Showing posts with label management. Show all posts
Showing posts with label management. Show all posts
Manufacturing Readiness Level (MRL) ASSIST
Manufacturing Readiness Level (MRL) Assist Tool tool is designed to allow continuous insight into manufacturing, quality, production, and industrial-base risks to acquisition programs and technology development efforts. For more information visit: https://www.mrlassist.bmpcoe.org/
Assessing the Degree of Analytical Competition
Daveport and Harris describe that there are 5 stages of analytical
competition in their book “Competing on
Analytics: The New Science of Winning”. The five stages are described in
the following Figure and Table.
Book Review: Crossing the Chasm, Marketing and Selling Disruptive Products to Mainstream Customers
The author's emphasis is on distinguishing between the selling and marketing tactics for the early innovators versus the mainstream customers. There is a chasm between the innovators and mainstream market and the author dedicates the book outlining the various steps a high tech company should perform to successfully navigate through the chasm.
Some key points and lessons learned:
- It is important to maintain momentum in order to create a bandwagon effect that makes it natural for the next group to want to buy in.
- Early adopters want a change agent while the early majority looks for productivity improvement for existing operations - they want an evolution not revolution.
- Vapor vare should be avoided during chasm crossing - Vapor vare is pre-announcing and pre-marketing a product which still requires significant development.
- Resistance is a function of inertia growing out of the commitment to the status quo, fear of risk or lack of compelling reason to buy.
- Crossing the chasm requires moving from an environment of support among visionaries back into one of skepticism among pragmatists. It means that moving from product related issues to unfamiliar ground of market oriented issues AND moving from the familiar audience of like minded specialist to uninterested generalist.
-It is the market centric value system - supplemented ( but not superseded ) by the product centric - One that must be the basis for the value profile of the target customers when crossing the chasm.
-Elevator Speech Template
1. For (target customers - beachhead segment only)
2. Who are dissatisfied with (the current market alternative)
3. Our product is a (new product category)
4. Unlike (the product alternative)
5. We have assembled (key whole product features for your specific applications)
- Why is elevator speech important ?
1. Your claim cannot be transmitted by word of mouth consistently.
2. Marketing communications will be all over the map.
3. R&D will be all over the map.
4. You are not likely to get financing from anybody with experience.
- The product alternative in your elevator speech helps customers understand your technology leverage (what you have in common) and your niche commitment (where you differentiate). Market alternative helps people identify your target customers (what you have in common) and your compelling reason to buy (where you differentiate).
- Positioning: Goal should be to make products easier to buy not easier to sell. The four stages in positioning:
1. Name it and frame it - Positioning needed to make a product easy to buy for a technology enthusiast.
2. Who for and what for - Positioning needed to make the product easy to buy from the visionary.
3. Competition and differentiation - Positioning needed to make the product easy to buy for the pragmatist.
4. Financials and future plans - Positioning needed to make the product easy to buy for the conservative.
- During the chasm period, the number one concern of pricing is not to satisfy the customer or the investor, but to motivate the channel.
- When crossing the chasm we are looking to attract customer oriented distribution by using distribution oriented pricing. There are two types of pricing strategies: value based and cost based. The value based strategy is based on the final big value the client will realize using the product while the cost based is dependent upon the cost incurred to deliver the product.
Chief Strategy Officer
Traditionally, the Chief Executive Officer (CEO) is responsible for strategy development and execution. In today’s complex organizations, the CEO is responsible for many business issues including strategy, which is the most important. Rapid globalization and constant need to innovate has enforced strategy development to be a continuous process than a static one-time activity. Companies are becoming larger and more complex, making it more difficult for one person alone to have total oversight over the whole organization. The CEO will traditionally delegate the responsibility to the Chief Operation Officer (COO) or Chief Financial Officer (CFO). Such delegation presents a dilemma. The COO is more concerned with getting things implemented, not necessarily getting the strategically right things implemented. Similar argument can be made for the CFO. According to the Bizmanuals, CFO is a corporate officer primarily responsible for managing the financial risks of the corporation. CFO is also responsible for financial planning and record-keeping, as well as financial reporting to the management team. Proper financial planning and reporting is the primary responsibility of the CFO and not necessarily whether the decisions are made according to company’s overall strategy.
In the past few years, the number of Chief Strategy Officer (CSO) appointments has surged. The CSO is an executive who is responsible for assisting the CEO with creating, communicating, executing, and sustaining strategic initiatives within the company. The January (2008) issue of Outlook Journal states that a typical CSO is not a pure strategist that creates long-term planning which is isolated from the company's current initiatives. Many CSOs are considered "doers" first and have the past experience in execution. CSO’s are often executives who have played variety of roles at different organizations before taking on the responsibilities and tasks of the title. Most CSO’s enter the organization in roles of planning or mid-management, and go on to become the CSO’s later in their career. CSOs have prior experience in an average of four different business functions, with the most years in management, operations and technology. Fig. 1 depicts the average work experience in different business functions before taking the responsibilities of a CSO.
It is necessary that the CSO must understand the company’s business and culture to implement and sustain strategic changes. The CSO must be a veteran when it comes to change management. In short, the CSO must have the ability to act as “mini” CEO of the company. CSO’s have considerable responsibility with an average of 10 business functions and activities as shown in Fig. 2.
There are three primary tasks for the role of a CSO. The first and most important is to ensure that the strategic plans are converted into action. The CSO is responsible to clearly explain a company’s strategy at all levels in the organization. In addition, CSO must be able to explain the role each individual plays and how it is related to the company’s overall strategy. The second task is to drive results. Strategies are discussed in boardrooms and formulated in strategic plans. However, it is important to put the strategies to work in order to achieve results. The third task is to sustain the change and make sure that the decisions made are aligned to the overall strategy. Sometimes, as business requirements change, strategy can become fuzzy. CSO task is to ensure that management does not revert back to their old practices based on prior experience and accomplishments. CSO’s must be pragmatic and analytical, but should also have a vision for the organizational growth and success. The CSO should leverage their deep understanding of the business and connections within organization.
The potential CSO candidate should have the following qualities/characteristics:
1.Should have a good working relationship and trust of the CEO.
2.Should have a reputation of achieving excellent results in his earlier roles.
3.Should have a working knowledge of various functions in the company e.g. operations, technology, marketing, sales and human resources.
4.Successful management requires taking decision under uncertainty. The CSO should be able to work under ambiguity and embrace the uncertain future.
5.Should have the ability to influence the incumbent management and communicate effectively at all levels of the organization.
6.Should have good multi-tasking abilities as they play a major role in various activities like planning, sales, mergers and acquisitions, new product development, market research and sales strategy.
7.Should be able to split the time between strategy development and actual strategy execution. The emphasis should be on achieving results by strategy execution.
The complex strategy development and implementation justifies the overhead cost associated with the appointment of CSO. Many organizations including Motorola, Marsh & McLennan, Nations Health, Universal Pictures and Yahoo, along with the other have appointed CSOs. It not only ensures quick and compliant action but can also serve as the succession plan. However, there are some challenges when it comes to hiring a CSO. The search for the right candidate can be long and expensive. The CEO needs to alter the organization chart which can face stiff resistance from the existing employees and stakeholders.
References:
[1] Chief Strategy Officer, R. Timothy S. Breene, Paul F. Nunes, Walter E. Shill, Publication date: Oct 01, 2007. Prod. #: R0710D-PDF-ENG.
[2] Rise of the chief strategy officer. R. Timothy S. Breene, Paul F. Nunes, Walter E. Shill. Accenture, Journal of High Performance Business, Jan 2008.
In the past few years, the number of Chief Strategy Officer (CSO) appointments has surged. The CSO is an executive who is responsible for assisting the CEO with creating, communicating, executing, and sustaining strategic initiatives within the company. The January (2008) issue of Outlook Journal states that a typical CSO is not a pure strategist that creates long-term planning which is isolated from the company's current initiatives. Many CSOs are considered "doers" first and have the past experience in execution. CSO’s are often executives who have played variety of roles at different organizations before taking on the responsibilities and tasks of the title. Most CSO’s enter the organization in roles of planning or mid-management, and go on to become the CSO’s later in their career. CSOs have prior experience in an average of four different business functions, with the most years in management, operations and technology. Fig. 1 depicts the average work experience in different business functions before taking the responsibilities of a CSO.
Figure 1: CSO Experience in Various Business Activities [2]
Figure 2: CSO Work Responsibility in Different Business Functions [2]
The potential CSO candidate should have the following qualities/characteristics:
1.Should have a good working relationship and trust of the CEO.
2.Should have a reputation of achieving excellent results in his earlier roles.
3.Should have a working knowledge of various functions in the company e.g. operations, technology, marketing, sales and human resources.
4.Successful management requires taking decision under uncertainty. The CSO should be able to work under ambiguity and embrace the uncertain future.
5.Should have the ability to influence the incumbent management and communicate effectively at all levels of the organization.
6.Should have good multi-tasking abilities as they play a major role in various activities like planning, sales, mergers and acquisitions, new product development, market research and sales strategy.
7.Should be able to split the time between strategy development and actual strategy execution. The emphasis should be on achieving results by strategy execution.
The complex strategy development and implementation justifies the overhead cost associated with the appointment of CSO. Many organizations including Motorola, Marsh & McLennan, Nations Health, Universal Pictures and Yahoo, along with the other have appointed CSOs. It not only ensures quick and compliant action but can also serve as the succession plan. However, there are some challenges when it comes to hiring a CSO. The search for the right candidate can be long and expensive. The CEO needs to alter the organization chart which can face stiff resistance from the existing employees and stakeholders.
References:
[1] Chief Strategy Officer, R. Timothy S. Breene, Paul F. Nunes, Walter E. Shill, Publication date: Oct 01, 2007. Prod. #: R0710D-PDF-ENG.
[2] Rise of the chief strategy officer. R. Timothy S. Breene, Paul F. Nunes, Walter E. Shill. Accenture, Journal of High Performance Business, Jan 2008.
Book Review- Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!
In this easy to read book the author outlines the differences in the financial decisions taken by the poor, middle class and the rich people. The rich people become richer by investing in assets. An asset is an investment which “puts money in your pocket”. That means that an asset is something which generates a positive cash flow. A liability is an investment which drains money out of your pocket and creates a negative cash flow. Against the contemporary belief, the author argues that the investment in the house you live is a liability and not an investment. Individuals should strive to build assets so that the cash flowing in your pocket is equal to your expenses – that is to be financial independent. One can pay their bills by a steady income but cannot create wealth. The author advices young couples to not invest all their money in a big expensive house, instead, concentrate on purchasing assets which will make them financially independent. The second point author emphasizes is to start your own business (work for yourself) and create a career ladder than climb a career ladder. Small businesses and corporations have enormous tax benefits. A short history of income taxes in United States is very interesting. The corporations spend first and then pay taxes, while the individuals must pay taxes beforehand. To conclude, the book provides commonsense financial and accounting advice for making sound decisions. A person not familiar with personal finance or just starting his/her career can find the book immensely useful. The author repeats many times that “make money work for you” instead of “work for money”.
Netflix vs. Blockbuster
Before 2004, Blockbuster was operating mainly using the physical stores throughout the country. In 2006, Blockbuster had 5194 stores through the country. 70% of the population was considered to be less than 10 minute of drive from a blockbuster store. Blockbuster charged about $3-$4 per rental for a fixed amount of time. The customer had to pay late fees if the title was not returned in the stipulated amount of time. More than 10% of blockbuster revenue represented the “late fees”. Only the high demand (majority of which comprised of newer tittles) were stocked. It was hard to find old, unpopular or independent films at the store. The economics of offering less popular films was not favorable. Blockbuster’s growth strategy was based on opening new locations to expand geographic coverage and increase market share. Increasing competition from Netflix, Redbox, Amazon on demand and other VOD services resulted in declining revenues for blockbuster (see Exhibit 5). The company filed for bankruptcy on September 23, 2010 wiping out more than $1B of debt. Some 54.8% of voters in a weekly poll said creditors shouldn't lend the company any more money, while 45.2% are still hopeful that Blockbuster will be able to rebound with more cash [1]. Recently the deadline to file a bankruptcy and restructuring plan was extended till March 21, 2011. Blockbuster planned to close 72 stores by the end of 2010 and another 110 stores in the first quarter of 2011 [3].
On the contrary, Netflix offered an online DVD rental service with no physical store location. Launched in 1998, the company focused on early adopters and offered only the DVD format even though the VHS cassette was prevalent at time of period. The widespread acceptance of DVD format was a presumption and risk for Netflix business model. Users could search through the collection and select the desired title. The DVD was mailed to the customer using the USPS service. Earlier, Netflix used the per rental charge model as other companies plus the shipping charges. However Netflix soon realized that it was spending $100 to $200 for a customer to make one $4 rental. As a solution, Netflix started the prepaid subscription based model. The new model allowed greater customer retention, turned the long delivery time to an advantage and most importantly allowed Netflix to offer “unlimited” DVDs per month. The new “all you can eat” model was an attractive alternative to the traditional per-day fee structure with late fees. A diagram of this system can be seen in Exhibit 1.
The next hurdle Netflix faced was high demand for hit and new movies and the user frustration with the movie unavailability. The recommendation system was developed which makes suggestions of movies that are available and might be of interest based on preference and history. The success of the recommendation system decreased the demand for newer releases to 20% of the total demand compared to the 70% for the traditional video rentals. A positive “network effect” was generated from the large customer-generated rating system. As a start-up company, Netflix did not have any business relationship with major studios. Netflix mainly acquired titles from smaller studios at a minimal discount. Sarandos who had excellent relationships with the studios and was veteran in the DVD rental industry was successful in forming revenue-sharing agreements with the major studios. The average wait time when there was just one warehouse in Sunnyvale was about 1 week. The one day delivery model was very useful. Today, Netflix has 44 distribution centers across the country, which can deliver to more than 90% of 6.6 million subscribers within a single business day. Using optimized processes, Netflix’s employees could open and re-stuff an average of 800 DVDs per hour, allowing the entire distribution center network to ship over 1.6 million DVDs per day. The efficient and minimalistic work processes are part of their overall competitiveness (see Exhibit 4). Their operating cost in relation to revenues is less than half that of their competition Blockbuster (see Exhibit 5). In addition, Netflix collaborated with USPS, to further reduce the turnover time and cost. Netflix received a standard discount for presorting the mail by zip code. As Netflix became known as the de facto source for independent and foreign movies, the smaller studios were interested in partnering with Netflix to market their movies. In 2006, Netflix started to acquire rights for some independent movies through its Red Envelope Entertainment subsidiary. Another growing concern for Netflix was the high attrition rate (churn rate), which grew from 3.6% in 2002 to 6.3% in 2006. Athough, Blockbuster and Netflix compete in the same video rental market they really do different jobs for consumers. Blockbuster has made its core business the idea of a “movie night”. They assumed that most movie rentals were impulse decisions for people who want to watch a movie right now. These are usually new releases and so this is a majority of what Blockbuster stocks. Netflix on the other hand has evolved to view movie watching as a regular part of daily entertainment. They appeal to the customers who do not see “movie night” as an event but instead as an ordinary form of entertainment like watching television. The ability to hold movies longer and the convenience of receiving/returning through mail is perfect option for this type of consumer. So, Blockbuster and Netflix cater to two different types of movie renters. A Blockbuster customer would probably watch fewer movies but the ones they do watch would be new releases rented impulsively. A Netflix customer would watch movies more frequently. They would also be more interested in lesser-known films and would plan out their rentals in advance.
Blockbuster and Netflix have differing business models and their operations strategies reflect it. As stated above, Blockbuster focuses on the “movie night” crowd who want a new release movie right away. So, they operate in a brick and mortar way where customers come into the store and leave with a movie. Their business model is to allow consumers to make an impulse decision to rent a movie and get it right away. To accomplish this they have an operations strategy of actual stores located heavily across the United States and stocked with mostly mainstream titles. Netflix on the other hand has created a business model around the idea that consumers want convenience and selection more than they want to be able to make an impulse decision. They then created an operations strategy to accomplish this. Monthly fees instead of rentals, mail delivery instead of pickup, and a wide choice of movies instead of just new releases are all a part of their operations strategy. It certainly appears that Netflix’s business model will win out in the end as shown by the stock price of the two companies in Exhibit 2 and 3.
With the rise in availability of broadband Internet and Internet connectible devices, the video on demand business model has gained prominence. VOD is a pay per view ability to access any multimedia content to an individual Web browser or TV set based on user requests. VOD systems either stream content through a set-top box, a computer or other device, allowing viewing in real time, or download it to a device such as a computer, digital video recorder or portable media player for viewing at any time [5].
I will bet short on Netflix unless, it starts VOD for “all” of its titles available. Netflix offers “some” select few titles for online viewing but this will not be enough in the future. Allowing users to watch any movie they want right away would be an enormous strategic advantage for Netflix. This would obviously take some negotiating with the other entities in the movie business. The DVD makers would be strictly opposed to this but if the price was right a deal could surely be made. In addition to expanding their selection of VOD titles, allowing playback easily on televisions will also be important. If a consumer owns a 50” HD television they are not going to want to watch a movie on their computer, even if it is being watched “on demand”. So, giving playback on internet enabled televisions (all brands) is going to be an important step towards winning the VOD battle.
Another Netflix disadvantage is the limited TV programming available to watch online. Services like HULU Plus offer a huge collection of high definition TV programming. The free HULU service is also available to view limited TV programming. While it may be hard to work out deals with the movie studios, working on deals for television shows (both past and present) seems easily possible. Also, a customer would be more willing to sit and watch a 30 minute television episode at their computer where as they might not be willing to do the same with a 2 hour movie. This eliminates the struggle to get VOD onto televisions and is another reason that focusing on “on demand” television show viewing could be arranged rather soon.
Even though they are currently struggling, Blockbuster, has started the “Total Access” service. The Total Access service allows the customers to order and return titles via mail, second, order and return the title at participating physical store, third, rent or purchase movies online on-demand. In addition to the movies, Blockbuster also offers access to Playstation 3, Xbox 360 and Nintendo Wii games at no extra charge. According to PwC, the video game industry will grow at 6.7% compound annually for the five-year period to $12.5 billion. It has already surpassed the music spending from the consumer spending point of view. Therefore, the offering the video game with movie DVD and blu ray disk can be vital factor for success.
Blockbuster has also started to set-up vending machines at local grocery stores and gas stations. For newer titles Red Box has been the preferred service in the recent times. Red box vending machines can be found in the everyday grocery stores like Kroger, Wal-Mart, Biggs etc., Pharmacies and even local markets. Red box offers convenience of reserving a movie through the Internet (an iPhone app is also available) to avoid the inconvenience of not finding the movie required. As of April 2007, kiosks had averaged 49.1 rentals per day and $37,457 a year in revenue [4]. Redbox is the cheapest movie rentals, which charges $1.00 for a DVD and $1.50 for a blue ray disk for one night. Redbox allows the customer to return the rental disk at any location. In addition to the rental business, customers also have the option to purchase the disks from the Red box vending machines. Other VOD providers like Qriocity have exclusive connectivity with Sony, which is a major player in the HD TV market. In short, Netflix has some stiff competition in the days ahead.
References
1. Blockbuster Creditors Should Call It Quits, Poll Says, TheStreet, 30 Jan 2011. URL: http://t.co/TcSPlun" http://t.co/TcSPlun
2. Blockbuster wins 3-month restructuring extension, Reuters, 20 Jan 2011. URL: http://t.co/iZPsUi5" http://t.co/iZPsUi5
3. Blockbuster wins 3-month restructuring extension, Reuters, 20 Jan 2011. URL: http://t.co/iZPsUi5
4. Redbox, Wikipedia, Accessed: 31-Jan-2011, URL:http://en.wikipedia.org/wiki/Redbox
5. Video On Demand, Wikipedia, Accessed: 31-Jan-2011, URL: http://en.wikipedia.org/wiki/Video_on_demand
6. NetFlix Annual SEC Report (2010) URL: http://files.shareholder.com/downloads/NFLX/1159919179x0xS1193125-10-36181/1065280/filing.pdf
Exhibit 1
Exhibit 2
Exhibit 3
Exhibit 4: SWOT Analysis
Strengths
-Few employees, low overhead costs
-Predictable revenue via monthly subscriptions
-Efficient/minimalistic supply chain
Weaknesses
-High DVD attrition rates ~4.2%
-Small Library
-Availability of new releases
Opportunities
-Continue to utilize WOM Marketing via referral systems
-Partnerships with production agencies
-VOD
Threats
-Competition, existing and new offering VOD capabilities
-Blockbuster Total Access
Exhibit 5
Source: Netflix Business Model, White Paper; Coates A., Deshpande A., Lopez N.
Strategy as a Wicked Problem: Citibank
Companies today face a vast array of difficulties and challenges. Most of these challenges can be addressed and remedied with well-established processes; however, some fall into a separate category known as WICKED PROBLEMS [1]. WICKED PROBLEMS are identified by John Camillus as problems that “[have] innumerable causes, [are] tough to describe and [do not] have a right answer [1].” WICKED PROBLEMS involve stakeholders with different values and priorities, making it difficult for managers to clearly identify the root cause of a particular problem. Once a company identifies it is faced with a WICKED PROBLEM, it must invent creative methods to deal with the dilemma as no preexisting solution is available. This predicament is primarily due to the fact that WICKED PROBLEMS, by their definition, have no historical precedent for which to benchmark appropriate managerial decision making.
Citibank is currently facing WICKED PROBLEMS; a variety of complex and intertwined reasons, involving various groups of stakeholders (to include numerous government agencies). Each party possesses a distinct set of priorities related to future industry regulation, viability, operations and profitability. The source of these troubling issues is not easily identified as they revolve around a complex network of occurrences: the collapse of the real estate industry, liberal lending practices, stringent government regulations and lax policies are a few of such underlying issues. During the global financial crisis in 2008-09, the “too big to fail” Citibank received more than $50 billion via taxpayer money in the form of the Troubled Asset Relief Program (TARP). The goal was to avoid a financial meltdown and strengthen the banks so that they can lend which in turn will revive the economy and reduce the high unemployment rate. However, because of the stricter regulations and lending practices, lending to businesses has plunged resulting in credit crunch [3]. On the contrary, to reduce cost, Citibank exercised massive lay-offs which further deteriorated its public image [4]. Another strategy adopted to reduce operational cost which ultimately had serious security consequences was outsourcing the information technology and support center tasks to India. Fraud incident were recorded where more than $350,000 from Citibank account holders in New York were stolen [6]. To make matter worse, there was a security leak of more than 600,000 social security errors [7]. Within the last few years, the share price of Citibank has plummeted from $37 to $4 resulting in an uproar from shareholders. If Citibank were to actively address these issues related to WICKED PROBLEM(S), the analysis would likely reveal a network of complex and interconnected root causes. For example, in order reduce massive losses from its credit card business; Citibank allegedly closed a limited number of co-branded MasterCard accounts including Shell, Citgo, ExxonMobil and Phillips 66-Conoco oil partner cards [2]. The arbitrary credit card closing of credit cards led to dissatisfied customers and potential lawsuits. If the problems plaguing the Citibank were thoroughly reviewed, one would have great difficulty in identifying which particular problem should be the immediate focus of attention. In order to attack WICKED PROBLEMS, it is important to use multiple strategies in order to bring the root cause (or more likely causes) to light.
There are frameworks and guidelines available to identify WICKED PROBLEMS but not clearly tame them with quantified results. There is a need to formulate multiple variable (constraints) stochastic optimization methodology to obtain the best possible strategy with the various interrelated constraints. In case of Citibank some of the considerations will be repayment of TARP funds, lending practices, foreclosure processes, hiring and layoff, restructuring and new business opportunities in the emerging markets. Last year, Citibank separated into two businesses, Citicorp and Citi Holdings, to optimize the company's global businesses for future profitable growth and opportunities [8]. Even though many of the corporate strategies may not address all segments of the WICKED PROBLEM, the change in policies may provide the company with valuable insight in order to identify other opportunities to contest. A well defined mission statement which clearly communicates the Citibank’s ethos, core competencies, growth projections and future aspirations will help guide managers and their decision making when tackling such WICKED PROBLEMS. It is extremely important to involve stakeholders, document opinions, and communicate during strategy formulations. In case of Citibank the various stakeholders will comprise of the government, shareholders, customers and its own employees. The implementation of new strategies developed to combat WICKED PROBLEMS may be extremely costly. The development of pilot programs and scenario analysis may be the best way to control the implementation of a particular solution for such issues. Companies faced with a WICKED PROBLEM need remember that their focus should not lie on “fixing” the predicament with a single strategy. The goal is to grasp a greater understanding of the problem(s) which come from multitude of strategies. Some of these strategies may indeed fail, thus providing additional insight into the WICKED PROBLEM’S solution.
References
1. “Strategy as a WICKED Problem”, John C. Camillus, Harvard Business Review, May 2008
2. “Citibank Cancels Credit Cards with Little Warning”, http://www.lawyersandsettlements.com/features/citi-mastercards-city-bank-cards-citybank-citibank.html. Accessed: 14-Nov-2010.
3. “Lending Falls at Epic Pace”, Michael R. Crittenden, Marshall Eckblad, The Wall Street Journal, 24-Feb-2010.
4. “Citigroup's Layoffs Could Reach 24,000 This Year”, http://www.cnbc.com/id/22639976/Citigroup_s_Layoffs_Could_Reach_24_000_This_Year. Accessed: 14-Nov-2010.
5. “Citi's Statement on TARP Repayment” http://online.wsj.com/article/SB126079048758690393.html
6. “Citibank call centre fraud reveals Indian data protection deficit”, Computer Fraud and Security, Vol. 2005, Issue: 4-Apr-2005. pp. 3.
7. “Citibank Exposes 600,000 SSNs.” Information Management (15352897), v. 44 issue 3, 2010, p. 10-10.
8. “Citi to Reorganize into Two Operating Units to Maximize Value of Core Franchise”, Citigroup Inc. Press Release, 16-Jan-2009.
Source: Deshpande A., Evans A., Roberts M., Citibank’s Wicked Problems, White Paper.
Citibank is currently facing WICKED PROBLEMS; a variety of complex and intertwined reasons, involving various groups of stakeholders (to include numerous government agencies). Each party possesses a distinct set of priorities related to future industry regulation, viability, operations and profitability. The source of these troubling issues is not easily identified as they revolve around a complex network of occurrences: the collapse of the real estate industry, liberal lending practices, stringent government regulations and lax policies are a few of such underlying issues. During the global financial crisis in 2008-09, the “too big to fail” Citibank received more than $50 billion via taxpayer money in the form of the Troubled Asset Relief Program (TARP). The goal was to avoid a financial meltdown and strengthen the banks so that they can lend which in turn will revive the economy and reduce the high unemployment rate. However, because of the stricter regulations and lending practices, lending to businesses has plunged resulting in credit crunch [3]. On the contrary, to reduce cost, Citibank exercised massive lay-offs which further deteriorated its public image [4]. Another strategy adopted to reduce operational cost which ultimately had serious security consequences was outsourcing the information technology and support center tasks to India. Fraud incident were recorded where more than $350,000 from Citibank account holders in New York were stolen [6]. To make matter worse, there was a security leak of more than 600,000 social security errors [7]. Within the last few years, the share price of Citibank has plummeted from $37 to $4 resulting in an uproar from shareholders. If Citibank were to actively address these issues related to WICKED PROBLEM(S), the analysis would likely reveal a network of complex and interconnected root causes. For example, in order reduce massive losses from its credit card business; Citibank allegedly closed a limited number of co-branded MasterCard accounts including Shell, Citgo, ExxonMobil and Phillips 66-Conoco oil partner cards [2]. The arbitrary credit card closing of credit cards led to dissatisfied customers and potential lawsuits. If the problems plaguing the Citibank were thoroughly reviewed, one would have great difficulty in identifying which particular problem should be the immediate focus of attention. In order to attack WICKED PROBLEMS, it is important to use multiple strategies in order to bring the root cause (or more likely causes) to light.
There are frameworks and guidelines available to identify WICKED PROBLEMS but not clearly tame them with quantified results. There is a need to formulate multiple variable (constraints) stochastic optimization methodology to obtain the best possible strategy with the various interrelated constraints. In case of Citibank some of the considerations will be repayment of TARP funds, lending practices, foreclosure processes, hiring and layoff, restructuring and new business opportunities in the emerging markets. Last year, Citibank separated into two businesses, Citicorp and Citi Holdings, to optimize the company's global businesses for future profitable growth and opportunities [8]. Even though many of the corporate strategies may not address all segments of the WICKED PROBLEM, the change in policies may provide the company with valuable insight in order to identify other opportunities to contest. A well defined mission statement which clearly communicates the Citibank’s ethos, core competencies, growth projections and future aspirations will help guide managers and their decision making when tackling such WICKED PROBLEMS. It is extremely important to involve stakeholders, document opinions, and communicate during strategy formulations. In case of Citibank the various stakeholders will comprise of the government, shareholders, customers and its own employees. The implementation of new strategies developed to combat WICKED PROBLEMS may be extremely costly. The development of pilot programs and scenario analysis may be the best way to control the implementation of a particular solution for such issues. Companies faced with a WICKED PROBLEM need remember that their focus should not lie on “fixing” the predicament with a single strategy. The goal is to grasp a greater understanding of the problem(s) which come from multitude of strategies. Some of these strategies may indeed fail, thus providing additional insight into the WICKED PROBLEM’S solution.
References
1. “Strategy as a WICKED Problem”, John C. Camillus, Harvard Business Review, May 2008
2. “Citibank Cancels Credit Cards with Little Warning”, http://www.lawyersandsettlements.com/features/citi-mastercards-city-bank-cards-citybank-citibank.html. Accessed: 14-Nov-2010.
3. “Lending Falls at Epic Pace”, Michael R. Crittenden, Marshall Eckblad, The Wall Street Journal, 24-Feb-2010.
4. “Citigroup's Layoffs Could Reach 24,000 This Year”, http://www.cnbc.com/id/22639976/Citigroup_s_Layoffs_Could_Reach_24_000_This_Year. Accessed: 14-Nov-2010.
5. “Citi's Statement on TARP Repayment” http://online.wsj.com/article/SB126079048758690393.html
6. “Citibank call centre fraud reveals Indian data protection deficit”, Computer Fraud and Security, Vol. 2005, Issue: 4-Apr-2005. pp. 3.
7. “Citibank Exposes 600,000 SSNs.” Information Management (15352897), v. 44 issue 3, 2010, p. 10-10.
8. “Citi to Reorganize into Two Operating Units to Maximize Value of Core Franchise”, Citigroup Inc. Press Release, 16-Jan-2009.
Source: Deshpande A., Evans A., Roberts M., Citibank’s Wicked Problems, White Paper.
Gandhian Innovation
In this must-read article Innovation’s Holy Grail by Prahalad and Mashelkar, the authors state that the next generation innovation will be driven by affordability and sustainability, not premium pricing and abundance. The authors call the new innovation model as Gandhian Innovation because at the core of it lies the two Mahatma Gandhi’s tenets:
- “I would prize every invention of science made for the benefit of all”
- “Earth provides enough to satisfy every man’s need, but not every man’s greed”
Fig: Innovation in India using Gandhian Model (Reference: Innovation’s Holy Grail)
Three kinds on Gandhian innovations
1. Disruptive business models using the low cost labor
2. Synthesizing several existing technologies and modifying organizational capabilities to offer new value added products
3. Developing and/or acquiring new capabilities to solve technical hurdles which require technology development or a collaborative approach
Rules for Gandhian Innovation
1. Deep commitment to serving the unserved
2. Unambiguous vision
3. Ambitious goals to foster an entrepreneurial spirit
4. Accept that constraints will always exist, and creatively operate within them
5. Focus on people, not just shareholder wealth and profits
Reference: For more information read “Innovation’s Holy Grail”, C.K. Prahalad and R.A. Mashelkar, Harvard Business Review, July-August 2010.
- “I would prize every invention of science made for the benefit of all”
- “Earth provides enough to satisfy every man’s need, but not every man’s greed”
Fig: Innovation in India using Gandhian Model (Reference: Innovation’s Holy Grail)Three kinds on Gandhian innovations
1. Disruptive business models using the low cost labor
2. Synthesizing several existing technologies and modifying organizational capabilities to offer new value added products
3. Developing and/or acquiring new capabilities to solve technical hurdles which require technology development or a collaborative approach
Rules for Gandhian Innovation
1. Deep commitment to serving the unserved
2. Unambiguous vision
3. Ambitious goals to foster an entrepreneurial spirit
4. Accept that constraints will always exist, and creatively operate within them
5. Focus on people, not just shareholder wealth and profits
Reference: For more information read “Innovation’s Holy Grail”, C.K. Prahalad and R.A. Mashelkar, Harvard Business Review, July-August 2010.
Traditional Manufacturing Consulting Firms should explore the Blue Ocean Healthcare Services Market
Recent advances in technology is revolutionizing industrial productivity, lowering cost structure and presenting new opportunities to provide the world market with innovative products. Traditional trade barriers between nations are vanishing; with the proliferation of internet and subsequent communication technologies, market information is available world-wide in real-time. Although these wonderful features of the world economy have been harnessed by corporations around the globe, there are hidden detriments as well. These rapid changes have commoditized traditional marketplaces faster than ever before, forcing companies to become entangled in price wars to stay competitive, resulting in ever-shrinking profit margins [6]. In order to succeed in the future, companies should focus on BLUE OCEAN strategies by creating and competing in “uncontested market space” and “making competition irrelevant” instead of fighting for market share in highly competitive RED OCEANS [6]. One critical element in a BLUE OCEAN is to align corporate functions and activities in order to achieve differentiation and low cost simultaneously [6]. Technology innovation, although advantageous, is not the defining characteristics of a BLUE OCEAN firm; nor is the myth that incumbents are at a disadvantage in creating blue markets. A large research and development (R&D) budget is not the prerequisite for creating blue markets: the key is proper managerial action and strategy, which can create long lasting brand value [6]. BLUE OCEAN strategy adopters benefit from economies of scale and have “first to market” advantage which makes would-be competitors entry difficult [6]. In summary, to be successful and profitable, corporations competing in traditional RED OCEAN markets should shift their focus on identifying strategies for creating, capturing and protecting BLUE OCEAN products and/or services.
In the mid-1970’s, the Japanese automaker Toyota created a BLUE OCEAN in America with its small and reliable line of automobiles. Toyota introduced and successfully implemented the tenants of Lean Manufacturing (often simply stated as: "Lean") which resulted in its affordable and reliable line of vehicles [4]. Lean Manufacturing is a production practice which considers the expenditure of resources for anything other than the creation of customer value to be wasteful; thus, a target for elimination [3]. The main objectives are to design out overburden (muri), inconsistency (mura) and eliminate waste (muda) [3]. These concepts, which were successfully implemented in the manufacturing industry, can also be applied to the service sector. The healthcare (service) industry differs in many ways from the manufacturing (product) industry; however, if thinking simply from a process perspective, many similarities exist. Similar to building a car, the task of providing healthcare to patients requires workers to execute multiple simple and complex processes in a defined sequence to provide value to the customer (i.e. patient). Waste, in terms of money, time, supplies and inventory, should be eliminated in these value additive healthcare services. Traditional manufacturing consulting firms should exploit the BLUE OCEAN opportunities within the service industry and expanded their product offerings in the form of healthcare. Firms should collaborate with healthcare organizations to implement business improvement, productivity and downtime reduction solutions. These solutions can minimize process variation and eliminate wasteful activities which lead to increased capacity, throughput and result in improved patient care and satisfaction. And most importantly, reduce the ballooning healthcare costs.
Application to healthcare has been limited and focused mainly on operational aspects using original Lean concepts. A more integrative approach would be to pay more attention to socio-technical (interaction between people and technology) dynamics of Lean implementation efforts. Every car produced on an assembly line has the same specifications, so standardized time (or “takt”) and resources for production of a car can be determined [3]. Unlike vehicle manufacturing, each patient is different in terms of needs and condition; a patient with nominal fever is not the same as the patient requiring an urgent surgery. Another industry difference is in demand and inventory storage. The demand for vehicles can be estimated based upon production capability, seasonally adjusted annual rate (SAAR) and dealer demand forecast [5]. Unlike vehicle manufacturing, it is difficult to estimate the number of people who will become ill or have accidents and require hospitalization. If vehicles are overproduced they can be stored for future sales; in healthcare, it is impossible to use up excess capacity if no patient demand exists.
In summary, Lean concepts have the potential to greatly improve healthcare and present a huge BLUE OCEAN market for consulting businesses. At the same time, methodological and practical considerations exist which need to be factored into any decision. If all aspects of implementation are not considered or understood, Lean can and will fail, adding to current costs and making it difficult to improve upon existing healthcare services.
References
1. Lean Manufacturing, Wikipedia, Accessed: 3-Oct-2010. URL: http://en.wikipedia.org/wiki/Lean_manufacturing
2. Toyota Production System, 3-Oct-2010,URL: http://en.wikipedia.org/wiki/Toyota_Production_System
3. Toyota Production System: Beyond Large-Scale Production, Taiichi Ohono, Diamond Inc. Tokyo Press, Japan
4. The Toyota Way, Jeffrey K. Liker, McGraw-Hill Press, 1998
5. How Toyota Became #1, David Magee, Penguin Group, 2007
6. Blue Ocean Strategy, W. Chan Kim & Renee Mauborgne, Harvard Business Review, 2004
Original Source: “Blue Ocean Strategy Concept Paper”, Deshpande A., Evans A. & Roberts M.
In the mid-1970’s, the Japanese automaker Toyota created a BLUE OCEAN in America with its small and reliable line of automobiles. Toyota introduced and successfully implemented the tenants of Lean Manufacturing (often simply stated as: "Lean") which resulted in its affordable and reliable line of vehicles [4]. Lean Manufacturing is a production practice which considers the expenditure of resources for anything other than the creation of customer value to be wasteful; thus, a target for elimination [3]. The main objectives are to design out overburden (muri), inconsistency (mura) and eliminate waste (muda) [3]. These concepts, which were successfully implemented in the manufacturing industry, can also be applied to the service sector. The healthcare (service) industry differs in many ways from the manufacturing (product) industry; however, if thinking simply from a process perspective, many similarities exist. Similar to building a car, the task of providing healthcare to patients requires workers to execute multiple simple and complex processes in a defined sequence to provide value to the customer (i.e. patient). Waste, in terms of money, time, supplies and inventory, should be eliminated in these value additive healthcare services. Traditional manufacturing consulting firms should exploit the BLUE OCEAN opportunities within the service industry and expanded their product offerings in the form of healthcare. Firms should collaborate with healthcare organizations to implement business improvement, productivity and downtime reduction solutions. These solutions can minimize process variation and eliminate wasteful activities which lead to increased capacity, throughput and result in improved patient care and satisfaction. And most importantly, reduce the ballooning healthcare costs.
Application to healthcare has been limited and focused mainly on operational aspects using original Lean concepts. A more integrative approach would be to pay more attention to socio-technical (interaction between people and technology) dynamics of Lean implementation efforts. Every car produced on an assembly line has the same specifications, so standardized time (or “takt”) and resources for production of a car can be determined [3]. Unlike vehicle manufacturing, each patient is different in terms of needs and condition; a patient with nominal fever is not the same as the patient requiring an urgent surgery. Another industry difference is in demand and inventory storage. The demand for vehicles can be estimated based upon production capability, seasonally adjusted annual rate (SAAR) and dealer demand forecast [5]. Unlike vehicle manufacturing, it is difficult to estimate the number of people who will become ill or have accidents and require hospitalization. If vehicles are overproduced they can be stored for future sales; in healthcare, it is impossible to use up excess capacity if no patient demand exists.
In summary, Lean concepts have the potential to greatly improve healthcare and present a huge BLUE OCEAN market for consulting businesses. At the same time, methodological and practical considerations exist which need to be factored into any decision. If all aspects of implementation are not considered or understood, Lean can and will fail, adding to current costs and making it difficult to improve upon existing healthcare services.
References
1. Lean Manufacturing, Wikipedia, Accessed: 3-Oct-2010. URL: http://en.wikipedia.org/wiki/Lean_manufacturing
2. Toyota Production System, 3-Oct-2010,URL: http://en.wikipedia.org/wiki/Toyota_Production_System
3. Toyota Production System: Beyond Large-Scale Production, Taiichi Ohono, Diamond Inc. Tokyo Press, Japan
4. The Toyota Way, Jeffrey K. Liker, McGraw-Hill Press, 1998
5. How Toyota Became #1, David Magee, Penguin Group, 2007
6. Blue Ocean Strategy, W. Chan Kim & Renee Mauborgne, Harvard Business Review, 2004
Original Source: “Blue Ocean Strategy Concept Paper”, Deshpande A., Evans A. & Roberts M.
Business in India - The Implications of Mythology, Culture and Beliefs
Devdutt Pattanaik: East vs. West -- the myths that mystify | Video on TED.com
Devdutt Pattanaik takes an eye-opening look at the myths of India and of the West -- and shows how these two fundamentally different sets of beliefs about God, death and heaven help us consistently misunderstand one another.
Devdutt Pattanaik takes an eye-opening look at the myths of India and of the West -- and shows how these two fundamentally different sets of beliefs about God, death and heaven help us consistently misunderstand one another.
Outsourcing: Do We Lose or Gain?
Historically, commodity trade has been a win-win situation for the participating countries which leverage their specialization. Developed countries like US have a distinct advantage of outsourcing low-cost low-skill products like shoes, clothes and concentrate on innovation and high technology products like airplanes, computers, cell phones, cars etc… This keeps costs low and increases the purchasing power of the US consumers. One aero plane built can buy tons of shoes and agricultural goods. Also producing an aero plane requires high skill workers and technology thus boosting salaries and standard of living. After having enormous profit from free trade the developed countries (USA, Europe and Japan) are suppressing the liberalization of markets where they have comparative disadvantage like the food markets. These nations have refused open trade in agricultural goods in an effort to protect farmers from being displaced [1]. Is this ethical to adhere to open trade/market only till it is profitable?
The latest political buzz is about the software and IT outsourcing to countries like India. The software outsourcing was one of the main agenda during the last presidential elections. Previously high skill computer jobs of programming and IT services were considered outsourcing proof. How are you going to transfer and control pieces of code and services across continents and manage the process? The dilemma of software outsourcing started with the advent of internet and better electronic communication infrastructure. Software development, maintenance, and services can now be outsources to countries like India. We reduce cost, save money on healthcare (employee health insurance), possibly save some vital resources and curb inflation through outsourcing. Motivations for outsourcing are cost driven, strategy driven or politically driven [2]. Software outsourcing to various parts of the world is primarily cost driven. However with better skilled talent in mathematics and science in developing countries outsourcing can also be strategy driven. For example IBM now focuses on capturing 50% Indian domestic market by 2010 [7]. As of July 2007, IBM employed more than fifty thousand employees in India. Google outsources its IT hardware and now setup research facilities outside US and Europe. GE global research has setup operations in China (Shanghai) and India (Bangalore) while scaling down operations in the West. GE argues that the strategy is not only cost effective but the young talent in the east is better helping them on their path of innovation. According to Seattle Business [11]-
The US unemployment rate is at record high at 9.4%. It is predicted that it will reach double digits by the end of the year before improving. Large corporations are now outsourcing high salary high skill jobs overseas. Who is gaining? Is it ethical to lay off thousands of people in US and expand overseas? IBM, GE, Google now maintains high skill R&D jobs abroad while reducing the workforce in the US. The justification is always the Free Trade philosophy. Even though it’s not illegal the question is – Is it ethical? Infosys technologies headquartered in Bangalore, reported 17% increase in revenue last quarter. The increase is attributable to the increased outsourcing projects and stronger dollar. How is this possible when the US is in recession with more than 4% reduction in GDP and almost all enterprises experiencing the spiral decay in the economy and domestic demand? Outsourcing phenomenon is certainly legal but let’s take a closer look at the ethical implications.
A corporation’s motive is to make money and increase shareholder value. Milton Friedman, a free market economy proponent stated-
According to free market ethics theory outsourcing is the correct option for the US high tech companies. So what if it takes laying off thousands of US workers and hire abroad. Actually it is wrong for the managers to think about the goodwill and society’s interest in taking decision. Decisions regarding the issues concerning the society should be handled within the legal framework and political arena. Analyzing the outsourcing issue by free market ethics framework leads us to the conclusion that US companies decision is completely justifiable and appropriate.
Now, let us analyze the issue from the utilitarian framework of ethical decisions. Utilitarianism is the idea that the moral worth of an action is determined solely by its contribution to overall utility: that is, its contribution to happiness or pleasure as summed among all people [13]. It is thus a form of consequentialism, meaning that the moral worth of an action is determined by its outcome [13]. We need to analyze three main issues - job loss in US, job gain in India and overall effect on the economy. Research says that only one third of the layoff people find equivalent jobs or higher paying job. On the other hand, a job for Indian worker who currently works for less than 1$ per day can be huge. Quantification of the both the effects are difficult. Some secondary impact includes effect on the local governments as tax revenue decline. Local communities get affected as the schools and higher education systems get lower tax revenues. From the economy perspective outsourcing will help corporation save money and remain competitive in the global economy. Corporations can invest the bloated profits in research and move up the ladder to offer higher value corporate packages of research, software and services which have higher profit margins [4]. For example IBM is currently working actively in the areas of utility grid optimization & energy conservation, genetics-based personalized medicine, fraud detection & prediction, and traffic management using sensors and congestion-pricing models [4]. Specialized skills are required which create higher paying jobs ultimately leading to more innovation and growth. Outsourcing has actually strengthened the US economy. According to recent reports, Indian outsourcing companies are hiring US citizens for the operations in the United States. For example, Tata Consultancy’s US headquarters is located in Cincinnati, Ohio which has generated numerous employment opportunities in the tri-state area.
Deontological ethics or deontology is an approach to ethics that holds that acts are inherently good or evil, regardless of the consequences of the acts [14]. A central theme among deontological theorists is that we have a duty to do those things that are inherently good. Our obligation or duty is to take the right action, even if the consequences of a given act may be bad [14]. Kant, a strong proponent of Deontology, states that the universal rights and duties should be “absolute”. Evaluating an ethical problem within the deontological framework can be difficult especially when the definition of universal rights and duties is not clear. What is “fair”- Maximizing the shareholder value? Offering a job to well qualified Indian worker? Or letting go an American job according to the market forces? The first two questions lean towards outsourcing as the correct way to move forward. But the third question indicates otherwise. Will you give up your job because there is low cost labor available out of the country? No. If it is your job you will oppose the outsourcing decision. This essentially contradicts the absolute universal rights and duties as proposed by Kant.
Virtue ethics is a branch of moral philosophy that emphasizes character, rather than rules or consequences, as the key element of ethical thinking [15]. Virtue ethics sets standard for moral excellence in contrast to Deontology and Utilitarianism which sets limits on moral minima [6]. When studied in business sense virtue ethics framework needs the definition of “community” in terms of business sense and moral decisions consistent with the company principles and guidelines. Some IBM principles include:
Evaluating the principles IBM’s decision of outsourcing is justified.
To conclude we think that the external and secondary effects of outsourcing are difficult to quantify. The political, social, legal and marketplace influences the decision. Also outsourcing decisions analysis cannot be generalized across the industry but should be considered on case by case basis. As of now outsourcing trend seems positive and gaining grounds. The effect on the economy and labor market of the “outsourced” and “outsourcing” countries remain to be seen.
References
1. Who Benefits from Outsourcing? Albino Barrera, Accessed 29-Jul-2009. http://www.religion-online.org/showarticle.asp?title=3115.
2. Outsourcing Decision Support: A Survey of Benefits, Risks, and Decision Factors, Kremic, Tibor, Tukel, Oya Icmeli, Rom, O. Walter Supply Chain Management: An International Journal, Vol. 11, No. 6. (2006), pp. 467-482.
3. Business process outsourcing in India. Wikipedia, The Free Encyclopedia. 6 Aug 2009, 11:55 UTC. 6 Aug 2009.
4. I.B.M. Showing That Giants Can Be Nimble, Steve Lohr, New York Times, Published: 18 July 2007.
5. Does Outsourcing Cost More Than It Saves? William J. Holstein, New York Times Published: 9 August 2009.
6. Law and Ethics in the Business Environment, Terry Halbert , Elaine Ingulli, Publisher: Cengage Learning, Pub. Date: February 2008, ISBN-13: 9780324657326.
7. IBM local outsourcing pie to be 50% by 2010, Pankaj Mishra, Economic Times - ET Bureau, 10 Feb 2009.
8. The Social Responsibility of Business Is to Increase Its Profits, New York Times, 13 September 1970.
9. Google Invests in India - Outsourcing Again, Engine Search Round Table, October 13, 2004.
10. Microsoft plans to outsource more, says ex-worker, The Seattle Times, September 3, 2005
11. “Microsoft outsourcing high-end jobs”, union says, Seattlepi Business, 16 June 2004
12. “How Outsourcing Affects The U.S. Economy!” Business Journal, 8 August 2009
13. "Utilitarianism." Wikipedia, The Free Encyclopedia. 4 Aug 2009, 03:09 UTC. 4 Aug 2009.
14. "Deontological ethics." Wikipedia, The Free Encyclopedia. 29 Jul 2009, 16:57 UTC. 29 Jul 2009.
15. "Virtue ethics." Wikipedia, The Free Encyclopedia. 30 Jul 2009, 03:47 UTC. 30 Jul 2009.
The latest political buzz is about the software and IT outsourcing to countries like India. The software outsourcing was one of the main agenda during the last presidential elections. Previously high skill computer jobs of programming and IT services were considered outsourcing proof. How are you going to transfer and control pieces of code and services across continents and manage the process? The dilemma of software outsourcing started with the advent of internet and better electronic communication infrastructure. Software development, maintenance, and services can now be outsources to countries like India. We reduce cost, save money on healthcare (employee health insurance), possibly save some vital resources and curb inflation through outsourcing. Motivations for outsourcing are cost driven, strategy driven or politically driven [2]. Software outsourcing to various parts of the world is primarily cost driven. However with better skilled talent in mathematics and science in developing countries outsourcing can also be strategy driven. For example IBM now focuses on capturing 50% Indian domestic market by 2010 [7]. As of July 2007, IBM employed more than fifty thousand employees in India. Google outsources its IT hardware and now setup research facilities outside US and Europe. GE global research has setup operations in China (Shanghai) and India (Bangalore) while scaling down operations in the West. GE argues that the strategy is not only cost effective but the young talent in the east is better helping them on their path of innovation. According to Seattle Business [11]-
“A Seattle-based labor union says newly surfaced documents show that Microsoft Corp. has looked to outsource to Indian companies high-level jobs in software architecture and development. ..the previously confidential agreements between Microsoft and Indian outsourcing companies Infosys Technologies and Satyam Computer Services debunk the popular notion that only lower-level technology positions are vulnerable to outsourcing….”
The US unemployment rate is at record high at 9.4%. It is predicted that it will reach double digits by the end of the year before improving. Large corporations are now outsourcing high salary high skill jobs overseas. Who is gaining? Is it ethical to lay off thousands of people in US and expand overseas? IBM, GE, Google now maintains high skill R&D jobs abroad while reducing the workforce in the US. The justification is always the Free Trade philosophy. Even though it’s not illegal the question is – Is it ethical? Infosys technologies headquartered in Bangalore, reported 17% increase in revenue last quarter. The increase is attributable to the increased outsourcing projects and stronger dollar. How is this possible when the US is in recession with more than 4% reduction in GDP and almost all enterprises experiencing the spiral decay in the economy and domestic demand? Outsourcing phenomenon is certainly legal but let’s take a closer look at the ethical implications.
A corporation’s motive is to make money and increase shareholder value. Milton Friedman, a free market economy proponent stated-
“… In a free society, there is one and only one social responsibility of the business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which to say, engages in open and free competition without deception or fraud [8].”
According to free market ethics theory outsourcing is the correct option for the US high tech companies. So what if it takes laying off thousands of US workers and hire abroad. Actually it is wrong for the managers to think about the goodwill and society’s interest in taking decision. Decisions regarding the issues concerning the society should be handled within the legal framework and political arena. Analyzing the outsourcing issue by free market ethics framework leads us to the conclusion that US companies decision is completely justifiable and appropriate.
Now, let us analyze the issue from the utilitarian framework of ethical decisions. Utilitarianism is the idea that the moral worth of an action is determined solely by its contribution to overall utility: that is, its contribution to happiness or pleasure as summed among all people [13]. It is thus a form of consequentialism, meaning that the moral worth of an action is determined by its outcome [13]. We need to analyze three main issues - job loss in US, job gain in India and overall effect on the economy. Research says that only one third of the layoff people find equivalent jobs or higher paying job. On the other hand, a job for Indian worker who currently works for less than 1$ per day can be huge. Quantification of the both the effects are difficult. Some secondary impact includes effect on the local governments as tax revenue decline. Local communities get affected as the schools and higher education systems get lower tax revenues. From the economy perspective outsourcing will help corporation save money and remain competitive in the global economy. Corporations can invest the bloated profits in research and move up the ladder to offer higher value corporate packages of research, software and services which have higher profit margins [4]. For example IBM is currently working actively in the areas of utility grid optimization & energy conservation, genetics-based personalized medicine, fraud detection & prediction, and traffic management using sensors and congestion-pricing models [4]. Specialized skills are required which create higher paying jobs ultimately leading to more innovation and growth. Outsourcing has actually strengthened the US economy. According to recent reports, Indian outsourcing companies are hiring US citizens for the operations in the United States. For example, Tata Consultancy’s US headquarters is located in Cincinnati, Ohio which has generated numerous employment opportunities in the tri-state area.
Deontological ethics or deontology is an approach to ethics that holds that acts are inherently good or evil, regardless of the consequences of the acts [14]. A central theme among deontological theorists is that we have a duty to do those things that are inherently good. Our obligation or duty is to take the right action, even if the consequences of a given act may be bad [14]. Kant, a strong proponent of Deontology, states that the universal rights and duties should be “absolute”. Evaluating an ethical problem within the deontological framework can be difficult especially when the definition of universal rights and duties is not clear. What is “fair”- Maximizing the shareholder value? Offering a job to well qualified Indian worker? Or letting go an American job according to the market forces? The first two questions lean towards outsourcing as the correct way to move forward. But the third question indicates otherwise. Will you give up your job because there is low cost labor available out of the country? No. If it is your job you will oppose the outsourcing decision. This essentially contradicts the absolute universal rights and duties as proposed by Kant.
Virtue ethics is a branch of moral philosophy that emphasizes character, rather than rules or consequences, as the key element of ethical thinking [15]. Virtue ethics sets standard for moral excellence in contrast to Deontology and Utilitarianism which sets limits on moral minima [6]. When studied in business sense virtue ethics framework needs the definition of “community” in terms of business sense and moral decisions consistent with the company principles and guidelines. Some IBM principles include:
“We are sensitive to the needs of all employees and to the communities in which we operate”
“The marketplace is the driving force behind everything we do”
“We never lose sight of our strategic vision”
“The marketplace is the driving force behind everything we do”
“We never lose sight of our strategic vision”
Evaluating the principles IBM’s decision of outsourcing is justified.
To conclude we think that the external and secondary effects of outsourcing are difficult to quantify. The political, social, legal and marketplace influences the decision. Also outsourcing decisions analysis cannot be generalized across the industry but should be considered on case by case basis. As of now outsourcing trend seems positive and gaining grounds. The effect on the economy and labor market of the “outsourced” and “outsourcing” countries remain to be seen.
References
1. Who Benefits from Outsourcing? Albino Barrera, Accessed 29-Jul-2009. http://www.religion-online.org/showarticle.asp?title=3115.
2. Outsourcing Decision Support: A Survey of Benefits, Risks, and Decision Factors, Kremic, Tibor, Tukel, Oya Icmeli, Rom, O. Walter Supply Chain Management: An International Journal, Vol. 11, No. 6. (2006), pp. 467-482.
3. Business process outsourcing in India. Wikipedia, The Free Encyclopedia. 6 Aug 2009, 11:55 UTC. 6 Aug 2009
4. I.B.M. Showing That Giants Can Be Nimble, Steve Lohr, New York Times, Published: 18 July 2007.
5. Does Outsourcing Cost More Than It Saves? William J. Holstein, New York Times Published: 9 August 2009.
6. Law and Ethics in the Business Environment, Terry Halbert , Elaine Ingulli, Publisher: Cengage Learning, Pub. Date: February 2008, ISBN-13: 9780324657326.
7. IBM local outsourcing pie to be 50% by 2010, Pankaj Mishra, Economic Times - ET Bureau, 10 Feb 2009.
8. The Social Responsibility of Business Is to Increase Its Profits, New York Times, 13 September 1970.
9. Google Invests in India - Outsourcing Again, Engine Search Round Table, October 13, 2004.
10. Microsoft plans to outsource more, says ex-worker, The Seattle Times, September 3, 2005
11. “Microsoft outsourcing high-end jobs”, union says, Seattlepi Business, 16 June 2004
12. “How Outsourcing Affects The U.S. Economy!” Business Journal, 8 August 2009
13. "Utilitarianism." Wikipedia, The Free Encyclopedia. 4 Aug 2009, 03:09 UTC. 4 Aug 2009
14. "Deontological ethics." Wikipedia, The Free Encyclopedia. 29 Jul 2009, 16:57 UTC. 29 Jul 2009
15. "Virtue ethics." Wikipedia, The Free Encyclopedia. 30 Jul 2009, 03:47 UTC. 30 Jul 2009
Entrepreneurship
Last week, I had a meeting with Sudhir, a successful entrepreneur who started a software firm more than 15 years ago in Cincinnati. Although the meeting was for some other topic we diverted to the all exciting topic of entrepreneurship. Here are some of the comments by Sudhir-
* I enjoy leading projects and meetings, the sales calls and ability to win projects, however, I am a engineer at heart.
* It’s fascinating to see people and company grow. The feeling of satisfaction is great.
* Never complain that it’s too much work (I guess it is an underlying assumption)
However at the end he made an interesting comment. When he started the company in Cincinnati he tried to do everything himself. He was the CFO, CEO, CTO, developer, sales person, marketing officer and sometimes even the janitor. Although he loves his entrepreneurship journey he says that he is an engineer at heart (He holds a PhD. Degree in engineering). He likes creating new things and systems. It would have been better if he had a team where each one is assigned to a particular task like marketing, sales, technology and human resource. That’s what he is going to try for his new start-up in the Silicon Valley. He says that this approach has its own pros and cons. Getting the right team together is the key. It infuses different ideas and thoughts. Effective communication and team work will ultimately be vital for success. However things can also go wrong very easily. Different attitudes, different ideas and personalities can clash instead of synchronization. It’s just like a marriage – You have your responsibilities, commitments and compromises. The moral of the story for any entrepreneur is: Weather you want to do all the initial work by yourself or you want to team up at the founding stage and concentrate on a particular task. Whatever you choose, proper planning, confidence (not arrogance) and commitment are the pillars for success.
* I enjoy leading projects and meetings, the sales calls and ability to win projects, however, I am a engineer at heart.
* It’s fascinating to see people and company grow. The feeling of satisfaction is great.
* Never complain that it’s too much work (I guess it is an underlying assumption)
However at the end he made an interesting comment. When he started the company in Cincinnati he tried to do everything himself. He was the CFO, CEO, CTO, developer, sales person, marketing officer and sometimes even the janitor. Although he loves his entrepreneurship journey he says that he is an engineer at heart (He holds a PhD. Degree in engineering). He likes creating new things and systems. It would have been better if he had a team where each one is assigned to a particular task like marketing, sales, technology and human resource. That’s what he is going to try for his new start-up in the Silicon Valley. He says that this approach has its own pros and cons. Getting the right team together is the key. It infuses different ideas and thoughts. Effective communication and team work will ultimately be vital for success. However things can also go wrong very easily. Different attitudes, different ideas and personalities can clash instead of synchronization. It’s just like a marriage – You have your responsibilities, commitments and compromises. The moral of the story for any entrepreneur is: Weather you want to do all the initial work by yourself or you want to team up at the founding stage and concentrate on a particular task. Whatever you choose, proper planning, confidence (not arrogance) and commitment are the pillars for success.
Do you have an innovative idea?
The federal stimulus bill (American Recovery and Reinvestment Act of 2009) is now a law. The State of Ohio is accepting proposals to fund potential meritorious project ideas which have a high probability of success and create sustainable jobs. Entrepreneurs who have great ideas –for innovative products or services - this is your chance to get the required capital. More details are available at http://recovery.ohio.gov.
When employees think & act like owners…
A few weeks ago I attended “The Great Game of Business” management leadership series seminar by Jack Stack. Jack started with his experience of working with SRC which at that time was a nearly bankrupt division of International Harvester in Springfield, Missouri. That's when Jack Stack and 12 other managers took over and came up with $100,000 to put toward a loan of $9,000,000 (A debt ratio of 89 to 1 -- the highest leveraged buyout in corporate America to date). Jack lays his emphasis on creating a business of business people. The three mantras for success of a business are -
1. Create leaders.
2. Become a successful business of business people.
3. Create business people who think and act like owners.
Stack’s methodology states that making money is not just the responsibility of the upper management and executives. Stack is a strong proponent of open book management where the employees understand the financial performance and strategic goal of an organization. Stack summarizes his ‘game’ as follows-
1. Know and teach the rules
2. Follow the action & keep score
3. Provide a stake in the outcome
1. Know and teach the rules
- High involvement planning (twice a year)
Part 1
- Market analysis
- Market competitive data
- Customer survey results
- Our strategy to accomplish growth
Part 2
- Sales and marketing performance
- Forecast for 12 months + 4 years
- Contingencies
- Employee buy-in survey results
- Financial planning (annually)
- Income statement
- Cash flow statement
- Balance sheet
- Bonus program/critical number
- Succession plan
- Business Training
- Classroom /formal training
- Tuition refund
- Interactive /informal training
2. Follow the action (weekly) & keep score (daily)
- Forward thinking - Adjust to a radically changing environment.
- Communication - A collective sense of responsibility for the direction and performance of the company.
- Create Wins - Reflecting day to day movement. Moment to moment excitement.
3. Provide a stake in the outcome
- Instant recognition - People need to be recognized for their contributions and their talents. They don’t want to be treated as part of a mob.
- Career opportunities
- Ownership equity - Believe in creating wealth for those you work with while you create wealth for yourself.
Subscribe to:
Posts (Atom)