alto, California, smack in the middle of Silicon Valley, while Tesla’s final assembly plant remains nearby in Fremont, California. Tesla actually broke ground at the Reno site in July and began shoving around some dirt, with Musk explaining that he was still keeping his options open on a final site decision. That claim strained credulity in many. But the hoopla around the gigafactory was largely a matter of trusting the credibility of the South Africanborn entrepreneur. He could drive a hard bargain because of what his accomplishments and because, with Steve Jobs gone, no other industrialist or technologist could spin future scenarios quite like Elon Musk. Indeed, Musk’s record for building businesses on brand-new ideas is almost unparalleled in modern times. A native South African who emigrated to the U.S. from Canada as a college student, Musk co-founded PayPal more than a decade ago. Since then, he also established SpaceX, a company that was nearing planned flights of space tourists in 2015 before other companies’ fatal accidents in late 2014 seemed to set back the notion of the privatization of space. Musk also owns the largest-capitalization solar-energy business. There’s also Tesla. Musk’s EV startup launched the $70,000-and-up, all-electric Model S and the car became the “it” thing for celebrities and the wealthy, outlasted other EV startups and began changing the equation for existing car companies. The Model S became the highest-rated car ever by Consumer Reports and spooked the German luxury-car brands into crash programs to launch their own electric vehicles after initially they had demonstrated indifference about the technology. It helped that Musk kept
painting pictures of a rosy future for EVs and aggressively defended his car and his company against every skeptic, from Wall Street to the news media.
Energizing EVs Now with the gigafactory it is building along with Panasonic, Tesla is bidding to dominate what Musk sees as a certain burgeoning of global demand for lithium-ion batteries that power the new generation of plug-in hybrids and all-electric vehicles. He has said that bringing the costs of these batteries down by 30 percent would be crucial to fielding EVs at mainstream prices that are necessary for popularizing the technology. Tesla itself plans a “Model III” sedan in 2017 with a 200-mile range and a starting price around $35,000. The obstacles remain daunting. The company itself still hasn’t recorded an annual profit based on standard accounting principles. “Tesla is throwing around big numbers, and I’m sure that something of a large magnitude is going to occur there,” says Scott Kupperman, founder of Kupperman Location Solutions, based in Lake Forest, Illinois. “But I’m not sure it will pan out the way they say it will. It’s an industry with a lot of volatility and a product [version] that hasn’t been made before.” And Musk still has to overcome what is essentially an aversion to EVs held by most Americans who aren’t wealthy or trendy enough to afford a Model S, which can easily be outfitted to demand a price of $70,000 or more. Tesla’s U.S. sales have actually leveled off lately as Tesla diverts resources to new markets, such as China. Plunging gasoline prices and continual improvements in the fuel efficiency of internal-combustion engines keep pushing general-market demand for electrified vehicles out at least several more years. GM and others now plan to compete with the Tesla Model III with their own new, mainstream-
CALIFORNIA DREAMING? TESLA CHOSE to site its battery factory in Nevada, but its selection process also may have changed the economic-development calculus for another state: California. There could be big advantages for Nevada in landing the gigafactory beyond the factory itself. “It gives Nevada a chance to talk about manufacturing where they didn’t have that before,” said Ginovus’ Gigerich. “And in Reno they can say that they will be able to support industrial production in close proximity to California but not have to do the production there.” Already in the wake of Tesla’s announcement in September, Nevada has “had a pickup of interest in the state” by other manufacturers and is counting on Tesla’s and Panasonic’s bringing at least some suppliers with them to Nevada, said Steve Hill, executive director of the governor’s office of economic development. At the press conference, Tesla CEO Elon Musk “called Nevada the ‘get-it-done state,’ and that’s about as good as any marketing campaign we could hope to have had.” California also may benefit from being in the derby for the gigafactory even though it didn’t win. Companies from around the world saw Musk invite California as a late entry and observed the state’s trying to knock down some inherent obstacles in its economic-development structure—
such as the extraordinary length of time required for some environmental permits. In the end, the California legislature didn’t convene the special session necessary to hammer out an incentive package acceptable both to Tesla and the politicians, even though Tesla is headquartered and makes its cars in the state. The hullaballoo over adding California to Tesla’s “considered” list also raised the profile of a significant new effort by the state—rated for several years running at No. 50 in the Chief Executive ranking—to make itself more attractive to native and outside businesses. Gov. Jerry Brown launched a “California Competes” initiative that sunsetted some existing tax incentives under an enterprise-zone program and instead provided an estimated $180 million through June 2015 in tax credits to businesses either threatening to leave California or interested in moving there. The idea was to target funds to high-impact projects or risk potential losses of employers. “I do think California, where it chooses, now can play a bit more in pursuing business under California Competes,” Gigerich said. “But still, at the end of the day, when you line up all the tax and regulatory factors, I don’t see more companies making that decision for the state unless it has to have a California address in its name.”
DESERT DISCOUNT Tesla claims renewables will supply the factory’s energy
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priced EVs Meanwhile, Toyota has abandoned its recent cooperation with Tesla on an EV and instead is betting big on hydrogen fuel cells as the alternative fuel of the future. “Reducing costs by 30 percent, as Musk claims the factory will do, isn’t alone going to open up EVs to that vast majority of the auto market who still want gasoline-powered cars,” says Smith of the Center for Automotive Research. “And the factory isn’t going to be at that efficiency level when it opens its doors because it won’t be at anywhere near capacity for a long time.” Indeed, ultimately, Musk may have to count only on social, cultural and regulatory pressures—generated by alarm over climate change and his ability to get people to believe in his vision of the future—in order to create “demand” for his all-electric cars in a marketplace where they couldn’t survive on their own. But in the here and now, Reno-ites are scrambling to take advantage of their godsend. Law firms and CPAs are sniffing for new space around town, as well as manufacturers, and land costs are rising. “It was just like a rocket took off when rumors started swirling about Tesla,” says Brian Armon, managing partner of the Cushman & Wakefield commercial real-estate office in Reno. “Animal spirits are strong right now.”
The Icing on the Cake— A Deal to Deal Direct IN WRAPPING UP the deal with to locate a giant EV-battery factory near Reno, CEO Elon Musk gained one last, very important concession: a measure making it legal for Tesla to sell directly to Nevada residents without having to go through a traditional dealer of the type that all existing automakers use. For Musk, it was critical. Many aspects of Tesla’s business model differ from those of the U.S. auto industry, including an investor base that remains enthused despite the lack of profits, allowing competitors open access to certain older elements of the company’s IP and a CEO who picks nasty fights with journalists. However, one difference near and dear to Musk’s heart is his desire to forge a direct path to consumers. Musk believes that his cars are marketed, sold and serviced far more effectively in a one-on-one relationship with the customer. So from coast to coast, Tesla has been tangling with politicians, state officials and auto-dealer associations to get its way. “It was important to Tesla, and part of it is because there’s some market in Nevada for their vehicles,” says Steve Hill, executive director of the Nevada governor’s office for economic development. “Tesla also wanted to use [the agreement] as a
DIRECT DEALER Tesla CEO Elon Musk won the right to bypass dealerships and sell directly to consumers in Nevada
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template for their efforts in other states.” Every state has different laws protecting the automotive-franchise system, so essentially Musk must fight 50 different battles on this front. Participants in this struggle suggested that a potential template has emerged in Ohio and Texas, where dealership interests agreed that the state could grandfather existing Tesla stores, but that no other Tesla outlets could open unless they are actual dealerships. Auto dealers aren’t happy that, in addition to fighting for his preferred business model, Musk also has been denigrating the traditional dealership-franchise model that has been a bedrock feature of the U.S. auto industry for many decades. Musk wasn’t the first to attack the dealership system as adding unnecessary costs and layers to automotive retailing. Several years ago the industry’s old-guard automakers, led by GM and Ford, tried mightily to diminish the dealer role in a number of experiments—all of which eventually fizzled. Dealer interests maintain that the franchise system is the best way to retail cars in America because intra- and inter-brand competition among local dealerships helps keep prices low. As independent business owners with skin in the game, dealers are said to work more effectively as a protective buffer between manufacturer and consumer than would salaried middle managers for the automakers. Also, their enterprises contribute hugely to local economies. That latter is why auto dealers also are especially influential with state legislators. “We don’t take a position on specific state legislation, but we believe the dealer model is pro-consumer and should be strengthened whenever possible,” says Jonathan Collegio, vice president of public affairs for the National Automobile Dealers Association.
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MANUFACTURING TECHNOLOGY
IS NO LONGER THE “NEXT BIG THING” …IT’S HERE Are you ready for the additivemanufacturing revolution? By William J. Holstein 40 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015
BUSY CEOS MAY BE forgiven for trying to tune out the noise and hype that technology suppliers try to generate. Remember the Y2K craze? But every once in a while, a technology reaches what Andy Grove, the first hire and ultimately chief executive of Intel, called the “strategic inflection point.” The technology’s cost falls dramatically and its performance rises equally dramatically. Grove was referring, of course, to semiconductors. But today, the same phrase applies to an entirely different field—Three-dimensional (3D) Manufacturing, also called Additive Manufacturing because parts and
Key
Takeaways
products are built one layer at a time by printers. The evidence can be glimpsed at Pratt & Whitney, which has Sophistication been developing 3D manufacturing Surge techniques for 25 years. In a room 3D—or additive— at its headquarters in East Hartford, manufacturing is Connecticut, four big machines almost moving beyond the soundlessly print out 600 plastic parts making of prototypes a year—to be used as prototypes or for onto the actual tooling and support for other metal production floor parts. But now, the company says it is ready for the first time to place dozens of 3D-manufactured titanium and nickel parts on its PurePower geared turbofan jet engines. Engines with Moving Down additively manufactured parts have the Cost Curve been flight-tested and will power Air3D manufacturing bus and Bombardier aircraft entering is growing less passenger service in the second half expensive even of 2015. The parts include fuel-bypass as performance manifolds, mounts, fittings, brackets, improves oil nozzles and airfoils. The strides that Pratt, a unit of United Technologies, and GE’s engine unit are making are attracting wide Liberating Design attention because jet engines are 3D frees designers among the most precise and powerful from limits of tradimachines in the world, and they are tional techniques subject to incredible heat and stress. “It’s like when IBM started in the personal computer business in the 1980s— the engine-makers have embraced who suffer head injuries. Likewise, in the new technology and given it the dental field, Align Technology, a legitimacy,” says Howard Kuhn, a 3D $660 million-a-year company, uses expert and Distinguished Collabora3D manufacturing to offer customtor Award winner at America Makes, ers largely invisible plastic spacers also known as the National Additive customized to each individual’s set of Manufacturing Innovation Institute, teeth. In other dental settings, patients based in Youngstown, Ohio. can watch an implantable tooth be Aerospace isn’t the only sector printed before their eyes. demonstrating the power of 3D In short, 3D manufacturing is manufacturing. However, in other breaking out of the prototype stage, industries, small- to medium-sized where it has lingered for many businesses often lead the way. In the years, to full-fledged manufacturing. medical field, Oxford Performance Wohlers Associates, a top consultancy Materials, a $10 million-a-year comin the field, says 34.7 percent of the pany, uses 3D manufacturing to make global market for additive manupieces of the human cranium out of a facturing is now devoted to making high-performance plastic and custom- parts for final products, as opposed izes them to fit the heads of patients to prototyping, molding and various
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types of tooling. That’s up from just 4 percent in 2003. Using 3D to make production parts passed the $1 billion mark globally in 2013 and about 38 percent of that activity was in the U.S. “We are seeing companies push the limits of additive manufacturing to new levels and apply the technology in entirely new ways,” says Terry Wohlers, president of Wohlers, based in Fort Collins, Colorado. The reasons that 3D is suddenly catching on are many and varied. The costs of printing machines have dropped, and the machines are more automated and efficient. Also, scientists and engineers have made progress in understanding how various metals, plastics and composite materials can be made from powders and then bonded with lasers and other tools. Designers are recognizing that they can develop parts and not worry about whether the parts can be manufactured through traditional techniques, which is allowing them to craft parts that are dramatically different in appearance. Furthermore, companies are realizing they don’t need long manufacturing runs for specialized spare parts, as in military uses, because parts can be made on an as-needed basis. A 3D printer has even been sent to the International Space Station so that astronauts and scientists can print replacement parts rather than having them blasted up from earth. This change has come about so fast that many CEOs of small- and medium-sized industrial companies now find themselves at a loss. “If you’re a CEO of a small or midsized company and you are not seriously investigating and investing in 3D printing and additive manufacturing, chances are you are placing your company in a significant, competitive disadvantage,” says Avi Reichental, chief executive of 3D Systems in Rock Hill, South Carolina. “You will be disrupted by
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How to JumpStart Your 3D Efforts
3D IN ACTION The 3D-manufactured version of this Pratt & Whitney part is sleeker, more refined and requires less material.
THEN
TAKE A PERSONAL INTEREST in 3D
NOW other companies that compete with you because they will have these capabilities.” Of course, Reichtental has good reason to be a 3D evangelist. His company, which expects $650 million in sales in 2014, is one of the largest suppliers of additive parts and machines, along with such players as Stratasys and ExOne. His arguments that SME’s should take steps to get into the 3D game are compelling. He points out that SME companies that lack the resources and scale of the aerospace giants can catch up rapidly. “The good news for smaller companies is that they don’t have to start where Pratt & Whitney started,” says Reichental. “Smaller companies can instantly stand on the shoulders of the Pratts that have been refining the knowledge for a quarter of a century. That should be their starting point. In the age of ubiquitous information and connectivity, nobody has to start from scratch.” How can SME CEOs shortcut the learning process? The first step, experts agree, is for a leader to show personal interest in additive manufacturing by attending trade shows, visiting potential vendors, seeking out university or government programs—
like America Makes—and tapping the expertise of consultants who may educate him or her. The process has to start at the top because the executives in any company who manage the manufacturing process are inherently conservative. They understand existing processes and existing equipment, and they know how to make all of it perform to acceptable levels of quality. However, they generally do not want to rock the boat. Reichental says a CEO should identify an internal champion within the company to lead the push toward 3D manufacturing. One set of possible internal allies are designers, who understand that 3D manufacturing will allow them to innovate parts in dramatically new ways. They no longer have to worry that a part is not “manufacturable” with traditional casting or forging techniques. With 3D, they can design sleeker parts and products that can be dramatically more effective, often at the same or lower cost. But Scott Defelice, CEO of Oxford Performance Materials, based in South Windsor, Connecticut, says that finding an internal champion may be difficult. The people in charge of manufacturing will not want to devote
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technologies that might be relevant to your business. Tap consultants, go to trade shows, visit potential suppliers and in general, demonstrate to your organization that you’re serious. Learn enough to challenge other executives and get them out of their zones of comfort. TO GET “BUY IN,”
seek internal champions to help push 3D and give them time and resources to explore the new technologies. IF INTERNAL CHAMPIONS are
not available, consider consultants, university programs and government programs like America Works or the Ohio Third Frontier program to introduce new ideas into the company and convince internal constituencies that 3D can be transformative. This is called “open innovation.” DON’T TAKE SUDDEN PLUNGES and buy big
pieces of 3D equipment. Start by buying additively made parts and simple machines to speed your company’s learning curve. BUILD UP THE SKILL SETS of your key
employees, such as engineers and machine operators, by encouraging them to take courses at community colleges or other entities that offer 3D training.
SIAS813-ManateeMan-CEG-m.indd 1
2/4/14 4:49 PM
MANUFACTURING TECHNOLOGY
Smaller companies saw the potential for the 3D technology and have converted it into a manufacturing platform. —EMORY WRIGHT, V. P. of Operations, Align Technology
the time and energy to study a new, disruptive technology, he warns. “The guys who are making the plant run are probably not going to be your internal innovators. But if the CEO just takes the word of his internal guys and they don’t go down the [3D] path and five years down the road they find themselves losing market share, that’s a substantial strategic mess.” Ultimately, most experts seem to agree, a CEO will need to introduce outsiders, such as consultants, suppliers, university experts and other players, into a company’s 3D deliberations. The fancy term for that is “open innovation.” “We would advise the CEOs of SMEs to look outside their own four walls for experts and solutions to help them achieve their goals in the 3D printing market,” says Paul Musille, an associate program manager at NineSigma, a Cleveland-based innovation advisor. “This can accelerate the R&D process and speed the time to market.” Once a CEO gets the company solidly focused on 3D, it does not sensible to make any wild leaps. “It’s just like anything that’s new,” says consultant Wohlers. “It requires some tender, loving care. If you don’t give it the attention it deserves, you can buy the wrong equipment or go down the wrong path.” Because there are so many different
types of industries and so many different 3D techniques, there is no one sacred path for a CEO to take. Therefore, it makes sense to set targets for the company and to embrace experimentation. The experts suggest buying some parts from a 3D supplier and buying a few inexpensive 3D printers to start developing a knowledge base. Getting the right set of skills on board is another key factor—and may require some strategic hiring and firing. “CEOs have to find the right people to take the technology and leverage it,” says Emory Wright, vice president of operations at Align Technology. “They need to make sure that [they] fit very well together.” CEOs who get the formula right can transform their businesses or create entirely new ones. That’s what Align, based in San Jose, California, has done. It built its business on the back of 3D techniques, reaching the $660 million sales level in its most recent fiscal year. Its products, which it calls aligners, are pieces of clear plastic that a patient wears in the mouth to move teeth into better positions. Over time, as a patient’s teeth shift, he or she gets new aligners that continue the gradual shifting process, perhaps more than a dozen times. The company uses technology similar to computer-aided design (CAD) to take pictures of a patient’s
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mouth, but then it uses an additive manufacturing technique called stereolithography to create molds that are exact replicas of the patient’s teeth. A piece of plastic is thermoformed over the mold, becoming the aligner, and the mold is then thrown away. But the company would not be able to get the accuracy it needs without the step involving 3D. “Everything we make is different,” says Wright. “When you are making something different every time, additive manufacturing is now a technology that can do that.” Because Align built its business on the basis of 3D technologies over the past 15 years, it did not have to overcome internal resistance. It’s an example of how small and mid-sized companies, which are not hemmed in by large capital investments that big companies make in plant and equipment, can move faster and disrupt their competitors. “For a company like GE to make a change in its manufacturing methods, from the traditional to the 3D world, is a big investment, not only in technology but also in people and cultural change,” explains Wright. “But smaller companies saw the potential for the technology like we did and have converted it into a manufacturing platform.” That’s the ultimate payoff for going up the 3D learning curve.
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ECONOMIC DEVELOPMENT
REGIONAL REPORT
The Northeast
In The Northeast, the Recession isn’t over yet. By Warren Strugatch
RECOVERY? Not in the Northeast.
The Northeast lags the nation in postrecession recovery. Real GDP increased just 1 percent in 2013, the last full year for which data is available. As a whole, that year the nation grew 1.8 percent. Slow job gains have frustrated efforts to bolster economic growth despite such positive signs as falling unemployment and rising personal income. The news isn’t all dour. “There is quite a bit going on in the Northeast,” states a report from Wells Fargo Securities’ Economics Group, which hails job growth in New York City and Boston. Strong gains have been made in technology in these cities and elsewhere. At the same time, traditional employment strongholds as publishing, legal services and financial services have faltered. New jobs created in such fields as home health care, hospitality
and retail have bolstered employment metrics but hampered income growth; many are low-paying McJobs. Mapped out by state GDP growth, the region’s overall performance is visibly lame. Despite those gains in New York and Boston, the Mid-Atlantic states show the slowest real GDP growth of any region in the nation. Delaware, whose revenue-forecasting practices during the slow recovery are raising corporate eyebrows, paced the limping pack with 1.1 percent GDP growth. The District of Columbia actually slipped, posting .5 percent negative growth. New England fared slightly better. Vermont led its neighbors with a 1.9 GDP growth. Maine and Connecticut, bringing up the rear, share a .9 percent expansion pace. The numbers for 2014, when they arrive, should be better. Nationally,
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the economy expanded in the second half of 2014 at its fastest rate in more than a decade. Hopefully, some of that progress will shine a warmer light on the Northeast. Meanwhile, economicdevelopment advocates in the region cheer each positive news announcement with maximum enthusiasm, hoping the bottom has at last been reached—and that the only way out is up.
DELAWARE
#23
Plagued by Unemployment
DELAWARE’S BEEN ADDING jobs, but unemployment is still rising. The reason might be the long-term drop in labor force participation. Delaware enjoyed stronger job growth than its neighbors in recent years, but
two-thirds of the new positions are part-time or short term. While Delaware led the region in GDP growth in 2013, business leaders worry that the state’s gimmicky revenue projection models will eventually lead to shortfalls. Meanwhile, forecasts show fall-offs in professional and business job growth midway through 2015. DuPont’s decision to exit Wilmington for a new headquarters in the burbs rattled business leaders without seriously affecting the job rate. Corporate recruitment and retention efforts are small but potentially attractive. “I think Delaware is underrated,” says Dan Breen, relocation advisor and executive VP at Jones Lang LaSalle in Parsippany, New Jersey. “Their incentives are better than people think—for the right projects.” Education is a divisive topic: nearly 40 percent of students have “choiced out,” leaving public schools depleted and underfunded. Increasingly,
relocating executives put their kids in private schools—or buy homes across the border in Pennsylvania. “An executive considering relocating here better take a hard look at the public schools,” says Bob Byrd, a partner with Wolf Block Public Strategies Delaware. The Tax Foundation ranks Delaware’s state and local tax burden 15th highest out of 50 states and ranks it 13th in business tax climate. Delaware spends over $43 million a year on incentive programs.
NEW HAMPSHIRE
#24
On a Slow Growth Track
THE GRANITE STATE is still below
pre-recession job levels. Jobs are returning—s-l-o-w-l-y, but two-thirds of the new jobs pay below-average wages. Manufacturing, traditionally the state’s breadwinner, is declining, but it still
dominates the labor market. After five straight years of diminishing job totals, the sector is expected to start adding jobs this year, albeit at a barely-there .4 percent rate. Dennis Delay, economist at the New Hampshire Center for Public Policy Studies, says the state struggles with declining rates of in-migration and an aging work force. This year through 2020, he projects 2.5 percent real economic growth, while the annual job growth will remain under 2 percent. Most new jobs will be in professional and business services, followed by hospitality, leisure services, education and healthcare. Government efforts to promote the state to employers and/or to foster job creation have come under criticism; last year, a state audit deemed over half the state’s tax credits issued were awarded erroneously or without documentation; expect incentives to be awarded more cautiously now. The Tax Foundation
How The States Stack Up Rank Best/Worst GDP Per Top Corporate GDP States 20141 Rank 20132 Capita 2013 ($)2 Tax Rate (%)3
Right to Work4
Education Quality of Jobs Quality (K-12)/ HQ Green State Service5 Incentives5 Incentives5 Incentives6 Post-Secondary5
Delaware
23
42
54,871
8.7
No
B
B+
A-
B
B/A
New Hampshire
24
40
38,119
8.5
No
A
C
B-
B
B+ / B+
Maine
36
44
42,121
8.93
No
B+
C
C+
B
B+/ B
Vermont
39
51
43,015
8.5
No
A-
C-
C-
A
A- / B
Rhode Island
40
51
45.381
9
No
B-
C+
C
B
B- / A-
Maryland
41
15
40,057
8.25
No
B-
B
B-
A
B+ / B+
Pennsylvania
42
6
43,935
9.99
No
B+
C+
B-
B
B+ / A
Connecticut
44
24
45,012
9
No
A-
B+
C+
B
A- / A
Massachusetts
46
12
39,133
8
No
B
C
C
A
C/A
New Jersey
47
7
46,925
9
No
B
A
A
B
B / B+
New York
49
3
38,921
7.1
No
B
B+
B+
B
B/A
District of Columbia
x
35
45,832
9.975
No
C+
C+
C+
A
C- / A
Sources: 1 Chief Executive Best & Worst States for Business 2 Bureau of Economic Analysis 3 Tax Foundation 4 National Right to Work Committee/National Right to Work Legal Defense Committee 5 Dan Breen, Jones Lang LaSalle; Dennis Donovan, WDG Consulting; Andrew Shapiro, Biggins Lacy Shapiro & Co; Joseph Lacy, Biggins Lacy Shapiro & Co; Andrew Mace, Cushman & Wakefield 6 DSIRE Database of State Incentives for Renewable Energy
MARCH/APRIL 2015
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ECONOMIC DEVELOPMENT
WHY WE’RE HERE / NEW YORK WHO Phil Grucci, CEO of Fireworks by Grucci WHAT Pyrotechnics company WHERE Long Island, NY SITE HISTORY Fireworks by Grucci was originally founded in 1850 in Bari, Italy by Angelo Lanzetta. Lanzetta and his family immigrated to U.S. in 1870 and set up in Elmont, Long Island. After a brief relocation to Miami, his descendants returned to Long Island in 1929 and built a munitions factory in Bellport. The factory was leveled by a 1983 explosion that killed three family members. In 2013, the company purchased a 20,000-square-foot office building in Bellport for under $3 million. They manufacture fireworks in a leased factory on a military compound in Radford, Virginia. WHY NEW YORK “About 65 percent of our market is in the New York tristate area. Access to the city’s marketing and public relations channels is invaluable.” BOTTOM LINE “It’s the community. My family lives here. Many aunts, uncles and cousins live here. Many of our employees live here. We couldn’t find this talent in other communities.”
ranked New Hampshire’s state and local tax burden 43rd highest out of 50 states and ranked it 8th in business tax climate. New Hampshire spends over $39 million in incentive programs.
MAINE
#36
Coming Out of the Woods?
WHEN PRIDE MANUFACTURING of Burnham announced it was bringing Lincoln Logs manufacturing from China to Maine, state business advocates cheered long and hard. The deal, however, hardly reversed the state’s persistent manufacturing decline. Once accounting for one in every three Maine jobs, factory work now represents 1 in 12—and most are in shrinking industries. Heavily reliant on forest products, Maine has struggled for years to bolster declining wood and paper product sales. The Pine Tree State’s aging population and relative lack of inbound migration stunt workforce growth. New governor Paul LePage came into office promising to cut income taxes; critics worry he’ll raise sales taxes to cover the difference. Charles Cogan, a professor at the
University of Southern Maine’s Muskie School of Public Service, and a former state economist, says economic growth picked up in 2014. He sees signs of renewed hiring this year in professional and business services, education, health care and tourism. “I think 2015 will be a fairly solid year for job gains in Maine,” he told the Bangor Daily News. “I think we will be most of the way back in 2015.” The Tax Foundation ranks Maine’s state and local tax burden 14th highest out of 50 states and ranks it 29th in business tax climate. Maine spends over $504 million a year in incentive programs.
VERMONT
#39
No Jobs Problem Here
VERMONT’S UNEMPLOYMENT RATE is
among the lowest in the nation, and “Help Wanted” signs are popping up. Vermont Economy Newsletter projects 6,000 new jobs this year, but the state’s population is falling and younger workers aren’t moving in. Vermont faces a $100 million shortfall this fiscal year and employers worry the state will impose a payroll
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tax. “The payroll tax has been scuttled, at least for now,” says William Driscoll, vice president of the Associated Industries of Vermont, a manufacturers’ trade group. Driscoll’s association and other trade groups continue to press for tax reform and energy-rate restructuring. The closing last winter of the Vermont Yankee power plant left a sour taste among manufacturers. “This was a big missed opportunity” to lower rates, Driscoll said. The Tax Foundation ranks Vermont’s state and local tax burden 9th highest out of 50 states, and the state came in at No. 45 in business tax climate. Vermont spends more than $407 million a year on incentive programs.
RHODE ISLAND
#40
Lacking Leadership
THE RHODE ISLAND ECONOMY is
healthier now than it was at this time last year, but the Ocean State continues to face “significant uncertainties and challenges,” according to the New England Economic Partnership. While unemployment continues to drop, Rhode Island’s current level remains third-highest in the country. Along with New Hampshire, it is one of two Northeastern states still below preRecession employment levels. The state suffers from slow growth in key industries, including manufacturing, construction, information, financial services, trade, transportation and utilities. Older and less-educated workers are marginalized in the state’s largely stagnant economy. Leadership has been problematic. Rhode Island “has been disserved by successive government administrations,” asserts site selector Dennis Donovan, a partner at WDG Consulting in Bridgewater, New Jersey. “Taxes are too high, the regulatory burden is too high and it’s too bureaucratic.”
Last fall, voters sent state treasurer Gina Raimondo to the governor’s mansion after she succeeded in cleaning up her state’s pension-system mess. Having campaigned on promises to reignite a sputtering economy, the 43-year-old new governor will now be held to it by business leaders. “She is talented, educated and smart,” says Dennis Roberts, a lawyer, ex-attorney general, and son of a former governor. “I have faith in her.” The Tax Foundation ranked Rhode Island’s state and local tax burden 8th highest out of 50 states and ranked it 46th in business-tax climate. Rhode Island spends over $356 million a year on incentive programs.
MARYLAND
#41
Lukewarm on Business
AS A CANDIDATE FOR GOVERNOR,
Maryland’s Larry Hogan campaigned on a pro-business platform, promising to “get the government off our backs and out of our pockets, so we can grow the private sector, put people back to work and turn our economy around.” During the race, he called for better state corporate recruitment and job-creation programs and promised an overhaul of the Department of Business and Economic Development if elected. Expect Maryland’s business leaders to press him to make good on his promises—and perhaps reverse his opposition to completing the Purple Line, the $2.45 billion light rail project that many consider key to the region’s economic future. Historically, Maryland has not been aggressive with incentives. “I don’t get the sense [that] they are very pro-business,” says Dan Breen. The Tax Foundation ranked Maryland’s state and local tax burden 7th highest out of 50 states, and ranked it 42nd in business-tax climate. Maryland spends at least $554 million a year on incentive programs.
PENNSYLVANIA
#42
Lagging the Nation
WHY WE’RE HERE / PENNSYLVANIA
PENNSYLVANIA’S ECONOMIC RECOVERY continues to lag the national pace. Jim Glassman, head economist at Chase Commercial Banking, sees the Keystone State’s economy as “on the mend” and forecasts a moderate expansion pace for the rest of this year. The Federal Reserve Bank, in regard to Philadelphia’s Survey of Business Conditions, showed most businesses are seeing “an uptick” of activity, leading the Fed to anticipate continuing strengthening throughout 2015. The state’s soft employment market recovered significantly last year, falling below 6 percent for the first time since the Recession. Fall-off in global energy prices continues to hold back the pace of new drilling, but Pennsylvania benefits from past natural gas exploration, and local industries enjoy access to cheap natural gas. Glassman forecasts a 2.8 percent annual growth rate through 2017. Economic development efforts have cut back in recent years; the popular Pennsylvania First program is now unfunded, and replacement programs have not impressed many. Says Dennis Donovan: “People aren’t thinking about Pennsylvania as much, perhaps, as they should.” The Tax Foundation ranks Pennsylvania’s state and local tax burden 10th highest out of 50 states, and ranks it 24th in business tax climate. Pennsylvania spends more than $4.8 billion a year on incentive programs.
CONNECTICUT
#44
Financial Sector Faltering
CONNECTICUT IS DOING OKAY, but it could be doing much better. The Constitution State’s major cluster, the financial
WHO Jason Wolfe, CEO of GiftCards.com WHAT Internet payment transfer company WHERE Pittsburgh, Pennsylvania SITE HISTORY While newly homeless, Wolfe launched an early Internet coupon business in 1995, working at desk space offered by a friend in an apartment used as an informal incubator. Tapping GiftCards.com cash flow, he rented an apartment. Then, in 1999, he moved into a shared office suite in Foster Plaza in Green Tree, a Pittsburgh suburb. In 2000, he expanded into a 5,000 square-foot private office in the same building. After the dot-com bubble burst, Wolfe accepted a North Dakota state economic development incentive offer and relocated to Beulah, North Dakota, setting up inside a converted warehouse. In 2006, he returned to Pittsburgh and purchased his current headquarters, a 5,000-square-foot building inside a former union hall. WHY PENNSYLVANIA “Western Pennsylvania has a lot going for it. I see great opportunity with the Marcellus shale being a big part of the economy. Pittsburgh has a thriving technology sector. Operating costs are low. There is a great work force and people will relocate here.” BOTTOM LINE “My son is here in Pittsburgh. I am divorced and my ex-wife is here. I am going to stay in my son’s life.”
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ECONOMIC DEVELOPMENT
sector, was hammered by the Great Recession. It continues to recover fitfully. A soft housing market has deleveraged many thousands of households and businesses. Forecasters look for the weather to break in 2015, calling for 35,000 new jobs (Moody’s) or a more tempered 25,000 (New England Economic Partnership). Economic stimuli include financial hiring, construction starts and increased orders for the F-35 jet fighter program. However, Wall Street restructuring, Dodd-Frank regulatory restrictions, casino retrenching and a well-educated but chronically tight job market are hampering the state. “Connecticut is seen as having a surplus of workers juxtaposed with a shortage of worker skills,” says Edward Deak, the partnership’s Connecticut forecast manager. “Restraints on the financial-services industry will likely be a challenge for Connecticut,” says Chase forecaster Jim Glassman. “The slow mend in the state’s commercial real estate market is a reflection of the slowly recovering economy.” The state’s generous but complex incentive programs can intimidate; Connecticut “has good programs, but there are so many incentives [that they are] complicated to figure out,” says site
selector Donovan. The Tax Foundation ranks Connecticut’s state and local tax burden 7th highest out of 50 states and 41st in business tax climate. Connecticut spends more than $860 million a year on incentive programs.
MASSACHUSETTS
#46
Job Growth Continues
THE MASSACHUSETTS ECONOMY is in Year 5 of an expansion that began just as the last recession was ending. Job growth in Massachusetts will continue accelerating over the next couple of years before stabilizing in 2018, according to a New England Economic Partnership forecast. While the commonwealth’s technology-driven growth continues to fuel prosperity, its aging work force causes concern. Increasingly, job growth will be in non-manufacturing jobs, particularly education, health services, professional and business services, leisure and hospitality. Business groups like the Boston Chamber of Commerce want to expand charter schools, “close the achievement gap,” and strengthen connections between employers and students. They’re
WHY WE’RE HERE / WASHINGTON, D.C. WHO Antwanye Ford, CEO of Enlightened WHAT IT consulting firm WHERE Washington, D.C. SITE HISTORY Targeting office locations within the capitol’s HUB Zone program, Antwayne Ford opened his IT business in 1,000 leased square feet across the street from the White House in 1999. Four years ago, he moved to the corner of 15th and L, next to The Washington Post building. Enlightened occupies about 8,000 square feet over three floors. WHY WASHINGTON DC “We’re near the center of government, where we need to be. Our clients are largely government agencies. We meet with legislative staffers all the time.” BOTTOM LINE “I grew up in D.C. and went to college here (George Washington University). It’s a big deal to me to go back to the high school I attended and give out scholarships or to go back to GW and recruit interns. When kids find out I’m from D.C., they’re motivated. They don’t see me as foreign to them.”
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also focused on tax-reform proposals, reining in unemployment insurance taxes and reducing health care costs. To bolster global positioning, business leaders call for expanding international connections at Logan Airport and funding improvement to the Port of Boston. Incentives? Massachusetts “feels they have a stranglehold on the pharmaceutical industry and they haven’t done much” spending to welcome relocators, asserts Dan Breen. The Tax Foundation ranks Massachusetts’ state and local tax burden 11th highest out of 50 states and ranks it 25th in business-tax climate. Massachusetts spends more than $2.26 billion a year on incentives.
NEW JERSEY
#47
Moving On Out?
BY MANY ACCOUNTS, the Garden State’s economy is rocking. So why all the wanderlust? Mercedes made headlines this winter when it accepted a $23 million incentive package from Georgia and bid farewell to Montvale. Households have been antsy, too; New Jerseyites led the nation in outmigration in 2014, the fourth time in the last five years that they’ve captured this dubious honor. Behind the exodus are such factors are high costs of doing business: taxes, fees, real estate costs and payroll. Professional services are scaling down. Still, 2015 will be “a positive year,” according to the New Jersey Business & Industry Association. In a survey last fall, 40 percent of companies the NJBIA surveyed said their profits rose in 2014, with 45 percent anticipating higher sales in 2015. Plus, 44 percent of companies spent more in 2014 than in the previous year, a rate they expect to continue this year. Furthermore, 22 percent expect to hire this year, twice the rate of future downsizers. Executives surveyed listed health care benefits and taxes as major con-
cerns, while fretting that government will reach into their pockets to make up budget shortfalls. New Jersey’s economic development programs generally earn glowing reviews. The state “has some of the strongest incentives you’ll see in this country,” says Joe Lacy, managing director of Biggins Lacy Shapiro & Company, based in New York, Princeton and Chicago. Jones Lang LaSalle’s Breen says, “Grow New Jersey has been very well received by the business community.” Others blame application complexity for scaring off aspirants. Infrastructure improvements and more competitive labor costs will please business owners and chiefs, but don’t expect them shortterm. The Tax Foundation ranked New Jersey’s state and local tax burden 2nd highest out of 50 states and ranks it 49th in business tax climate. New Jersey spends more than $675 million per year on incentive programs.
NEW YORK
#49
Bringing In The Bottom
DERIDED FOR STIFLING REGULATIONS,
archaic permitting and bureaucratic logjams, New York ranks behind only California as Chief Executive readers’ worst state in which to do business. (To be fair, most states in the Northeast cluster near the bottom.) Taking aim at widely held perceptions, two-term governor Andrew Cuomo last year slimmed the state’s corporate income tax system and estate tax, pruned some red tape and revamped the state’s economic-development efforts, most noticeably touting “Start-Up New York” with a $160 million marketing budget. His administration’s signature economic-development offensive, the program offers 10-year tax write-offs to execs willing to move onto government-specified campuses of the state university system. Albany claims it’s already created 2,100 new jobs while attracting 40 companies.
NEW YORK MINUTE
Governor Cuomo’s year-end decision to ban fracking, which is legal across the border in Pennsylvania, won him praise from environmentalists but scorn from many business leaders. The verdict is mixed. New York “offers an impressive range of incentives, and it’s an easier sell these days,” says Dennis Donovan, a partner at WDG Consulting, a site-location advisory firm in Bridgewater, New Jersey. Other relocation advisors wonder why their clients now have to go back to college to benefit. Mike Durant, New York State chapter president for the National Federation of Independent Businesses, likes Governor Cuomo’s direction but warns that heavy taxes and regulatory strangleholds remain. “New York has not addressed the major issues affecting its business climate,” he told the Rockland County Times. Case in point: the Scaffold Law, a worker’s compensation liability he says is the country’s most onerous. Governor Cuomo’s year-end decision to ban fracking, which is legal across the border in Pennsylvania, won him praise from environmentalists but scorn from many business leaders. The Tax Foundation ranks New York’s state and local tax burden No. 1 in the nation and ranks it 50th in business tax climate. (Both rankings were determined pre-Cuomo tax cuts.) New York spends over $4 billion a year on incentive programs.
DISTRICT OF COLUMBIA Bouncing Back THE D.C. AREA, one of the nation’s
fastest-growing metropolises, took a
huge hit last year. Washington’s GDP shrunk half a percent, as cuts in federal spending played dominoes on contractors, subcontractors, service companies and household spending. The D.C. metro area, which includes the capitol, nine counties in Virginia, five in Maryland and one in West Virginia, has largely bounced back, and leaders are more intent than ever on reducing dependency on government spending. An influx of foreign, direct investment has capitalized a boom in commercial construction. “We’re not just a company town anymore, with government the company,” says Harry Wingo, president of the D.C. Chamber of Commerce. “Diversification in Washington has been enormous.” D.C.’s appeal as a cultural hub and its quality of life pull in a highly qualified and educated 25- to 34-year-old work force. New Mayor Muriel Bowser is committed to implementing the five-year economic plan inherited from her predecessor, formulated with help from the D.C. Chamber, Georgetown University and other business thought leaders. Red tape, once synonymous with doing business in Washington, is becoming “less of a problem,” says Wingo. The Tax Foundation ranks Washington D.C.’s local tax burden 20th highest out of 50 states and ranks it 44th in business tax climate. D.C. spends over $94 million a year on incentives.
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CYBER SECURITY
What CE the Sony All companies—not just breaches. Fortunately, By Tom Pettibone
A CLOSER LOOK at what happened to Sony suggests
that the nature of the recent cyber breach was more serious than first thought. As the story continues to unfold, we may find out that the North Koreans are not the true hackers. However, regardless of the origin of the perpetrators, it is clear that the incident should serve as a wake-up call for board members and CEOs. In a recent attempt to survey 580 CEOs about security, we received a response rate of less than 1 percent. Today, thanks to the impact of Sony’s cyber attack, we believe that number would be much higher. While Sony’s breach spawned the broadcast of an embarrassing amount of sensitive data, it also shut down the company’s computers and put the company in limbo for several days. Sony tried to continue with manual systems but simply couldn’t keep up. Even worse, it was unable to pay actors, suppliers and employees. Sony had to suspend operations until the company could rebuild the computer systems and networks. Known as “Destover,” this class of malicious software (“malware”) is dangerous because it disrupts computer—and company— operations by first copying data and then erasing the “Master Boot Record,” disabling the computer storage. Similar disruptions occurred
in 2012 at Saudi Aramco, where 30,000 terminals were shut down by the Shamoon virus, and in Iran, where the Stuxnet worm destroyed a thousand centrifuges in 2009. To create further damage, the hackers posted online several unreleased films that undoubtedly cost millions in production expenses. Plus, they exposed thousands of sensitive and embarrassing emails, movie scripts, HR data, salaries, legal reports, passwords and the personal information of hundreds of employees and actors. The Sony experience comes on the heels of a recent breach at JPMorgan. In June 2014, hackers stole an employee’s password and deposited malware on the company’s servers. Over several months, they eluded the company’s sophisticated alarms by extracting a huge amount of data very slowly. While one cannot address all security risks, there are things CEOs
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can do to mitigate the risk of a breach. The answer lies in analyzing all areas of vulnerability and consciously deciding what to protect—and to what degree. Cyberattacks come from hackers who breach company firewalls and security systems, stealing data and/or disabling the computers. Some believe that hackers are stopped by robust firewalls and sophisticated detection software, but that is only a part of the solution. Hackers gain easy access through three pathways—people, processes and systems.
PEOPLE PROBLEMS Most breaches (some say 80 percent) come through the “people route,” employees, subcontractors, suppliers and anyone else who has authorized access. It’s the easiest way. The “people route” includes: 1. Negligence. Many penetrations occur through simple negligence— misplaced or stolen laptops and cellphones or due to leaving passwords in plain sight. A hacker may ask to borrow your phone for
Os Can Learn from Cyber Attack
big, public firms—are vulnerable to security there are measures CEOs can take to mitigate risk.
an “emergency call.” These are by far the easiest and quickest ways hackers penetrate security barriers and insert malware in company systems, creating hidden pathways for instant or later access. It takes only seconds. 2. Disgruntled Employees. A disgruntled employee might simply hand over his passwords or lend the hacker his or her phone for a few minutes. Some believe the Sony hackers had inside help because they said, “Sony doesn’t lock their doors physically, so we worked with other staff with similar interests to get in.” 3. The “Candy Drop.” The hacker provides free CDs or thumb drives to conference attendees. Ostensibly loaded with conference information, they are also infected with malware that the conference attendee unknowingly loads onto his laptop and subsequently onto the company’s computers. Free CDs and thumb drives may also be passed out by third parties in company classrooms, social functions and even company gyms. 4. Phishing. The hacker sends enticing emails with a “click on this offer” invitation. Once opened, the hacker uploads malware to the computers, unbeknownst to the employee. 5. Greed. A cash-strapped employee sells his access information to a hacker.
Employee and supplier awareness sessions and training are mandatory for people to understand the risks, the methods and their obligation and responsibility to protect company assets. They must be told the impact of failing to do so. Constant effort must be made to identify and resolve disgruntled-employee situations. Other people with access (contractors, suppliers, etc.) must be contractually bound to company security.
2. Insufficient physical access controls. Hackers and thieves with ready access to company offices can easily steal equipment containing access codes and passwords. 3. Poor third-party security: • THE CLOUD. There are many stories of private data and photographs downloaded from insecure public and private clouds. Also, unintentional “leakage” of data from one customer to another has been documented. • SYSTEMS DEVELOPMENT, MAINTENANCE, TESTING AND OPERATIONS. Third-party contrac-
PROCESS ISSUES Weak company processes are another major area of vulnerability that hackers frequently exploit. These include: 1. Weak network access controls. While it is recognized that strong network security controls frustrate ease-of-use, weak security controls are easily penetrated and provide ready access to hackers. Restricted access, robust firewalls, segmented and secure networks and applications, and diligent network traffic monitoring are the minimum measures companies should have in place to reduce risk.
tors usually require access to company computers. Plus, sensitive data in the hands of third-party contractors is always a risk. Third-party security controls that are at least as strong as those for employees must be contractually established. A restricted-development environment, as well as additional monitoring, may also be necessary. • INFRASTRUCTURE. Outside infrastructure providers must be governed by strong security controls. • FACILITIES. Third-party contractors who maintain your facilities (building personnel, cleaning people, etc.) must also be governed by strong security controls. 4. Insufficient business-partner access controls. In today’s
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In addition, the actual data theft or disruption may take place days or weeks after the initial penetration and may continue for some time—undetected.” integrated supply chain, business partners are connected electronically and pass forecast-to-order-to-cash data back and forth, over the wire, to company systems. Malware can easily be inserted in these transmissions. Companies must ensure that business partners maintain the same (or stronger) levels of security control and they must continually monitor data inputs. 5. Weak employee onboarding (vetting) and termination processes. Stopping the problem at the door is critical. Personnel with checkered backgrounds must not be allowed access to the computer systems. The access and information possessed by exiting employees must be immediately neutered. 6. Poor personnel training and awareness. Employees, contractors and other personnel must attend frequent awareness and training sessions to be reminded constantly of their risk mitigation obligations, especially new people. All must be advised of new hacking techniques as they emerge. 7. Poor equipment disposal processes. When disposed of, computers and mobile devices must be electronically “wiped clean” of all data, access and security codes. This is especially challenging for BYOD (bring your own devices) environments.
SYSTEMS SAFEGUARDS 1. Weak cyber security: • A HACKING “INDUSTRY” EXISTS— largely offshore with smart hackers and sophisticated computers that continually “ping” thousands of networks, day and night, with random and “continuous-learning” codes to unearth security holes. Called Advanced Persistent Threats (APT), sometimes the loot is used directly by the scanning party, but often it’s sold to other parties with a malicious interest in the victim. The scanners could be individuals or maybe even a nation-state that can afford sophisticated “pinging” equipment and staff. One can reduce the risk of this type of penetration with superior network-monitoring tools and a skilled staff. • ONCE PLANTED, MALWARE MAY GO ACTIVE IMMEDIATELY OR SIT DORMANT UNTIL ACTIVATED. Sophisticated, up-to-date malware-detection software must be constantly run to sniff out the offending code and remove it. To the extent possible, applications should be discrete to contain damage and well-thoughtout procedures must be in place to
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contain damage if and when malware goes active. 2. Vulnerable Web and Customer portals. Hackers exploit security holes in web and customer portals, thereby gaining access to company computers. Robust firewalls, sophisticated network security software, discrete applications and skilled staff are necessary. 3. Insecure mobile and teleworking access. Personnel must use secure Wi-Fi channels when communicating with company computers. Otherwise, hackers can sit nearby and piggyback on unsecure Wi-Fi channels to gain access to the logged-on devices and computers. Often, successful penetrations are the results of not just one but two or more techniques. In addition, the actual data theft or disruption may take place days or weeks after the initial penetration and may continue undetected for some time. At Target, the data on 80 million credit cards was slowly copied over three weeks from production Target computers and staged in Target backup computers. It was subsequently transmitted undetected, in big batches at odd hours to offshore entities from Target’s backup computers. At Sony, the hackers used Sony’s PlayStation servers to distribute their loot. The JPMorgan data theft occurred slowly over three to four months in order to avoid detection. Security breaches are now a way of life and are potentially very damaging. It’s not “if” you’ll get hit but “when” and “how badly.” TOM PETTIBONE the
managing partner of Reston, Virginia-based Transition Partners Co. (www.TPCO.us), an IT management consulting firm specializing in IT assessments, strategy, security, organization, governance, sourcing and turnaround.
The Power of the Network Effect Allow your team to benefit from the experience of peer senior executives with comparable roles and responsibilities at noncompetitive companies. Let your them find solutions in Senior Executive Network (SEN) group sessions designed to explore issues and clarify options and actions steps, including: • Benchmarks for projects and outcomes • Clarifying what’s working (and what’s not) • Developing individual skills, and management methods, learning from shared experience Imagine a more effective and motivated team with enhanced skills and new relationships, focused on driving your bottom line.
We have networks for the following key executives in your company: • Finance • Operations • Marketing • Controllers • Sales • Product Development • Engineering & Technology
Candidates must be nominated and sponsored by their CEO and/or President.
Tap into the Power of the Network Effect >> Visit www.SrExec.com Or call Rob Grabill at: 785-832-0303
CEO2CEO SUMMIT / HIGHLIGHTS
GROWING YOUR BUSINESS IN UNCERTAIN TIMES Part II of takeaways and highlights from the presentations and roundtable discussions at the 2014 CEO2CEO Summit at the New York Stock Exchange. By Jennifer Pellet 56 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015
PHOTOGRAPHS BY BEN HIDER
HOW TO MANAGE VALUE NETWORKS FOR SUPERIOR PERFORMANCE CONCEPT Three panelists offer insights on how CEOs can improve their supply chains JEFF SILVER, CEO, COYOTE LOGISTICS
“To run a supply chain effectively, you need a coordinated leader heading up manufacturing, warehousing, distribution and transportation. If you try to do any one thing without considering the others, you will be in bad shape. “One of our clients called us to complain about our detention charges—which is when you start charging by the hour after a truck sits for two hours waiting to get loaded. He said, ‘This is ridiculous.’ I said, ‘I agree. If we never charge you a penny in detention, that would be wonderful. Let me send an engineer in to look at your process. But you have to promise me that you’ll be able to implement change.’ Because if transportation is getting billed for $1 million for detention, but they can’t turn around and bill production for not getting the trucks loaded, it’s all fruitless. Nothing will change.” ERIK FYRWALD, CEO, UNIVAR
ABOVE: Coyote Logistics’ Jeff Silver, Univar’s Erik Fyrwald, and Rush Trucking’s Andra Rush
➼ FOR ADDITIONAL COVERAGE OF THE CEO2CEO SUMMIT, SEE THE JANUARY/ FEBRUARY 2015 ISSUE OF CHIEF EXECUTIVE
“You can’t be optimal with logistics without strong analytics. Three years ago, we distributed almost $10 million of product with thousands of trucks and individuals’ making decisions about how to dispatch them. You can’t imagine how sub-optimal that was compared to working with computers and algorithms. “Look at how the best-in-class in
your industry handle logistics. We visited FedEx and UPS to look at their processes and what we could learn from them. It’s also important not to be afraid of forging alliances with companies that can help you rather than trying to do it all by yourselves.” ANDRA RUSH, CHAIRMAN, RUSH TRUCKING, DETROIT MANUFACTURING SYSTEMS
“Keep it simple, but streamline is our solution to success. We do our own analytics. When I first started out, we had a business partner from France. They said they were experts at [analytics], but using their system was far too complicated. It was a bit like saying. ‘We want to go from New York City to LaGuardia airport but we want to use a spaceship and so we need to send a rocket scientist in case something goes wrong.’ We had 20,000 backflush errors in three weeks. If you overcomplicate, you can destroy your business overnight.”
Keep it simple... if you overcomplicate, you can destroy your business overnight.” —ANDRA RUSH, RUSH TRUCKING
CEO2CEO SUMMIT / HIGHLIGHTS
LEFT: CE ’s Wayne Cooper, CE ’s J.P. Donlon, L Brands’ Leslie Wexner, CE ’s Marshall Cooper, Cardinal Health’s George Barrett, Columbus Partnership’s Alex Fischer
BEYOND BUSINESS
L Brands CEO Leslie Wexner is just as enthusiastic about philanthropic endeavors as entrepreneurial endeavors—perhaps more so.
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one of the greatest success stories of modern times,” notes Fischer. “What might be less obvious is that if there were an equivalent award for community leadership and philanthropy, or for development, master planning and architecture, he would also be the right choice. His greatest legacy beyond his family—in my opinion, actually greater than his business achievements—is the value structure that he's brought, taught and instilled in our community.” Wexner serves as chairman of the Columbus Partnership, a membership organization he founded in 2002 to foster local economic development and support civic projects. What began as eight CEOs meeting informally has grown to include 52 members who meet regularly to discuss community issues, economic development strategy and civic matters. “We have a motto: ‘We leave our selfish interests at the door and we bring our community interests to the table,’” explains Fischer. “Our member CEOs give back, invest, roll up their sleeves and do good in our community and that all stems from what Les started.”
FOR MORE EVENT HIGHLIGHTS AND OUR COVER STORY ON L BRANDS’ CEO LES WEXNER, SEE THE JANUARY/FEBRUARY 2015 ISSUE OF CHIEF EXECUTIVE.
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ABOVE: XLR-8’s Bob Nardelli, Microsoft’s Barb Edson
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AT DECEMBER’S CEO SUMMIT EVENT, L Brands’ CEO Les Wexner was honored with Chief Executive’s 2015 Lifetime Achievement Award in recognition of his visionary business leadership. Wexner is something of a legend in the retail world, having created and grown a litany of successful retail ventures, including internationally recognized brands like Victoria’s Secret, The Limited, Lane Bryant, Abercrombie & Fitch and Bath & Body Works. Over a career spanning more than 50 years, he forged an $11.4 billion company that today operates 2,942 specialty stores in the U.S., Canada and the UK. But while Wexner’s successful business track record is welldocumented, his considerable philanthropic endeavors are less known, says Columbus Partnership CEO Alex Fischer, who was among those who gathered in New York to participate in the award ceremony. “His business accomplishments—among other things, his creation of a store that has resulted in multiple reinventions and ancillary spinoff enterprises—alone make him
For information about Chief Executive’s Smart Manufacturing Summit, visit SmartManufacturing Summit.com
ROUNDTABLE
ARE YOU READY FOR THE INTERNET OF THINGS? What CEOs need to know to compete in the next great wave of value creation in manufacturing. By Jennifer Pellet
Key Takeaways 1 Size Matters The IoT could generate $2.3 trillion in value by 2025
2 Beyond the Hype View IoT as an evolution rather than revolution
3 Data Overload Break adoption down into manageable steps
UNLESS YOU’VE BEEN LIVING UNDER A ROCK, you’ve probably heard quite a bit about the Internet of Things (IoT). The buzz around employing advances in embedded sensors, processing, data analytics and wireless connectivity to enable the type of machine-to-machine communication that can revolutionize businesses has definitively become a roar. For manufacturers, the implications are huge. McKinsey estimates the IoT could unleash as much as $2.3 trillion in new economic value worldwide by the year 2025. In fact, the IoT topped Garner’s Hype Cycle for Emerging Technologies last year, bumping Big Data off the peak. To some, this might sound like a potentially dubious distinction, given the somewhat negative connotations of the word “hype.” However, what occupying the pinnacle of Gartner’s Hype Cycle actually indicates is that the market has enormous expectations for an emerging technology. In making it to the peak, the IoT joins a venerable list of technologies with game-changing potential, including 3D printing, gamification, wearable user interfaces and cloud computing. In other words, expectations may be inflated, but the potential is undeniable. Yet the excitement around the IoT’s capabilities is also a source of anxiety for business leaders, who face the challenge of getting their arms around yet another emerging technology. For value creation to happen on the scale predicted by McKinsey, manufacturers must be ready to collect, analyze and capitalize on vast streams of data from customers, suppliers and even products themselves, all arriving at increasing volumes and speed. Further complicating that formidable task is the fact that the term itself has yet to be clearly defined, agreed participants at a recent Chief Executive roundtable held in partnership with Microsoft. “The hype on IoT is actually pretty
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deafening,” noted Barb Edson, general manager, marketing, for Microsoft Cloud & Enterprise. “Yet, the reality is that there is not even a common definition for it.” However, Edson went on to urge CEO participants not to let the murkiness surrounding IoT—the cloud around cloud-enabled technology—to sour them on pursuing the business opportunities it represents. “Many people are scared of IoT from a business standpoint, and they really shouldn’t be,” she explained. “It’s not about ripping out and replacing existing systems. It’s about looking at which business processes you can really impact. Start small and you can have a big impact.” IoT can be viewed as an evolution rather than a revolution, building on the infrastructure companies already have in place, she added, pointing out that most companies today are already gathering massive amounts of data on myriad devices. More of a concept than any one specific technology, IoT involves leveraging connectivity to efficiently collect and analyze that data
to make more informed business decisions, identify opportunities and predict customer behavior more effectively. That can be as simple as a trucking company’s effort to automate maintenance of its vehicles (see sidebar: “M.G. Bryan: Curbing Breakdowns”) or as complex as an enterprise-wide endeav-
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THE IoT COULD UNLEASH AS MUCH AS
$2.3 TRILLION IN NEW ECONOMIC VALUE WORLDWIDE BY THE YEAR 2025
or to collect, integrate and organize sensor data from remote equipment across global supply chains.
Delving Into Data Those struggling to fully leverage connectivity should take solace in the fact that they are not alone. Most companies are early on the IoT learning curve. Several CEO roundtable participants expressed frustration about being unable to make effective use of the huge amounts of data flowing into their companies. “The ability to install sensors and get millions and billions of bits of
information is pretty straightforward,” noted Bob Nardelli, CEO of XLR-8. “The challenge that some of the smaller companies, and maybe even some of the bigger ones, are having is when you get to the data analytics. There’s the question, ‘Okay, I’ve got all these sensors. We’re recording all this data. We’re on this thing called the Cloud. Now what do I do with it all?’” “In our case, we have information, but we’re not using it to such an extent that it’s preventive,” agreed Erik Fyrwald, CEO of Univar. “It allows us to look back historically and say, ‘Oh, now we know why that happened,’ but we’re not at the point where we can make sure something won’t happen again.” Even companies like Federal Express, which is viewed as a forerunner in real-time data collection and analytics, are struggling to take IoT’s capabilities to the next level. The company has made great strides in forecasting accuracy since equipping drivers with handheld devices and compiling information on efficiency and customer dynamics in real-time. “Now we’re trying to link all of that together to be more predictive in
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Curbing Breakdowns FOR HEAVY EQUIPMENT MANUFACTURER M.G.
Bryan, operating oil and gas fracturing vehicles, each of which typically costs more than $1 million, in remote, extreme environments (think no cell phone reception) has long been a challenge. The vehicles require a good deal of TLC, including oil filter replacements every 200 to 400
hours and complete engine rebuilds after 7,000 hours of service, sometimes sooner. Mismanaged maintenance can be costly—downtime on a vehicle has a price tag of between $3,000 and $7,000 per day, not including lost product revenues. Leveraging the power of the IoT to develop a scalable solution for remote asset management of its fracturing vehicles came as a real boon for the company, which can
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now access and analyze in-field service information. Using mobile technology, the cloud-based system gathers control-system data to produce reports and dashboards on the condition of an individual vehicle’s drive train and fracking performance, as well as process performance and maintenance trends related to entire fleets. Data is broken down into incredibly small packets so
that information can be sent even in areas with poor cellular coverage. Or—in cases where a connection can’t be found—stored in a gateway and sent once a connection is regained. In addition to improving up-time and productivity for M.G. Bryan customers, the system has the potential to collect data that will demonstrate the vehicles’ competitive performance to customers.
You generate a lot of data in IoT. It needs to be processed in layers.” —SUJEET CHAND ROCKWELL AUTOMATION
nature,” Cary Pappas of FedEx TechConnect told participants. “The question is, how do you take forecasting and make it a more exact science by overlapping better information, and how do you then boil that down to the things that are most crucial to your business? In other words, how do you simplify that [data] so it’s usable to the people who run our operations? We’ve got a ways to go before we get to where we want to be.” While the sheer amount of data being generated and the possibilities that data represents can be daunting, the process can be broken down into more manageable steps, pointed out Sujeet Chand of Rockwell. “You generate a lot of data in IoT,” he acknowledged, noting that crunching the data should begin before it ever reaches the Cloud. “It needs to be processed in layers. For example, data generated by a jet engine needs to be processed locally on the jet engine first and converted to what we call information, because any information you generate directly on the jet engine while the plane is flying can be acted on instantly. The moment you move the data further away from the jet engine, the loop-closure time increases.” After information, the next step is knowledge, which requires storing information and analyzing it using simulations or other analytical processes, explained Chand. “An example would be predictive diagnostics or predicting failure,” he noted. “Once you have the knowledge, the next goal is wisdom, which comes from analyzing multiple jet engines and then figuring out how you redesign certain components to optimize performance or pre-empt a type of failure that you see across hundreds
of engines. It has to be thought of in those layers or you get overwhelmed.” That thinking resonated with Jeff Silver, CEO of the logistics transportation company Coyote Logistics. Five years ago, he noted, sensors on refrigerated trucks could tell you after the fact the temperature of beverages during transit. Today, the technology has advanced to the point where data is available in real-time—during transit. “When a load of orange juice is about to get ruined, you know about it immediately and have a fighting chance,” he says. “Over time, we’ll take it to the next level and be able to predict when those units will fail before they actually do.” Ultimately, that’s one of the many
ABOVE: Univar’s Erik Fyrwald, Rockwell’s Sujeet Chand, XLR-8’s Bob Nardelli
roads companies that embrace IoT will travel, improving efficiency by monitoring and tracking the health of your assets. “IoT is really not as much about the technology—although advances in technology are what enables it—but about taking a step back and understanding how you want to change your business,” says Edson. “It’s a business process evolution of what you’re already doing and a way to move your business forward in the digital age.”
Who’s Who ■ LEANDRE ADIFON Vice President Enterprise Systems Engineering & Advanced Technology, Ingersoll Rand ■ TED BILILIES Managing Director, AlixPartners ■ JAMES DEITCH CEO, Teraverde Management Advisors ■ J.P. DONLON Editor, Chief Executive ■ MARK DOHNALEK CEO, Pivot International ■ TOM DUNCAN CEO, Positek Tool ■ BARB EDSON General Manager, Product Management, Cloud & Enterprise, Microsoft ■ ERIK FYRWALD CEO, Univar ■ MELVIN GRAY CEO, Graycor
■ JOSHUA HEBERT CEO, Magellan Jets ■ FAROOQ KATHWARI CEO, Ethan Allen ■ DAN MONTGOMERY CEO, Fritz Industries ■ BOB NARDELLI CEO, XLR-8 ■ SUSAN NOVAKOSKI Director, Michigan Economic Development ■ CARY PAPPAS CEO, Fedex TechConnect
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■ SUJEET CHAND CTO, Rockwell Automation ■ TOM PETTIBONE Founder and Managing Partner, Transition Partners ■ ASH SAHI CEO, CSA Group ■ JEFF SILVER CEO, Coyote Logistics ■ VICTOR SMITH Indiana Secretary of Commerce, Indiana Economic Development
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WHY CAPABILITIES ARE CRITICAL FOR SUCCESSFUL M&A How can companies solve the integration challenge? By C.J. Prince EVERY YEAR, somewhere between 50 percent and 90 percent of mergers fail. Deals that once seemed full of promise fizzle, falling short of stated goals; and executives are left scratching their heads, wondering what happened. Take eBay’s purchase of Skype in 2005; eBay was sure the VoIP technology would speed the closing of deals, but ultimately, the capabilities didn’t match, and eBay sold Skype for a loss of more than $1 billion. Then there are the deals that soar. Google’s purchase of DoubleClick for $3.1 billion in 2008 expanded its online advertising position into display ads and gave it access to DoubleClick’s relationships with Web publishers, advertisers and advertising agencies. Skeptics questioned the high price tag at the time; but today, DoubleClick accounts for a significant amount of Google’s profit and the deal has been heralded as a resounding success. “So what distinguishes those that fail from the ones that succeed?” Gerald Adolph, senior partner with Strategy&, formerly known as Booz Allen, asked a group of CEOs gathered for a roundtable on M&A success. The answer: those that are based on a strong capabilities fit, explained Adolph, also the co-author of Merge Ahead: Mastering the Five Enduring Trends of Masterful M&A. While post-merger integration is a key piece of the puzzle, the best integration planning can’t cure a deal that should
never have happened. Only those M&A deals that either enhance each company’s distinctive capabilities systems or leverage those systems—or both—have a shot at real success. In this context, a capabilities system is very specific: three to six mutually reinforcing, distinctive capabilities that are organized to support and drive the company’s strategy, integrating people, processes and technologies to produce something of value for customers. A 2011 Booz Allen study found that even when two companies seemed to have direct overlap, if the capabilities fit was poor, there was almost a nine-point spread in performance in total shareholder value two years after the deal. “The traditional definitions of why we do things, of adjacency and of consolidation are inadequate,” Adolph noted. The most successful deals were those in which an acquiring company took a capability of its own and leveraged
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The traditional definitions of adjacency have failed us and the traditional definitions of consolidation are inadequate.” —GERALD ADOLPH STRATEGY&
it in the newly acquired company. The second most successful ones were those companies that acquired a capability that could then be leveraged to enhance their own capabilities. These capabilities are like a successful company’s core DNA—a few distinct competencies that work together in a system that makes each company what it is. “If you are, in fact, a successful entity, that set of capabilities probably syncs up with a distinctive way in which you go to market—it’s your strategy, your positioning, your value creation, your metrics. It’s what we call your ‘way to play,’” says Adolph. Adolph points to Danaher as an example of a conglomerate that appears to be made up of very disparate,
unrelated businesses, but which are actually linked by their conformity to the Danaher business system, a group of lean manufacturing methods and quality improvement processes that can be applied to acquisition targets. “The way they select candidates is not by high growth, high margin, an attractive market or any of that stuff, because when you see those things, you are observing where somebody else has an advantaged capability system,” noted Adolph. “Danaher selects targets based on [fitting] with their capabilities system.” As a result of this tightly focused approach to acquisition, Danaher’s M&A program has helped raise its share price by a factor of 15 over a 16-year period, during which it made 31 transactions. The bottom line? Clarity and specificity from the start is critical, Adolph said. “If people come to you with vague words like attractive market and synergy, best practices and all of these kinds of things that you cannot reduce to leverage and enhancement, chances are you’re being dragged into a bit of an acquisition trap that might not play out the way you want.” Tad Mitchell, CEO of WellRight, a maker of corporate wellness software, agreed that knowing precisely why you’re making a buy and staying focused on that end goal, can smooth integration, even when the companies
don’t seem to have all that much in common. He recalled selling Compliance11, a compliance software company, to Charles Schwab in 2011, merging a technology company with a financial services firm. “Instead of running it like a software company, they run it more like a value-added service for their advisors,” he said.
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d
1 Sync Up M&A must be based on the right capabilities match
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GOOGLE’S PURCHASE OF DOUBLE-CLICK FOR
$3.1 BILLION HAS BEEN HERALDED AS A RESOUNDING SUCCESS
“They still have 95 percent of the people working there three years later, and it’s growing. They’ve added more people to the business.”
Value Is a Two-Way Street Maximizing capabilities can go both ways in a merger, noted Marc Robinson, senior executive advisor at Strategy&, who recounted the Pfizer takeover of his then-company, Warner Lambert. At the time, Pfizer’s consumer business was about $500 million and Warner Lambert’s was $2.5 billion. “So it was kind of a reverse merger,” noted Robinson. “The CEO was very explicit. He said, ‘We don’t know what we’re doing in consumer. You have a very well-oiled machine in terms of marketing capabilities. You have to use
Key Takeaways 2 Watch & Learn Be willing to learn from the newly acquired
3 Pursue Clarity Clear leadership and strategy are critical
our infrastructure and backbone, but otherwise impart your learnings and your knowledge on us.’” On the pharmaceutical [side], it was just the opposite, with Pfizer leading the charge and working to absorb Warner Lambert. Robinson, who ran the consumer business, worked closely with his counterpart on the Pfizer consumer side to deliver a clear message from the top. “We knew the marching orders. We set the tone, we communicated constantly, and it worked really, really well. Had it not been for that direction upfront, for the clarity of where the capabilities were going to be applied, it would have failed.” Robinson admitted that he and many of his Warner Lambert colleagues were skeptical of the merger at the time. “But it turned into a great acquisition. It really brought a lot of value to Pfizer.” Decisiveness made all the difference, Robinson added, because the desire to win over the new company often leads to too much conciliatory kumbaya and not enough authoritative leadership. “There has to be a clear, conscious delineation of when directive leadership will be applied and when it won’t. I’ve seen business leaders bend over backwards trying to be so collaborative and welcoming that the clarity of communication and decision-making isn’t set. From my experience, people would rather get clear communication with some rationale. Even if they disagree, they can at least say, ‘All right, I know what to do. I understand the direction.’” Alan Marash, CEO of performance improvement consulting firm Oriel STAT A MATRIX, had a similar experience—but with the opposite result—when the company purchased a business that was also focused on performance improvement—but in the service arena as opposed to manufacturing, where Marash’s company had a strong foothold. “In hindsight, I think we made a tremendous tactical error of the important job of clearly
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defining the authority of the CEO who stayed on and perhaps trying to be too collaborative with her. It caused a great deal of disruption in the integration within the business and a lot of problems with staff.” Even when the synergies seem right, cultural differences can blow up into major personnel issues, which is partly what happened to the Bank of America acquisition of U.S. Trust, said Ted Henderson, managing director at U.S. Trust. Mergers are difficult, as a rule, in financial services because the market is intensely competitive. “Bank of America had a different culture than U.S. Trust and I think it was a classic example where the best people at U.S. Trust decided they were going to be better off elsewhere.” When a foreign acquirer is involved, cultural differences only intensify the challenge of integration. Gould Paper’s sale of a 51 percent stake to Japan Pulp and Paper in 2010 is a case in point. The merger gave the two companies, which had almost no overlap as far as suppliers and customers were concerned, the ability to cross-pollinate supply resources and achieve greater global reach. But the two had very different cultures and JPP, as the acquirer, needed to understand that it could not simply apply Japanese principles to an American company. “In Japan, as you know, nobody gets fired, nobody quits. It’s a job for life. So the concept of somebody being unhappy and maybe going to a competitor is beyond their capability to understand.”
diversify or grow. That doesn’t necessarily mean the underlying deal is a good match. Higher costs of running a business can make consolidation necessary, too. “Like in banking, if you’re not big enough, with the new costs of regulation, you can’t survive, so you have to find somebody to buy you,” noted Larry Senn, founder and chairman of Senn Delaney, a Heidrick & Struggles global culture-shaping firm. “About a quarter of our work is around the cultural aspects of mergers and acquisitions, but I see another quarter as companies who never really did merge; they just came together and they’re still apart.” In other cases, a company will bite off more than it can chew—and lose sight of the goal. Meeta Vyas, interim CFO of NanoViricides, recalled her time as CEO of Signature Brands, which was acquired by Sunbeam under Al Dunlap’s management. “He
The Need for Scale Some mergers are doomed because they happen as a result of pressure from stakeholders responding to a current trend. When the economy recesses, for example, people want to retrench and consolidate rather than
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did it exactly the wrong way,” she said, noting his purchasing three large companies in one day, without a solid plan for integrating them. “The second mistake he made was that I had gone around the company and rebuilt it in every way—and he never met me once after buying the company.” Even with the best-laid plans, the integration can fail on the people end, said Doug Mellinger, managing director of Clarion Capital Partners, which has overseen numerous acquisitions by its portfolio companies. “For us, ultimately, it comes down to people and integration. Where we see these things just get murdered is if you don’t pick appropriate leaders.” By starting with a focus on capabilities, CEOs can not only choose the right partners but also ensure that they preserve what is special about the company they’re buying—not to mention their own.
Who’s Who ■ GERALD ADOLPH Senior Partner, Strategy& ■ WAYNE COOPER Chairman, Chief Executive Group ■ ANIL DIWAN President & Chairman, NanoViricides ■ HARRY GOULD, JR. Chairman & President, Gould Paper ■ CHARLES HELDRETH Chief Relationship Officer, Farm Credit of the Virginias ■ EDWARD “TED” HENDERSON Managing Director, U.S. Trust ■ ROBERT HUGHES President, Hughes Development ■ DANIEL JOHNSON COO, Pureflow
■ ALAN MARASH CEO, Oriel STAT A MATRIX ■ BRAD MEHL President, Boundless Markets ■ DOUG MELLINGER Partner, Clarion Capital Partners ■ TAD MITCHELL President and CEO, WellRight ■ MARC ROBINSON Senior Executive Advisor, Strategy&
■ LARRY SENN Founder and Chairman, Senn Delaney ■ JOHN THOMAS CEO, Physicians Realty Trust ■ ANTHONY TIVNAN President, Magellan Jets ■ MEETA VYAS CFO, NanoViricides ■ RICHARD ZUSCHLAG Chairman & CEO, Acadian Ambulance Service
CEO PASSIONS UNDERWRITTEN BY PURE INSURANCE
Collector With a Cause JOHN RIVERS, passionate about antiques made in Charleston, is on a mission to keep them there. By George Nicholas
JOHN M. RIVERS, JR., whose family has lived in Charleston, South Carolina since the city’s founding in 1670, wants the antique furniture and decorative arts made by Charleston’s artisans to stay in the city. For the past 25 years, he’s been repatriating museum-quality objects that had been taken elsewhere and acquiring others so they’ll all remain in Charleston. The Rivers Collection now includes more than 250 historically significant items dating from the late 1600s. Rivers shows them to the public in a suite of rooms in the headquarters of his company, Rivers Enterprises, a leading real estate and asset management holding company. Rivers began collecting when he learned that the earliest known piece of Charleston furniture, a 1733 writing desk, had been sold to a museum in North Carolina. “I didn't like it because that writing desk represented Charleston's history,” he explains. He formed an advisory group to help him select what to buy. It includes the dealer who sold the writing desk, a museum professional and a consultant. All four members have to agree before a purchase is made.
Charleston, America's richest city in the mid-18th Century, produced distinctive furniture in large quantities for its prosperous local clientele. Much of it was lost during the American Revolution when the British occupied the city, when Sherman's troops set Charleston afire during the Civil War and during seven other conflagrations, an earthquake in 1886 and Hurricane Hugo in 1989. Collectors in other markets snapped up what remained. Rivers tracked down a dressing table that had crossed the Atlantic six times and survived three fires. An 1805 embroidery had been stored in a New York City attic for 100 years. He bought the only Charleston-made guns known to exist “out of a trunk of a guy's car going south from Greenville, South Carolina to a gun show in Florida.” The first piece he reclaimed was an 1850 teapot made from coin silver that was a wedding gift from a ship's captain to a couple married in Washington, D.C. “The teapot migrated to Kentucky where we found it and brought it back,” Rivers says. ➝
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CEO PASSIONS UNDERWRITTEN BY PURE INSURANCE
The collection includes an 1848 map of the Carolinas and Georgia that has no mention of Atlanta, which Rivers bought at a flea market. Also included is a desk that his family has owned since 1760 and which was used to store his toys when he was a child. The family has a notable history in Charleston and one of its ancestors was a Lord Mayor of London in 1753. Rivers founded his company in 1987, following the sale of his family’s business, one of South Carolina’s pioneer television stations, which began broadcasting in 1953. The company’s properties include the Charleston Gateway Center office complex; Harbor Walk, a mixeduse development in Charleston; an industrial park; and the Chattooga Club, a 200-acre private club and residential community at the foothills of the Blue Ridge Mountains and the headwaters of the Chattooga River. Off-hours, Rivers is an active philanthropist and civic leader who keeps searching for additional pieces crafted by early Charleston’s artisans to add to his collection.
✱
TREASURE TROVE Rivers, top, with his
several of his antiques, including a writing desk, kettle stand and a vintage clock. Left, an embroidery rescued from an attic. Below, an 1805 silver horseracing trophy.
SAFEGUARDING YOUR COLLECTION It’s every collector’s nightmare—damage to, or theft of, a prized and possibly even irreplaceable item. While there’s no way to eliminate the threat entirely, you can take steps to ensure that you’ll at least be adequately compensated for any loss or damage that occurs, says JOAN SMITH, senior member advocate at PURE Insurance, an insurer specializing in high-net worth families, who offers these tips. 1 Consider a “Collections” or “Valuable Articles” Policy. While homeowners policies do offer some protection for your valuables, specialist insurers can provide cost-effective coverage options designed specifically for art, antiques and other collectibles.
2 Update Your Appraisals. Your policy may provide for some fluctuation of value, but maintaining recent appraisals is the best way to ensure that you have the right amount of coverage.
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3 Choose Your Mover With Care. Since damages occur most often during transit, use specialty firms who know how to pack and ship fine antiques, understand the need to allow pieces to acclimatize before unpacking and the importance of detailed condition reports.
4 Document Your Collection. Sales receipts, catalogue entries, appraisals, etc. should be kept in a secure location. Some companies, including PURE, offer concierge resources that can provide risk management advice tailored to your collection.
5 Shop Around. The specialty-insurance industry is fiercely competitive, so there’s a good chance that you or your broker can get better rates from high-quality carriers just by exploring your options and asking for competitive terms.
If service matters most to you, we invite you to explore PURE.
PURE is a member-owned insurer for responsible families with homes insured for $1 million or more. Innovative. Proactive. And dedicated to an exceptional member experience. To learn more visit pureinsurance.com or call 888.814.PURE
HIGH VALUE HO MEOWNERS | AUTOMOBILE | JEWELRY, ART & COLLECTIONS | WATERCRAFT | PERSONAL EXCESS LIABILITY PURE® r efers to Privilege Underwriters Reciprocal Exchange, a Florida-domiciled reciprocal insurer & member of PURE Group of Insurance Companies. PURE Risk Management, LLC, a for
in all jurisdictions. Visit pureinsurance.com for details. Trademarks are property of PRM used with permission. ©2014 PURE.
EXECUTIVE LIFE
Taking it to Extremes Here are three ways to escape—or indulge in—winter’s chill. By Michael Gelfand
VIEWED FROM THE DESPERATE CHILL of winter, there are really only two ways to look at a potential vacation destination: more or less. By more, we mean double-down and give in to the allure of the cold—definitely an acquired taste. Whereas, by less, we mean escape to a place where warm sand, turquoise water and delicious ocean breezes wash away all memories of ice, snow and work. Realizing that no single choice is necessarily best for everyone (and that going to extremes isn’t always the goal), we’ve decided to present three very different vacation destinations. One will literally take you to the frozen edge of the Arctic Circle to interact with the kind of nature that thrives amid ice; another brings you to a restored Colorado ghost townturned-luxury spa, where hot springs and Rocky Mountain heli-skiing will
vie for your attention; and the last nestles you in the lap of Caribbean-style luxury, where fun and sun can cure all of your winter doldrums.
Arctic Kingdom’s Icy Adventures The word “safari” tends to conjure up gorgeous images of wildlife in a natural habitat that involves the rolling grasslands, marshes and jungles of Africa. This is exactly the concept the pioneering folks at Arctic Kingdom want you to experience—albeit with a tundra twist—when you travel with them for a custom-tailored trip to the Arctic regions. As go-to logistical providers of equipment and outfitting services for filmmakers and scientists in the Northwest, Arctic Kingdom is an Iqaluit, Canada-based firm that excels at shepherding small groups of hardy adventurers on weekend or extended
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ARCTIC ADVENTURES Hot air balloon rides above Baffin Island take travelers through giant columns of an iceberg on an Arctic Kingdom safari
trips to camps on land and ice in the Northwest Territories and Greenland. They offer a variety of season-specific excursions with personalized itineraries, such as going to see polar bears and migratory birds, taking hot air balloon rides above Baffin Island, scuba diving under (yes, under) glaciers or taking in the Northern Lights, among others. Not your typical walkin-the-park stuff. Depending on the trip, guests may stay in timber lodges with full amenities (including on-site chefs), remote log cabins 100 miles from the nearest town, temporary tents or structures for extreme adventures or partner hotels for shorter, weekend trips. Their Taste of Arctic Spring (offered
from February through May) pairs you with local Inuit guides. You’ll travel on a sled pulled by a team of dogs across the frozen wilderness, ice fish for Arctic char and even, if you’re up for it, help build the igloo you’ll bed down in after viewing the Northern Lights. Similarly, their Taste of Arctic Summer (July through September) plants you on a sea-ice camp near Baffin Island where you’ll witness the soul-shifting migration of thousands of hungry whales that congregate at the icy edge of the bay. BEST ROOMS Depending on the trip you take, you will stay in a local partner hotel, a timber lodge, a remote log cabin, a tent, or a yurt. The truly intrepid or authentic traveler, however, may prefer to build his or her own lodgings out of the copious amount of ice at hand—you guessed it, an igloo. With help from the pros, you cut blocks of ice and assemble your very own igloo, throw down a few caribou skins, light some candles and slide into the provided sleeping bag. You’ll be about as in-touch with the Arctic as it gets. 888-737-6818, www. arctickingdom.com
Rustic Rewards at Dunton Hot Springs What happens when a German billionaire focuses his attention on a 19th century ghost mining town in the shadows of Telluride that happens to be rich in natural hot springs? In the case of Dunton Hot Springs, the result is an absolutely stunning collection of 12 original miner cabins (appointed with antiques, modern comforts and luxurious amenities, as well); a tented, high-end suite for the more outdoors-inclined traveler; and a nearby sister camp (eight tented suites with river- or mountain-facing views). All told, Dunton’s two main properties—located in Dolores, Colorado—en-
compass more than 1,700 acres of private wilderness, providing no shortage of activities (some included, others a la carte). From fly fishing, mountain biking, show shoeing, hiking and horseback riding in the wilderness to snow mobiling, dog-sledding, ice-climbing and exceptional skiing at nearby Telluride (plus heli-skiing direct from your cabin for the truly intrepid), you won’t find yourself wishing there was something to do here. There’s even a boxing gym for those who relax by sparring. The best reason to visit, however, is the chance to submerge in the natural, sulfur-free hot springs of the blissfully updated bathhouse that the town’s old miners once enjoyed. Afterward, stroll down to the town’s old saloon (now a restaurant) for gourmet Alpine cuisine, followed by a peek at the scrolled signature of Butch Cassidy who, the story goes, paid a visit after robbing a bank in Telluride. BEST ROOMS All of Dunton’s cabins are centered in “town,” whose focal point is a saloon, but the best of the bunch is the 740 square-foot Wellhouse (seasonal from $1,400$1,900 nightly). This small but stylish one-bedroom cabin, which sits just opposite the saloon, features a large,
MINING MINER’S PARADISE Dunton Hot Springs’ cozy cabins feature inspiring views and natural hot-spring fed baths just a stroll away.
copper tub in its center, which is fed directly by water from the hot springs (there’s also a cold-plunge pool in a wooden barrel to accommodate any cryotherapy needs). In addition, there’s a comfy king-size bed, a wood-burning stove, a private porch with mountain views and all-inclusive food and beverages (with exception of the reserve list), as well as some included on-property activities. reservations@duntonlife.com, 877-2284674, www.duntonhotsprings.com.
Caribbean Comfort at St. Regis Bahia Beach Approximately a 35-minute drive from San Juan, the St. Regis Bahia Beach sits between El Yunque National Forest and the mouth of the Espíritu Santo River on Puerto Rico’s northeast coast. Known as AAA’s only Five Diamond Award resort in Puerto Rico,
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EXECUTIVE LIFE
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PICK YOUR PEACE St. Regis Bahia Beach is all about pampering and pleasure
this former coconut plantation sits on 483 lush acres of property, including two miles of pristine, private beach. Among its notable features are an oceanside world-class golf course with fabulous views, a top-rated restaurant and a luxurious spa. As far as outdoor activities are concerned, it’s hard to beat the Robert Trent Jones, Jr. oceanfront golf course,
Remède Spa, near the hotel’s main entrance, is all about pampering and peacefulness, with seven secluded massage villas lining the spa’s garden, plus men’s and women’s steam rooms, sauna and hot and cold plunges. An incredible menu of treatments and services, including massage, skin, salon and well-being programs are readily available, including customized treatments featuring indigenous, organic products. BEST ROOMS The 2,510 square-foot, bi-level Governor’s Suite ($2,600 nightly) offers a second-floor terrace with beautiful ocean views. This low-rise Caribbean plantation-style building fits in perfectly with the lush surroundings. The entire suite, which receives butler service and has a full kitchen and a dining room for six, is decorated with custom-designed dark cherry wood furnishings and original artwork. The master bedroom features a king-size bed layered with 300-thread-count Pratesi linens and a sleek marble bathroom with a huge rainforest shower connected to the private, outdoor terrace. 787-809-8000, www. stregisbahiabeach.com
The St. Regis oceanfront course boasts views that will delight even the most jaded of golfers. which offers 18 holes (par-72) with fairways featuring views of the ocean, scenic lakes and mangroves that will delight even the most jaded of golfers. Other tempting attractions include nature trails, a bird sanctuary, tennis, art classes and a zip line that takes adventurers through the tropical canopy of nearby El Yunque’s rainforest. The resort’s top restaurant, Fern, is a Jean-Georges Vongerichten creation that features notable dishes from his portfolio of renowned restaurants around the world.
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Compensation Report 2015 chiefexecutive.net/compreport 38, 39 Greater Fort Lauderdale Alliance lesstaxing.com 17 Indiana Economic Development astatethatworks.com Outside Back Cover JetSuite jetsuite.com Inside Back Cover Jobs Ohio jobs-ohio.com/gamechangers.com 23 Michigan Economic Development Corp. michiganbusiness.org/ce 3 Microsoft microsoft.com Inside Front Cover, Page 1 NetJets netjets.com 5 PURE Insurance pureinsurance.com 67 Senior Executive Network seniorexecutivenetwork.com 55 Smart Manufacturing Summit smartmanufacturingsummit.com 7 Stein IAS steinias.com 43 Talent Summit ceotalent2015.com 31 Tennessee Economic Development masteredintn.com 9 The New Economics of 3D Printing chiefexecutive.net/3D 45
FLIP SIDE
Nut Job
What would a Korean executive’s über tantrum look like stateside? By Joe Queenan
Joe Queenan
I LLU ST R AT I O N BY T I M TO M K I N S O N
Is it possible to imagine something like this happening in the U.S.? The kneeling, the apologies, the humiliation and the getting shown the door?
THE KOREAN “NUT RAGE” episode is truly one of the strangest events in the history of commerce. According to varied press reports, on December 5, 2014, Cho Hyun-ah, the eldest daughter of Korean Air’s chairman Cho Yang-ho, both verbally and physically abused the first-class flight attendants on a Korean Air flight from South Korea to New York after they had the gall to serve her macadamia nuts in an unopened bag rather than on a plate. Imagine. Some reports say that Cho Hyun-ah, executive vice-president in charge of inflight service on the airline, actually forced the attendants to kneel in front of her and apologize. She also poked the cabin crew chief repeatedly with a binder and demanded that the plane return to the gate so that he could be thrown off. This sort of impromptu flight rescheduling is against the law just about anywhere. Since her outburst, Cho has since been indicted on charges of assault and forcing an airline to change its flight plans, as well as obstruction of justice for ordering company officials to intervene in the brouhaha. If convicted, she could get 15 years in prison. She also lost her job. The incident caused a furor in South Korea, where her father apologized publicly for not raising his daughter properly. It is also a serious blot on the image of family-controlled business empires in that country, which have long been criticized for nepotism on an epic scale. Is it possible to imagine something like this happening in the U.S.? The kneeling, the apologies, the humiliation and the getting shown to the door? Yes, but probably
EXHIBIT
A
not because of the improper presentation of macadamia nuts. Here are a few scenarios where something like nut rage could happen on these shores: A highly placed Sony executive calls in the entire IT department and demands to know why computer security was so weak that North Korean hackers managed to delete all the company’s files, access private messages and just generally wreak havoc. “Get down on your knees, you IT dogs,” he screams at the terrified employees. “And whoever is responsible for that wisecrack about Obama getting leaked to the press can start packing his or her things right now.” The head of a humongous hedge fund calls in an array of portfolio managers, and starts working them over with telephone books. “Which one of you ding-dongs joked about front-running and did it in a company email?” he demands. “And if you dipsticks are going to trade on inside information, could you please not use my phone?” The owner of a legendary baseball franchise has to apologize for his son’s drafting another dud lefty from Japan. “I didn’t raise that kid properly,” he confesses mournfully. “If I had, he would have drafted a righty from the Dominican Republic.” The owner of a virtually extinct metropolitan newspaper calls in the entire staff and hisses, “Why didn’t somebody tell me about the Internet? About blogs, websites and the information highway? I’d like to smack you guys.” The head of a large oil conglomerate calls in his staff and starts slapping them with binders. Really, really thick binders. “$100a-barrel gas till the cows come home, huh?” he shrieks. “What do I pay you guys for?” A mutual fund manager who shorted Apple at $7 makes his staff kneel before him and beg for forgiveness. “You guys are enough to drive a man to drink,” he mumbles. “Pass the macadamia nuts.” MARCH/APRIL 2015
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FINAL WORD Public Sector Unionization Rates by State, 2012 States with the highest rate of public-sector unionization tend to rank lowest in Chief Executive’s Best and Worst States for Business ranking.
NC
MS VA
Who’s Afraid of Public Sector Unions?
NY
RI MA
60%
GA
NJ
40% 20%
ID
CT
LOWEST 10
HIGHEST 10 SC
CA
20% 40%
AK
MN
60%
WY TN
IN ONE OF THE EARLY episodes of the
80%
NM
PA AL
MI
Total Union Membership: Public and Private, 1973-2013 Organized labor in the U.S. has been transformed. It is no longer concentrated in the private sector, with blue-collar workers filling the ranks. Percent Membership of
Private
Public
Total
40% 30% 20%
2012
2010
2008
2006
2002
2004
2000
1998
1996
1992
1994
1988
1990
1986
1984
1981
1979
1977
0%
1975
10% 1973
Netflix series “House of Cards,” the antihero and majority whip of the House of Representatives, Frank Underwood (played with gusto by Kevin Spacey) battles the teacher’s unions. Conflict over an education reform bill triggers a national teacher’s strike, which leads to a top teacher union lobbyist punching the majority whip in his office. In earlier scenes, union lobbyists possess extraordinary access to key policymakers and are even involved in crafting the bill’s language. Indeed, the public union appears to be the only constituency the elected officials truly fear. In his recently published work, Government Against Itself, Daniel DiSalvo, assistant professor of political science at City College of New York, charts the rise of public sector unions (PSUs) since the 1960s and why this powerful interest group poses a threat to U.S. democracy. Since 2009, more public sector employees (7.9 million) than private sector employees (7.4 million) belong to unions—even though there are five times as many workers in the private sector as in the public sector. DiSalvo’s central claim is that unionization and collective bargaining in state and local government impose significant costs on society while providing few broadly shared benefits. Unions are no longer the working class heroes that liberals imagine. They are not fighting to increase minimum wage for a workforce in poverty or to improve harsh conditions. They are
80%
Source: CPS, Unionstats.com, Barry T. Hirsch and David A. McPherson
lobbying on behalf of members who work in safe and well-paying jobs. In fact, members of PSUs are now among the most affluent retirees in the country due to the generosity of public pensions. Eight states pay, on average, a lifetime pension benefit of $1 million to retired workers, and 23 states pay more than $750,000. This does not include healthcare benefits. PSUs enjoy intrinsic advantages over their private sector counterparts. Among other things, they vote for the politicians with whom their unions negotiate. No private union can vote their bosses out of office. They are among the largest donors to candidates, mostly Democrats, but sometimes Republicans, at the state and local level. The unions that spearheaded the unsuccessful recall of Wisconsin Governor Scott Walker signaled the
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opening salvo in a growing conflict between elected officials and unions. But it’s a conflict that should worry centrist democrats more than republicans. Organized government employees as an interest group drive government to grow bigger and cost more diminishing its ability to provide services at a given level of tax revenue. As the chart of public-sector unionization rates of states above shows, those states with the highest percentage are also those with the lowest ranking of competitiveness by CEOs in our annual Best and Worst States survey as indeed by others such as the Tax Foundation. Two pillars of Democrat politics, LaGuardia and Roosevelt, both feared that democracy would be compromised by the peculiar nature of public sector unionism. The debate is just getting underway.
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