Edited by Randy Weston ____________________________________________________ Torn from the Headlines ____________________________________________________ The Rise of Africa IBM calls out the New African Reality Is Africa the growth engine of the 21st Century? We think so, and apparently so do companies like IBM. IBM recently held its Global Innovation Outlook (GIO) in Manhattan to discuss findings of its latest deep dive into issues shaping the globally integrated economy. Counter to what one might expect of a tech giant like IBM, however, the topic was not e-commerce, global sourcing, or some other classic of business arcana, but rather a close look at the economic prospects for Africa today. An opportunity waiting Visionary executive vice president of innovation and technology Nick Donofrio kicked off the session by citing some compelling numbers: African economic growth has averaged 5.4% the past decade and is forecast to reach 6.8% in 2008. Mr. Donofrio described Africa as “the world’s last great emerging market—the youngest and fastest-growing population and rich in natural resources.” He described its 930 million people as holding “tremendous economic potential that has yet to be realized.” In planning for this GIO initiative, IBM did extensive research with 150 experts on Africa, including business and government leaders, entrepreneurs, academics, as well as other thought leaders and non-government organizations (NGOs). The consensus was clear: Africa is on the “verge of breaking wide open.” Mr. Donofrio was followed by Ginny Rometty, senior vice president of IBM Global Business Services, who crisply broke down the eight major themes, or keys to development, that the GIO distilled from the deep dives. This is where I began to feel the surge of momentum inherent in the self-reinforcing trends IBM had identified, particularly in the first three themes: - Moving up the value chain—This concedes that Africa is “the mother lode of natural resources,” but posits that doing more with these commodities than simply shipping them abroad will benefit the African economy and people.
- Infrastructure—This includes the physical, like roads and bridges, and communications, including soon-to-be-available high-speed Internet lines.
- Finance—This helps to bridge the gap between microfinance for individuals and commercial finance available to large businesses.
The inherent synergy is obvious and irresistible. We at AMR Research have spent 20 years studying the value chain. Our view is that demand-driven value chains are those that start with the customer in mind and build capabilities that allow faster and better innovation to get new and profitable products to market. One absolute prerequisite is visibility, which means information systems. Another essential ingredient is a physical network of plants, roads, rails, refrigeration, and so on that gets ideas realized and delivered to customers. The final piece is, of course, finance, which capitalizes the network to get things going in the first place. Recipe for success The GIO struck a chord because it showed that all these ingredients are in place now. In terms of moving up the value chain, examples like Starbucks’ Rwandan coffee venture illustrate how adding brand to the value proposition can create wealth. Similarly, linkages between an aluminum smelter, the road that serves it, and the port that sends product into the global economy create “development corridors”—in this case, the Maputo Corridor, which fosters wider growth. Big corporate leaders like SAB/Miller, ShopRite, and Woolworth’s are also driving growth on the continent by building and tapping a fast-expanding series of value chains that are a lot more than just sourcing of cheap raw materials. Infrastructure is also ready to come on stream. Physical infrastructure remains a challenge, but one with pent-up potential to be cracked. In the past few months, $3B has been raised for infrastructure projects alone, according to Haiko Alfeld of the World Economic Forum. Meanwhile, massive new communications infrastructure is being laid into place, including an east coast, high-speed Internet cable and a continental network of wireless communications and high-speed routers. Cisco’s director of Internet business solutions, Waseem Sheikh, is quoted with the defining mental image: “When I see the Maasai installing Cisco equipment in the Bush, it makes me a believer.” As for finance, the GIO showed a new way of financing, while painting enough of a picture of classic developing markets to give hope that traditional finance will be quick to follow. The new way is a form of microfinance that taps the same vein as eBay or YouTube to get money to small entrepreneurs that need it. Kiva.org is an explosively growing online lending system that allows anyone, anywhere, to go online, shop among a galaxy of small business projects, and pony up a few hundred dollars in PayPal or credit-card cash that finds its way immediately into the hands of a grower in Malawi or a street vendor in Timbuktu. The genius is to completely eliminate friction in moving cash so that regular people can participate in development economics for the price of little more than an expensive dinner. In its first 12 months, Kiva lent $500,000. In its second year, it lent $15M. Clearly a path is opening. Oh, and as for traditional finance, consider the following data from Frannie Leautier, a risk management specialist and managing partner of The Fezembat Group: 10 years ago, the likelihood of economic growth in Africa overall was 25% and decline was 22%. Today the likelihood of growth is 45% and decline 12%. With risk dropping and the potential upside growing, traditional finance will be quick to follow. Forget what you think you know about Africa To the skeptic who still sees Africa as a hopeless mire of starving orphans and gun-toting thugs, consider what may be the most important fact of all: 25 years ago, Africa boasted only three democracies. Today there are 40. Problems like AIDS—still a massive humanitarian issue—are getting increased attention with more aid, as well as from focused governments like Uganda, which is dramatically reducing infection rates. Corporate leaders are also stepping up, like Rio Tinto, which is taking huge steps to deal with AIDS within its employee base and in the wider community. The watchword offered by Mark Harris, IBM’s country general manager for south and central Africa is not just hope, but belief. Belief is the spark that starts the explosion, and respect will keep it burning Belief that Africa can grow and thrive, belief that the globally integrated economy will foster and benefit from that growth, and belief that we are all in this together—these give us hope. But there is one ingredient too often missing: respect. IBM has shown respect by simply taking the time to investigate the opportunity and investing in developing it. Kiva has shown respect by connecting real people at a human level. SAB/Miller, Cisco, Starbucks, and Rio Tinto have shown respect by entering Africa with an open mind, expecting to learn as much as teach. Summits on Africa are nothing new, but a meeting held in New York focused on Africa as an equal partner in business is, and that respect makes me a believer. IBM closed by taking the first steps to turn its belief into meaningful business investments. Mr. Donofrio committed IBM to a set of significant investments: - Investing $120M since 2005 in an integrated delivery center to service more than 300 global and regional customers from Johannesburg. This has created more than 1,500 new jobs. The commitment is to build a larger team of skilled people on the ground.
- Donating a 14-teraflop Blue Gene/P supercomputer for scientific research applications across the continent. This will be the most powerful supercomputer on the African continent.
- Partnering with CARE International to roll out an Africa Financial Grid to be used by microfinance institutions to reduce administrative costs in the provision of loans to small businesses.
IBM is serious about Africa, and my bet is that IBM’s shareholders will applaud the move as the continent’s staggering potential becomes obvious and businesses from around the world begin to invest heavily in this “last great emerging market.” We at AMR Research only see upside in the market and will be initiating on-going coverage of the African value chain opportunity. In the meantime, our book Supply Chain Saves the World addresses a number of these issues. If you have thoughts on this opportunity, let me know at komarah@amrresearch.com. (Kevin O’Marah is AMR Research’s Chief Strategy Officer) ____________________________________________________ Industry Insights ____________________________________________________ —Value Chain Transformation Sony Ericsson dials up turnaround Few transformations have been as fast and complete as the one at cell phone maker Sony Ericsson. The joint venture between Sony and Ericsson started in October 2001: Sony would bring its famed expertise in consumer electronics design, marketing, and branding, and Ericsson would bring deep technology, an understanding of the infrastructure of the network, and tight relationships with the telecom channel. It was a perfect marriage...on paper. In the 2002, Sony Ericsson reports a before-tax net loss of Euro 291M on Euro 4.2B in sales. The company bled cash and registered the worst service in its industry. Flash forward four short years: Sony Ericsson delivers Euro 1.3B pre-tax profit on Euro 11B in sales, among the highest operating margins in the business. Vital to this turnaround has been a relentless focus on supply chain as a strategic weapon. To find out how they did it, AMR Research talked to Matthew Costello, Sony Ericsson’s senior vice president and head of corporate programs and sourcing, and Patrik Jansson, the vice president and head of supply chain operations. One secret was understanding the changing nature of the mobile phone industry. Accelerating product innovation and shifts in consumer preferences have turned mobile phones into fashion accessories. Variety has exploded, with lifecycles now as short as three months. Prices in high-end segments have stabilized, but industry-average selling prices continue to decline by as much as 8% per quarter. Unfortunately for manufacturers, the analogy to fashion apparel stops at the notion of markup. Makers of designer clothing are typically able to price their wares at just over 50% above product cost. Thanks to stiff competition, the top performers in the cell phone wars are barely able to muster gross margins above 30%. Sony Ericsson’s first steps were stabilizing the core. Rather than shooting in all directions, Sony Ericsson’s supply chain leadership team chose instead to focus: they removed all non-value-added complexity, standardized and strengthen cross-functional decision processes and established resilience in those elements of the supply chain that were under their direct control. Next, Mr. Costello and Mr. Jansson knew they would need to break down thick walls between operations and the business. The executive team set up a top-down strategic planning process that started with the following questions: What distinct markets do we serve, and what do we do to win? How do we do it economically and efficiently? How do we reinforce the change? The executive team then matched product types to market segments and supply chain design. The company set up a radical flex arrangement among its factories and component suppliers that allowed the company to hedge rapidly and profitably against the inevitable demand surprise. It has paid off. Sony Ericsson’s positive earnings news continued into the third quarter of 2007. Despite the steady addition of more lower priced product to the portfolio, the company’s 30.7% gross margin exceeded market forecasts, increasing margin by nearly a full percentage point from just three months earlier. For more details on how Sony Ericsson executed this turnaround and our conversations with Mr. Costello and Mr. Jansson, see “Sony Ericsson: Leadership Through Total Supply Chain Transformation.” (Analysis by Steve Hochman, Value Chain Strategies) *** —Life Sciences Hearing the patient A leading global life sciences organization recently asked AMR Research for help with this question: “How do we incorporate the voice of the customer into our supply chain?” In life sciences, the voice of the customer is usually associated with capturing consumer interests in product development and not necessarily on customer service. A fundamental aspect of the demand-driven transformation is to think outside-in: understand who the customer is and build strong integration between product, supply, and demand. To get there, you first have to know who your customer is. A recent AMR Research survey showed only 19% of respondents viewed their customers as patients/consumers. Any initiative must be built for the eventual customer, the consumer, or, in this case, the patient. In the consumer products world, retailers aren’t the customer Proctor & Gamble is worried about. We are, the people buying soap, toothpaste, and other products. This is the same with life sciences and all of the healthcare industry. When the voice that companies capture is that of the eventual patient, life sciences companies will begin to get closer to the customer, which can help minimize cost and improve efficiency. They’ll also realize faster recognition and resolution of operational problems. We know from our retail research that it only takes 2.3 negative interactions before a customer leaves permanently. Alignment of performance measures is another benefit. Too often operational metrics are built to reward internal expectations that are not aligned with the customer, but the only metrics that matter are those that mean something to the customer. Finally, building in mechanisms that force consumer insight into operations ensures that everyone in the company keeps them top of mind. To get closer, life sciences companies can turn to some of the techniques perfected in more consumer-oriented industries like CPG. These include live focus groups, distribution of service call recordings, mandatory customer visits, and integration of customer feedback from the web. Leaders are starting to incorporate this thinking when designing their product supply networks to manage and harmonize their end-to-end value chains from raw materials to customers. This results in collaborative activity between a business and its trading partners, which includes planning of production and distribution to meet end customers (patients) needs. For more details on the benefits of getting closer to the customer and the best practices that life sciences companies can employ, see “Incorporating the Voice of the Customer in the Life Sciences Supply Chain: Where is the Chief Patient Officer?” (Analysis by Hussain Mooraj and David Aquino, Value Chain Strategies) *** —Life Sciences GSK: Fair and balanced sourcing Most chief procurement/purchasing officers (CPOs) will tell you that a best practice in sourcing and procurement includes slashing the number of suppliers the company works with in order to maximize buying power and standardize processes, thereby reducing the risk of failure to ensure quality. It makes sense. The more companies you deal with, the more complex the process becomes and the higher the risk the relationship will falter. It’s also clear that buying a larger amount from one supplier will generally yield lower unit costs than buying small amounts from a number of suppliers. Why then is life sciences leader GlaxoSmithKline(GSK) actively adding suppliers and favoring supplier diversity? GSK currently operates with about 75,000 suppliers, running about 6,000 electronic sourcing events a year across 50 countries. It actively seeks new suppliers, and only a mere 20% of IT contracts go to the lowest price. Why? It’s all about balance and fair play. GSK’s procurement professionals evaluate assurance of supply, quality/regulatory, service, and innovation, as well as equally consider GSK’s corporate social responsibility (CSR) policy. GSK operates a free-market concept, but its aim is to balance the big guys against the smaller, less able suppliers. Of course, it still requires adherence to supply assurance, quality, service, and innovation requirements. It’s also subject to adherence to REACH, just as any other company in the sector. But GSK adds weight to bids from disadvantaged companies, such as those from developing countries or minority owned companies. It finds that large suppliers are less willing to supply small amounts, and it uses this to the advantage of these groups. It allows local supply decisions based on clear global rules, such as embedding eight separate human rights clauses in every RFP, RFQ, and contract. The procurement systems are still delivering the same sort of savings as they did soon after the companies originally merged. As the Emptoris system operates as a managed hosted service, GSK is able to run its programs globally and add new countries and participants with relative ease. GSK also seeks out local supplier exchanges that can join the fold, providing increased diversity. For more on GSK’s work, see “GlaxoSmithKline Shows Best Practices Can Also Be Socially Responsible Practices.” (Analysis by Nigel Montgomery, Enterprise Strategies, and Mickey North Rizza, Market Services) ____________________________________________________ Market Roundup ____________________________________________________ —ITInfrastructure SAP a force in SOA wars? SAP’s recent analyst meeting was a breath of fresh air. Our biggest takeaway was a clearer roadmap on how SAP was going to deliver on NetWeaver as a tool for business innovation and deal with the problems of complexity and stability earlier versions have suffered from. As described in “SOA and BPM for Enterprise Applications: A Dose of Reality,” SAP’s NetWeaver 7.0 was lagging other competitors because the various components were not well integrated. Our perception was that the tools suffered from having too many uncoordinated development teams and a high rate of change for each component as they tried to deliver functionality, standardize the architecture, and deal with problems found in the field. NetWeaver 7.1, which is just finishing ramp up, brings a user-installable Enterprise Services Registry to coordinate tools and services better. It also pulls the tools into a common Eclipse-based framework and a more complete Composition Environment. Finally, it severs the connection between NetWeaver as a platform for composite applications and NetWeaver as the platform for Business Suite, which will remain on the now-stable NetWeaver 7.0. NetWeaver 7.1 can be evolved faster without threatening the stability of ERP, CRM, SRM, and the other parts. SAP still has a way to go to be competitive with other service-oriented architecture (SOA) frameworks, but it finally seems to realize that the goal is not to compete directly with BEA Systems, IBM, and TIBCO on SOA and business process management (BPM) for custom software development. NetWeaver just needs to be the best tool to add innovation around the edge of a significant footprint of SAP applications. For more on SAP’s plans and an update on Project Galaxy, which brings business process management to NetWeaver, see “SAP SOA Wars: In a Galaxy Not So Far Away.” *** —ITManagement Enterprise 2.0 goes Mainstream Enterprise 2.0 has become one of the most interesting developments in business applications. It could become one of the major technologies fostering effective corporate collaboration and, ultimately, better top-line and bottom-line results. Enterprise 2.0 uses Web 2.0 technologies like wikis, social networking, rich-client technologies, mash-ups, and blogs to encourage better collaboration, easier and more spontaneous sharing of information and knowledge, and higher levels of productivity among employees. It also holds the promise of integrating structured processes—the work supported by applications like ERP, supply chain management (SCM), and customer management (CRM)—and non-structured, cross-functional collaborative processes. A number of enterprise application companies, including IBM, Microsoft, Oracle, and SAP, are sharing strategies with customers and analysts on how they plan to integrate Enterprise 2.0 functionality into their product lines. Some of these firms have been shipping basic collaboration tools, such as instant messaging or presence applications, and have integrated rich-client technologies and web/portal services into their suites. Companies in life sciences, consumer electronics, and high tech are employing a social networking approach to marketing, creating communities in which customers cannot only get technical and product support, but can also share insights and experiences about their use of the company’s products. On the employee side, users are taking it on themselves to use consumer-grade Web 2.0 technologies like Facebook, blogs, and wikis to improve internal collaboration more quickly, sometimes using tools that have been approved and provided by their employers and integrated into corporate systems, and sometimes not. However, these employees may be inadvertently ignoring or bypassing compliance and security policy, if it exists at all, and may be exposing their firms to an unnecessary level of risk by doing so. All enterprise applications, structured or unstructured, need to be integrated into the corporate IT infrastructure. The absence of corporate policy and compliance on Enterprise 2.0 is a genuine risk to the corporation. In the face of this external and internal activity, the office of the chief technical officer (CTO) has to take a leadership role in not only helping to introduce these emerging technologies into the organization, but also in ensuring appropriate use. A corporate usage and compliance policy is just as critical as a technology roadmap for the successful implementation and use of Web 2.0/Enterprise 2.0. The CTO also needs to ensure the technical success of early Enterprise 2.0 initiatives and continue to ensure these technologies are being used in ways that will augment the commercial needs of the organization. For more on how to go about this, including an Enterprise 2.0 strategy checklist and first steps companies can take, see “Enterprise 2.0 Enters the Mainstream.” *** —Manufacturing Operations Rockwell Automation’s process Pavilion We’ve been anticipating a large industry vendor with a footprint in the process industries to make a bid for PavilionTechnologies. With potential suitors hailing from the ERP and automation realms, Rockwell Automation’s winning bid for this gem of a company was no great surprise and also good news for Pavilion users. From the outside looking in, it has been occasionally difficult to parse the past three years of partnering and acquisition activities at Rockwell Automation. Between the Datasweep acquisition back in 2005, the partnership with IBM and Cisco, joint marketing and development activities with OSIsoft, and the ongoing FactoryTalk replatforming effort, Rockwell Automation has a lot of irons in the fire. That said, its definitive agreement to purchase Pavilion Technologies was an unambiguous statement to the market: Rockwell Automation is serious about the process industries and is positioning to compete head on with the likes of Emerson and Siemens in process scenarios in which programmable logic controller (PLC) and distributed control system (DCS) functionality overlap. Rockwell Automation gets instant advanced process simulation and control (APS/APC) leadership in polymers, plus a burgeoning biofuels pipeline. Pavilion has a blossoming client list in the biofuels, consumer packaged goods, and cement process segments, and is showing tremendous growth opportunity, particularly in biofuels. It also gains sophisticated operations intelligence. Pavilion’s modeling, optimization, scenario analysis, and multiple model management are well beyond virtually anything else available on the market today, with the exception of proprietary systems. Rockwell Automation also inherits a variety of interesting strategic partnerships, including global service providers TCS, Hatch, Halliburton, and scientific instrument and laboratory informatics provider ThermoFisher. Last but not least, Pavilion is an SAP NetWeaver certified partner and part of SAP’s IVN for chemicals. Pavilion customers should also rest easy. Until we see indications to the contrary, Pavilion users should be comfortable that Rockwell Automation recognizes the value of Pavilion’s team and technology. It has at least acknowledged the need to adopt Pavilion’s best-practice direct sales and high-touch customer engagement approach to marketing, selling, and supporting its products. For more on this deal, see “Rockwell Automation Boosts Process Portfolio with Pavilion Technologies Acquisition.” (Analysis by Alison Smith, Market Services) ____________________________________________________ First Thing Monday is compiled and edited by Randy Weston. Send comments and questions to rweston@amrresearch.com.
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