Chief Executive November/December 2015

2015 Wealth Creator Index How top-performing CEOs generate value, p. 28

Lessons from Amazon

What the retail giant does well— and what it doesn’t, p. 40

Outside-In Innovation How to start your own shark tank, p. 46

Transformative Technology What intelligent systems can do for your company, p. 64

NOVEMBER / DECEMBER 2015

NEW 2016

OPPORTUNITIES & CHALLENGES IN

FOR YOUR BUSINESS 15 CEOs share their insights on the year to come

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CONTENTS

November/December 2015 No. 279

FEATURES 34 Cover Story CEO Outlook 2016 Chief Executive asked 15 CEOs across industries and business size ranges for their insights on the biggest challenges and opportunities in the year to come. By Dale Buss

46

28 Wealth Creation Index The 2015 WCI Shows the Power of Two The problem with growth at any cost is that it often disguises mistakes and bad managerial hygiene.

To grow profitably in real economic terms is the mark of strong leadership. By J.P. Donlon

40 Corporate Strategy Is Amazon Overreaching?

In evolving from selling books into an array of capabilities and services, the world’s largest retailer may be stretching itself too thin. By Russ Banham

46 Innovation Shark Tank, Corporate Style Searching for edgy innovation and top talent, big companies buy—or stake—the startups that might once have unseated them. By Dale Buss

52

52

Mid-Market Financing How CEOs Can Work with BDCs Looking for an alternative to banks for your capital needs?

Here’s why a Business Development Company may be right for your company. By Christian Oberbeck

54 Economic Development Regional Report: The Midwest Mandatory unionization is hampering conditions in the Midwest. By Warren Strugatch

60 Talent Summit Winning in the Workforce Revolution How to take the lead in the war for talent. By C.J. Prince

64 CEO Roundtable 64

Technology’s Impact on Innovation and Transformation Will software soon be the lifeblood of every company? By Jennifer Pellet

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 279, November/December 2015. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306.

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COVER ILLUSTRATION BY EDDIE GUY

CONTENTS

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer Production Director Rose Sullivan

70

Associate Copyeditor Carl Levi

DEPARTMENTS 8 Editor’s Note 10 CEO Watch

• Genomic Vision’s Aaron Bensimon on embracing entrepreneurship • Barnes Group’s Patrick Dempsey on leading transformation

• CEO Confidence: CEOs Angry at Washington

18 Chief Concern

26 Sonnenfeld

Should We Care Who Is the Chair?

It’s time to stop splitting hairs over splitting the chairman and CEO roles. By Jeff Sonnenfeld

68 CEO Passions The Chess Collector

The Key to Transformational Change

By Dr. Thomas J. Saporito

20 CEO Risk Index

CEO Concern About Personal Privacy/Data Security Risk Continues to Increase

70 Executive Life

Beating the Retreat Game Finding it tough to sort through your options? Here’s our short list of venues that can’t be beat— plus tips on how to beat retreat option overload.

How Mid-Market Companies Innovate

24 Making

Technology Work Beyond CRM: What Sales Acceleration Can Do for Your Business

Now that technology is delivering the sales leads your company needs, how will you handle them all?

Presented in partnership with PURE Insurance, Chief Executive’s newest column on leaders who are notable collectors features Jon Crumiller of Princeton Consultants.

By George Nicholas

22 Mid-Market Report

Chief Copyeditor Rebecca M. Cooper

By Michael Gelfand

72 Flip Side

Drive, He Said

Where will Google’s drive into automating auto technology lead?

By Joe Queenan

By Sean Gordon

Contributing Editors Dale Buss Michael Gelfand George Nicholas C.J. Prince Joe Queenan Dr. Thomas J. Saporito Prof. Jeff Sonnenfeld Online Editor Lynn Russo Whylly VP, Associate Publisher Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net

Director, Business Development Lisa Cooper 203/889-4983 lcooper@chiefexecutive.net

Director, Business Development Liz Irving 203/889-4976 lirving@chiefexecutive.net Director, Business Development

Marc Richards 203-930-2705 mrichards@chiefexecutive.net

Vice President Phillip Wren 203/930-2708 pwren@chiefexecutive.net

Marketing Director Jason Golden 201-889-4978 jgolden@chiefexecutive.net Wayne Cooper Chairman & President

Marshall Cooper Chief Executive

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DAILY BEST OF THE WEB We scour dozens of websites so you don’t have to.

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PLUS Important lists and rankings you can reference all year long, including: Best & Worst States for Business • Best Companies for Leaders CEO Confidence Index • CEO of the Year • Annual Wealth Creators

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EDITOR’S NOTE

The necessity of transitioning one’s organization is not just critical to beating the competitors; it’s crucial to survival.

More than ever, adapting to technological change is an imperative. By J.P. Donlon AT OUR CEO TALENT SUMMIT, held recently in Dallas, GM Chief Talent Officer Michael Arena got our audience’s attention with a chart showing how the longevity of S&P 500 companies is shrinking. The number of companies listed on public stock exchanges during the mid-20th century that remain intact will drop from 55 today to 15 by 2020. The rest will be merged or go out of business. I remember 25 years ago that enterprises like Digital Equipment, MCI Worldcom and RCA were seen as formidable technology giants that would live forever. And it isn’t just tech giants.

Who remembers General Foods, Enron, E.F. Hutton or Montgomery Ward?

Adaptability has always been essential to success. But the rate of change and disruption—most recently by digital technology—is placing unprecedented pressure on companies to further adapt and evolve. According to McKinsey, at current rates, 75 percent of S&P 500 incumbents will be gone by 2027. That means the necessity of transitioning one’s organization is not just critical to beating competitors; it’s crucial to survival.

It’s clear that business leaders are making a concerted effort to become more digital, but in practical terms what does this mean? A recent McKinsey study revealed 71 percent of C-suite executives expect that over the next three years, digital trends and initiatives will result in greater top-line revenues for their businesses. Importantly, top executives expect their companies to increase investments in digital initiatives with the expectation that returns on these investments will boost growth.

Most companies have yet to reap the

08 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

full value of digital transformation, and, if our Talent Summit showed anything, it is that the biggest hurdles to success for future growth and transformation will be leadership and talent. Companies making progress are devoting their best people to digital and keeping them engaged.

CEOs and executives cite a variety of hurdles that reflect the difficulty and complexity of digital transformation. Lack of leadership or digital talent tops the list, followed by limited understanding of how digital trends companies and industries. Related challenges involve misaligned incentives between digital and traditional businesses. Half of those surveyed say their companies are capturing just 20 percent or less of the potential that digital activities offer.

In the end, any transformation involves at its core how one’s people respond. If there was a single message from our Talent Summit, it is that CEOs must communicate often and to everyone about what really matters. It also demands dedicating one’s best people to digital and keeping them focused even if it means trying things that won’t succeed. Experiment and fail early.

On December 8 of this year, Chief Executive is hosting its CEO2CEO Digital Transformation Summit (CEO2CEOSummit.com) at the NYSE. We will bring leading figures from a variety of different industries that will show the way. Among them is Xerox CEO Ursula Burns, who will highlight what CEOs can do to make digital happen. As always, these exchanges emphasize practical advice and implementable steps that help business leaders skip the theoretical and go directly to what works.

I LLU ST R AT I O N BY T I M TO M K I N S O N

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The Necessity of Going Digital

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CEO WATCH

CEO INSIGHT / GENOMIC VISION’S AARON BENSIMON

Genomic Vision: Realizing a DNA Dream How Aaron Bensimon’s experiments with the elasticity of DNA molecules evolved into a thriving biotech. By Jennifer Pellet JUDGING BY Dr. Aaron Bensimon’s experience, the road from researcher to CEO of a biotech company is a long and meandering one—but then the CEO of Genomic Vision didn’t exactly set out to found a company. A doctor of molecular biology, he was well into a science career at Paris’s Pasteur Institute when he and his brother began experimenting with stretching single DNA molecules in 1994.

“To do that we had to bind the molecules by one extremity to a solid sup-

port—to anchor them,” he recounts.

“We succeeded, but it was difficult to bind a single bead. One day, I saw the meniscus, the interface between the air and the water, stretch the DNA—a phenomena we call DNA combing.”

Put simply, the combing process essentially arranges DNA strands in a uniform way—Bensimon describes them as “bar codes.” By using a fluorescent substance to “tag” the strands, the researchers were able to isolate specific genes and more easily hunt

10 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

for aberrations in the DNA that would be indicative of genetic mutuations.

“I realized pretty quickly that the discovery would help the identification of genetic diseases,” explains Bensimon.

Deciding to make the jump from researcher to entrepreneur, he negotiated with Pasteur Institute to gain an exclusive license on his patent portfolio and launched Genomic Vision in 1995. Since the Human Genome Project—the blueprinting of the human genome—would not be completed until 2003, Bensimon faced an uphill battle in getting the world to understand his invention’s potential.

“I would present DNA combing process to the scientific community and people would say, ‘It’s cute,’” he recounts. “I would say, ‘No, it’s not cute. It’s a revolution in terms of what you can do with it.’ I began to understand that while inventors may understand what they can with their invention, the environment doesn’t always see it. It’s very frustrating to make an avant-garde discovery—one that’s ahead of science in the current environment.”

A turning point came when a French professor who had read about DNA combing contacted Bensimon to explore the idea of using his discovery to aid in the diagnosis of facioscapulohumeral muscular dystrophy (FSHD). In time, that conversation led to the 2013 launch of Genomic Vision’s first commercialized test—which, in turn, led to a pivotal alliance with Quest Diagnostics to provide the FSHD test in the U.S., India and Mexico and to partner with Genomic Vision on its research.

That accomplishment, however, is just the beginning of Genomic Vision’s potential, says Bensimon.

“FSHD is a rare disease, so it’s not the test that will bring major income,” he explains. “Our blockbusters will be tests for breast cancer, cervical cancer and colon cancer.” Genomic Vision’s strategic plan calls for revenues from these tests to be $500 million, $100 million and $300 million,

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CEO WATCH

WHO

respectively, in the U.S. alone.

While transitioning from the research world into entrepreneurship put Bensimon on a demanding learning curve, it’s one he has navigated admirably, managing to attract investors and then raise an additional 23 million euros by taking the company public in April of 2014. “I read a lot of books,” he recalls. “I also took an MBA-like course designed for entrepreneurs in France. So I had some tools, but what you really need is perseverance and some of a kind of

Aaron Bensimon, Co-founder and CEO, Genomic Vision

internal drive where you in which Genomic Vijust won’t give up on what sion plays—is projected SIZE you believe in.” to grow from $5 billion 4 million euros (revenue), The company’s marto $25 billion within a 555 employees ket cap is now a hefty 62 decade. “We want to MOST ADMIRED million euros, but Bensicreate partnerships American aviator, Charles Lindbergh mon sees plenty of room with other companies for growth. “Our goal in addition to Quest RECENTLY READ The Indies Enterprise, is to push the company Diagnostics and to bring

by Erik Orsenna to become a leader in the company to a certain genetic testing,” he says, level of independence noting that the market for molecular so that we can develop and spread our diagnostics testing—or the broad arena technology worldwide.”

CEO CONFIDENCE

CEOs Angry at Washington; Outlook Depends on Industry CEOS ARE FURIOUS at Washington, saying that current policies are hampering business opportunity and contributing to uncertainty. Top complaints include overly burdensome taxes and regulation, a lack of leadership in addressing domestic problems and global instability and structural industry changes.

“With so many negative balls in the air, who can tell what will happen and, even worse, nobody in Washington is doing anything about it,” says one CEO. Another laments “an administration [that] is clueless about creating an environment that incentivizes business to grow.”

CEOs’ future outlook diverges greatly by industry. Pharma/medical device leaders have the most confident outlook, rating current conditions a 7.2 out of 10, and believe conditions will improve in the next 12 months to a 7.6. Construction/engineering CEOs rated current conditions

a 7.1, but see a slightly worse environment in 12 months, down to 7.0.

“Even though our company is experiencing growth, our community has lost a significant amount of manufacturing jobs, which has had a negative impact on our practice,” says Raymond Zinicola, COO of OMNI Orthopaedics. One wholesale/distribution CEO sees a lack of talent constraining growth: “The labor shortage is impacting growth in construction. [The government needs] to address immigration to get more good people into the U.S.” Energy/utility CEOs, already dour due to battered oil prices, believe even tougher times are ahead. Their low current sentiment (3.8 of 10) looks relatively rosy compared to the even worse outlook (3.5) they see ahead in 12 months. Retail executive sentiment also dropped from 5.3 now to just 4.7 in 12 months.

THE TAKEAWAY

Current Confidence Future Confidence (12 months)

Energy/Utilities Retail Trade

Professional Services (Legal, Consulting, Accounting, Architecture)

3.5

3.8

4.7

5.3 5.4

5.8 5.8

Advertising/Marketing/PR/Media/Entertainment

5.8 5.8

Manufacturing (Industrial Goods) Transportation (Airlines, Trucking, Rail, Shipping, Logistics)

5.5

Real Estate Financial Services (Banking, Insurance, Brokerage, Investments) High Tech/Telecommunications/Information Technology Healthcare

Energy/Utilities Heavy Negative, while Pharma/Med Products Upbeat

5.6

6.0 6.7

6.0 5.6

6.0 5.9 6.1 6.3

Wholesale/Distribution

6.2

Manufacturing (Consumer Goods)

6.2

6.8

6.6 6.7

Government/Non-Profit

7.0 6.8

Construction/Engineering/Mining

7.1 7.0

Pharmaceuticals & Medical Products

7.2

7.6

SOURCE: SEPTEMBER 2015 CHIEF EXECUTIVE CEO CONFIDENCE INDEX. FOR MORE ON CEO CONFIDENCE, VISIT CHIEFEXECUTIVE.NET/SEPTEMBERCEOCONFIDENCE.

12 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

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CEO WATCH

CEO CASE STUDY / BARNES GROUP’S PATRICK DEMPSEY

In Pursuit of IP

How a newly minted CEO led a century-old manufacturing company on a transformation journey.

By Jennifer Pellet

The Challenge You’re the COO of an international industrial aerospace and industrial manufacturer and service and distribution provider founded in 1857. With its CEO of seven years retiring, your company is re-evaluating its businesses and looking to position itself for a new phase of growth. You’ve been tapped to lead the way.

The Context “The challenge that lay in front of us was to identify the core competencies and competitive advantages that would position the Barnes Group

for the long term,” recounts Patrick Dempsey, who took the company’s reins in March of 2013. At the time, the Bristol, Connecticut-based company had three operating groups: distribution, aerospace and industrial. It had recently augmented its manufacturing arm with the purchase of Synventive Molding Solutions Group, a manufacturer of hot runner systems used in complex plastic injection molding applications.

“We realized that our true core competency lay in and around manufacturing, so one of the first things I initiated as CEO was the sale of

14 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

our distribution business,” explains Dempsey. Shedding a business the company had been in for 50 years to shift toward engineered products and becoming an innovative solutions provider represented a huge move for Barnes Group—and one that Dempsey knew better than to take lightly.

“The task was to get out and win the hearts and minds of our employees to get their buy-in for that vision and strategy,” he notes. “The first order of business was communicate, communicate, communicate.” To that end, Dempsey spent a grueling 18 months traveling to locations around

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CEO WATCH WHO

the world to speak to employees, as well as investors, customers and other stakeholders.

The Resolution With the sale of Barnes Distribution North America under his belt and Barnes’ employees energized around the plan, Dempsey was free to pursue his vision of steering more firmly into engineered products and solutions.

“We became more cognizant of the fact that customers came to us for our expertise in manufacturing, but after we made a part and gave it back, they owned the intellectual property and the product,” explains Dempsey. “We decided to leverage our long legacy in manufacturing but to move into a more differentiated, IP-based set of businesses.”

For example, having homed in on the $2.5 billion hot runner solutions market with its purchase of Synventive, Barnes has since acquired two additional hot runner systems providers—Germany’s Otto Männer in 2013 and Italy’s Thermoplay in early 2015. “We didn’t go after fixer-uppers or turnarounds,” says Dempsey of the three deals. “We went after premium

businesses where the value created was in the design, engineering, applications engineering, materials engineering—and, of course, they also manufacture and provide aftermarket services. In acquiring them, we also acquired a suite of patents that protect that technology, or systems IP.”

Patrick Dempsey, CEO of Barnes Group WHAT

International industrial and aerospace manufacturer and service provider

acquisitions and to fund investments in organic growth.

The Lesson

Reflecting on the past three years, Dempsey cites the importance of EDUCATION communicating effecUniversity of Limerick tively and often to stakeFIRST JOB holders during times of Apprentice in a shipyard change as a key lesson RECENTLY READ from his tenure thus far.

The Price of Politics

by Bob Woodward That learning was driven The Endgame home when the market LEISURE ACTIVITIES Kayaking, cycling, fishing While the transformareacted negatively to the tion of Barnes Group is first acquisition in the still in progress, Dempsey is confident transformation process.” that the company is on the right path.

“It became evident that we had surInvestors seem to agree. The compaprised the investor community—they ny’s stock price rose from $26.32 to weren’t sure where we were going,” $37.19 during his tenure. Overall sales says Dempsey, who now takes a proacwere down 2 percent in Q2 of 2015, tive approach to communicating to however, adjusting for the unfavorable employees, customers, investors and exchange rate brings that figure to a other stakeholders. “When you’re dorespectable 4 percent. “With a good ing something this transformational, first half of 2015 behind us, we foresee telling people once or twice isn’t suffianother year of solid financial percient. You need to tell them probably formance and cash generation,” says four, five, six times before they really Dempsey, who notes that the company start to understand and embrace what is well positioned to make additional you’re saying.”

SIZE

4,700 employees worldwide, $1.1 billion

THORNS AND ROSES Infrastructure Inefficiencies

Shine On, Sunny Sunset Provisions

Delays in approving infrastructure projects cost the nation more than twice what it would cost to actually fix the infrastructure, according to a new report released by COMMON GOOD, THORNS a nonpartisan government reform coalition.

Approvals can take a decade or longer, and a six-year delay in starting construction on public projects costs over $3.7 trillion, including the costs of prolonged inefficiencies and unnecessary pollution. That’s more than double the $1.7 trillion needed through the end of this decade to modernize America’s decrepit infrastructure.

Funding isn’t always the issue. In 2009, America had more than $800 billion in the economic stimulus package, but few permits. In its five-year report released in February 2014, the White House revealed that $30 billion (3.6 percent of the stimulus) had been spent on transportation infrastructure. In the current legal quagmire, not even the President has authority to approve needed projects.

Two academics—BRIAN BAUGUS of Regent University and FELER BOSE at Anderson University—recently examined whether sunset provisions in regulatory law ROSES actually reduce government waste. Their finding? With few exceptions, the sunset review process is about more than garnering more political cash for reelection; the real money is in holding political power over the regulated industry.

However, the good news is that some states actually use the sunset process to achieve tangible savings for taxpayers. Texas and Ohio, for example, use it extensively and regularly to eliminate agencies and regulations. In the five-year period examined, Baugus and Bose found that the Ohio state legislature subjected 274 agencies and laws to the sunset review process and eliminated 79 of them for a 28 percent kill ratio. Texas had an 18 percent kill ratio. Buckeyes and Longhorns are onto something.

16 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

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CHIEF CONCERN

The Key to Transformational Change

By Thomas J. Saporito

MERGERS, new technologies, fast-shifting competitive landscapes: More than ever, these events demand vast transformational changes for companies that want to maintain success— or even survive.

All too often, companies develop a bold strategy for change but neglect the human side of the effort—work that will produce the new, smart behavior that’s needed throughout the organization.

As a result, they risk missing out on gaining traction with what otherwise might have been a successful shift in the direction the company is headed.

When that happens, it’s often the CEO’s fault. When it comes to transformational change, it falls on CEOs to design and communicate it—and then to align their senior leadership teams around the impending journey. The secret ingredients of a successful transformation are senior-level buy-in on the new strategy or business model and ensuring that top teams have the tools needed to make the change cascade and accelerate downward.

We’ve worked with a Midwestern industrial services company as it carried out a merger and simultaneously embarked on a path to become an organization known for its great talent and effectiveness. The CEO was a charismatic and compelling leader who took three steps to begin the company’s transformation: He made sure senior leadership was aligned around the change program, he developed a rigorous infrastructure to manage the progress, and he engaged with employees throughout the organization via face-to-face workshops and training seminars. In other words, the CEO went to great lengths to ensure that new behaviors transcended old ways of doing things.

“This CEO focused on aligning the top team around the program, because he knew that one executive’s disagreement could potentially become exaggerated downward throughout the organization,” says RHR Senior Partner David Astorino.

Indeed, this company’s experience underscores that an organization’s

DR. THOMAS J. SAPORITO is chairman and CEO of the consulting firm RHR International.

18 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

senior leadership team is like a microcosm of the company as a whole. Each executive brings different biases, different agendas and different personal and professional histories to the table. But when aligned, the top team can become the driving agent for accelerated change throughout the organization. And that is how transformation takes place.

A unified team of senior leaders can make all the difference in a transformation effort, and it is the CEO’s role to secure that alignment—to engage the top team to come together, to discuss the process, to discover the points of agreement and resistance and to ensure they speak with one voice in pursuing change. The senior team is the bridge between a CEO’s vision and the rest of the organization—they often act as the ingredient necessary to turbo-charge transformational change.

Beyond aligning the leadership team, what are the mandates for CEOs as they prepare for change? They must negate resistance, break down the status quo, and implement new and transformational ways of leading and working.

More specifically, CEOs must demonstrate powerfully the real, tangible belief they hold for their visions of the future. Without an evangelical passion for the direction in which you want to take your company, you’re not likely to convince anyone else it’s a good idea.

CEOs must also engage meaningfully and genuinely with their organizations. To succeed, they need to get out there and do the hard work of taking their messages directly to the managers and employees who will be on the front lines of making a vision a reality. For example, during our client’s transition, the CEO organized a series of 70 “roadshows” around the country in which he explained and brought to life his vision.

A CEO’s contagious passion and a highly aligned leadership team are the most important tools a CEO has when it comes to implementing profound and transformational change.

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RISK INDEX

CEO Concern About Personal Data Privacy/ Security Risk Continues to Increase New breaches happening daily capture everything from credit data to health records to fingerprints—and put CEOs and their families at risk DATA PRIVACY/SECURITY CONCERN FAR OUTWEIGHS ALL OTHERS With 563 data breaches this year exposing more than 150 million personal records, it’s no wonder concern about the safety of personal data among CEOs is significantly higher than concern for other types of risk. Privacy/data security risk garnered a 6.81 on a scale of 1 to 10 (with 10 being the highest) in August of 2015, compared with 4.59 for liability threats, 4.53 for terrorism, 3.68 for physical damage and natural disasters and physical security/ family security at 3.63 points.

Privacy/data security concern has steadily increased, from 6.5 points in September 2014 to its current level, a 4.4 percent increase. Meanwhile, concern over risk from terrorism and physical damage/natural disasters dropped (9.5 percent and 5.6 percent, respectively), while concern about other personal risks remained relatively flat. These surveys were conducted by Chief Executive in partnership with PURE Insurance.

CEOs Rate Their Chief Personal Security Risks 7.0

•

•

•

•

Data Privacy/Security

CEOs Rate Their Comfort That They Have Adequately Mitigated These Risks 8.0 Physical Damage/ Natural Disaster

Liability Threats

6.0

••

7.0

•

5.0 Liability Threats

• • •

• •

Physical/ Family Security

3.0

• •

•

•• • •

9/2014 12/2014 5/2015

•

• •

•

Physical/ Family Security

Geopolitical/Terrorism

4.0

• •

•

7.5

• •

6.5

••

Data Privacy/ Security

6.0

• •

Physical Damage/ Natural Disaster

••

8/2015

5.5

•

• •

•

• •

Geopolitical/Terrorism

5.0

9/2014 9/2014

5/2015

8/2015

ARE CEOS TAKING ENOUGH PRECAUTIONS WITH THEIR PERSONAL TECHNOLOGY?

As we become an increasingly wireless society, with the ability to work from home and from just about anywhere, CEOs spend more time using mobile devices, home computers, tablets and laptops while on the road. A third of August 2015 survey respondents report doing 20 percent or more of their weekly business on personal devices.

Just half of respondents were confident that their personal technologies had the same protective systems as their office technologies. Nearly 20 percent said definitely not, while another 25 percent had only partial protection relatie to their corporate safeguards. Mid-market CEOs were significantly less confident than their larger and small-business peers about the safety of their home/personal technology. At companies with revenues between $100 million and $1 billion, only 42.4 percent of CEOs rated their home and personal devices as secure as their office devices versus 56.3 percent for CEOs of companies with revenue over $1 billion.

What percentage of your weekly business do you typically conduct from non-office equipment, such as a home computer or personal cell phone?

56.3%

12.5%

12.5%

<10%

10-19%

6.3% 32.2%

6.3%

20-29%

40-49%

30-39%

6.3% 50-59%

PERCENT OF WEEKLY BUSINESS CONDUCTED

20 / CHIEFEXECUTIVE.NET /

NOVEMBER/DECEMBER 2015

Do your personal technologies have the same protective systems that your office technologies have? >$1B

Yes

No

Somewhat

18.8%

56.3% COMPANY SIZE

PERCENT OF RESPONDENTS

CYBERSECURITY RISKS INCREASE WHEN AWAY FROM THE OFFICE

$100M-$1B 42.4%

Not Sure

25.0% 1.7%

28.8%

27.1%

$99M-$10M 47.2%

19.4%

25.9%

<$10M 65.0%

7.4% 5.0%

8.3% 21.7%

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MID-MARKET REPORT

How Mid-Market Companies Innovate The most successful innovators take a value-capture, profit-oriented approach to innovation.

THE MOST SUCCESSFUL middle market companies— those growing at least four times the rate of GDP growth—are 40 percent more likely to describe themselves as innovative than less dynamic businesses of their size, according to the National Center for the Middle Market (NCMM)’s “Blueprint for Growth.” Overall, middle-market companies surveyed also fare relatively well with execution of innovation projects, reporting that 57 percent of ideas generated in 2014 made it to market.

This success may be partly due to the fact that their innovation efforts tend to skew conservatively, focusing on familiar markets and knowledge rather than unmapped “blue oceans.” Furthermore, mid-market companies tend to use their own internal resources to generate ideas and to manage innovation risk carefully.

The most effective innovators tend to engage the entire company around innovation initiatives, fostering crossdepartmental interaction, as well as the involvement of senior leaders. They are also more likely to possess a well-developed set of capabilities and practices—formal processes, tools to track and measure innovation, attention from senior leadership—to better manage the risks they take.

The statistics, tables and charts to follow offer insights on how the most successful mid-market companies foster innovation.

Where Does Innovation Come From?

Internal innovation teams are the most common source of new ideas, but customer feedback is also critical.

INTERNAL INNOVATION TEAM 34% CUSTOMER OR USER FEEDBACK 32% CEO DECISION (POSSIBLY IN CONSULTATION WITH FAMILY MEMBERS OR FRIENDS) 29% EMPLOYEE OR SUPPLIER FEEDBACK 27% CHIEF TECHNOLOGY OFFICER 25% CHIEF MARKETING OFFICER 21% CHIEF R&D OFFICER 21% CHIEF INFORMATION OFFICER

Most Innovation Efforts Focus on Existing Markets

19%

Safer and more conservative projects are easier to execute and more likely to be considered successful by most mid-market executives.

CHIEF FINANCIAL OFFICER 18% IMITATION OF COMPETITORS' EFFORTS 17%

Proportion of Innovation Oriented Investment

Profitability

13%

15%

COMMUNITY CONTESTS OR TOURNAMENTS OPEN TO THE "CROWD" OF INTERESTED CUSTOMERS, EMPLOYEES & INDIVIDUALS

13%

14% 42%

24%

Revenue

19%

20%

48%

21%

19%

Existing Knowledge/Existing Markets Existing Knowledge/New Markets

48%

18%

New Knowledge/Existing Markets New Knowledge/New Markets

EXTERNAL AGENCIES, CONSULTANTS, GOVERNMENTS OR UNIVERSITY RESEARCH LABS 13% CHIEF RISK OFFICER 12%

Successful Innovators Use Formal Processes

Percentage of firms that employ formal idea-generation processes

More than half of mid-market firms have formal processes in place for generating, selecting and implementing innovative ideas.

$10M-<$50M

BY COMPANY SIZE

BY INDUSTRY

TOTAL

TOTAL 51%

51% HEALTH & LIFE SCIENCE 72%

47% $50M-<$100M

INDUSTRIAL 51%

$100M-$<1B

48% TECHNOLOGY

55%

58% SOURCE: Organizing for Innovation in the Middle Market, a report by The National Center for the Middle Market, Ohio State University’s Dr. Michael Leiblein and Cherry Bekaert LLP

22 / CHIEFEXECUTIVE.NET / NOVEMBER / DECEMBER 2015

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MAKING TECHNOLOGY WORK

Beyond CRM: What Sales Acceleration Can Do for Your Business

Now that technology is delivering the sales leads your company needs, how will you handle them all? by Sean Gordon CHANCES ARE, you need to look no further than your own pocket to find an example of how technology has taken slack out of our lives. At the same time, products featuring much-heralded capabilities that ultimately proved unnecessary come and go. Often, it’s hard to differentiate between the two until time tells us which ones deliver on their ROI promise.

Before marketing automation, the most pressing challenge facing sales departments was the need to identify qualified leads. However, today’s managers are more concerned with marshaling enough manpower to handle the tremendous influx in leads that automated systems now generate. In fact, the number of non-retail sales representatives are expected to increase from 5.62 million in 2013 to six million by the end of the decade. Yet, while customer relationship management (CRM) software has helped companies earn 17 percent higher revenues by organizing the selling process, its lack of automation features leaves much untapped potential.

Enter sales acceleration software. Sales acceleration applies mechanisms of marketing automation to the sales side of the equation, leveraging computer capabilities to free sales representatives from tedious and mundane tasks. By building upon the foundation of CRM software, the technology aims to outperform people at an even faster rate.

Responsive tools act as soon as leads are passed from marketing to sales.

For example, acceleration software automatically uses a variety of methods to contact leads, from phone calls to LinkedIn messages, instead of email (400 percent and 700 percent more likely to be answered, respectively). Rather than waiting for a salesperson to act, the software launches messages as soon as leads signal purchasing intent. By offering a library of prewritten templates, it frees reps from the time-consuming task of typing messages.

The same principle can be applied to redundant work outside of email. For example, MassMutual

Financial Group used tools to ease the creation of complex presentation tables. They reduced production time by about 85 percent, requiring less than 30 minutes to complete work that previously took three to four hours. Similarly, a New York Allstate agent leveraged sales acceleration to compete in a highly aggressive market. Over a two-year span, the effort realized a 389 percent increase in call attempts and a 175 percent increase in lead contacts per Allstate producer.

The average sales representative calls a lead four times when 12 calls are necessary, because their attention is often diverted to more urgent tasks such as following up with nurtured leads. Calls can also easily fall at a bad time. Automating these tasks allows salespeople to complete other work while placing an unlimited number of calls at the most desirable times, therefore reaching out to as much as 48 percent more contacts daily and resulting in as much as 15 percent more sales conversations.

As sales progress, the software compiles all contact details and assigns purchasing probabilities to leads, helping sales representatives decide where to concentrate. Other solutions—such as seamless video conferencing as an alternative to travel—trim down on time, effort and costs wherever possible. Because customers are far more receptive to messages sent in the first minutes after they display purchasing interest online, these proactive measures not only preserve the time and effort of sales members, but increase the likelihood of a sale by striking while the iron is hot.

Signs suggest that businesses are increasingly recognizing this technology’s potential. Companies that close bigger deals faster and at a higher rate spend more per capita on acceleration tools.

Projections call for the industry to grow to $30 billion annually by 2017. Although some companies may be content with the productivity of their sales workforce, others seeking growth should consider reallocating dull work to a machine—just as mankind has always done.

SEAN GORDON is the CEO of Intelliverse, a global provider of enterprise cloud software and managed services, and a former director of sales at AT&T.

24 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

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SONNENFELD

Should We Care Who is the Chair?

The f‌inancial performance of once-high performing f‌irms was actually diminished through the introduction of separate roles.

IN LOGAN CITY, UTAH in 2011, a fast-thinking, brave construction worker inspired 10 fellow bystanders to help him rescue a motorcyclist pinned under a burning car after a fiery collision by lifting the 4,000-pound sedan. You don’t require a title to be a good leader. Nonetheless, boards ranging from large publicly listed corporations to small family enterprises endlessly debate whether the CEO can also serve as chairman.

Recent Events This fall, the strong-performing CEO of Bank of America, Brian Moynihan, survived a contentious proxy battle over whether he could retain the dual tiles of chairman and CEO awarded by his board last year. Fashion legend Ralph Lauren made headlines by relinquishing his title as CEO, staying on as chairman and chief creative officer. Mylan Labs shareholders ratified a tax inversion proposal to become a Dutch company with a controlling foundation—which ensures it will continue to be led by an entrenched chairman with a figurehead CEO who functions in the shadows. Boeing’s highly regarded Jim McNerney recently stepped down as CEO but retained his chairmanship title. United Airlines just replaced Jeff Smisek with a president and CEO and a non-executive chairman of the board, amidst a federal investigation over possible criminal misconduct.

Which of these models is the correct one?

Surprisingly, stock exchange, SEC and IRS rules do not require the chairmanship title.

Nonetheless, the doctrine of many governance activists is that both titles must be used, but always held by separate people.

No Panacea Such arrangements may, on occasion make sense, such as at Ford Motor Company,

where the Ford family controls 40 percent of the voting stock, or at firms going through disruptive change, such as United Airlines, or even smooth gradual successions, such as at Boeing. However, there is no reason to accept the conventional wisdom that the split roles are a panacea or predictors of better governance practice or superior financial results.

Most of the corporate scandals in the U.S. (WorldCom, Enron, Global Crossing) and all of those at scandalized UK firms (HSBC, Barclays, BP) took place in companies that had separate roles. A systematic study of 309 firms between 2002 and 2006 by Mathew Samadeni and Ryan Krause of Indiana University found that the financial performance of once-high-performing firms was actually diminished through the introduction of separate roles. They concluded, “If it ain’t broke, don’t fix it.”

Fewer than 25 percent of major U.S. firms actually separate the chairman and CEO roles, contrary to the religious fervor by many governance activists to do so. In fact, many firms cited by shareholder activists as poster children for the wisdom of the separation of roles experimented and discarded it. Such firms as IBM, Procter & Gamble, Boeing, Dell, GM and Walt Disney reverted back to combined roles after just one term of split roles. Last year, 18 of Fortune’s top 25 “Most Admired Firms” (Amazon, Starbucks, Facebook, PepsiCo) had combined chairman/ CEO leadership roles.

Boards need strong, independent-minded directors like United’s Henry Meyer, Bill Nuti and Walter Isaacson, with a lead director—or a chair who can set the agenda and provide backbone to remove the CEO— whatever the titles.

JEFFREY SONNENFELD is senior associate dean for executive programs and professor in the practice

of management, Yale School of Management, and past chairman of Blue Ribbon Commission on CEO Succession of the National Association of Corporate Directors.

28 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

I LLU ST R AT I O N BY T I M TO M K I N S O N

Jeffrey Sonnenfeld

It’s time to stop splitting hairs over splitting the CEO and chairman roles. By Jeffrey Sonnenfeld

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WEALTH CREATION

2015 WEALTH CREATION INDEX SHOWS THE POWER OF TWO

The problem with growth at any cost is that it often disguises mistakes and bad managerial hygiene. To grow profitably in real economic terms, without unsustainable leverage and without mucking up the balance sheet, is the mark of strong leadership.

By J.P. Donlon 28 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

NOW IN ITS 8TH YEAR, the Wealth Creation Index (WCI) seeks to identify the top public companies (S&P 500 and middle-market) whose CEOs created true economic value as opposed to GAAP accounting value. The methodology, which is explained in greater detail on p. 29, is based on the idea of Economic Value Added (EVA) and Market Value Added (MVA), which measure the degree to which companies make money in excess of their risk-adjusted cost of capital. Companies with positive EVA are creating wealth. Those with negative EVA are destroying wealth.

While no single metric is the Holy Grail of performance and wealth creation, EVA and MVA come close. How effectively is each dollar invested in a business? It’s a discipline that can be used by any public or private business, from a chain of pizza parlors to Apple Inc. Many private equity firms use variations of such measures in evaluating their own portfolio companies.

For the data and analysis we partnered with EVA Dimensions LLP CEO Bennett Stewart, a pioneer in economic value research and with Drew Morris, CEO of Great Numbers!, a New Jersey results consultancy.

The idea is to look at companies in the S&P 500 (minus REITs) whose CEOs have been at their jobs for at least three years, a practice that screens out leaders taking credit for a predecessor’s actions. (For the full list of 328 ranked companies please go to ChiefExecutive. net/WCI2015.) The top 100 ranked companies and their leaders feature the best performers in the same way world-class swimmers are separated by mere hundredths of seconds in Olympic competition. All of them are in a league of their own.

Yet someone’s got to collect the gold, silver and bronze and this year it falls to Facebook, MasterCard and O’Reilly Automotive respectively—companies that couldn’t be more different from one another apart from being perhaps lighter on fixed assets than most. Facebook’s rise clearly reflects the network effect. The company, which had its IPO in May of 2012, was first-to-scale

in social media and benefited mightily from technological and commercial advances in mobile phones and mobile phone cameras. Facebook is the epitome of being in the right place at the right time. MasterCard returns this year in second place from its No. 1 rank in 2014. It also represents economies of scale and a network effect. It helps to have a business model that has proven astonishingly successful in throwing off cash. The Purchase, New York payments firm depends on a strong technology network that addresses the increasing convergence of physical and digital worlds. Given that $8 out of $10 of world consumer transactions are still done in cash, MasterCard has a lot of headroom to expand its market.

Third-ranked O’Reilly Automotive also benefits from economies of scale and an extensive distribution network.

Launched in 1957 as a retail auto parts distributor in Springfield, Missouri, it has since expanded into 43 states with 4,433 employees. It boasts a robust supply chain and overshadows competitors, such as Pep Boys, in operational efficiencies.

Other companies such as Roper Industries, Pall, Chipotle, L Brands, Schein Pharmaceutical, Monsanto, Walt Disney and Harman are notable for having greatly improved their ranking from previous years, showing that such firms are no flash in the pan.

Apple, ranked 43, is to some degree the victim of large numbers. At $224 billion it is 10 times as large as the third-largest player in its field and must struggle to keep that meteoric EVA momentum growth. Tim Cook has said he wants to diversify Apple’s dependence on mobile phones, which represent twothirds of its revenue.

If there is a theme to this year’s rankings it may be the power of two.

For every Facebook there is a Google; for every MasterCard there is a Visa; for every O’Reilly Automotive, there is an AutoZone. Facing off with a tough competitor, the way Coke and Pepsi once did and CVS and Walgreens still do, reinforces competitive spirits and spurs wealth creation for shareholders.

Ranking CEO Wealth Creation

By Bennett Stewart and Drew Morris Our ranking is based on the performance of companies in the S&P 500 index (and their CEOs) for the three years ending on June 30, 2015. Only companies for which the CEOs were in their roles for the entire July 2012 through June 2015 period were ranked. Not ranked are the 19 REITs in the June 30, 2015 S&P 500 Index. (Also, several companies were not ranked due to incomplete data for the measurement period.)

Again this year, we used a methodology recommended by Bennett Stewart, CEO of EVA Dimensions.

CEO performance was assessed using four measures based on the concept of Economic Value Added, or EVA. EVA is profit remaining after subtracting the full cost of the capital the business uses—known as economic profit.

The first and most important measure, EVA Momentum, shows the trend in the growth of the firm’s economic profits (EVA) over the past three years. It is a better measure of wealth-creation progress over time than growth in sales, EBIT, EBITDA or earnings per share, since it only counts profit growth after covering the full cost of capital, including a minimum shareholder return to compensate for risk.

The second, EVA Margin, shows how profitable the firm is per dollar of sales. It blends pricing power,

operating efficiency and how well assets are managed into a single net-margin score.

The third, Market-Implied EVA Momentum, measures the expected long-run growth rate for economic profits reflected in the company’s stock price. It shows how well the CEO has positioned the company for continued profitable expansion, as far as investors can tell, through initiatives targeting growth markets, innovations, brand value and operational excellence.

The fourth measure uses the concept of Market Value Added or MVA, to judge wealth creation. MVA is the difference between a firm’s stock-market value and the overall amount of capital it has invested. It’s the shareholder wealth the business has created.

MVA Margin, our fourth metric, is MVA as a percentage of sales—the higher, the better.

All of the measures were computed for each company using June 30, 2015 TSRS OF THE TOP & BOTTOM 50 A Validity Check on the Ranking Method

TOTAL SHAREHOLDER RETURN

JUL. 2012JUN. 2015

TOP 50 Average 118.6% Median 103.5% BOTTOM 50 Average 75.2% Median 61.4% ALL SCORED S&P 500 Actual 85.8%

share prices, and the most recent reported financial data up to, but not after, June 30, 2015. The measures were then ranked within their industry groups to arrive at percentile scores. A company’s final score is a weighted combination of the four percentile scores above. Those ranked at the very top consistently outperform their industry peers across all four measured categories. They show an exceptional rate of profitable growth, are highly profitable and valuable and justify continued confidence in their future success.

The top 50 companies in the ranking delivered an average Total Shareholder Return (TSR) of 118.6 percent percent between July 2012 and June 2015 (the period covered in the reported financials).

The bottom 50 companies’ TSR averaged 75.2 percent, while the actual for all of the scored S&P 500 companies was 85.8 percent. The top 50’s median TSR was 103.5 percent; the bottom 50’s was 61.4 percent.

As the table at left shows, the top 50 companies in the wealth-creation ranking far outperformed the bottom 50 companies and the scored S&P 500 between July 2012 and June 2015. [Note: Total Shareholder Return = share-price return plus dividend yield reinvested dividends, expressed as a percent.]

FOR MORE ON THE RANKING METHOD AND HOW COMPANIES SCORED, PLEASE VISIT: WWW.EVADIMENSIONS.COM/CEO, OR CONTACT BENNETT STEWART AT GBSTEWART@EVADIMENSIONS.COM.

NOVEMBER/DECEMBER 2015 /

CHIEFEXECUTIVE.NET

/ 29

WEALTH CREATION

2015 Top 100 Wealth Creators Rank Company CEO 2015 Score 2014 Score Change 3 Yr. EVA EVA Margin Market MVA Margin

in Score Momentum -implied Momentum 1 Facebook

Mark Zuckerberg

99.7

57.7

42.0

2 Mastercard

Ajay Banga

99.5

100.0

-0.5

3

O’Reilly Automotive

Gregory L. Henslee

99.3

99.7

-0.4

4

Roper Industries

Brian D. Jellison

99.1

95.7

3.4

5

Monster Beverage

Rodney C. Sacks

98.9

99.5

-0.6

6 Pall

Lawrence D. Kingsley

98.0

95.0

3.0

7 Brown-Forman

Paul C. Varga

97.8

99.1

-1.3

8

Chipotle Mexican Grill

Steve Ells

97.6

97.8

-0.2

9

Dollar Tree

Bob Sasser

97.2

86.3

10.9

10 TripAdvisor

Stephen Kaufer

97.0

60.3

36.7

11

Cognizant Technology Solutions

Francisco D’Souza

96.8

97.0

-0.2

12

Constellation Brands

Robert S. Sands

96.5

90.1

6.4

13 Starbucks

Howard D. Schultz

96.3

96.1

0.2

14 Moody’s

Raymond W. McDaniel, Jr.

96.1

89.3

6.8

15 Paychex

Martin Mucci

95.9

94.2

1.7

16

Leslie H. Wexner

95.7

77.3

18.4

17 3M

Inge G. Thulin

95.5

76.3

19.2

18

Thomas F. Farrell, II

95.3

55.8

39.5

19 Cerner

Neal Patterson

95.0

94.8

0.2

20 Amphenol

Adam Norwitt

94.8

89.9

4.9

21 Monsanto

Hugh Grant

94.4

97.6

-3.2

22

Leggett & Platt

David S. Haffner

94.2

83.1

11.1

23

Under Armour

Kevin A. Plank

94.0

91.6

2.4

24

Avago Technologies

Hock E. Tan

93.8

94.4

-0.6

25 Hanesbrands

Rich Noll

93.6

78.0

15.6

26 Cintas

Scott D. Farmer

93.3

76.1

17.2

27

Henry Schein

Stanley Bergman

93.1

93.8

-0.7

28

F5 Networks

John McAdam

92.7

93.6

-0.9

29

Edwards Lifesciences

Michael A. Mussallem

92.5

87.8

4.7

30 Praxair

Stephen F. Angel

92.3

96.5

-4.2

31 Sherwin-Williams

Christopher M. Connor

92.1

87.6

4.5

32

Sempra Energy

Debra L. Reed

91.4

89.1

2.3

33

Walt Disney

Robert A. Iger

91.0

85.0

6.0

34 Nike

Mark G. Parker

90.8

83.7

7.1

35 Fiserv

Jeffery W. Yabuki

90.6

75.2

15.4

36

Dan O. Dinges

90.4

89.7

0.7

37 Snap-On

Nicholas T. Pinchuk

90.1

72.2

17.9

38 Sigma-Aldrich

Rakesh Sachdev

89.9

85.7

4.2

39 Equifax

Richard F. Smith

89.7

88.9

0.8

40 AMETEK

Frank S. Hermance

89.5

92.1

-2.6

41

Affiliated Managers Group

Sean M. Healey

88.4

87.2

1.2

42

Robert Half

Harold M. Messmer, Jr.

88.2

92.5

-4.3

43 Apple

Timothy D. Cook

88.0

86.9

1.1

44

Kansas City Southern

David L. Starling

87.8

98.2

-10.4

45

Rockwell Automation

Keith D. Nosbusch

87.6

87.4

0.2

46

PPG Industries

Charles E. Bunch

87.4

79.9

7.5

47

CVS Health

Larry J. Merlo

86.9

79.3

7.6

48

Universal Health Services

Alan B Miller

86.7

59.0

27.7

49

Urban Outfitters

Richard A. Hayne

86.5

81.8

4.7

50

Harman

Dinesh C. Paliwal

86.3

92.9

-6.6

L Brands Dominion Resources

Cabot Oil & Gas

30 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

Rank Company CEO 2015 Score 2014 Score Change 3 Yr. EVA EVA Margin Market MVA Margin

in Score Momentum -implied Momentum 51

Keurig Green Mountain

Brian Kelley

86.1

98.7

-12.6

52

J.B. Hunt Transport

John N. Roberts

85.9

84.0

1.9

53

Red Hat

James M. Whitehurst

85.5

84.6

0.9

54

Mohawk Industries

Jeffrey S. Lorberbaum

85.2

71.6

13.6

55 Schlumberger

Paal Kibsgaard

85.0

91.2

-6.2

56

Autozone

William C. Rhodes, III

84.6

83.3

1.3

57

Whole Foods Market

John P. Mackey

84.4

97.2

-12.8

58

Linear Technology

Lothar Maier

84.2

80.5

3.7

59

T. Rowe Price

James A. C. Kennedy

84.0

94.6

-10.6

60 Honeywell

David M. Cote

83.7

84.4

-0.7

61

Wisconsin Energy

Gale E. Klappa

83.5

86.1

-2.6

62

United Rentals

Michael J. Kneeland

83.3

89.5

-6.2

63

FMC Technologies

John T. Gremp

83.1

71.4

11.7

64

W.W. Grainger

James T. Ryan

82.9

91.0

-8.1

65

Precision Castparts

Mark Donegan

82.7

91.4

-8.7

66

Texas Instruments

Richard K. Templeton

82.3

54.7

27.6

67 Colgate-Palmolive

Ian M. Cook

82.0

94.0

-12.0

68 NetFlix

Reed Hastings

81.8

67.3

14.5

69 DuPont

Ellen J. Kullman

81.6

70.1

11.5

70

Michael Kors

John D. Idol

80.8

98.9

-18.1

71

Dow Chemical

Andrew N. Liveris

79.9

83.5

-3.6

72

Exxon Mobil

Rex W. Tillerson

79.9

79.5

0.4

73

Newell Rubbermaid

Michael B. Polk

79.7

36.2

43.5

74

Alliance Data Systems

Edward J. Heffernan

79.3

88.2

-8.9

75

Kimberly Clark

Thomas J. Falk

78.8

60.7

18.1

76 Loweâ&#x20AC;&#x2122;s

Robert A. Niblock

78.6

35.3

43.3

77 Hershey

John P. Bilbrey

78.4

90.6

-12.2

78

Scripps Networks Interactive

Kenneth W. Lowe

78.2

82.5

-4.3

79

VF Corp

Eric C. Wiseman

78.0

75.6

2.4

80

Expedia

Dara Khosrowshahi

77.8

74.8

3.0

81

Comcast

Brian L. Roberts

77.6

68.4

9.2

82

Range Resources

John H. Pinkerton

77.3

65.6

11.7

83

Verizon

Lowell C. McAdam

77.1

86.5

-9.4

84

TJX

Carol M. Meyrowitz

76.9

91.8

-14.9

85

Clorox

Donald R. Knauss

76.5

49.0

27.5

86

Accenture

Pierre Nanterme

76.1

68.6

7.5

87

EQT Corporation

Murry S. Gerber

75.9

82.3

-6.4

88

Ecolab

Douglas M. Baker, Jr.

75.6

53.7

21.9

89

Lennar

Stuart A. Miller

75.0

61.6

13.4

90

Regeneron Pharmaceuticals

Leonard S. Schleifer

74.8

74.6

0.2

91

Charles Schwab

Walter W. Bettinger II

74.6

66.0

8.6

92

Lam Research

Martin B. Anstice

74.4

44.9

29.5

93

Tiffany & Co.

Michael J. Kowalski

74.2

78.8

-4.6

94

Twenty-First Century Fox

Rupert Murdoch

73.9

77.8

-3.9

95

Cincinnati Financial

Steven J. Johnston

73.7

68.8

4.9

96

Southwest Airlines

Gary C. Kelly

73.1

41.3

31.8

97

Google

Larry Page

72.9

76.7

-3.8

98

Ameriprise Financial

James M. Cracchiolo

72.7

66.3

6.4

99

Xilinx

Moshe N. Gavrielov

72.4

81.0

-8.6

Frederick W. Smith

72.2

34.5

37.7

100 FedEx

NOVEMBER/DECEMBER 2015 /

CHIEFEXECUTIVE.NET

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WEALTH CREATION

Top Ten Mid-Market Companies ($100M-$500M) Rank Company CEO 2015 Score 2014 Score Change 3 Yr. EVA EVA Margin Market MVA Margin

in Score Momentum -implied Momentum 1

Rick Smith

100

98

2

2 Cognex

Taser International

Robert Willett

100

82

18

3

AAON

Norman H. Asbjornson

100

94

6

4

Western Alliance Bancorporation

Robert Gary Sarver

99

87

12

5

Bank Of The Ozarks

George G. Gleason

99

88

11

6

MarketAxess Holdings

Richard M. McVey

99

90

9

7

Natural Health Trends

Chris Sharng*

99

61

38

8

Popeyes Louisiana Kitchen

Cheryl A. Bachelder

99

92

7

9

Pinnacle Financial Partners

M. Terry Turner

99

81

17

10

Home Bancshares

C. Randall Sims

98

93

6

*President (there’s no CEO)

A Look at Three of the Best Wealth Creators

by Drew Morris

Three of this year’s leading wealth creators are profiled at right. All share one underlying reason for their prosperity: synergistic strengths. Their principal strengths reinforce one another, creating a notably more powerful wealth-creation effect, as we’ll see. (These write-ups reflect company events and performance up until June 30, 2014.)

Keys to Wealth Creation

BUSINESS DESIGN Far and away, how a business goes about making money is the most powerful reason for prospering—or failing

Starbucks CEO Howard Schultz S&P 500 RANK 13 BACKGROUND With more than 21,000 coffee shops in about 60 countries, Starbucks is the world’s No. 1 specialty coffee retailer. In addition to hot and cold beverages, food items, roasted beans and coffee accessories, it’s known for providing customers with a welcoming ambiance, comfortable sitting areas, friendly service and free WiFi. SYNERGISTIC STRENGTHS • An admired, trusted brand, recognized worldwide.

• A strong value proposition: high-quality custom coffees and teas, in a cafe atmosphere, complete with WiFi and bathrooms for customers.

• A high-potential business model (reflected in the stock price); premium pricing, international opportunities (China, India, etc.); diversified distribution channels, including supermarkets (packaged coffee, K-Cups), kiosks, hotels and airlines.

• Management with intent: expanding into juices, teas and energy drinks; forming fruitful partnerships; exploiting opportunities, such as the lunch and evening periods; and improving the current customer experience.

WISE CAPITAL MANAGEMENT Companies like 3M excel at spending— and saving—money judiciously

A STRONG BRAND A trusted brand, like Starbucks, attracts and keeps customers coming back and protects pricing

LEADERSHIP MINDSET What you, as a leader, want and how serious about it will propel your company

Top Ten Mid-Market Companies ($500M-$1B) Rank Company CEO 2015 Score 2014 Score Change 3 Yr. EVA EVA Margin Market MVA Margin

in Score Momentum -implied Momentum 1

Dunkin’ Brands Group

Nigel Travis

100

58

42

2

IPG Photonics

Valentin P. Gapontsev, Ph.D. 100

96

3

3

Gentherm Daniel R. Coker

100

92

8

4

Signature Bank/NY

Joseph J. Depaolo

99

89

11

5

Boston Beer

Martin F. Roper

99

87

12

6

Natural Grocers Vitamin Cottage

Kemper Isely /Zephyr Isely* 99 49 50

7

PrivateBancorp

Larry D. Richman

98

74

24

8

Methode Electronics

Donald W. Duda

98

75

23

9

Lifelock

Todd Davis

98

46

52

10

Astronics

Peter J. Gundermann

98

76

21

*Co-Presidents (there’s no CEO)

Cognex*

3M CEO Inge Thulin

CEO Rob Willett

S&P 500 RANK 17

RUSSELL 3000 ($100M-$500M) RANK 3

BACKGROUND 3M manufactures products for industry, safety and graphics, electronics, energy, health care and consumers.

SYNERGISTIC STRENGTHS • 3M’s value proposition: consistently high product performance that’s worth the price premium.

• Brand: In this case, product reputation—it will meet your need, and be “on spec.” Example: 3M’s adhesive products stick, appropriately. This reputation enables a bit of pricing power.

• Business design: 3M has a sound sense of where to play. A good bit of its sales are of consumables, such as industrial sanding disks and components embedded in other manufacturer’s products. Both of these create recurring revenue.

• World-class, centralized R&D that over time has garnered more than 100,000 patents. That R&D results in one-third of sales coming from products less than five years old.

Finally, there is R&D’s technology leverage. Its innovations, in abrasives, adhesives, filters and coatings can be pushed out through more than one of the operating businesses above.

BACKGROUND Cognex provides machine-vision hardware and software that’s used in manufacturing products and tracking their distribution. It enables direct part mark (DPM) identification that facilitates accurate assembly and can track individual parts over their life, leading to quality improvements. Its surface inspection systems division, divested on July 7, 2015, provided continuous inspection of the making of glass, paper, metal and plastic to ensure the absence of defects.

SYNERGISTIC STRENGTHS • A solid value proposition, that saves customers (a lot of) money and helps them succeed by improving manufacturing productivity.

• Its business is somewhat protected from price competition by its advanced, proprietary technology. It holds 403 patents, with another 330 pending, worldwide. The result? A pre-tax net income (three-year average) of 26.7 percent of sales.

• A culture in which people tend to stay, rather than taking their considerable machine-vision expertise elsewhere. *Mid-Market Wealth Creator

ACKNOWLEDGEMENT We thank Spencer Stuart for their helpful information on CEO tenure.

DREW MORRIS (drew.morris@greatnumbers.com) is the founder and CEO of Great Numbers! The company helps executives discover the full extent of their upside’s elements: value proposition, creating passionate customers, persuasive ads, product/service design and others, and to forge them into a prosperity design—a blueprint for delivering on all that potential. He has no stake in any of the companies mentioned.

BENNETT STEWART (gbstewart@evadimensions.com) is CEO of EVA Dimensions, a firm that helps corporate management teams to make better decisions and create stronger incentives by bringing the best practices in EVA in-house. The firm also provides EVA-based equity research to institutional investors.

DISCLAIMER: EVA Dimensions, its owners, employees and/or customers may have positions in the securities listed in this article. The information provided is based on material EVA Dimensions believes to be accurate and reliable. However, its accuracy and completeness and conclusions derived there from, are not guaranteed.

NOVEMBER/DECEMBER 2015 /

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COVER STORY

CEO OUTLOOK 2016 Chief Executive asked 15 CEOs across industries and business size ranges for their insights on the biggest challenges and opportunities in the year to come. Here’s what they had to say. By Dale Buss THE GLOBAL FINANCIAL CRASH was seven years ago, but now China has been laid low and Europe is being overrun by refugees. Brazil has also tanked. U.S. growth remains a paltry two percent. Stock-market gyrations are a continual source of whiplash and interest rates can’t seem to move much off zero. ¶ Yet, the near-miraculous domestic auto recovery continues apace. Oil prices have slid, making consumers happier. The U.S. unemployment rate is back down close to the magic 5-percent number, and companies surely are hiring.

Spending on the presidential campaign alone could be enough to juice the economy. ¶ To be sure, disparate sets of indicators have been running through American CEOs’ heads as they try to sort out the direction of business heading into 2016. The good-news and bad-news scenarios aren’t easily reconciled and obviously tug at business chiefs in offsetting ways. Yet, on the whole, most CEOs report seeing a rosier picture than they have had in some time. Not only has the U.S. economy flipped decisively into a growth mode, demonstrating the ability to shake off one drag after another, but the nation has assumed global economic leadership once again.

So while being cautious, most company leaders have adopted a growth bias toward next year. “We look at the United States now as a shining city on a hill, pretty robust and strong and stable,” says David Zuchowski, CEO of Hyundai Motor America, owned by the Korean chaebol. “Our parent looks to us to help lead its global growth because of our stability.”

Asher Raphael, CEO of the mid-market leader Power Home Remodeling Group, echoes this bullish sentiment. “We feel confident in the U.S. economy,” he says. “The unemployment rate is a great indicator. Interest rates are still at all-time lows, banks are starting to lend again and consumer confidence is increasing. I feel like the country has finally stared down the Great Recession.”

Annually, Chief Executive magazine talks with a handful of notable CEOs, diversified by size, industry and geography, about their outlooks. This year’s group includes a wide swath of large, mid-market and even small companies, providing products and services, both consumer facing and business-tobusiness outfits.

We asked them three questions: What is in your crystal ball for your company and your industry for the year ahead? What is your outlook for the U.S. and global economies? And what issue or challenge are you most concerned about?

Here are synopses of what 15 CEOs said: 34 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

t

ANDRA RUSH Founder and CEO Rush Group

I FORESEE NOTHING but a positive upside. There is tremendous growth in the auto industry still. The economy is sputtering, but gaining.

We’ve benefited from fast growth in the auto industry.

We have also gained from the big drop in gasoline and diesel prices, plus the oil-price decline has benefited vehicles for which we manufacture parts.

The slight bubbles in China have been exposed, but we’ve managed through it, and I don’t think that’s ultimately going to impact U.S. consumer confidence.

But for business and the U.S. in general, there is a big imbalance in the lack of manufacturing talent and skilled trades throughout the country. It’s to the point where the average age of a truck driver is 61, and the average age of a manufacturing worker is 56. By 2025, we’ll have a 2.5-million-person gap if it’s not addressed, and that’s a concern in every industry.

THE COMPANY, HEADQUARTERED IN DETROIT, IS A $1.5 BILLION PROVIDER OF TRANSPORTATION, LOGISTICS AND COMPONENTS TO AUTO COMPANIES.

BRENT SHAFER CEO Philips North America

WE’RE COMBINING OUR consumer and healthcare businesses in North America into a joint portfolio, based on the changes we see around how healthcare and wellness are being approached. We see large healthcare customers— integrated delivery networks—trying to structure themselves along these lines, so this creates a great opportunity.

The economy looks to have a stable and improving outlook for the businesses we serve. And what can’t be missed is the aging population in North America and, with that, increased need for healthcare technology and services—which create new opportunities for new innovations and solutions.

We announced this year a $500 million, 15-year contract with the Westchester [New York] Medical Center, for instance.

We’re concerned about the outcome of the elections and the healthcare issue, such as the Republican candidates’ stands on the Affordable Care Act. Any major policy change could create a big ripple effect and create changes in the markets we serve.

THE U.S. ARM OF THE 21-BILLION-EURO NETHERLANDS-BASED PROVIDER OF ELECTRONIC GOODS AND SERVICES IS HEADQUARTERED IN ANDOVER, MASSACHUSETTS.

CHERYL BACHELDER CEO Popeyes Louisiana Kitchen WE ARE IN A STRONG POSITION, with 2015 being our seventh consecutive year of same-store sales growth. We’ve been building a couple hundred restaurants a year, a top number in our sector; and we are expanding globally with new franchisees in Chile, Peru and elsewhere. We’ve been in other places for a long time through our strong franchises including Central America, Singapore and Turkey.

Growth in the U.S. economy may be modest in 2016, a bit choppy, and certainly influenced by the global economy. I’m encouraged by the fact that gas prices are low and consumer confidence is high. But interest rates will influence what happens in the U.S., and so will global questions. I’m hoping that 2016 is a mild year of modest growth and that we avoid recession.

My primary concern is about creating conditions for small business to thrive in this country. Right now, the lifeblood of our economy is at risk.

HEADQUARTERED IN ATLANTA, THE CHICKEN-BASED, FAST-FOOD FRANCHISOR POSTED SYSTEM-WIDE REVENUES OF $2.7 BILLION LAST YEAR.

If you’re not nervous reading forecasts of commodity-metals prices though, you’re not listening.”

STEVE KASE CEO Ask Products

HEAVY-TRUCK AND UTILITY MARKETS will be strong, with things like retro-fitting of coal boilers. And obviously, the petroleum-related markets have come way, way back.

It’ll be much like every year since 2011. You have a few good months and things take off; then there’s a make-up month. I’m not sure what to think. We’ll stay at this level next year, though two years from now that’s a little less likely. The rest of the world is so spooked that it will continue to send shivers through the American economy from time to time; but largely the U.S. economy is strong, and unemployment is down.

If you’re not nervous reading forecasts of commodity-metals prices though, you’re not listening. Because of China, the worldwide demand is down significantly. But I’m still concerned about unexpected news: It just freezes everyone in their purchasing patterns for a while.

BASED IN AURORA, ILLINOIS, THE COMPANY IS A $10-MILLION MAKER OF ELECTRICAL CONNECTORS AND OTHER COMPONENTS FOR TELECOM AND OTHER INDUSTRIES.

MARGARET KEANE CEO Synchrony Financial WE WILL HAVE TO FIGHT HARDER to get consumers to shop and use our credit cards. They want to shop, and an area that will be especially positive is things related to the home, such as furniture and flooring. That has held very well and will continue to hold.

The consumer is getting stronger. Wage compression has muted expectations a bit, but I feel good about where

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COVER STORY

the consumer is positioned in our industry.

I also believe that moving on interest rates is a positive sign for the economy—you can’t stay at zero forever. Movement says there is positive momentum in the economy.

I am concerned about the whole payment space in general. There’s still a big question about how quickly mobile wallets will take hold, but there is a lot of momentum there.

And we want to make sure we’re staying extraordinarily relevant in the digital and mobile space.

SPUN OFF FROM GENERAL ELECTRIC IN 2014, THE COMPANY IS A $13-BILLION LEADER IN CONSUMER FINANCE, HEADQUARTERED IN STAMFORD, CONNECTICUT.

GARY KOVACS CEO AVG Technologies

THE WORLD IS WRESTLING with how to secure the online environment. In the coming year or two, the industry will really sort out the winners and losers and what consumers and businesses expect when they think about security.

Over the next couple of years, consumers and [small- to medium-sized businesses] will start to really think about their identities online, and privacy and passwords, and doing nothing won’t be an option for them anymore.

I’m more optimistic now than I was a year ago about the coming economy, partly because election years are usually fairly buoyant for the U.S. About half our business is in Europe, and our general forecast is for continued weakness for the euro zone versus the U.S., but stabilizing.

One concern is that security threats are so broad and varied, stemming from foreign governments to a lot of underground elements, that even though we think we have the right path, we need to be on our toes.

HEADQUARTERED IN SAN FRANCISCO, THIS PROVIDER OF ONLINE SECURITY SERVICES REPORTED 2014 REVENUES OF $374 MILLION.

EILEEN MCDONNELL CEO Penn Mutual Insurance

WE SEE GREAT OPPORTUNITY for continued momentum, outpacing the industry for the seventh consecutive year. As others have sought out global opportunities, we have remained a domestic player. We’re keenly focused on the demographic shifts in the U.S., 36 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

including the fact that we are staring at the first generation that is going to be primarily responsible for funding their own retirement.

There continues to be opportunity in the U.S. economy. Growth will be slow and there will be some knock-ons driven by the global impacts of China and other economies. The life insurance industry overall continues to recover from 2008.

We’re concerned that the advisor population in our industry is pushing an average of 50 years old, while the census age of the average worker is 37. So the industry has a huge gap of who we employ in the advisor ranks; therefore we’re getting ahead of the curve in attracting Millennial talent.

BASED IN HORSHAM TOWNSHIP, PENNSYLVANIA, THE LIFE-INSURANCE PROVIDER REPORTED $1.5 BILLION IN 2014 REVENUE FROM INSURANCE OPERATIONS.

JODY GREENSTONE MILLER CEO Business Talent Group

WE SEE INCREASING INTEREST at even higher levels of Corporate America in different ways to get work done, so I think our industry will continue to see small growth. I think our company will continue to see strong growth, and we’re looking to partner in a deeper way with our clients.

I think the economy will be more of the same: steady progress, but not anything that’s going to blow anybody away. I don’t think it will be negative in any serious way, but there will be a lot of volatility.

There’s a lot of change in China, and Europe is a mixed bag. But I’m not foreseeing anything dramatic one way or another.

The legal framework in the U.S. around employment law really concerns me. There is enormous uncertainty and confusion around that; and with presidential politics getting into the issue; it’s even less likely to have resolution anytime soon.

BASED IN NEW YORK CITY, THIS ENTERPRISE IS A $25 MILLION LEADER IN HELPING COMPANIES HARNESS CONTRACTORS AND CONTINGENT EMPLOYMENT.

JIM PECK CEO TransUnion

WE ARE POSITIONED TO GROW in the U.S. and internationally, given the investments we’ve made in our technology, allowing us to put new solutions in the market for financial institutions, healthcare, insurance and government.

In the U.S. and internationally, things will go up and down; TransUnion is very well positioned regardless. People make decisions about how they do business in any economy. And if times are tough, people manage their assets more carefully.

Some emerging markets are particularly promising, such as India, where the prime minister is trying to build the middle class—and in virtually every economy that requires a good credit-reporting system. We own the largest credit bureau in India.

I do worry about talent. Our effectiveness is really all about our people. We need to maintain and attract people who understand the technologies but also those who understand our customer base and are deeply passionate about those verticals.

SUSAN SALKA CEO AMN Healthcare Services

HEADQUARTERED IN CHICAGO, THE $1.3 BILLION COMPANY PROVIDES CREDIT INFORMATION AND SERVICES AND FILED FOR AN IPO IN 2015.

Making sure everything is coming back on all cylinders is the tricky part.”

ASHER RAPHAEL Co-CEO Power Home Remodeling Group

THE RECESSION WAS A REAL SHOCK to the entire nation, but confidence is coming back. We don’t anticipate huge growth, but consistent growth like we’ve seen the last two or three years will continue.

The building and home-remodeling industry nationwide will continue to have slow, consistent increases. There is a direct correlation between increased home values and people feeling comfortable reinvesting in their homes, coupled with increased access to capital.

Our biggest growth years have come during recessions, but we’re expecting really big things now because the industry is on the rise. We’ve also been focused on leadership development. Our five-year growth plan is to open in 15 more markets.

As the economy is coming back, there are some pretty big labor shortages, and some raw materials, such as glass, are difficult to come by. Making sure everything is coming back on all cylinders is the tricky part.

HEADQUARTERED IN CHESTER, PENNSYLVANIA, THE COMPANY IS AMERICA’S SECOND-LARGEST EXTERIOR HOME REMODELER AND POSTED ABOUT $400 MILLION IN 2014 REVENUES.

THE AFFORDABLE CARE ACT will continue to add more patients to the system. And the general population is getting older, which means they’ll be utilizing more healthcare services. Add to that the general perception that the economy is improving and relatively stable, which means people have more money in their pocket to pay co-pays and for elective services.

There’s also massive consolidation across the healthcare industry. I see this transformation continuing, which creates opportunities for us to continue to deliver new and innovative services to help clients manage their workforces in effective ways.

The problem is that we don’t have enough clinicians to keep up with the growing number of jobs. That will be a challenge not just next year but for the next several years.

An additional layer is that the population of clinicians is aging as well; currently, the typical retirement age for nurses is the early 50s, and not enough new ones are coming in.

HEADQUARTERED IN SAN DIEGO, THE $1-BILLION COMPANY IS AMERICA’S LARGEST PROVIDER OF HEALTHCARE-STAFFING SERVICES.

STEVE TANGER CEO Tanger Factory Outlet Centers

WE JUST COMPLETED a significant growth spurt that increased the size of our footprint by 7 percent in 2014 and 10 percent in 2015, and we’re building our 48th shopping center. Now we plan to build another one or two new centers in each of the next two to three years.

But we don’t see the robust demand out there to continue to grow at 10 percent a year, because consumers are being cautious.

We want to see how they react in an environment of increasing interest rates.

You’re starting to see some small wage increases, which is good NOVEMBER/DECEMBER 2015 /

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COVER STORY

for the economy. I see continued GDP growth of 2 percent to 2.5 percent as reasonable and consistent.

We’re not overly concerned about the growth of e-commerce.

We’ve learned to offer the consumer what they love: the experience of going into stores and touching items and putting them on.

OPERATOR OF 47 SHOPPING CENTERS ACROSS THE U.S. AND CANADA, THIS GREENSBORO, NORTH CAROLINA-BASED REIT HAD 2014 REVENUES OF $419 MILLION.

Plus, luxury spending is up in general, and our hotels are mainly five-star. Also, the lower price of fuel is helping prices overall. We’ll open about 10 new hotels in 2016. We’re growing in bookings by about 30 percent over 2015 levels, so we see enough new demand.

We also have more Europeans coming to our hotels, looking for new beaches because of the unrest and migration in north and eastern Africa.

But there is tremendous competition in the United States: Cruise lines are growing and doing a better job of putting bigger, cheaper, better ships in the water.

CREATED IN 2013 BY BAIN CAPITAL, THE $3-BILLION GROUP BASED IN NEWTOWN SQUARE, PENNSYLVANIA, INCLUDES APPLE VACATIONS, AMRESORTS AND OTHERS.

AVI STEINLAUF CEO Edmunds.com

WE ARE A PRETTY GOOD BAROMETER of where the car market is, and we just had 20 million shoppers coming to our site in a month, which is an all-time high.

That’s a reflection of where the category is and where we are as well.

The fundamentals of our market continue to be strong.

Low gasoline prices work to spur the good old internal-combustion engine, where the technology has gotten better and better. Also, credit continues to be readily available; interest rates are still at historic lows. And production is in line with demand; incentives haven’t gone crazy.

Overall, I’m concerned about any black swans in the overall economy. But our biggest challenge comes down to execution: We’ve got a lot on our plate, and it’s ours to lose.

We need to take the share and the market that we believe we can achieve. Our biggest obstacle is hiring all the people we need to execute our plans.

THIS PRIVATELY HELD, MID-MARKET COMPANY IS A LEADING ONLINE AUTOMOTIVE-INFORMATION PORTAL HEADQUARTERED IN SANTA MONICA, CALIFORNIA.

ALEX ZOZAYA CEO Apple Leisure Group

WE SEE A VERY STRONG 2016 in our space, particularly tourists coming from the U.S. to our region, which is the Caribbean and Mexico. More Americans are traveling out of the country for the first time, and these trips are more a part of life rather than unique, like a honeymoon.

38 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

Overall, you have to be bullish on the economy. Look at the macro indicators.”

DAVID ZUCHOWSKI President and CEO Hyundai Motor America

THIS IS A PRODUCT BUSINESS, so we feel great: We’ve got a bunch of new products coming out over the next 12 months, including in the SUV category where we’ve lacked enough products in the past. We’ve been mostly a sedan company.

Overall, you have to be bullish on the economy. Look at the macro indicators: oil prices, jobs, Fed actions, housing—they’re all very stable and going in the right direction. And so much of what drives the economy is related to the automotive business.

There are two big uncertainties. One is the timing of the Fed’s interest-rate actions, which is dictated by global activity more than anything else. They affect our business a lot in terms of affordability, and manufacturers and dealers don’t have a lot of capability to offset the increased costs of funds. Also, the troubles in China, Brazil, Russia and Europe all are coming at the same time.

HEADQUARTERED IN FOUNTAIN VALLEY, CALIFORNIA, THE COMPANY IS THE U.S. ARM OF THE $84.7 BILLION HYUNDAI CHAEBOL HEADQUARTERED IN SEOUL.

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CORPORATE STRATEGY

Is Overreaching?

In evolving from selling books into an array of capabilities and services, the world’s largest retailer may be stretching itself too thin.

by Russ Banham

40 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

SET ASIDE the frightful articles about the Dickensian culture, employees responding to urgent texts in the wee hours or weeping at their desks from the workload. Forget for the moment the stark comparisons to Charlie Chaplin’s Modern Times, his masterpiece on socioeconomic utopianism, in which he once explained, “humanity is weighed down with duty.” ¶ Focus, rather, on Amazon’s Amazonian ambitions.

The company is a provider of video on demand, a television producer, a device manufacturer, a streaming music service, a B2B seller of software services, a developer and distributor of video games, an auction house, an online, fine-art maketplace, an operator of websites for other retailers and a deliverer of fresh groceries. It also plans to produce feature films.

Can Amazon continue to plow revenue back into new businesses and maintain its current track record of success? Surely. The stock has been stellar and consumers love the shopping experience. In fact, I am among the more than 50 million Amazon Prime users who find Amazon.com a reliable, simple to use, one-click deliverer of all sorts of stuff that makes my family happy. I own a Kindle, I watch “Transparent” from Amazon Studios on TV and I’m eager for a drone to buzz outside my home office window with a ham and cheese sandwich for lunch.

Analysts, however, see things differently. They’re increasingly concerned that Amazon is straying beyond core competencies, burdening its vaunted distribution system with too many products and stretching Wall Street’s patience thin. Although Amazon recently declared a profit that exceeded analysts’ expectations, the challenge has been to consistently report profits.

Despite their concerns, Amazon watchers nonetheless praise the company’s bravery in experimenting with new businesses like the successful Kindle reader and the failed Cell Fire smartphone. They marvel at its ability to develop new businesses

like Amazon Web Services, Amazon Prime Music and Amazon Pantry.

They extol its historic rise from a mere online bookseller into the undisputed Queen of Online Retail.

And they laud the company’s ability to be extraordinarily convenient and, therefore, indispensible to consumers, bestowing upon Amazon an enviably trustworthy brand.

How trustworthy? According to a May 2015 survey by the Conference Board, 52.9 percent of consumers say they trust Amazon most as a provider of online information. Next on the list is Google at a distant 13.9 percent, followed by Apple at 10.8 percent.

We love Amazon. Still, there are chinks in its armor.

WHAT IS AMAZON? To describe Amazon a decade ago was pretty easy—an e-commerce company that sells books, CDs and a few other items online for delivery to one’s home. Today, it is that and so much more. Yet, do these varied enterprises have something in common?

“Bezos is pushing the boundaries of what we think Amazon is into something that is quite different,” says Kai Clarke, president and COO of American Retail Consultants. “It’s a risky strategy.”

Like others, Clarke questions founder and CEO Jeff Bezos’ penchant for plowing revenues into new businesses rather than rewarding shareholders. While Amazon has reported quarter-after-quarter profits, it has yet to declare a dividend.

Dick Seesel, principal at retail consulting firm, Retailing in Focus, also worries that Amazon is over-stretching the rubberband of possibilities.

“While their growth has been pretty organic, they risk becoming the Sears Roebuck of the e-commerce age, selling everything under the sun,” he explains. “Just because their predictive technology tells them consumers are likely to buy something doesn’t mean they need to get into that business.”

A case in point is the company’s awkward plan to sell its own line of Amazon Element diapers to Prime members, an idea that was shelved in January, although the company still sells Amazon Element baby wipes.

Others see these varied ventures as hewing to Amazon’s core competency, which Ryan Mathews, CEO of Black Monk Consulting, describes as its ability to “attach as many touch points to the customer” as possible.

“They’re in the business of finding significant new ways to direct deeper and longer-term relationships with

Key Takeaways 1

2

All Things to All People Some question whether Amazon overstretched in evolving from selling books into an array of capabilities

Intensifying Competition From Jet.com and Alibaba to Walmart and Google, competitors are battling to win share from Amazon

3

4

Regulatory Threats Perceived as a business-killer, Amazon risks attracting unwelcome attention from regulators and law firms

Troubling Turnover Amazon has the second-highest turnover among Fortune 500 companies

NOVEMBER/DECEMBER 2015 /

CHIEFEXECUTIVE.NET

/ 41

CORPORATE STRATEGY

consumers,” he elaborates. “This is their brand.”

Sharing this perspective is Larry Chiagouris, a professor of marketing at Pace University. “Their core competency is online relationships with customers—not the sale of books, records or groceries,” Chiagouris says.

“Effectively communicating with consumers is their bread and butter.”

But, is there risk in a strategy that is built essentially on consumer trust? Amazon is a repository of more consumer data than most other commercial enterprises put together.

The company knows what we buy, what we’re thinking about buying and lots of our personally identifiable information. With each business it gets into, Amazon knows even more about us. Can this backfire?

“The danger is that as they become more intimate with customers, customers will push back,” says Mathews.

“There’s the fear that this one company will know too much about me, knowledge that can be hacked and used against me.”

Chiagouris agrees. “Were they to experience a data breach along the lines of a Target, consumer trust would fast erode, with potentially damaging repercussions,” he says.

“They can’t afford a major security breach.”

The good news is that Amazon (unlike nearly all its competitors) hasn’t suffered a reported data breach, which speaks volumes about the integrity of its technology

platform. To the company’s credit, it owns probably the securest site online, its servers and encryption technology are the equivalent of Fort Knox. But, as Chiagouris acknowledges, “You can never say ‘never.’”

SHARPENING THEIR KNIVES Another possible Achilles heel is intensifying competition in the e-commerce space. New players like Jet.com and China’s Alibaba, which is in the thick of expanding its cloud computing business in the U.S. to take on Amazon Web Services, are likely to make inroads. Ditto for both traditional brick-and-mortar stores like Walmart and high-tech stalwarts like Google, each looking to topple the Queen. Walmart is spending more than $1 billion to upgrade its e-commerce site this year to replenish declining store revenues, while Google has dispatched blue-and-white Google Shopping Express vans on the road to deliver merchandise bought on its site.

Both behemoths are going headto-head with Amazon, battling to win the lion’s share of what has become, according to the U.S. Department of Commerce, a $225 billion e-commerce market. Google, for instance, recently refined its Android smartphone search app to notify users when they are physically close to a store with a product they recently searched for.

Walmart, on the other hand, is preparing to launch a membership model (reportedly called Tahoe) that’s similar to Amazon Prime, albeit at

“The danger is that as they become more intimate with customers, customers will push back. There’s the fear that this one company will know too much about me, knowledge that can be hacked and used against me.”

—RYAN MATHEWS, CEO, BLACK MONK CONSULTING

42 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

half the $99 fee. Not that Amazon is resting on its laurels—in mid-July it unveiled the first Prime Day, an online equivalent of Black Friday with deeply discounted merchandise.

Amazon’s chief competitor may be Walmart, given the latter’s geographic presence (4,100 stores and counting, excluding its Sam’s Club franchise), more than five million SKUs and longtime price-leader pledge.

“Walmart has the advantage of a vast network of thousands upon thousands of physical stores,” says Seesel.

“If they can figure out how to turn these stores into shipping locations for e-commerce—and Walmart is a company that can figure this out— watch out.” (See ChiefExecutive.net for more on competitive threats.)

As this competition blazes, Amazon must slow its burn rate internally.

Free shipping is great for consumers, but Amazon pays dearly to provide it.

“Their shipping costs are crazy,” says Paula Rosenblum, managing partner at technology research firm RSR Research. “We love Amazon because they ship an almost infinite assortment of items in two days or less, but that infinite assortment and delivery timeframe are very problematic.”

To serve customers, distribution centers have to make difficult decisions on which items to stock and the different-sized shipping boxes to keep on hand. “Have you noticed that a lot of Amazon goods arrive in boxes of the wrong dimension, and by ‘wrong’ I mean too large,” says Rosenblum.

“The added dimensions tack on additional cost, since shipping companies charge by the cubic inch.”

Prime doesn’t always provide free shipping on all items, compelling consumers to surpass a dollar-value order hurdle. To receive the freebie, they have to toss more items into their shopping baskets, compounding the problem of unpredictable order sizes. “It’s not like Amazon ships all the different items in a single box,” Rosenblum says. “Often, they arrive

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CHIEFEXEC.COM

CORPORATE STRATEGY

AMAZON REVENUE PER EMPLOYEE OVER THE PAST 10 YEARS $1M $900K $800K $700K $600K

2006

2008

piecemeal in different-sized boxes, accomplishing really nothing.”

Another problem with Amazon Prime is that it puts inordinate pressure on the company’s distribution infrastructure. “It’s extremely expensive to promise free two-day shipping, despite the $99 received each year by tens of millions of members and all the great publicity,” says Sucharita Mulpuru, retail analyst at Forrester Research. “They’ve backed themselves into a corner by subsidizing Prime with their other ventures.”

PROFITS AND ANTITRUST Far bigger threats include government intrusion and Wall Street’s frustration. Franklin Foer, former editor of The New Republic, has suggested that Amazon is a monopoly that may require a government breakup along the lines of AT&T. Although not a monopoly in the traditional sense of cornering markets and holding consumers captive with higher prices, Amazon is perceived as a business-killer, which has a similar effect on market freedom. The company reportedly owns 41 percent of the sale of all new books, whether they’re sold online or at the local bookstore.

If other Amazon merchandise follows the same pattern, it could breed monopolistic lawsuits, Chiagouris says.

Amazon also can’t control the impulses of Wall Street, which has been patiently waiting over decades

2010

for serious profits. Although the company’s stock is in the stratosphere, what goes up must come down. One metric that might give analysts pause for deeper consideration is Amazon’s revenue per employee (see chart above), which has dropped off a cliff over the past two years, unlike competitor Google.

“If Wall Street sours, it could drive the stock down and take away Amazon’s ability to pursue its strategy of buying its way into other fields,”

+

Visit chiefexecutive.net /Amazon for two related stories:

LESSONS FROM AMAZON What businesses can learn from Amazon’s journey JET.COM: FLANK ATTACK A look at an upstart looking to challenge Amazon

asserts Max Goldberg, president of business consultancy Goldberg & Associates. “The big question is how much pressure Wall Street will bring to bear.”

Others are asking the same question. “The larger Amazon gets, the more difficult their ability to generate regular profits in enough key divisions to outpace their spending,” says Clarke from American Retail Consultants.

“A strategy of pouring revenue into new businesses is not a proven key to

2012

2014

success but one for failure, since the company eventually must develop returns back to shareholders.”

If the stock price falters, there could be reverberations beyond Amazon’s access to growth capital. Mulpuru points out that the company generally pays its executives comparatively low salaries in the $150,000 range and makes up the financial difference by awarding restricted stock units, a nearly $1 billion figure. “If the stock tanks, it would cause a dilution in stock value that might create a serious recruitment and retention problem,” she says.

Amazon’s turnover is already the second-highest of all Fortune 500 companies, according to a 2013 study.

Following August 2015 The New York Times articles bashing Amazon’s workforce culture, this comes as no surprise.

When I asked a former Amazonian I know why she headed for the exits, her response was that the company had an out of whack life-work balance. “It was 80 percent work—often 12 to 14 hour days,” she told me. “The anxiety and stress were overwhelming.”

Still, the greatest threat to Amazon is, well, us. The company has never boasted that it is the price leader.

“Even with free shipping, I’ve found products online by others that were cheaper overall, even with the shipping costs,” says Rosenblum.

At the end of the day, it is the consumer that will decide Amazon’s fate.

Love doesn’t always last forever.

RUSS BANHAM is a Pulitzer-nominated business journalist and author. His new book, Higher: 100 Years of Boeing is in bookstores now.

44 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

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INNOVATION

SHARK TANK, CORPORATE STYLE

Searching for edgy innovation and top talent, big companies buy— or stake—the startups that might once have unseated them.

by Dale Buss

46 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

I

Innovation is critical to PepsiCo as the consumer-packaged-goods giant tries to separate itself from the irrelevance being suffered by much of Big Food.

That is why fully 9 percent of the company’s $65 billion in sales now comes from products and brands that are less than five years old, double the percentage of just a few years ago.

To boost that percentage further, PepsiCo has established two corporate venture-capital funds over the last six years, one of them with Unilever. The Pepsi brand has sponsored contests to solicit the best new ideas from small digital-marketing outfits. And the company has invested quietly in a “health and wellness” startup in Silicon Valley that it refuses to identify.

“Good ‘scientists’ learn to discover things in their own or in others’ labs,” says Mehmoot Khan, PepsiCo’s vice chairman and chief of R&D. “It could be someone else’s recipe that works for you. So give them credit, and recognize them, and also leverage your strengths to make them bigger or better.”

Dozens of other Fortune 1000 and mid-market companies are following similar prescriptions these days as they swallow their provincialism, smash their old business models and avidly seek ties with the really small fry of the universe to get access to innovation and the talent that drives it.

In the hopes of discovering a leap-frogging new product or at least getting a fast pipeline to new ideas and the people who create them, these

mid-market and large outfits buy startups, take equity stakes in young companies, initiate and expand corporate venture-capital funds. They rack up partnerships with entrepreneurs, nurture outside enterprises by establishing incubators and accelerators, stage contests, launch vehicles for “intrapreneurial” startups and otherwise plunge into the frothy world of entrepreneurship like never before.

ROILING WATERS Call it the era of “big-to-small” alliances, an unprecedented explosion of activity that resembles Shark Tank on steroids. This new dynamic subsumes not only the thinking behind the smattering of corporate venture funds that were founded as far back as 20 years ago by Intel and others, but also the aims behind the “open innovation” push established by P&G and a handful of other big companies more than a decade ago.

“There is no doubt about the proliferation of the ‘big-to-small’ mindset especially within the major brands, especially when it comes to the agility and speed in making fast decisions and continuously pivoting yourself as an organization,” says Mayur Gupta, global head of marketing and technology innovation for Kimberly-Clark. In 2014, his company launched an annual competition at the Consumer Electronics Show in Las Vegas that rewards the winning startup with the opportunity to pilot a project with Kleenex, Huggies

or one of the company’s other global brands. “However, we are not sure if there is any single brand who has figured it out, and in many ways, we are all in the journey right now and at different stages of the course.”

Baron Concors, global chief digital officer for Pizza Hut, notes that “big, iconic brands that aren’t afraid to take some risks” are major participants in the movement—and his division of Yum! Brands is one of them. He takes “regular trips out to California to meet with incubators, and we have done business with a few startups in the last several months,” especially those in digital marketing, Concors said.

“We are constantly in beta mode, always testing and experimenting to see what really clicks, because to really think big you need to start small—and scale up quickly.”

Indeed, one major reason so many companies across the business spectrum (see “Meet the Sharks,” p. 50) have embarked on the big-tosmall journey is that they’re trying to answer a common central challenge: how to unlock the secrets to renewed growth when fast-moving small companies and startups seem to hold the keys. The new approach dramatically increases their exposure to startup products, technologies, people and creativity, and drastically telescopes the time, resources and attention required to find and develop worthy new ideas and get them to market.

Also, CEOs want to inoculate

Key Takeaways 1

2

3

Look for Disrupters Companies seek to capture innovators before they become disruptors

ROI Requires Patience The biggest benefits, such as culture change, are often long-term

It’s a Risky Business Risks include missing the right targets and relationships that don’t pay off

NOVEMBER/DECEMBER 2015 /

CHIEFEXECUTIVE.NET

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INNOVATION

their companies against fast-moving hornets, if possible, before being stung by them. They recognize that, in many industries, new and nimble smaller companies have been strapping up the Gulliver-like major players like never before; think of Uber and auto makers, or Sparkling Ice waters and soft-drink brands.

“More incumbent companies are worried about disruption than ever before,” says Tom Ciccolella, U.S. venture-capital leader for PwC, the consulting firm. “Or they want to make sure they have the finger on the pulse of what might be disruptive to their business.”

These companies searching for investments specifically see that startups tend to have a better grasp on the digital technologies that have become crucial to nearly all industries and usually possess a better understanding of the sensibilities of the key Millennial generation—in large part because many of the entrepreneurs themselves are members of it.

Savvy chiefs of large and mid-size companies also want to get access to

the best talent, and direct relationships with entrepreneurs are one of the best ways. And advocates of a big-to-small strategy see value in the possibilities for revitalizing their own ossified company cultures in the process.

“The real [key performance indicator] is—have we fundamentally changed how people think and how we’re preparing to enter into the next generation of our approach to organization?” says Bonin Bough, vice president of global media and consumer engagement for snack giant Mondelez International, which has launched accelerators for startups in both mobile tech and shopper marketing. “We have recognized that we can bring a startup mentality and culture shift into the organization.”

On the flip side, startups are greeting this development with open arms. Many indeed have the stuff that big companies are seeking, but the little guys usually lack the resources and backing to prove, market and scale their innovations.

Larger-company sponsorship can provide exposure, clients, capital, distribution, sales growth, marketing muscle,

financial expertise and other things of commercial value—and, of course, maybe the ticket for them to reach the next level of business or strike it big.

One of the earliest successes of the big-to-small era involves Sky TV, the cable giant in the UK, and Saratoga, California-based Roku. Searching for a quick and effective way to enter the domestic streaming-video market, Sky invested in Roku and “white-labeled” its technology platform, branding it “Now TV.” For fiscal 2015, Sky TV reported its strongest customer growth in 11 years— most of it provided by Now TV. “We could have built [a streaming platform] ourselves, taken a year and a decent amount of money,” says Hilary Perchard, head of U.S. investments for Sky. “But instead we searched and found Roku in Silicon Valley. We’ve also used their technology platform to grow Now TV and our overall business at a faster rate than in 10 years thanks to the rate at which it engaged consumers.

“For Roku, it has given them the huge success of distribution in a market where they didn’t have that much traction before. So it has proved

Exelon: Prizing Entrepreneurship FEW INDUSTRIES would qualify as more old-line and conventional than the Rust Belt electric-utility business. But Chicago-based Exelon has emerged from that with a pacesetting big-to-small strategy that belies its traditional roots.

Last year, for example, Exelon invested in two local startups “that have had a real impact for us,” Sonny Garg, the company’s chief information and innovation officer said in 2014. ADMCi is a “design thinking” school, and the other new Exelon partner, AKTA, is a mobile-development company that since has been recognized as an Inc. 500 company.

“We’re looking to drive a culture of innovation, develop emerging technologies and work with entrepreneurs,” explains Brian Hoff, Exelon’s director of emerging

technology. “We’ve even shown the board our program. From a high-level program with board-level visibility, down into the weeds with specific startups—everything weaves together.”

One successful “weed patch” for Exelon has been an annual program it began in 2013 called “Dancing with Startups,” in which the company hosts emerging startups at a smattering of cities across the country for a day of presentations and partnership discussions. It offers prize money for the best ideas and business models, and it has brought some of the entrepreneurs into the company “to try out their products and technologies,” Hoff says.

“If we think there’s an investment opportunity, we have an investment arm, and after we’ve piloted something and seen

48 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

that it has value, we can make an equity investment,” he says. That’s how ADMCi and AKTA got on Exelon’s radar. Or sometimes there’s a good fit within Exelon. Or maybe the startup is more interested in strategic advice than cash.

Hoff notes that the process already has produced a steady deal flow.

Exelon’s courting of outside innovators also has raised the company’s esteem in the eyes of its own employees, based on internal questionnaires, and is “impacting the culture,” he says.

Of course, there are dangers for the company in plunging so dramatically into the exciting new realm of the startup: Garg recently resigned to join one of the startups in which Exelon invested, Uptake, a data-analytics company.

to be hugely synergistic for both them and us. And since then, they’ve been cutting similar deals with operators around the world.”

Similarly, KPMG in 2013 created KPMG Capital as a fund “to invest in the best and brightest data-analytics technologies that we can take to our clients,” says Mark Toon, CEO of KPMG Capital. Its first investment was in Bottlenose, a $20-million, Los Angeles-based “trend-intelligence” company.

“We’re not the most innovative organization in the world when it comes to creating new technologies to do stuff that’s cutting-edge,” he says of KPMG, the New York based global accounting and consulting firm. “Our investment in Bottlenose was our way of ensuring that we can provide our clients with the brightest thinking in a specific space that we wouldn’t get to for years, if ever.”

Two years ago, Molex, a Lisle, Illinois-based major maker of electronic components, formalized a program of investments in “external innovations that can specifically disrupt our future vision, or in strategic growth areas to get us a jump start in new technologies,” explained Lily Yeung, director of corporate development for the company that Koch Industries acquired in 2013.

NINE PERCENT AMOUNT OF PEPSICO’S $65 BILLION IN SALES THAT COMES FROM PRODUCTS AND BRANDS THAT ARE LESS THAN FIVE YEARS OLD

two hundred eighty NUMBER OF STARTUPS THAT GOOGLE VENTURES CURRENTLY HAS STAKES IN

$100 MILLION THE VALUE OF RIDESCOUT AFTER HAVING BEEN ACQUIRED AND GROWN BY DAIMLER

Last year, Molex invested in a round of convertible notes and struck a strategic partnership agreement with NuCurrent, a Chicago-based wireless-antenna design outfit. That followed by a year Molex’s similar investment in Vasa Applied Technologies, a startup that developed a technology for accurate measurement of fluid flow rates for medical applications.

Our investment was our way of ensuring that we can provide our clients WITH THE BRIGHTEST THINKING IN A SPECIFIC SPACE THAT WE WOULDN’T GET TO FOR YEARS, IF EVER.” —Mark Toon, KPMG Capital

For Vasa, says co-founder and CEO Jacob Polger, the opportunity is clear.

“With Molex’s global sales force and engineering capabilities, we expect to significantly increase our technology reach in new geographies and markets,” he says. For Molex, the deals are a way to place more bets on the future.

“It’s related to the many unicorns we see in the startup world,” Yeung says, referring to the term for a new company that quickly burgeons into a big one.

“Big companies are learning that these small companies can disrupt their core businesses and become really valuable as well, and tapping into innovation is absolutely crucial for our survival.”

THE MIDDLE MINDSET Savvy mid-market companies are participating in this trend as well.

Executives of Kwikset, for example, a $600-million maker of residential locks owned by Spectrum Brands, in 2012 saw a startup called UniKey on Shark Tank demonstrate a digital “smart lock” that threatened the traditional security devices where Kwikset reigned.

The company quickly partnered with UniKey to introduce its own smart lock ahead of its rivals.

The relationship also is making all

NOVEMBER/DECEMBER 2015 /

CHIEFEXECUTIVE.NET

/ 49

INNOVATION

Meet the “Sharks” HERE IS A PARTIAL ROSTER

of major companies taking a big-tosmall approach that aren’t covered in the main story: CHOBANI has launched a food incubator in New York City, selecting about 10 companies to provide with test kitchens, office space, mentorship and access to chefs and other Chobani resources, with an initial $2 million investment.

DAIMLER acquired RideScout as the platform for an urban-mobility play and already has developed it into a $100 million business.

DIAGEO launched Diageo Technology Ventures to partner with innovative digital and technology companies to the tune of $100,000 each and started Distill Ventures, which is investing up to $15 million in supporting and nurturing

of Kwikset more nimble. “We looked at our own organization internally and decided to evolve our structure to be more like a small company,” explains Greg Williamson, Kwikset’s chief marketing officer.

“In some ways, mid-market

startups and new ideas ranging from vermouth to gin, in Western Europe and beyond.

FORD is teaming with suppliers Verizon Telematics and Magna International to fund an incubator that will support transportation-related startups, investing $2 million in Techstars Mobility, driven by Detroit to help 30 companies get off the ground in the next three years.

GOOGLE through its Google Ventures arm has close to $2 billion in assets under management with stakes in more than 280 startups. They include hundreds of millions of dollars alone invested in one research startup, Calico, whose ultimate goal is to help human beings live hundreds of years.

IBM has set up a $100 million fund to back startups that use the technology behind Watson, its iconic computer

that can communicate in colloquial language. First investment: Welltok, a health-care startup that invented an app that uses the technology to analyze users’ habits and give medical advice.

KROGER AND TESCO backed a joint venture called Dunnhumby Ventures, which is looking for innovations and making investments in startups seeking to transform the future of retail.

NIKE has been a pioneer with programs such as the Nike+ Accelerator program to drum up new ideas for its fitness devices, and the Launch Systems Innovation Challenge, aimed at garnering innovative ideas and processes to transform the way fabrics are made.

WALT DISNEY has a smallbusiness accelerator.

companies are better positioned than big companies for this, because they still possess a fairly nimble structure, making the interface with startups less of a disconnect,” notes Mike Morin, COO at Start Garden, a venture-capital fund based in Grand Rapids, Michigan.

“They often have significant regional social capital and relationships through their employees and their supply base, and that makes them a more likely access point for local innovators.”

While it’s almost too early to recognize failures, a big-to-small strategy clearly carries some risks for both sides.

For big companies, the method remains essentially a crapshoot, providing little of the traditional ROI metrics that they typically have used to make investments. And they still may not avoid disruption by some startup that they passed over.

For small companies, the risks are big as well. They may select the wrong big partner and then not be able to escape a corporate vice grip that is fortified by lawyering, or they may be suffocated by their corporate relationships instead of transforming their much larger partners.

But big-to-small thinking is already blowing a big hole in traditional business models and relationships. And it seems here to stay.

IT COULD BE SOMEONE ELSE’S RECIPE THAT WORKS FOR YOU. So give them credit, and recognize them, and also leverage your strengths to make them bigger or better.”

—Mehmoot Khan, PepsiCo 50 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

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MID-MARKET FINANCING

How CEOs Can Work with BDCs

Looking for an alternative to banks for your capital needs?

Here’s why a business development company may be right for your company. By Christian Oberbeck AT A TIME when more and more small and mid-sized companies need to look beyond banks for sources of financing, it’s important to understand the role Business Development Companies (BDCs) can play in meeting capital needs. In 1980, Congress passed an amendment to the Investment Company Act of 1940 in order to create a regulated entity—the BDC—that would serve as a source of capital for smaller, middle-market companies.

Thirty-five years later, there are more than 50 publicly traded BDCs in the U.S. Yet, CEOs are still learning how to work with them.

The advantage BDCs have over banks is that a BDC will make cashflow loans with higher leverage, fewer covenants and less restricted payment

schedules than a bank. Consider a company we will call Vivtxt. It leases office machines to small businesses in two Mid-Atlantic States. Vivtxt is healthy, generating $20 million a year in leasing and servicing revenue.

When its CEO approached a bank for growth capital, the bank agreed to a loan based on two times EBITDA for five years, pending an audit of the number and the value of business machines in place at customer locations. However, the CEO needed four times EBITDA for five years to fund a fully planned expansion. With the bank loan, he would need to find an additional lender or equity investor to provide the remaining funds needed.

However, a BDC was able to take a different approach to valuing the

business and its creditworthiness.

Ultimately, it lent Vivtxt four times EBITDA with fewer covenants than the bank required.

BANKS VS. BDCS Both BDCs and banks look for a steady stream of cash flow that will pay interest expense on a five-year loan. However, rather than focus on collateral, a BDC looks at the business itself and its value proposition. In this case, the BDC was looking for a steady income flow and a sustainable business.

What the BDC liked about this business was that it sells to a diversified group of 10,000 customers and it generates $10 million a year just on the recurring service side of the business.

This represents a “sticky” revenue

stream because customer lease contracts normally last three to five years.

BDCs also consider the strength of the management team. In Vivtxt’s case, a strong team of owners with a vested interest in success had been running the business for 10 years.

Vivtxt’s smaller size made it a less attractive customer for banks, which typically require borrowers to have EBITDA of at least $10 million. A BDC, however, digs deeper in due diligence to understand the business itself at a granular level. If a BDC believes a business has a strong value proposition and sees no macro-industry events or regulatory or technology changes looming in the next five or 10 years that would impede its growth, it will generally underwrite a smaller business.

With Vivtxt, the combination of a recurring revenue stream and the quality of the products leased made it stable enough to warrant an investment. Vivtxt leases its machines to churches, municipalities and small business offices, all of which could, in theory, be affected negatively in a downturn. However, Vivtxt had withstood the recession in 2008-2009, demonstrating resiliency and stability.

MORE FOR LESS The bank would have lent capital for two times EBITDA, which meant that Vivtxt would have had to find a second lien or sub debt or equity to get to four times EBITDA. Going with a BDC that covered all four turns gave its CEO “peace of mind.” He was able to get a five-year term from a single investor, while not having to worry about defaults from two different lenders, or refinancing a senior or second lien.

The bank’s pricing was roughly 5.5 percent for a collateralized loan at two times EBITDA; the BDC’s was at 10 percent for a cash flow loan at four times EBITDA. While on the surface the BDC terms are more expensive than the bank’s, other factors come into play. For example, bringing in another lender to get the full amount of capital needed would likely have given Vivtxt a blended rate of between 8 percent to 9 percent. Therefore, the additional cost of using a BDC was more than offset by the efficiency of a one-loan transaction.

The bank also required amortiza-

+

tion of principal during the term of the loan. A BDC loan can be flexible with scheduled amortization because the BDC has permanent capital. If a company wants to spend more to grow or to invest more on people or capex, a BDC can allow this without having to worry about paying down scheduled amortization. A BDC’s sweep can also be flexible, taking into account capex, gross expenses and contingent reductions of the sweep.

When borrowing from a bank, a company must comply with a bank’s scheduled amortization, regardless of business circumstances. In Vivtxt’s case, the bank offered a one-year grace period, then 10 percent annual amortization with a balloon payment after five years versus the flexibility of a non-amortizing six-year BDC facility.

By embracing the BDC approach, Vivtxt’s CEO can run his business and pursue opportunities with minimal capital structure constraints. He is able to invest both more dollars and more time withouat being concerned about strict repayment schedules.

One final benefit to Vivtxt was the way a BDC works, which allows portfolio managers to coordinate directly with the chief investment officer. When companies need to make a change, need to refinance or need an amendment, they can get a decision more quickly than from a bank, which would run requests through multiple committees for approval.

Banks generally do not have as deep an understanding of a business as a BDC does, so any change or modification in a loan generally takes substantially longer than with a BDC. A BDC does its homework and gets close to a borrowing company initially, so it can quickly respond to that company’s request for an adjustment in its debt due to operating changes, acquisitions or other opportunities.

CHRISTIAN OBERBECK is the chairman and CEO of Saratoga Investment Company.

For more on BDC Financing, visit chiefexecutive.net/EasyIce-BDC

NOVEMBER/DECEMBER 2015 /

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ECONOMIC DEVELOPMENT

The campaign in the Midwest is far from over. Illinois remains a union stronghold, as does Prof. Vedder’s home state of Ohio. In June, Missouri’s Gov. Jay Nixon vetoed a bill that would have added the Show Me State to the fold. Despite facing unerringly emotional and loud opposition, Midwest business leaders are too aware of economic growth across state lines to abandon the fight. The next round of right-to-work bills comes next year, the following year and likely for years to come. With grassroots supporters increasingly visible and outspoken, the movement against compulsory unionism seems unstoppable.

REGIONAL REPORT

The Midwest Mandatory unionization is hampering conditions in the Midwest. By Warren Strugatch A GENERATION AGO, business leaders

in America’s old-line manufacturing centers faced a quandary: stay in what was increasingly derided as the “Rust Belt,” or depart for sunnier—and more business-friendly—climates down south. Many employers envied the lower tax rates and cheaper labor costs that prevailed in the Sun Belt, calculating they could run their businesses more efficiently south of the Mason-Dixon Line. That began a southbound exodus that continues to this day.

A big factor inflating labor costs was—and is—mandatory unionization, or state laws that force all hourly employees to pay union fees. Although common sense suggested that compulsory unionization inflated costs, firm data was lacking.

All that changed in 2010. That year, an Ohio State economist by the name of Richard Vedder released a landmark comparison study equating freedom from mandatory unionism alongside such birthrights of American citizenship as freedom of expression, freedom of association and freedom of belief. Included as well was empirical evidence equating mandatory unionization with economic stagnation.

Right-to-work states, the study reported, grew 6 percent in per capita income over those without it.

Prof. Vedder’s report provided ballast for the burgeoning right-to-work

movement. After two decades in which the only state to pass right-to-work legislation was Oklahoma, in 2012, Indiana and Michigan became the 23rd and 24th states respectively to enact right-to-work legislation. In Wisconsin, Gov. Scott Walker signed a bill this spring making the Badger State the 25th state—exactly half the country—to pass right-to-work legislation.

Dick Resch, CEO of KI Furniture in Green Bay, counts himself as a Gov. Walker supporter—and believes the new labor rules will boost job creation. “The law is sensible,” he says.

“It will allow our workers to keep more of their wages.”

INDIANA | #6 | PEERLESS IN PROGRESS “No state in the Midwest,” says site selection consultant Larry Gigerich, managing director of Genovus, “has made as much progress as Indiana” in economic development. Two-thirds of the way through this year, over 200 commercial projects representing over $3.3 billion in investment have been completed.

“Last year was a record year in Indiana,” says John S. Taylor, president of the Indiana Economic Development Association. “And we are on pace to

How The States Stack Up Rank Best/Worst GDP States 2 1 Rank 2014 2014

Indiana

6

Education Quality (K-12)/ Post6 Secondary

GDP Per Capita 3 2014

Top Corporate Tax 4 Rate (%)

Right to Work 5 State

Quality of State 6 Service

HQ 6 Incentives

16

$43,861

7 (flat)

Yes

A-

A-

A-

B

B+ / A

Jobs 6 Incentives

Workforce 6 Quality

Wisconsin

12

20

$46,665

7.9 (flat)

Yes

B

B

B+

B+

A- / B+

Iowa

13

30

$49,074

12

Yes

B+

B

B-

A-

A / A-

N. Dakota

19

43

$65,225

4.53

Yes

A-

B

B

B-

A- / B+

Ohio

22

7

$45,886

State uses alternate taxation

No

B+

B-

B

B+

B- / A

State uses alternate taxation

S. Dakota

23

46

$46,687

Yes

A-

C

B+

B+

A- / B

Nebraska

25

35

$52,723

7.81

Yes

B+

C+

C+

B

B / A-

Missouri

26

22

$42,853

6.25

No

B

A-

B+

B+

C+ / B

Kansas

27

21

$45,765

7

Yes

A

B

B

B

B+ / B+

Minnesota

31

17

$52,801

9.8

No

C

C

C

A-

A / A-

Michigan

43

13

$42,110

6

Yes

C+

C+

C

B+

A- / A-

Illinois

48

5

$52,827

7.75 (flat)

No

C-

C

C+

C

C+ / B+

Sources: 1 Chief Executive reader poll 2 Bureau of Economic Analysis 3 U.S. Census 4 Tax Foundation 5 Right to Work Foundation 6 Larry Gigerich, Ginovus; Gregory Burkart, Duff & Phelps.

54 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

break that record this year.” Indiana continues to lead the nation in share of manufacturing employment per capita and highest manufacturing sector income share of total income.

As the state positions itself as the Crossroads of America, the need for new infrastructure funding mechanisms is top of mind. “We’ve reached the point where gasoline taxes and diesel fuel taxes are no longer keeping pace with inflation,” says Indiana Chamber of Commerce president Kevin Brinegar.

Chamber-spearheaded legislation has facilitated highway lease deals; last year a new lease for the Hoosier State’s toll road, touted as the “Main Street of the Midwest,” pumped over $4 billion into the state coffers. Gov. Mike Pence has championed such innovations as driverless cars, solar-powered roads and a second beltway around Indianapolis. Pence’s signing of the Religious Freedom Restoration Act in March was rebuked by CEOs of corporations like Apple and Salesforce, who contended the law created a hostile environment. They threatened to pull out of the state and Pence backed down.

The Tax Foundation ranks Indiana’s state and local tax burden 22nd highest out of 50 states and eighth in business tax climate. Indiana spends over $921 million a year on incentive programs.

WISCONSIN | #12 | WORKING ON ITS FUTURE Supporters of Wisconsin’s rightto-work legislation cheered when it passed in March. Since its passing, “we are getting more and more investors coming in and putting plants up,” says Green Bay-based KI Furniture CEO Richard Rensch. Wisconsin can use the boost after last year’s meager 1.5 percent private-sector job growth.

The Metropolitan Milwaukee Association of Commerce sees “a solid majority” of economic indices “point(ing) upward,” driven by rising employment; Manpower Group’s spring study says employers “feel bull-

WHY WE’RE HERE / INDIANA WHO Scott Moorehead, CEO, TCC WHERE Carmel, Indiana SITE HISTORY TCC was founded in 1991 in Marion, in a small converted house next door to the CEO’s family-owned electric company headquarters. Seeking more space and a community environment more suited to attracting employees, the company moved its headquarters in August into a 55,000-square-foot building in Carmel, near Indianapolis.

WHY INDIANA “The cost and quality of living for employees and their families is very reasonable. In Indiana, you can afford a home in a friendly neighborhood that you and your family can enjoy. Indiana also offers talented individuals who attended major universities including Purdue in Lafayette, IU in Bloomington, Notre Dame in South Bend and more.”

BOTTOM LINE “The cost and quality of living for employees and their families is very reasonable, We love all the city parks in Carmel for our family to explore and have fun outside and the access to great grocery stores. Personally I love Bub’s Burgers & Ice Cream!”

ish” about hiring. The Tax Foundation ranks Wisconsin’s state and local tax burden fifth-hghest out of 50 states and 43rd in business tax climate. Wisconsin spends over $153 billion a year on incentive programs.

IOWA | #13 | PROJECTING A PLATEAU After several solid years of economic growth, Iowa began 2015 with a record-level work force and employers expressing high confidence levels.

Gem State economists expect the growth rate to slow down to a steady 1.1 percent annual growth over the next seven years. Projected occupational gainers are construction, computing, personal services, sales, healthcare and social services; growth clusters include office services, transportation and construction.

Signs of potential concern: the growth rate for personal income declined to 1.4 percent last year, down from a 3.1 percent average gain the past couple of years—and well below the state’s post-Recession high water mark of 9.2 percent growth. The Tax Foundation ranks Iowa’s state and local tax burden 22nd lowest out of 50 states and 19th in business tax climate.

Iowa spends over $43 million a year on incentive programs.

NORTH DAKOTA | #19 | ENERGIZING GROWTH North Dakota ranked first in the ALEC-LAFFER State Economic competitiveness index, based on 150 percent cumulative growth over the recent 10-year period. The state also reversed a long run of negative or flat domestic migration, welcoming over 15,000 new North Dakotans in 2013.

Oil, of course, is the driver.

While energy has bolstered the state’s economy coming out of the Great Recession, recent price drops make the future less sanguine. Still, JPMorgan Chase projects gross state product will continue steadily rising at about 6.5 percent a year through 2018; the “broadening of the state’s economy, built on its energy assets, (will) sustain the state’s supercharged growth rate for the next half-decade,” forecasts JPMorgan Chase economist James Glassman.

The Tax Foundation ranks North Dakota’s state and local tax burden 15th lowest out of 50 states and ranks it 25th in business tax climate. North Dakota spends over $43 million a year on incentive programs.

OHIO | #22 | MANUFACTURING MAVEN Ohio’s GDP was $583.2 billion in 2014,

NOVEMBER/DECEMBER 2015

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ECONOMIC DEVELOPMENT

WHY WE’RE HERE / WISCONSIN WHO Dick Resch, CEO of KI Furniture WHAT Furniture manufacturer WHERE Green Bay, Wisconsin SITE HISTORY Founded in Aurora, Illinois in 1941 as Krueger Metal Products, the company moved into an 180,000-square-foot factory in Green Bay’s Bellevue section in 1945 and changed its name to KI. The building underwent a $3.3 million, 100,000-square-foot expansion in 2012. KI operates eight additional plants around the world.

WHY WISCONSIN “The Badger State has implemented sensible right-to-work rules that encourage us to create jobs in Wisconsin, and allow our workers to keep more of their wages. Wisconsin’s workforce is welleducated. Our state is home to a quarter-million college students and more than 360,000 enrollees in technical colleges. We rely on this home-grown talent to fill KI’s ranks. And, Wisconsinites have a tremendous work ethic. That’s a big reason why manufacturing jobs are growing in our state.”

BOTTOM LINE “Green Bay has given us generations of highly skilled workers, without whom KI would not have grown from a $4 million company to a $700 million company over the past 50 years.”

making the Buckeye State the counthan half the national average. Recent try’s seventh-largest economy. Ohio surveys show that industries are addranks fourth in the nation in value of ing jobs: manufacturing (5.2 percent manufactured products. After manugrowth over past 12 months), logging, facturing, logistics is the state’s largest mining and construction (4.1 percent industry, followed by business services, growth) and leisure/hospitality (3.8 education & health and real estate. percent growth).

The American Legislative Exchange The most significant issue among Council, or ALEC, ranks Ohio 23rd in employers is workforce readiness. the nation for in its Economic Outlook, ”CEOs tell me they’re trying to get and 49th in economic performance. enough people with the right skills Unemployment compensation but there is a shortage,” says David reform is high on the agenda of the Owen, president of the South Dakota National Federation of Independent Chamber of Commerce and IndusBusinesses, says Ohio state director try. Ernie Goss, director of Creighton Chris Ferruso. The Tax Foundation University’s Institute for Economic ranks Ohio’s state and local tax burden Inquiry and lead researcher in the 18th-highest out of 50 states and ranks institute’s monthly Mid-American it 44th in business tax climate. Ohio Business Conditions survey, says spends over $3.24 billion a year on indications “point to positive gains for incentive programs. the rest of 2015.” The Tax Foundation ranks South Dakota’s state and local SOUTH DAKOTA | #23 | tax burden 3rd-lowest out of 50 states and 2nd in business tax climate. South SEEKING SKILLS IMPROVEMENT South Dakota’s economy grew .6 Dakota spends over $27.8 million a year percent last year, well below the on incentive programs. national 2.2 percent rate. The pace left South Dakota ranked No. 41 in growth NEBRASKA | #25 | HAMPERED

BY LOW EMPLOYMENT among the 50 states. A continuing agriculture sector slide hammered the Nebraska’s stagnant labor pool reflects one of the nation’s lowest unemployeconomy; farm revenues fell 20 perment rates. Nebraska’s total labor force cent in 2014. Personal income limped averaged just over 1 million people in along at a 1.7 percent growth rate, less 56 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

June, up one tenth of a percent from the previous May. Underscoring workforce shrinkage is a weakening manufacturing sector. This year the state has lost jobs at a nail-biting 3.8 percent rate through the summer.

Bob Hallstrom, Nebraska state director for the National Federation of Independent Businesses, says employers would like to see more training programs helping resident develop skilled trades like welding. “I know companies that would be expanding if they could hire welders,” he says. The Tax Foundation ranks Nebraska’s state and local tax burden 25th highest out of 50 states and ranks it 29th in business tax climate. Nebraska spends over $1.4 billion a year on incentive programs.

MISSOURI |#26 | TRAILING IN GROWTH TREND Missouri’s GDP surpassed $284 billion in 2014, 21st in the country and third largest in the Midwest. The total represented an increase of 2.8 percent from 2013 to 2014; the rate trailed the overall U.S. GDP growth rate by 1 percent. Manufacturing represents 12.5 percent of the state’s economic output; government takes second place with 12.1 percent.

“Missouri’s economy grew more slowly than the national economy for the past 15 years, and the same theme is present in the recovery,” observes JPMorgan Chase economist James Glassman. The Tax Foundation ranks Missouri’s state and local tax burden 18th lowest out of 50 states and 17th in business tax climate. Missouri spends over $96.5 million a year on incentive programs.

KANSAS | #27 | TAX TAKEBACK Kansas’ growth has slowed after several months of expansion. Payrolls are growing less quickly than the national average and high-paying industries have shrunk over the past 12 months.

Economic development leaders fret that most of the new jobs are in lowwage industries. Business leaders

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ECONOMIC DEVELOPMENT

cheered Gov. Sam Brownback’s tax reform initiatives, which included eliminating the small business tax and phasing in lower personal income taxes.

“Tax reform has been very positive.

Kansas is now regarded as low-tax state, very easy to do business with,” says site selector Gingrich. Recent revenue shortcomings—the pre-reform $380 million budget reserve is now a two-year $700 million gap—have prompted some tax policy reversals; business leaders hope the governor sticks to his promises.

MINNESOTA | #31 | SHINING ON Despite some slowing down in the manufacturing sector and diminishing energy production in the Bakken, the North Star State’s economy shines on.

Minnesota’s unemployment rate rolls along at 3.7 percent, well below the national average. Business investment “remains strong, with plenty of commercial construction underway” says Michael T. Wolf, a senior economist at Wells Fargo. Singling out the state’s burgeoning medical equipment manufacturing business, he declares: “Minnesota’s economy remains a real standout.” Those considering expanding or relocating to the state may find that “Minnesota nice” applies, but not

“Minnesota speedy.” Government services are “very slow and bureaucratic,” assesses site selector Burkard.

The Tax Foundation ranks Minnesota’s state and local tax burden 6th highest out of 50 states and 47th in business tax climate. Minnesota spends over $239 million a year on incentive programs.

MICHIGAN | #43 | STILL UNDER PRESSURE Is Michigan’s economy back on track?

The economic glass, says Michigan State University economics professor Charles Ballard, is both half full and half empty. While the state added half a million jobs since its economy bottomed out in the winter of 2010, it was only this spring that the unemployment rate caught up with the national figure. Michigan still lags its centennial peak by 400,000 jobs, and in the ensuing years income inequality has expanded.

“Looking back at how far Michigan has come economically over the past five years, it’s easy to breathe a sigh of relief and think, ‘good, now that’s behind us,’” says Doug Rothwell, CEO of Business Leaders for Michigan. “The alarming truth is it’s not behind us at all. We’re still very much in a comefrom-behind position as we build jobs,

WHY WE’RE HERE / MICHIGAN WHO Andra Rush, CEO, The Rush Group Family of Companies WHERE Detroit, Michigan SITE HISTORY Andra Rush founded Rush Trucking in 1984, and formed the Rush Group in 2001. The Rush Group moved into its present headquarters, a 482,000-square-foot facility in the Gateway Industrial Center in Detroit’s Brightmoor neighborhood, in 2012.

WHY MICHIGAN “In Michigan, we can move any raw material by water, by train or by truck, and move finished goods in a multi-modal situation. By adding the international gateway Detroit Metro Airport, we cover every mode of transportation to move products across the world very efficiently.”

BOTTOM LINE “Detroit endured a steep decline for 50 years and then filed for Chapter 9 protection, the largest municipal bankruptcy in U.S. history. Instead of viewing the situation as the end, I saw it as the beginning. To be part of shaping a major city and creating what you would hope or imagine it to be is exciting, not only for me but also for our team members.

How often do you get that chance to have a significant, dramatic, positive impact?”

58 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2015

income and productivity.”

That couldn’t start too soon. As measured by economic performance, Michigan finished 50th—dead last—in this year’s American Legislative Exchange Council’s (ALEC) rankings. Energy costs rankle. “Michigan electric rates are higher than the national average,” observes Greg Burkart, managing director of Duff & Phelps, a site selector based in Southfield, Michigan. The Tax Foundation ranks Michigan’s state and local tax burden 21st-highest out of 50 states and ranks it 13th in business tax climate. Michigan spends over $6.65 billion a year on incentive programs.

ILLINOIS | #48 | NOT NEIGHBORLY He’s mad. Boy, is Illinois Gov. Bruce Rauner mad. So mad, he told the Chicago Tribune in April, he wants to “rip the economic guts out of Indiana” and will target Hoosier employers to rebuild the Prairie State’s languishing economy. Bad feeling between the Midwestern neighbors goes back at least to 2011. That year the Indiana Development Corp plastered billboards with posters asking residents if they felt “Ill-innoyed by higher prices.” The campaign prompted—or reflected, depends who you ask—a steady stream of corporate migrations across state lines.

The exodus continues. In March, Caterpillar announced 230 layoffs in Joliet as production of a line of oil pumps and valves was moved to Monterrey, Mexico. Over the summer such manufacturers as Hoist Liftruck, DESTA-CO, General Mills and Mitsubishi announced they were either closing their Illinois plants or relocating to lower-cost states.

Indiana is not the only state to welcome Ill-annoyed CEOs and business owners; Missouri, Iowa and Wisconsin attract disgruntled employers too.

The Tax Foundation ranks Illinois’s state and local tax burden 13th highest out of 50 states and 31st in business tax climate. Illinois spends over $1.5 billion a year on incentive programs.

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CEO TALENT SUMMIT

CEOs consistently rate talent management as one of their top priorities, but are often challenged to marry theory with practice. Southwest Airlines CEO Gary Kelly, who presides over one of the world’s leading corporate cultures, hosted Chief Executive magazine’s CEO Talent Summit at his headquarters in Dallas. Participants were also treated to tours of the airlines’ Training & Operations Center, above.

WINNING IN THE WORKFORCE REVOLUTION How to take the lead in the war for talent

by C.J. Prince

IN A WORLD EVER IN FLUX, the one constant CEOs can count on is that the best people are always hard to find. Today, that task is further complicated by a growing skills shortage in the U.S., Baby Boomers retiring in droves, the entrée of a new generation into the workforce and technology dramatically reshaping the way people work.

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“They leave because they don’t feel valued, they don’t feel inspired. The companies finding ways to inspire employees and have the highest engagement scores, they are going to be out ahead.” —CATHY ENGELBERT, CEO, DELOITTE

As companies compete for talent, the HR status quo will no longer suffice, agreed participants at last month’s 2015 CEO Talent Summit in Dallas, Texas, where business leaders discussed challenges and opportunities in the war for talent.

Winning that war starts not with compensation packages, but with creating an outstanding culture that employees want to be part of, and then carefully screening candidates for those who best suit the organization’s culture, said Gary Kelly, CEO of Southwest Airlines, which despite being the nation’s largest carrier, has managed to hold onto the maverick spirit that put it on top. “We have a

PANEL TOPIC

The Leader’s Role in Attracting and Retaining Top Talent

passion for what we do, and we’re looking for people who share that passion,” he said. “Our mantra is we hire for attitude and train for skill.”

With Millennials marching in, attitudes at work can clash. Graham Weston, chairman of Rackspace, noted a fundamental schism between Gen X/Boomers and Millennials: “The Boomer wants to be appreciated for years of experience, the blood sweat and tears they put into getting where they are. But Millennials won’t do that,” he said. “If your experience leads to a better view, a better way of working, then great, the millennial says, bring it to work. But if not, then what’s the value? That’s the gener-

MILLENNIALS IN THE WORKFORCE By the year 2020, Generation Y-ers will comprise half of the workforce; by 2025 that figure climbs to 75 percent.

50% BY 2020

75% BY 2025

“My job is to look at every one of them, to know them, to figure out where they’ve never been exposed and how they can be the best they can be.”

—ROBERT WEISS, CEO, THE COOPER COMPANIES

ational divide. Any employer that doesn’t get their head around that will struggle.”

Employers need to get it soon. By the year 2020, 50 percent of the workforce will be Generation Y-ers. By 2025, that figure climbs to 75 percent.

Yet these tech-savvy, adulation-seeking workers have the highest attrition rates of any group. To attract and keep the best of them companies need to invest in social media tools; offer flexible work environments, mentorship and career guidance; and, above all, show a clear path to future growth, said Dan Schawbel, founder of WorkplaceTrends.com.

The task of creating a culture that attracts and engages a multigenerational workforce is increasingly being elevated to the c-suite. John Stacey, chief HR officer for Harman Interna-

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CEO TALENT SUMMIT PANEL TOPIC

CEO as Culture Setter

“We have a passion for what we do, and we’re looking for people who share that passion,” he said. “Our mantra is we hire for attitude and train for skill.”

—GARY KELLY, CEO, SOUTHEWEST AIRLINES

tional, works very closely with CEO Dinesh Paliwal to ensure that the company’s people strategy addresses strategic business challenges. “It’s open and constant communication.

Even over-communication sometimes,” noted Stacey.

But constant communication is critical in a world that moves too fast for annual reviews. Michael Arena, chief talent officer for GM, noted there is no one-size-fits-all solution, particularly when it comes to measuring employee performance. “How you assess someone in operations might be the opposite of how you assess someone driving growth,” said Arena. “We need to be thinking about

“It’s open and constant communication. Even over-communication sometimes.”

—JOHN STACEY, CHIEF HR OFFICER, HARMAN

PANEL TOPIC

Transform Your Organization by Putting Culture & People First

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From left: Rick Harrison, Julie Weber and Bob Weiss accept awards on behalf of Deloitte, Southwest Airlines and the Cooper Companies, respectively, for being among the 40 Best Companies for Leaders in 2015.

multiple sets of tools, and different approaches that are driven by data, PANEL TOPIC not just best practices.”

The Science One consensus among CEO of Managing panelists was that, given both the People expense of turnover and cost of hiring externally, developing internal talent must be a key job of the CEO going forward. Robert Weiss, CEO of the The Cooper Companies, spends more than 50 percent of his time developing the capabilities of his top people and pushing them beyond their comfort “How you assess zone. “My job is to look at every one someone in of them, to know them, to figure out operations might where they’ve never been exposed and be the opposite how they can be the best they can be.” of how you assess “When people leave Deloitte, they someone driving don’t leave because of money,” added growth.”

Cathy Englebert, Deloitte’s CEO. —MICHAEL ARENA, SENIOR TALENT OFFICER, GM “They leave because they don’t feel valued, they don’t feel inspired. The companies finding ways to inspire Full coverage of the 2015 employees and have the highest enCEO Talent Summit will appear in the Jan/Feb 2016 gagement scores, they are going to be issue of Chief Executive. out ahead.”

10/8/15 3:34 PM

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ROUNDTABLES

CEO ROUNDTABLE

TECHNOLOGY’S IMPACT ON BUSINESS INNOVATION AND TRANSFORMATION

Will software soon be the lifeblood of every company? // by Jennifer Pellet IT’S NO SECRET that technology has the potential to revolutionize virtually every type of business. We saw it with the decline of Kodak as digital photography went mainstream.

Now we continue to observe technological changes come fast and furious to businesses of all sizes across all industries today, noted Wayne Morris, corporate vice president Microsoft Business Solutions, during a recent roundtable discussion held in partner-

ship with Microsoft.

“We’re all looking at how to apply intelligent systems to business processes to make them more dynamic, agile, predictive and proactive,” said Morris, who pointed out that companies ranging from World Caribbean Cruise line and Walt Disney World to the mid-market UK restaurant supplier JJ Food Service are leveraging the capabilities of machine learning. “Disney theme park guests

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We’re all looking at how to apply intelligent systems to business processes to make them more dynamic, agile, predictive and proactive.”

—WAYNE MORRIS VP, MICROSOFT

now wear its Magic Band, which is a way for visitors to get premium service as they walk around—but it also generates data on traffic flows and patterns so that Disney can manage the guest experience more effectively,” he notes. “Meanwhile, JJ Food is taking advantage of historical purchasing patterns and marrying that with the profiles of similar restaurants to make proactive suggestions on what its customers should be buying.”

At the heart of each of those examples lies the much-vaunted Internet of Things (IoT), or the networking of physical objects through the use of embedded sensors, actuators and other devices that can collect or transmit information via the Internet and Cloud services. Yet, it’s the next step of the process—analytics and application of those analytics—that truly offers potential. In fact, a recent McKinsey Global Institute report, The Internet of Things: Mapping the Value Beyond the Hype, put a value range of $3.9 trillion to $11.1 trillion per year in economic value by 2025 on that potential.

However, data must be amassed,

sanitized and combined, then analyzed for useful patterns and anomalies in order to generate the kind of insights that can be integrated into real-time operations to gain efficiencies or provide market differentiation. While technology providers can be enablers and key partners in that process, companies themselves need to play a large part in finding and delivering on that

“As granular data becomes more and more valuable, the issue of privacy and who owns it will become huge.”

—TOM ROGERS CEO, TIVO

Ethan Allen’s Farooq Kathwari warned his peers that society will look to CEOs as technological innovation impacts job markets.

value proposition—which is no easy feat, pointed out Jim McNerney, chairman of Boeing.

“The sensors have been put in place and we have data streaming off of airplanes—it’s the analytics part that remains the big challenge,” he notes. “Optimizing the use of an $800 million asset by improving performance, maintenance and predictability through data analytics is huge, but it’s a frontier that we’re really just beginning to dive into.”

That dive may ultimately be deeper than we imagine, noted Jay Walker, CEO of Walker Digital, who says that fueling business growth by collecting and analyzing data is just the beginning of technology’s potential impact on our future lives. “The big breakthrough, coming in the next decade or so, will be the movement of organics—the proteins and the bacteria in your body, for example— into the Internet of Things,” predicted Walker, who painted a picture of a

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ROUNDTABLES

Realizing the potential technology has to offer is still a huge challenge for companies like Boeing, Jim McNerney told participants.

future where the IoT expands into the IoT&L, or the Internet of Things and Lifeforms. “Fitbits and those kinds of sensors are really just the crudest Apple 2s of the modern age.”

But for the present, there remains a huge gap between technology’s potential benefits and what is actually being delivered, observed McNerney.

“Our development costs continue to go up even though we have technology that should bring them down,” he pointed out.

Printing Potential Many companies are looking to 3D printing as offering the most immediate opportunity for businesses. “A lot of our investment in software has been on design software that takes maximum advantage of additive manufacturing,” said Dr. Helmuth Ludwig, EVP, Siemens Product Lifecycle Management Software.

Boeing, too, is looking for ways to leverage 3D printing to speed the product design process and pare down on the whopping $50 billion in inventory it carries. “There are 4.5 million parts that go into a 777, and you can take very complicated parts and print them with 3D technology,” said McNerney, who noted that additive manufacturing is increasingly enabling manufacturing to combine production, process and design. “There’s a huge opportunity to lower both design and physical inventory costs if you can free some meaningful percentage of that 4.5 million from the constraints of the manufacturing process. That’s probably the single most important technology for us to focus on.”

“The sensors have been put in place and we have data streaming off of airplanes— it’s the analytics part that remains the big challenge.”

—JIM McNERNEY CHAIRMAN, BOEING

Hiccups Along the Data Highway?

There is also a dark side to the promise that connectivity and data analytics represents, noted several roundtable participants, who pointed out several potential roadblocks. Cybersecurity factored prominently among the concerns these CEOs expressed.

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“Larger corporations are very sophisticated about how they secure their networks, but as you look down the size spectrum at companies deploying technology to try to transform business processes, some of them do not have the [proper] security,” says Dan McCarthy, CEO of Frontier Communications. “Cyber attacks are an everyday event, so when people are not careful about what they deploy, it leaves them very vulnerable to the extraction of IP and other horrible things. There are plenty of access systems that can be hacked, as well as a lot of unprotected devices.”

Privacy issues and data ownership represent related, but separate issues, noted Tom Rogers, CEO of TiVo. “All individuals and all businesses are sitting on a vast amount of data and information, some of which is mined and analyzed but much of which is not,” he pointed out. “As granular data becomes more and more valuable, the issue of privacy and who owns it will become huge.

You have a dynamic of a younger gen-

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eration with very little concern about the data they throw out there and a business world that is driven more and more by the value of data.”

Finally, several CEOs expressed doubts about whether America’s workforce has the necessary skill sets for an increasingly technological world and about how a technologically focused future will impact employment. Ethan Allen’s Farooq Kathwari suggested that all CEOs should be considering the social issues of our increasingly high-tech business world.

“This is all great for the kids coming out of MIT and schools like it, but what about the rest of the people?” he

asked. “What kind of social problems will this create?”

Ultimately, it will fall to businesses and the CEOs who lead them to address some of these issues, noted Walker. “We’re clearly going to have to reinvent what it means to have a job in the good sense of the word,” he said. “People will look to business people and say, ‘Okay, you’re the leaders. We’re willing to work; tell us where the jobs will be.’ And the answer can’t be, you’re all going to become software engineers. We’re going to have to answer that question because no one is going to figure it out for us.”

AICPA www. CGMA.org 13 B2B Sales and Marketing: Benchmarks and Best Practices Report www.chiefexecutive.net/media/b2breport/ 7 Capital One www.capitalone.com/commercial 9 CEO2CEO Summit www.ceo2ceosummit.com 51 Chief Executive Insurance Services www.chiefexecutiveinsurance.com 45 Chief Executive Network www.chiefexecutivenetwork.com 43 CohnReznick www.CohnReznick.com 23 Compensation Report 2015 www.chiefexecutive.net/compreport 27 Corporate Citizenship Award www.chiefexecutive.net/corporatecitizenship 19 Indiana Economic Development www.astatethatworks.com 5 JetSuite www.jetsuite.com/values 11 Jobs Ohio www.jobs-ohio.com/ohiomanufacturing 25 Louisiana Economic Development www.opportunitylouisiana.com 15 Michigan Economic Development Corporation www.michiganbusiness.org/CE 57 Microsoft www.microsoftcloud.com Inside Front cover, page 1

CEO Roundtable Participants ■ JOHN CORLEY President, Channel Partner Operations, Xerox ■ GREG GERNHARDT President, Commercial Engines, Pratt & Whitney ■ WALTER JOHNSEN CEO, Acme United ■ FAROOQ KATHWARI Chairman & CEO, Ethan Allen Interiors ■ BILL KROLL Executive Chairman, Matheson TriGas

■ DR. HELMUTH LUDWIG EVP, Siemens Product Lifecycle Management Software ■ ALAN MASAREK CEO, Vonage ■ DAN MCCARTHY CEO, Frontier Communications ■ JIM MCNERNEY Chairman, Boeing

NetJets www.netjets.com Outside Back Cover

■ WAYNE MORRIS VP, Microsoft ■ BOB NARDELLI Founder & CEO, XLR-8 ■ JEFFREY NUGENT CEO, Biolase ■ TOM ROGERS CEO, TiVo ■ JAY WALKER Chairman, Walker Digital ■ BRUCE WHITMAN Chairman & CEO, FlightSafety

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CEO PASSIONS

Jon Crumiller demonstrates DoubleCross chess, a new version that introduces chance to the game

The Chess Collector Presented in partnership with PURE Insurance, Chief Executive’s newest column on leaders who are notable collectors features JON CRUMILLER of Princeton Consultants. By George Nicholas

JON CRUMILLER IS PASSIONATE about chess. The COO and co-founder of Princeton Consultants has a Master rating from the U.S. Chess Federation and has played with Garry Kasparov.

It’s understandable, therefore, that his choice of objects to collect is chess pieces, boards, timers, publications and other chess paraphernalia.

“My initial acquisitions were driven by a lifelong love of the game itself,” he says. It was “a thrill to touch the well-worn pieces from chess games of the distant past.” His collection now spills over into multiple rooms in his Princeton, New Jersey home.

Some of the 600-plus sets he’s collected are more than 1,000 years old. They include ornamental sets that were created as objects of beauty rather than for use in play. They also include many sets made from elephant or walrus ivory, also known as white gold, which chess artisans 68 / CHIEFEXECUTIVE.NET /

An ivory, bird-themed set from China dates back to 1900, while others in the collection depict mythical figures

NOVEMBER/DECEMBER 2015

have used as their medium of choice for centuries. Crumiller notes that he has collected his ivory sets in full compliance with trade restrictions on endangered species.

Within his collection is a set of Neapolitan cloth and silk doll pieces circa 1900, gold and silver filigree pieces with semi-precious stones from mid-20th Century Israel and ivory pieces in the form of birds from China, circa 1900. Also included are sets representative of armies facing off: Europeans vs. Africans, British East India Company vs. Indian military forces and participants in the Napoleonic wars. An ivory set depicts satyrs led by Mephistopheles opposing Bible-carrying figures representing piety. Another set in polychrome and gilded ivory pits the love of Venus and Cupid against the lust and excess of Bacchus and Bacchante.

“Chess has taught me valuable lessons that I’ve been able to apply to business,” says Crumiller, whose firm was formed in 1980 “to combine information technology and management consulting.” He recently began playing a new form of chess, DoubleCross, which combines chess rules with chance. “It emulates real life in the sense that one’s strategy and tactics should also take into account unpredictable events,” explains Crumiller, who continues to collect, focusing on rare and unique sets, and to compete in tournaments. “When a game teaches life lessons and is also fun at the same time, that’s a winner.”

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EXECUTIVE LIFE

Gateway Canyons Resort

Beating the Retreat Game Finding it tough to sort through your options? Here’s our short list of venues that can’t be beat—plus tips on how to beat retreat option overload. By Michael Gelfand IF YOU’RE NEW to retreat-planning, it’s easy to get overwhelmed by the sheer number of potential destinations available. Googling “corporate retreat venues” clearly won’t do—unless you feel like sorting through 212,000+ initial search results to find the perfect one for your company’s needs.

“The challenge is where to start,” says Kelly Foy, general manager of Elite Meetings International, a hospitality marketing and technology company that provides a host of tools, services and information to hotels and meeting planners through its Elitemeetings.com website and sister-magazine, Elite Meetings.

Washington School House Hotel

“If a CEO says, ‘I want to take my top 10 executives to a great golf/spa resort on beach’ and types that into a search engine, the results are nearly impossible to deal with.”

The good news? By creating and prioritizing personalized meeting criteria you can weed through the abundance of inappropriate options to get to a more manageable list of viable ones.

Event planners suggest starting with location by considering ease and cost of transportation and what type of local attractions or activities you hope to have for your group’s leisure activities.

Once you’ve homed in on a region or one or more possible cities, it will be

easier to sort through the venue options in the area to find those that can meet your needs. Most states and many cities offer searchable databases of local meeting facilities, hotels and resorts.

There are also national databases (see sidebar, “Retreat Resources,” below) that can help you sift through your options. Elitemeetings.com, for example, lets you look up venues by destination, by rating or by specific features, such as “beach,” “golf” or “gaming,” explains Foy. “It narrows down the options and helps you find really cool properties that you may never have heard of. It’s hard for some of these independent hotels and lesser known resorts to shout from

Retreat Resources Elite Meetings International (elitemeetings.com) This online portal lets you search from its database of more than 3,000 hotels and resorts in North America, the Caribbean, Latin America, and Europe for the right venue for your corporate retreat.

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Retreat Central (retreatcentral.com) Simply enter the type of retreat and the state you hope to hold it in and this site will deliver a list of conference-center (nonhotel) retreat options.

Meetings.com (meetings.com) Fill in a short form detailing your needs and venues will respond with offers.

Advanced filters enable you to sort by price or star rating and the site’s “View Hotels on a Map” feature displays hotel, space and rates laid out on a map.

the rooftops when they’re up against some of the bigger brands out there, but we help put them all on the same playing field.”

Founded in 2006, Elite Meetings International (which was recently acquired by the Cvent, a cloud-based enterprise event management platform) used an advisory board of senior-level corporate planners and highly respected travel-sector executives to develop a ratings system, recounts Foy. “I said, ‘Ok, guys, I’ve been to a lot of hotels and resorts in the world, but nobody’s going to care if I say they’re great. If you guys say they’re great, that’s going to matter.’”

He and his advisory board set specific experiential criteria—including best in service, meeting facility and services, food and beverages, arrival experience, amenities on-site, accommodations, guest and event services service level indicators, activities onsite or nearby and, unique property characteristics—to create a searchable list of hotels and resorts, which is actively updated with feedback and ratings from professional planners in addition to the advisory board’s regular input.

The site now offers approximately descriptions of roughly 4,000 different hotels and resorts that either meet or beat Foy’s teams’ expectations. (“Gold” means a destination meets at least 15 of the site’s criteria, “platinum” typically requires at least 25.) “We also consider ratings from Forbes, AAA and other reputable sources,” says Foy, who notes that firsthand experience is also factored into the results. “Some hotels may not offer the most luxurious experience and may only meet 20 of our criteria, but the overall meeting experience is so great that the group walks away blown away, so we bump it up.”

“I like finding needles in the haystack for planners,” he says, “and planners that hotels would consider needles in the haystack,” says Foy. With his help, Chief Executive has assembled 16 “platinum” retreat destinations—a few already well known, the others less so—to consider for your team’s retreat in 2016. (See “Top Retreat Destinations.”)

Top Retreat Destinations NAME

DIFFERENTIATOR

Brown Hotel Louisville, KY EC

A true downtown Louisville landmark, the Brown Hotel revels in its Old World ambience. With 293 guest rooms and suites, a retreat here will take you back in time—albeit with modern-day amenities—where white-glove service is de rigueur. Brownhotel.com

Canyon Ranch Lenox, MA EC

Located in a mansion in the bucolic Berkshires region, the inn’s famous wellness programs and natural setting will quickly set your team on a harmonious path. There are 126 guest rooms, numerous meeting spaces and plenty of team building and individual activities, including as hiking, cycling, kayaking and skiing. Canyonranch.com/lenox

Carneros Inn Napa, CA EC

Just an hour’s drive from San Francisco, the inn relishes its seat in Northern California’s wine country, and your group will, too. The 27-acre property boasts 88 cottage-style accommodations, as well as two- and three-bedroom luxury homes and 10,000 square feet of indoor and outdoor group meeting space. Thecarnerosinn.com

Cloister at Sea Island Sea Island, GA EC

One of only six U.S. destinations to host a G8 Summit, this regal destination has 17,000 square feet of event space. Once you get past the breathtaking coastline views, try the clay-target shooting school, horseback-riding clinics, tennis, fishing, three on-site golf courses or the 65,000-square-foot, award– winning spa. Seaisland.com

Garland Lodge Resort Lewiston, MI / E C

Nature abounds on 3,000 acres at this northern Michigan location that offers four championship golf courses, mountain biking, hiking, fly-fishing, canoeing and tubing. Garlandusa.com

Gateway Canyons Resort Gateway, CO / E C

Designed and owned by John Hendricks, founder of the Discovery Channel, this 225-acre location offers 10,000 square feet of indoor facilities and boasts dinosaur tracks, helicopter tours, off-road driving and top-notch spa and restaurants. Gatewaycanyons.com

Homestead Inn-Thomas Henkelmann Greenwich, CT / E C

A short drive from New York City, this inn features an exceptional restaurant, a boardroom that seats up to 20 people. and 18 guest rooms. Your team can enjoy water sports, hiking, mountain biking and golfing on nine nearby courses.

Homesteadinn.com

Inn on Lake Granbury Granbury, TX EC

Ideal for small groups, the inn has a single, 650-square-foot indoor meeting room that can comfortably hold up to 18 people. Located roughly 80 minutes from Dallas or Ft. Worth, it offers 15 luxurious guest rooms and boating and kayaking on the lake. Innonlakegranbury.com

La Playa Beach & Golf Resort Naples, FL EC

This resort’s sandy beachfront, as well as its exceptional golfing and awardwinning spa experience, will prove hard for your team to resist. It’s equally well-equipped for business, with recently renovatied indoor and outdoor meeting facilities. Laplayaresort.com

Lodge at Whitefish Lake Whitefish, MT EC

The lodgings here offer a rare mix of natural beauty and AAA-rated, 4 Diamond accommodations—plus 8,000 square feet of conferece and meeting space equipped with high-speed internet access and A/V equipment. Lodgeatwhitefishlake.com

Pinehurst Resort Pinehurst, NC EC

Established in 1895, “the cradle of golf” is renowned for nine 18-hole championship courses (including designs by George and Tom Fazio, Rees Jones, Ellis Maples, Jack Nicklaus and Donald Ross). Luckily, the 14 technology-ready meeting rooms are on par with the golfing, as is the 31,000-square-foot spa. Pinehurst.com

Turning Stone Resort and Casino Verona, NY / E C

Located 30 miles from Syracuse, this upstate resort boasts championship golf, top line entertainment, luxurious accommodations and conference facilities capable of housing groups of up to 2,000. Turningstone.com

Walden Aurora, OH EC

This AAA Five-Diamond Award destination in horse country is a balance of old and new. Only 40 minutes from Cleveland, it boasts 25 guest suites surrounded by tranquil pastures and gardens, and a restaurant housed in what was a 175-year-old barn. Yourwalden.com

Willows Lodge Woodinville, WA EC

Just 30 minutes from Seattle, this 84-room lodge sits on five acres of lush gardens, enjoys easy access to over 100 nearby wineries and offers seven meeting rooms equipped with the latest technology. Willowslodge.com

Washington School House Hotel Park City, UT / E

This intimate hotel (12 guest rooms and suites) and doesn’t have any onsite meeting space, but is only two blocks from the Park City Mountain Resort Town Lift and has a dedicated event team.

Washingtonschoolhouse.com

E = Event Planning C = Catering

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FLIP SIDE

Drive, He Said Joe Queenan

If search engine companies can make cars, why can’t car companies break into the search engine business?

GOOGLE’S DETERMINATION to bring a self-driving car to market is a glorious example of the ingenuity, alacrity and refusal to be bound by tradition that has always characterized the American business community. While naysayers cavil that Google should stick to its knitting and remain a search engine powerhouse, the company, in its trademark fashion, blithely brushes aside such criticism.

For starters, self-driving cars enable driver’s to conduct even more Internet searches, and thus increase the number of ads Google’s customers see. Since Google is basically in the advertising business, this will keep its clients happy. As for the charge that Google only wants to get into the car business so that it can track users’ movements more precisely, forget it: Google already knows where everybody goes, what everybody buys, whom everybody sees.

So why hasn’t Yahoo! introduced a line of sleek, upscale sedans? Why didn’t AskJeeves. com have the foresight to develop the prototype of a self-driving two-seater, sidecar motorcycle? Why didn’t Lycos ever start work on high-quality self-driving farm equipment?

Where are Alibaba’s self-driving school buses? Come on, guys, get into the game.

One key question in all this is: If search engine companies can make cars, why can’t car companies break into the search engine business? This is yet another example of lack of foresightedness on the part of auto industry executives. Car companies should be working on search engines, smart watches, tablet computers and even designer earphones. Again, you guys, it’s time raise the level of your game.

These are exciting times! Thanks to

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Google and Amazon and Apple, companies no longer feel obligated to keep churning out the same types of products that first put their names on the map. In years to come, we are certain to see all sorts of corporations bursting the fetters of conventionality and plunging into enterprises no one would have thought possible.

The possibilities are literally endless: growth-and-income funds that do a side business in customized kitchens; fast-food chains that also operate commercial aircraft.

I, for one, would love to fly Air Chipotle, to go wherever I want on the planet eating the food I want to eat. Jet Chi-Chi’s would be equally appealing, not to mention The Friendly Skies of Papa John’s.

I would also love to patronize Bed, Bath and Aerospace and I can think of few things more exciting than a chain of Just for Chubbies haberdashery outlets specializing in dapper fashions for the portly and the rubenesque that would also sell yachts. Not to mention a line of cutlery designed by Victoria’s Secret.

But there is a downside to all this. Imagine if Amtrak started designing self-driving cars?

They would break constantly and always arrive six hours late. Many would never leave the garage—and that dashboard voice would have a bad attitude.

The nightmare scenario, of course, would be if the U.S. Post Office decided to branch out and get into new businesses. Are any of us ready for a Smart Watch made by the post office? Are we ready for search engines operated by the post office, where you would search for “Nearby Restaurants” and the computer would send you a message, “This Line Is Closed” or “Out to Lunch?” Finally, are any of us ready for a self-driving car dreamed up by postal workers? You would pick it up at the dealer’s and the insides would already be mangled. Or the dealer would say, “It’s got lost in transit. But it’ll get here. In about six weeks.”

No. I don’t think so.

Q U E E N A N I LLU ST R AT I O N BY T I M TO M K I N S O N

Where will Google’s drive into automating auto technology lead? By Joe Queenan

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2/4/14 4:49 PM

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