To plan ahead, one must first look back, take stock, and then try to peer over the horizon. Senior executives around the world are busy doing just that as they update their company’s strategic and operating plans for 2008 and beyond.

In its annual virtual roundtable, the staff of Executive Current asks Capgemini’s business sector leaders to offer their opinions on the year just past, to help our readers forecast and prepare for what lies beyond that horizon. This year, they have also asked the Chief Currency Strategist of Brown Brothers Harriman, one of the world’s leading investment banks, to add a Wall Street perspective. His view comprises our podcast this month. Finally, a conversation with Capgemini’s Vice President for Business Innovation summarizes and supports these industry insights.

The thread that runs throughout this year’s dialogue is ‘innovation’. It is the weapon of choice for market leaders as they battle today’s business uncertainties. We hope you find these insights helpful in your planning and decision-making.

Board action items:
* Mass collaboration—using the Internet to harness talent outside the company will increasingly be the benchmark of innovative companies. That is why Procter & Gamble’s CEO has instructed the company’s business unit leaders to source 50% of their new product and service ideas from outside the company. Has your company set such a target for 2008 and 2009? Have your business sector leaders begun to execute to the targets?
* 28% of Amazon’s revenue comes from its open business platform that is leveraged by external partners: 975,000 seller accounts and 140,000-plus developers. Has your Board asked for a presentation on “mashups” and “web services” and the linkage between them and top-line growth? What are the company’s targets for the next two years?
* Skilled management and operating executives are a company’s lifeblood. Does your company have an up to date succession plan to replace first line executives? Is the compensation of senior executives also related to their performance in identifying, educating and replenishing management and operating executives?

Jean-Marc Neimetz, Vice President, Life Sciences
“Patent expirations, loss of exclusivity, and an overcrowded product marketplace have put the pharmaceutical industry’s revenues and business model under enormous pressure.”

During the past year the pharmaceutical industry witnessed an increase in the market-forces that have buffeted it for some years. “Top line growth continued to erode under the combined pressures of patent expiration and loss of exclusivity,” says Neimetz. He points to Pfizer’s Lipitor that earns around $12 billion a year, almost a quarter of the company’s revenue, entirely at risk with its 2010 patent expiration. “Compounding the intensity of the problems facing the industry is a marketplace that is focused on key therapeutic areas overcrowded with products with sometimes limited differentiation, and the pricing pressures from payers,” he says.

Market leaders have begun to review the effectiveness of their marketing and sales operations and reduce their overall spending to address these challenges.

Their objective: how to spend less, more effectively, and still achieve the same commercial objectives. “Ruthless application of return on investment (ROI) analysis has demonstrated that the existing business model, with its reliance on a large sales force and traditional sales and marketing tools (samples, speaker events, conventions, etc.) offer marginal benefit in the new environment,” he says. Or, when it works, there is a clear need for the industry to be more targeted and cost conscious in how these initiatives are being deployed and measured. In parallel, we see the expansion of account management teams (interacting with payers and the public sector). Alternate channels such as the web-based e-marketing, supported by sophisticated customer data warehouses, are also receiving a higher level of spending and are being developed to target customers more cost-effectively.

Lastly, the industry is engaged in reducing its cost base through the aggressive use of shared and outsourcing services, catching up with other sectors such as financial services or manufacturing.

“This first response is nevertheless incremental and insufficient by itself to transform the industry’s business model. The second response is far more structural and really begins to implement the pharmaceutical model for the future—which Capgemini calls Customer Value Integration,” Neimetz says. Customer Value Integration is a response to the realization that it is no longer enough to just get Federal Drug Agency (FDA) approval based on product safety and efficacy to be successful in the marketplace. “Today, in order to impact the marketplace, one needs to adopt customer-centric product development and commercialization, a process that takes into consideration the needs of key stakeholders such as physicians, patients, managed care organizations, and government regulators, early in the development cycle,” Neimetz says.

By doing so, the pharmaceutical company will have the ability to generate a wider range of data and information to support its products’ claims and obtain better market access and adoption. But these changes will inject added complexity into marketing and sales management including targeted messages to different stakeholders; use of a wider range of marketing tactics; need for increased flexibility in managing the marketing mix, together with the ability to react rapidly through closed-loop marketing capabilities.

Going forward, Neimetz has two messages for pharmaceutical company’s CEOs. “The first and key message is that the transformation of the industry has just begun and is set to accelerate. Changing the development and commercial models is now a prerequisite for long-term independence and survival for many of the top industry players.”

His second message: “To overcome its current challenges, the industry needs a wave of new innovations. There are still many unmet medical and healthcare needs. The good news is that there are a large number of compounds already identified that could be revived for development. In view of the development costs and the competitive landscape, however, choosing the right compounds to move from proof of concept to full development will become a critical capability of the industry going forward.”

Greg Jacobsen, Vice President, Telcom, Media, and Entertainment
“The changing world of advertising is today’s burning issue for Telecom, Media, and Entertainment companies. Market leadership and even survival are at stake.”

Unlike most companies in the industrial and financial sectors that are focused on top-line growth and innovation, in 2007 TME sector companies were just as likely to be in an aggressive cost-cutting cycle as they are in making large strategic technology investments.

“My team is busy helping a telecom completely reengineer its front-end and back-end systems, as well as install enterprise resource planning (ERP) software that will support their expansion for the next decade. While on the other hand, we are helping another telecom outsource functions to slice costs,” says Jacobsen..

This was also the year in which the electronic distribution of DVDs and global acceptance of wireless broadband was to have taken off, but did not. “This was mainly because there were few early adopters willing to put up the marketing money for DVD distribution,” he says. This was a bit of a surprise for Jacobsen because the technology exists. In fact, Capgemini had helped build a solution with Hewlett Packard.

“In the case of wireless broadband, everybody seems to be waiting for the killer applications that will drive more digital uptake. “Do you drive high speed data on your cell phone, watch TV or download content on it?” he asks rhetorically.” I don’t, I have a Blackberry and when I pick it up, it is to check email with Microsoft Outlook.”

Looking ahead to 2008 and beyond, Jacobsen recommends that CEOs and their strategic planning groups keep their focus on two critical issues.

“The first long term concern has nothing to do with technology, it is a human resource issue,” Jacobsen says. “We project a shortage of talent, and whether you are a telecom, or a movie producer, you have to look at the team below you, and ask who is coming up and what are they bringing with them?”

The second issue is the changing world of advertising. “Telcos will need to start making money from advertising, which is new to them. Think about downloading television programs to cell phones,” Jacobsen says to illuminate his point. “You are going to be more willing to download television on your mobile phone if it is free. And the only way it will be free is if it is advertiser-sponsored. So whether you are a wireless carrier trying to drive that traffic on your network, or you are a television producer trying to dominate that channel, you must figure out the advertising model of the future for your sector,” Jacobsen says.

Another big challenge for TME companies in the next few years will be the impact on their supply chain by Internet Protocol (IP) networks and other technologies that are enabling distribution of high-end video content electronically. “Direct connection with consumers via personal computers, cell phones and other IP platforms will lead to dramatically lower distribution costs,” according to Jacobsen. “But also threats,” he says pointing to the recent strike by media writers who believe they are entitled to residuals from these emerging channels. “Coming up with a business model that reconciles these two opposing forces is their biggest issue for the next several years, I think.”

Joseph M. Pavalon, Vice President, Consumer Products, Retail & Distribution Leader
“To drive shareholder value: continuously reinvent yourself, focus on differentiating your stores from the competition, and keep improving those strategic ERP systems.”

Planning for change is a cardinal business rule and during the past few years, the consumer product and retail industry demonstrated how true it is. “The industry had assumed that the close relationships that consumer product companies had developed with retailers, and their influence on retailers’ supply chains, product placement, and even shelf appearance would continue to strengthen. But during the past few years, this trend has gone into reverse,” Pavalon says. “Empowered by increasingly strategic deployment of Enterprise Resource Planning (ERP) systems, this trend of retailers regaining control is set to continue.”

“Retailers’ concentration on supply chains throughout the nineties gave way, around 2000, to a focus on e-commerce, which has evolved into the current wave of ERP systems to optimize the retailers’ merchandising and marketing efforts,” he says. “As the legacy systems are replaced, the ERP systems’ flexibility is being used as levers to drive margins, inventory turns, and to increase profits,” according to Pavalon.

This assumption of control by retailers has, in turn, led to centralization of functions, more standardization, and more consistent operations. “It is very hard to execute a tailored merchandising strategy if one relies on numerous vendors to come in and manage shelves with their own procedures and marketing priorities,” Pavalon says. “As retailers learn how to use their ERP systems strategically, we expect they will continue to take more control back from consumer products companies and simplify merchandising execution,” he says. “It is the way Capgemini expects the industry to continue to evolve.”

The big hitch in ever more retail control is around trade funds. “These funds are paid by manufacturers to the retailer for certain privileges such as more space in the stores, more SKUs, and so on. “But more store control by the retailer may be better for the customer, and how the retailers strike a balance between the benefits of a completely consumer-driven strategy versus a vendor-driven strategy is the question at hand,” Pavalon points out.

This evolution in the industry is taking place against a backdrop of potentially disappointing sales projections for retailers this year. “Retail sales are built around the holiday shopping season which is a make or break time for stores,” Pavalon explains. “Earlier rosy projections have now moderated under the pressures of the sub-prime mortgage credit crunch, concerns around inflation, and the steady rise in fuel costs.”

Pavalon believes retailers must continuously reinvent themselves and continue to unlock value. “Even if sales dip, continue to challenge your executives to find areas to transform that will drive shareholder value,” he says. “Continue to differentiate your stores; look at each store’s assortment and how to align the assortment with specific store clusters and trip missions. With increasing sectionalization of life-styles, customer segmentation and store-clustering take on a bigger significance. And do not forget that all this fine-tuning relies on your stores’ strategic ERP systems.”

Doug Houseman, Principal, Energy, Utilities, and Chemicals
“North America’s electrical utilities are faced with a shortage of 12,000 engineers. We produce around 100 per year. It is a very disturbing situation.”

“During 2007, more people retired from the industry, no new education programs were set up, and we are now faced with a shortage of 12,000 engineers in North America,” says Houseman. “Engineers are urgently needed to repair and refurbish our decades old electrical grid, but we simply do not have them, our educational institutions are not making them, and no one else is either,” he says.

“Back in the seventies, the industry hired a tremendous number of engineers, but then for the better part of thirty years it didn’t hire any. Consequently, universities chose to switch their electrical engineering programs to electronics and today the United States produces less than 100 engineers per year,” Houseman explains. As an example that is replicated throughout the country, he points to American Electrical Power, the Ohio utility. In 1980 it had 15 standards engineers, in 1990 there were 11, and today there are 5, of whom 4 are in their sixties.

Houseman expects the situation to get a lot worse and he forecasts price increases and escalating supply problems. “Look what happened a few months ago in Maryland,” he says, “As price caps came off, power prices doubled; Pennsylvania is facing a similar experience.”

What about the renewed interest in Nuclear power generation? “Nuclear power plants are caught in the same skills squeeze as the distribution side of the industry,” Houseman says. “Where do we get the people to build them? We have not built a Nuclear power plant in thirty years and the U.S. Navy, whose nuclear programs supplied most of the skilled workforce, is in cutback mode.”

Houseman is one of the most experienced energy and utility consultants in the country and believes CEOs in these industries should make it their priority to find solutions to the engineering skills crisis and looming shortfall in power supply. He has specific suggestions.

He would like to see the utility industry help finance (with strong support from industry regulators) the rebuilding of education programs for the next generation of engineers. “This includes a commitment to hire all the graduates, just like in the seventies,” Houseman explains.

He would also propose an accelerated deployment of smart-meters. This is the only way to stretch our supply of electricity without long fights over environmental issues. “We have seen commitments of hundreds of millions of dollars in California, Maryland, Pennsylvania, Michigan, Ohio, Texas, and New York. But we need to see much more leadership here, especially from the media that has so far neglected this crisis,” he says. “We need to think out of the box to successfully reverse the looming energy crunch. For instance, with smart meters, utilities could provide every customer a base level of 200-300 KWH at low rates and then charge by time of usage. This would let people with limited means afford the minimum power they need, but force those of us who want 10,000 square feet houses and a dozen TVs to pay for these luxuries.” These are contentious issues that cannot be tackled by the industry alone. “Government officials at the Federal and State levels, citizens, and especially the media, need to join together to begin finding solutions to our energy dilemma before it is too late.”

Jim Sourges, Vice President, Automotive and Manufacturing Sector Leader
“I would like to see senior management think hard about the need to achieve process and technology convergence.”

Three major trends dominated the North American automobile manufacturing industry last year according to Sourges. “2007 was a year in which the North American automobile companies continued to transform their business model by rationalizing scale to demand, recapitalizing core operations and focusing on a return to profitability,” Sourges says. “General Motors’s decision to put fewer vehicles into the fleet-market was an example of this trend—taking a hit on the top line to improve profit margins.” The privatization of the Chrysler Group, GMAC and others is a throw back, which can be good, taking the NA Automotive sector back to the formative years at the turn of the 20th century where entrepreneurs forged a great industry. This trend will continue across the entire NA Automotive value chain in the years ahead. The return to profitability can best be demonstrated by landmark labor agreements the vehicle manufacturers put in place to hedge the rising retirement and healthcare costs. Additionally, NA Parts Manufacturers, as well as the OEM’s, continue to shift operations to the lower cost countries (e.g., China and Eastern Europe).

Hybrids continued their march to popularity. As Capgemini’s Cars Online report noted, with oil at almost $100 per barrel, fuel efficiency as well as “green” vehicles are front-line customer concerns. The industry awaits further clarification on improved CAFÉ standards which most customers seem to want implemented. These government standards released by the Department of Transportation specify average fuel economy requirements such as miles per gallon for cars, trucks, and SUVs.

“Outsourcing is still a hot topic in this sector, but with a distinction: We have seen auto companies move to the Next Generation outsourced model and struggle. A clear indication of this has been several companies that had outsourced began to reverse course to set up internal shared service centers in functions such as finance, controlling, procurement and global trade logistics,” Sourges says. “They can get the same economies of scale in labor arbitrage that outsourcing once provided by setting up shared service centers in places like Eastern Europe, and they can retain the margins on their own balance sheet and in some cases improve their service delivery.”

Where would Sourges advise senior managers to focus over the next two years? “Think hard about the need to achieve process and technology convergence to drive standardization and harmonization in the increasingly global, distributed work flows,” Sourges says. “Look at Ford’s purchase, during good economic times, of Jaguar, Land Rover, and Volvo. Terrific assets, but they were unable to achieve process convergence to get economies of scale and wound up with assets that basically stood alone. Without efficiencies of scale and harmonization, today’s down market finds the company struggling to keep these lines profitable.”

And Sourges points to the need to get ever close to the customer—however the customer is defined: end customer, supplier, or channel partner. “You have got to continuously ask yourself how you can shorten the interface between communicating with them and fulfilling their needs. It is the only way to quickly respond to changes in today’s mercurial marketplace,” Sourges explains.

Finally, in this global business environment, leaders must keep a truly global perspective on opportunities as well as threats. “Take India’s Tata Motors, a fast emerging competitor for Western car companies. They are about to introduce a $2,500 car. Is this is a commodity product, an innovation, or a concerted effort to change the rules of the game? A wrong bet might cost you a slice of your market.”

Sourges reminds his audience that innovation is no longer confined to Detroit. It is dispersed to the West Coast, East Coast, Texas, Alabama and around the globe. The Automobile world is not flat: look to the so called BRICs (Brazil, Russia, India, and China) where the sector footprint is soaring. The American automobile industry is not getting decimated, it is just moving south, and globalizing. In the end, Sourges says, “The changes and course reversals are a sign of an industry that has transformed. The ability to innovate is a defining strategy. Hope and wishful thinking are not going to bring the good old days back. They are gone forever.”

Hans van Grieken, Vice President, Business Innovation
“Company valuations will increasingly be determined by a company’s ability to mash-up with other businesses to create a whole new value proposition.”

We asked Van Grieken to imagine he was in a room full of CEOs from the sectors highlighted above: what would you advise them to keep on top of their radar screen in 2008?

“The most important message I would leave with them is—future commercial success belongs to businesses that innovate. It is today’s strategic imperative, and the stars are aligned for companies who have the vision and ability to leverage fast emerging technologies,” Van Grieken says.

Examples of these technologies include the next generation of the Internet, or Web 2.0. “The ability to mashup, or create entirely new services in combination with other companies, is the most important development offered now. For the first time, technology allows us to mashup not just within organizations, but more importantly between organizations, to create commercial ecosystems of businesses that sometimes are not even in the same market or sector,” says Van Grieken. “For instance, a bank, a telco, and a transportation utility might join forces and create a mashup to enhance their clients’ payment process.”

“As another example, more effective mobile phone payment systems such as Near Field Communications (NFC) rapidly convert cell phones into a multi-purpose payment device. These types of mashups have the potential to transform companies’ competitiveness,” according to Van Grieken.

Mashups let companies alter their business model and compete in a completely different industry. A manufacturer of goods might want to change its business profile and also offer services without the need to acquire a services company.

Van Grieken is so convinced that mashups signal a sea change in the business landscape, that he has proposed the term “mashmarks” as the new benchmark to measure far-sighted companies. “A mashmark indicates the level at which an organization is able to integrate with the outside world and quickly arrive at new insights based on continually changing information sources and events. A mashmark also indicates the extent to which an organization is able to enter into new, flexible collaborative ventures with partners and customers, even if these are in totally different sectors or the parties are on remote continents,” Van Grieken says.

“We in the consulting business have grown by advising you on how you compare to your peers using benchmarks. I believe we must now begin using mashmarks,” he says. “If I were an investor, I’d be far more interested in a company’s ability to quickly mashup with others. A high mashmark score would tell me your company is positioned to innovate and compete with the best companies in the world.”

Source: Capgemini

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