Coping With Uncertainty
Economic Development
How the public and private Ram Charan offers a seven-step sectors can work together, p. 42 offensive strategy, p. 56
When Late Is Better
Is second-to-market better than beating the pack? p. 50
Driving Innovation
Car technologies that will change your driving experience, p. 66
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CONTENTS
May/June 2015 No. 276
28
FEATURES 28 Cover Story
The 2015 Best and Worst States for Business: CEOs Favor Pro-Growth, Low-Tax States In our 11th annual survey of CEOs, Texas and Florida continue to dominate as the top two states for business while California and New York hold onto their traditional death grip as the worst and second-worst states respectively.
42 Economic Development The Next Great Leap
42
How can economic development organizations—and CEOs—really move the bar for their states?
By Rick L. Weddle and William J. Holstein
50 Strategy
When Second is Best
Why second-to-market often beats early mover advantage.
By Russ Banham
56 Leadership
Going on the Offense in an Uncertain World Seven steps to getting your game face on.
By Ram Charan
56
62 CEO Passions
Collecting Art for 40 Years Meet real estate developer Ron Pizzuti, owner of 2,000 artworks—none bought as an investment.
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COVER ILLUSTRATION BY ALLAN PETERS
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$2 BILLION IN TAX RELIEF BUILDS
CONFIDENCE. STRONG BUSINESS IS BUILT ON BOTH.
IN WISCONSIN® WE’RE AS INVESTED AS YOU ARE. We know financial stability is important to your business. That’s why we work hard to keep our tax policies in check. In doing so, we’ve created an economic environment that allows your business to compete globally and nationally. If you’re paving the way in an emerging industry, our policies are suited for your advancement. If you’re looking for highly skilled employees, we’ve devoted millions to workforce development programs. If you’re in manufacturing or agriculture, we can virtually eliminate your tax burden. That way, you can build your business with confidence in a climate you feel good about. To learn more about how our tax policies can help you expand or relocate In Wisconsin, call 855-INWIBIZ (toll free) or visit Confidence.InWisconsin.com.
®
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Photo: Schneider, Green Bay, WI. In Wisconsin® is a registered trademark of Wisconsin Economic Development Corporation.
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CONTENTS
Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi
66
DEPARTMENTS 08 Editor’s Note 10 CEO Watch
• Energy Focus’s Eric Hilliard on lighting the future • Talking Rain’s Kevin Klock on reinvigorating a fizzling business • Deloitte’s Catherine Engelbert on mapping the future • CEO Confidence: Confidence Greater Among Large-Company CEOs
18 Chief Concern
26 Sonnenfeld Signposts
Driving Technology: The Future is Now A look at three technologies that will change the way we drive.
By William J. Holstein
70 Flip Side
On Second Thought
Winning the Mid-Market Talent War
Avoiding Windbags, Wizards, and Villains By Jeffrey Sonnenfeld
66 Executive Life
Breaking Up is Hard to Do
22 Mid-Market Report
Online Editor Lynn Russo Whylly
Should your company split the roles of CEO and chairman?
By Thomas J. Saporito
It’s good… it’s bad. No, wait! It really is good!
By Joe Queenan
VP, Associate Publisher Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net
Director, Business Development Lisa Cooper 203/889-4983 lcooper@chiefexecutive.net
Director, Business Development Liz Irving 203/889-4976 lirving@chiefexecutive.net
Vice President Phillip Wren 203/930-2708 pwren@chiefexecutive.net
72 Final Word
California and Parasitic Leakage
24 Making
Contributing Editors Michael Gelfand William J. Holstein George Nicholas C.J. Prince Joe Queenan Dr. Thomas J. Saporito Prof. Jeff Sonnenfeld
Technology Work
Wayne Cooper Chairman & President
Marshall Cooper Chief Executive
One Sound Shore Drive, Suite 100 Greenwich, CT 06830, 203/930-2700
The Trouble with Time-to-Market By Tom Pettibone
Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 276, May/June 2015. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NONPOSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306. Subscription Customer Service:
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CHIEF EXECUTIVE OF THE YEAR 2015 SELECTION COMMITTEE
ChiefExecutive.net TIMELY CONTENT TO HELP YOU RUN YOUR BUSINESS
DAN GLASER President and Chief Executive, Marsh & McLennan FRED HASSAN Chairman, Zx Pharma Partner/Managing Director, Healthcare, Warburg Pincus ROBERT IGER Chairman and Chief Executive, The Walt Disney Company 2014 Chief Executive of the Year CHRISTINE JACOBS Former Chief Executive, Theragenics Director, McKesson
DAILY BEST OF THE WEB We scour dozens of websites so you don’t have to. Top stories for CEOs to help you start your day
CEOS IN THE NEWS Advice from successful CEOs, along with news and information about your industry peers
CEO INSIGHTS Insider information from experts on leadership, strategy, operations, marketing, sales, manufacturing and much more
PLUS Important lists and rankings you can reference all year long, including: Best & Worst States for Business • Best Companies for Leaders CEO Confidence Index • CEO of the Year • Annual Wealth Creators
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TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries ROBERT NARDELLI Chief Executive, XLR-8 WILLIAM R. NUTI Chairman and Chief Executive, NCR THOMAS J. QUINLAN III President and Chief Executive, RR Donnelley JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management MARK WEINBERGER Chairman and Chief Executive, EY MAGGIE WILDEROTTER Executive Chairman, Frontier Communications Solutions C O N TACT U S Corporate Office Chief Executive Group, LLC One Sound Shore Drive, Suite 100 Greenwich, CT 06830 Phone: 203.930.2700 | Fax: 203.930.2701 www.chiefexecutive.net Letters to the Editor letters@chiefexecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 | Fax: 847.730.3666 advertising@chiefexecutive.net Reprints Phone: 203.889.4974 hdewing@chiefexecutive.net
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EDITOR’S NOTE
CEOs as Handmaidens of States’ Prosperity
Unfortunately, there are too many states that seem impervious to the lesson that growth comes from the private sector.
GIVEN THE COMMON language spoken throughout the U.S., the existence of a common currency and fairly similar social customs of various state populations, as well as the contiguous nature of all but two states, it is clear that there is more that unites us than separates us. Economic integration is an almost perfect union. Yet a trend has been developing for decades: Not all states prosper at the same rate. As evident in Chief Executive’s 11th annual survey of CEOs’ opinions as to which states are best for business, the pro-growth, low-tax, lighter-regulation states—the so-called red states—clearly have pulled ahead of the high-tax, heavy-regulation, so-called blue states. It is no mystery why the top 10 states in this year’s ranking outperform the bottom 10. State and local governments have almost unlimited powers to tax, spend, regulate and oversee as long as their voters permit them to do so. The fact that Texas, Florida, Tennessee and North Carolina have elected to do these things sparingly shows up in how well regarded they are by business leaders. This relationship gets to the flower-and-bee symbiosis between regions and CEOs. The CEO-bees will pollinate those flowers where the honey is. Hence, investment and job creation tends to favor places run mostly for the benefit of their citizens rather than for the benefit of the political class and interest groups that dominate. Consider the 10-year population growth changes from 2002 to 2012. One of the first things to catch one’s eye is that eight of the nine zero-personal-income-tax states were in the top half of decadal population growth, while six of the nine highest-income-tax states were in the bottom half of population growth.
In addition, all 11 states that adopted a personal income tax over the past 50 years are in the bottom half of decadal population growth. In other words, people vote with their feet. Corporations do the same. Business leaders may be more affluent as a group and are better able to take a tax hit, but they see where their workforce is going and often they want to follow. If our survey shows anything, it demonstrates that CEOs are open to areas where there have been fundamental policy rethinking. Louisiana was once considered a hopelessly corrupt and educationally backward state. Business leaders now consider it worthy to be in the top 10. Wisconsin was once considered the epicenter of the progressive labor movement. With legislation passed by Governor Scott Walker, it enacted numerous reforms, including right-to-work. Who could have imagined a day when Michigan, the home of the United Auto Workers union and the Teamsters, would become a right-to-work state? Gradually, perhaps grudgingly, business leaders are seen as the handmaidens of prosperity. They seek to grow their businesses in a climate that favors prospects for success. Former Citibank chief Walter Wriston, commenting on world financial markets, famously said that money will go to places where it is well-treated. The same goes for business. Unfortunately, there are too many states that seem impervious to the lesson that growth comes from the private sector. Too many politicians, like too many wolves, soon deplete their food source (tax base) and the game ends in something like a Detroit or a Stockton, California. Don’t let this happen to your state.
I LLU ST R AT I O N BY T I M TO M K I N S O N
J.P. Donlon
Investment—and job creation—tends to happen in hospitable climates. By J.P. Donlon
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CEO WATCH
CEO INSIGHT / ENERGY FOCUS’S ERIC HILLIARD
LED-ing the Navy
Working with the DoD brightened the future for this energy-efficient lighting company. By Jennifer Pellet
WHEN ERIC HILLIARD joined Energy Focus in 2006, it was a company in transition. The California-based company—known as Fiberstars at the time—was looking to move from its niche as a producer of fiber optic lighting for swimming pools into the energy-efficient lighting arena. To that end, it had inked a deal with a Solon, Ohiobased lighting technology company, moved its headquarters there and adopted the moniker Energy Focus to better reflect its target market. When those drastic moves failed— Energy Focus posted its 15th straight year of losses in 2012—James Tu stepped in as executive chairman and CEO. Tu is the founder, CEO and chief investment officer of 5 Elements Global Advisors, an investment advisory and management company focusing on investing in clean energy companies, and co-founder of Communal International, which helps clean energy companies gain access to global marketing, distribution licensing, manufacturing and financing resources. At the time, Eric Hilliard was the company’s COO. “When [Tu] came in he did a management restructure— and I am the last executive standing,” he explains. “That’s how I became president.” The company’s new management redoubled its efforts to develop light-emitting-diode (LED) products, focusing first on fast-tracking a relationship with the U.S. Navy that dated back to 2002. “Back then, the Navy was getting ready to invest in the next big lighting move for the ships,” explains Hilliard. “They realized that the ship lighting they had wasn’t going to cut it and that they didn’t want to make incremental improvements. They wanted the next generation.” Energy Focus won a bid to work with the Navy’s Defense Advanced Research Projects Agency and Naval Sea Systems Command (NAVSEA) to develop LED fixtures and bulbs compliant with requirements for naval ships, explains Hilliard, who credits
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WHO
the company’s passionate pursuit of innovation for enabling it to compete against industry goliaths for Navy contracts. “We didn't look at it from a financial perspective,” he says. “We held true to wanting to create the next best thing in lighting. By staying true to that focus we were able to work with the Navy in a very non-contentious way. As the specification was coming to bear, we helped support [innovation] by saying the technology can be pushed harder, you can expect more.”
Success at Sea Eventually, that effort paid off. Today, Energy Focus is the only domestic manufacturer of LED lamps certified by the Navy to provide replacements for the existing fluorescent lighting on its warships. The LED lights are significantly more expensive than the fluorescent ones they replace, but they are expected to last 5 to 10 times longer and offer 50 percent or more in energy savings. The company currently has a $23 million contract with the Navy to replace fluorescent tube lights with its IntelliTube LEDs and has received an additional $25 million in purchase orders. Even after those contracts are fulfilled, the Navy will only have retrofitted 10 percent of its fleet, leaving plenty of potential for future orders. In addition to sales, Energy Focus’s work with the Navy has given the
Eric Hilliard, president of Energy Focus SIZE
$28 million, 100 employees WHERE
Solon, Ohio MILITARY SERVICE
Operations Specialist, U.S. Navy MENTOR
“My father” LEISURE PURSUIT
Golfing, Motorcycling FAVORITE READ
Uncommon, by Tony Dungy
company a durable competitive edge, explains Hilliard. “Anybody can go out and try do what we do, but it took a lot of brain trust and years to develop this product and then get it to a price point that was acceptable for the Navy…. You're not going to show up tomorrow and compete against us.” The Navy also places a premium on safety—and is willing to pay a premium for it. That’s something that Hilliard, who served as an operations specialist in the Navy during the Persian Gulf combat action, understands from experience. “When you go to sea, as I have, a warranty really doesn't
count while you're sitting off the coast of Afghanistan,” he says. “You need the lights to stay on, not a piece of paper guaranteeing that if they go out new ones will be sent.” Competitors, in other words, will need to do more than dangle a lower price in front of the U.S. Navy to win its business. Going forward, however, Energy Focus will need to grow its commercial sales to sustain its double-digit growth rate. That means winning contracts with school systems, healthcare facilities, general industry—any place where replacing fluorescent lighting with LEDs has the potential to dramatically reduce energy costs. Hilliard refers to those targets as the “red ocean” market. “That’s where there’s blood in the water, because everyone who makes tubular LED technology, from companies in Asia to here, is fighting for the building across the street,” he notes. Even there, however, Energy Focus enjoys a Navy-endowed edge. Having two government contracts under its belt gives the company a certain amount of credibility in the marketplace—plus the security of a solid revenue stream. “Back in my blue ocean, I have the Navy, which will always produce for us,” Hilliard says. “So if you don't win that building, you die; whereas if I don't win that building, I'll be here for the next one.”
THORNS AND ROSES
Cornell: Cool with ISIS They have strange sports brackets in Ithaca, New York. JOSEPH SCAFFIDO, assistant dean for students at Cornell University, was captured on a Project Veritas hidden camera THORNS advising a journalist how to start a pro-ISIS and pro-Hamas club on campus. He also advised how to obtain funding to have a member of ISIS run a “training camp,” astonishingly equating the latter to “bringing in a coach to do a training on a sports team or something.”
Kudos to the plain-spoken SERGIO MARCHIONNE, CEO of Fiat Chrysler, who pointed out that the Obama fuel economy rules virtually require auto companies to produce ROSES electric cars at a loss. Policies that prop-up such cars subsidize the already-affluent with $7,500 tax credits and pretend to do something about global warming when they do no such thing. The electricity powering a Tesla, for example, mostly comes from coal.
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CEO WATCH
CEO CASE STUDY / TALKING RAIN’S KEVIN KLOCK
Pouring Profits for Talking Rain By Jennifer Pellet The Challenge You’re the vice president of operations at the sparkling water company you joined four years ago, where management has struggled mightily to build share in the fast-growing bottled water market. Despite burning through more than $35 million of investors’ funds, sales are stagnant. Outgunned by the likes of Coke’s vitaminwater and Pepsi’s SoBe brand, your company’s regional brands fail to catch on. Then comes the kicker: in 2010, over a six-week period, the CEO, president and head of sales all abandon ship. Rather than join the exodus, however, you decide to take the helm and start steering.
ny’s situation was dire. Where others saw the need to bail, Klock spotted opportunity. “I had always wanted to be a CEO some day,” he recounts. “I thought that would mean going back to school to get an MBA, but then [the top three executives] all left at once. So I went to the owners and they gave me the title of senior vice president and put me in charge.”
WHO
Kevin Klock President & CEO, Talking Rain Beverage WHAT
The Context Back in 1987, the founders of Preston, Washington-based Talking Rain Beverage Company hoped to follow the regional-to-national growth track forged by startups like Starbucks, Snapple and Nantucket Nectars. When sales failed to soar, they sold out to investors, who began aggressively pitching its regional brands— Twist, a lightly flavored water, and Active Water, a vitamin-enriched water—nationally. Deals with Costco and BJ’s brought brief sales surges, and the Sparkling ICE flavored sparkling water brand launched by the company in 1992 gained some popularity. Still, by 2010, the compa12
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Preston, Washingtonbased beverage company, maker of Sparkling ICE zero-calorie sparkling flavored water EDUCATION
Chemical Engineering degree from Oregon State
Deciding to pour all their resources into the Sparkling ICE brand, Klock, his investors and his team went into a lengthy huddle. “We spent about 11 months working on a vision, which was to be recognized as a solid, leading beverage company with
brands that people trust and enjoy,” he says. “That was important because funding is so difficult today that a lot of entrepreneurs make noise in the press and talk up strategies. We were able to really bore down and focus on business.”
The Resolution Klock and his team focused first on retooling both the product itself and how it was marketed and sold. Talking Rain fine-tuned the flavor profile and appearance of each of eight products in the Sparkling ICE line and redesigned its packaging, adopting a black label that really “popped out on the shelves,” explains Klock. When reintroduced to the market, the revamped Sparkling ICE’s sales surged, jumping from $2.7 million in 2009 to more than $100 million in 2012. It didn’t hurt, of course, that the re-launch came at a time when cola-weary Americans were actively seeking soda substitutes. According to a recent Wall Street Journal article, soft drink sales have been in decline for 10 years straight. “When you look at where our sales are coming from, it’s mostly from diet and regular soda,” notes Klock, who says Talking Rain purposely kept a low profile during Sparkling ICE’s initial sales run-up for that very reason. “We didn’t go out and trumpet it. This was not a category
“
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to the next level in order to hold its own against its vertically integrated competitors. “Last year we put in one of the independent national direct-store delivery (DSD) networks,” says Klock, who will now distribute products directly to retailers through relationships with Anheuser-Busch, MillerCoors, Snapple and independent distributors.
The Endgame
“
This was not a category that Coke and Pepsi were in at the time...we wanted to steal as much share as we could before we
got figured out.” that Coke and Pepsi were in at the time and we wanted to steal as much share as we could before we got figured out.”
The Hurdle Rapid growth often brings growing pains, and such was the case for Talking Rain. When sales spiked,
the company had to scramble to meet demand. In 2012, the company expanded its manufacturing to six plants across the U.S. and one in Canada. Then, to sustain growth by expanding into convenience stores and food service outlets, it needed to bring its distribution capabilities
Today, beverage industry experts estimate Talking Rain’s sales revenues at over $400 million. While the company holds just a 6 percent share of the overall market, Klock notes that it is the largest single-serve (purchases of less than 20-ounces) brand in the water category in the food, drug and mass-market retail channels. Now poised to extend Talking Rain’s retail reach, Klock is optimistic about the future. “If we can get our brand as well-established in convenience stores as we are in food, drug and mass-market retail, we should double sales right there,” he says. “We’ve also started global expansion, launching in Australia and exploring outside-the-country partnerships. So we have plenty of things in the pipeline.”
The Lesson His tenure at Talking Rain has given Klock a new appreciation for the role pricing plays in a brand’s premium status. As a result, he urges CEOs to resist the temptation to resort to promotions for a sales bump. “You’ll never see Sparkling ICE for under $1 because we find that once you go below a dollar, your brand loses value for consumers,” he says. “You can destroy a brand by pricing too low.” MAY/JUNE 2015
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CEO WATCH
CEO POV
Deloitte CEO Cathy Engelbert Enjoys a Commanding Lead Among the Big Four By J.P. Donlon
“RUNNING A PROFESSIONAL
services firm is like herding cats,” Ed Kangas, a former Deloitte Touche Tohmatsu CEO, once remarked. “Everyone thinks he is smarter than you and can run it better.” The partnership model of professional service firms sets them apart from most companies. The firm’s “product” is human ingenuity and its knowledge base. It is also uniquely challenging from a leadership perspective. Deloitte, with 210,000 employees in over 150 countries, is the largest of the Big Four, with more than $14 billion in revenue. It’s also the only one to retain its consulting arm. Every four years, a nominating committee of 12 partners scours the firm for its next CEO and chairman. As of March, Catherine Engelbert became its current CEO, the first
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woman to lead a Big Four firm. A 29-year-veteran of the firm, she started with Deloitte Haskins & Sells in its Philadelphia office and ultimately rose to run its audit practice. What caught the partners’ attention was her focus on clients and innovation, particularly investments in Deloitte’s people. “I was a line client-service partner working with large companies mostly in the pharmaceutical industry,” she recalls. “I could see how they were evolving with the pace of change in technology.
WHO
Catherine Engelbert, CEO, Deloitte LLP BIGGEST INFLUENCE
“My father, who died young, at 51. He worked three jobs, and he sent all eight kids through college.”
That path hasn’t always been easy. “At times it’s been difficult raising two children and doing this,” says Engelbert, who served as her daughter’s middle school basketball team coach. “But I have had some great sponsors who said, ‘Cathy, you need to go do this because if you do this, you’ll get to the next level in your career.’” Engelbert believes investing in innovation and expanding the firm’s global footprint are among Deloitte’s biggest challenges. To that end, the firm intends to hire 24,000 people in 2015. Deloitte’s human capital transformation practice is also expected to play a bigger role going forward. While Engelbert didn’t necessarily anticipate becoming CEO, she has always aspired to be a leader. Her father, an engineer with RCA who
worked on various NASA projects, was a major influence on her personal life, as was her aforementioned mentor Mike Cook. Her husband, a West Point graduate, flew helicopters in the U.S. Army and joined Mobil (now Exxon Mobil) around the time she joined Deloitte. A four-year term as CEO doesn’t seem like much time given her longterm goals (Deloitte permits a second four-year term if re-elected.) “For me, it’s about differentiating yourself versus the competitors,” she says. “And it’s not just the traditional Big Four competitors, it’s the consulting competitors as well—the McKinseys, Bains, BCGs and IBMs, even.” Chief Executive’s J.P. Donlon recently caught up with Engelbert in her Parsippany, New Jersey office.
➼
BUSINESS MENTOR
Mike Cook, former Deloitte CEO
?
FAVORITE READ
Bold: How to Go Big, Create Wealth and Impact the World, by Peter H. Diamandis and Steven Kotler
The biggest killer of CEOs is I thought we could bring some of that inside.” Engelbert, who studied computer engineering at Lehigh University and who is raising a 13-year-old son and a 17-year-old daughter, was spotted early in her career by then-CEO Mike Cook, who asked her to join his steering committee. “Mike had daughters at the time who were coming out of college,” says Engelbert. “He said, ‘I see that my own company isn’t really retaining the best women.’ So, this set me on my path and I stayed in touch with him off and on.”
A HEART ATTACK
The most common (FIRST) symptom is
SUDDEN DEATH
Half of CEOs who have a heart attack have
NORMAL CHOLESTEROL
WHAT WOULD THE IMPACT BE ON YOUR COMPANY IF YOU WERE SUDDENLY GONE? GO TO
www.CEOHeartProgram.com
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: Q CEO WATCH
What is your vision for Deloitte?
IN THE U.S., we serve over 80 percent of the Fortune 500, in some capacity, in one of our businesses. My vision is to maintain that clientcentricity, but since we also see how these companies are evolving, to invest in people and innovation. So we’ll hire over 24,000 people over just the next year to serve our clients. We’ll also double our investment in innovation spend over the next three years. This is innovation in digital, cloud, 3D, cyber, artificial intelligence and analytics. There’s so much change going on with the way companies are thinking of marketing themselves. We’re well positioned because all our businesses serve those niches. Our vision is to differentiate ourselves in how we do this. Tell us about the innovation categories and about what each specifically means to you. When you think about cloud, and about the traditional way that our technology practice operates around big ERP [enterprise resource planning] systems that companies have put in, it represents a huge change in the way companies operate. We are trying to evolve in a similar way. We look at the way companies are marketing themselves. Is everything going to be conducted through one’s smartphone now, rather than traditional advertising or media? The ecosystem of the digital economy is evolving. We intend to partner with companies and form alliances and collaborations in this ecosystem of emerging digital communication. Cyber is a key area for us. Cyber conjures high-profile breaches, but
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for us it’s about methodology. Is it vigilant, resilient and secure? Many companies don’t know whether they have had a major breach into key systems. I was at a client the other day where they were talking about a credit card file breach being worth $1 per record, whereas healthcare records are worth $10 each. Looking at how different industries are being targeted for cyber [theft] is an important part of the way we look at cyber. Understanding how resilient you are once you are breached is an important capability and an important emerging business for us, as well as important methodology for ourselves. We’re also examining the impact of such things as 3D and wearables. One of my partners tells a story about how he was able to print out a Barbie house for his five-year-old daughter on a 3D printer and how different things have become when you can print out a 3D car and other things. So 3D is something we’re looking at too, because it represents a different delivery mechanism to the consumer. Then there’s analytics. Like everyone, we’re investing in analytics and how they can be used in business. We want to help our clients use big data to drive their strategy. We are keenly listening to clients who are successfully using this as an enabler. In the process we are refashioning our services to help them. Much of this sounds like it’s coming from the consulting side of Deloitte. Yes, but our innovation is across our businesses. Believe it or not, in the
audit and tax traditional businesses, we’re innovating around the use of artificial intelligence. How does artificial intelligence help with tax and audit? Let me offer one example. Our clients have thousands of contracts on the tax side. If you’re serving a partnership, they have hundreds of K-1s. Artificial intelligence involves machine-reading that can rapidly examine contracts. Traditionally, we used to audit only a sample of those contracts; now we can look at 100 percent of them in seconds. We used to manually review them and highlight them, now we can feed them into a machine and tell it what we want it to read—maturity dates, extension options, or different provisions. This is going to be huge in financial services when looking at derivatives and other contracts where one can find anomalies. It also allows one to assess risk in a different way than before. Our clients who are seeing this love it, and our people who don’t want to manually review and highlight things, are also excited. Apps on your smartphone: Instead of doing inventory counts on the audit side with manual tallies, which we were still doing six months ago, now we have an app which will download information right into the company’s SAP or ERP system and be able to do a count right there and feed it right back to corporate. It identifies whether you have a difference. It’s another enabling technology tool that takes the manual, rote tasks out of the audit.
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“
CEO WATCH
Dow Chemical’s Andrew Liveris recently told us that the biggest impediment to business is the complexity of our tax code and the briar patch of regulations, many of which are at cross purposes. While I’m not suggesting that Deloitte supports an overtaxed, overregulated economy, one has to concede that your profession benefits from the fees it is able to command due to this situation. How can you fulfill your mission to help your clients, who would like a more simplified world, when that would go against your own self-interest? I don’t think it goes against our self-interest. The intersection of regulatory risk and strategy is where we play well. We help companies respond to regulatory risk and strategy. We look at the regulatory environment—we’re regulated as well—and not just our audit business, but across our businesses in different ways. Andrew makes a great point, but the companies that can solve that intersection that I describe, that have the right
We’re investing in analytics and how they can be used in business. We want to help our clients use big
data to drive their strategy.”
strategy moving forward, make the right investment and put the regulatory part of this in the context of managing risk and driving forward with a strategy, will come out on top. We can help them get there. I understand some may view complexity as a business opportunity for Deloitte. But in the end, we’re about helping clients solve their complex business problems. Would Deloitte join others in trying to roll back overregulation and lobby for tax reform?
We absolutely have a public interest and a public obligation to help companies drive towards what they want. We’re obviously involved in Washington and with the U.S. Chamber with public policy issues such as tax reform and another Homeland Investment Act, where companies are incentivized to invest more in U.S. manufacturing and create more U.S. jobs with the right tax environment here. I realize some may not think so but we look at public policy from the benefit of our clients.
CEO CONFIDENCE
Large Mid-Market Firm CEOs Are More Confident Than Their Smaller Company Peers FOR FOUR OUT of the last five years, CEOs of
mid-market companies with more than $100 million in revenue had the most confidence in their expectations for overall business conditions a year from now as compared to their smaller-company peers. They also scored higher than the average of all CEOs surveyed. In March 2015, CEOs of larger mid-market companies rated their confidence level in how they see overall business conditions a year from now a 6.79 out of 10. Meanwhile, CEOs of companies with revenues of between $10 million and $100 million gave a 6.63 rating, while those of companies with revenue under $10M scored 6.06. 18
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7 6
THE UPSHOT
5
Small company confidence is flagging
4
MARCH ‘11 <$10M
MARCH ‘12
MARCH ‘13
$10-100M
MARCH ‘14 $100M+
MARCH ‘15 OVERALL
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CHIEF C
ONCERN
p U g n i k a ard e r B sH I o D o t Should yo split the ur company role and cha s of CEO irman? By Tho mas J. Sapori to
THE ANSWER IS YES—except when it’s no. Not the advice you anticipated, right? That’s because this isn’t a black-and-white issue. You wouldn’t necessarily know that, however, given the swinging corporate governance pendulum. In 2003, 23 percent of S&P 500 companies split roles, according to law firm Akin Gump. Ten years later, the number almost doubled. Yet, while the trend to split roles appears clear, you shouldn’t view separation as a panacea. Instead, you should ask: Would splitting roles be good for my company? From my experience working with CEOs for over 30 years, three areas should be carefully explored before making that decision. Corporate Complexity The degree of complexity that an organization has to manage is a key factor. If an organization grapples with high complexity and many constituents, it may need to make the split. Since a high level of complexity is difficult to manage for one person, a “divide and conquer” mentality can be very effective in complex organizations. On the contrary, if you’ve got a leader effectively juggling both roles in an organization where complexity
is low and the number of constituencies is limited, then separation may be unnecessary. Chairman-CEO Dynamics If the roles are split, what is necessary is unity of leadership. A CEO and chairman must always be on the same page with one voice on strategy, key goals and pace of change—whether dealing with analysts, shareholders or within the organization itself. “It starts with the relationship that the CEO has with the board,” says Doug Conant, former CEO and board member of Campbell Soup Company. The boardroom can be a messy place if your CEO and chairman are not working together effectively. You need to make sure both are aligned regarding strategy, philosophy and communication. “It’s absolutely essential that whoever is shepherding that relationship ensures that there is good, transparent, candid dialogue between the CEO and the board.” To do that, some boards appoint a former CEO chairman—someone with a distinct perspective and valuable experience managing the company. This is particularly advantageous if the company has a new CEO not quite ready for chairmanship. Lead Director There may be no one formula for
making your decision, but unless you have a non-executive chair if you split roles, or a lead director otherwise, you probably have a formula for failure. That a strong lead director can ensure a healthy, effective, accountable board is increasingly recognized. Indeed, according to Farient research, almost 60 percent of S&P 500 firms had a lead independent director. As former Hallmark CEO Irvine Hockaday Jr., who has served as lead director at four companies, explained recently in Harvard Business Review, “I look at the lead director as a conductor, like a symphony director, working to ensure maximum collaboration among directors and maximum support of management.” Ultimately, good governance is not about joining a bandwagon. It is not about adopting a supposed best practice. And it is not about making a kneejerk reaction. As Indiana University associate professor of strategy Matthew Semadeni suggested in his 2012 report on the topic, “Companies shouldn’t undertake a separation…because other companies have, but instead take a studied approach that looks at current performance, determines how a change will affect overall performance, and then separate only if necessary.”
DR. THOMAS J. SAPORITO is chairman and CEO of the consulting firm RHR International. This column is part of a series on leadership.
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MID-MARKET REPORT
Winning the Mid-Market Talent War A strong brand and employee value proposition are top recruiting tools
THE ABILITY TO ATTRACT, train and retain talent consistently ranks among the top five challenges facing middle market leaders, according to surveys by the National Center for the Middle Market (NCMM) at Ohio State University. Pitted against firms of all sizes, middle-market firms often struggle to compete with the name recognition and diverse compensation packages larger companies can offer. ¶ Those that excel at recruitment often appeal to desirable candidates by providing growth opportunities, compelling work/life balance programs and a strong image and reputation, according to a recent NCMM report. Less bureaucracy, more opportunities to work directly with the CEO, a shorter path to the top and stronger connections to the community are other advantages middle market companies can cite. Here’s a look at some of the best ways that mid-market companies compete for talent.
IMAGE IS IMPORTANT 83% of executives at companies with clear employer brands believe those brands play a role in securing and keeping top talent. My Company's Employer Brand Helps Us Get Top Talent 83%
63%
How Mid-Market Companies Can Compete for Talent BRAINSTORM BENEFITS What can your company can offer that larger and smaller organizations cannot?
CONSIDER YOUR COMPETITION Know who you are up against and what they can offer so that you can differentiate yourself.
79%
ENCOURAGE REFERRALS Create a program that rewards employees for bringing in potential hires.
MOVE QUICKLY Great candidates can slip away during a long, drawnout interview process.
21%
Clear Employer Brand
Employer Less Developed Brand Employer Needs Work Brand
OF MIDDLE MARKET EXECUTIVES AGREE THAT A GOOD EMPLOYER BRAND IS ESSENTIAL TO THEIR ABILITY TO ATTRACT TOP TALENT
BEYOND SALARY Executives cited these tangible and intangible benefits as the most compelling components of their EVP. Components of a Strong Employee Value Proposition (EVP) 75%
74%
73%
70%
70%
36%
29%
33%
30%
28%
THE QUALITY OF PEOPLE WITHIN OUR COMPANY
MEANINGFULNESS OF WORK
THE CULTURE OF OUR COMPANY
THE BENEFITS WE OFFER (HEALTH, RETIREMENT, ETC.)
64%
63%
62%
61%
22%
27%
19%
23%
OUR BASE PAY & SALARY STRUCTURE
JOB SECURITY
THE QUALITY OF FACILITIES & WORKING ENVIRONMENT
THE MISSION & PURPOSE OF OUR COMPANY
61%
19%
OUR INCENTIVE & BONUS PROGRAMS very attractive
OPPORTUNITIES FOR PROMOTION & ADVANCEMENT WITHIN OUR COMPANY very attractive/attractive
22 / CHIEFEXECUTIVE.NET / MAY/JUNE 2015
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IT TAKES EXPERTISE TO STAY AHEAD. To succeed today, you need industry expertise and transformative advice to drive your business forward. Find out what CohnReznick thinks at CohnReznick.com. Forward Thinking Creates Results.
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cohnreznick.com CohnReznick is an independent member of Nexia International
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MAKING TECHNOLOGY WORK
The Trouble with Time-to-Market
Racing past red flags to introduce a new product or service invariably backfires. Here’s how to get the launch process right. by Tom Pettibone LAUNCHING A NEW PRODUCT or service typically involves many moving parts—including information technology (IT)—that must all come together simultaneously. Often, the long lead times that complex IT components involve become a drag on time-to-market. Yet, as the examples to follow illustrate, efforts to speed the process by buying or building workaround systems frequently backfire. HEALTHCARE.GOV’S HURDLE Launched on October 1, 2013 with great fanfare, Healthcare.gov promptly crashed. Applicants struggled to access the website and, when they finally did, computations were wrong, accounts were not recognized, insurance links didn’t function and live chat didn’t work. The site improved over time, but only after copious delays, frustration, manual workarounds, bad data, confusion, security problems and great expense. Why the debacle? First, the scope was far too large. Overnight, the Affordable Care Act sought to displace one-sixth of the U.S. economy with no fallback plan. Second, the plan involved a “Big Bang,” with everything launching at once although many modules were untested and others had yet to be written. Third, specifications for the project were continuously changing—right up to the launch date. Fourth, leadership forged ahead with the initiative despite copious warnings and danger signs. HERSHEY’S GREAT WHITE HOPE In the late ’90s, Walmart and other retailers were demanding more inventory and logistics information from suppliers. To adapt, Hershey decided to replace its legacy systems with “Enterprise 21,” a sophisticated combination of SAP, Siebel and Manugistics
software. However, the company had little experience implementing a huge system that required many simultaneous business process changes. After three years in development, some modules launched but several were delayed. In July 1999, with critical Halloween orders pouring in and Y2K looming large, management succumbed to pressure, scrapping the company’s legacy systems and launching the new system, “Big Bang.” Problems in order fulfillment, customer service and shipping quickly arose, devastating the candy company’s most crucial selling season. Unable to get Hershey products, retailers switched to competitors. Hershey’s sales for 3Q 1999 dropped $150 million; profits declined 19 percent and the stock dropped by 8 percent as a result. APPLE GETS BITTEN When the recent live, video-stream introduction of Apple’s iPhone 6 glitched, all viewers saw for 25 minutes was a fixed test pattern and all they heard was Tim Cook’s presentation—in Mandarin. Two days later the Apple Store website crashed, frustrating customers who had queued overnight to place early orders. While the iPhone 6 is now a success, its launch was marred by these support issues, which were not
unusual for the company’s launches. Clearly, new product or service launches can be badly tarnished by problems with the supporting IT systems. To ensure that the IT workstream is on target, CEOs should: Appoint a Program Czar • Designate someone with total accountability and responsibility for the new product launch and the ability to spend the majority of his/her time on the program. Avoid or Limit New Software • Implement “mega projects” that span the entire company and require business process changes in small pieces. • If new software is required, test and install it well in advance of the product launch date. • Keep the old legacy systems operational until the new software is proven. Understand All Workstreams • Review the overall program schedule, questioning anything that isn’t clear. Stop everything if there is no documented plan or if it is superficial. • Understand and monitor milestones. • Ensure there are fallback strategies for things that go wrong. Ensure the IT Components Are Complete and Sufficiently Robust • Commission an IT workstream assessment by another department or an outside firm. Review Frequently • Review the program weekly, then daily as the launch date nears. • Be receptive to bad news. CEOs can reduce risk and avoid sloppy and embarrassing launches by following these recommendations. An ounce of prevention is worth more than a pound of cure. TOM PETTIBONE is the managing partner of
Transition Partners.
24 / CHIEFEXECUTIVE.NET / MAY/JUNE 2015
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SIGNPOSTS
Avoiding Windbags, Wizards, and Villains Jeffrey Sonnenfeld
Many U.S. presidential advisors, across parties, have seized power, operating behind-thescenes to undermine colleagues.
LAST YEAR, a CEO of one of our nation’s largest financial institutions confided to my MBA students, “I have no real friends anymore.” Sure, he had sports buddies and neighborhood friendships, but none of these friends, nor any of his family members, could serve as an informed business confidant. Similarly, the former CEO of a global company who abruptly left his position due to boardroom politics recently confided that his failing had been in not securing a mentor to serve as a guide and advocate. While most leaders have genuine friendships, often these are not peers with whom they can discuss strategic matters. Adoring fans often come with agendas for their own advancement, personal biases and commercial interests—which can be a greater danger. Sometimes chiefs of staff abuse their power, leading to misinformation, resentment and palace revolts. The wizard Merlin guided Arthur to a failed destiny, while Pangloss, the king’s advisor in Hamlet, was a ridiculed windbag. Many U.S. presidential advisors, across parties, have seized power, operating behind-the-scenes to undermine colleagues, filtering access to the boss and distorting data. The manipulative Russian mystic Grigori Yefimovich Rasputin, who advised Tsar Nicholas II and Tsarina Alexandra, was widely despised. How can CEOs obtain invaluable expert counsel while minimizing the possibility of manipulation? One way is to diversify across different parties to fill each of five distinct styles of advisor relationships— tutors, guides, agents, heroes and coaches. TUTOR ADVISORS provide technical skills or industrial insights that complement the CEOs’. In launching his company,
Michael Dell drew on the startup expertise of entrepreneur George Kozmetsky, as well as on former American Airlines CEO Don Carty. Yahoo’s Marissa Mayer drew on the financial insight of investor Dan Loeb of Third Point to size up acquisitions. GUIDE ADVISORS help navigate cultural norms and the big-picture political landscape. President Kennedy, for example, stepped across parties to draw on the insights of his predecessor. President Eisenhower counseled Kennedy on the dangers of relying on the weak leadership of CIA chief Allen Dulles. In business, Ford CEO Mark Fields has been an openly grateful beneficiary of mentoring from his predecessor, Alan Mulally, and Ford Chairman Bill Ford. AGENT ADVISORS can enhance a CEO’s reputation by celebrating successes and providing a shield from setbacks. Former Citigroup chairman Richard Parsons provided introductions to Washington authorities when Vikram Pandit took the helm. HERO ADVISORS provide inspiring examples of how to master common trials of high office. Apple’s Steve Jobs, for example, was inspired by Polaroid founder Ed Land’s model of scientific, ever-learning community at work. Mark Zuckerberg turned to Jobs and others, for insight on how to retain control when taking your company public. COACH ADVISORS provide perspective when CEOs are at their most vulnerable. Ken Langone famously told Bernie Marcus—who would go on to found Home Depot—after an early career setback: “Bernie, you’ve just been kicked in the ass by a golden horseshoe!” Marcus, in turn, provided coaching to others. In fact, he made a practice of speaking to new managers, not about their successes, but about their failures.
JEFFREY SONNENFELD is senior associate dean for leadership studies; Lester Crown professor of leadership practice, Yale School of Management; president of the Yale Chief Executive Leadership Institute, and author of The Hero’s Farewell and Firing Back.
I LLU ST R AT I O N BY T I M TO M K I N S O N
Where can a CEO turn for informed, objective, respected counsel? By Jeffrey Sonnenfeld
26 / CHIEFEXECUTIVE.NET / MAY/JUNE 2015
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The Power of the Network Effect Allow your team to benefit from the experience of peer senior executives with comparable roles and responsibilities at noncompetitive companies. Let your them find solutions in Senior Executive Network (SEN) group sessions designed to explore issues and clarify options and actions steps, including: • Benchmarks for projects and outcomes • Clarifying what’s working (and what’s not) • Developing individual skills, and management methods, learning from shared experience Imagine a more effective and motivated team with enhanced skills and new relationships, focused on driving your bottom line.
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CEOS FAVOR PRO-GROWTH, LOW-TAX STATES
In our 11th annual survey of CEOs, Texas and Florida still dominate as the top two states for business, while California and New York continue to hold onto their traditional death grip as the worst and second worst states respectively. By J.P. Donlon 28 / CHIEFEXECUTIVE.NET / MAY/JUNE 2015
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After Texas and Florida, North Carolina edged out Tennessee for the third and fourth ranking, with Georgia, Indiana, Louisiana, Nevada, Arizona and South Carolina filling out the fifth through 10th places respectively. Following California and New York, business leaders see Illinois, New Jersey, Massachusetts and Connecticut as the worst places, largely due to the perception that they are high-tax and overregulated environments. But there are degrees of disenchantment. One of the biggest factors in CEOs’ thinking is the attitude that local and state authorities have toward business and the perceived capriciousness of regulations, particularly those imposed on smaller firms least able to bear the costs. In this respect, if it were possible to rank 60th out of 50 states, California would likely rank No. 61. Joseph Vranich, an expert on corporate relocations, has counted more than 200 major companies with tens of thousands of employees that left the Golden State over the last four years. While Google, Apple, Intel and HP are not likely to leave, neither do they expand locally if they can help it. Google server farms tend to be built in lower-tax states like Nevada, Arizona and Iowa. Were it not for its climate and excellent university system, it is a wonder that more California companies don’t leave. For example, voters and politicians in San Francisco and Oakland approved new minimum wage mandates. Predictably, the move to alleviate income inequality has had the opposite effect on area service providers. Restaurants have been
cutting back employment or even closing their doors. Many restauranteurs told the San Francisco Chronicle that the $15 minimum wage puts them in a position where they are no longer able to absorb the costs of doing business. Such a phenomenon would be unthinkable in, say, Indianapolis, Indiana; Columbus, Ohio; or Madison, Wisconsin, where politicians are grounded in the day-to-day realities of how disincentives and costs affect employment. However, California is a lotus land free of feedback loops—at least any that Sacramento recognizes. Texas continues its economic miracle despite the hit it has taken with the slowdown in oil fracking. Since the recession began in December 2007, 1.2 million net jobs have been created in Texas. Only 700,000 net jobs were created in the other 49 states combined. However, the slowdown in the energy industry has also taken its toll in job creation, with Texas dropping to fourth in the month of January and California rising to the top owing to a Bureau of Labor Statistics (BLS) revision. Texas and other top-producing oil states have been hurt by a 50 percent-plus drop in the price of crude oil since July. As a result, oil-related companies have announced tens of thousands of job cuts and reductions in capital spending. But California’s labor force—18.9 million—is 43 percent larger than Texas’ 13.2 million, so the 12-month job gain for California translates into 3.2 percent, while Texas saw a 3.5 percent employment increase. Moreover, Texas’ unemployment rate of 4.4 percent is
2015 RANK RANK (Change from 2014)
STATE
1 (0)
TEXAS
1
2 (0)
FLORIDA
2
3 (+1)
NORTH CAROLINA
4
4 (-1)
TENNESSEE
3
5 (0)
GEORGIA
5
6 (+1)
INDIANA
7
7 (+3)
LOUISIANA
10
8 (+1)
NEVADA
9
9 (-1)
ARIZONA
8
10 (-4)
SOUTH CAROLINA
6
11 (+5)
COLORADO
16
12 (+2)
WISCONSIN
14
13 (+6)
IOWA
19
14 (-3)
VIRGINIA
11
15 (-2)
UTAH
13
16 (+4)
OKLAHOMA
20
17 (+1)
WYOMING
18
18 (+10)
IDAHO
28
19 (-7)
NORTH DAKOTA
12
20 (+3)
DELAWARE
23
21 (+3)
NEW HAMPSHIRE
24
22 (+5)
OHIO
27
23 (-8)
SOUTH DAKOTA
15
24 (-7)
ALABAMA
17
25 (-4)
NEBRASKA
21
26 (-4)
MISSOURI
22
27 (-1)
KANSAS
26
28 (-3)
KENTUCKY
25
29 (+2)
MONTANA
31
30 (+6)
MAINE
36
31 (+3)
MINNESOTA
34
32 (+1)
WASHINGTON
33
33 (-4)
ARKANSAS
29
34 (-2)
ALASKA
32
35 (+7)
PENNSYLVANIA
42
36 (-6)
NEW MEXICO
30
37 (+3)
RHODE ISLAND
40
38 (-3)
WEST VIRGINIA
35
39 (-2)
MISSISSIPPI
37
40 (+1)
MARYLAND
41
41 (-2)
VERMONT
39
42 (-4)
OREGON
38
43 (+2)
MICHIGAN
45
44 (-1)
HAWAII
43
45 (-1)
CONNECTICUT
44
46 (0)
MASSACHUSETTS
46
47 (0)
NEW JERSEY
47
48 (0)
ILLINOIS
48
49 (0)
NEW YORK
49
50 (0)
CALIFORNIA
50
/
/
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CHIEFEXECUTIVE.NET
2014
TOP 10
CEOs across the U.S. asking them to evaluate four or more states with which they are directly familiar. They were asked to rate each with respect to three categories they regard as highly important: taxes and regulations; quality of the workforce; and living environment, including such considerations as quality of education, cost of living, affordable housing, social amenities and crime rates.
BOTTOM 5
CHIEF EXECUTIVE CANVASED 511
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40 percent lower than California’s 6.9 percent, one of the nation’s highest. Industrial development is helping diversify second-ranked Florida’s economy. Each year, the Sunshine State edges closer to its goal of overtaking Texas as the best state for business. This year, it bests its rival in its rating for living environment, but the Lone Star state still runs ahead in the other two categories—tax and regulation and workforce quality. As Florida continues its transformation beyond tourism, it will chip away at the gap. According to a Wells Fargo Securities report, both the amount of expansion and the growth in construction payrolls have been significant. The industries expanding the fastest are not directly related to tourism and are some of the best-paid industries in the state. Technology is becoming an increasingly important driver of the state’s growth. What is most evident in the survey is how four states—Louisiana, Wisconsin, Ohio and Indiana—dramatically transformed themselves over the last six years in the eyes of CEOs. In 2010, Louisiana ranked 40th; now it’s No. 7, demonstrating that even a state with entrenched bureaucracy and a poor tax structure can improve its appeal when determined to change its policies.
BIGGEST GAINS FROM 2014 CHANGE
2015
2014
STATE
+10
18
28
IDAHO
+7
35
42
PENNSYLVANIA
+6
13
19
IOWA
+6
30
36
MAINE
BIGGEST LOSSES FROM 2014 CHANGE
2015
2014
STATE
-8
23
15
SOUTH DAKOTA
-7
24
17
NORTH DAKOTA
-6
36
30
NEW MEXICO
In addition to the above four, Michigan is making slow but steady progress. Detroit’s meltdown has overshadowed the muscular economic recovery in this region, driven by a manufacturing and technology renaissance. Many states have come to understand that states don’t just compete with one another for business and jobs. As Gov. John Kasich told The Wall Street Journal last January, “In Ohio, we’re in a contest against Europe, Asia and the rest of the world, so we have to keep our taxes low.” The common thread among more successful regions is the tax-cutting wave that is sweeping the states. Most governors recognize that states with lower taxes on work, investing and business activity are winning the competition for jobs and businesses. In his 2014 book, An Inquiry into the Nature and Causes of the Wealth of States,” economist Arthur Laffer (see sidebar, p. 36) studied the 11 states that had instituted an income tax over the last 50 years. Without exception, all declined as a percentage share of GDP. New Jersey (No. 46) is an interesting example. In 1965 it had a balanced budget and neither a sales tax or an income tax. Today, it ranks among the biggest losers, with a cumulative $21 billion loss in personal AGI from 1993 to 2010, as people who leave take their incomes with them. New Jersey has many natural wonders, including proximity to New York, a highly skilled workforce and above-average educational attainment, but a high-cost, high-tax region cannot stop out-migration. As Laffer says, “high taxes don’t redistribute income; they redistribute people. Americans are more mobile than ever, and as demonstrated throughout the past two decades, not at all averse to moving away from states with oppressive income tax climates and into pro-growth states that offer more attractive economic environments that are beneficial to both businesses and individuals alike.”
“
WHAT MATTERS TO CEOS We asked survey respondents to tell us what makes for a good or bad state in which to do business
“Texas is pro-business in terms of taxes, licensing, incentives, as well as quality of workforce. Utah continues to pleasantly surprise us with a businessfriendly environment and support at many levels.”
•
“I see Tennessee as a great place to have a $35 million-$40 million electrical contracting firm. Rightto-work is very important.”
•
“Right-to-work is essential for launching a new manufacturing facility. Availability of quality employees, with good skills and character, is critical. Government friendliness is very important.”
•
“High tax rates are bad for business. Excessive regulations don’t create more jobs.” •
“Excessive regulation and lack of state-level fiscal responsibility are problems. Lack of a state income tax is a good indication of attractiveness. Right-to-work laws and reasonable workers comp rates are as well.”
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RATINGS1
5.33
5.95
Steps up job-preparedness efforts, but anti-gay stance may put off some CEOs.
5.46
4.77
6.23
Remains a low-tax attraction for CEOs, but oil-price drop sacks state’s coffers.
ARIZONA
9
6.64
6.90
7.59
Keeps trimming taxes, including phased-in cuts in corporate rate.
ARKANSAS
33
6.24
5.08
5.46
Loses ground as neighbors keep gaining manufacturing and tech jobs.
CALIFORNIA
50
2.36
6.29
6.99
California Competes is a good sign of recognition, while tech still spews jobs.
COLORADO
11
6.45
7.50
7.82
Quality of life beckons, and tech burgeons—but legalized pot is problematic.
CONNECTICUT
45
2.51
5.87
5.66
Pro-growth forces are still overwhelmed by state’s commitment to high taxes.
DELAWARE
20
8.00
7.25
6.58
Jobs growth that betters neighbors is biggest factor pushing it up the charts.
FLORIDA
2
7.48
6.68
7.79
Scott gets more aggressive about pursuing jobs with sights set on becoming No. 1.
GEORGIA
5
6.74
6.79
6.91
Alliance between state and Georgia Power, scored big by landing Mercedes-Benz.
HAWAII
44
3.33
3.90
7.40
Paradise remains too far away for most CEOs to bother—except for vacations.
IDAHO
18
6.33
7.00
8.19
State rides high growth rates in GDP and jobs to huge leap in “Best/Worst.”
ILLINOIS
48
2.70
5.73
4.98
Can new Governor Rauner shock sclerotic system enough to turn it around?
INDIANA
6
7.02
7.66
7.21
Right-to-work status begins to pay off in manufacturing and distribution wins.
IOWA
13
6.44
7.64
7.12
Property-tax cut and parade of tech investments help alter state’s trajectory.
KANSAS
27
6.09
6.86
6.64
Ambitious tax reforms haven’t yet created jobs that would offset fiscal pain.
KENTUCKY
28
5.67
5.8
6.87
Remains solidly mid-tier, but local right-to-work initiatives show promise.
LOUISIANA
7
6.87
6.91
7.34
Climbs briskly with tech while benefiting from downstream position in oil and gas.
DIRECTION
COMMENTS
6.31
34
TAXATION AND REGULATION
24
ALASKA
RANK
ALABAMA
STATES
LIVING ENVIRONMENT
DEVELOPMENT TREND INDICATOR
WORKFORCE QUALITY
STATES AND RANK
MAINE
30
4.5
5.57
6.79
Sales tax increases, but CEOs warm to overall economic-development efforts.
MARYLAND
40
4.43
6.98
6.72
New GOP governor is trying to reverse big-government legacy, but it’ll take time.
MASSACHUSETTS
46
3.04
6.62
5.45
New Republican governor tackles obstacles with gusto, but faces long odds.
MICHIGAN
43
4.02
5.95
5.71
Snyder reforms are beginning to pay off broadly, as automotive jobs burgeon.
MINNESOTA
31
4.06
7.09
7.11
Pro-growth tax moves last year partially offset big tax hike in 2013.
MISSISSIPPI
39
6.18
4.81
4.78
Touts infrastructure and available sites to try to gain in highly competitive region.
MISSOURI
26
5.60
5.91
6.09
Gets some major job commitments in 2014, but most CEOs still say, “Show me.”
MONTANA
29
7.15
7.38
7.23
Public-private partnerships appeal to entrepreneurs and boost prospects.
NEBRASKA
25
7.11
7.11
6.56
Improves corporate, individual-income and agricultural-equipment tax structures.
8
7.66
6.42
6.23
While waiting for Tesla complex, Sandoval has a huge fiscal mess on his hands.
NEW HAMPSHIRE
21
6.92
7.85
7.92
Bipartisan progress helps leverage state’s long-time low-tax advantages.
NEW JERSEY
47
2.98
5.97
4.64
Christie’s magic can take state only so far before high-cost legacy undercuts gains.
NEW MEXICO
36
5.30
5.20
6.30
Restructured business taxes to be regionally competitive, but more is necessary.
NEW YORK
49
2.63
6.24
5.17
Cuomo is trying, with some lower taxes and university-focused “StartupNY.”
3
6.86
7.6
8.29
Development programs faltered before new economic development whiz arrived.
NORTH DAKOTA
19
7.83
7.61
5.72
Oil prices giveth and they taketh away; slide dents previously robust growth.
OHIO
22
5.26
6.61
6.06
Kasich lights fires of job growth as legislature accelerates income-tax cuts.
OKLAHOMA
16
7.00
6.27
6.77
Passes package that could cut top income tax rate to 4.85 percent from 5.25.
OREGON
42
3.81
5.65
6.84
Created cesspool of environmental insider dealing that led to guv’s resignation.
PENNSYLVANIA
35
4.31
5.94
6.00
Competitors lick chops as Wolf proposes new levy on oil and gas drilling.
RHODE ISLAND
37
2.38
4.50
5.50
Finally seeing the light, slashed corporate income tax to 7 percent from 9 percent.
SOUTH CAROLINA
10
7.46
7.25
7.96
Adds to its manufacturing corridor as Haley trots the globe seeking new wins.
SOUTH DAKOTA
23
8.69
7.31
6.92
Quality of life attractions enhance state’s low-tax bona fides.
TENNESSEE
4
7.27
7.10
7.77
State politicians shouldn’t have messed with Volkswagen’s unionization business.
TEXAS
1
8.10
7.66
7.65
Some doubt that Abbott will become as effective at bringing in jobs as Perry was.
UTAH
15
6.81
8.00
8.19
Tech drives job gains, and quality of life draws growing stream of Millennials.
VERMONT
41
3.48
5.52
6.14
Passes nation’s first patent-trolling law, as it appeals more to entrepreneurs.
VIRGINIA
14
7.03
8.00
7.97
Remains vibrant across the board, and growth of federal government is an engine.
WASHINGTON
32
4.17
6.28
6.50
Keeping company nucleus with incentives hasn’t stopped some Boeing job leakage.
WEST VIRGINIA
38
4.70
4.00
3.91
Undergoes painful transformation from coal-based economy as natural gas rises.
WISCONSIN
12
6.12
7.63
7.29
Walker signs right-to-work as previous reforms make him a presidential candidate.
WYOMING
17
8.59
7.28
7.39
Tax-haven status remains compelling—no corporate or individual income tax.
NEVADA
NORTH CAROLINA
UP
DOWN
NO CHANGE
32 / CHIEFEXECUTIVE.NET / MAY/JUNE 2015
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z.
s.
s.
STATE-LOCAL6 TAX BURDEN
STATE GOV’T5
STATES
6,883
19
1,876
615
8.3
-1.5
-65,571
47
8,487
766
7.0
-2.8
ALASKA
1.1
-0.7
6.7
1.1
52,968
3
2,083
473
8.9
-0.9
ARIZONA
2.4
0.6
5.7
0.1
-6,342
36
1,336
585
10.3
0.5
ARKANSAS
2.0
0.2
7.0
1.4
-96,202
49
3,987
505
11.4
1.6
CALIFORNIA
STATES
COMPARED TO NAT’L AVG. (9.8%)
0.1 0.7
STATE DEBT PER RESIDENT 2013 ($)
5.7 6.3
RANK
-1.0 -4.3
NET MIGRATION 2014
0.8
RATE DECEMBER 2014 (%)
RTAE (%)
DOMESTIC MIGRATION4
STATE & LOCAL GOV’T EMPLOYEES PER 10,000 RESIDENTS
COMPARISON W/ NAT’L RATE (5.6%)
UNEMPLOYMENT3
-2.5
% GDP GROWTH 2012-2013
1.
2
% GROWTH 2012-2013 VS. NAT’L AVG. (1.8%)
STATE GDP
ALABAMA
3.8
2.0
4.0
-1.6
40,195
4
3,119
542
9.0
-0.8
COLORADO
0.9
-0.9
6.4
0.8
-3,249
33
9,003
537
11.9
2.1
CONNECTICUT DELAWARE
1.6
-0.2
5.4
-0.2
12,019
13
6,245
599
10.1
0.3
2.2
0.4
5.6
0.0
105,411
2
1,950
489
9.2
-0.6
FLORIDA
1.8
0.0
6.9
1.3
8,826
15
1,335
546
8.8
-1.0
GEORGIA
1.9
0.1
4.0
-1.6
-2,354
32
5,945
560
9.6
-0.2
HAWAII
4.1
2.3
3.7
-1.9
-2,196
31
2,274
539
9.5
-0.3
IDAHO
0.9
-0.9
6.2
0.9
-81,039
48
4,944
503
10.2
0.4
ILLINOIS INDIANA
2.1
0.3
5.8
0.2
-1,964
29
3,443
536
9.5
-0.3
2.9
1.1
4.1
-1.5
-1,820
27
2,156
611
9.3
-0.5
IOWA
1.9
0.1
4.2
-1.4
-4,248
35
2,362
677
9.4
-0.4
KANSAS
1.6
-0.2
5.7
0.1
4,494
21
3,415
583
9.5
-0.3
KENTUCKY
1.3
-0.5
6.7
1.1
-7,822
37
4,029
605
7.60
-2.2
LOUISIANA
0.9
-0.9
5.5
-0.1
7,940
18
4,046
581
10.2
0.4
MAINE
0.0
-1.8
5.5
-0.1
-21,791
43
4,413
535
10.6
0.8
MARYLAND MASSACHUSETTS
1.6
-0.2
5.5
-0.1
-20,374
42
11,420
518
10.3
0.5
2.0
0.2
6.3
0.7
-22,905
44
3,072
491
9.6
-0.2
MICHIGAN
2.8
1.0
3.6
-2.0
-14,396
39
2,513
542
10.7
0.9
MINNESOTA
1.6
-0.2
7.2
1.6
-3,842
34
2,380
648
8.4
-1.4
MISSISSIPPI
0.8
-1.0
5.4
-0.2
21,324
11
3,200
557
9.0
-0.8
MISSOURI
3.0
1.2
4.2
-1.4
8,445
17
3,522
585
8.6
-1.2
MONTANA
3.0
1.2
2.9
-2.7
-1,901
28
992
642
9.4
-0.4
NEBRASKA
432
8.1
-1.7
NEVADA NEW HAMPSHIRE
1.0
-0.8
6.8
1.2
25,661
10
1,302
0.9
-0.9
4.0
-1.6
-1,219
26
6,626
550
8.0
-1.8
ns.
1.1
-0.7
6.2
0.6
-65,412
46
7,234
593
12.3
2.5
NEW JERSEY
.
1.5
-0.3
6.1
0.5
-18,789
41
3,470
680
8.6
-1.2
NEW MEXICO
0.7
-1.1
5.8
0.2
-129,374
50
6,935
634
12.6
2.8
NEW YORK
2.3
0.5
5.5
-0.1
28,832
8
1,945
600
9.8
0.0
NORTH CAROLINA
9.7
7.9
2.8
-2.8
9,100
14
2,575
649
8.8
-1.0
NORTH DAKOTA
-15,766
40
2,866
535
9.7
-0.1
OHIO
8,694
16
2,482
598
8.5
-1.3
OKLAHOMA
.
t.
1.8
0.0
4.8
-0.8
4.2
2.4
4.2
-1.4
2.7
0.9
6.7
1.1
32,161
6
3,473
509
10.1
0.3
OREGON
45
3,682
478
10.3
0.5
PENNSYLVANIA
0.7
-1.1
4.8
-0.8
-23,015
1.4
-1.5
6.8
1.2
-2,011
30
9,105
511
10.5
0.7
RHODE ISLAND
3,100
577
8.3
-1.5
SOUTH CAROLINA
1.2
-0.6
6.5
0.9
37,321
5
3.1
1.3
3.3
-2.3
924
24
4,080
546
7.1
-2.7
SOUTH DAKOTA
.
0.8
-1.0
6.6
1.0
27,028
9
956
528
7.6
-2.2
TENNESSEE
s.
3.7
1.9
4.6
-1.0
138,057
1
1,509
564
7.5
-2.3
TEXAS
3.8
2.0
3.5
-2.1
5,926
20
2,450
495
9.4
-0.4
UTAH
1.9
0.1
4.2
-1.4
1,407
23
5,317
641
10.5
0.7
VERMONT
e.
0.1
-1.7
4.8
-0.8
29,928
7
3,408
574
9.2
-0.6
VIRGINIA
ge.
2.7
0.9
6.3
0.7
17,162
12
4,395
527
9.4
-0.4
WASHINGTON
s.
5.1
3.3
6.0
0.4
3,330
22
3,964
558
9.7
-0.1
WEST VIRGINIA
te.
1.7
-0.1
5.2
-0.4
-9,352
38
4,044
503
11.0
1.2
WISCONSIN
7.6
5.8
4.2
-1.4
-566
25
1,761
918
6.9
-2.9
Sources:
1 Chief
Executive Magazine
2 Bureau
of Economic Analysis
3 Bureau
of Labor Statistics
4 U.S.
MAY/JUNE 2015
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Census Bureau /
5,6 The
Tax Foundation
CHIEFEXECUTIVE.NET
/
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“
WHAT MATTERS TO CEOS “Low taxes, and no state income tax is key; you can have an educated workforce and low state taxes; that is why I put Tennessee first.”
•
“Texas ‘gets it’ with incentives, workforce development and low taxation, but everyone cannot move there. Austin is overrun with want-to-bes. Yet, it’s still a great place.”
#
1
•
“The good states ask what they can do for you, the bad states ask what they can get from you.” •
“The most important element for us is talent and work ethic. Places like Dallas, Nashville and Charlotte are where the talent resides these days. Of course, the tax situation is important too, especially on the personal side.”
•
“One item not on your list is consistency of policy, e.g.. tax, regulation, workman’s comp, education funding. Also the predictability of these in the future.”
•
“A successful business requires access to high-quality human capital. The major metropolitan markets have always dominated on this issue. However, high taxes, excessive regulation and neglected infrastructure in these markets increasingly offset the human capital advantage.”
•
“California is a sad story; both state and city government love to make it impossible for any business.”
TEXAS: BEYOND BLACK GOLD BY DALE BUSS
FOR THE ENTIRETY OF ITS RUN atop the Chief Executive Best & Worst States for Business annual rankings, Texas has benefited from high or rising prices for crude oil, and from the savvy and energy of a single, exceptionally growth-minded governor. Producing more black gold than any other state provided tremendous fuel to Texas’s powerful job-production engine—and so did former Governor Rick Perry. Now two things have changed. One, Greg Abbott was elected governor last fall to succeed his fellow Republican, who had decided to seek the GOP presidential nomination. Two, in the wake of the bounty produced by the American fracking revolution, global oil prices plunged and have stayed lower, creating a huge new drag on the Texas job-creation juggernaut and promising to reduce
oil-drilling and pumping revenues. Even as Texas hung on to its No. 1 ranking for 2015 in the Best States & Worst States list, can the Lone Star State withstand the continued hit from the global surplus of oil because of its diversifying economy—or even outperform its previous benchmarks as the U.S. economy gains steam? State officials concede that now is the time for Texas to shift gears. “Texas must become bigger, broader and bolder in our economic-development efforts and more aggressive in attracting companies and foreign direct investment so that we become not just the national leader, but a world leader, in job creation,” says Tracye McDaniels, president and CEO of Texas Economic Development. But internal players and outside observers alike give Texas good odds
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of finishing No. 1 again in the 2016 Chief Executive index based largely on four factors: only about 4 percent of the state’s workforce is in the oil and gas industry now, a fraction of a generation ago; other industry pillars keep rising; regions outside the oil patch have made their own prosperity; and the Abbott administration has some strengths of its own. “Every year Texas becomes more diverse, becomes more things to more people, and it remains competitive and attractive to all of our clients from an access and infrastructure point of view, and for labor costs and availability,” says Andy Mace, managing director of supply-chain solutions in the global business consulting practice of Cushman & Wakefield. Indeed, Texas continued to lead America in job BY THE NUMBERS BIG NUMBER
4,000 TOYOTA JOBS MOVING TO PLANO, TEXAS, FROM TORRANCE, CALIFORNIA, OVER THE NEXT FEW YEARS
growth in January 2015, adding 20,100 jobs and nudging its unemployment rate down to 4.4 percent from 4.6 percent in December 2014. The oil-price slide already has tested the diversification strategy that Perry initiated, in part by trying to raid California and other states for manufacturers, technology outfits and other growing companies that weren’t dependent on oil prices. One of his biggest plums was Toyota’s move of its U.S. headquarters and about 4,000 jobs to Plano, Texas, from Torrance, California, over the next few years. Such moves have enhanced the broadening of most regional economies in Texas that will help the whole state power through. Dallas is reasonably diversified, with autos and
healthcare, for example; San Antonio has Toyota truck manufacturing, tourism and other industries; and Austin has become a high-tech outpost every bit as vibrant as any in the country except Silicon Valley. “You have all that stuff plus Texas’s proximity to Mexico and the manufacturing boom that is going on there,” notes Dennis Cuneo, head of DC Strategic Advisors and a former top executive of Toyota Motor USA. Only the West Texas oil patch, and Houston and the Gulf Coast strip are especially dependent on oil prices anymore. And the Houston area benefits because so much of its energy business is refining and petrochemical processing, whose companies actually benefit from lower oil prices. “Houston will no longer be leading the nation in job growth, and Texas won’t be the strongest job-producing state if oil prices stay down for long,” says Blair Garrou, head of Mercury Fund, a venture-capital firm that specializes in investing in Flyover Country. “But the drag won’t be nearly as pronounced as people think.” Still, lower oil prices will have an effect. Lower oil revenues “will force Texas to roll back their incentives a bit” to attract companies and jobs, argues Larry Gergerich, head of Ginovus siteselection consultants. “Abbott wants to be more strategic and directed.” And some wonder whether Abbott can “match up” with Perry’s acknowledged skill as an economic strategist and cheerleader, as Cuneo put it. However, Abbott managed to lure the highly regarded McDaniels back to her home state from a stint in New Jersey. According to McDaniels, Abbott also has “an extensive economicdevelopment agenda” that includes “evaluating and restructuring existing programs, reducing the tax burden on citizens and businesses, reducing regulatory burdens that stifle job creation and improving our roads.”
“
WHAT MATTERS TO CEOS “The corporate tax rate in the U.S. is the highest of any major country in the world. So, it is important to have a favorable state tax rate.”
•
“I call California the ‘Great Socialist State of California.’ If we only did business there, we probably would leave, scale down or close.”
•
“Taxes are out of control in California.”
•
“Illinois politicians are elected and controlled by the public service unions. All focus is on keeping them happy and funded. All else takes a second or third seat. Business is only viewed as a source for taxation revenue.”
•
“A difficult tax structure like the ones in New York or Connecticut makes incentive-giving easy, but penalizes existing businesses. The climate for coming is better than the climate for staying.”
•
“The determinant for our company is the education level of the workforce, quality of life and the degree of burden of regulatory authorities.”
•
“Illinois seems not to like business and treats us horribly.” •
“Right-to-work is essential for launching a new manufacturing facility. Availability of good quality employees, skills and character, are critical. Government friendliness is very important.”
•
“I don’t know why anyone would consider starting or moving a business to California!” CHIEFEXECUTIVE.NET
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“
WHAT MATTERS TO CEOS “Connecticut is a horrible state for business. The governor is anti-business and the economic environment he creates is confrontational. The roads and highways are in poor condition, and the state is fundamentally broke. The cost of living continues to rise and the governor raises taxes and spending and does not work to lower expenses.”
•
“Florida is making all the right moves as a great place to work and live. Property taxes are high though.” •
“South Carolina, Indiana and Texas are all ‘right-to-work’ states, which supports our decision to work in these states. Additionally we prefer to be within a 90-minute drive for technical education facilities to access technical assistance. Greenville, South Carolina is outstanding in its location for workforce access, quality of life and logistical access via Interstate and oversea containers coming through Charleston into the U.S. ”
•
“Rule of thumb for manufacturers. ABC = Anywhere But California.”
•
“California and Oregon are essentially anti-business, whereas Texas and Tennessee do everything possible to make business comfortable and successful.”
•
“Minnesota is taxing business people right out of the state. The last tax increase was 28 percent!”
Arthur Laffer: Taking On Taxes BY DALE BUSS
BACK IN THE ’80S, Arthur Laffer became known as the father of “supply-side economics” and the intellectual inspiration for much of the domestic Reagan Revolution. Nowadays, the 75-year-old iconoclastic economist is preaching the gospel of tax cuts at the state level as the ticket for regional and national prosperity. Laffer, who heads the Nashville-based consulting firm Laffer Associates, is exulting in the 2015 action in statehouses around the country, where several governors—newly elected or chastened by last fall’s election results—have been taking the chopping block to taxes in their grand plans for this year and beyond. “Republicans now have 31 governorships and 30 state legislatures and flipped 12 houses in the states in the last election,” he enthuses. “Every Republican governor won re-election, and three of six tax-increasing [Democratic] governors got their tushes handed to them.” Laffer has made a career out of prodding governments to slash taxes to spur enduring economic growth,” but he isn’t satisfied just yet. “If I were a governor, I would initiate zero income tax, no sales tax, a broad-based tax and no exemptions, and go take a vacation for the next three years while my economy grew,” he says. Over the 10 years ended in 2010, he points out, average job growth in the nine states without income taxes was 5.5 percent versus a decline of 1.6 percent in the highest-tax states. Laffer serves on the board of advisors of the American Legislative Exchange Council, and also tends a state competitiveness index with the
group and co-writes “Rich States/Poor States,” its annual evaluation of tax positions. The newest edition noted that pro-growth tax reform was a key theme last year even before the elections, with 14 states making “significant progrowth tax changes.” Despite this validation, however, Laffer’s counsel can be controversial. In 2012, for example, he was paid by Kansas Governor Sam Brownback to consult on a huge tax-cut plan that included repealing the state’s top individual income-tax bracket of 6.45 percent, lowering its bottom two brackets and exempting from taxation all income earned by pass-through entities. Working from Laffer’s playbook, Brownback promised that the cuts would spur economic development, investment and a lot of job creation. Laffer backed him up, virtually guaranteeing “enormous prosperity.” However, Kansas’s economy is stagnating, the deficit has grown, the state’s bond ratings have been downgraded and it is facing a budget crisis, with a gap of more than $1 billion projected in the current and next budget years. Laffer is unbowed. He notes that Kansas politicians misforecast taxes from unearned income, which left a $300-million hole in the budget that “had nothing to do with tax-cut forecasts.” He also points out that success “takes some time. When you raise tax rates or lower tax rates, very few people can move in the first seven seconds. You really have to look over the course of a decade at such moves, because then you capture the whole effect.” Once Kansas’s growth spurred by tax cuts kicks in, expect Laffer to be there to document it.
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WHAT MATTERS TO CEOS “Have manufactured in Connecticut for 106 years. If I could leave I would.”
•
“Texas has taken many good workers in my industry— leaving California with few well qualified people.”
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•
“Businesses are still moving out of California—despite Sacramento’s efforts to retain and attract businesses. California has liberal labor laws favoring employees over employers that also make it unattractive.”
•
“Moved from California to Texas to start business. Extremely glad I did.” •
“California is a the highest-taxed state in the nation, highest gas tax, 60-plus cents per gallon, which—combined with CARB regulations—makes delivery within the state extremely costly. Added to this is the disdain for any and all manufacturing as Sacramento wants this to be a Green State. Add to that a pension debt that is largely ignored but very real.”
•
“Illinois would be better if our state-elected officials knew how to work together and for the people instead of only working for their own best interests.”
•
“If New York had a commission designed to actively deter small and medium-sized businesses in their state, they couldn’t have come up with a better program.”
ILLINOIS: DIVIDED ON REFORM BY DALE BUSS
TWO CEOS, David MacNeil and Julie Smolyansky, illustrate the polarization in Illinois that has followed new Republican Governor Bruce Rauner into office as predictably as a disappointing season for the Chicago Cubs. In January, Rauner laid out an ambitious plan to close the state’s projected $6.7 billion operating gap for 2015 and to attack a $111 billion unfunded-pension liability by slashing public-sector pension benefits, spending $400 million less on public universities and cutting disbursements for mass transit and health care. He wants to lift Illinois’s credit rating, which now is lowest among the 50 states, and make it attractive to business again. The self-made millionaire and former investment banker also wants to reform worker’s comp, cut unemployment-insurance costs and curb plaintiffs’ lawyers. Furthermore, Rauner has already suggested giving Illinois communities a “home-rule”
approach to right-to-work. “Right now, Illinois companies look at neighboring states and see much more inviting places to grow and add jobs,” Governor Rauner told Chief Executive. The state’s GDP grew by just 0.9 percent between 2012 and 2013 compared with a national average of 1.8 percent. MacNeil, founder and CEO of WeatherTech in Barrington, Illinois, loves Rauner’s plan. “It’s exactly right,” said MacNeil, whose $400-million-plus company makes premium floor liners and other automotive accessories. “The policies coming out of Springfield have been holding the state back. Folks understand this is our last, best chance to turn things around. Bruce is the right person, at the right time, in the right place to finally get it right.” But Smolyansky, CEO of Lifeway Foods in Morton Grove, Illinois, couldn’t disagree more. Rauner’s
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BIG NUMBER
$6.7 BILLION THE STATE OF ILLINOIS PROJECTED OPERATING GAP FOR 2015
proposals “are a step backward in regard to the types of investments we need to be making to produce healthy and safe communities and a state ready to compete and grow over the long term. Only by supporting and investing in our people,” said the secondgeneration chief of the $100-million maker of probiotic dairy beverages, “can Illinois truly grow, and it is that growth more than anything else that will solve our fiscal challenges.” Predictably, Rauner’s aggressive approach to reform has enraged political opponents and prompted some leaders of the Democratcontrolled state legislature to declare his biggest ideas non-starters. Chicago Teachers Union President Karen Lewis called Rauner “Scott Walker on steroids.” And Senate President John Cullerton said that “the basic math still doesn’t work” in Rauner’s plan. Some experienced observers of economic development in the Midwest believe the Illinois legislature will give Rauner some of what he wants, in part because recent big tax increases forced the state to do one-off incentive deals with major employers including Navistar, Caterpillar and Sears to
BIGGEST GAINS FROM 2010 CHANGE
2015
2010
+33
7
40
+29
12
41
+21
22
+10 +7
keep jobs in the state, says Larry Gigerich, president of Ginovus, an Indianapolis-based site-selection consulting firm. Rauner’s program also includes “major investments in infrastructure, which has been a major problem” for Illinois, Gigerich says. “That will create opportunities in economic development—and put a ton of people to work on construction,” most of them in union jobs. Still, some pundits said that even if Rauner succeeds in getting big chunks of his plan through the legislature, it may not come strong enough or fast enough. There are other problems, such as the fact that Illinois’ economic-development apparatus is poor compared with those of surrounding states, which in turn puts more pressure on localities to make themselves attractive to businesses. “Illinois could hit bottom soon,” says Alex Frei, co-head of the business-incentives practice for Cushman & Wakefield consultants in Chicago. “Will states still completely eliminate Illinois from their lists? I think so.” But Rauner believes he can find a way to bring Illinois’ formidable, inherent strengths to the fore. “We have everything going for us,” he says. “We have hard-working, industrious people, good infrastructure, a great location in the center of the country and the economic capital of the Midwest,” he says. “The problem [has been] bad policies coming out of Springfield.”
BIGGEST LOSSES FROM 2010 STATE
CHANGE
2015
2010
STATE
LOUISIANA
-13
34
21
ALASKA
WISCONSIN
-10
14
4
VIRGINIA
43
OHIO
-9
23
14
SOUTH DAKOTA
6
16
INDIANA
-8
20
12
DELAWARE
30
37
MAINE
-7
40
33
MARYLAND
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WHAT MATTERS TO CEOS “Michigan is improving under a new governor. The previous governor was a disaster. Massachusetts is overtaxed and overregulated, but Boston is a great city.”
•
Iowa has an emerging tech,
creative class, and young professional environment in several of its metro areas.”
•
“New York is clueless.”
•
“California is a deeply troubled state with problematic infrastructure and social issues. Businesses in the state are so highly regulated that most cannot afford to do business and elected officials do not have any business experience/understanding. Growing tensions between ethnic groups and haves/have nots will ultimately result in strife.”
•
“Am encouraged by California’s attempts at small business initiatives. I respect North Carolina’s early initiatives to encourage corporate emigration.”
•
“Georgia works very hard at both attracting and keeping businesses with jobs in the state.” •
“Pennsylvania taxes are too high, The state controls liquor sales, which is ridiculous. Pittsburgh and Philadelphia have poor schools, too much unionism and control the ballot box ensuring that a continuous stream of corrupt politicians, mostly Democrats, rule.”
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CALIFORNIA: DRIVING CHANGE BY DALE BUSS
STEPHEN GORDON was mad as hell at California government, and he wasn’t going to take it anymore. So the chairman, CEO and president of Opus Bank launched a $1 billion challenge fund to provide capital to businesses that dare to expand their operations in California. So far, Irvine, California-based Opus has disbursed more than $200 million in loans to small-business owners with revenues between $1 million and $10 million and to commercial companies with revenues of up to $100 million. “When we get through the $1 billion, we’re going to commit to another $1 billion,” says Gordon, whose commercial bank has $4.7 billion in assets. So far, no other bank has dared to match Opus’s offer. Of course, in attempting to make California more attractive to businesses against the prevailing grain, Gordon has embarked on a quixotic quest indeed. “Every day, economic developers
from other states get up and thank God for California,” says Dennis Cuneo, Nevada-based founder of DC Strategic Advisors and an experienced manufacturing-site consultants. Gordon was sick and tired of seeing California state government not only choke the ambitions of home-grown businesses with high taxes and a thicket of regulations, but also lose hundreds of thousands of jobs to other states, in an unparalleled erosion of the state’s job base. Gordon claims California has lost 77,000 businesses over the last several years, perhaps the most painful of 2014 being Toyota’s decision to uproot its U.S. headquarters in Southern California and move its 4,000 jobs to Texas. Thus, California ranked ninth among the states in out-migration of population for the years 2003 through 2012, according to the American Legislative Exchange Council. “You’re talking about five to six times more business leaving California than any other state
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because of decisions made in Sacramento, with the result that the largest economy in the United States clearly isn’t living up to its potential,” Gordon says. “I don’t want to keep waiting for Sacramento to address this from the top down; we’ve been waiting a long time for intelligent concepts to come from there. I’d rather do it from the bottom up.” Last year, after seeing California land in 50th place in the annual Chief
READY, SET… RIGHT-TO-WORK IN EARLY MARCH, Wisconsin Governor Scott Walker visited
New Hampshire. Even the governor of one of America’s bluest
the Milwaukee factory of Badger Meter, where he signed a bill
states, Illinois, advocates such a “home-rule” approach.
making his state the 25th bastion of the “right-to-work.” The
Unions, which saw their ranks decline to about 11 percent of
company’s CEO, Rich Meeusen, immediately pledged to begin
the U.S. workforce in 2014, are panicking at this private sector
making a new water-metering product at the plant instead of in
trend—even as many of the same states also put the squeeze on
Mexico, adding a dozen workers in the coming months, with the
their public-sector unions. In Michigan, for example, the specter
potential for additional hires.
of the state’s switch to right-to-work status in 2013 loomed over
That was more than President Barack Obama could take. Within 24 hours, Obama issued a statement that he was “deeply disappointed” in the new law that bans contracts in Wisconsin that require private-sector workers to pay union fees. Stagnant for about a decade, laws against forced workplace obeisance to unions have lurched ahead in the last few years,
the spring opening of new-contract talks between the United Auto Workers union and the Detroit Three carmakers. “Hardworking folks deserve a choice,” Michigan Governor Rick Snyder says. “If they see value in a union, they should be happy to join it. But they shouldn’t have to.” Real change, however, takes time. In economic-develop-
with adoption by Republican-led governments in Indiana, then
ment terms, the biggest immediate impact of the expansion of
Michigan, and now Wisconsin. Right-to-work proponents are also
the right-to-work was to place Wisconsin, Michigan and Indiana
gaining ground on the county level in states like Kentucky and
back on consideration lists for company-siting decisions. “It’s
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WHAT MATTERS TO CEOS Executive “Best States/Worst States” rankings, he was beside himself. So Gordon decided to take matters into his own hands last fall. Opus is making loans out of the $1-billion fund only to businesses that vow to use the capital to expand employment in California only. Opus’s focus is on manufacturers, distributors, technology companies, and healthcare concerns, but its client base also includes restaurants and retailers. And the program is primarily aimed at business leaders and successful entrepreneurs who already have proven their ability to expand their companies and add jobs. Specifically, the initiative gives companies a .25-percent rate reduction if they certify that they’ve added five or more jobs as a result of investing the capital. BIG NUMBER
NINTH CALIFORNIA’S RANK AMONG THE STATES IN OUT-MIGRATION OF POPULATION FOR THE YEARS 2003 THROUGH 2012
Some observers gave the state credit for the California Competes tax-credit initiative, launched last year to replace a poorly performing enterprise-zones program and aimed at “high-value” businesses growing in the state. And California officials noted that the state added 320,000 jobs in 2014; added more private-sector jobs since the recession ended than any other state, at 1.5 million; and remains home to more venture capital, patents, tourism, Fortune 500 companies, agriculture, biotech and manufacturing output than any other state. But Cushman & Wakefield clients “have no awareness that things are getting better in California for business,” said Andy Mace, a managing director in the supply-chain business of the real-estate consulting firm. “It’s not uncommon for companies to simply cross California off their lists without taking a look at it.” And Gordon has tired of California relying on its crown jewels: hightech companies. “Real America isn’t Silicon Valley,” he said. “The bulk of America is driven by businesses that aren’t sexy. You cannot bet all of California on that [sector] and then shut out the rest of America.”
“Since former Governor Mitch Daniels,
Indiana has became very business friendly.”
•
“New York, California and Illinois are long-term reclamation projects that will require a major crisis to make progress. Policies support union deals with longtime political cronies.”
•
“California has made it possible for us to create a venture that attracts highly-motivated and extremely talented individuals.”
•
“The Democratic politicians have been bullshitting the voters in Chicago for close to 40 years. The state fiscal situation is a mess and Bruce Rauner may be the last, best chance to save the state.”
•
“California appears to not want mid-size businesses to settle in this State; too bad!”
really opened up the pipeline of the number of companies willing
lican Governor Bruce Rauner to believe that he could get a statewide
to come here,” Snyder says. “The hard part is when people ask,
right-to-work bill past a legislature still dominated by Republicans,
‘Can you translate that into actual wins?’ As a practical matter,
Rauner did quickly introduce the idea of allowing local governments
companies won’t say that they’ve come to Michigan because it’s
to decide on “employee empowerment zones” that would enforce the
now a right-to-work state.”
right to work. “People want to control their own destiny, instead
Minah Hall of True Partners site-selection consulting, says
of having the politicians in Springfield dictate it,” Rauner says.
that non-right-to-work states often get eliminated without even
“Local voters deserve to determine their own futures, and our
knowing they were in the running. “Some CEOs decide that this is
agenda gives them common-sense tools to do that.”
an important issue for where they will add jobs. If that’s their view,
Until now, right-to-work has been considered the prerogative
then non-right-to-work states get eliminated without a second
of states. The idea for such local zones, hatched by conservative
glance.” Plus, many business leaders believe their companies are
groups like the Heritage Foundation and the American Legislative
less likely to be unionized in a right-to-work state. Often, they theo-
Exchange Council, is proving attractive to politicians in other
rize that if the populace of a state politically supports the principle,
cities and counties ranging from South Carolina to New Mexico.
workers there are less inclined to want to join a union. The near-ringing of Illinois with right-to-work states has intensified the issue there. While it was unrealistic of newly elected Repub-
By proliferating the pressure points for unions and their defenders, this approach might allow the right- to-work to flourish even within hard-core blue states.—DB
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ECONOMIC DEVELOPMENT
The Next Great Leap How can EDOs— and CEOs—really move the needle for their states? By Rick L. Weddle and William J. Holstein
I
IN THE FACE OF GRIDLOCK at the federal level in Washington, D.C., states and cities are turning to the economic development profession as never before for help in spurring their regional economies. This affords the profession an opportunity to rapidly mature and assume its rightful place as the branch of economics that achieves tangible results, as opposed to macroeconomists who merely debate whether the Federal Reserve should raise or lower interest
rates. The success of Austin, Texas; San Diego, California; Research Triangle Park, North Carolina; and Orlando, Florida prove that what happened in Silicon Valley can be replicated elsewhere. These newer technology clusters show that dynamic innovation ecosystems do not have to occur as an accident. But before the economic development field can reach its potential, it has some growing up to do. Here are four goals it must achieve:
1
POLITICAL SAVVY
Learn how to achieve greater independence from the political cycle. Genuine economic development cycles can be measured in decades. When Research Triangle Park was unveiled in North Carolina in 1959, many people laughed at it and equated it with Seward’s Folly, the 1867 purchase of Alaska. It wasn’t until IBM opened a facility in the Research Triangle in the 1960s that it gained
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Key Takeaways 1 Engagement Matters Get involved locallyâ&#x20AC;&#x201D;a healthy community means a healthier talent pool for businesses
2 A Seat at the Table Private sector CEOs can encourage development by serving on the boards of local EDOs
3 Foster Conversation Economic development professionals, educational institutions and business leaders must all work together
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ECONOMIC DEVELOPMENT
credibility. Today, of course, it is a major hub of innovation and manufacturing, including in the life sciences field. The reality is that political cycles of election and re-election are often just two to four years. When economic development organizations (EDOs) are captives of that cycle and have to deliver results so that the mayor or governor can get re-elected, it results in reactionary opportunism (i.e. seizing the next deal coming down the road) rather than focused and deliberate long-term strategies. It also raises the risk that a state or city will use large tax or financial incentives to lure in a major company or a casino or a sports franchise to get a quick win. That may not be in the best long-term interest of taxpayers. The key to reducing dependence on public sector funding is for economic development leaders to reach out to the CEOs in the private sector, both to sit on the boards of EDOs and to fund a percentage of their budgets. The Orlando Economic Development Commission, for example, receives 70 percent of its budget from the private sector. The Greater Phoenix Economic Council is supported politically by 22 mayors and five county supervisors, but it turns to local CEOs to sit on its board and provide 65 percent of its funding. Those agencies are able to take long-term views, but too many EDOs cannot do that because they haven’t been able to persuade CEOs to support them. Jeff Finkle, president and CEO of the International Economic Development Council, the industry’s trade association, says that building relationships with CEOs is one of the most critical issues that developers face. “I think there is a real issue about whether our business leaders are committed to the communities where they have invested,” says Finkle, who is based in Washington, D.C. “They are not taking leadership roles at the EDOs as their predecessors traditionally did. The question is, how do we get their engagement?” One answer, says Chris Comacho,
The key to reducing dependence on public sector funding is for economic development leaders to reach out to the CEOs in the private sector.” new president and CEO of the Phoenix economic council, is to run a development agency on the basis of research, long-term strategic plans, annual reviews and audits of the agency’s effectiveness. CEOs, who often are frustrated by the opaque and cumbersome decision-making methods of nonprofits, understand and appreciate those business concepts. “We’ve built an apolitical evidence-based organization,” says Comacho, who at 34 is one of the rising stars of the profession. “We do have a percentage of funding coming from public sector, but we run our company like a private sector business model. We’re one of the most metric-ed organizations across the country. We have bottom-line performance measures we must meet as an organization.” That formula has worked to draw about 10 C-level executives onto his board.
2
BRIDGING DIVIDES
Overcome the false divide between those who seek to lure companies to invest in their geographies (i.e. the “smokestack chasers”) and those who seek to develop indigenous technology-based clusters. The fact is, these strategies are complementary, not competitive. The ability of Texas to persuade so many companies to relocate to the Lone Star state is predicated on the existence of ecosystems in Texas that support those companies, not just on tax breaks and the governor’s Texas Enterprise Fund. The support of universities and community colleges in creating
the right skill sets, for example, helps increase the “stickiness” of the state’s metropolitan regions, five of which now rank in the nation’s top 10 cities by population. Once settled in Austin or San Antonio or Dallas, companies are less likely to pull up stakes and leave when tax breaks expire. This is one reason why Texas consistently wins Chief Executive’s award for Best State for Business. To create the ecosystems and infrastructure that companies must have, EDOs must understand the supply networks that companies in specific industries need. One example of that is what NorTech (Northeast Ohio Regional Non-Profit Technology) has done in the greater Cleveland-Akron area. It identified three emerging industries— advanced energy, water technology and flexible electronics. It then brought in seasoned private industry experts to become directors of “cluster acceleration” for each sector. It has been their job to find emerging technologies, whether from large or small companies or from university researchers, and help those players find new customers. “It didn’t matter where the idea came from,” says Rebecca Bagley, who just departed NorTech as president and CEO after six years. “It was all about moving new technologies and new products to market.” Doing the nitty gritty work of building supply chains and customer networks is one way to both nurture start-ups and draw in larger companies for the long run. Developers know that roads, bridges, airports and seaports are
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crucial pieces of infrastructure, but they need to look more broadly at what Willy Shih at Harvard Business School termed the “industrial commons,” the agglomeration of integrated suppliers and providers of human capital. That’s been one of the problems associated with persuading American companies to bring their manufacturing home from China—the supplier base has been wiped out and the skills sets that are necessary, like quality engineers, may not exist. As EDOs come of age as a profession, they’re learning that chasing smokestacks is more productive if they build the broad infrastructure to support them. That’s how a genuine cluster is developed. It’s not just a matter of flipping a switch by luring in one major transplant company.
3
CODIFYING BEST PRACTICES
Partly thanks to the research that the International Economic Development Council has funded, EDOs now have solid information about what works and what doesn’t work when it comes to technology transfer from universities, federal research labs, research institutes and other “idea factories.” Incubators require long-term funding and must have carefully calibrated motivations to encourage young companies to leave the nest and achieve scale. We know a great deal about how to develop and attract angel investors and venture capitalists. We realize that large companies such as Intel and Johnson & Johnson can play key roles in these clusters by investing in smaller companies and taking seats on their boards. We’ve learned a great deal about workforce training and retraining, and also about export promotion, which is an essential ingredient for any technology cluster. We should ask ourselves, across all these areas, what are the structures that work? It is not possible to guarantee that innovation occurs, but we know,
CEO PERSPECTIVE | WHY ENGAGEMENT MATTERS SCOTT FARRIS is an Orlandobased serial entrepreneur who is CEO of two healthcare startups—Aerosonix, which is developing next-generation aerosol delivery devices, and Nanozyme, which is working on technologies to prevent viruses from replicating. He is the immediate past chairman of the Orlando Economic Development Commission. Why is it rational for you as a private sector CEO to be on the board of an economic development organization? For me personally, all the businesses I’m involved in succeed on the basis of our ability to attract the best and brightest people. If our community is growing and thriving, it’s helpful for me because I need to attract people. It is a bit of a self-serving mission. I come from the Rust Belt— Altoona, Pennsylvania, where the best and brightest leave. When I moved here 10 years ago, I committed to becoming highly engaged in the community. We want our best and brightest to stay but more importantly we want this to be the destination of choice for the best and brightest from everywhere else. How do you justify the amount of time it takes? Many of the relationships that my companies enjoy right now have been a direct result of engaging with other CEOs in the community. We come together to talk about the good of the community, but as an outgrowth of that we also find ways of doing business with each other. It’s an investment in marketing and
business development as well. My previous companies have all been in semiconductors and energy. But now I’m doing a lot now in the healthcare space because of the new Lake Nona Medical City (a 650-acre health and life sciences park) and the investments that the community is making in healthcare. I’ve been exposed to a lot of healthcare opportunities that I normally wouldn’t have been exposed to. As a serial entrepreneur, I’ve been able to use the relationships I built on the Economic Development Council to define what my next companies will be. Is the complete innovation ecosystem represented on the EDC board? We’re making a concerted effort to make it so. We want to make sure that the board is representative of not only the traditional economic drivers in the community but also representative of target industries where we see growth such as healthcare and high tech. We need to make sure those folks are on the board and part of the discussion about our economic development strategy. We’re having an empty discussion unless they are part of it.
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ECONOMIC DEVELOPMENT
as in the art of cooking, what ingredients are essential to enable the desired outcomes. All this means that we take economic development out of any ideological or political context and concentrate on doing what is most pragmatic. If macroeconomists can argue that their field is a “science,” so can development experts. To help develop further credibility, the profession needs to insist that governors and mayors hire developers who have genuine credentials and are not just political fundraisers or friends of the family. To that end, the IEDC has developed certifications for economic developers and conducts frequent conferences and seminars in its effort to codify best practices. There are competencies that can be defined. One other best practice to stimulate a community’s learning is organizing visits to cities or regions that have demonstrated success. The Orlando EDC in 2012 took 100 business and political leaders, technologists and university experts from Orlando to Austin, Texas, to see how that city has become such a leader in advanced manufacturing. Now Orlando is organizing a similar trip to Phoenix, which has world-class leadership in aerospace and advanced electronics and is now trying to nurture what it sees as the next wave of growth in software, biomedicine and financial services clusters. This type of shared peer-to-peer learning is essential in helping any state or region overcome its internal political and institutional rivalries to concentrate on the patterns of interaction among all the players that create wealth for an entire community or state. The lessons sink in and are absorbed.
4
BREAKING DOWN SILOS
All of the above sets the stage for the fourth and final goal— overcoming the silo effect. One of the major problems in many regions is that different
One of the major problems in many regions is that different players don’t truly communicate with each other.” players—universities, incubators, investors, start-ups, large companies, chambers of commerce, political leaders, and others—don’t truly communicate with each other. They speak different languages with different vocabularies. They don’t agree on metrics to evaluate success, or lack thereof. That means economic development professionals must work to leave their own comfortable silos and facilitate the emergence of broad-based consensuses regarding regional development strategies. A piece of this is educating the different players about behaviors. One set of behaviors at the micro level may seem rational but seen in the broader context of cluster development strategy, they are irrational. Many universities, for example, still look at technology transfer offices as a way to avoid having technology “leak” from the university and create wealth for the private sector. One of the worst-case scenarios for university leaders is how Gatorade escaped from the University of Florida’s football program in the 1960s without the university earning a nickel on it until it sued for a percentage of the sales. But rather than worrying about damage limitation, more universities should be gearing up to follow the lead of Stanford and Massachusetts Institute of Technology in actively promoting the commercialization of their technologies. Universities may fear a loss in the short term, but over the long run, successful technology commercialization creates huge wealth and prestige for a community and therefore for the universities. It’s much the same message to
CEOs. At the micro level, it may not seem rational to use shareholders’ money to support an economic development organization and it may seem unwise to spend precious time sitting on a board of directors, but if enough CEOs do that, it can have a hugely positive impact on a region’s growth and on every company’s bottom line results. In short, economic developers must become genuine regional leaders who can communicate a clear set of policy choices to all other constituencies. That requires genuine thought leadership. “That is a dramatic shift in the economic development discipline,” says Phoenix’s Comacho. “We have to be the convening agent to have the discussions about creating the next economy.” It won’t be easy to achieve all this because the generation of people who have created today’s economic development profession will be retiring in coming years. “We’re going to be looking at a scenario all around the country where the baby boomers are going to be stepping back from their positions,” says the IEDC’s Finkle. “Are there enough younger people who will be ready to rise into these leadership roles? Do they have right skills sets, the right attitude, the right political moxie?” Much work clearly remains to be done. RICK L. WEDDLE is president and CEO of the Orlando Economic Development Commission and was CEO of the Research Triangle Park in North Carolina from 2004 to 2011. WILLIAM J. HOLSTEIN has been writing about economic development issues since 1992 and is the author of The Next American Economy: Blueprint For A Real Recovery.
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STRATEGY
WHEN SECO N Why SECOND-TOMARKET often beats an early-mover advantage. By Russ Banham AN ACCEPTED WISDOM in business is that being first-to-market with a product, service or a new wrinkle on an old idea is the optimal strategy. Intuitively, this makes senseâ&#x20AC;&#x201D;a new market is there for the taking. The early mover can capitalize on its inventiveness, win brand loyalty and fend off the copycats that follow. Âś Now comes a series of provocative books declaring
Key Takeaways 1 R&D Savings Early movers spend more capital on R&D than followers
2 Finding Flaws Followers can identify and fix issues upfront
3 Seeking Speed First movers often lack infrastructure and distribution channels
4 Deeper Pockets Cash-rich followers can overtake shoestring startups
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O ND IS BEST
FIRST TO WIN, FIRST TO LOSE He makes a compelling point. Southwest wasn’t the first airline, but it is the preeminent air carrier today. Google wasn’t the first Internet search engine, Kickstarter wasn’t the first
crowdfunding site and Boeing wasn’t the first airplane manufacturer. In fact, the latter company shrewdly analyzes whether it is better to be first-to-market with a new airplane or be second with something better. (Fair disclosure: The reporter is the author of the book Higher: 100 Years of Boeing.) Boeing’s 787 Dreamliner demonstrates the wisdom of waiting. Prior to the Great Recession, airlines wanted next-generation aircraft with higher passenger capacity for hub-to-hub routes. Boeing’s chief rival Airbus responded first with plans to build the A380, the world’s largest passenger airline. Boeing instead planned to develop a supersonic jet. When the financial crisis reared, Airbus stuck to its plans but Boeing went in a completely different direction, developing the smaller capacity, but longer-range and more fuel-efficient 787. The company figured that during the difficult economic period, airlines would want more efficient planes with lower operating costs. Airbus hit the market first, but Boeing had the more appealing product. Even though the Dreamliner’s debut was postponed because of supply chain issues, it seized more than three times the volume of orders from global airlines than the mammoth A380. By taking its time, Boeing could assess Airbus’ market experience and deliver a product better suiting demand. Both manufacturers had great products, but in this case the early bird did not get the worm. This is not to conclude that all early
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that being an early mover is fraught with danger, that the risk of failure for a first-to-market company is much higher than for the pack in pursuit. In business, the silver medal may be worth more than the gold. This is the conclusion of books like Copycats, Fast Followers and Will and Vision: How Latecomers Grow to Dominate Markets. Oded Shenkar, author of Copycats, has stated, “The facts don’t suggest that the innovator wins the market. Rather, the return is quite meager and declines over time.” Shenkar is the Ford Motor Company chair in global business management and a professor of management and human resources at Ohio State University’s Fisher College of Business. Other academics draw the same conclusion. Their research indicates that holding back has its virtues. “There is much more evidence to suggest that it is better to be second than first,” says Aleksios Gotsopoulos, Ph.D., assistant professor of management at Sungkyunkwan University in South Korea. “Once a market has been proven, a fast follower with capital, distribution channels and innovative marketing can come in with a superior product, satisfying customer needs that the early mover had failed to satisfy. Being first does not mean winning.”
BY THE NUMBERS
BOEING
A380
AIRBUS’ LARGEST PASSENGER AIRPLANE THAT WAS FIRST ON THE SCENE
787
THE BOEING MODEL THAT FOLLOWED, WITH LONGER RANGE AND BETTER FUEL EFFICIENCY
3x
VOLUME OF ORDERS FROM GLOBAL AIRLINES THAT BOEING SEIZED FROM AIRBUS
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movers run the risk of a bad fate or that the real advantage belongs only to those that follow. First movers can neatly tie up patents and copyrights, cultivate strong alliances with regulators, and build unshakable brand loyalties. Shenkar says being first-to-market or second-to-market is less important than having excellent market timing. Nevertheless, he insists that it is generally better to follow than to lead. “There is no reason to rush to market, even though analysts continually tout it as the surest way to gain and hold market share,” he explains. “While the innovator enjoys some preliminary advantage, the return on this innovation goes down over time.” WAITING IN THE WINGS Many first movers make the mistake of jumping in too soon with an ingenious product, hoping to create a market sensation. In such cases, it is not
“The innovator does most of the work, invests the greatest amount in R&D, prepares the market and
makes the most mistakes.”
uncommon for the innovator to give less thought to the supply chain, order fulfillment, distribution channels, regulatory compliance and back-office finance and accounting aspects of profiting on the product. Having spent a bundle on R&D and production, they may be short on capital to make quick adjustments correcting mistakes. The fast follower has these elements in place and can quickly pounce with an improved alternative that may also be less expensive. There is value in letting the early
movers absorb the first blunders. This wisdom helped the launch of crowdfunding marketplace CircleUp, an online intermediary between private equity investors and startup companies. CircleUp deliberately waited to see how earlier equity-based crowdfunding sites fared before it opened its virtual doors in 2012. “The first movers wanted to be all things to all investors,” says Ryan Caldbeck, CircleUp founder and CEO. “There would be tens of thousands of startups looking for investments,
MAINTAINING MOMENTUM DESPITE RESEARCH indicating that many first-to-market companies incur steep declines in customer demand, not all early movers suffer this dismal fate. To capture market share and retain this leading position, early movers must continually innovate. “Once you set your technology as the industry standard, you must make it increasingly difficult for followers to catch up,” says Sungkyunkwan University’s Gotsopoulos. “You do that by making your product or service increasingly more responsive to customer needs.” BlackLine, the market-leading provider of integrated financial close automation technology, fits this profile. Launched in 2001 with a handful of employees to automate a single client’s account reconciliation process, the company was the pioneer in the soonto-burgeon financial automation market.
Today, it serves more than 950 clients, from major enterprise-level companies through the midmarket tier, and tallies over 300 employees. In between is a story of listening to client complaints about their other time-consuming, manual processes to close the books, and then acting upon this information. “We’re in a constant mode of asking ‘What do you need, what can we do better?’” says Therese Tucker, BlackLine founder and CEO. “Much of our functionality derives from customers expressing an issue and us working on ways to fix it.” For instance, when corporate accountants grumbled about having to manually file journal entries, BlackLine developed an automated solution taking the drudgery out of the process. When they carped about having to manually reconcile and settle intercompany transactions, and
manually identify deviations in the balance sheet and P&L statement, two additional functions were added to BlackLine’s growing platform. The technology simply kept getting better, innovation after innovation. Accountants were liberated to focus on value-added tasks, their CFOs acquired enhanced visibility into business data, and controllers gained more control over reporting and compliance. Not only has BlackLine been able to maintain its market lead over secondto-market competitors like Trintech, but its growing solutions platform also encouraged Gartner to create an entirely new category of financial technology— Enhanced Finance Controls and Automation. “We’ve learned that to stay on top, you have to be more creative than your competitors,” Tucker says. Or as Gotsopoulos puts it, “Never leave room for seconds.”
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DARE TO REDEFINE Other late entries win market share from early movers by redefining a category, which was the case with Burlintong, Vermont-based Sustain Condoms. Like Starbucks, by no stretch the world’s first coffee shop, Sustain came to a mature market with a new product and novel marketing message. “Our goal is to get people to think about sustainability and corporate responsibility every time they open a condom package, even though they’re understandably distracted,” says Jeffrey Hollender, the company’s founder and CEO. Sustain’s condoms are made from natural latex, the sap of the rubber tree, a renewable, sustainable material unlike synthetic rubbers. The packaging is recyclable and Sustain gives 10 percent of profits to support women’s reproductive health care. The company is leveraging these brand equities with a unique target market—women. “Forty percent of condom purchasers are women, but the product is aimed at men,” Hollender says. “We wanted to make a product that was aimed and owned by women. We sincerely hope this will increase condom use by single, sexually-active women, which is 19 percent.” The condom’s packaging is in a
Tiffany-like blue-green color, with pictures of shells and wet rocks. Advertising is confined primarily to women’s health and beauty magazines like Self. Launching in 2014, the product is now available online and in more than 1,000 stores nationwide. Another fast follower that is redefining a category is Sonoma Cider. Longtime beverage industry executive David Cordtz saw that hard cider sales were beginning to rise in the mid-2000s. In the 1970s, Cordtz was the youngest commercial wine maker in California’s Napa Valley with Cordtz Brothers Cellars. He sold the winery in the early 1980s, but stayed in the industry in a variety of sales and production positions, dreaming about running his own company again. His entrepreneurial itch was scratched in 2014 with Sonoma Cider. The timing was crisp, as the hard cider market had more than tripled in size since 2010 and was on track to bring in $1 billion in sales by 2018, according to IRI. Big beverage companies like MillerCoors and Anheuser Busch had just jumped into the business to take on industry veterans C&C Group and S. Martinelli & Company. Cordtz entered the fray with a product that took the category in a new direction—hard cider made from organic heirloom apples and pears harvested in Washington State’s Yakima Valley. “They taste better and are vegan and gluten-free,” he says. He marketed his cider blends, Hatchet, Anvil and Pitchfork, to health-conscious Millennials and Gen X-ers at youth-oriented music festivals like Coachella. The effort paid off. Organic hard cider has caught on with Millennials in the same way that craft beer caught on with their parents. Sonoma Cider is now sold in 24 states, producing more than 70,000 cases and chalking up an impressive $3 million in revenue in its first year of business. The company is on track to produce 200,000 cases in 2015.
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with most of them just dying on the platform because the investors were confused and frustrated.” Caldbeck had a better idea. “We decided to focus on startups in one industry—consumer products and retail—and reach out to investors that were solely private equity,” he explains. “We also curate the ventures that reach out to us, eliminating 98 percent of applicants. This way, the right ideas reach the right investors.” He adds, “This is not about firstto-market, it’s about first-to-market fit.” The strategy is working. CircleUp has expanded the number of startup companies it works with by 10 times since July 2013.
BY THE NUMBERS
SONOMA CIDER
2014
FOUNDING OF COMPANY, WELL AFTER THE HARD CIDER MARKET HAD ALREADY TRIPLED IN SIZE
$3 million FIRST YEAR REVENUE
200,000 PROJECTED CASES OF HARD CIDER IN 2015
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▲ BY THE NUMBERS
PAXTI’S PIZZA
LATE
1990s WHEN THE WOOD-FIRED PIZZA CRAZE TOOK SHAPE
800 DEGREES THE TEMPERATURE OF A REVOLUTIONARY ELECTRIC OVEN USED BY PAXTI’S TO COOK PIES FASTER AND AT LESS COST
14
NUMBER OF PAXTI’S IN THE PACIFIC NORTHWEST, WITH 3 MORE ON THE WAY
BETTER FAST FOOD Even in deeply entrenched markets like fast food, followers can beat the early movers by giving consumers more choices, better food and more upscale dining environments. Two fast casual—and fast-growing—restaurant chains taking this route are Boloco and Paxti’s Pizza. Boston-based Boloco sells burritos in an upscale environment, taking its cue from pioneer Chipotle Mexican Grill. Where it differs is in the variety of its fare. “We’ve got more than a dozen different burritos on the menu besides Mexican,” says Patrick Renna, co-founder and CEO of the chain of 20 restaurants throughout the Northeast. “This way a diner can come here on multiple occasions, even in a single week, and find something different. They don’t get tired of eating Mexican all the time.” At San Francisco-based Paxti’s Pizza, founder and CEO Bill Freeman, who had launched several successful Silicon Valley technology startups like United Telecom, watched from the sidelines as the wood-fired pizza craze took shape in the late-1990s and early 2000s. Pizza chain pioneers like Pizza Hut and Domino’s, despite much cheaper prices, were fast losing market share to startups like Seattle’s Tutta Bella, which baked its pies with better ingredients in ovens fed by burning wood, which cook crispier crusts. “Next thing you knew, every town across America had a small pizza chain with wood-fired ovens,” Freeman says.
With money not a problem and lots of time on his hands, the successful entrepreneur was eager to enter the market with a childhood friend, Francisco “Paxti” Aspiroz. The latter had heard about a revolutionary electric oven manufactured in Italy that quickly reached a temperature of 800 degrees, much hotter than a woodfired oven. It also cost less to operate than both gas-fired and wood-burning ovens, and delivered cooked pies in 30 percent less time. “Our motto is ‘better before cheaper, and revenue before cost,’” Freeman says. The founders launched Paxti’s Pizza in 2004 in Berkeley, California. It didn’t hurt that the original office of Facebook was next door or that its founder Mark Zuckerberg survived on its pies (smudged boxes bearing the company’s name can be seen in the movie The Social Network). Today, there are 14 Paxti’s restaurants in the Pacific Northwest, and three more under construction. In both cases, innovative latecomers like Boloco and Paxti’s were able to take advantage of the pioneering brands’ perceived shortcomings. “The innovator does most of the work, invests the greatest amount in R&D, prepares the market and makes the most mistakes,” says Shenkar. “For this they get the early returns. But, unless they maintain continuous innovation and continually lower costs, someone is sure to come in, copy what you do best and innovate the rest.”
“Unless pioneers maintain continuous innovation and continually lower costs, someone is sure to come in,
copy what you do best and innovate the rest.”
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t BY THE NUMBERS
WINNER’S CIRCLE FIELD/SECTOR/PRODUCT
PIONEER/INNOVATOR
WINNER(S)
FAST FOOD
WHITE CASTLE
MCDONALD’S, BURGER KING
SCHEDULED INTERNATIONAL AIR SERVICE
PAN AM
UNITED, AMERICAN, DELTA, FOREIGN AIRLINES
DIET COLA
RC COLA
COKE/ PEPSI
CAT SCANNER
EMI
GE, OTHERS
CREDIT CARD
DINERS CLUB
VISA, MC, AMEX
DIGITAL PHOTOGRAPHY
SONY (1981)
CANON, OTHERS; THEN APPLE ETC.
SOCIAL NETWORKING
FRIENDSTER, MYSPACE
VIDEO GAME
ATARI (PONG)
NINTENDO, MICROSOFT, SONY
MAINFRAME COMPUTER
REMINGTON RAND
LENOVO, APPLE, DELL, HP
MASS DISCOUNT RETAIL
KORVETTE, MAMMOTH MART, ZAYRE, VORNADO
WALMART
DISCOUNT AIRLINE
PEOPLE’S EXPRESS
SOUTHWEST, RYANAIR, EASYJET, AIR ASIA
CHEWING GUM
ADAMS
WRIGLEY
WILL PATIENCE REWARD? Fast followers will not make a dent in or dominate a market unless they have resources, infrastructure and relationships. Freeman had the money, expertise and agility to hit the ground running. So did Hollender, who possessed distribution savvy and sharp marketing skills. In another mature market—household products—in 1988, he founded Seventh Generation, which makes products from biodegradable plant-based materials. With Sustain, he is simply leveraging the same message of sustainability and natural
resource conservation, not to mention many of the same retail channels. Cordtz also had strong ties to distributors, in his case with hundreds of taverns and restaurants across the country, thanks to his previous job as national sales manager for Thames America, a British maker of hard cider. He had similar contacts in liquor stores and other establishments selling wine and beer. He also had the inside savvy to buy state-of-the-art fermenting equipment from a manufacturer in China he knew, at a discount. The machines were reengineered using sensors
and data analytics to reduce labor costs. “It would be a stretch to say we had a second-to-market strategy,” Cordtz says. “Hard cider was once the largest alcoholic beverage category in America, a position that lasted until Prohibition. We’re just coming at the market with something different.” He has a point. In many ways, fast followers aren’t reinventing the wheel. They’re simply making better products to customers’ tastes, whether it’s airplanes, pizza or condoms. First acts get the audience going. Second acts get the applause.
RUSS BANHAM is a Pulitzer-nominated business journalist and author of 24 books.
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GOING ON THE OFFENSE IN AN UNCERTAIN WORLD Seven steps to getting your game face on. By Ram Charan THERE IS NO QUESTION: Taking control of uncertainty is the
fundamental leadership challenge of our time. We live in the age of a technology renaissance that is not only disruptive, but destructive; it is literally destroying existing industries and creating new ones. The risk of not making a shift now outweighs that of making it, and maintaining a defensive posture leads only to a shrinking business. Âś Companies must go on the offense to survive. The greatest advantage goes to players that create change, not just learn to live with it. Rather than waiting and reacting, these industry leaders immerse themselves in the ambiguities of the external environment, sort through them before things are settled and known, set a path and steer the organization decisively through it. They conceive of a new need â&#x17E;ź MAY/JUNE 2015
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X
or a total redefinition of an existing one, often with a new model in mind. They don’t cling to core competencies—they take advantage of new developments to create a new need among consumers, or give them a new and more compelling experience. As CEO, you have to be able to change course, and more than once, yet without zigzagging so much that consumers and investors become confused about who you are. Those who can do this successfully will be among the attackers, not the attacked, and ultimately among the fittest who survive. The following are seven key steps to playing an offensive game:
1 2
X
“COMPANIES CAN BE REBORN DIGITAL IF THEIR LEADERS HAVE THE MINDSET FOR OFFENSE.”
Hone your perceptual acuity. Have the psychological and mental preparedness to “see around corners” and spot potentially significant anomalies, contradictions, and oddities in the external landscape, ahead of others. Some are born with this ability, but it can be learned and even institutionalized over time. (See sidebar, page 59.)
Be a Born-Again.
3
Some companies are digital from their first breath. Others, legacy companies, must think about how to harness digitization in all of its forms to provide better information about the consumer and create new and improved experiences. They cannot simply retrofit their businesses for technology; they must experience a digital rebirth. Companies can be reborn digital if their leaders have the mindset for offense and the courage to venture into uncharted waters. Macy’s, for example, is forging a rebirth, becoming an omni-channel retailer by blending store, online and mobile, and investing in technology over the past five years to improve the end-to-end consumer experience. Some retailers may manage to remain purely bricks and mortar, but they will be in the minority. For
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those who choose to make the shift, be decisive. If you vacillate, a born-digital player will move swiftly to capture your juiciest, most profitable segments.
Learn the power of math. The single biggest instrument of change, the one creating major uncertainties and opportunities for an ever-growing universe of today’s businesses, is the advancement of the mathematical tools called algorithms. Algorithms and the decision engines they drive process enormous amounts of data, far beyond what the brain can handle, at light speed. Companies that use these new mathematical capabilities possess a huge advantage over those that don’t, even those that have been highly successful in the past. We can see the power of math in upending healthcare, an industry as legacy as they come. As the Affordable Care Act sharply accelerates trends already under way, aggressive companies are using sophisticated software and algorithms to help shape the industry transformation rather than become victims of it.
Des Moines-based UnityPoint Health, for example, is investing talent and funds to build an infrastructure of digitization, algorithms and software that integrates aspects of patient care from various departments and centralizes the collection and analysis of patient data, to which nurses and other providers have instant access.
4 Still, remember that the consumer holds the key.
The most sophisticated data mining software won’t replace an intuitive feel for the customer and what he or she really wants. The human mind still is unsurpassed at making connections and generating hypotheses that can then be tested. Even UPS’s sophisticated algorithm-based On-Road Integrated Optimization and Navigation system was designed to be overrode by drivers when necessary. A feel for the consumer can only be honed by observing consumers firsthand, as Sam Walton, Steve Jobs, Jeff Bezos and countless others were famous for doing. This is not a quaint pastime; it is a necessity for staying relevant.
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5
4
THE TOOLS TO BUILD PERCEPTUAL ACUITY
The pressures of daily work and total immersion in tactical details can narrow your thinking and lower its altitude. Here are just a few tools to broaden your vision. THE 10-MINUTE EXERCISE.
5
Get comfortable with uncertainty. Your tolerance for ambiguity and risk will be tested, because going on the offense almost always requires taking action before you have a crystal clear picture of all the factors your success will depend on. As CEO of Thompson (now Thomson Reuters), Dick Harrington was a broad thinker with a finely tuned antennae for picking up signals about the outside world. Thomson, owner of what was then the world’s largest newspaper chain, was still profitable and performing well in the mid-1990s, when Harrington concluded that the rise in Internet usage would inevitably cripple Thomson’s largest source of revenue: the sale of classified ads and display ads in print media. With the storm clouds still far on the horizon, Thomson prepared to exit newspapers altogether. A defensive mind would have seen gloom and doom in the rise of electronic media and might have sought to buttress the print business. Harrington’s mindset for offense saw the opportunity to build a business based on something new, and put the company onto a new trajectory ahead of others.
In every staff meeting of an hour or more, devote the first 10 minutes to learning about and discussing the anomalies in the external landscape. Ask a different staff member at each meeting to present to the team a past, present or possible structural uncertainty or bend in the road in another industry: What is it, why did it happen or why could it happen? SEEK CONTRARY VIEWPOINTS. Test
your perceptions by talking with others,
OCCASIONALLY DISSECT THE PAST. Spend time
with colleagues and look at a big external change that hit your industry or another one in the past 50 years. Dissect that change. There is much you can learn from a glance in the rearview mirror.
That does not mean you have to be the very first in a segment; the world doesn’t change the day a technology is invented. But don’t confuse patience with a frustrated desire for certainty. Barnes and Noble got caught waiting too long to see where online commerce was going, and as a result, lost much ground to its born-digital rival, Amazon.
6
2015_CE_MJ_OFFENSE.indd 59
especially those you expect might have opposite views. Widen your social group, surrounding yourself with people from different industries and backgrounds, with different cognitive bandwidths and attitudes about risk-taking.
Remove the blockages. Even if you educate yourself about digitization and the consumer, your own psychology can trip you up in the following ways: • ATTACHMENT TO EXISTING CORE COMPETENCIES. Many lock
CONSIDER WHO MIGHT CREATE A BEND IN THE ROAD.
Is the creator of a new invention, patent or law driven to make a difference? Is someone else likely to use the invention? Who has the interest and/ or resources to do something with it? BE A VORACIOUS READER.
Look for what surprises you, what is an anomaly. Reflect on what it might mean and for whom. Who will be on the attack, who on the defensive, and why? Is there a game-changer here?
on to these with a death grip, assuming that they are the company’s greatest or only strength and its foundation for a secure future. The CEO of Kodak is the poster child for this problem: he focused on geographic expansion into China, building on Kodak’s great expertise in film photography, and, despite his background in semiconductors, missed the implications of the shift to digital photography. John Akers, IBM’s CEO in the early ’90s, was locked on to its core competency in mainframes. His successor, Lou Gerstner, liberated the company from that blockage and refocused it from hardware to software and services, where the new game was emerging. MAY/JUNE 2015
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• REFUSAL TO RECOGNIZE OBSOLESCENCE IN KEY PEOPLE. No one
wants to abandon people who have helped them succeed. But if that sentiment stops you from having a clear view of where the business should go, by definition it’s a blockage. A variation on this theme is the delusion that the key person will change. People can and do change—but will they change fast enough? During the spring of 2014, the 20 most critical senior executives of a company we’ll call “Super Snacks” convened from around the world to discuss strategy. The company was the industry leader, but CEO “Gail Jones” was worried about the accelerating shrinkage of the sweets market, the company’s mainstay. Jones invited me to help the team visualize the evolving forces that were reshaping the market space. It was a supreme challenge for them to think beyond the traditional boundaries of their business, but after some months, all but a few came along. Those few holdouts, all great people who had contributed much to the company’s success in the past, had become blockages. As painful as it was, Jones had no choice but to move them out of their jobs. • FEAR OF FAILURE. Despite the unwavering confidence business leaders outwardly display, many have psychological blockages rooted
7
in fear: of being shown to be wrong, of being embarrassed, of how others will respond to their decisions or actions, and, more generally, of the unknown. At times, fear can be constructive, as Intel founder Andy Grove pointed out in Only the Paranoid Survive. But if you let your subconscious fears block your judgment, you won’t know how to gauge the degree of business risk. Going on the offense does not grant you permission to gamble a business on hunches or theories, but it does involve risk-taking. Becoming aware of and confronting your own inner fears will allow you to see things more accurately, think more creatively and move more decisively. • AVOIDANCE OF OPPOSITION. If you see something shaping up on the horizon that others don’t yet see, you will raise some hackles with your board, your investors and even a few powerful direct reports. If you doubt your ability to bring such powerful people along, you may rein in your ideas. It’s not an unfounded fear; when you push for radical change, you run the risk of triggering backlash or revolt. But you can win over constituents by helping them develop a mindset for offense along with yours. In any organization, some 2 percent have a disproportionate influence on the other 98 percent. Never lose sight
of your 2 percent—their buy-in will make all the difference.
Don’t be a wimp.
Ultimately, going on the offense is a test of your courage. Do you have the guts to make a big move? Intellectualizing is one thing; having the courage to pull the trigger is another. As Dean Stamoulis, head of global leadership and succession services for executive search firm Russell Reynolds Associates puts it: “Savoring complexity and processing it intellectually is a learned skill that needs to be well developed. But the capacity to act is a reflection of self-confidence—not behavioral boldness or arrogance but genuine authentic self-confidence about one’s ability to figure things out and deal with the consequences. That self-confidence is vitally important when the unexpected occurs.” We can never completely eliminate uncertainty. Doing nothing can be risky in itself and there will always be unknown unknowns—risks you don’t even know exist despite careful thinking. But building your perceptual acuity, being able to spot the opportunity in uncertainty, having the willingness to forge a new path and commit to it as well as the adeptness to manage the transition—those are the leadership skills absolutely necessary in these, the most uncertain and fast-changing times.
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Collecting Art For 40 Years
Meet real estate developer RON PIZZUTI, owner of 2,000 artworks—none bought as an investment. By George Nicholas
Top left: Ron Pizzuti at his new Columbus hotel, The Joseph, with treetotriangle, an acrylic on canvas piece by Franklin Evans (2011); At right: Targowica III, artwork in felt and acrylic paint on tri-wall cardboard by Frank Stella (1973)
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A DRAWING OF A CIRCUS SCENE by the Dutch artist Karel Appel called out to Ron Pizzuti, CEO of Pizzuti Companies, from a Columbus, Ohio gallery in 1974. “I was a young man with a young and growing family,” Pizzuti says, but he and his wife, Ann, paid the $900 price in nine monthly installments “without any intent to ‘build a collection’ or ‘invest in artwork.’ We just bought what we liked, as we do today.” Thus began the Pizzuti Collection, a world-class trove of some 2,000 contemporary paintings, sculpture, film, photography, drawings and prints that the couple has amassed over the last 40 years. Pizzuti’s passion for art began some months earlier when, as a buyer for The Limited Stores, he was traveling to “the world’s most exciting and engaging cities.” “Frankly, after a while, I got tired of looking at cathedrals and pubs. So I started going to museums and art galleries. I had no idea what I was looking at, but I was intrigued enough to keep visiting.” He was entranced by a Frank Stella painting at a little gallery
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RON PIZZUTI: SCOT T CUNNING HAM; ALL ART WORK COURTESY OF PIZZUTI COLLECTION AND AL AN GEHO
CEO PASSIONS
RON PIZZUTI: SCOT T CUNNING HAM; ALL ART WORK COURTESY OF PIZZUTI COLLECTION AND AL AN GEHO
Clockwise from above left: American Appeal (Bridge), a work in oil, fishhooks, nails and canvas on plywood by Yoan Capote, (2009); Cake Stool, stuffed animals hand-sewn on a canvas cover over stainless steel by Fernanado & Humberto Campana (2008); Kiss, in acrylic, beads, and string on canvas by Sarah Cain (2013)
in Montmarte. The $10,000 price “was a sum that I couldn’t contemplate, but I was hooked.” Back in the States the following week, “I went to the New York Public Library—Google, of course, having not been invented—and looked up Frank Stella. I became a student of his work, devouring everything I could read about him and his contemporaries...I am proud that our collection includes a number of Frank Stella’s works, but I am more proud that I have gotten to know him well over the years and consider him one of my good friends.” Pizzuti founded his Columbus, Ohio-based company in 1976. It has since developed more than 50 million square feet of office, hospitality, healthcare, retail, residential and industrial facilities in the Midwest and Southeast. Of his passion for art, Pizzuti says, “I get a great deal of pleasure out of the process of researching, discovering and collecting. I love meeting the artists, watching them work and hearing what inspires them. It’s a great joy to follow them, watch them grow and witness their work evolve. I also
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CEO PASSIONS
LOANING YOUR PRIVATE COLLECTION JOAN SMITH, senior member advocate at PURE Insurance, an insurer specializing in high-net worth families, offers these best practices when loaning your works of art.
find it fascinating how history can be studied through the lens of art. Among my favorite museums in the world are the Victoria and Albert and the National Portrait Gallery in London. I go every time I visit London and learn something or have a new insight about history or art or myself.” Being surrounded by fine art and great design, he says, feeds the spirit, challenges the mind and stimulates thought. “I spend my time traveling to artists’ studios and art fairs, exploring the world’s art centers and looking for new ones,” says Pizzuti. “Cuba is being discovered by the art world now, and China, Brazil and India are exploding onto the scene.” Over the years his passion has shifted from collecting great works to discovering artists and sharing his collection with his community. He opened the Pizzuti Collection to the public two years ago in a historic building
Top: Backupenchantress, painted chrome and steel by John Chamberlain, (2007); In background: New Mexico, New York #3, acrylic on fir plywood by Richard Tuttle (1998); Above right: Homestead Ghost, oil on canvas, by Tomory Dodge (2014)
in Columbus. It has since begun an extensive community-outreach program. He’s also showing new pieces from local artists in his newest project, The Joseph, the city’s first full-service boutique hotel. The art is exhibited in the hotel’s public spaces and some individual rooms. Pizzuti often is asked for advice on how to collect art. His advice? Don’t buy it as an investment—it’s easy to get burned. “Visit as many fairs, galleries and museums as possible,” he advises. “You’ll eventually figure out what you like and want to collect.”
Appraisal Before loaning any work of art, be sure you have a current appraisal in place, complete with replacement value, condition report and photos. Loan Agreement Make sure you understand and agree to loan terms, including whether your property will be part of traveling exhibitions or remain at a single location and which party is responsible for insuring the piece while in transit or off the premises. Insurance Enlist your broker to ensure your piece(s) are properly insured while on loan. Be aware that losses on international soil are subject to different laws, coverages and timetables. Personal collections policies tend to offer the broadest “all risk” protection. Packing & Shipping Be clear about who is arranging and paying for the packing and transport of the object to be loaned. If your piece is part of a traveling exhibition, make sure the fine art professionals hired to do the packing will be using exhibition crates and that condition reports and acclimatizing precautions will be made at each stop. Security Ask the host institution(s) for a detailed overview of security technologies and protocols in place. Consider checking with local law enforcement as to whether any thefts or other incidents have been reported on site.
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EXECUTIVE LIFE
Driving Technology: The Future Is Now Whether you’re into safety, sustainability, sporty performance or all three, you’re likely to find one of the many new automotive technologies compelling. Read on for a look at THREE CUTTINGEDGE TECHNOLOGIES and a preview of more innovations on the way. By William J. Holstein and John O’Dell
THE AUTOMOBILE IS undergoing the
most sweeping technological changes since it was invented more than a century ago. A bold statement, but true. The gasoline-burning internal combustion engine no longer holds a monopoly as new propulsion systems come to the fore. One of the most exciting is the hydrogen fuel-cell electric drive system that delivers decent range and quick refueling and is pollution-free at the tailpipe. Another is the battery-electric car that can now provide the same acceleration and thrills as any conventional supercar— maybe even more. The other big news is the marriage of the automotive and computer
industries. The rule of thumb these days is that the average new luxury car contains more lines of software code than a jet airplane. One important area of innovation is driver assistance technologies such as adaptive cruise control, lane control and crash avoidance systems. They are a big step toward the ultimate ideal of autonomous driving. Google proclaims that the era of completely autonomous driving has arrived, but the auto industry believes drivers will have to remain at least minimally engaged with their vehicles for the foreseeable future. The greater challenge for automakers, at least for now, is learning how to unleash the full power of the Internet,
TO BOLDLY GO... ... to California. For now, Toyota’s futuristic hydrogen car will only be available in The Golden State
social media and smart phones in their cars, SUVs and trucks in a way that does not distract the driver and cause accidents. After years of experimentation, the best methods of doing that are appearing. Once again, Chief Executive teamed up with Edmunds.com to pick three exciting technologies on the market this year. We also offer a glimpse of what is on the horizon.
1
Toyota’s Mirai: Sensible Sustainability
Imagine stepping out of your car and going around to the rear exhaust pipe while the engine is running. You kneel, place your face by
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the pipe and breathe deeply. Insane, right? Not with Toyota’s hydrogen fuel cell vehicle, the Mirai— because the only thing that comes out of the tailpipe is steam or water. There is no carbon dioxide, no particulates; nothing but H2O. We drove a pre-production version of Toyota’s $57,500 hydrogen car on a test track in Japan and on a short freeway and surface-street route in Southern California and concluded that there was no loss of functionality or performance in the vehicle. The car performs like a refined version of Toyota’s popular Prius. Mirai’s fuel cell separates the electrons from the hydrogen to supply electricity to the drive
system, then combines the left-behind hydrogen atoms with oxygen to produce water, which is emitted. The environmental consequences of hydrogen-fueled electric cars are enormous. Someday the air in Los Angeles might actually be tolerable. However, questions must be answered. First, where is the hydrogen going to come from? Toyota’s vision is to initially produce hydrogen from natural gas, which can be done at a fuel station or in central plants with truck or pipeline delivery to the stations. The process requires a lot of electrical power, which produces carbon dioxide—which will require overcoming the issue of capturing and storing that
CO2 so it doesn’t enter the atmosphere. Toyota and other automakers with hydrogen cars in their futures—Hyundai, Honda, Mercedes-Benz and General Motors—all are exploring methods of hydrogen capture and storage. The second question is whether a hydrogen-fueling infrastructure can be built to support fuel-cell cars. What will it cost to build and who will pay for it? Toyota understands the argument, which is why it is introducing the Mirai in California only, at least in the beginning. In Southern California, several different fuel suppliers, some backed by automakers and all with
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EXECUTIVE LIFE
SCREEN SENSE Ford’s Sync 3’s infotainment panel system functions like a smart phone
state support, are building hydrogen fueling stations along what is nicknamed the Hydrogen Highway, where the a fuel-cell car can operate reasonably normally. Questions may linger, but hydrogen cars are one of the most stunningly bold attempts to re-imagine the automobile and transform its impact on the environment.
2
Ford’s Sync 3: Smart Communications
Remember BMW’s iDrive when it debuted in 2001 on the 7 Series? A small silver knob sat on the console between the two front seats and linked up with a computer screen in the dashboard. The driver was expected to move the knob in three different ways to manage
more than 200 permutations for climate control, entertainment, telephone and other functions. It was infuriating because the driver had to memorize too much. Figuring it out took time and caused distraction. Since then, auto manufacturers have been experimenting with ways to allow drivers to engage with ever more sophisticated communications and computing capabilities. After nearly 15 years, a truly workable solution has arrived in Ford Motor’s Sync 3 system, a highly intuitive touch screen system that allows a driver to quickly command the full functionality of a vehicle’s systems. Several advances made this possible. First, Ford moved away from the Microsoft software it used in the two previous versions of Sync
THE NEXT WAVE OF TECHNOLOGIES MOTION SENSING CONTROL
CONNECTED CARS GM will launch
SYSTEMS These systems will use
Connected Cars technology (also called V2V, or vehicle to vehicle) soon in a new Cadillac. These Caddys will be able to talk to each other, sharing traffic condition and road speed information so that drivers can avoid problems identified by those who traveled the same route earlier. Toyota also is planning a V2V system for several of its Toyota and Lexus models. Once the two automotive giants show it works, others will follow and with a common channel dedicated to V2V, it won’t be too long before cars will be talking to each other.
in-dash cameras and sensors to sense and respond to your hand motions. That will allow you to tune the radio, adjust volume, answer the phone, turn on windshield wipers and control air conditioning and heating systems with mere flicks of your wrist. Apple is one of the leading developers of this technology. AUTOMATED TRAFFIC JAM DRIVING Several automakers, including
Mercedes-Benz, are working on systems that will combine already-available active safety systems (lane keeping, active cruise control, frontal collision avoidance, pedestrian avoidance) to enable drivers to let the car do most of the work in traffic jams. Drivers will still have to keep their eyes on the road and be ready to intervene, but commutes should be a lot less stressful.
GIANT TOUCH SCREENS The sporty
electric car’s 17’’ touchscreen is the one of the first things most people notice about the Tesla Model S. The large screens make it easier to read navigation system maps, heater and AC
system control functions, audio system channels and song titles, even smart phone text messages. Tesla may have been first, but it won’t be alone—Volvo has said it will begin installing giant touch screens in its cars within a year or so, and others will follow. CARS THAT SENSE YOUR MOOD
Other systems will train cameras on the driver’s eyes, watch facial features and combine that data with information from sensors in the steering wheel to make a judgment about the driver’s mood. If the driver is clearly angry, the car could respond by slowing down; a drowsy driver might get a jolt from a vibrating steering wheel and a word of caution to pull over for a cup of coffee. The Media Lab at Massachusetts Institute of Technology is a leader in developing this technology.
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(roundly criticized as too complex) and embraced Blackberry’s more natural operating system, called QNX. Second, thanks to improvements in voice recognition software, the Sync 3 software no longer constantly asks the driver to repeat commands. Third, Ford decided not to hard-wire a telephone into the car but rather to use Bluetooth to sync up with the driver’s cell phone. The net result is an infotainment panel system that operates like a smart phone. You can even pinch the screen to change dimensions, just like you can on a smart phone. The main categories of functions, including navigation, are all displayed on the Sync 3 screen at the same time to make for ease of use. Ford says the Sync 3 system has been the most heavily researched program in its history—and it shows. Sync 3 will be available on 2016 models beginning this fall.
3
Tesla’s P85D: Souped Up Supercar
The stunning surge of power happens immediately. The driver of Tesla’s Model S P85D supercar has a choice, while standing still, of choosing a sports mode or an “insane” mode. If he taps the insane mode and hits the accelerator, the electric engines on the front and rear axles of the vehicle provide instant torque of a sort that simply does not exist in conventional automobiles. If you don’t believe us, look at the YouTube videos of the faces of passengers as a professional driver hits the pedal. It’s almost an afterthought that the car reaches 60 mph in a bone-crunching 3.2 seconds, on par with McLaren, Ferrari and Lamborghini. The P85D, unveiled in October 2014 and now available commercially, generates 691 horsepower because the rear engine produces 470 hp and the newly added front motor brings an extra 221 hp. All that power is available as soon as the accelerator pedal is depressed. There is no lag. The thrill is indeed in the torque.
The P85D looks like Tesla’s wellknown single-motor Model S. The new dual-motor model might be considered pricey at $120,000, but not if benchmarked against the likes of a Ferrari, which can easily cost twice that much. The addition of a front motor added nearly 300 pounds to the vehicle’s weight, making it a heavy car at more than 4,900 pounds. But the driver does not notice any bulking up and the extra weight has a minor impact on the range that the vehicle’s lithium ion batteries can provide. Accounts differ but the vehicle still has a range of about 280 miles when driven with a bit of restraint. Using different criteria, the EPA rates it at 242 miles. The bottom line is, it still has plenty of range. The car also boasts the latest automated driving technologies, including radar and ultrasonic sensors that can read and respond to speed signs and adjust the vehicle’s speed accordingly. More software upgrades, including automated steering will be sent wirelessly to the vehicles for download. Welcome to the future.
ELECTRIC ACCELERATION Tesla’s Model S P85D can go from zero to 60 mph in just 3.2 seconds
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FLIP SIDE
On Second Thought
Everywhere we turn, truths once held to be self-evident are being turned on their heads.
UH-OH, NOT AGAIN! The government now admits that it was completely wrong about cholesterol. Contrary to what they’ve told the public for 30 years, fat and cholesterol are actually good for your health; it’s switching to carbs that is bad! Darn, darn, darn! But that’s not all. Hiding peanuts from babies in the first year of their lives is the last thing you want to do; the sooner they get exposed to peanuts, the less likely they will develop dangerous allergies later in life. Who knew? Not scientists, that’s for sure. There’s more. According to Consumer Reports, gluten might not be as nutritious as other foods, could make you gain weight and increase your arsenic intake. No one saw that one coming. It’s not just on the health front that conventional wisdom is being turned on its head. Former supporters of Net neutrality now think that letting the government regulate the Internet like a utility might be a bad idea. And the French guy who wrote the book about inequality now says that his theory does not apply to economic events of the last 100 years. Everywhere we turn, truths once held to be self-evident are being turned on their heads. Consider other truths once carved in stone now being challenged: People are not saving enough for retirement. Yes, they are. They’re saving plenty. Anyway, their kids will take care of them. People will be fine. Don’t worry. Be happy. Listening to loud music will hurt your hearing. Nope, audio experts now say that listening to loud music makes your hearing better. It forces the cochlea to reconfigure the auditory canal—or something. Especially heavy metal, which is a terrific toner.
Ethanol is a total scam and a stupid drain on taxpayers’ money. Come on, who are you going to trust: the ethanol industry or your lying gas tank? Sure we had good reason to think that ethanol was a joke, a con job, a hoax, but now we know otherwise. Ethanol is great. And the guys who produce it are unsung heroes. Class acts, every last one. Baseball is boring. Wrong again. For decades, we’ve all operated under the assumption that baseball is positively lethal, especially Mets-Padres doubleheaders in August. Nope—whiffed on that one. Baseball is actually incredibly exciting. Its subtle charms are just not readily apparent to the naked eye. But they’re there! We’ve got the facts and figures to prove it. Classical music is dying. Pshaw. Didn’t you see that last Celtic Woman special on PBS? Those gals have violins, don’t they? Exercise helps you lose weight and stave off heart disease. Says who? More junk science. Another myth that needs debunking. Bank depositors earn a mere pittance on their savings. Lies, lies, lies. Who starts these rumors anyway? The Blackberry has had it. History will prove otherwise. The Greek economy is a joke. Is not, is not, is not! Stop saying things like that! You guys are so mean! In uncertain times such as these, are there are there any rock-solid truths, immutable truths that provide us with a reassuring sense of continuity and peace? Yes. 1. Chicken soup helps a lot when you have a bad cold. 2. Madonna will never, ever go away. 3. Boys will be boys. 4. Kentucky will win the National Championship. 5. If Kentucky doesn’t, Duke will. You heard it here first.
Q U E E N A N I LLU ST R AT I O N BY T I M TO M K I N S O N
Joe Queenan
It’s good… it’s bad. No, wait! It really is good! By Joe Queenan
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FINAL WORD
AD INDEX
California and “Parasitic Leakage” CAN POOR PEOPLE SPEND them-
selves into wealth? Can higher tax burdens lead to prosperity at the state level? Is the so-called “Texas Miracle” merely an economic illusion, as Princeton economist and New York Times pundit Paul Krugman believes? By looking at quantitative data from all 50 U.S. states, Arthur Laffer, founder and chairman of the economic research firm that bears his name, has assembled an impressive case for showing that economic prosperity at the state level—job creation, population growth and beyond—is linked to taxation. Laffer uses the metaphor of “parasitic leakage” when comparing California, where he lived and worked for many years, with Texas. Leakage refers to any case where actual power differs from stated power, such as measuring horsepower at the engine vs. actual horsepower at the rear axle where the rubber hits the road. The same is true, he argues, with regard to tax rates on economic activity and tax revenue. California has a higher unemployment rate and a lower labor participation rate than Texas. Over a 10-year period the Golden State has swung from being one of the biggest net in-migration destination states in the nation to being one of the biggest exodus states. Texas’s in-migration is the highest in the nation and has been growing. All of these are components of parasitic loss. Laffer estimates that the marginal tax rate on economic activity in California is about 65 percent higher than the marginal tax rate on economic activity in Texas. Then, there’s parasitic loss that happens between tax revenues and state and local spending. This type of loss is a product of regulations, restric72 / CHIEFEXECUTIVE.NET / MAY/JUNE 2015
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tions, requirements and environmental standards. Laffer recalls a time when he was a board director of California builder William Lyon Homes. “From the time we bought the land to the time we could start building a house was over two years because of the environmental impact statements and regulations. By the time we built the roads and put in the infrastructure, it would be another two-and-a-half years—sometimes up to 10 before we could complete the sales. Texas is nothing like that. California has prevailing wage provisions in all of its spending. Texas does not. All of these regulations create a very big parasitic leakage.” But what can business leaders do? Laffer believes that if California, which still has many strengths, got rid of its personal income tax, it would rise as one of the fastest-growing states in a decade. The downside is that the immediate three years would be horrific on its budget—the equivalent of a drug addict going cold turkey. And if it continues the way it is going, what then? “Detroit is the perfect example of how this thing spirals until it finally stops,” he says. “California is a spectacular state, it’s got so many advantages over other places, but it’s stealing the capital stock of people who invested in it over generations— just the way Detroit did. In 1950, Detroit had a population of 1.85 million people. Today, Detroit has a population of 680,000. As a family living in Cleveland, we used to go to Detroit for vacations. It was the Paris of North America. The train station was like the Taj Mahal. Now, look at it. It takes a long time to create a capital stock—and it takes a long time to destroy it.”
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