Cornell Business Review - Spring 2011

FINANCE

GOVERNMENT

INDUSTRY

INTERNATIONAL

Dot Com Bubble 2.0

Sovereign Debt: Trouble in Europe

Change in the Big Three Automakers

North Korea: The Economics of War

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Cornell Business Review SPRING 2011 | VOLUME 1, ISSUE 1

CLIMBING THE CORPORATE LADDER FEATURED INTERVIEW WITH

WAYNE MEICHNER, President and COO of Polo Retail Group, on leadership and career development

Cornell University’s School of Hotel Administration:

preparing the leaders of the world’s largest industry for nine decades.

Now featuring an undergraduate minor in real estate.

Cornell Business Review CONTENTS FINANCE

6 Buttoning Up the Green Collar 8 Dot Com Bubble 2.0 10 Jobless: To Be Or Not To Be?

By Judith Amsalem

By Arielle Kan

By Michael Ashton

GOVERNMENT

Europe's Sovereign Debt

By Shashwat Samudra

Supreme Court: Federal Reserve Transparency

18 23

By Kasey Ashford

Apple Turnover: 24 Steve Jobs Controversy

By Marc Hershberg

Bernanke & Inflation 28 The 2011 Budget 29

By Marshall Verdi

By Kasey Ashford

SPRING 2011 CORNELL BUSINESS REVIEW 1

Cornell Business Review CONTENTS INDUSTRY

34 The Future of

Financial Services

By Constance Qian

38 40 44

Pod Hotels: The Next Big Trend?

By Eric Rabinowitz

Change & Opportunity in the Big Three

By Christopher Henty

IBM: Social Media Marketing

By Emily Schuit

INTERNATIONAL

China: Our Number One Frenemy

50 Global Youth Unemployment 54 North Korea: The 58

By Austin Opatrny

By Ji Yung Suh

Economics of War

By Ivi Demi

The Changing Face of Media

By Amanda Joe

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60

FEATURED

SPRING 2011 | VOLUME 1, ISSUE 1

5 14 30 46

Letter from the President

Scott Belsky CEO & Founder, Behance

Wayne Meichner

President & COO, Polo Retail Group

Eric Larsen Arctic Explorer

SPRING 2011 CORNELL BUSINESS REVIEW 3

Cornell Business Review THE TEAM

MATTHEW LINDERMAN, President RAHUL KISHORE, Editor DEREK JEONG, Director of Finance Design CONSTANCE QIAN EMILY SCHUIT OLIVIA LERNER Promotion NANCY BLANKS HILDA CABRAL Copy Editors AMANDA CHAN CHRISTOPHER HENTY ALEXANDRA SKINNION 4 CORNELL BUSINESS REVIEW SPRING 2011

Editorial JUDITH AMSALEM KASEY ASHFORD MICHAEL ASHTON IVI DEMI MARC HERSHBERG CHRISTOPHER HENTY AMANDA JOE ARIELLE KAN WILL KIPLINGER AUSTIN OPATRNY CONSTANCE QIAN ERIC RABINOWITZ SHASHWAT SAMUDRA EMILY SCHUIT JI YUNG SUH MARSHALL VERDI

LETTER FROM THE PRESIDENT INAUGURAL ISSUE

I

asked students at Cornell “What is business?” and their responses included banking, consulting, human resources, entrepreneurship, management, and marketing. These responses are typical, but restrictive. The implication is that those in “business” simply help businesses do better business, while the doctors lengthen lives, the engineers forge social networks, and the architects build the world. However, a “business” is a combination of strategy and operations—a mixture of management and professional services with engineers, scientists, and supporters— which is able to produce value and move the world ahead. We use this broader interpretation of business when discussing its current state and how any student, from those studying economics to engineering, may succeed in this arena.

This magazine views business from the 10,000-foot standpoint, giving students a recap of important events that expired during the semester with an analysis of why events happened and what

has changed. We not only bring student content, but expertise, insight, and advice from business leaders such as Wayne Meichner (President & COO of Polo Retail Group), Scott Belsky (CEO & Founder of Behance), and arctic explorer Eric Larsen. For the market update, there’s The Wall St. Journal, for the details, there’s The Economist, but for the student-tailored snapshot, there’s The Cornell Business Review. Whether you’re walking into an interview, curious about the world beyond the Ithaca bubble, or simply looking to impress your parents over dinner, the review will provide you with a quick source of business news and advice that is both interesting and informative.

The Cornell Business Review wants to help you establish a business sense as you venture into the corporate world and craft your career. While glancing over the following pages, I hope you find value, insight, and direction.

Matthew Linderman Founder & President SPRING 2011 CORNELL BUSINESS REVIEW 5

FINANCE

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GREEN COLLARED

by Judith Amsalem

6 CORNELL BUSINESS REVIEW SPRING 2011

FINANCE

F

ew tasks are harder than trying to sell people on environmental reform in the midst of an economic downturn. This has been the task of the Obama administration. Today, we are facing a global community critical of our actions on climate change, and unwilling to take the next step until we attempt to weather the greatest economic crisis since the Great Depression. The administration’s answer to this dilemma has been to stimulate the economy by promoting growth of the so-called “green sector” in order to lay the groundwork for a clean energy economy and create much needed jobs.

The American Recovery & Reinvestment Act of 2009 set out to boost this “green sector.” The stimulus package included $80 billion for solar farms, wind turbines, electrical grid updates, mass transit, weatherizing buildings – you name it. Along with the price tag came the promise for jobs, and lots of them. Environmental groups claimed that between one and 1.5 million jobs could follow the Act. The White House claims to have already gone above and beyond this promise, citing a study by the Council of Economic Advisors that found that two million jobs were created in the first year alone since the act’s implementation. This represents an acceleration of growth in an already promising industry.

Who is filling these jobs?

Green jobs vary in pay and level of education. Many of the new green-collar jobs can be expected to be taken by blue-collar construction workers. However, secretaries, administrators, public relations specialists, etc. may also transition to green-collar positions.

There is a lot of uncertainty about what specifically qualifies as a green job. A factory worker assembling a low-efficiency SUV is blue collar, while one assembling a Toyota Hybrid is green collar. A person who assembles solar panels is green collar, but what about a janitor at the same facility? The answer will vary depending on the definition. This has led many to fear the “greenwashing” of other jobs – or the construction of an environmental veneer, the implications of which are no more than skin deep.

A Net Addition?

Many of these green jobs will be taken by people left behind by a devaluation of another sector, and therefore will not actually contribute to a net increase in jobs. The National Association of Manufacturers estimated that one of the main carbon cap-and-trade proposals Congress considered in 2008 would cost the U.S. economy up to four million jobs by 2030. The problem here is that transitioning to a sustainable energy economy inevitably means transitioning away from a fossil fuel

one, and the decreased reliance on these industries will cause them to become obsolete and shrink (over a long period of time of course). For this reason not everyone is on board with what they call the “myth” of green-collar job creation.

The American Enterprise Institute studied European green job booms and found that investments in renewable jobs are less efficient uses of capital than market-created jobs. The Bruno Leoni Institute in Italy supported this notion, finding that money invested in renewable energy would have created 6.9 times as many jobs had private industry invested in the larger energy sector, or 4.8 times as many jobs as investment in the economy in general. Of course, this does not address the primary goal of transitioning to a low-carbon future…

Good or Bad: They’re Here to Stay The U.S. is seeing tremendous growth in low-carbon sectors, and this growth is likely to continue well into the future. Green-collar jobs represent a wide range of employment opportunities, some greener than others. While the net job creation will be smaller than the numbers touted by green industries, the jobs certainly are being created in unprecedented numbers for those interested in playing a part in a low-carbon future.

Judy Amsalem (jma262@cornell.edu) is a junior at Cornell University majoring in Natural Resources.

THE FACTS Green jobs grew by 9.1 percent from 1998 to 2007, when they amounted to roughly 770,000 jobs. Jobs in the clean energy economy were already growing about two and a half times faster than the overall job market. (Pew Charitable Foundation) Environmental engineering managers are at the top of the list of best paying green jobs, with a typical $103,200 salary. Wind turbine technicians ranked 12th on the list of 21 jobs, with a median pay of $53,600. (BusinessWeek and PayScale.com joint study) If 25 percent of all American energy were produced from renewable sources by 2025 we would generate at least 5 million new jobs. (The Rand Corporation and the University of Tennessee joint study) SPRING 2011 CORNELL BUSINESS REVIEW 7

FINANCE

DOT COM BUBBLE 2.0

by Arielle Kan

A

larm bells have been ringing for investors ever since loss-making Twitter was valued at $10 billion and the 7-year old Facebook was said to be worth more than Internet giants such as Google and Amazon.

Still not convinced? Let me throw in a few more numbers.

LinkedIn plans to do an IPO of $2 billion at the end of 2011.

AOL paid $315 million to purchase Huffington Post.

Groupon, the 2-year old vendor of online discounts, spurned a $6 billion takeover from Google and is going full speed on its own IPO, valuing itself at a generous $15 billion.

Facebook is currently valued at an astounding $65 billion, up from the $50 billion valuation by Goldman Sachs 3 months ago, and up from the $10 billion valuation in mid 2009. When Facebook goes public in 2012, a new dotcom frenzy may begin.

8 CORNELL BUSINESS REVIEW SPRING 2011

All these mind blowing numbers eerily remind investors of the dot-com bubble in 2000, where stock prices soared and NASDAQ peaked at 5132.52 in intraday trading. All because valuation for start-up internet companies soared as long as they add an “e-“ prefix to their name or a “.com” to the end. Alan Patrick, cofounder of technology consultancy Broadsight, says: “A bubble is defined by too much money chasing assets, greater production of those assets, then the need to find a greater fool to buy them.”

Now, 10 years later, we see signs of another dot-com bubble; money seems to be chasing a small group of companies, namely the above-mentioned few start-ups, and valuations are no longer accurate in predicting the future success of companies.

What’s driving all of these crazy valuations? Some blame it on the naive newcomers, though that may put Goldman Sachs out of the picture. Others say there are simply too many “ super angel investors” out there providing capital to these start-up ventures, even when they might know absolutely nothing about the industry.

Whatever is the case, bubbles tend not to be rational by definition, and the skill is – surprisingly – not to avoid the bubble but to get out of it before it bursts in our face.

FINANCE

FACEBOOK

Just as how Facebook surpassed expectations by rapidly expanding from an exclusive social networking website for Harvard students to a global network service with active users reaching 500 million, it has once again challenged our perceptions with Goldman Sachs’s $50 billion firm value of Facebook at the beginning of 2011. Shocking as this skyhigh valuation may seem to some, others argue that this valuation is easily justified by looking at Facebook’s dominant position in the social media industry. In 2010, Facebook even overtook Google to become the most popular site in US and has in fact become the defacto social network, possibly the only one that has gained mass-market acceptance every since the rise of social networking tools.

Though Facebook does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

Interestingly, another interpretation of Facebook’s $65 billion valuation is due to a scarcity of shares that has resulted in an imbalance in supply and demand. Dana Stalder of Matrix Partners, the venture capital firm that helped bring Apple public in the ‘80s, admitted that Facebook’s value is pegged on imperfect information. Yet there are early stage venture capital firms that are buying Facebook off of private secondary markets and at the same time other early stage venture capitals are selling their Facebook shares on the secondary market. “There is every characteristic of a bubble that you can imagine that is starting to emerge. We’re seeing it really just in the private market though, we haven’t seen it in the public markets,” Stalder said. “That’s where we may get into trouble is when we see this start to shift into the public market in a meaningful way.”

This imperfect information that Stalder talks about becomes more clear when you take a closer look at Face-

book’s revenue breakdown. According to Financial Time’s Lex column, most of Facebook’s revenue comes from generic online advertising, which has not proven historically to be a sustainable and profitable business structure for most media organizations. Furthermore, it should not be ignored that Facebook still have enormous infrastructure costs mounting to as much as $700 million for two data centers. Though it could be argued that a significant portion of Google’s revenue is similarly generated via online advertising, the nature of the Google website (i.e. the search engine) differs from that of Facebook such that the advertising model may work for Google but not for Facebook. While Google’s strategy of offering advertisers the ability to place their messages alongside search-engine results has long proved to be successful, it cannot be said the same for Facebook, as Facebook users generally do not seek out advertisements on Facebook when surfing the website.

For example, when a Maroon 5 fan logs on to Facebook, he/she is not necessarily interested in buying Maroon 5 concert tickets. Facebook provides users a platform to share their life with others, and there is no way for Facebook to know exactly what product/service users are actively looking for while surfing Facebook, as opposed to when users key in a specific query into the Google search engine. While Facebook has definitely become an amazing social phenomenon, it remains idealistic to assume that Facebook will ever be able to monetize its online social network services the way Google does. Hence, putting a $65 billion valuation on Facebook, which gives Facebook a market cap of 36 percent of what Google’s is, seems indeed like a big leap of faith.

TWITTER

Since Twitter releases its earnings, we know that Twitter’s $10 billion valuation cannot be based on its current revenues. Twitter’s reported earnings in

2010 were $45 million and had negative profits due to high spending on hiring and data centers. Its estimated 2011 revenues are said to be around $100 million to $110 million. Hence a $10 billion valuation would be more than 200 times the company’s revenue. What makes Twitter attractive to investors is its 200 million users. Twitter now must figure out a way to take advantage of this huge network in order to start generating profits.

The more interesting question now is how should we justify Twitter’s $10 billion valuation? Why would Andreessen Horowitz, a $950 million venture capital firm, buy an $80 million stake in the company? Twitter is a highly speculative investment, and investors would not have invested in Twitter by simply analyzing the predictable discounted cash flows. Perhaps invenstors are taking a calculated risk when placing betting on Twitter and other key social media companies. Besides Twitter, Horowitz has also invested in companies such as Foursquare, Groupon and Facebook. Twitter simply falls into the category of “revolutionary” social media companies that investors do not want to miss out on.

However, it is necessary to be cautious and remember that a company’s revenue, profit and business model are much more reliable indicators than a company’s growth potential.

Indeed, while Twitter has influenced the way information is shared around the world, the million-dollar question may be how well Twitter can monetize its services. Skeptics of Twitter’s $10 billion valuation point out that Twitter’s current profit generating business model is either brilliant or nonexistent.

Since 2006, in an effort to start a stream of revenue, Twitter has relied primarily on investments from venture capitals and only started charging for advertisments last year.

Arielle Kan (wk95@cornell.edu) is a junior at Cornell University majoring in Operations Research & Engineering.

SPRING 2011 CORNELL BUSINESS REVIEW 9

FINANCE

JOBLESS: TO BE OR NOT TO BE?

by Michael Ashton

10 CORNELL BUSINESS REVIEW SPRING 2011

FINANCE

It’s frightening enough to think that we’ll need to carry more than our Cornell ID and pay with something other than Big Red Bucks, but with the seemingly endless recession, jobs appear to be nowhere in sight. That said, let’s discuss three “Hot” Industries that may be hiring in coming years.

Management, Scientific, & Medical Consulting In 2008, just over 1,000,000 individuals could be classified as employed under this category. But by 2018, that’s expected to nearly double to an estimated 1,844,000. Competitive innovation will drive technology and ways of doing business in ways hardly imaginable today. Become a part of that development and innovation.

My advice: Think about taking an interest in technology, and then make a career out of sharing that specialized knowledge and expertise.

Top 5 1. Scientific Consultant 2. Human Resources Consultant 3. Marketing Consultant 4. Logistics Consultant 5. Admin. Management Consultant

“Green” Careers A good thing about investing in eco-friendly initiatives is that they will impact many sectors of the economy. A recent U.S. News and World Report article, “10 Hot Green Careers for You” stated quite nicely “the eco-job market is expanding and will continue to, albeit more slowly, with opportunities that will turn both white and blue collars a deep shade of green.” It is clear that President Obama agrees, as he made a commitment to creating “green” jobs in his recent State of the Union Address.

Richard Matthews, owner of The Green Market, one of the web’s most comprehensive resources on the business of the environment, recently noted, “One of the best degrees with the widest applicability is a Green MBA. My advice: Consider making “eco-friendly” a greater part of your life; there may be unforeseen but valuable payoffs for you and your career.

Top 5 1. Agriculture/Forestry Supervisors 2. Architect 3. Construction Manager 4. “Green” Consultant 5. Engineer

SPRING 2011 CORNELL BUSINESS REVIEW 11

FINANCE

Healthcare The Bureau of Labor Statistics predicts that the healthcare industry will generate more jobs in years ahead than any other. In fact, 13 of the top 20 occupations will come from this sector. The increase in demand is driven by several factors, most notably Obama’s Healthcare Reform Bill and 76 million aging “Baby Boomers.” To the right are some careers to consider, each expected to grow 25 percent annually.

Lena Botto, Director of Compensation at Salary.com, on the growth of the Health Care industry: “It could bump your pay by 20 percent or more, maybe even double your salary.”

My advice: If you have a passion for healthcare and medicine, medical school can still pay big dividends.

Top 5 (+1) 1. Medical Assistant 2. Cardiovascular Technologist 3. Ultrasound Technician 4. Physician’s Assistant 5. Medical Director + 1. Sub-Specialty MD

Baby Boomers Meet Medicare

80 70 60 # of People (millions)

50 40 30 20

2010 v. 2030 Estimates

10 0

<65

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65-74

75-84

>84

FINANCE

Dr. Marvin Wool – a consultant to physican groups, advisor to hospital and health care insurers, and former Medicare director – talks about health care jobs.

Cornell Business Review: While the US has lost 8 million jobs during the recession, the healthcare industry has consistently added them. What reason is there to believe this will continue?

cialist, consider those most frequented by seniors- cardiologists, orthopedists and hospitalists, those specialists who care for the very sickest patients in acute care hospitals.

and share financial responsibility for all costs for large panels of patients.

Marvin Wool: Because Americans are getting older, and at a breath taking rate. Today our most rapidly growing age group is the “old, old”—those over 85. But starting this year and for each of the next 18, four million baby boomers a year will turn 65, nearly doubling the Medicare population to 80 million by 2029. By then the first boomers themselves will become “old, olds.”

CBR: What about people who cannot stand the sight of blood?

MW: Yes. ACOs are partnerships including physicians, hospitals and other health care providers such as skilled nursing facilities and home health care agencies. They will not sell health insurance policies but will contract with commercial and government insurers like Medicare and Medicaid.

CBR: So what will be the hottest direct patient care jobs?

MW: Unfortunately those in the lowest pay bracket, which actually provide the most direct care—personal care attendants, health aides, and nursing assistants. Increasingly, they’ll be working in patients’ homes as elder care continues to shift out of hospitals, extended care facilities and nursing homes. And since there is likely to be a shortage of physicians for the foreseeable future there will be more highly skilled jobs for professionals who work alongside physicians – nurses, nurse practitioners, and physician assistants.

CBR: My mother thinks I should become a doctor; do you think that is a good career move?

MW: Again, here the greatest demand is on the lowest pay rung, primary care, which includes general and family practitioners and internists. If she thinks you should become a spe-

MW: There’s the old standby – psychiatry, but also consider pharmaceutical companies. Over the past decade most new drugs have been ‘look alikes’ of older chemical drugs. But biologically derived drugs, so called biopharmaceuticals, have been thriving but have barely skimmed the surface. Then there’s the medical device industry: from insulin injectors to micro surgical instruments, to prosthetic joint prostheses, to heart valves to you name it.

CBR: What if I enjoy science but am unsure about going through medical school?

MW: Think about biopharmaceutical and medical device companies. But you’ll need a PhD in order to have a Doctor in front of your name.

CBR: What overall effect will last year’s health reform law have on healthcare in America?

MW: The Affordable Care Act (ObamaCare) aims to insure 30 million Americans while simultaneously slowing the rate of health care cost increases and improving quality of care. It hopes to transform the existing fee for service payment system, which rewards quantity over rewarding quality. To accomplish this it encourages physicians and hospitals to band together to care for

CBR: Is that where Accountable Care Organizations (ACOs) come in?

CBR: I’m interested in the business side of health care. Where will those jobs be?

MW: The hot new areas are of course ACOs and the Federal Government since the ObamaCare will create dozens of new agencies, mainly in Health and Human Services. Hospitals will remain strong as more physicians leave independent practices to join them in salaried positions. Traditional health insurers will expand to deal with ACOs and a larger market for individual and small employer policies to be sold through state “exchanges.”

CBR: Finally, what about that $20 Billion bonanza for electronic health records in the 2009 stimulus package?

MW: Sorry. Most have been spoken for by dozens of companies already busy designing the software to link physicians, hospitals, pharmacy benefit managers and insurer. It’s uncertain how many will come to fruition but there’ll certainly be an after market for maintaining those that survive.

Michael Ashton (maa246@cornell.edu) is a sophomore at Cornell University majoring in Hotel Administration.

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FEATURED

SCOTT BELSKY CEO & Founder of Behance

Scott Belsky is the founder and CEO of Behance, a company dedicated to developing products and services for creative industries and professionals. The company oversees three major projects: the Behance Network, The 99 percent, and the Action Method.

The Behance Network is an online portfolio networking site for creative professionals of all different fields. The 99 percent is Behanceâ&#x20AC;&#x2122;s think-tank with practical and insightful advice on becoming more productive and creative; the 99 percent also holds an annual conference devoted to execution in the creative world. Lastly, the Action Method is a popular online/mobile productivity application and line of organizational paper products.

Belsky is also the author of the national bestselling book Making Ideas Happen.

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FEATURED

Cornell Business Review: What are Behance’s major products and what is the central underlying objective of each?

unfamiliar to most of our readers.

Could you explain how the website works, connecting creative individuals and encouraging action?

Scott Belsky: We are a company that is medium agnostic and mission centric. Despite our products, we’re not a company that started out saying we want to be a tech company, a paper product company, or a consulting company. We are medium agnostic. What we care about is our mission, which is to help organize and empower creative professionals.

SB: What people don’t realize is that behind the scenes there are about three or four projects being published every single minute on this platform by creative professionals around the world. Every time someone publishes a project, they are inputting information about the tools they used to create that product (e.g. what camera did you use, what model, what version of Adobe Photoshop, what type of everything). We capture all that data, and we capture who you collaborated with, who identified you, and which agency you worked with on each project. We also track who likes it and we also track how good it is based on how many people like it. This allows us to sort the creative world’s work at any given moment by who did what for whom. So for example, if I want to see every single illustrator based on in the country of Romania that did work for Nike yesterday and then sort that on quality of work and who used a particular version of Adobe Illustrator, we can do that. This is a level of data we never had before about how

We began acting upon that mission by creating the paper product line and online tools for organization because we realized that creative people, people with ideas, people that are always thinking, need more of a bias towards action. We then went into the Behance Network, which is an online platform that organizes the creative world’s work. There we realized that in the creative professional market, which is the area we are focused on as a company, there needed to be a LinkedIn of the creative world. That is a hardcore technology business.

We are building web-applications and we are leveraging the latest program

SB: There is one story of a man named Bobby in California. He was working at a full time advertising agency at some cubicle in corporate America. He had a portfolio on Behance where he posted the work he had been doing. His work was getting a lot of appreciation from the Behance community and receiving a lot of exposure. Companies noticed this—and so he started doing a lot of freelance assignments for them on the side. He would soon realize that he could earn more money leaving his desk job and doing freelance work full time. So he became a full-time freelance designer.

Then one day, Apple contacted him through the Behance network. They asked him if he could redesign their iAds interface for this product. He agreed and joined Apple for a 6 month contract design. While he was there, he met another guy who was interested in doing an iPad app together. And so they decided to create this iPad app based on the social sharing of news called FLUD, and it became a huge hit in the iPad store. They are just closing a large round of VC funding and they are now entrepreneurs.

CBR: What do you believe is the

Creative people, people with ideas, people that are always thinking, need more of a bias towards action. languages to create some of the most unique products on the web. And then we also have something called the 99 percent which is a conference and a think tank devoted to organizing and empowering creative people.

So actually, everything we do is fulfilling our mission, but in different ways.

CBR: As an innovative site, Behance Network has features that are still

the creative world operates. That data is our business model—and we can build things on top of it so that we can create products for recruiters and companies hiring top talent.

CBR: I’m sure Behance Network now has multiple success stories of creative professionals who were able to expand their careers through the website. What is one you consider most memorable?

biggest impediment to executing upon one’s creativity in modern society, especially for college students?

SB: I think we are taught to think before we act, that is what our mother told us. But it is actually the opposite.

We should be acting without conviction because that is what tells us whether we are on to something. All the research tells us that innovation comes out of acting without conviction; it comes out

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FEATURED of rapid iteration. You have an idea, you’re not sure it is going to work, but you just do it, see what sticks, iterate, and make it better. Is that a much better option than waiting for two years developing the perfect plan? Absolutely.

Most ideas never happen, and it is because we like to find reasons why we shouldn’t act. The message is that if you have an idea for business or an organization that you want to start, or project you want to do, the best thing to do is to start taking micro-actions. Develop this way, talk to so and so, meet so-andso, talk to a designer, keep iterating, and you will get somewhere.

CBR: When you had the idea to create Behance, whatever its initial form, what convinced you that this was the idea that you want to go found a company on? And how did you take it from nothing to where it is today?

SB: Behance, for whatever reason, every time I talked to someone about it, wrote about it, thought about it, it just kept leading to something new. And this process just kept evolving and so I was really being led by it and of course always taking the initiative to push it

new project or a new team within that company that is closer to what you ultimately want to do.

CBR: Most work generally falls into two categories, operational and strategic. How do you encourage people to spend time on long-term strategy, when short-term tasks constantly demand employee time?

SB: I think it’s difficult because you and I can sit down and have a strategy meeting right now about where we should take our organization in the next three years, what we need to get there, and be so psyched about our plans. But then we will get back to our desks and have an inbox full of e-mail and stuff to prepare for. It’s urgent, it’s the gravitational force of operations, and it’s so strong that it will always pull us away from what is important in the long-term. To escape that gravitational force of operations is an incredibly rare skill of a leader. Most people cannot do it. In fact, for large companies that are operating at a larger scale, their gravitational force of operations is so strong that do not end up innovating as much as startups, which is why small companies become large companies.

CBR: You were also once an undergraduate student at Cornell. How did you spend most of your time on campus and how did you prepare yourself for a career in business?

SB: What made the greatest contribution to me career-wise was what I learned outside the classroom. I think that people learn through experiences. For example, sitting in a club or student organization and trying to deal with people who are not showing up, people who are outspoken, or people who are not pulling their weight. Those are real leadership dilemma, and that’s what it means to build a business or build a team.

Technical skills are ten percent of the equation, but I think that a much larger part is experiential education. Ironically, Cornell doesn’t require you to do anything outside the classroom. The real education on campus that prepares for what we’re going to do later on is all on our own initiative. Those that take this initiative and develop their leadership capabilities will be the most likely to succeed later on. As a company now that recruits students, I don’t care about GPA as much as I care about what this person has done that shows initiative pursuing

If you have an idea for business you want to start, or project you want to do, the best thing to do is to start taking micro-actions. a little further as long as it would go further. So I think it’s wrong to say that you need to find the best business idea or come up with the perfect model, that’s not realistic. What you need to do is you need to constantly pursue your genuine interests and get one step forward with everything you do.

Even if you’re working in a company and you’re sure you’re not destined to be there for life. You don’t necessarily need to leave, you could find a

Why do small companies make it?

Our competitive advantage is not money; we don’t have as much money as the big guys, pull, fame, or whatever. So there has to be some crux here, and it is the gravitational force of operations. How do you escape it?

It is leadership, it is acting without conviction, and it is overstepping bureaucracy to somehow transcend the forces that weigh down on large institutions.

16 CORNELL BUSINESS REVIEW SPRING 2011

what is interesting to them.

CBR: You also serve on the Board of Cornell University’s Entrepreneurship Program. What has convinced you to keep such strong connections with your alma mater?

SB: I would not ever have the ounce of experience I have had thus far without Cornell. I feel severely indebted to this institution. You need to always go back

FEATURED

Those that take initiative on campus and develop their leadership capabilities will be the most likely to succeed later on. to your roots and tend to them. It’s just like there is some sort of cosmic, karma way that the world works where you must always be grateful and nourishing about where you came from. Part of it is also that the circumstantial benefits of remaining connected to an institution like Cornell are hard to measure but invaluable. Last year I came back to speak in a class and I met a girl named Caitlyn who now works at Behance and is now doing a wonderful job. That really benefited my team, I didn’t come back to intentionally hire somebody, but it was an unintentional consequence that made the trip well worth it.

CBR: You also mentioned the Action Method. How is it different from other

average planner applications?

SB: Well, the action method projects were designed to help people work at think with bias towards action. Our products particularly make people feel uncomfortably pushed towards action. If you have an action method page in your journal open and there is nothing actionable discussed in your meeting, you question whether the meeting was worth it.

The greatest leaders I have ever worked with never let a thing go by that doesn’t seem like it’s reconciled. Such great leaders are the annoying ones, always asking what should we do, does everyone agree, or should we just forget about that? Is there an action step and where is

it? When is it going to be done by? Leadership by action is the catalyst of a wellrun team.

CBR: How can leaders instill an action oriented mindset among group members?

SB: Creating a culture of action is hard.

Have a conversation and spend time as a team discussing how we operate, rather than getting into the thick of it or what we’re going to do next. Have a meeting about how we should operate and set rules. For example, is it okay if we take three minutes at the end of meeting to go over our action steps each week?

Interview by Matthew Linderman

SPRING 2011 CORNELL BUSINESS REVIEW 17

GOVERNMENT

SOVEREIGN DEBT In late 2010, Europe neared the precipice of economic collapse. Slowing growth and rising debt threatened to swamp Western European economies, and fears of default weighed heavily on policymakers as the consequences of the Greek and Irish bailouts continued to unfold.

by Shashwat Samudra

18 CORNELL BUSINESS REVIEW SPRING 2011

GOVERNMENT

SPRING 2011 CORNELL BUSINESS REVIEW 19

GOVERNMENT

In late March, the European Central Bank took action to stem these fears of default among European nations. At an ECB meeting on March 24, as rising euro and bond market pressures weighed on Portugal and Spain, central bankers hashed out a deal that resulted in the creation of the €500 European Stability Mechanism – a bailout fund that will replace the existing European Financial Stability Facility, one inadequate in stemming the crises in Greece and Portugal. But for most of Western Europe, the sovereign debt crisis that originated in hundreds of bank failures during 2008 and 2009 has caused severe economic contagion, wreaking havoc on budgets, and causing negative spikes in many economic indicators. Let’s take a look at how different countries are dealing with their debt situations.

PORTUGAL

Hit hardest by crises, Portugal experienced further political turmoil late in March as Prime Minister Jose Socrates submitted his resignation after his austerity plan – which includes tax hikes – was defeated in a nationwide referendum. Opposition leader Pedro Passos Coelho also publicized his plan for taming the budget deficit, currently seven percent of GDP, which is greater than the three percent of GDP guideline that the EU has set as a limit for member states. More bad news hit in early March as Standard and Poor’s, a major credit rating agency, downgraded the credit ratings of four state-owned Portuguese railway and transport utilities to junk status, highlight-

IRELAND

And then there’s Ireland. After breaking its nose on rock bottom last year with an 85 billion euro bailout, Ireland, led by Prime Minister Brian Cowen, managed to fall further, though it had stitched together a fouryear plan to turn the Celtic Tiger around. 15 billion euros of savings from welfare cuts and higher taxes, across-the board cuts in public sector pay and a reduction of minimum wage – to the equivalent of $10.34, three dollars higher than in America – launched fresh, wellpublicized protests in downtown Dublin.

Yet the Irish GDP notched a 1.6 percent decrease in the last quarter of 2010, while in early March, two-year bond yields on Irish debt skyrocketed above 10 percent. Though Irish leaders walked out of March 25’s ECB 20 CORNELL BUSINESS REVIEW SPRING 2011

ing how national debt problems have spread rapidly, contaminating basic infrastructure.

Arguing that as these utilities – one of which includes the Lisbon metro system – rely heavily on state support, S&P mentioned that possible constrained government support “increases the risk of [these utilities] not finding a rapid solution to their short-term debt burdens,” as reported in the Financial Times. With interest rates on Portuguese 10-year bonds rising to 7.78 percent, Portugal is the only member of the tottering European quartet – itself, Greece, Ireland and Spain – to refuse. It may be doomed without swift, but likely government action.

meeting with fresh guarantees on their banks, fresh promises to extend 70 billion euros in medium-term funding, and growth-encouraging policies such as an extremely low 12.5 percent corporate tax rate; according to Satyajit Das of Roubini Global Economics, the problems created by the crises in sovereign debt “are now spreading to the broader economy. Unemployment and lower incomes mean that householders are unable to meet payment obligations on mortgages and other loans. Weak economic conditions have affected businesses, increasing default levels.”

If the Irish want to find themselves back in the growth wave of the late 90s and early 2000s, it’s unclear that they have anything but a murky shot at success.

GOVERNMENT

GREECE

Greece, on the other hand, emerged from the March summit with many of its concessions won, but a deeper reading of this event proves it to be a superficial victory. On one hand, European leaders extended the repayment period of last year’s 80 billion euro bailout to 7.5 years, while lowering the interest rate on that loan by one point to 4.8 percent. In addition, due to the early March downgrade of the Greek credit rating by three points, European leaders voted to allow it access to the EFSF for emergency funds,

SPAIN

But for evidence that the lights aren’t dimming over Western Europe, let’s look at Spain. A bust in the country’s long-running construction and real estate boom forced the former Iberian power to run a 71 billion euro budget deficit at the end of 2009, but a vigorous regimen of public sector wage cuts and tax hikes saw the deficit plunge to 39 billion euros at the end of 2010, in line with goals to reduce the gap to six percent of GDP by the end of fiscal 2011. Yields on sovereign debt have fallen to 5.16 percent, as analysts express growing confidence that the country is immune to the contagion of bank failures and of bond market panic, in contrast to neighboring Portugal. And although Moody’s – another large credit rating agency – cut the ratings of 30 small Spanish banks in late March, the country’s three largest banks, Santander, BBVA, and La Caixa retain their Aa2 rating, signifying their solid footing, and implying that the government expects consolidation, not nationalization, for the banking sector. Though rising underlying inflation of 3.4 percent as of late March may pose a longterm problem, ECB president Jean-Claude Trichet announced plans to hike interest rates from a record low of 1 percent, which is likely to alleviate any of these issues.

There’s no denying that the euro zone has seen its share of tumult in the past two years.

Moving forward, however, the question is, what’s the future for Europe itself? Stagflation fears persist, with the combination of interest rates nearing four percent in the majority of Western Europe and stubbornly high unemployment, while the currency itself – having appreciated against the dollar seven percent

anticipating trouble as it tries to access bond markets, a move applauded by Finance Minister Giorgos Papaconstantinou. On the other hand, the Greek unemployment rate of 14.8 percent, second highest in the EU, has been described by Economy and Competitiveness Minister Michalis Chrisochoides as a “bomb in the foundations of society.” Even worse, two-thirds of economists surveyed in a BBC poll believe the country will fail to meet its budgetary goals, and project a default within the year.

this year to $1.40 – is claimed to be overvalued, according to Michael Hart, chief currency strategist at Roubini Global Economics. Furthermore, Finnish economist Heikki Taimio, one of the 38 economists surveyed by the BBC, argued that euro stresses might lead to the “expulsion for some countries in the south. Before this happens, we shall see all kinds of efforts to keep the members together.”

Could a multilateral default, one that mirrors the 1997-1998 Russian debt crisis, be in the cards for Western Europe? If it is, then Taimio’s claim might hold true – but remember, recovery was much easier for Russia, at that time still bouncing back from the collapse of the USSR. For fully developed countries such as Ireland or Portugal, default means years of austerity measures that border on the edge of stifling growth – a dangerous line to walk for any country.

As Jean-Claude Trichet announced in late 2010, in this crisis, “the standard linear economic models … may no longer be reliable.

In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.” Given this, though a series of ugly defaults would go a long way towards destroying faith in the EU, Taimio’s minority beliefs only reflect the obvious – that only time, a steadfast commitment to painful austerity, and perhaps international aid – will patch the growing fissures in the euro zone.

Shashwat Samudra (sps94@cornell.edu) is a freshman at Cornell University majoring in Economics.

SPRING 2011 CORNELL BUSINESS REVIEW 21

GOVERNMENT

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GOVERNMENT

SUPREME COURT MANDATES FEDERAL RESERVE TRANSPARENCY

by Kasey Ashford

A

ccording to the March 21st Supreme Court ruling on Clearing House Association v.

Bloomberg, the Fed is now required to release its record of emergency loans given to banks during the onset of the recession in 2008. This decision builds upon the DoddFrank bill passed last year, which mandated disclosure of emergency loans after two years of their issuance but was not retroactive. This ruling mandates that the Fed reveal exactly where and to whom their loans went and will amount to more than 6,000 pages detailing loans made to hundreds of banks.

This ruling is nothing short of monumental for every taxpayer in America because of the sheer size of the loan, which totals to $3.5 trillion dollars. This number dangerously approaches this year’s proposed federal budget of $3.8 trillion. And before March 21st, the government denied any responsibility of transparency of where this money went.

This monstrous amount of loans was issued just as subprime mortgage defaults began and created large losses for banks. As defaults increased, the Fed lowered the dis-

count rate, making it cheaper for banks to borrow money from the government. As the crisis continued, the Fed continued lowering the discount rate until it stood at 0.5% in December of 2008, substantially cheaper than consumer deposits.

Effectually, these loans amounted to an enormous subsidy that masked the questionable solvency of many banks.

Everyday both good and bad decisions are made in the market that result in either success or failure of a business. A remarkably small number of businesses succeed, compared to those who fail, and the market continues to reward good decision making while weeding out bad business practices. Government subsidies, whether through outright money grants, trade restrictions, or in this case sub-market price loans, prevent the market from working and ridding consumers of businesses that simply don’t work.

While the Fed maintains its public assurances that the issued loans are being repaid with interest, emerging information from the ruling on this case shows otherwise.

Bloomberg describes how Park Na-

tional Bank, who borrowed from the Fed under the low discount rate, was forced to close regardless.

The loans that banks are not able to repay are footed by the Federal Deposit Insurance Corp. In this singular case of Park National the FDIC picked a tab of $656 million.

Perhaps similar cases will come to light as the Fed makes more information public in the upcoming weeks.

The Fed resisted demands for the release of this information citing “negative market effects” if the information was to become public, in the belief that people would lose confidence in banks they saw receiving aid. This statement absolutely begs the question if the Fed considers it a “good market effect” when people place their money into insolvent institutions because negative information about their bank is kept secret by the government?

“What you don’t know can’t hurt you” is both a dangerous and outrageous economic policy for the government.

Kasey Ashford (kda25@cornell.edu) is a junior at Cornell University majoring in History.

SPRING 2011 CORNELL BUSINESS REVIEW 23

GOVERNMENT

APPLE TURNOVER Steve Jobs’ Medical Leave Sparks Disclosure Debate

by Marc Hershberg

A

fter Steve Jobs’s abrupt announcement on January 17, 2011 dark clouds of controversy and uncertainty formed over Apple’s corporate headquarters in Cupertino, California. The company’s Chief Executive Officer, who was previously stricken with pancreatic cancer, disseminated an internal memorandum to employees informing them that he would relinquish his oversight of day-today operations and take a “medical leave of absence, so [that he] could focus on his health.” Apple subsequently published a press release revealing the unfortunate news, and declined to disclose further information concerning Jobs’s health conditions or future with the firm. Investors were essentially left out of the loop, and were thus forced to make financial decisions with a dearth of pertinent information. However, in compliance with the Securities Act of 1933, Apple must give investors a bite of its knowledge concerning Jobs’s health and provide realistic guidance as to his prospect of continuance with the company.

President Franklin Delano Roosevelt packaged the instrumental Securities Act of 1933 in his “New Deal” programs to combat the legal loopholes and deleterious conduct that contributed to the 1929 crash of the Stock Market and the consequential “Great Depression.” He believed that a government agency, the Securities and Exchange Commission, should be established to super-

24 CORNELL BUSINESS REVIEW SPRING 2011

vise the sale of securities like children in a playground. Senate Investigator Ferdinand Pecora discovered the unethical practices and securities fraud prevalent in the private sector prior to the economic turmoil of 1929, and President Roosevelt wanted all future abusers to be punished. The Securities Act of 1933 reduces duplicitous reporting by requiring all forms of “material information” to be disclosed to investors and later clarifies that this nebulous term refers solely to “matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered.” If an individual is contemplating whether or not to invest in an oil firm, then he or she should have legal access to earnings statements or bankruptcy filings that would influence his or her decision. Similarly, if an individual wishes to invest in Apple, then he or she should know whether or not the Chief Executive Officer will ever resume his regular role. Negative news regarding the top management would certainly influence one’s decision to invest. For example, nobody would have migrated to Austria in 1914 with knowledge that Archduke Franz Ferdinand would soon be assassinated, prompting pure political chaos. The Securities and Exchange Commission no longer wanted investors to make blind guesses about the subsequent success of stocks; companies needed to disclose basic infor-

GOVERNMENT

mation to indicate the financial condition of the firm. Information became the lifeblood of the marketplace. Although the Securities Act of 1933 and Regulation Fair Disclosure in 2000 attempted to transform the United States’ stock market into a fair playing-field, investors are still forced to call bets without seeing the cards in their hand. When the Securities and Exchange Commission released Regulation Fair Disclosure, the agency admitted that it did not “define the term ‘material’ […] but relies on existing definitions of this term established in case law.” It redirects readers to the official judicial opinions of TSC Industries, Inc. v. Northway, Inc. and Basic Inc. v. Levinson, which were equally equivocal and have confounded securities attorneys for decades. Furthermore, the Securities and Exchange Commission failed to incorporate a “bright-line test or an exclusive list of ‘material items’” into the regulatory legislation. Like in Franz Kafka’s renowned novel, The Trial, people are asked to follow a Law which they do not truly know. In the absence of a concrete definition of what specific content constitutes “material information,” investors have been shortchanged as companies have withheld pertinent information that would discourage individuals from purchasing their stocks. The Securities and Exchange Commission never proposed specific criteria, so companies were provided wide latitude and discretion in regards to disclosure. Investing is still unfair. And, Apple has exploited the federal government’s lack of clarity by

clouding Steve Jobs’ health, upon which “a reasonable investor would attach importance in determining whether to buy or sell” shares in the Cupertino-based company.

The core of an apple contains the seeds of the future, and if Steve Jobs is unable to return to his regular role, then Apple would be left without its core. An anonymous Apple official confessed to the Los Angeles Times in February that “without [Jobs], the innovation will slow, regardless of all the great people there.” The Chief Executive Officer has been the catalyst of the corporation’s progress and sparked its incredible innovation for several decades. As a BusinessWeek article proclaimed, Jobs “brought digital technology to the masses… [and] conceived of elegant products that captured consumers’ imaginations.” And, interestingly, the author made the complimentary comment in 2004 before the release of the revolutionary Mac Mini, Mac Pro, MacBook, iPhone, and iPad devices. Steve Jobs is the Thomas Edison of our generation, and possibly an irreplaceable component of Apple’s success.

In addition, Fortune’s Philip Elmer-DeWitt contends that, regardless of who is selected to succeed Steve Jobs, “that person will never have the authority that comes from having founded the company, been ousted, and returned to rescue it from bankruptcy.”

The visionary leader built the Fortune 500 firm from its foundation, and it is challenging to even imagine the corporation being administered in the absence of its omnipotent architect. Tim Cook, the Chief

The core of an apple contains the seeds of the future, and if Steve Jobs is unable to return to his regular role, then Apple would be left without its core.

SPRING 2011 CORNELL BUSINESS REVIEW 25

GOVERNMENT

Operating Officer, has presided over Apple in the past, but Steve Jobs remained in the organization as the Chief Executive Officer and still had an influential role in the decision-making process. When Jobs announced his third “medical leave of absence” in January, Apple’s value suddenly plunged by about 6.5% as market analysts dreaded the 56-year-old entrepreneur’s death. Jobs’s name is synonymous with Apple, and few people could ever fill his shoes. It is improbable that Apple will shrivel up and decay in the event of Jobs’s death, but prospective investors have a valid reason and concern to learn about the leader’s health and future with the firm before purchasing stock. His health is “material information” that would influence their decision, and should thus be divulged.

If Apple is not compelled to abide by the spirit and intent of the Securities and Exchange Commission’s regulatory directives, then it should at least follow the suit of other blue-chip executives. In 1993, Tenneco Inc. provided extensive coverage of its Chief Executive Officer’s cancer treatment. According to the Wall Street Journal, Mike Walsh produced a lengthy video re-

accident.” Investors will stand by companies that they trust, and trust can be earned through transparency. Harry Pearce of General Motors similarly did not hesitate to announce that he had developed leukemia in 2001. He affirmed that “any investor in a company is entitled to know the health of all the members of the senior management team… [and] if we are in any way seriously impaired and can’t perform those responsibilities, the shareholders need to be apprised.” Steve Jobs has a responsibility to his shareholders, who own a significant stake of the firm, to inform them of his medical prognosis. Warren Buffett of Berkshire Hathaway commented that “if I have any serious illness, or something coming up of important nature such as an operation or anything like that, I think the thing to do is tell Berkshire shareholders about it. I work for them. Some people might think that I’m important to the company. Certainly Steve Jobs is important to Apple. So, it’s a material fact.” Shareholders and prospective investors alike “attach importance” to the health of the Chief Executive Officer when making critical investment decisions; investors are buying the management when buying a

Investors will stand by companies that they trust, and trust can be earned through transparency. cording that “quieted the rumor mills that might otherwise have been springing up” and answered all questions concerning his health. Consequently, shares of Tenneco rose by 30% as Walsh’s health deteriorated, and there was a seamless management transition when the Chief Executive Officer passed away in 1994. In addition, Campbell Soup Company recently confirmed that its President would “undergo long-planned surgery […] as a follow-up to earlier procedures related to his July 2009 automobile 26 CORNELL BUSINESS REVIEW SPRING 2011

share. And, people have an inherent to right to know what it is that they are buying.

Ironically, Apple has done more than any other corporation to encourage the exchange of information with its extraordinary innovations. However, in regards to transmitting “material information” of great interest to the investment community, the Fortune 500 firm has been mum.

Marc Hershberg (mjh336@cornell.edu) is a freshman at Cornell University majoring in Industrial and Labor Relations.

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GOVERNMENT

BERNANKE & INFLATION: The Uncertain Future of the United States Economy

by Marshall Verdi

T

he only thing certain about the future of the Unites States economy is its uncertainty. The recent recession was one of the largest in the past decade, and it has created an unusual degree of uncertainty.

As a result, economists will dissect every monetary and fiscal policy. Ben Bernanke has been at the center of many discussions surrounding federal economic policy. As the Chairman of the Federal Reserve Bank, Bernanke executes policies that influence the national interest rate, which affects aspects of the economy including inflation and, through the availability of credit, the money supply. In an economic climate many economists believe will produce slow inflation that discourages economic growth, Bernanke has attempted to use monetary easing to stimulate the economy.

Quantitative easing is a policy decision that creates money and uses it to buy government bonds and other assets, simultaneously increasing the money supply and raising the prices of these assets. Both of these outcomes should raise inflation. According to CNN, Bernanke projects future inflation to be about two percent each year for the next three years, a rate that he set out to raise through quantitative easing at the end of 2010. His policy included a six hundred billion dollar bond buyback and a seventy five billion dollar injection. The goal of this

policy is simple: to decrease interest rates and increase inflation in order to stimulate growth, thus decreasing unemployment. If the policy works, bond yields should fall, the dollar should drop, and riskier assets like stocks and commodities should rise.

By buying back a large quantity of treasury bonds each month, the Fed becomes a major force in determining and depressing market interest rates on the bonds, making other investments more appealing. In keeping rates down and channeling cash to bondholders for their treasuries, the Fed hopes to encourage lenders and investors to put that money to work in the economy.

While the intentions behind this policy might be good, the risks are evident, especially of late. First, monetary policy is slow to implement and lags behind economic indicators; thus, by the time such policies take effect, the climate is often different from what it was when the policy was instated. In addition, any easing policy raises the threat that inflation will grow too rapidly ahead of unemployment and growth.

Lately, Bernanke has endured criticism as food and oil prices shot up to surprisingly high levels. While the cost of these commodities is a real concern, it has most likely risen due to other factors, particularly in the case of oil, where unrest in the Middle East has threatened produc-

28 CORNELL BUSINESS REVIEW SPRING 2011

tion and driven up prices. Bernanke maintains that, while increased prices do put stress on households, these areas of high inflation are market-specific and overall inflation remains low. Another risk of quantitative easing is that banks will simply sit on the money rather than lending it out. This scenario becomes more likely when lenders are facing high default rates, like mortgages, which is currently the case. Despite these concerns, the Federal Reserve continues to pursue quantitative easing with relative confidence.

The issue, going forward, is how Bernanke will deal with a very erratic United States economy. It is hard to tell whether monetary easing will enhance the recovery, and even more difficult to determine when easing should stop in favor of a tighter monetary policy. Bernankeâ&#x20AC;&#x2122;s main concern has been job creation, which has been the most confounding aspect of the recovery.

The economy has grown significantly since the great recession of 2008, with assets and stocks almost doubling; however, hiring has remained stagnant. While most experts are optimistic about the future, this uncertainty puts the spotlight on Bernanke to guide the future of the economy.

Marshall Verdi (mjv62@cornell.edu) is a junior at Cornell University majoring in Economics and Government.

GOVERNMENT

THE FISCAL YEAR 2011 BUDGET

by Kasey Ashford

A

s April sets in and your deadlines for papers and projects get ever closer don’t feel bad procrastinating! The federal government has been doing the same thing for the last seven months. On March 17th, the Senate and President Obama approved a fifth consecutive spending resolution that will fund the government through the beginning of April. Hopefully lucky number five will give Congress enough time to resolve the current budgetary stalemate as House Republicans continue to battle for greater spending cuts to the federal budget President Obama proposed earlier on February 14th.

The political battle ensues over some $60 billion in spending cuts proposed by the GOP; however, this controversial number is important to put into perspective. As proposed, the current federal budget for the fiscal year of 2011 is projected to be $3.82 trillion. With projected revenue at $2.17 trillion this leaves $1.65 trillion as the 2011 budget deficit, constituting 10.9 percent of GDP. Putting these numbers in even greater perspective, they will contribute to raising the total US debt from $13.8 trillion in FY 2010 to $15.1 trillion in FY 2011.

The bulk of this spending goes mostly to paying for healthcare, which makes up about 22.62 percent of the budget, along with social security at 20.04 percent, and national defense at 19.27 percent. The other 48 percent is divided up between the many agencies covering other entitlement spending such as food assistance, unemployment compensation, education, and veterans’ benefits, in addition to infrastructure maintenance and energy. One of the outstanding spending allocations is also the net inter-

est due on the current debt, which stand at 6.31 percent, or about $240 billion.

Considering these figures and the size of the budget at $3.8 trillion and the national debt at about $15 trillion, the current debate in Congress over slashing some $60 seems like a drop in the bucket. The GOP’s efficacy aside, why do they even want to cut any spending at all? Doesn’t higher government spending contribute to a higher GDP, which is after all what we want?

The answer to this question is twofold. Sure, we want a higher GDP. But do we want a higher GDP based off of deficit spending? Not really. What any business or industry wants to see in America is economic growth based on the efficient allocation of resources by the private market. However, the “growth” from government spending should be considered with some hesitation.

Since the amount of tax revenue generated does not cover the amount of expenses in the current budget, the federal government must take out loans to pay for what they lack. This is just like a family who takes out a loan for the next several years in order to purchase a home. Both this family and the government borrow money for something they want to purchase now, but can’t afford to pay for entirely. Over the course of the next few years, probably decades, both have to gradually pay back this loan – the amount they owe and also interest. Now the difference comes into play between the family and the government. While the family is paying back the home loan and interest due, they must make spending cuts or sacrifices in consumption such as not buying that new car or cutting back the amount they eat out at restaurants

every week. If the family does not make such consumption sacrifices they won’t be able to pay back the loan and might have to face foreclosure. In dealing with debt, the government, like the family making spending cuts, can either raise taxes or cut spending enough to start reducing debt. Unlike the family, however, the federal government can continue to take out loans and increase the debt by just passing on this obligation onto future taxpayers.

Why is passing the tab like this bad for the economy? In the short term, the government faces increasing payments on interest. Imagine what that $240 billion this year could have been spent on. Alternative energy research? Education? Or perhaps even given back in tax cuts? That’s about $800 dollars back to each individual in America. The longterm consequences include spurring a new financial crisis. The pesky issue with loans is that the creditor usually wants his or her money back. While the current international political and economic climate may not result in an immediate call for payment any time soon, China has already started to express concern about their loans and the future stability of international politics is not guaranteed.

So while the House Republicans continue to battle with the Senate on pouring a few bucketfuls in the lake, it seems that no matter the outcome of this debate the current budget proposed by Obama for FY2011 will continue to contribute to the national debt and no real cuts will be made to its biggest components of social security, healthcare, and national defense.

Kasey Ashford (kda25@cornell.edu) is a junior at Cornell University majoring in History.

SPRING 2011 CORNELL BUSINESS REVIEW 29

FEATURED

WAYNE MEICHNER President & COO, Polo Retail Group Wayne Meichner is responsible for the strategic management and development of Polo Ralph Lauren's domestic retail concepts, including Ralph Lauren stores, Polo Factory Stores, RalphLauren.com, Rugby, and RRL. Before joining Polo Ralph Lauren, he spent 23 years at Saks Fifth Avenue in numerous capacities, including the executive vice president of merchandising. As a member of the Dyson School Advisory Council at Cornell, he speaks with the Cornell Business Review about career development, effective leadership, and the retail industry.

30 CORNELL BUSINESS REVIEW SPRING 2011

FEATURED Cornell Business Review: You’re currently the President & COO of Polo Retail Group. How did you scale the corporate ladder and will the corporate progression be very different for students today?

Wayne Meichner: That’s a great question. For me, it was always clear to me that to be a president you have to understand the differ-

WM: On the surface it seems like a simple industry, but it’s not. You have my CFO and my head of design sitting in the same room, and to tell you the truth, they couldn’t hold a conversation for the life of them.

They are both great people, but have different interests and specialize in different areas of the business.

Thankfully, I’m able to have a conversation on both extremes of those

ning side. You’re making real estate decisions one minute and you’re talking marketing and human capital minutes later. It’s such a diversity of responsibilities that you have to be generalist. You are not going to be an expert in any one topic, you will hire experts, but you need to be able to communicate and work with all of them. That’s a challenge to the industry in general and it’s also one of the

ONE OF THE MOST CHALLENGING AND ENJOYABLE ASPECTS OF RETAIL IS A COMPLETE DIVERSITY BETWEEN ART AND SCIENCE. ent disciplines within the business.

Put simply, retail is comprised of a buying function, where people select the merchandise, a planning function, which helps manage the inventory levels, and a stores function.

I really felt that to be an effective leader today, I had to spend time in each one of the core disciplines: merchandising, planning, and stores.

business disciplines, but you really have to work on it. In retail especially, it’s important to try and get people’s opinions. It goes back again to putting in the time and effort to having open communication.

The problem I have with most people today [and please don’t be insulted by this], is that everyone seems to want to be in my job tomorrow. There’s a little bit of patience required, it may not be a bazillion years, but you’re going to have to go through each one of those silos in order to qualify yourself, and more importantly, to be able to do the job effectively when an opportunity presents itself.

WM: In my world of responsibility, Ralph designs everything within Ralph Lauren. We manufacture ourselves, we do our own marketing and advertising, we do our own real estate, we build and design our own stores, we hire our own people to run the stores, we have our own buyers and planners to secure the inventory, and on and on. Everything I just talked about goes from financial planning, to strategy, to creative design. So I think one of the most challenging and also one of the most enjoyable aspects of retail is what I call a complete diversity between art and science. You’re going from creative product on the design side to strategic thinking on the plan-

CBR: I imagine your position requires being able to communicate with all different sections of the company including product development, brand management, retail distribution, and finance. How do you manage this web of responsibility?

CBR: What do you consider to be the most challenging aspects of a retail fashion industry?

allures to it.

CBR: From your experience, how do you define effective leadership?

WM: For me, with 12,000 people in my organization, effective leadership at any level is based upon clarity of strategy. I have to make sure that I’m on the same page with what our chairman, Ralph Lauren, is expecting of me and of the company. What are my corporate goals? What are my retail goals? And making sure we’re in sync with all that.

Then it’s communication. This is really ensuring that everyone in your organization, regardless of their level, understands the goal and to some extent has input into the strategy. This reduces the amount of decision making that has to be done beneath you and makes those decisions a lot easier.

The other aspect of effective leadership is about being human—being real, being approachable, being accessible. Let people know that

SPRING 2011 CORNELL BUSINESS REVIEW 31

FEATURED you’re approachable and that you care about their career development and that you’re there for advice.

If that’s the way you operate as a leader, that’s the way your team beneath you will operate, and you instill a genuine concern and care

we all want to make a good living. So be mindful of people’s time. I want people to get out of here and have a life because, if you’re not having a life, you’re not going to be happy or be effective at work. It’s about worklife balance, it’s about integrity.

that phrase mean to you?

WM: I’ve seen enough people in our industry that regret their success to some degree because it came with a price. For them, success may have come with the price of divorce or the

EFFECTIVE LEADERSHIP AT ANY LEVEL IS BASED UPON CLARITY OF STRATEGY. for everybody’s development and their well-being. You also want to be happy about who your boss is.

We have a great company here and I want to make sure that everybody has the right perspective, the clarity of strategy, and great integrity. Not everybody is perfect but it starts with strategy and then its clear communication.

CBR: Beyond the aspects of effective leadership that you just mentioned, what can students do over the shortterm to build their brand as a leader?

WM: For me, one constant is integrity. You need to be able to be trusted.

I have to trust the people at work, whether they’re in my company or outside of it. I don’t have the time to figure out if everybody’s going to do what we just said we’re going to do. That goes back to everybody being on the same page internally.

And similarly on the outside with our suppliers, I need to know that they are going to do what we agreed to do.

You also have to be fair with people.

It’s not about trying to win every time; it’s about trying to understand what individuals want at specific times. Let’s face it, we all have families, we all have certain aspirations,

From a technical perspective, it’s about making timely decisions.

If you continue to procrastinate, people get tired of it and turn off.

Get the facts, do your homework, and make a decision. You’ll make a lot of wrong decisions, but I think it’s better to make a wrong decision than to make no decision at all.

CBR: How would you recommend that students at Cornell develop their leadership potential while at school?

WM: Besides the technical course load, it’s getting involved in as many activities as you can. Before you’re officially in the workforce, get yourself into an internship in an industry or profession that you’re really interested in. I’m looking to find the kid who really wants to be involved in our business. Going to a good school simply isn’t enough today. You have to show some interest and get your foot in the door.

Leadership, entrepreneurial spirit, and work ethic reflect your desire to get into a specific industry and that’s what we look for when we come to campus. At the same time, it’s also about enjoying life. You got to have a balance.

CBR: You’ve mentioned work-life balance multiple times, what does

32 CORNELL BUSINESS REVIEW SPRING 2011

price of not knowing who their kids are. Believe me, I work hard and I work long hours, but I still find the times for my wife and my kids.

I’ll tell you a quick story. I am involved with the youth lacrosse program in New Canaan and a couple of years ago they asked me if I’d be a head coach. Now I work in New York City and live in Connecticut, so I’d have to leave work at about 4:00pm every other day to go coach these kids. I asked the people who work for me, not my boss, how they would feel if I took the coaching position. They said, ‘Wayne we wish you would do it tomorrow because it would send such a positive message to the team that life is about more than just work.” They gave me the confidence to go do it and I managed my schedule accordingly and here I am four years later still doing it and loving it. It’s important to have that balance, otherwise I don’t think you’re a complete person and I don’t think you are happy.

CBR: A lot of recent students today are switching careers much more often; do you think that forced mobility is required to get to your same position today?

WM: When you’re changing jobs

FEATURED within the same industry, I’d say I think it’s healthy to a point. When you see someone moving around every two years or so, that’s not healthy and it makes me question their motivation. Is it all about money, or is it just they aren’t ever happy and they want to keep trying something else? My mentors over the years in business, especially as I approached years 10 and 15 with Saks, suggested that it would really be smart to move into another company within the industry. But I never did, I had a comfort zone at Saks and I kept growing there, from a trainee to an EVP of Merchandising. Eventually I transitioned to Polo Ralph Lauren, where there is so much more

that I am now getting exposed to that I wouldn’t have been if I had stayed with Saks. I think it’s about a balance, but if you’re jumping around every 18 months, I think that’s excessive.

On the other hand, if you move jobs every four to five years just to get another company’s perspective, I do think that could be a positive as someone grows into a President or a CEO role.

CBR: For our student leaders reading, how do you balance the management equilibrium between time spent developing strategy and time spent executing strategy?

WM: I don’t think there’s a right

or wrong answer, but if you don’t have the right strategy, executing it is a waste of time. Understanding and finding the right strategy really goes back to being a student of your business. Initially, as you take on a new responsibility, you’re going to spend a disproportionate amount of time either validating the strategy that you inherit or revamping it. Once you have that blueprint, then it’s really a question of executing it. Part of the execution is communicating a clear strategy. You also need to have the ability to monitor, to measure, and to course-correct.

That strategy will evolve because not everything is that predictable, but you want to keep a general course.

CBR: What’s the best piece of advice that you think a student can receive starting out of college?

WM: Keep being a student. There’s a lot to learn, don’t think you know it all. Be a student of your industry, read the trade papers, and read the daily tabloids religiously. Not to the point that it’s all you read, but be immersed in your business and be a sponge. Ask your boss appropriately and at the right moment, why did you do that, can you explain that to me. You’ll have 1000 questions. I think it’s really important that you stay hungry for information because that information continues to help you make better decisions and continue to grow.

Lastly in today’s world, you really need to find a company that is financially sound. You don’t want to be worrying about whether you have a job. There are a lot of great and strong companies, so do your homework on the company and the industry. Is the industry a fertile place? Is the company in good standing? Then, once you get inside, you need to continue to be a student and stay hungry for relevant information.

Interview by Matthew Linderman

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INDUSTRY

THE FUTURE OF FINANCIAL SERVICES Despite the nation’s recent economic woes, careers in financial services remain popular among college students. Top undergraduates are continuously drawn to the sector’s prestigious entry-level jobs and high starting salaries. However, there is a great deal of variation among the different tracks in the industry. To investigate the differences, we categorized twelve of the most popular jobs in three macro-categories — Money Makers, In Recovery, and Depressed.

We utilized a holistic methodology incorporating compensation, exit options, and how well the sector is performing in the current economy.

by Constance Qian 34 CORNELL BUSINESS REVIEW SPRING 2011

INDUSTRY

Money Makers

Sales & Trading

Private Equity

Investment Banking

Consulting

Overview As hired advisors, consultants play an important role in all large corporations. Their classic role is to provide operational and strategic feedback, although specialties range from information technology to human resources.

Regardless of their area of expertise, consultants hold considerable influence from offering market information to reconstructing an entire company.

Pros

Cons

▪▪ Intellectually stimulating ▪▪ Builds business experience ▪▪ High compensation and prestige ▪▪ Good exit options ▪▪ Consulting firms typically hire a large number of MBA and college graduates ▪▪ Business is expected to grow across all industry sectors

▪ ▪ Phenomenal training and The primary function of i-banking is to exit options identify strategic opportunities to raise ▪ ▪ Top-notch compensation money for corporations, whether it be ▪ ▪ Exhilarating work that through debt or equity financing. It also comes with variety provides advice for mergers and acquisitions, leveraged buyouts, and takeover protection. Investment banks focus on underwriting securities and giving strategic advice for mergers and acquisitions, but their range of services is constantly expanding to meet the needs of clients.

▪ ▪ Long work and travel hours ▪ ▪ Transient nature of the work ▪ ▪ Risk of market outsourcing

▪▪ ▪▪ ▪▪ ▪▪

Demanding lifestyle Long hours Extremely competitive Limited upward mobility

Private equity firms use a variety of strategies to make money by taking publicly-held companies private, often through heavy leverage and minimal equity. The investors then restructure the companies with the intent of selling them in the open market at a high price.

▪ ▪ Power to make important investment decisions ▪ ▪ Application of previously acquired skills to analyze complex strategies ▪ ▪ Very lucrative

▪ ▪ Typically need prior investment experience in another industry ▪ ▪ Work sometimes carries a negative connotation (e.g. corporate raiding)

The sales and trading division of an investment bank is at the forefront of market operations. Traders typically execute tracks on behalf of clients and take their own positions in various securities, while salespeople are more often in charge of developing relationships with clients (corporations, pension funds, etc.) and pitching ideas and research to the clients.

▪ ▪ Fast paced, dynamic work environment ▪ ▪ Potential to make spectacular gains that may allow one to enter retirement much earlier than planned ▪ ▪ Typically shorter hours than investment banking

▪ ▪ Work comes with a high level of stress and little tolerance for errors ▪ ▪ Exit opportunities are not as bountiful as those in investment banking

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INDUSTRY

In Recovery

Venture Capital

Corporate Finance

Asset Management

Accounting

Overview

Pros

Cons

Accountants are responsible for overseeing financial records and preventing mismanagement or fraud within corporate operations. These tasks are particularly important when the economy is in recession. Yet despite growing demand, accountants typically receive lower salaries than those in other financial services industries.

▪ ▪ The Big Four (Ernst & Young, PricewaterhouseCoopers, KPMG, and Deloitte) offer prestige and great work experience ▪ ▪ Most industry hires are recent college graduates ▪ ▪ Ever-increasing demand for accounting services

▪ ▪ Repetitive work and long hours during tax season ▪ ▪ Subject to administrative rules and restrictive regulations ▪ ▪ Low raises in the beginning, although senior-level accountants can expect salary increases of 5-10 percent

Asset managers decide how large, pooled investment funds are allocated among various investment vehicles, such as stocks and securities. The major players in this industry are hedge funds, pension funds, and mutual funds.

▪ ▪ Good training in financial analytics ▪ ▪ Wide range of specializations ▪ ▪ Less demanding than investment banking and management consulting

▪ ▪ Bonuses are typically less than investment banking ▪ ▪ Range of tasks are generally less than other areas of high finance ▪ ▪ Compensation dependant on market factors

A business’s money is managed through the professionals of corporate finance and accounting.

Essentially, their role is to create projections, accumulate funds, and advise spending in a way that would be most profitable for the company.

▪ ▪ New opportunities as a result of new financial markets and globalization ▪ ▪ Performing essential duties within a corporation

▪ ▪ Work does not necessarily take place in a financial services firm ▪ ▪ Generally need to work in an accounting role before entering corporate finance

Venture capitalists invest in developing companies offering new services and technologies. To do well in venture capital, it takes entrepreneurial spirit and a keen insight into market trends.

▪ ▪ Rewarding to back a successful start-up ▪ ▪ Evaluating industries at the broadest level, rather than getting caught in the details

▪ ▪ Risky when a company fails (although smaller losses than for entrepreneurs) ▪ ▪ Competitive to enter; firms are very selective

36 CORNELL BUSINESS REVIEW SPRING 2011

INDUSTRY

Depressed

Real Estate

Personal Finance

Insurance

Commercial Banking

Overview

Pros

Cons

Commercial banking is the most traditional type of banking, taking deposits and extending credit. If you start a checking account or take out a home loan, you are working with a commercial bank. Some common jobs you will find in commercial banking are loan officers, tellers, and branch managers.

▪ ▪ Commercial banking is much more relaxed environment than its closest industry counterpart, investment banking.

▪ ▪ The hours are better, the qualifications are less stringent, and there is still plenty of opportunity for promotion.

▪ ▪ Commercial banking lacks the compensation and prestige of the investment side of finance.

▪ ▪ The skill set involved is less financially sophisticated, so exit opportunities are not as strong.

Insurance is the business of protecting against risk. There are many different types of insurance, such as auto insurance, life insurance, and health insurance.

▪ ▪ The hours for insurance are a lot more flexible, and it is still possible to achieve a large salary as an actuary.

▪ ▪ It is fairly easy to climb the ladder quickly in insurance, and there are plenty of non-actural specializations within larger companies.

▪ ▪ The industry is still in recovery, and on top of that many jobs are being lost to consolidation and computerization.

▪ ▪ Insurance is not the most stable industry to move into.

Financial planners aid individuals in both long and short-term decisions, including where the money should go— such as investment, housing, and retirement—and how much money should be used. A financial planner advises based on current market trends and the country’s existing legal requirements.

Thus, he or she must comprehend complicated legal documents as well as financial documents.

▪▪ Personal finance is a growing industry. One of the reasons is because middle-age and elderly people facing difficult investment decisions are likely to hire financial planners.

▪▪ Therefore, their demand will increasingly rise as the country’s population continues to age.

▪ ▪ The industry is highly competitive, with over 250,000 working financial planners.

▪ ▪ Personal finance has one of the most varied salary distributions in business that is based largely on performance.

Real estate agents negotiate property transactions on behalf of their clients.

The scale ranges from individual homeowners buying a place to live to institutional investors buying large commercial properties. Notably, the industry is highly skewed, with the top 10 percent of agents receiving around 90 percent of the deals.

▪ ▪ If you are good at real estate, it will be good to you.

▪ ▪ The hours are flexible, the pay can be massive, and the work is fulfilling.

However, this is only true for top performers.

▪ ▪ The compensation is entirely based on commission, which leads the majority of real estate agents to quit within a year.

▪ ▪ Real estate is at the epicenter of the financial crisis.

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INDUSTRY

Pod Hotels: The Next Big Trend in Lodging?

by Eric Rabinowitz

D

o today’s hotel guests really need 325 square-foot designer guestrooms, overstuffed mini-bars and beautifully appointed marble bathrooms fit for royalty?

Following the lead of low-cost airlines—Southwest and JetBlue—pod hotel companies have tackled this issue by designing hotels that eliminate what their target market considers unnecessary facilities and services.

By incorporating highly efficient design and state-of-the-art technology into relatively compact spaces—less than 200 square-feet—pod hotels serve their purpose: to provide unique, convenient, and comfortable experiences at an affordable price tag. Epitomizing developers’ efforts to match design with market changes in demand, tastes, and preferences, pod hotels are positioned to target a younger generation (18-35) of budget conscious travelers.

The Pod Hotel Concept Inspired by Kisho Kurokawa’s coffin-like “capsule” hotel—omnipresent in Japan since the 80s— pod hotels have a similar model: growth by small footprint in densely populated cities. Despite capsule hotels’ success in Japan, the concept has failed to penetrate Western (European and North American) markets.

The pod hotel concept—modeled after well-designed air cabins—better captures the preferences of the target market. When compared to capsule hotels, pod hotels have several fundamental differences. First, pod hotels do not only target business travelers,

but they also target price conscious, younger generation leisure travelers, airport travelers in need of a place to rest, and price sensitive business travelers. Secondly, pod hotels offer large, stylistically designed, and hightech accommodations—appealing to a broader market than capsule hotels.

Lastly, pod hotels offer more than a furnished room for weary travelers to sleep; they provide guests with a modern, high-tech, and upscale experience at a discounted price. The logic behind this phenomenon is that people are willing to stay in compact spaces if they are well designed Pod hotels are located in major cities that generate significant business and leisure demand. These cities include New York, London, Tokyo, Antwerp and Amsterdam. Starting at $89 per night, typical pods range from 75-150 square-feet and include a bed, lamp, television, and workspace.

Some rooms may include a private bathroom for a higher price, but bathrooms are generally shared. Of course, these amenities will vary from city to city, and from brand to brand, as some may offer Wi-Fi, mp3 docking stations, and mood lighting.

The overall design assumes that guests will spend little time in the room aside from sleeping. Boasting varied public spaces such as lobby lounges, bars, and cafés, pod hotels provide guests with ample space to socialize, relax, and work. On-site restaurants are not common, but pod hotels typically provide some type of food and beverage services—vending

38 CORNELL BUSINESS REVIEW SPRING 2011

machines, in-room snack service, or grab-and-go.

Positive Signs for Pod Hotel Development Unlike traditional hotels, the efficient design and compact size of pod hotels allow developers to build in prime locations—where real estate values are extraordinarily high—at reduced costs. The versatility of pod hotels’ design facilitates building in tight spaces, old commercial buildings, airport terminals, and underground areas. Since many pod hotels do not have external windows, they can be built virtually anywhere within an urban environment. Therefore, densely packed cities near major airports, such as New York and San Francisco, would seem like an ideal fit.

The ability to build the pods outside of the building— via prefabricated construction—and then plant them within the hotel when completed is enticing to developers. Through prefabricated construction, Pod hotels can open their doors in less than six months—whereas a typical hotel requires at least 18 months. Both of these factors of the result in significantly decreased construction costs and maintenance expenses.

Since guests can rent rooms based on an hourly basis—especially common at Airports—pod hotels have higher daily occupancy and turnover rates. Yotel, a successful European pod hotel company, experiences occupancy rates between 150 percent to 180 percent at its Heathrow Airport property, which results in a higher

INDUSTRY

profit margin when compared with typical hotels (65 percent occupancy).

Although pod hotel rates are not as high, pod hotels’ cost savings— not only in development but also in operating expenses—are substantial in comparison. Labor costs at pod hotels are significantly less because positions such as bellman, front desk agents, food and beverage staff, and concierge do not exist. In fact, pod hotels employ as few as one full-time employee for every 12 rooms, while the typical hotel averages one employee for every two rooms. Similarly, the process of making a room “vacant ready” is reduced by more than half, resulting in lower payroll expense and increased room turnover.

Drawbacks to Pod Hotel Development Despite the clear benefits of pod hotel development, there are some

drawbacks that must be considered by developers.

In comparison to traditional hotels, pod hotels sacrifice opportunities for additional revenue generating facilities such as restaurants, business centers, meeting space, spas, parking, and retail stores. Pod hotels will also forego generating revenue from the group segment because they lack sufficient meeting and banquet space for groups to hold conventions and catered events.

They also face heightened competition from firms, such as Starwood’s Aloft, which target a similar type of traveler—millennial generation, budget conscious business and leisure travelers— but offer more spacious accommodations, albeit at a higher price point.

How will pod hotels be received in other parts of the world? Evidence

shows Europe has responded well, but it may take a long time for the US and Australia to adapt. The compact space and limited features alter what we perceive as the typical guestroom.

For business travelers, the ability to work productively in a private environment is the most important purchase decision; will a small-pod with limited public spaces and services suffice?

Experts note that through efficient, thoughtful, and effective design, pod hotels can overcome these challenges, affording guests a convenient and satisfying experience. By no means, however, will pod hotels serve all—no hotel can—but there is definitely a niche market they can penetrate.

Eric Rabinowitz (ejc72@cornell.edu) is a junior at Cornell University majoring in Hotel Administration.

DOTTINGTHEMAP.COM

New York’s Pod Hotel: Entrepreneurial development of pod hotels is already underway. With several pod hotels throughout Europe, the question is not a matter of if, but when the pod hotels will fully “invade” the United States. So far, pod hotels have been popping up in major cities such as New York and Los Angeles, but we can count on more developers wanting “skin in the game.”

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INDUSTRY

YOU’RE GONNA HAVE TO PUSH

CHANGE AND OPPORTUNITY

by Christopher Henty

40 CORNELL BUSINESS REVIEW SPRING 2011

INDUSTRY

How the “Big Three” U.S. automakers failed to adapt to market changes, and what they are doing now to stay competitive in their industry

V

iewing change as an opportunity, the business and management expert Peter Drucker once wrote: “One cannot manage change. One can only be ahead of it.” In business, understanding the underlying forces behind industry change and strategically acting on such knowledge are critical to success.

With the “Big Three” of the U.S Automotive Industry, General Motors, Ford, and Chrysler, the events of the last three years have shown the financial consequences that companies may face if they fail to successfully adapt to change. General Motors filed for Chapter 11 Bankruptcy Protection in June of 2009 and was subsequently bailed out by the U.S government. Chrysler also filed for Chapter 11 Bankruptcy in May 2009, but exited when Fiat, an Italian car manufacturer, bought a 20% stake in the company.

Although Ford steered off bankruptcy and avoided a government bailout, the motor vehicles company faced major profitability concerns, as revenues declined 7.2% annually in the years leading up to 2009. During these troubling times for the automakers, many industry experts were not surprised by the poor results; in an industry fraught with significant foreign competition, the “Big Three” had failed to adapt to changing consumer preferences for smaller, more fuel-efficient vehicles.After suffering the consequences of not adapting to new national trends, U.S. auto manufacturers have taken conscious steps to improve their competitive position in the industry.

In the 1960s and 1970s, few U.S automakers produced many compact and fuel-efficient automobiles. This was not by accident. Since fuel prices relative to average incomes stood at low levels and consumers generally preferred vehicles with more space, little demand existed for small cars. This suited well with Detroit’s automakers—profits, in both margins and absolute dollars, for large vehicles were far greater than those for smaller vehicles. However, eager foreign competitors-- looking to expand to the U.S—noticed a potential opportunity in this small and unnoticed market segment.

Foreign automakers established what business strategists refer to as a “beachhead” or a market segment with low barriers to entry that serves as a broader market entry point. From this “beachhead,” foreign automakers—including Toyota, Honda, and Mitsubishi—carved a critical, albeit small position in the U.S auto market. This strategy has paid dividends for the foreign car companies; today Honda and Toyota now have a large and growing share of the U.S auto market and, unlike GM, Chrysler, and Ford, have remained profitable.

Harvard Business School Professor Theodore Levitt, an economics professor who has written about the troubles in the Auto Industry, long asserted that a source of Detroit’s troubles rests in a flawed strategic marketing framework.

The Big Three, he argued, had been mainly product oriented, not customer oriented. Instead of restructuring their

product line to suit changing customer needs, Detroit believed it could cater to its customer by making minor product changes to their existing vehicle offerings. In this way, perhaps the Big Three failed to realize the importance of good marketing. Not marketing in the promotional or advertising sense, but the kind of strategic marketing that improves a firm’s understanding of its customers’ needs and positions its products around that knowledge.

General Motors, Chrysler, and Ford have often been referred to “The Big Three” because they were once the three largest automakers in the world—true titans in their industry. With U.S government bailouts and financial calamity still fresh in many minds, the “Big Three,” as a group, is now defined more by its failures than by its successes. For the last decade the three U.S. automakers misread the market and put out poor products for consumers, relying on SUV and truck sales when fuel prices were slowly rising.

Today, the companies have refocused their strategy towards manufacturing products that consumers want, and their efforts thus far have been met with mild financial success. If Detroit’s “Big Three” has learned anything from its failures, it may be that being the biggest company is no guarantee of success. It is often product-market fit that matters more to the bottom line.

Christopher Henty (cmh279@cornell. edu) is a junior at Cornell University majoring in Industrial and Labor Relations.

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INDUSTRY

THE BIG THREE’S General Motors

company attributed the decline to high gas prices and tightening credit conditions, its internal decisions played a crucial part in their economic unraveling. In the run-up to its bankruptcy, GM contended with rising production costs and debilitating legacy expenses—such as healthcare and pensions—for its retired workers.

More importantly, GM paid little attention to its customer base as national consumer prefer-

ences moved toward smaller, fuelefficient cars. In spite of rising gas prices and heightened demand for small sub-compact cars, GM continued to produce expensive SUV’S with low fuel mileage. For example in 2006 shortly before its crisis, GM heavily marketed its new Chevy Silverado and GMC Sierra, both full size pickups, and announced that it would cut $1 billion out of its mid-size car development budget.

Similar to Ford and GM, Chrysler’s primary products have consisted of light trucks and SUV’s under the names of Chrysler, Jeep, Dodge, and GEM. Furthermore, the company also suffered severe financial difficulties in 2009 because of lower demand caused by the recession and Chrysler’s inability to provide enough affordable small car

options to satisfy the demand that still existed. Additionally, Chrysler underwent a serious of failed mergers that sent it in an uncertain direction. With little overlap between the product lines of the two companies, many analysts regarded its merger with German based Daimler as a disaster, and Chrysler was sold to a private equity firm, Cerberus Capital

Management, after a short nine years. After declaring bankruptcy in May 2009 and undergoing a government bailout, Chrysler announced a strategic alliance with the Italian automaker Fiat and exited bankruptcy in June 2009. Fiat currently has a 25% stake in Chrysler and can increase its stake pending U.S government approval.

Of all the U.S automotive manufacturers, Ford experienced the least financial hardship during the recession and did not need government bailout money. While Ford made the same mistakes as GM and Chrysler by primarily selling SUV’s and pickup trucks at homes, its international small car sales helped Ford make a small profit during the heart of the

crisis in 2009, outperforming the industry as a whole. International offerings of small cars, such as the Ford Focus, became one of the primary drivers behind this success.

Similar to GM and Chrysler, Ford also contended with significant union legacy costs compared to foreign competitors Honda and Toyota.

Ford also failed to anticipate higher prices for commodities

used in auto making, such as steel and plastic.

Ford

Trailing Japan’s Toyota, General Motors is the world’s second largest manufacturer of cars and trucks. Based in Detroit, Michigan, its North American brands include Buick, Cadillac, Chevrolet, and GMC. Leading to its eventual bankruptcy and partial bailout, GM experienced a drop in demand for its products in recent years: between 2005 and 2009, GM’s revenue declined 11.1% annually. While the

Chrysler

FAILURE

42 CORNELL BUSINESS REVIEW SPRING 2011

INDUSTRY

THE BIG THREE’S

Ford

Chrysler

General Motors

FUTURE

After GM’s bankruptcy and government takeover, the Obama Administration’s automotive task force urged the company to downsize its business. To that end, the company sold its Pontiac, Hummer, Saab, and Saturn brands while also eliminating 12,000 employees, 1,500 dealerships, and $3,000 in vehicle costs. The leaner GM reported a 2010 annual profit of $4.7 billion, the company’s

first positive return since 2004.

The company has also shifted its product strategy with more fuel-efficient high mileage offerings. The company’s CEO, Daniel F. Akerson, explained this shift in a conference call to investors: “We’ll have four really good entries in the compact segment with high-mileage products […] We’re hitting North America with the right products.” For example, one of

these new products include the Chevrolet Volt, a plug-in hybrid car. In addition, on November 17, 2010, General Motors filed for an initial public offering and collected $23 billion. As a result, GM was able to partially pay back the U.S government, as the government has now reduced its stake in GM from 60% to 26%.

Chrysler’s partnership with Fiat, who has long successfully manufactured and sold compact, fuel-efficient cars to an international market, plays a pivotal role in the company’s strategic vision. So much so that Fiat’s increase in ownership stake in Chrysler depends on whether the companies can successful produce and design more fuel-efficient vehicles for the future. Further,

Fiat can increase its Chrysler ownership to 35% if it agrees to build a Chrysler vehicle based on Fiat technology that gets at least 40 miles per gallon. Moreover, Chrysler/ Fiat has plans to make nine hybrids and extended range plug-in hybrids in the next six years, and four of these offerings will be based on Fiat products. The company will also incorporate hybrid tech-

nology to its current popular vehicles, such as the Dodge Durango and Jeep Grand Cherokee.

Despite relative success in 2009, Ford saw revenues fall by 7.2% annually in the five years preceding the crisis. To restore growth, Ford has taken serious steps to reduce employment, to close down plants and to invest heavily in crossover vehicles. Ford also sought to reduce costs by selling divisions not aligned with its future strategy of lower volumes and smaller cars; the company sold

Aston Martin to various foreign investors for $925 million and Jaguar and Land Rover to Indian-based Tata Motors for $2.3 billion. In contrast to its American competitors who are investing in one or two fuelefficient technologies, Ford is making multiple bets on a host of new technologies for future vehicles. In an attempt to compete with Toyota as the industry’s “green auto leader,”

Ford has announced plans for electric vehicles, such as the Ford Focus EV, and the current 2011 Ford Explorer uses EcoBoost engine technology that improves fuel efficiency by 25%.

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INDUSTRY

The Not-So-New Trend of Social Media Marketing

by Emily Schuit

O

ver the past decade, the question of social media has evolved from “What is social media?” to “What is social media not?” Today, the uses of social media sites such as Facebook, Twitter, and LinkedIn are infinite, as individuals and corporations are finding endless ways to take advantage of a society connected by a single homepage. Marketing via the social media outlet has become more of a necessity than a trend. While it is obvious that social media is a platform for building relationships, this means of communication has the power to affect everyone in a business, making social media an integrated part of sales and marketing strategies. IBM is an example of such a company, always one click ahead of the loading icon.

IBM has become one of the world’s largest users of social media tools. Fifteen years ago, long before the existence of social media sites, IBM began facilitating

its globally dispersed company to communicate and collaborate internally. Specifically, in 1997, IBM took initiative to get employees out on the web when a lot of other leading corporations were actually restricting their employees from accessing the internet, fearing the unknown consequences. IBM, however, foresaw the benefits that the internet could have for its brand; by realizing the mass amounts of people on the internet, it was one of the first companies to take advantage of the marketing opportunities that the World Wide Web has to offer.

IBM encourages its own employees to be evangelists for the company via such social media outlets, knowing that employees are truly the best advocates. In 2005, IBM distributed blogging guidelines to further encourage employees to be involved in the blogging industry and embrace the blogosphere. As Karen Lilla, the

44 CORNELL BUSINESS REVIEW SPRING 2011

Global Communications Manager at IBM, explained, “We set up social computing guidelines for our employees so that they understand the IBM guidelines but also feel empowered to go and participate on their own.”

Furthermore, in 2008, IBM published social computing guidelines to help employees better understand the virtual world and the sharing of rich media, hoping that they would eventually come to embrace all modes of social vehicles.

Overall, the past fifteen years have resulted in a major evolution for IBM, transforming into one of the most social companies in the world. “[At IBM] we like to call ourselves ‘social business’,” says Lilla. “We see social media morphing into what we do as key requirements for social business—as tools, organizational productivity, and culture change the other diverse constituencies of clients

INDUSTRY

and experts out there, we want to help organizations embrace social software and become social businesses so they take advantage of this major industry trend to help them drive more revenue for their own company.”

As IBM and the efforts of its employees continue to be heard across social media sites, the company has also created unique products such as “IBM Connections” to aid corporations in internal collaboration. “IBM Connections” allows both small and large companies to keep updated profiles on their employees, blogs, activities, and status updates but is more robust and secure than other forms of social media. “We see this major convergence of people using mobile devices and organizations as ways to help their employees collaborate internally, which is why we are helping other companies embrace social networking technologies within their own

organizations,” Lilla said. Moreover, communication behind a firewall is essential, especially in an age where seemingly anything is accessible with the help of a few proxies and passwords.

As IBM celebrates its centennial this year, it continues to keep its corporate responsibility efforts tightly aligned with business priorities. But what does the future of IBM’s social media marketing efforts look like? With several programs in place, IBM aims to continue to uphold its position as one of the most prolific users of social media in the industry. For example, each year IBM hosts a “social business jam” where thousands of leaders from all over the world come together to talk about what the next generation of business is going to look like and analyzing how organizations continue to embrace social software. This is done in an online format so that IBM can bring companies together

from around the world. “We actually use our social technology to pull all of this knowledge from around the world to solve grand challenges that are happening everywhere,” Lilla explains.

Marketing via social media has become the ultimate conversation tool, with IBM as the main speaker. By implementing a decentralized socialized media, the success of IBM continues to heighten, ultimately raising the bar for all other companies in the industry. Whether it is communication from employee to employee or blogging about novel projects and advances, IBM has created the ideal environment for both employee and product promotion. The grassroots movement that IBM initiated continues to advance the technological world in ways unforeseen.

Emily Schuit (eas295@cornell.edu) is a freshman at Cornell University majoring in Communication and Design.

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ERIC LARSEN & Save the Poles

In November 2009, Polar explorer Eric Larsen began the “Save the Poles Expedition,” a first-ever journey to the South Pole, North Pole, and summit of Mt. Everest in a continuous 365-day period. His purpose was to travel to the “front lines” of global warming to document the changes occurring in these last great frozen places. The Cornell Business Review spoke with Mr. Larsen about his groundbreaking expedition, the lessons he has learned, and action steps we can take today to combat climate change.

Cornell Business Review: Surrounded by aspiring doctors, lawyers, and businessmen in college, what inspired you to branch out and become an explorer?

Eric Larsen: First of all, being in college is about being surrounded by all sorts of people - not everyone is on the same path. For me, I grew up thinking that there wasn’t necessarily one particular path that was better or would be more successful. That said, I had no idea how someone could make a living by camping and going on polar expeditions. Ultimately, my inspiration grew out of my background as an educator and my curiosity about the natural world.

CBR: After years of preparation and planning, you successfully completed the “Save the Poles” expedition. Can you briefly describe this unprecedented expedition and its objective?

EL: The goal of the Save the Poles expedition was to complete three expeditions to the South Pole, North Pole and Summit of Mt. Everest within a 365-day period.

My bigger purpose, however, was to travel to the “front lines” of global warming to document the changes occurring in these last great frozen places. I wanted my journey to tell the story of these remote places so we can better understand how our actions affect the poles and ultimately the planet.

CBR: Throughout your threepronged expedition, you surely experienced a number of immensely stressful team environments. How have you seen people change in these situations and how do you maintain clear decision making skills despite the stress?

EL: On a major polar or mountaineering expedition, you are traveling constantly under stressful conditions. More often than not you are cold, tired, hungry, and scared so it’s not always your best foot that is forward. In these situations is easy to make decisions based on fear or fatigue. One thing that I try to do is eliminate any sort of personal bias or animosity by creating clear systems and defined roles. From who cooks breakfast to how long we travel before taking a break, we each

have a specific predetermined role in order to accomplish the myriad of expedition tasks. Physical exhaustion can really affect your ability to be an effective team member as well, so training and conditioning prior to departure is an important part of creating a positive team environment. Lastly, we also establish a hierarchy of how decisions are made. Sometimes these are shared roles; other times, the burden falls solely to me.

CBR: When hearing your story, the word ‘persistence’ always comes to mind. How do you begin such a huge initiative and how do push through without ever giving up?

EL: Well, I have to be honest, there were several times when I might have quit if an opportunity would have presented itself. There were so many hurdles along the way that I was more surprised than anything that I was able to complete this expedition. I have a motto that I repeat constantly which is... ‘begin with one step’. So many things seem overwhelming and impossible when looked at as a whole. However, I’ve learned to break up big things into

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manageable pieces and set shorter term goals along the way. That way the path from one small step to the next small step seems much more attainable.

CBR: Despite the perceived freedom granted while exploring the world, its hard work and responsibility that must keep you alive on extreme expeditions. In this regard, what lessons have you learned that you can bring back to the millions of people in the “working world”?

EL: Nearly everything during expedition life transfers back to the working world and I’m amazed at how many times in my normal routine that I finding myself making expedition-related analogies. Completing an expedition is really a project management issue (doesn’t sound as glamorous but it’s true).

Therefore, organizing and prioritizing tasks, creating a cohesive team, solving problems, communicating clearly, working hard, and creating

systems and much more are all integral parts of being successful.

CBR: After your “Save the Poles” expedition, you’ve been quoted saying that the work starts now.

What steps are you taking to maximize your impact following the expedition?

EL: I’m working on four basic initiatives: 1) spreading my story through media 2) speaking engagements 3) writing a book 4) creating a documentary.

CBR: You have mentioned before that you currently view your job more as a storyteller than as an explorer. Could you expand more on this link and how you intend to translate your experience and knowledge into a clear message for students, friends, and businesses?

EL: The reason I view myself as more of a storyteller than explorer is because the world has long since

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been ‘discovered’. I am not charting unknown territory. Therefore, the goal of my expeditions is really to connect people to these places by telling the story of what it is like to travel to these areas, the mental and physical challenges these travels incur, and the lessons learned throughout the entire process. My message is different for different audiences. For example, I focused on leadership at Cornell. My clients are organizations that hire me to speak.

Therefore, my job is to translate... and motivate each audience that I encounter. Of course, I also have my own personal mission which I try to incorporate in a more subtle manner.

CBR: As you continue to speak around the country, who do you hope to impact most with your speaking arrangements and what background experience has helped you become such a strong motivation speaker?

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EL: My goal for my presentations is to really reach as many people as possible – whether that be some fifth graders in Wisconsin, University students in New York, a business in Arizona – I think one of the unique things about my speaking engagements is that they reach people on many different levels.

In terms of the physical act of giving presentations, I took a teacher training course in grad school where we were constantly evaluated on our teaching and presentation techniques. We also had to videotape ourselves speaking, which was humbling to say the least.

Once I began to better understand the components of good speaking technique, it was easier to organize my thoughts into a clear story line.

After that, it’s about practice. The first time I do a new presentation is much different than several times later. The key for me is learning a lot from my mistakes.

CBR: Before we finish, let’s talk

action. I’m a student at Cornell, what can I do about climate change right now? And what can I do when I move into the corporate world?

EL: A big thing that we all need to do is simply use less. Conservation of resources is a huge factor.

Buying local, turning down your thermostat, recycling, using reusable containers - we’ve heard all this a million times over, but it’s still important to make these actions a priority. Hold on to that aluminum can until you can recycle it. I’m sure you’ve already heard the bit about turning off lights, but it’s important to remember the cumulative effect of individual actions. For example, I know of several universities that have saved a substantial amounts - tens of thousands of dollars - by simply turning off lights in many of their buildings at night. I think university students have the ability to make an even larger impact by encouraging administrators to use renewable energy, purchase carbon offsets, and much more.

Moving into the corporate world, it’s important to understand that conserving resources also saves money and can improve efficiency.

Today, most larger corporations understand that the global economy is moving toward one where having a smaller carbon foot print will have positive economic benefits.

CBR: When you spoke at Cornell this semester, I distinctly remember the phrase “Begin with One Step” as that step will begin a journey. Do you think the world is ready for the long journey ahead against climate change?

EL: The world has long been ready for this and if you happen to journey outside the comfortable borders of our wonderful country you will find a world that is already embracing the challenge. As Americans, we need to take a leadership role and understand that this is not a political issue.

Interview by Matthew Linderman

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CHINA: Americaâ&#x20AC;&#x2122;s Number One Frenemy

It was recently announced by National Geographic that a 28-year-old Han Chinese male is the most common person on the planet. There are nine million of them â&#x20AC;&#x201C; more than the entire population of New York City.

Since moving to open-market global trading in 1978, China has experienced incredible economic, social, and political ascendance as a world power, averaging a stellar eight percent annual growth. It has seen its cities transformed from rural fishing towns to burgeoning metropolises producing exports bound for all corners of the globe.

by Austin Opatrny

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B

ooming growth has created wealth and prosperity for millions of citizens, while also spawning numerous problems of pollution, inequality and corruption. The majority of this period has been characterized in Western media with reports of how China will eventually overtake the United States, leading to a collapse of the current world order and all the privileges Americans currently enjoy by being at the top. Americans seem to need a foreign power to compete with, and China seems to be winning this competition by leaps and bounds – to an average American, owning $1.16 trillion of US debt can be construed as a national insult. The proliferation of ‘Made In China’ manufactured goods has become the disparaging catch phrase involving retailers such as Walmart.

More importantly, the growing success of China in areas outside of manufacturing, such as finance and education, suggest the creation of a backbone which will selfpropagate growth. While these concerns are well founded, Americans do not need to be as worried as the numbers might suggest.

Forty percent of imports arriving into the United States today are from China, and in 2010 we imported 27 percent more than we exported to China, leaving a substantial trade deficit (a disparity between net imports versus net exports). These numbers, combined with high, stagnant unemployment in the US manufacturing sector, have convinced many social and political leaders that the proper response is higher tariffs (fees imposed on imported goods), greater trade regulation, and exchange rate restructuring (China’s currency, the yuan, has been proved to be artificially cheap versus the dollar). Of these three responses, read-

justing the Chinese currency to its market rate and reasonable regulation make sense economically, while the imposition of tariffs will cause unnecessary harm to all involved partners. Approximately 50 percent of the goods produced for export within China are produced on behalf of a foreign outsourcer.

That means that the final profit from that good is going not to a Chinese company, but to a foreign one. Of the goods that are being produced, while they may be finally assembled in China, they most likely contain components from around the world. For example, the popular iPhone is assembled in China, but contains more parts (approximately $10) from the United States than China itself (approximately $6 worth).

WHAT DO THE NUMBERS REALLY MEAN? This exemplifies one of the most problematic issues with our relationship with China – misinformation and miscalculations. The large trade deficit is often quoted as a success for China, since this trade gap seems to represent a failure of American products to successfully compete. However, the trade deficit is actually not so problematic, in that in return for an excess of dollars flowing into China for goods, there is a large amount of dollars flowing out into investments in America. China’s sovereign wealth fund has invested in American companies such as Blackstone Group ($3 Billion) and Morgan Stanley ($5 Billion). This return of money benefits US companies, who have more capital at their disposal. In addition, the large trade deficit may in fact not be so large – many other high tech goods manufactured in China all contain parts from around the world, reflecting the influence of

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globalization on manufacturing patterns.

Growth figures and other economic statistics out of China are widely regarded as flawed, opaque and subject to intervention by the Chinese government, depending on the aims of the Communist party at the time. For example, the Chinese National Bureau of Statistics does not disclose absolute weightings for their Consumer Price Index (CPI), which is used to determine inflation. In January, it was announced that the ratios within the CPI had been readjusted to reflect new realities in the markets (CPI measures changes in price for common consumer products over time). With this changed ratio, inflation was calculated at 4.9 percent, while previously the government had predicted a rate of 5.3 percent. Examples of such discrepancies along with China’s buildup of military forces, have seeded distrust within the American government towards China’s government, which has had negative effects for Chinese companies.

While China has maintained that its growth in military strength is for self-defense only, the lack of good faith in the Chinese government means that every public statement

is second-guessed and scrutinized. For example, the telecommunications Huawei was recently reversed its decision to acquire bankrupted US Server company 3Leaf due to fears that the Committee on Foreign Investment in the United States would eventually move to block the acquisition.

At the same time, the United States has benefited tremendously from cooperation on the part of the Chinese government. In 2001, China joined the World Trade Organization, and, as a condition of its joining, has made a series of changes that have benefitted the United States. For example, it has eliminated export subsidies for agriculture (the USA is the world’s largest agricultural exporter), as well as allowed trade outside of official channels, increasing the dynamism of US-China trade. In addition, it is frequently overlooked the amount of jobs trade with China supports in the United States. The distribution network for goods, whether in warehouses, trucks or shipping, supports hundreds of thousands of blue collar workers in the United States. While this does not fully compromise for the lost jobs in manufacturing centers in the Midwest,

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CHINA’S RISING MIDDLE CLASS WILL PROVE TO BE A VITAL MARKET FOR WESTERN COMPANIES. the additional benefit of lower prices across the board benefits United States consumers as a whole.

SO IS EVERYTHING PERFECT? The main way in which the United States can maintain its prowess on the world scene is through the enforcement of intellectual property rights, which is the main point on which China deserves the criticism given to it. These property rights go beyond simply enforcing logos on a t-shirt or DVDs minted in backroom shops – Ford motor company estimates that it has lost $2 Billion in sales due to counterfeiting of brake pads, spark plugs and other replacement parts due to counterfeiting in China. The Chery QQ, a Chinese city car exported to multiple countries, is a carbon copy of the Chevrolet Park, although it sells for several thousand dollars less due to saved research and development costs as well as cost cutting (such as no airbags). It is estimated that the purchase of legitimate software and entertainment property would add between $2.5 and $3 billion of additional revenue to American firms. The approach of United States companies in dealing with this phenomenon has been cooperation and subtle negotiations with the Chinese government, which is slowly revamping its intellectual property laws. This is where China will change the most in the coming decade – its laws dealing with business. It has recognized that foreign companies are reluctant to become fully involved in the Chinese market because of certain requirements to do business: For example, most industries carry the requirement that any foreign company enter the Chinese market only accompanied by a joint-venture partner. The Chinese legal

system has been constantly evolving, both in rigor and practice. In 1981, there were 6,218 lawyers in China. In 2005 there were 114,471.

Since 2005, many new sets of laws have been instituted, including anti-monopoly legislation, labor contract legislation and revised bankruptcy law. In 2007 private citizens were given the legal right to own property, a major shift from the days of Maoism and the Cultural Revolution. The civil legal system will continue to grow more dynamic and efficient in the next decade.

With this path of legal reform, certain advantages for Chinese firms will be removed and obstacles to American firms taken away.

Rather than fret about the continued ascendance of China, Americans should embrace the potential for cooperation that China offers. While there has definitely been more competition globally due to China’s rise, in the long run it will only be advantageous for long established players who will use management expertise and consumer relations to take advantage of China and other rising countries’ success. China’s rising middleclass is expected to soon reach 700 million members. They will prove to be a vital market for Western companies, including those of the United States, as long as American companies remain focused on innovation and quality, the same tenets that have been responsible for America’s growth over the past century. What is most important is maintaining access to that market, and if the United States chooses to take a confrontational attitude rather than a cooperative one with China over economic issues, it will find its long-term growth prospects severely stunted.

Austin Opatrny (abo27@cornell.edu) is a freshman at Cornell University majoring in Economics.

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Central and South Eastern Europe (non-EU) and CIS 1 million more unemployed

Developed economies + EU 5 million more unemployed

East Asia 4 million more unemployed

South Asia 2 million more unemployed

Latin America and the Caribbean 2 million more unemployed

South-East Asia and Pacific 2 million more unemployed

ILOâ&#x20AC;&#x2122;s 2011 projection of world wide unemployment

GLOBAL YOUTH UNEMPLOYMENT: Stifling the Freshest and Most Talented

by Ji Yung Suh

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One of the first revolutionary cries against the Egyptian dictator Hosni Mubarak originated among the Egyptian youth as they protested against police brutality after the murder of Khaled Saeed, a young Egyptian man tortured and murdered by the police.

These cries then spread on through the entire nation and onto the international community with a magnitude that finally brought Hosni Mubarakâ&#x20AC;&#x2122;s 30-year-old dictatorship to an end. However, an angst more powerful than the usual youthful revolutionary or political rebellion propelled this breaking of a decades-long tradition - a cry filled with economic frustration.

Kids Throwing Tantrums

Currently North Africa and the Middle East suffer from some of the highest rates of youth unemployment at nearly 24 percent. The issue, however, is not limited only to these regions. According to the International Labor Organization, youth unemployment is a global trend extending far beyond these select countries not only in number, but also in violence. As the energetic youth wait for work, their boredom evolves from lethargy to anger. Spain is currently suffering from a youth unemployment rate of 42 percent; Tunisiaâ&#x20AC;&#x2122;s dictator Ben Ali was kicked out after a series of revolts set in motion by a frustrated unemployed youth who used his own body as a torch by setting it on fire. In Serbia, 50 percent of the youth are unemployed and in London, thousands of college students revolted against rising university tuition costs. Globally, the ILO reported that at the end

of 2009, about 81 million young people (from ages 15 to 24) out of 620 million were unemployed.

The Causes: Too Many or Too Few?

Global youth unemployment can be broken down into two trends: one in which the problem is due to a youth generation too small in size relative to the older generation, and another in which the youth are too abundant in number.

The US and most Western countries are suffering from the first case. The immense presence of the baby-boom generation prevents the younger generation from replacing older workers who still cling onto their jobs, unwilling to pass them on.

And even upon retirement they continue to demand unrealistically huge amounts of retirement benefits that the younger generation will have to bear.

Then why are countries like Egypt, with larger youth popula-

tions, still struggling from high youth unemployment rates? It is because both trends of large and small sizes of youth populations are tied to the same commonality: both cases lack the economic growth and ability to absorb the younger work force.

The global economy, especially with the global economic crisis, has not been able to substantially absorb the emerging supply of the young labor force, no matter how qualified or talented. This is why non-democratic nations in the Middle East and North Africa, even with a larger youth generation, have fared poorly. With their autocratic governments and lack of private-sector growth, new members of the labor force are dependent on public-sectors for employment, but it is impossible for the governments to fully absorb the sheer quantity of unemployed youth.

Not the End of the Picture

The key to increasing youth employment, therefore, seems to lie

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INTERNATIONAL in economic growth, one extensive enough to absorb the newly generated labor force. But even a successful recovery from the current economic crisis will not entirely wipe out this situation. In the long-run, the economy will recover, but by that time the current youth will no longer be at the frontier of the line. By then these youth will be, in turn, part of the older demographics, and they will be products that corporations will deem as ‘outdated’ or ‘damaged,’ easily replaced by the newer and fresher graduates. According to the research of Lisa B. Kahn, an economist at the Yale School of Management, a class of white, male American college students, suffering from a one percentage point increase in unemployment by the time they graduate, will receive, 15 years after graduation, 2.5 percent less than the wage they would have received had the recession not occurred. Even with possible economic recovery and future employment, current unemployed youth will not be able to survive this turbulence without a few scars.

Our Solutions: Initiative, Independence, & Innovation

It seems silly for the current youth to simply sit and wait for a miraculous

recovery that will bring the economy back home. In fact, this is perhaps the very attitude that might have exacerbated the issue even further than necessary. As much as students demand to be treated as adults, they suffer from a chronic dependency.

We are told to go to school, we take the required courses, and by the time we graduate we hope to have somehow magically acquired the skills to taken under their massive corporate wings. This not only creates a fissure between the abilities of the newly generated labor force and the background skills that corporations in reality demand, but it also drains the entrepreneurial spirit of the younger generation, taking away their initiative to carve out their own paths.

The best way of ensuring extensive economic growth, however, especially one fit for increasing the employment rate of a relatively lessexperienced margin of the labor force, lies in the heart of entrepreneurship.

As President Barack Obama stressed when speaking at the 2010 Summit on Entrepreneurship: “entrepreneurship [is vital] because throughout history, the market has been the most powerful force the world has ever known for creating opportunity and lifting people out of poverty.”

Entrepreneurship will allow the younger generation to take a more creative, direct initiative to what is essentially their own problem. Starting businesses will work as an outlet for the youth’s freshest, most innovative ideas. Entrepreneurial businesses will create employment opportunities that earlier did not exist, and as businesses starting from the bottom, their entrepreneurial attributes would be well-suited for employing workers who had just recently joined the labor force and lack experience.

The “real world” outside campus is the college student’s equivalent of the boogie-man that used to scare us in to falling asleep by bedtime. But just as we realized by our pre-teens that nothing actually lurks beneath our beds, the unemployment problem might not be as beyond our control as we might have first perceived. Our generation is one that kicked both Ben Ali and Hosni Mubarak out of office – if we can outlet that type of initiative and leadership that characterizes our generation into economic production, we should be able to solve the problems we face.

Ji Yung Suh (js988@cornell.edu) is a freshman at Cornell University majoring in Economics.

How the Germans Survived:

Thanks to their blue-collar apprenticeship program, Germany is one of the select few countries with a relatively decent youth unemployment rate. The apprenticeship program employs young workers as ‘trainees’ and offers them on-the-job training with vocational classes. Aside from the fact that the program brings a huge relief to the Government’s budget since most of the training is provided on behalf of the companies, the major advantage of this program is that it smoothens out the transition between learning and working, allowing companies to personally train their future employees at their own expense. Employers are thus able to ensure the skills they need in their employees, and trainees of these programs are able to work, be paid, and learn all at the same time.

However, one downside to this policy is that it takes a while for the German companies to benefit from these investments as short-term labor production of early-stage trainees hardly outweighs the initial costs. It is only later on in the long-run that companies are able to recollect the benefits of their investments.

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Cornell Universityâ&#x20AC;&#x2122;s School of Hotel Administration:

preparing the leaders of the worldâ&#x20AC;&#x2122;s largest industry for nine decades.

Now featuring an undergraduate minor in real estate.

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THE ECONOMICS OF WAR:

Possible impacts of further North and South Korean aggression

by Ivi Demi

T

his past November the international community witnessed the Korean peninsula come the closest it has been to war in over a decade. The bombing of the South Korean facility on Yeonpyeong Island brought both sides to a tense standstill. The aftermath of North Korean military action are clearly visible, but some of the economic repercussions have not been as widely discussed. So far, North Korean offensive has focused on targeting mostly military sites such as Yeonpyeong, but if North Korea chooses to target South Korean economic infrastructures, as it appears they may in the future, this will create further problems for both Koreas and even their neighbors.

In particular, petroleum reserves could be a future target of outward aggression on part of the North Korean military. Due to South Koreaâ&#x20AC;&#x2122;s sustainability interdependence with neighboring nations, such an action on part of North Korea could put the relationships shared between South Korea, Japan, and China in jeopardy. All of these nations rely on each other to filter and refine their petroleum products, with South Korea and Japan sending products back to China for industrial use. Thus, such an attack on South Korean petroleum reserves may have more harmful repercussions for North Korea. This close tie with China and its neighbors may in fact push it into opposing North Korean actions in light of a war, or at minimum dropping partial or even complete support for North

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Koreaâ&#x20AC;&#x2122;s actions. Because of the close-knit relationship that China maintains with its democratic neighbors, they may place this delicate petroleum balance above their strong ties with the communist North Korean regime.

It is unclear to the international community exactly how long the North and South Korean conflict may last. Nonetheless the economic consequences of any further aggression need to be addressed. There are multiple economic side effects that risk markets assess in response to a perceived or real threat from any aggressive action. These responses may come in the form of crude oil price increases or an increase in insurance prices for delivery services that ship oil between petroleum partners in the region; there may also be major equity market effects in response to verbal threats or attacks. All stakeholders for the oil industry in the area would be facing major backlashes from perceived threats in risk management costs. Because North Korea is isolated from the industrial world, they stand to lose very little from economic threats or impacts, making them a larger threat to nearby petroleum trading neighbors.

With increasing technology advancement on the part of North Korean missile systems, attacks on South Korean or even Japanese oil refineries and/or other economic targets are becoming ever-more realistic threats. Civilian targets are providing less of an incentive for Kim Jong-Il and his regime, since they would much rather gain a competitive ad-

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vantage over their enemies in the South than simply attack citizens. Also, attacks on economic resource centers could place the South Korean infrastructure in disarray for a period of several months, providing a fairly large time period for the North Koreans to establish a firmer hold on the situation. Since the majority of South Korea’s petroleum refineries and major economic footholds lie within the range of North Korea’s Scud missiles, the threat looms ever closer and the opportunity for attack remains present. Much of what is probably keeping things at bay temporarily is the possible threat of causing fuel prices to skyrocket for their ally and possibly prompting China to sever its relationship with North Korea.

So where does this tense situation move forward from here? There are a number of ways in which the global superpowers would react to a variety of North or South Korean acts of aggression, but responses will greatly depend on the severity and type of act brought into question. In instances of minor aggressions, which we have seen multiple times since the armistice of 1953, it appears as if the message sent thus far is a stern display of authority on behalf of the elite powers, but no true outbreak of conflict. Mainly due to ties between China and North Korea, the

majority of North Korea’s displays of aggressions against South Korea have not been retaliated with counterforce, but instead with the warnings and use of close quarters military exercises near North Korean waters by South Korean troops and U.S. Naval air carriers.

If continued aggressions lead to South Korean aggressive responses, the timeliness of the forthcoming North Korean power transfer could certainly lead to continued backand-forth military attacks from each side.

This is a trend that is likely considering the probable need for Kim Jong-Il’s son to prove his worth to his father and his people. If no actions are taken on the part of both sides, we may return to the pre-shelling atmosphere, but this may be unlikely from the standpoint that most South Koreans feel their well-being may be in jeopardy. This guess may be as good as any others, but what is certain is that the continued tension between North and South Korea may take a different course if North Korea realizes its capacity to affect the economic interdependence of its neighbors.

Only time will tell how the North and South Korean governments will choose to act.

Ivi Demi (js988@cornell.edu) is a junior at Cornell University majoring in International Agriculture and Rural Development.

Kim Jong-Un With the decision to ascend his third son Kim Jong-Un to the seat of power when he steps down, Kim Jong-Il has left many world leaders wondering how the change of power will affect the delicate and tense situation with South Korea. One thing is for sure though: the world will be watching closely.

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THE CHANGING FACE OF MEDIA

by Amanda Joe

T

he media’s dramatic evolution reflects the universal consumer’s insatiable appetite for every piece of information and news at any time. In a recent press conference at Cornell, Keith Olbermann recently spoke to student journalists about his experience with media’s changing form.

In the olden days of print journalism, a story was offered in a basic format in one perspective. In our modern age, people expect to sift through the various media channels in order to develop their own informed opinions based on access to data. The bare skeleton of the news was originally the written form, which was enhanced with black and white photography. Words subsequently came alive on radio and then through pictures in motion on the television screen. It eventually penetrated cable networks to the Internet through websites, blogs, podcasts, and news at its simplest, Twitter, in 160 characters.

Media has become an all-encompassing source, as information has been transmitted to cellular phones and electronic reading devices. With so many different channels, their intersection can produce an overload of information, at which point it becomes relevant to ask, what is most effective?

Is the meaning of news, exactly that, to deliver a succinct message that is only noteworthy and essentially new to us? Or is it to replicate an entire real life experience complete with sound bites and reactions of others present in real-time action? Furthermore, what qualifies as news? And who is qualified to determine what is news and present it to us? With the emergence

of guerrilla or citizen journalism, any person with a cell phone can become a messenger of such a message, which can be distorted along the way. Thus, there are no longer any universally established name brands that people ultimately trust. The New York Times is no longer the superior brand simply because of its name. It must prove not only its credibility, but relevance as well, because journalists need to distinguish themselves and their story by adding real value. People now have increased access to knowledge and are empowering themselves through various means of expression. Thus, this is changing the face of journalism literally, in that these journalists must compete on the basis of the merit of their ideas, according to Olbermann.

The choices of medium in which the journalist presents news has expanded greatly. Writers are scrambling to do video takes, while the on-air broadcaster has essentially the “one-man band” with his camera on a tripod. With the rise of so many different channels of media, it is no longer a given that the whole world is watching or is interested in one established anchor’s delivery of the news. In fact, Olbermann argues that there is no such thing as a universal audience. The role of a journalist is not to pander to the audience’s expectations, but to create and add value for a specific, defined audience, who will recognize the truth.

The traditional print-driven outlets are not dying, but merely adapting, by supplementing their content with videos. Olbermann mentioned that whoever can deliver content online in

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a way that does not alienate readers is the next most important thing. He referred to the decrease in online and print subscriptions that has resulted from the Wall Street Journal’s use of the paywall, despite News Corporation’s CEO, Rupert Murdoch’s claims of a minimal negative effect.

According to an online poll by Times Magazine, the most trusted newscaster is not a news anchor at all, but instead a comedian, Jon Stewart, whose satirical approach to news is believed to be entertaining yet effective.

Polls have showed that more people are well-informed by watching parody shows like the Colbert Report since they care about the content and are engaged.

Keith Olbermann argues that a transformation of journalism is taking place as result of the advances in technology and expectations. Instead of a spontaneous combustion like the Big Bang that would give rise to different forms of media, it is becoming more of a “black hole,” as he calls it, in which all forms merge into one. Thus, these “super sources” would become amalgamations of articles, videos, and web-based content. Earlier, the media forms would compete with each other and show disdain for the other’s craft, believing theirs to be the most truthful or more complex. Sports Illustrated had the opportunity to acquire ESPN in the 1990s but did not see the value in having a subsidiary devoted to television. Now, the chance to control both magazines and television would be very valuable.

Since people are demanding much more from their news, media organizations and personalities are aiming to exceed such expectations with a greater variety of different types of content.

Otherwise, the people themselves pose the threat of choosing instead to rely on their own methods and sources for news. Media companies are working to satisfy its viewer and reader base by offering a diverse range of unique perspectives.

Amanda Joe (akj36@cornell.edu) is a junior at Cornell University majoring in Industrial and Labor Relations.

Cornell Business Review Thank You To Our Kind Sponsors: Charles H. Dyson School of Applied Economics and Management Student Assembly Finance Commission The School of Hotel Administration The School of Industrial Labor Relations

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