By Nancy Moffitt
Wharton Prophets on Profits – and a Host of Other Economic Issues
The signs are everywhere and they all point to the emergence of a truly global economy with slippery, never-before navigated slopes, entirely new rules, questions galore, and a pace that makes breakneck look sleepy.
So what do Wharton professors expect at the dawn of the 21st Century? We queried a group of key faculty on several critical areas – the stock market, banking, globalization, leadership, employment, entrepreneurship, e-commerce , retailing and marketing – and got answers , insights, and uncertainties aplenty. Their summarized comments follow.
Jeremy Siegel on the Market: Are Bears Inevitable?
Stocks are the place to be in the long run, but Jeremy Siegel is much more cautious about the next five years than the last. Siegel, Russell E. Palmer Professor of Finance and author of the well-known book Stocks for the Long Run, says not to expect the spectacular rates of return that have marked the 1990s. And what of the spate of recently published books – from Dow 36,000 to Dow 100,000 – predicting even greater run-ups in the Dow? Again, Siegel is skeptical.
“The Dow is going to hit 36,000 sometime, it’s just not going to be in the next few years,” Siegel says. “I don’t believe it will even happen in the next decade, because that would be more than a tripling of stock prices. It’s true that there has been a 10-year period in which stock prices have tripled – namely the ‘90s. But to expect that over the next 10 years we can have again these spectacular rates of return is just unrealistic.”
If the U.S. moves into a recession and global growth slows, stock returns could dwindle over the next five years. Siegel says there’s a 50 percent chance of such a slide. And while he remains optimistic about the economy’s strength and value of stocks, he believes a recession or slowdown is likely in the future. “We are already at the longest economic expansion in history. It’s true that we have controlled the business cycle enough that a slowdown would not become a major disrupting factor the way it has in the past. But I wouldn’t say it can’t happen, because lot of economic activity is built on psychology and through the centuries the human psyche has always had its ups and downs.”
Despite his view that a slowdown is inevitable, Siegel also sees unprecedented global strengths. The communications revolution, driven by the Internet and other data communications technologies, will bolster productivity and continue to give some stocks above-average returns, he believes.
Are technology stocks overpriced? To some degree, yes, he says. Siegel is particularly skeptical that Internet stocks will justify their current sky-high valuations. Still, a select group of star performers, such as Cisco and Sun Microsystems, could continue to out perform other stocks even during an economic slowdown, Siegel believes. And despite their current high prices, Siegel remains a fan of big-cap growth stocks. “I believe they still have good value. They are pricey, yes, and you’re not going to get the kinds of returns on these stocks that you’ve gotten in the last five years. Nonetheless, they can still provide leadership for you.”
Siegel suggests consumer brand stocks, such as Coca-Cola, that are currently out of favor but ultimately have the ability to rebound. As always, diversification is critical to long-term success, he says.
What about inflation? Siegel believes some edging up is likely, perhaps to the 2 to 4 percent range, but doesn’t see the double-digit numbers of the late 1970s. “I don’t think the public wants it or will tolerate it, and the Fed knows how to avoid it,” he says.
Anthony Santomero: Bigger, Fewer, More Multinational Banks and the Challenges of Managing Them
It’s tough to imagine, but banks are going to get even bigger and fewer. After two decades of unprecedented consolidation in the banking industry, Anthony Santomero sees even more consolidation coming, with one significant difference: regional and national consolidation will give way to international mergers. “The net result is an extraordinary consolidation the likes of which we’ve not seen since the 1920s,” says Santomero, Richard K. Mellon Professor of Finance and director of the Wharton Financial Institutions Center. “In the financial services industry, we are clearly going to a global market with global investments and transnational firms.”
In the U.S., wave after wave of local, then regional mergers have resulted in a truly national banking market. In Europe, country-by-country consolidations are taking place on the argument that a competitive balance can be maintained via nationalistic turf battles. “So for Europe in the next five or ten years, there’s a question as to what the European market means, and this is accentuated by the introduction of the Euro,” Santomero says.
The bottom line: a more transnational financial world with larger full-service firms, universal banks, and financial entities with assets of a trillion or more dollars. In the U.S., consolidations will continue, but American banks will lose their foothold as the world’s largest banks.
“Can these large firms be efficient or will they stagnate?” Santomero asks. “Nobody’s got a handle on that. The markets and the academic work consistently argue that scale by itself isn’t sufficient. And in fact scale becomes a problem rather than a solution. Yet managers (positively) view the synergies or the potential synergies that consolidation can bring. But the sheer size of the market can get so large that you can’t possibly adequately deliver across time and space and products. That’s the big challenge,” Santomero says.
This trend toward increasing economic nationalism, increasing globalization of markets and larger institutional players means it will be ever more important for organizations to keep entrepreneurship and innovation alive. “This is a fundamental challenge in the face of the need to consolidate and expand control. Can banks remain competitive and efficient in local markets?” Santomero says. “I tend to think it will be very difficult.”
Santomero differs from popular opinion in his long-term view of globalization. He points out that the USSR’s downfall was not a linear process; it was in fact an abrupt change that caught most people by surprise. He suspects that globalization will ultimately end in a similar radical reversion. “If you go back 100 years, 200 years, we had globalization followed by nationalism and reassertion of boundaries. So the question I have is, “Are we really going to Star Trek – one big world order? Or are we following this path until something disrupts it and we have national states vying for control again. My guess is it’s the latter even though everyone is thinking it’s the former,” Santomero says.
“But if you really believe there will be these ups and downs in the process of globalization, it has devastating implications on how business planning and economic policy must proceed. It means one can’t depend upon Japanese steel for U.S. cars, for example, because if and when we close borders again we’re going to have no steel industry. That was the view that led to the subsidization of inefficient industries in the 1960s and 1970s – not a pleasant prospect,” he points out. “So, although we’re clearly moving toward this global world order, we also have to understand that there’s a long history and it’s likely to cause some disturbance that we don’t fully understand. The results of these changes are not at all clear.”
Stephen J. Kobrin: Another View of Globalization
Stephen J. Kobrin, the William H. Wurster Professor of Multinational Management and director of The Joseph H. Lauder Institute of Management and International Studies, offers a different view of globalization: it’s here to stay, thanks largely to the information revolution. The Internet has brought borderless markets where geography is much less relevant, and Kobrin doesn’t see that changing. Having said that, he believes this new world economy is headed for a period of turmoil and uncertainty. Some reasons why:
Many kinds of “goods” are sold via the Internet – from a very tangible L.L. Bean field coat to a collection of songs that is downloaded and paid for with electronic cash. Given this new trend towards digital products and markets, Kobrin sees tax collection becoming more difficult. “It’s not clear to me how any country can collect sales or value-added tax on transactions that are information for information. There are very real enforcement problems and a conceptual question of what jurisdiction means in cyberspace. I also wonder what corporate taxes will mean in a world where corporate headquarters could be a couple of servers that are very mobile,” he says.
Regulation and taxation have historically been based on jurisdiction- where a product is sold or a firm is based. Kobrin predicts that as geographically defined national markets become less relevant, their regulatory and taxing powers will erode. In the long run, international coordination will become necessary, though Kobrin believes nations will resist this for as long as they can. The result: increasing discord between existing governmental institutions and the global economy. “Geographic jurisdiction doesn’t map onto cyberspace. And until we manage to square that circle we are going to have a problem with governance: who taxes or regulates and how they do so.”
Kobrin worries about the viability of democracy in this new global environment. Democracies require meaningful participation by citizens and a degree of control over the processes that affect people’s lives, Kobrin observes. But as localities and nation/states lose a degree of control of their economies, he questions whether these democratic processes will become challenging. He believes the world will ultimately move toward international organizations having more authority and power, but is uneasy about the difficulties of exercising democratic control over such organizations. “And as the scale increases, it’s harder and harder to have democratic participation,” he says.
Kobrin also has misgivings about the inequalities that have emerged with globalization and the information revolution. “Twenty years ago a poor country could build shoe factories and enter the world economy,” he says. “Now you need to have infrastructure, educational systems and the wiring that lets you participate in a digital world economy. Is a world with inequality sustainable? I don’t think so. Social instability is a virus that is easily transmitted across national borders.”
For managers, cross-cultural skills and an understanding of the global context of business will become increasingly vital. As they find themselves working together either physically or virtually, managers will need the ability to deftly interact with others from dissimilar backgrounds and who speak different languages. More and more of today’s business problems require international solutions, Kobrin says. And cross-cultural differences are a barrier to such solutions.
Michael Useem: The Challenges of Communicating Your Vision to a Global Audience
An increasingly world-wide capital market means investment dollars are progressively moving beyond domestic markets, Michael Useem, professor of management and director of the Center for Leadership and Change Management, points out. As recently as 1995, most investors allocated the bulk of their assets within their home nation. But this is changing. For corporate leaders, then, Useem sees a slew of new challenges as they grapple with the reality of communicating strategy and vision to a tough-minded international investment community. “It’s no longer the cozy club in New York and a few other financial centers,” he says. “Whether you are an American or Chinese company, you have to convince investors worldwide that your business model is a winning one and that you will deliver the financial results.”
So the fundamentals of leadership must change. Historically, executives have focused on leading those who report to them, something Useem calls “leading down.” Today, however, “leading up” is also becoming the norm. “Leading up means that you have to be an effective leader with those who are ultimately your bosses: the investors. You always have had to have skills for leading downward inside the company, but now you have to add a capacity for leading up and outside the company too,” Useem says.
“Company executives now need an ability to present the company’s strategy to a constitutionally skeptical audience, and for this to occur several classic virtues of downward leadership should also be in evidence, including accuracy, credibility and integrity,” Useem adds. What does he suggest? “To build these capabilities, there’s no substitute for regular dialogue with investors through road shows, executive visits to money managers and investor visits to the company.”
Another key leadership challenge relates to the growing trend of outsourcing the management of internal operating functions – from information systems and human resources to food service and property management. Useem describes the resulting necessary skills as “lateral leadership:” managers must negotiate sourcing contracts and ensure the performance of outside vendors without having authority over them. “The manager has to guarantee that the outsourced services are delivered to the people inside the company, but the manager can’t tell the providers what to do because they don’t work for him or her,” Useem says. To lead laterally without authority requires managers to develop an ability to think strategically, govern partnerships, and foster change.
But what Useem calls “the incredible shrinkage of time” is likely one of the most critical career issues facing most managers. Customer response and product development times continue to dwindle, loading ever-greater pressures on managers’ backs. Toyota, for instance, last year announced it would produce made-to-order cars within five days.
What does Useem suggest to managers looking for ways to make themselves more adept at “leading with speed?” First, there’s no place today for technophobia. “There isn’t anything out there that is rocket science,” he says. Second, Useem suggests attacking – rather than avoiding – projects with demanding deadlines. With practice, people can learn to think and work faster. “You have to do it repeatedly to get comfortable with it. You may be reluctant to try new technology or to put yourself in time-driven situations you’ve never faced before, but self development requires those experiences.” The ability to drive a fast-moving organization and to move quickly and with agility, he says, will be an essential skill.
Peter Cappelli and the New Realities of Employee and Employer
Like many areas of business today, employment is controversial, rapidly changing and promises many new pitches and swells, says Peter Cappelli, the George W. Taylor Professor of Entrepreneurial Studies and author of the book, The New Deal at Work: Managing the Market- Driven Workforce. The employee/employer relationship has undergone a fundamental change in recent years: long-term commitment and promoting from within have gone the way of the black and white television. Today, companies struggle to retain their most valuable employees in a tight labor market. Many mid-level managers and long-time employees, meanwhile, find themselves caught in a strange, new and largely insecure employment world.
Cappelli believes performance management will become a critical issue as companies increasingly recognize the vast differences in employee performance and continue to move toward incentive-based compensation. “Companies have to find ways to measure employees accurately, and that’s a real challenge because while they may have a gut feeling that performance differs radically among employees, it’s not an easy thing to measure,” Cappelli says.
The bigger issue? Traditional internal equity issues are exploding. In the short term, highly productive employees have major advantages. And in the long run, as companies are better able to document employee productivity, employment terms and conditions will differ vastly. “Ultimately, this issue will drive the organizational structure of firms as they begin considering key questions of intellectual capital,” Cappelli says. Companies are already moving in this direction, in some cases offering access to equity based on productivity.
As increasing numbers of star employees flee traditional corporate roles for high-flying IPOs and dot-coms, some companies are creating subsidiaries that, in a sense, give employees some of the perks that come with participating in a start-up. “Existing companies are going to have to find a way to respond to this because their intellectual capital is just going to walk out the door,” Cappelli says. “It used to be that you could always walk out the door, but you couldn’t do outside what you could do inside of a company. I could leave with an idea but I could never make it happen. Now, that’s not the case.”
Which employees will fare best in this workplace of the future? Those with specific skills that easily translate across the organization, Cappelli says. Generalists, people whose performance is difficult to measure, and employees who appear wedded to bureaucracy will have more difficulty. “As bureaucracies get leaner and leaner, the skills needed to manage those bureaucracies become less and less valuable,” he says. Overall, inequality between employees will rise. “It’s not so much education as it is skills that are in demand, and that will drive how employees are compensated and valued within organizations,” Cappelli says.
Ian MacMillan: The Necessity of Entrepreneurial Transformation
Five-year plans have given way to five-month product cycles. Forecasting has been replaced by anticipation and positioning. Uncertainty is the norm. These are the new realities of business today, and the pace is only going to get more harried, says Ian MacMillan, professor of management and director of Wharton’s Sol C. Snider Entrepreneurial Research Center.
The dynamics of the new economy mean established businesses now face the same time pressures and ambiguity that have long characterized entrepreneurial businesses, MacMillan explains. “As competitive barriers come down and the velocity of technology change increases, the window of opportunity to extract profits is increasingly shortened. This wreaks havoc with traditional planning financial models because not only do you have a brief period to enjoy profits, but the demands of continually launching new businesses consumes even more of the profits derived from this short window,” he says.
In order to prosper and survive these heightened challenges, a new strategic approach that follows the logic of entrepreneurial discovery will become necessary for all businesses, says MacMillan, who is co-authoring a book on the issue. This new managerial mindset draws on the skills of “habitual entrepreneurs” – people who have founded multiple successful businesses.
What can businesses of all sorts learn from habitual entrepreneurs? MacMillan cites three major characteristics his research has shown to be particularly vital. First, habitual entrepreneurs constantly look for and inventory high-potential new business opportunities, as well as new models for doing business. They often don’t immediately pursue them, instead positioning themselves to act when the time is ripe. The second key behavior is a ruthlessness about time management. Habitual entrepreneurs, no matter how wealthy or influential, are spartan about how they focus their time and attention. “They have learned not to take on too much, not to squander money, and not to focus on anything but the most attractive opportunities that emerge from their register of opportunities,” says MacMillan.
Finally, habitual entrepreneurs execute rather than analyze, but execute adaptively. They revisit, question and probe opportunities and are fearless about taking action even in the face of uncertainty. But, they always maintain their ability to quickly change course.
“In conditions of uncertainty, truly effective managers create an entrepreneurial mindset among their entire workforce,” MacMillan says. “They work to build a huge sensory mechanism where all members of the firm feel the right and obligation to spot opportunities to change the business model, then help poise the organization to quickly seize opportunities with the expectation that the competition will rapidly follow,” MacMillan says.
David Reibstein: Marketing, E-commerce and “Sticky” Sites
Like traditional retailing, e-commerce is increasingly about product differentiation and niche marketing, predicts David Reibstein, the William Stewart Woodside Professor and author of e-commerce-related studies and book chapters. And while retailers have typically served a regional customer base, e-commerce has globalized retail markets, a reality that has brought higher prices for products in short supply. What was once sold to neighbors at a garage sale, for instance, is now sold on eBay at a much higher price, Reibstein observes.
Another interesting Internet trend to watch: e-commerce has turned traditional supply-chain issues upside down. Supply chain processes historically include layers of businesses: companies provide materials to manufacturers, which assemble then sell complete products to distributors, who sell to consumers. Thanks to e-commerce, many manufacturers are cutting out the middleman and selling directly to the customer online, while others, concerned what this leapfrogging will do to longstanding vendor relationships, are not. A major consumer products company, for instance, decided not to sell contact lenses on-line despite the obvious potential for profit. Why? It would disrupt the company’s relationship with optometrists, who write brand-specific prescriptions and often sell contact lenses themselves.
“Without any question, more and more companies are going to be leapfrogging some of their supply chain but still trying to maintain some of these relationships in other ways,” Reibstein says.
Beyond supply chain issues, most e-businesses are in a ferment over what makes an e-commerce site “sticky,” or able to draw repeat traffic. Reibstein says accurate product representation, particularly when it comes to gift buying, is even more important than pricing. It’s also vital to deliver what you promise when it comes to shipping and other services. Merchant tactics also make a difference. Most effective, according to Reibstein, are product search tools and express ordering. These convenience- related features are more important to the average buyer than offering featured sale items, discounted shipping and on-line coupons.
In their quest for return e-shoppers, Reibstein suggests companies not focus their energies on gimmicks such as product giveaways and deep discounts because marketing research has shown that “deal prone” customers aren’t generally loyal. “They jump from deal to deal and brand to brand,” Reibstein says. “People who go to a site because of its low price are easily lured away to other sites. So we can’t lose sight of that reality in this new world of e-commerce.”
Reibstein observes that while almost half of total e-commerce revenue for the first quarter of 1999 was generated from first-time buyers, repeat buyers generated nearly 75 percent higher growth. Companies who can keep customers coming back are likely to be those who “deliver at a level that the customer wants and monitor how well they are doing,” Reibstein concludes.
Marshall Fisher of the Imperative of Rocket Science Retailing and Barbara Kahn on the Benefits of Variety
Once upon a time, local retailers knew their customers’ purchase patterns because, simply put, they knew their customers. Flexible local suppliers meant merchants were able to get what they needed when they needed it. But a massive consolidation of local and regional stores has meant an end to these personal relationships. And as more and more wares are purchased in Asia and other remote corners of the world, retailers have increasingly found themselves constrained to rapidly respond to changing customer interests. The result: a constant and costly struggle to match supply with demand.
Marshall Fisher, professor of operations and information management and co-director of the Fishman-Davidson Center for Service and Operations Management, recently co-authored a multi-year study of 30 well-known retailers that examined how merchants are handling these challenges. The study, co-authored with Harvard’s Ananth Raman and Wharton research associate Anna Sheen McClelland, and to be published in an upcoming issue of the Harvard Business Review, found widely disparate results in retailers’ ability to accurately predict inventory needs.
“There are three ways retailers try to predict inventory needs,” Fisher says. “One, to have lots of inventory on hand, which is easy but expensive. A second but tougher way is to actually accurately predict what people want. Another is to very quickly replace the goods you have sold. Most companies blend these three: some are very quick but don’t predict well. All too many have a lot of inventory. Most just don’t do a very good job managing these issues,” Fisher says. In addition, many retailers are able to capture reams of electronic sales data, but most have yet to figure out how to use these data to more accurately gauge inventory needs.
And Fisher believes the competitive environment is only going to get tougher for retailers. Specialty stores will likely continue to batter their somewhat calcified department store counterparts. Exploiting speed and “having more of the right stuff ” will be critical, he says, as will using information technology to capture, interpret and effectively use point-of-purchase data.
How can retailers do this? Fisher and his co-authors propose the retail industry learn from the world of investment management, which in the late 1960s and 1970s, went through a transformation that culminated in the “rocket science” movement on Wall Street. Mathematicians and engineers were employed to create a more scientific approach to investing by developing program trading systems that went on to become the norm. “There’s much retailers can borrow from this movement, including using transaction data to predict future demand, benefiting from more sophisticated ways to measure and manage risk and creating organizations that blend scientific approaches with traditional ones that rely on human judgement,” Fisher says.
Specifically, Fisher suggests that retailers begin to measure stockouts, the resulting lost sales and gross margins, markdowns, inventory carrying costs, as well as customer satisfaction and employee morale. Also, retailers must work to blend new IT based systems with the knowledge and experience of existing managers. Today, in their haste to implement new inventory tracking systems, many retailers find themselves caught between old and new processes and have seen store performance decline as a result. “Retailers need a system that blends their merchants’ knowledge with the computational efficiency of computers,” Fisher says.
Retailers should also use early sales to guide replenishment, Fisher suggests. In practice, this process is not as simple as it sounds: it’s important to know not just how much of a product was sold, but the conditions under which it was sold, including price and inventory availability. It’s also critical, Fisher believes, for merchandising executives and MIS staff to improve their historically tense relationship. Without cooperation from both sides, retailing businesses are less likely to move toward a more scientific operating model.
Ultimately, given the competitive realities facing them, retailers will have to find a way to implement rocket-science retailing, Fisher says. “But it’s not clear when, or how quickly, this transformation will occur.”
The Internet allows marketers to track customer interests, preferences and search behaviors in entirely new ways. At some point, says Barbara Kahn, the Dorothy Silberberg Professor, this will lead to increased microcustomization or “high-variety” strategy, a research area Kahn specializes in. Microcustomization creates products tailored to individual customers so that “over time you’re building a relationship with that customer and really giving them what they want and need. And this is what the future holds: we record your data, we know what you want, we can create a customized product for you,” she says.
What about today? Customization and variety are still key, though for businesses, lots of variety means lots of inventory – an expensive and often risky prospect. Still, there are opportunities. Kahn’s recent research explores ways for businesses to offer greater variety without simultaneously breaking the bank. One way: standardize a product’s components but customize its configuration. This strategy keeps costs down by using many of the same pieces in combination with other customized ones. Automakers rely heavily on this strategy, offering customers made-to-order options such as air conditioning and leather seats, while most other features remain virtually the same.
Brick and mortar retailers, meanwhile, can create an illusion of newness by simply rearranging existing inventory. “One of the things that brings people into a store is perceived variety, assortment, stimulation and excitement,” Kahn says. And customer perceptions are key. “I’ve talked to financial services people who say that many people are genuinely pleased just to feel that you’re giving them a customized financial services package even if it’s essentially standardized,” Kahn adds. “It’s this notion of understanding people’s need for individual attention and for having something different in their lives, then trying to create that perceived variety.”