Friday, June 30, 2006

Cultural Assessment - Prerequisite for successful Mergers

"Tata Tea acquires Jemca, A Czechoslovakia based company"
"Dishan Pharmaceuticals & Chemicals acquires Solutia Inc. USA for $76 Million"
"Wipro Technologies acquires Quantech Global Services USA for $10 Million"
"BILT acquires Malaysian Pulp & Paper for $230 Million"
"Jindal Steel & Power acquires a Iron Ore mine in Bolivia"

All these acquisitions happened in month of May 2006. These were not the only acquisitions in that month - there were 26 other multi-million dollar acquisitions done by Indian companies in the month of May 2006.

Indian firms have now got the taste for foreign acquisitions - may be this is because Indians in general have a craze for foreign goods. So when companies go shopping - they buy overseas companies. For example, in the month of May 2006, Indian business saw more of overseas acquisitions than local acquisitions. The same can be observed for the year 2005 also. All these M&A activity made me write this article on the need for cultural assessment prior to M&A.
In many of my previous articles, I had written about the importance of cultural diversity within an organization. But in a merger or acquisition, cultural differences can wreak both the companies. A whopping 53% of acquisitions fail - and this is mostly due to cultural differences. In this article is on cultural assessment which is the necessary first step for cultural integration.

M&A Realities

M&A activities are nothing new. Mergers & Acquisitions have been happening ever since humans started doing business. Companies merge or acquire when they see a new business opportunity or to realize synergy between two firms. Managers/Owners always perform a due diligence in finance, market opportunity and operations before any merger. But most companies fail to do a basic inquiry on skills & talent of the people in the acquired company. This does not mean that companies do not value human skills & talent, it implies that companies often tend to take the human talent & skills for granted and assume that the same skill sets will be available to the enlarged firm even after the acquisition.

In today’s business world where knowledge is the key, companies cannot be complacent on human skills & talent. This has led to a new awareness of the need for cultural integration as a mandatory process in any M&A activity. The process of cultural integration begins with doing a cultural audit or a cultural assessment of both the organizations before the merger/acquisition.

Importance of Organizational Culture

Organizational culture can be defined as the "Basic assumptions and beliefs that are shared by members of an organization, that operate unconsciously, and that define in a basic 'take it for granted' fashion an organization's view of itself and its environment."

Organizational culture is important because it has a significant impact on organizational performance. It is this culture that supports the mission, goals, strategy of an organization, ease communication and coordination and provide a means for dealing with change and conflict when they arise.

Organizational culture has four important traits. These traits can have a significant impact on organization performance:
  1. Involvement: Building human capability, ownership and responsibility.
  2. Consistency: Defining the values and the organization’ systems that are the basis of a strong culture.
  3. Adaptability: Translating the demands of the business environment into action.
  4. Mission: Defining a meaningful long-term direction for the organization.

Culture represents shared beliefs, assumptions, and values. All these are not readily observable. An organization's culture becomes obvious only when contrasted with the culture of another organization - say a merger of two firms. When two organizations unite, the combination inevitably results in some form of culture shock. The extent of culture shock can range from
slightly unpleasant to exceptionally distressing, depending on how employees in each organization evaluate the attractiveness of the other culture in regard to their own. Generally, the greater the cultural dissimilarity, the greater the culture shock. The impact of culture shock can be seen in the extent of employee attrition after the merger.

A culture shock results in cultural clash. These clashes can be the result of several factors, including ignorance (i.e., lack of understanding of other's culture), disrespect for another company's norms, and arrogance (i.e., a belief that one culture is superior). Consider the case of a partnership between Canadian and Brazilian chemical manufacturers. American executives insisted that the meetings commence with a working breakfast session. The Brazilians, who are unaccustomed to discussing business over a meal, found this practice objectionable and were deeply offended by the idea. This had a negative impact on the negotiations.

Though a seemingly innocent misunderstanding, such occurrences frequently result in failed mergers. Consequently, companies have begun to acknowledge the existence of divergent cultures, identify cultural components that potentially hinder successful combination, and prioritize the cultural dimensions believed to be most important for a successful combination. This process of analyzing the fit between two independent organizations is known as " due diligence or Cultural Assessment"

Why is cultural integration so important?

A survey on M&A by Mercer, a business consulting firm found some interesting results. Of the 700 international M&A between 1996 & 1998:

  • 53% of the M&A activity destroyed share holder value.
  • 30% of the mergers/acquisitions did not create any additional shareholder value.
  • Only 17% of M&A resulted in increasing shareholder value.

Harvard business school survey conducted in 1995-1996 also found a similar results.
While there can be infinite reasons why the merger/acquisition did not create additional shareholder value. But one thing is clear - to create additional shareholder value, people from the merged company must perform - i.e., "soft issues" must be addressed. A successful cultural integration creates an environment for employee performance, reduces infighting, organizational friction and raises employee morale.

In an another survey conducted by KPMG on M&A in 1999 brought out the factors that were essential in a successful merger:

  • Synergy Evaluation
  • Selecting the management team
  • Resolving cultural issues
  • Internal & External Communications
  • Integration planning

Note that all the above factors are based on people skills & people issues. These independent surveys give a clear indication that cultural integration is very important.

Cultural Assessment

Until very recently, there was no systematic model for performing cultural due diligence. There was no overall conceptual model, let alone a defined process and analytical tools.
Now after learning from several successful mergers, new techniques are available that can be applied at any stage of a merger or acquisition. This provides the data to help managers decide how to move forward with a merger, anticipate significant problems as the merger is completed, and deal effectively with these problems in the post-merger phase.
Cultural Assessment starts with asking the right questions. I have listed most of these questions, but they can be tailored for a particular industry/company.

  • How does cultural integration planning fit into acquisition strategic planning, negotiation, and due diligence processes?
  • How can executives identify critical implementation issues during the planning and negotiation stages?
  • What integration tools are useful for functional departments? For merged cross-functional projects? For individuals and small task groups who must work together for the first time?
    What are the roles of top and mid-level management (on both sides) during implementation?
  • Who are the stakeholders in a merger/acquisition? What are their concerns and interests?
  • How should management communicate with stakeholders? What are common pitfalls and how can they be avoided?
  • How does the organization reward, communicate and celebrate the success of its employees?
  • Are there special privileges for executives (e.g., reserved parking spaces)?
  • Are these offerings incompatible with the culture of the acquiring organization?
  • How long have these practices been in place?
  • What is the plan, if any, for dismantling after the acquisition?

Answers to these questions will help leaders/managers get an idea of what to expect during the merger and how do deal with the specific issues.

Cultural assessment must address the following issues for both the companies separately and for the combined firm:

  • Strategic Intent & direction
  • Vision & Mission Statement
  • Goal & Objectives
  • Core Values
  • Team agreement, coordination & Integration policies
  • Culture of learning in the organization
  • Employee capability development
  • Customer focus & employee empowerment
  • Ability to change & adapt to new environment
Closing Thoughts

Organizational culture issues are responsible for a significant amount of failures in merger and acquisition transactions. It is extremely difficult to gain synergy when two organizations have conflicting operating styles. When faced with this scenario, some organizations have had to rebuild themselves at great sacrifice to customers and employees. Cultural assessment tools are now available - and this provides a framework to manage cultural differences and identify resources needed for successful integration. Understanding cultural synergy and differences before the merger can make a vast difference in the success or failure of the merger.

Wednesday, June 28, 2006

Building a Diverse Workforce

"Infosys to Hire 300 US Grads"

"Infosys to hire from European Universities"

"Infosys Technologies said on Friday that it was recruiting 30 interns from 17 European technology and business schools as part of its Global Internship Programme — InStep.
"We firmly believe that the future success of Infosys lies in its ability to create an environment that is open to people from different nationalities and ethnicities," -- Infosys Chairman Narayana Murthy

"Talent is imperative in today's economy and the increase in globalisation means the competition for global talent is rife. At Infosys, we recognise the importance to invest in skills globally and provide opportunity for future business leaders to understand the changing dynamics of a flat world." -- Mr Nandan M. Nilekani, CEO, Infosys Technologies.

Above statements are the leading indicators that companies have a need to build a globally diverse work force. As companies expand abroad, they will need people with diverse skill sets and with deep knowledge of doing business in those countries. Employees from home country - say India for example will never be able to match the deep knowledge on Brazilian business by a Brazilian. This makes it essential for companies to hire talent from other countries.

Global IT giants such as IBM and Accenture have already built a multiethnic, multinational, multicultural work force. Indian IT companies are now starting to do the same. In my previous article I had written the benefits of having a diverse work force at all levels. In this article, lets explore the challenges of creating a diverse work force from the Indian perspective. (Also applicable to newly global/multinational companies)

Newly Global Firms

Companies that have traditionally operated in only one country or in one cultural geography - i.e., Europe, South Asia, Central America etc., had a uniform workforce. A vast majority of employees were from the similar background - same religion, culture, speak same language etc. But as companies expand abroad and go global - the demographics of its work force needs to change. Company’s need for talent and desire to hire the best - will force companies to look for people beyond their national boundaries.

India itself has a diverse group of people: Different Religions, Languages, Ethnicity and lifestyles. India is home to 50+ languages and 200+ dialects. India probably has all the world’s religions represented and also has people from almost all ethnicity (African, Caucasian, Aryan, Dravidian, Chinese, Polynesian). Yet a workforce of Indians alone is not enough. Firms will need people from other nationalities too.

A good thing about India though is that the country and its culture has been diversity friendly. This creates a suitable base for Indian firms to create a globally diverse workforce. A diverse work force can create diverse ideas which are superior and that can provide competitive advantages.

The challenge for the companies is to manage this diversity. The company will now have to create an environment that is based on appreciation and respect to different ideas, different points of view, different opinions - and at the same time minimize friction within the organization. Once a reputation of being "diversity friendly" organization is created, it becomes easier to attract talent from other nations and thus create a perpetually diverse organization. Thus a well managed diverse work force can create new growth opportunities and innovation that the organization had never imagined before.


The benefits of diversity are not instantaneous. Diversity creates differences and this differences often mean conflicts. I remember my days at Texas A&M University - where people from different countries tended to form their own groups and these groups could not get along easily with each other. The same is applicable to the work force within a company.

Differences in communication styles, work attitudes, or behavior can create friction within teams - and when these differences are not controlled, it can cripple a team. Research has found that a diverse teams often go through an extended period of time in the storming phase ( I am referring to 5 stages of team formation). It becomes important and essential for the management and team leaders to take concentrated efforts to integrate the team.

Managing diversity creates one of the biggest challenges to any organization - The need for skilled managers who can integrate diverse teams. Managers who skilled at this are not easy to find - and therefore existing managers have to be trained in diversity skills: Ability to mediate disagreements, ability to put down any form of intolerance, ability to understand different cultures and speak different languages.

These global mangers are very difficult to find - let alone hire.

To make diversity succeed, a strong and committed leadership is needed. These leaders who are from top management must understand the benefits of diversity. They must be committed to create a diverse workforce - by creating suitable staffing strategy and cultural integration plans.

Leaders must be able to standup to these beliefs and demonstrate their appreciation to different ideas. The best way to have such a leadership is to create a diverse leadership.
A weak leadership or if leaders show any signs of favoritism, inter-group fights will reign which results in low morale and high employee turnover. And over a period of time if the problem is not corrected, the company loses its image and that can turn away customers and potential good employees.

For example, Dillards - a departmental store in US was hit with racial discrimination within its work force. And when the news came out in public, sales dropped 8-10% points.

Integrating a diverse work force

Integrating a diverse work force is not easy neither it is instantaneous. Intel, Microsoft, IBM, Accenture etc., have created a high performing global work force by taking a series of steps over an extended period of time. The same will hold true for Indian firms.

The first and the most essential step in creating diversity is to have commitment from the top leadership. Leaders of the company should wholeheartedly endorse diversity and should also create a diversity in the leadership cadre. For example take a look at the leadership team (VP and above) at Intel, it consists of people from multiple countries - India, China, USA, Europe etc. The same holds true for IBM and Accenture.

Second step is to replicate this diversity in all levels of the organization starting from the top. This implies that the company will now need a global staffing strategy. Few firms have gone to the extent of having a policy that mandates it to have at least one woman, one racial minority employee in each level of the organization. Recently, my wife got an offer as Sr. Account Manager - because the president of the company wanted to have at least one woman account manager.

The third step is to set target for the entire organization. Targets for every group/division within the company in terms of workforce diversity has to be set. This will mobilize the middle management to take proactive steps to create a diverse work force. This should be followed by having a suitable employee rotation program - wherein employees are encouraged to work in different locations and with different sets of teams (these teams are diverse teams). A well crafted work rotation program can create a truly integrated diverse work force.

When I was working in Intel as Full Chip Integration lead, I had to work with people from multiple ethnicity, cultures and nationalities - and deliver results against a set target. The need to achieve targets will overpower any cultural differences between team members.

The similar example can be seen at US universities which have substantial foreign students. Most universities will have an International Student Day - where students from all foreign countries will join hands and present a cultural show. I learnt to appreciate and cook Ethiopian and Turkish food in one such event.

A important process in cultural integration is to have formal training classes for all employees. It is essential to have formal classes which explain different cultures and tell people why certain people behave the way they do. All employees must attend these training programs and these training programs must be held regularly.

Closing Thoughts

Diversity is not a case of representation of different nationalities or ethnicities. It is a process of creating greater wealth through increased creativity and productivity. Consistent internal communication and employee education is vital to gain support of all the stake holders.

In the early stages, promoting diversity is a sensitive issue among the employees. In Indian context, it may be confused with reservation or in American context it may be confused for affirmative action. And this can create a serious heartburn among existing employees. Care must be taken to explain the need, benefits and plans to create a diverse workforce. Ensure that the current employees have understood the management's plan to create a diverse workforce.

Create a diverse workforce at all levels of the organization. This involves having training programs, a recruitment strategy, and building a cadre of diversity aware managers.

Finally, creating a diverse workforce takes time. Reaping benefits of this diverse workforce takes even longer time. The company management and leadership must not lose focus and interest in creating a diverse workforce - due to the lack of immediate returns.

Also See:

  1. Leadership & Diversity
  2. Why have International work experience?
  3. Global Manager
  4. Women's day: A brief history and Implication to firms
  5. Developing a Global Mindset
  6. Leadership for a Global Enterprise
  7. Global Product Development Teams
  8. Value of International Work Experience
  9. Global Careers and Culture Shock
  10. Role of Leadership in Team building
  11. Building a company of Leaders
  12. International Staffing Strategy

Sunday, June 25, 2006

Employee Churn is here to stay

"Today employees are always on the move. Constant churn in the labor market creates a new employee-employer relationships. For top employees this churn generates opportunity and increased pay scales while for employers are able to hire the talent they need"

Today’s knowledge workers are constantly on the move, especially those with advanced degrees. Employees who already have a good job are always on lookout for something better. Money alone is not enough to attract and retain talented employees. This is forcing employers to compete for skilled workers and to improve working conditions to retain key employees.

Companies have introduced flex time, relaxed the dress code, work-from-home and improved amenities at the work place - Gyms, day care facilities, work-life balance, recreation facilities to make the work environment more attractive in order to retain good workers."

Globalization and ease of movement of labor between countries has created a "loyal but mobile" workforce. Companies are willing to allow employees to change their work locations - especially for well-educated or skilled workers in high-demand fields such as technology, software and health care.

Employee turnover is expensive and cuts into productivity, giving employers an incentive to retain workers. Creating a workplace that attracts and retains a higher percentage of key employees gives a company "unmatched advantages" in the market. The current shortage of highly skilled knowledge workers has changed the balance of power from employers to employees. In many cases, employees are able to set the terms of employment.

The stigma of "job hopping," or moving quickly from one job to another, has diminished as competition for top employees intensifies. Most companies show no reluctance to hire people who have worked for just few months at other firms. A recent study showed that people with engineering degree from IIT have worked for an average of six months at a single firm. And yet companies are willing to hire these talented engineers. My company recently hired an engineer from IIT who had worked for only four months at another firm. We also hired an employee with MBA from IIM who worked for six months in the previous firm.

This rapid job hopping has redefined a "truly loyal" employees as those who are committed to the company and plan to stay for at least two years. A survey conducted by a Mckinsey found that more than 55% of employees say that their company treats employees well.

Employees today are more mobile. The younger generation are eager to climb rapidly in their career. As a result they want to be sure they have a job, and in the other, they're always looking for a better opportunity. This is one of the reasons why the open labor market is so extremely dynamic and relatively efficient.

Today employees are always on the move. The strong economy gives employers the opportunity to move on to a better job. Combine this with coveted technical skills, and the smart employee will always be in demand, especially at leading companies, such as Intel, Microsoft, Biocon, etc. But more than that, prized employees will be able to pick and choose among competing offers to find the company that's the right fit for them.

Closing thoughts

It's almost "push-me, pull-you" relationship between employee-employer. The definition of employee loyalty towards the employer is changing towards employee’s loyalty to their career and employer’s loyalty towards their bottom line. This new dynamic employee-employer relationship is the accepted new middle ground - which acknowledges high employee churn in return the employer gets the much needed talent.

Also see:

Sales - Importance of Planning

"It’s not the plan that is important, it’s the planning" -- Dr. Gram Edward's

Last week I met a friend of mine at Casa Picola restaurant in Bangalore. Lets call him Mr. G, who is the sales head at reputed company that sells networking equipment such routers, switches, etc. We were generally chatting about work and he mentioned that he was chasing a huge order - Rs 20 Million from a local manufacturing firm. Over the next 30 minutes, while eating a burger, we discussed about the sales plan that is needed to win that customer. This discussion prompted me to write about sales planning.

Sales planning is the first necessary step in winning a major account. In B2B world, it is next to impossible to win a major account without diligent sales planning. So this article is all about sales planning.

All sales plans will have four essential components:
  1. Situation assessment
  2. Objective
  3. Strategy
  4. Tactics
These four are sequential steps that are necessary in developing a winning sales plan.

Situation Assessment

To develop a workable and solid sales plan, it is essential to know the current situation: What is the customer’s business need? When does the customer intend to buy? What is the sales environment? Who is the competition? What are the pricing pressures from the customer?

Often times customers send out a Request for Proposal/Quotation {RFP/RFQ) - which describes the customer’s technical needs, but the business needs are never mentioned. Also the salesmen do not know who the major decision makers are and what are their concerns/objectives. This makes the process of situation assessment a difficult task. To accomplish this, salesmen often will need some business intelligence. Few firms have a dedicated group which collects business intelligence, but most salesmen will have to be contended with what they can collect from customer contacts, vendors, and competitors.

Information collected during situation assessment has to be written down. Documenting is of immense value to overall sales process. In B2B markets, sale to a single customer is often handled by a team - usually drawn from different departments. A written document on situation assessment helps sharing this information with the entire sales team - this bringing everyone on the same page. Sales manager working on a B2B sale will often be working on multiple opportunities. Documenting the business situation helps the salesman by providing concise, accurate and reliable information when needed. Documenting will help prevent salesman from confusing or remembering things wrongly or confusing the customer.

For example, the salesman at computer firm is trying to sell data storage solution to a publishing house. He has received the RFP. The RFP has to be analyzed by an engineer to access the technical challenges and propose a suitable solution. The pricing for the proposed solution has to be cleared with the finance - and if required, the finance department will have to work out a suitable payment/credit terms. The marketing department then generates a suitable sales presentation or other marketing collateral. A lawyer from the legal department will have to write up the contract. All these members together form the sales team. The members of this team may be geographically dispersed and yet they need to collaborate to win. Each member on this team will be working on multiple accounts and they will need accurate & reliable information to work with.

Situation assessment must be done continuously during the sales process. Complex B2B sales usually take several weeks or months. The competitive landscape and the business outlook is always dynamic, thus information must be continuously be updated even after the sale is closed. If the sale is done, this information can then be passed on to Customer Account Manager or Customer Relations Manager etc. The knowledge gained in the pre-sales process will be very useful in the post-sale customer relationship management.

Salesmen often have numerous excuses not to document the customer/prospect situation. One of them being that it takes too much time to do it. Other is that the chances of winning is ~20% so in 80% of the cases they will not win. So documenting all the details is a waste of time. This argument however is no longer valid. Today there are several software tools:, outlook organizer etc., to help salesmen capture information in a time efficient manner. Few companies have even deployed a sales transcription service - where salesmen have to record their assessment of the situation, that will be converted into text by a service provider, and that data will be analyzed and processed and distributed by the marketing department.


Objective is nothing but three statements: What to sell, For what price and by when? Defining this is absolutely essential for developing an effective strategy. Note that the answers to these three statements are derived from situation assessment. By careful situation assessment, salesman will know what the company will buy, and what are their price targets and when they will buy. This information of customer intentions must be shared with all members of the sales team and executives - this will help in formulating the sales objective.

Note that the customer objective on product, price and time frame may differ from that of the seller. Salesman’s objective is to get the customer pay the full price - i.e., no discounts ( This helps the bottom line), and in a time frame that can be supported by manufacturing/engineering or service groups. While the customer objective is to get the lowest price and in a time frame suitable for him. It then becomes the job of the salesman to bridge these two diverse objectives in order to close the deal.

Sometimes the objective of the seller may not be to sell at all. In a B2B world, there exists a strong relationship between the buyer and seller. A new vendor who wishes to displace the incumbent may have a different objective. Many first time vendors (to that buyer) may have an objective which is to lose the bid - but come a close second so that they will be invited next time and in the mean time learn as much as possible about the customer during the sales/bidding process so that they are better prepared to replace the incumbent.


A sales strategy is the one which answers the question:

Customer will buy from me because _____________??

A salesman should be able to answer this question with conviction. If he/she cannot answer this with 100% confidence, then the sales strategy is not complete. Sales strategy is absolutely essential to win the customer.

"A winning general always has a plan to create situations necessary for victory" - Sun Tsu

The above statement provides a concise requirement for a strategy: Situation assessment - knowing the current situation and the required situation for victory, Objective for the plan and the strategy (plan) to achieve the objective.

In the world of sales the objective is to determine what to sell, when to sell and for how much. This objective cannot be developed without knowing the current market situation. In sales, situation is always dynamic which forces the salesman to have in-depth assessment of the situation. Some of the things to be considered for situation assessment are:
  • Financial Situation of the customer
  • The buying criteria, evaluation process and decision process
  • Criticality/Importance of this purchase
  • Market trends
  • Customer Issues
  • Goals & objectives of the customer
  • Leadership style of the customer
  • Market position of the customer
  • Competition in this account
  • History of this account
  • Allies/Customer champion in this account
Market reputation of your company/product (Strengths/Weakness of your product)

Intimately knowing the current situation will help the salesman answer the big question. Often I find it useful to develop a top ten list stating the reasons to buy. For example:

  1. Customer will buy from me because my product has to lowest cost of ownership and/or highest ROI
  2. Customer will buy from me because I guarantee the successful installation of the product
  3. Customer will buy from me because I can deliver a customized product which will meet their unique requirements
  4. Customer will buy from me because my product is the safest alternative.
  5. Customer will buy from me because my company has the best understanding of their business requirements and have the capability to ensure customer’s success.
  6. Customer will buy from me because my product is the best among all the alternatives available to them.
  7. Customer will buy from me because my company enjoys the highest level of relationship with their executives
  8. Customer will buy from me because we provide the best post-sales support
  9. Customer will buy from me because my solution will meet their budget constrains
  10. Customer will buy from me because we are also sharing the risk in the project.

It is always not easy to come up with a top ten list for every account in the initial days. But as time proceeds, making a top three list on why customer chose to buy from me for the deals already concluded will help identifying the reasons why future prospects will buy from you. Similarly making a list of reasons as to why the customer did not buy from you in the past will help address the weak points and develop a winning strategy.

The most common reason why a salesman lost an account will be: " I lost a customer because I did not have a strategy to win that account" This however happens because the salesman does not have a thorough knowledge about the current situation. Knowledge is the key - A thorough situation assessment will help a salesman to overcome challenges in the business climate, develop multiple sales strategies, anticipate challenges and adapt accordingly.

A successful sales strategy can be characterized in two words "Flexible" and "Thorough". A successful sales strategy must be detail oriented down to finer points and flexible to adapt to changing business environment.


Tactical planning is the final step in the sales planning process. Tactics that has to be deployed to win the customer is determined by the earlier three stages of situation assessment, Objective and strategy. Tactical planning becomes easier if the other stages (Situation Assessment, Objectives, Strategy) are completed first.

Sales is a dynamic process - competitive situation is always changing. This implies that the sales plan must be flexible and tactical plans must be flexible. To get maximum flexibility, tactical plans must include a lot of details - including trivial details which are of interest to customer. To visualize the importance of details, think of Lexus car. The attention to details in fit and finish makes it a luxury car that commands a premium price. Variation on these details allows a salesman to position the product differently.

Tony, a top salesman at my company has won a lot of deals due to his meticulous attention to detail. This provides his prospective customers a sense of comfort to buy from him. Some of the tactical details in his sales plans are:
  • Give the best reference of his past clients that best matches with the current prospect’s needs
  • Willingness to go over the finer points of the customer’s requirements - and collecting all details before working out the contract details.
  • Making it a point to meet all the stakeholders & executives of the prospect during the sales process
  • Address all objections or concerns no matter how trivial or unfounded they are - and make the customer comfortable.
  • Ensure that all presentations are well rehearsed and see to it that there are no surprises while presenting it in front of the customer.
  • Develop a sales checklist. For example while selling an ASIC, Tony has a checklist for: Initial presentation, Product specification documents, Customer requirement document, Complete technical solution documents, get approval for the viability of the solution from customer’s chief engineer, show the financial value of the proposal to the CFO, etc.
Attention to details does not always necessary result in increased price, but it definitely increases the confidence of C-level executives in your product. The sales checklist process helps the salesman to concentrate on details. The checklist should be dynamic - but it should always include your company’s standard procedures and processes, competitive influences, strengths, weakness, opportunities and threats for each account etc.

Every successful salesman will have a master template that includes events, meetings, approvals, calls, presentations, proposals, quotations, demonstrations etc.

Closing thoughts

Winning an order begins with the sales plan. The final sales plan is necessary but the main value lies in the planning process. The sales plan is just the end product of the sales planning process. It is during the sales planning process challenges, strengths, weakness and opportunities with each customer are discovered and this knowledge is essential for developing the winning sales plan.

Sunday, June 18, 2006

Value of Property Rights

Recently I went to Mumbai for a business visit and some of the things I saw were shocking!! Mumbai is not new to slums - infact more than 50% of people in Mumbai live in slums. What shocked me was not the slums - but people are forced into poverty by living in slum. The shocking fact is that people in India and Mumbai in particular are unaware of the fact that it is the economic systems of the country is creating poverty. To explain let me tell you a few strange examples:

  • Many slums in Mumbai have air conditioning!
  • Slums exists right next to corporate offices and 5-star Hotels!
  • One person from each family is forced to stay at home(i.e., in slum) to protect their right to live in that place! Thus depriving the much needed income to these people.
  • About 50% of the Mumbai land area is covered with slums - Yet Mumbai has the costiliest real estate in the world!
  • People who live is these slums do not have any form of legal protection to their property!
  • This means that all the land on which these slums reside do not have proper owners.
Poverty in Mumbai & rest of India is artificially created by the economic policies of the government. Inefficient property right laws: right to own property, the protection to private property offered by the law is weak or nonexistent, draculan zoning laws - forces people to violate building codes - which inturn makes the property illegal - by which I mean the building is declared illegal when it violates the zoning laws. All these results in lands being mired in legal litigation - thus violating individual property rights.

The problem extends to private business as well. The laws are so complex that it forces most small scale business to operate without proper legal clearances - which inturn makes these industries run away from bank loans. Employees in these firms do not have any protection from labor laws - which results in their exploitation.

These problems are not unique to India - In fact this problem is universal to all developing & under developed countries. These problems was extensively studied by Mr. Hernando de Soto and well explained in his book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000). This Noble prize winning economist explains how governments perpetuate Poverty. The following section is an article from web - which explains the poverty in developing countries.
Peruvian economist Hernando de Soto has found a way to enrich the poor.

Nasser City, a neighborhood on the northeast side of Cairo, contains the biggest housing project in Egypt. Its concrete block apartment buildings, each six stories high, stretch for miles. When the Peruvian development economist Hernando de Soto presented a photograph of this project to Egyptian Prime Minister Atef Ebeid and his cabinet at a meeting in 1999, they recognized it immediately. It has been a landmark in the country ever since President Gamal Abdel Nasser’s socialist regime built it in 1960.

According to two observers of the meeting, Mr. de Soto asked, "Do you remember how tall it was when it was built?"

"Yes," said the minister of housing. "Two stories."

"Then who built the other four?"

As Mr. de Soto knew well, developing nations are rife with these sorts of anomalies. He and researchers in his private, nonprofit economic development research organization, the Lima-based Institute for Liberty and Democracy (ILD), had found dozens more during the years they had spent collecting data and studying the hidden economic life of Egypt. Cairo was apparently full of illegal apartments constructed literally on the rooftops of public housing, where contractors had paid off local officials (and the first- and second-story residents), built extra floors, and sold the apartments themselves. The extra stories could be seen plainly by anyone walking by, but they were invisible to the government. There were no official records of the structures or their inhabitants, no titles of ownership, no tax records, and — most important for Egypt’s economic future — no way for apartment owners to use these assets as collateral or capital. "I’m sure the residents have pieces of paper saying they own the property," says Mr. de Soto. "But if the public records don’t recognize that the property exists, how can a banker give them a mortgage?"

For the last 30 years, Hernando de Soto has been presenting such stories to government leaders, first in his native Peru, and then throughout the developing world and in former Communist nations, to explain how their legal systems and bureaucracies prevent poor but inherently capable people from helping themselves to overcome their poverty — and the chronic underdevelopment of their countries.

There are plenty of talented, aggressive, entrepreneurial, and technologically capable people among the world’s poor. "You cannot walk through a Middle Eastern market, hike up to a Latin American village, or climb into a taxicab in Moscow without someone trying to make a deal with you," Mr. de Soto wrote in his best-selling book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000). Why, then, is it so difficult to succeed at transforming the economies of these nations?
What separates poor nations from wealthy ones is "the mystery of capital," says Mr. de Soto. To solve that mystery, he argues, one must understand why it is so common for the poor in non-Western countries to be locked inside large, informal, extralegal economies where they are unable to accumulate wealth.

To be sure, there are always some people in even the poorest countries with registered assets, credit with global banks, and formal protection of their property against seizure and disputes. "But they are only a tiny minority," Mr. de Soto writes in The Mystery of Capital. "The great majority of people … cannot get the fruits of their labor represented by the formal property system." Lacking legitimacy, most citizens of developing nations are driven into the underground economy, where they can’t register their assets in any system that banks recognize; where they must spend inordinate amounts of time bribing officials and protecting their property from thieves; where they obtain credit at exorbitant rates, often from organized crime; and where their wealth has far less impact than it otherwise would. Indeed, Mr. de Soto has estimated that what he calls dead capital — assets that currently can’t be used to spur investment or economic growth and are controlled by the world’s poor — adds up to as much as $10 trillion. If it could be converted to "living capital" by giving people legally enforceable rights to the property they already have (and the knowledge to use those rights to grow their assets), then the developing world would finally gain the leverage to achieve a healthy free-market economy and vibrant middle class.

Economic Formalization

Mr. de Soto and his associates at the ILD use the term "formalization" to refer to the conversion of economies from those in which shadow economies and inconsistent property rights predominate to those in which the legalities of home and business ownership are mostly clear, welcoming, and equally accessible to everyone. (See "Building a Bridge to the Formal Economy," below.) In "formalized" economies, like those of North America and Western Europe, consistent and accessible property title systems and credit records are commonplace. This makes possible a lending and market infrastructure in which anyone can transfer property or start new enterprises with relative ease — giving people who would otherwise be stuck in the underground economy a chance at participating in the legitimate economic system and at elevating their living standard.

Building a Bridge to the Formal Economy

Moving a country from a feudal economy to the rule of law doesn’t happen overnight. It took 300 years in Britain and about 100 in the United States. Hernando de Soto believes that a concerted initiative could do the job in as little as five years in the modern developing nation. He portrays the work of formalizing an informal economy as a process of building a bridge in five stages — and over many years — from a dispersed extralegal economy filled with dead capital to a formal economy governed by the rule of law and reliable information on market characteristics and property status.

• Stage 1: Awareness. The ILD typically comes into a country at the invitation of a head of state or cabinet minister. ILD staff study the culture of the particular country they are working in, its history of property rights, and its leadership. Then they create a customized presentation explaining to the leadership how bringing informal economic activity and assets into the formal sector will resolve fundamental political and economic problems. The goal is to have high-level government support and sponsorship for their work in the reform and development process.

• Stage 2: Diagnosis. This involves detailed field research observing activity in the informal sector, and a diagnosis of property, settlement patterns, and livelihoods of the poor. How long, for example, does it take to start a bakery or a sewing shop? Where do the squatters in a city live, and how many are there? What drives people away from the formal economy?

• Stage 3: Designing Reform. Once the analysis and diagnosis is complete, the next step is putting new laws into place. In Peru, legal reforms included not just streamlining procedures (the cost of registering a title went from $2,000 to $45), but also instituting a public ombudsman and such good-government measures as transparency laws and a new system of conflict resolution. Instead of superseding the informal property-ownership documents that local communities develop for themselves, lawyers study them and codify them into formal, consistent arrangements.

• Stage 4: Implementation. Teams of researchers move into neighborhoods to interview residents, identify the most appropriate owners, delineate property rights, and issue titles. Development professionals sometimes see this stage as a typical "land-titling" exercise based on installing information technology systems, but it more closely resembles anthropological fieldwork. Community meetings are an important part of this step: As COFOPRI administrator Miguel Delgado notes, the critical test of the process occurs not when the title to a house is granted, but when the house is sold 10 years later — and the seller has been taught how to register that sale with the appropriate government office.

• Stage 5: Capital Formation and Good Governance. Not until this stage do banks, utilities, development agencies, and other organizations have a reliable platform to operate upon — to lend money, offer electricity and water, form partnerships with local residents, and ultimately create jobs. The fostering of vibrant stock markets, in which all citizens can invest, is part of this stage.

Economic formalization includes legal and political reforms — eliminating the hurdles that most governments unwittingly place before their citizens who wish to register property or start businesses. For example, a recent Cost of Doing Business survey conducted by the World Bank found that starting a business in Angola requires $5,531 (which is more than eight times the per capita income of that country). In New Zealand, it costs $28, or far less than 1 percent of the per capita income.

Successful formalization also requires significant cultural changes, including the fostering of a new trust in official systems among people who have lived for so long on the outside. Thus, the Peruvian formalization process, more or less overseen by Mr. de Soto and his colleagues at the ILD, took about 10 years. Though it was never quite completed, the ILD work transformed the country and made Mr. de Soto a national hero. Along the way, he also became a highly sought after advisor to governments in other developing countries and something of a political celebrity. In 2004, the ILD was one of seven think tanks that won the first annual Templeton Freedom Prize, funded by philanthropist John Templeton.
During the next two years, Mr. de Soto will see his theories undergo an unprecedented test, funded in part by the United States Agency for International Development. USAID, which got its start administering the Marshall Plan and was a primary conduit for development grants during the Cold War, is granting $25 million in seed money to ILD in 2004. This is a huge funding commitment for the agency, which has formerly granted ILD an average of about $1 million per year since 1986. Mr. de Soto and his colleagues, who have been invited into 30 countries by their political leaders — including Russia, Ghana, Guatemala, the Philippines, Mexico, Georgia, Kazakhstan, Madagascar, Mongolia, Thailand, Ethiopia, Nigeria, Tanzania, and (as of February 2004) Pakistan — will now be equipped to launch a coordinated training and formalization effort in all of these countries. If this major initiative succeeds, it could jump-start the emergence of a prosperous middle class on every continent.

That, in turn, could transform the environment for global businesses, both large and small. Although ILD has not successfully involved any private-sector companies in its work in the past (in part because of long-standing mistrust between many corporate and government leaders in the developing world), Mr. de Soto points out that multinational corporations are typically among the most direct beneficiaries of his work. Indeed, the formalization of developing country economies may well be the missing link that paves the way for multinational corporations in many industries to enter or expand in these countries, not in their stereotypical role as exploiters of cheap labor and extractors of raw materials, but as seekers of customers, talent, and capital.

"Trillions of dollars of dead capital are locked up in the developing world," says Peter Schaefer, ILD senior fellow and head of its branch office in Washington, D.C. "If it were liberated, it could be used to consume and invest."
One of the reasons Mr. de Soto’s theory is resonating with international development experts is that it represents an alternative to the Marxist conception of poor people as victims of the wealthy. "Instead of seeing the developing world as victims of capitalism, Hernando argues, ‘We’re inflicting our own wounds,’" says Andrew Natsios, administrator of USAID. "Since he is Peruvian, he can make this argument credibly."

At the same time, business and policy elites (in both developing and industrialized nations) appear to be recognizing the limits of the world’s entrenched dependency on aid from governments and nonprofits, and the value of private-sector efforts to generate wealth in developing countries. In March 2004, the U.N. Commission on the Private Sector and Development (of which Mr. de Soto is a member) issued a report to the secretary-general calling for new approaches to "unleashing" the potential of the domestic private sector and entrepreneurship in developing countries. The report notes three facts of economic life: First, domestic private investment in developing countries averaged 10 to 12 percent of their GDP in the 1990s, which is almost twice as much as government funding and much more than the foreign direct investment (FDI). Second, the informal sector asset base, such as land value, is far larger in value than either cumulative FDI or private portfolio flows. Third, property rights and entrepreneurial momentum have been highly visible components of every stable, sustained economic development success.

By focusing on property rights and economic opportunity, and by visibly steering clear of corruption in his own politically troubled country, Mr. de Soto has managed to maintain an apolitical, nonideological reputation. In the United States, he’s been praised extravagantly by conservatives such as former Republican presidential candidate Steve Forbes and by former president Bill Clinton, who has said, "De Soto’s ideas about how to empower the world’s poor represent one of the most significant economic insights of our time." In May 2004, Mr. de Soto became the second economist to receive the $500,000 Milton Friedman Prize for Advancing Liberty from the Cato Institute, the libertarian think tank based in Washington D.C.

Lessons in Development

Mr. de Soto, who is a tall, rumpled, balding, and genial-looking 62-year-old with a slight resemblance to comedian Carl Reiner and a general air of childlike insouciance, is fond of illustrating his argument to audiences by holding up a piece of fruit. In an October 2003 speech at Yale University’s Center for the Study of Globalization, he peeled a banana onstage. "Nowhere does it say, ‘This is Hernando’s banana.’ Nothing about the banana says that Hernando can sell it, mortgage it, pledge it, leave it to his heirs, or do a hundred things that you can do with a house in the United States. Which obviously means that my property right has nothing to do with the banana itself, but only with the law. If the banana is your house, and you haven’t got the right papers, it’s invisible to the law. All you can do is use it for shelter."

The expression "dead capital" is another of Mr. de Soto’s favorite attention grabbers. He used it, for example, in his 1999 meeting with Prime Minster Atef Ebeid and his cabinet to refer to the vast tracts of land at the edges of the city colored in purple on a map of Cairo that he had prepared. "That’s where people are squatting on agricultural land," he said. "We estimate that 25 million people, a full third of the Egyptian population, are living where no one is supposed to be."

Why did so many people settle there? Mr. de Soto displayed a time line showing the dozens of applications and authorizations necessary to site a home in the legally approved sector, amounting to a 17-year process. Legal entrepreneurship was equally difficult; it took 549 days to get permission to start a bakery. Another chart showed the difficulties of the underground economy: People spent up to several weeks each year protecting their property, defending ownership, preventing theft, and in some cases paying fines, going to jail, or abandoning their homes when caught squatting. This in itself represented a major drain on Egyptian productivity, and a key reason so many Egyptians felt alienated from their government.

Then Mr. de Soto unveiled a calculated estimate: Egyptians had $248 billion worth of dead capital locked up in illegal properties and businesses. If they could somehow bring those assets to life, as either collateral or sources of investment, the potential capital, says Mr. de Soto, would represent 30 times the capitalization of the Cairo Stock Exchange, 40 times the value of all World Bank loans ever made to Egypt, and 55 times the value of all foreign private investment in Egypt since the time of Napoleon.

To an outsider, it’s hard to believe that impoverished countries like Egypt could profitably tap into that capital. If it were so easy to do, why wouldn’t they already have done it? Mr. de Soto answers by holding up as examples some countries that have successfully formalized their economies — the U.S., Japan, Canada, and most European nations. In all these places, formalization happened slowly, in fits and starts, and without much conscious awareness of what was going on.

For example, the 19th-century American West was "wild," says Mr. de Soto, precisely because its property records were ambiguous. "The same acre," he argues in The Mystery of Capital, "might belong to one man who had received it as a … land grant from the British Crown, to another who claimed to have bought it from an Indian tribe … to a third who had accepted it in place of salary from a state legislature … and to squatters who believed that if they occupied the land and improved it with houses and farms, it was theirs…. That past is the Third World’s present."

Only by the beginning of the 20th century was property ownership in the American West codified into law, often because of the increasing political influence of frontier squatters. In the process, the concept of property was transformed. No longer "a means of preserving an old economic order," Mr. de Soto writes, it became "a powerful tool for creating a new one." Similar changes, he says, can be found throughout European history; the suburbs of London were originally illegal settlements that gradually gained legitimacy. Japan, for its part, did not enter the modern economy until U.S. General Douglas MacArthur brought property rights there after World War II.

Irons of Hope

In a sense, Mr. de Soto has pursued his inquiry into poverty since 1948, when he was 7 years old. His father, who had been the first secretary in the Peruvian embassy to Canada, left the government after a military coup and moved the family to Geneva. Growing up attending a school for expatriate students, Mr. de Soto developed a cosmopolitan view of the world, rejecting out of hand the idea that people in developing nations were less capable or sophisticated.

"You never knew at our school who was going to be the smartest in class: a Mexican, an African, an Arab, or a European. So for me, all the explanations about Latin Americans not having the cultural capability for development didn’t make sense. I’d seen otherwise."
Mr. de Soto remained in Europe after graduation, studying international law and economics, then working at the General Agreement on Tariffs and Trade (GATT) offices, and finally joining a Swiss consulting firm. Then, at age 39, eager to return to Peru, he cofounded a gold mining company in Lima. What he saw in the city surprised him. At that time, in 1979, Lima had undergone two decades of intensive and continuing rural-to-urban population migration. Millions of people were moving from the Andean mountains to the nation’s cities, more than half of them squatting on government land or occupying homes without formal title. They squeezed into shantytowns on the edge of the city, building houses out of discarded lumber and corrugated tin if they couldn’t afford stucco and concrete, and taking whatever jobs they could get.

Today, Lima’s paradoxically rigid but haphazard cityscape reflects the transition it went through. Most homes, whether in relatively rich or poor parts of town, are small, modular, boxlike structures, packed into a dense street grid. Since credit was hard to come by, each family tended to expand its home vertically, one story at a time, saving up for the building materials. From many roofs, small steel rods known colloquially as the "irons of hope" still jut skyward — visible symbols of the aspiration to anchor another floor onto the existing house.
Another prominent feature of the Lima skyline helps explain why credit was so difficult to access. On many commercial streets, the largest and flashiest retail signs say "Notario." These signify the offices of legal officials who verify the identity of people turning in applications for government licenses or approvals. In the early 1980s, with only about 40 notarios in the entire country, it took an applicant nine months of full-time work to get formal approval for a new business, two years for a minibus route, and 728 bureaucratic steps for a legal title to a home in Lima. Most Peruvians took their chances instead with the underground economy.

Mr. de Soto had bought a large but rundown house in Lima, which he immediately hired workmen to renovate. Coming from Switzerland, he was struck by something that most Peruvians took for granted: the precariousness of the livelihoods of the carpenters at his house, the miners working for his company, and the street vendors he came in contact with every day. These people had neither formal contracts nor business licenses. If an employer or customer stiffed them, they had no legal recourse. They could not get credit to buy tools, and they had to make all their transactions in cash; they didn’t even band together into entrepreneurial collectives or try to organize their work more effectively. With so many regulations and laws in place, he wondered, why were the working poor so unprotected?
The most important reason, he says now, "was that they were operating outside the legal system." And they were also invisible: Official statistics claimed that shantytowns made up 12 percent of the city of Lima; just from observation, Mr. de Soto knew the correct figure was closer to 60 percent.

As he grew more intrigued, he left his position in the mining company and formed the
Institute for Liberty and Democracy. He convened conferences on the extralegal economy, bringing together Peruvians with economists and development experts he had known in Europe. He also began touring shantytowns on foot with local police officers, interviewing residents he met, and resolving to apply some empirical tests to the conventional wisdom. How long, for example, did it actually take to open a sewing factory? In 1983, two ILD associates charted every application, approval, and office visit that the law required, paying bribes only when absolutely necessary and making no use of privileged connections. There were 11 steps, involving eight separate agencies, requiring a total of 289 days and costing about $12,000 — or 32 times the average living wage.

During the next few years, from 1982 through 1986, ILD contracted with the Lima city government to formalize some of the homes in some of Lima’s poorest neighborhoods. This meant surveying neighbors and community members to find out who held the moral right to apartments, houses, and businesses. While this required an enormous amount of legwork, there were comparatively few property disputes in the end. (This, too, is true in most countries. One of Mr. de Soto’s favorite stories recalls a visit to Bali, where every time he crossed a property line, a dog barked. The Indonesian government might not recognize the lines of demarcation, but the dogs knew.)

By 1983, the city of Lima had granted 23,000 new titles to property. Citizens with titles no longer had to bribe officials or stay home for fear of losing their houses, and the result was a burst of economic activity that caused then-Peruvian president Fernando Belaúnde Terry to seek out Mr. de Soto in 1984, saying, "You’ve gotten under the nation’s skin."

The next president, Alan Garcia, further involved Hernando de Soto in Peru’s government, inviting him to operate as an advisory group on legal reform. ILD lawyers began designing and building a government-streamlining process, along with a series of property-rights reforms and transparency initiatives that the legislature and president adopted. To explain the laws, the ILD began producing television commercials, not unlike American state lottery commercials, inviting people to dream: "What would you do if you had capital?" By 1991, a staff of 100 worked at Mr. de Soto’s think tank, 140,000 real estate titles had been granted, and ILD had evolved a powerful model for replicating its work in other countries. There were even a few private banks emerging, with ILD’s blessing, to take on the business of lending money to the newly legitimate homeowners.

"ILD was the most talented group of people I’d ever seen in Peru together," says then-ILD lawyer Victor Endo, who recently rejoined the institute after several years with the World Bank. "It was also a kind of school for the country. Most of the important ministers, lawyers, journalists, and economists in Peru are ILD alumni."

The Other Path

At the same time, however, the Shining Path guerrilla group (Sendero Luminoso) — whose war of terror during the 1980s and early 1990s took 25,000 lives — had singled out Mr. de Soto and ILD as targets for terrorism. Mr. de Soto had deliberately provoked them: Recognizing that "the Shining Path could never be eliminated without first being defeated in the world of ideas," he reoriented the book he was writing, publishing it in 1987 under the title El Otro Sendero ("The Other Path: The Economic Answer to Terrorism"). It was a runaway best-seller, with an unambiguous message: Open property rights make terrorism irrelevant.
The aftermath was as clear an illustration as ever existed that ideas matter deeply in real life. Shining Path leader Abimael Guzman, a former philosophy professor, launched several attacks on ILD — and also instituted his own underground property-titling system, following the example of Mao Tse-Tung in China. Mr. de Soto installed bulletproof glass in his car, which saved his life during at least one drive-by shooting; there were two car bomb explosions at ILD headquarters; the second, in 1992, killed three people. Meanwhile, the citizens of Peru, many of whom were small-business owners with private property, facing the runaway inflation of the late 1980s (which reached 1,700 percent at its height), recognized the alternative that Mr. de Soto offered them. In 1988, when a 300,000-member bus drivers’ union that had supported the Shining Path endorsed the Other Path instead, it became clear that Mr. Guzman’s popular support had been eclipsed.

Formalization expanded even further in 1990, when Alberto Fujimori, then Peru’s new president, allied himself closely with Mr. de Soto. The alliance was credited with paving the way for the capture of Abimael Guzman in 1992. Meanwhile, ILD staffers helped draft much of Peru’s new constitution and created a plan with the International Monetary Fund to reduce Peru’s yearly inflation rate. That involved renegotiating Peru’s international debts and a series of legal and economic reforms, including a property-rights system that titled 1.6 million of the country’s 2.3 million extralegal buildings and licensed 280,000 small businesses that had been operating illegally. Suddenly, Peru had a 6 percent annual growth economy, with Mr. de Soto getting much of the credit. (Newspaper political cartoons of the time regularly portrayed Mr. Fujimori as his puppet.)

Then, in a much-heralded triumph of the early 1990s, Mr. de Soto forestalled an American antinarcotics attack on Peruvian farmers through a property-rights campaign that successfully sought out the informal farmers’ networks, and signed them up in an agreement to collaborate with the government and switch to noncocaine-based income sources, such as growing coffee. According to Mr. de Soto, U.S. President George H.W. Bush agreed to the deal after asking at a White House meeting, "Let me get this straight, Mr. de Soto. You mean to say that these little guys are on our side?"

"Absolutely," the Peruvian economist replied. "A coca grower is a father, like you and I are. So who is his daughter going to marry? If we attack them, chances are it will be someone from the Shining Path, a corrupt cop, or a member of the Colombian drug cartels. They don’t want that. They want to be respectable."

This moment of triumph, however, also led to Mr. de Soto’s separation from the Peruvian government. In 1992, one of the leaders of the farm reform initiative was assassinated by a man riding a Peruvian military motorcycle. When President Fujimori failed to appoint a prosecutor or bring the murderer to justice, Mr. de Soto resigned, naming government involvement with drug traffickers as the reason. This was an early link in the chain of military corruption scandals that forced Mr. Fujimori to resign in 2000.
The two Peruvian presidents since then have more or less kept Mr. de Soto at arm’s length, and while the land titling has continued under a World Bank–funded agency called the Committee for the Formalization of Private Property, or COFOPRI, many other reforms have atrophied. The notarios, whose fees had been sharply reduced in the early 1990s, have returned to their former position, and Peru’s economy is stagnating again.

Still, Mr. de Soto’s programs have undeniably helped strengthen the economy. For example, according to data gathered by the government of Peru, 28 percent more Peruvian children are going to school in communities where a formalization process has occurred. There is also a noticeable increase in the number of small businesses established outside the home, and a 17 percent increase in the number of hours worked per household.

To Harvard University economics researcher Erica Field, who conducted a study in 2002 of Peru’s formalization while a Ph.D. student at Princeton, these changes signify some critical effects. According to her research, from 1995 to 2001 more than 1.2 million households — 6.3 million people — received titles for the homes they were living in. As squatters, they devoted significant time to protecting their property and less time to work. With titles to their homes, they could seek jobs in the formal sector, hence the increase in the official record of hours worked. Women in particular have benefited; of the new property titles that have been registered in Peru since 1990, 60 percent are held by women, a statistic that is especially significant for single mothers or wives of bigamous husbands. Energy and utility companies have reported less waste and fewer spikes in Peru, because they have a much clearer idea of the people who are using their services. For instance, they now know where people are running sewing machines, and can adjust their transformers accordingly.

Then there’s what Miguel Delgado, an administrator of COFOPRI, calls the "paradox of the Peruvian economy." Since 2000, Peru has been gripped by a severe recession, and the number of Peruvians in poverty has increased to 54 percent of the population from 47 percent. Credit and banking are stagnant; jobs are hard to find. Despite all of that, the level of investment in house construction has risen markedly, and microcredit — the granting of small loans to the working or entrepreneurial poor — is growing at more than 20 percent per year.

The Peruvian experience also demonstrated the many ways in which asset values can rise when prospective owners no longer face potential seizure or arbitrary penalties. In 1993, the
Peruvian telephone company, the Compañia Peruana de Teléfonos, was owned by the national government and valued at $53 million. A government privatization team, trying to take it public, could not convince any global phone company to buy it. Peru spent $18 million retitling it — reconstituting the charter so that it spelled out the law for settling conflicts over ownership. Then the team conducted an auction and sold it to Telef"nica of Spain for $2 billion.

"They didn’t paint headquarters," says Mr. de Soto. "They didn’t repair any broken windows. They simply made it easier for people to identify the company, assess its value, settle disputes over its ownership, and issue shares and bonds against its worth."

All they did, in short, was make the inherent capital in the telephone company visible. Do that everywhere, and it could change the world. Or, as Hernando de Soto puts, it, "We are all brothers and sisters in this world, but there are too many of us to be able to recognize each other by face. We need a better system of passports. We need the rule of law."

The ILD branched out to other countries in the last decade. El Salvador, recovering from a devastating 1986 earthquake and an 11-year civil war, recruited ILD to help it design a formalization process in the early 1990s. The initiative is still under way; it is credited with registering 70 percent of the country’s informal settlements. In 1999, Egypt and the Philippines invited Mr. de Soto to begin working with them. With the subsequent publication of The Mystery of Capital, Mr. de Soto’s theories have become a kind of semiconventional wisdom: generally accepted, but never fully applied until now.

Creating Choices

Some observers, while agreeing that Mr. de Soto’s concept is valid in theory, doubt that it can ever fully take hold in practice. There are too many entrenched interests threatened by his reforms, and too many necessary prerequisites for economic development that ILD doesn’t address: for example, an educational system that can train people in the business skills needed for entrepreneurship, or even the widespread literacy and math needed to survive in a formalized world.

To Cornell University professor Stuart Hart (who is also the director of the Center for Sustainable Enterprise at the University of North Carolina), the ILD work falls short of necessary reforms because it requires central governments to lead the way across Mr. de Soto’s development bridge. "In 30 developing-world case studies we’ve done at the center," says Professor Hart, "one thing comes through clearly: Central governments are the epicenter of corruption. They almost always change the rules or renege. Approaches based on cutting deals with them will almost always fail."

What is more, after 15 years of manic boom-and-bust cycles in much of the developing world, people are suspicious of most economic theories, particularly if they involve strengthening the private sector. For example, a former Peruvian banker (who is now an official in an international development agency) had this to say about the practicality of Mr. de Soto’s theory of inclusive capitalism: "Hernando believes that if you have collateral, banks will behave in a rational fashion. But the banking system never got on board. Emotionally, we weren’t equipped. If you lend money to someone who has spent years getting $10,000 together to build a home, and then they mortgage it to start a business and it fails, are you going to foreclose and send three kids out in the street? You stick with the middle class instead, where the worst that happens is you take away their TV." It is also of note that of the few banks in Peru that granted mortgages to newly empowered homeowners, only one — the Orion Bank, founded by a longtime associate of Mr. de Soto’s — is still in business.

Moreover, ILD’s natural constituents, both government leaders and shantytown and street market entrepreneurs, share a suspicion of the private sector. To most developing-world people, the term "private sector" means the old economic elites, the privileged lawyers and family-run businesses that thrive in the restricted, feudal-style economic systems. Nor is there a generally accepted identity for the emerging entrepreneurial masses. "If they had a name for themselves," says Mr. de Soto, "they would start running the country."

In short, Mr. de Soto’s work will require a comprehensive shift of attitude among three groups, all suspicious of one other, all with their own entrenched habits: government officials, corporate leaders, and impoverished entrepreneurs. Unlikely though this change may seem, there are signs it is happening.

For example, the Overseas Private Investment Corporation (OPIC), a self-sustaining agency of the U.S. government that fosters private-sector investment overseas, is beginning to design mortgage guarantees tailored to countries that are reforming their property rights. "They want to become a Fannie Mae for the Third World," says ILD fellow Peter Schaefer.

Professor Hart and University of Michigan professor C.K. Prahalad authored an article in strategy+business in 2002 espousing the business theory that global companies can thrive by developing markets for the poor at the "bottom of the pyramid." In other writings, the professors cite the example of Cemex, the Mexican cement company, which is now the largest cement company in the world, in part because they serve "irons-of-hope" homeowners, who can expand their houses only one floor at a time. The company finances their construction costs at low interest and stores and delivers the cement at the time the homeowner needs it. ILD’s Peter Schaefer cites Cemex as a harbinger of the kinds of companies that naturally emerge when underground capital surfaces in the formal sector. "I say that serving those markets is ‘the next big thing,’" says Mr. Schaefer, "and [businesspeople] don’t challenge me. They all get a wistful, faraway look in their eyes."

If a history of globalization is ever written, perhaps this moment will be remembered as a time of two prevailing private-sector models. Corporations can enter a new country in a hurry, exploiting cheap labor and buying natural resources. Or they can enter with the idea of helping to develop markets, expanding their customer base for the long term. If the second model catches on, then Mr. de Soto’s theory may be a prerequisite. For until they have property rights, and the habitual behaviors that go with property rights, people in developing countries won’t be equipped to become the kinds of consumers, employees, distributors, and suppliers who can sustain the presence of global companies effectively.
"We don’t go into a country with a message that they must change," says Mr. de Soto. "We diagnose the change that is already taking place, and we try to add the laws, the accountability, and the infrastructure that will allow people to hold their own. Once those elements are in place, you can give people a choice about how to set up their own lives and work. That choice, in the end, is what we’re really trying to provide."

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Monday, June 12, 2006

Global R&D Network

I am currently living in Bangalore. Today there are several high tech MNC companies in Bangalore – Intel, Oracle, Microsoft, Cisco, Juniper networks, Sony, Kyocera, NEC, LG, Novatris, Biocon, HP, DELL, SUN, AMCC, AMD, Triology and several others. All these diverse companies have one thing in common - that these companies have established R&D centers in Bangalore. Most of these companies do not sell in India – and do not even have a sales office. Yet companies have come here to setup their R&D Labs – and to tap the Indian talent. This represents the changing face of global R&D.

Historically companies had one or two primary R&D center supported by a handful of special-purpose sites around the world. This comparatively sparse network has helped in the efficiency of its R&D. Microsoft for example, had its only R&D center near Seattle, Cisco’s R&D mainly done at Santa Clara, SUN microsystem’s R&D center was in Palo Alto. A concentrated R&D center was beneficial when it was built largely through internal growth and had few products to develop.

Global R&D

In the era of globalization, companies have grown through acquisition. Products have multiplied with multiple brands for multiple markets and operate a worldwide network of manufacturing, sales and marketing offices. To support this kind of an organization R&D centers had to be spread across the world to: 1) Support & develop multiple product lines 2) Tap local talent & accelerate R&D process.

Having a global R&D network is not easy. It creates a new set of complexities which makes the R&D groups more expensive to operate – replicating R&D infrastructure, duplicating work and coordinating. Yet companies have continued to expand their R&D networks. Companies have learnt to configure their R&D networks for cost efficiency and then manage these centers to deliver value. In a study conducted by INSEAD, 66% of the R&D centers are now located outside the company’s home country with India & China being the favorite locations for the new R&D centers.

Several factors have contributed to this dispersion of corporate R&D sites:

  • Rising costs in the West, rapid growth of markets in developing nations
  • Rapid advancement of information technology
  • A scarcity of engineers and scientists
  • Opening of markets in China and India have each encouraged companies to globalize their R&D efforts.

Future R&D sites in Western Europe, the United States, and Japan will be selected primarily because they offer value such as proximity to technology or research clusters, to markets or customers, or to qualified workers commensurate with their higher cost. Locations in the developing world will be chosen primarily to gain access to local markets, to decrease costs, and, particularly in India and Eastern Europe, to tap into a pool of highly qualified workers.

But choosing the right location isn’t an easy task for R&D leaders. Because it’s critical that leaders be able to justify the high cost of knowledge access in a developed market location and of operational efficiency in a developing market location, the process must be managed strategically. Without fully understanding the calculated benefits of a potential site, R&D executives are likely to incur an unjustified increase in structural costs.

When the process is managed properly, however, the benefits are easily identifiable. A diverse class of multinational corporations, including LG, Adidas, Novartis, and Toyota, have all taken advantage of globalization. Korean giant LG was able to move part of its software and project engineering to India, whereas apparel manufacturer Adidas created a key consumer and fashion product development center in Japan.

A global footprint also enables companies to better tailor their products for local markets. There are countless examples: Novartis moved its research on tropical diseases to Singapore, while Areva have more than 1,000 engineers working in India to develop products for the local markets.

In the face of such obvious need to disperse innovation networks, companies are configuring their R&D networks for cost by:

  1. To cost-effectively access critical knowledge that could not otherwise be tapped
  2. To locate capabilities where they can deliver results better, faster, and cheaper than anywhere else in the network.

Efficient R&D

Compared with traditional innovation networks, these leaner, more cost consciously designed networks can achieve 37 percent faster time-to-market and lower costs by 24 percent, according to the study done by INSEAD. This is possible only by removing inefficiencies in the R&D networks by:

  • Having a well-planned processes and tools in place that can help foster innovation and collaboration across geographies, cultures, and organizational groups.
  • Being the first to market and introduce breakthrough technologies.
  • Having common product and component architectures as communication platforms that give global teams a reason to foster collaboration. For example, project reviews should be conducted the same way in all R&D centers with inputs from other centers.
  • Evoking and sustaining a healthy innovation culture and attracting and developing talent.
    This are more of a soft skills development – where cross-cultural skills, leadership skills and communication skills of the employees have to be developed.
  • Providing financial and career incentives to encourage staff to work in different geographies. By having people work in foreign countries and them bringing them back to their home countries, people can influence and reshape organizational culture and work practices.
  • Access the capability of each R&D site and assign tasks to them accordingly. This implies that some of the low value-add sites will eventually move up the value chain as they take on more complex responsibilities. (This also helps in retaining the highly trained staff in these centers)

Closing Thoughts

Global R&D networks are now an integral piece of the emerging international economic system, but creating networks that deliver real value requires thorough, painstaking consideration. An effective global R&D network should operate with seamless efficiency across borders and cultures. This can be achieved by having cost-effective R&D location, well-designed product development platforms, an innovation-friendly global culture, and a well-aligned set of incentives.

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