Executive Agenda ®
A.T. Kearney's business journal of featured articles and management insights examines today's most crucial global business issues.
The hospitality industry is on the cusp of a major market shift to Asia and Latin America.
Change is coming to the hospitality industry. Although Western countries still drive the global hospitality business, it won’t be long before emerging Asian and Latin American countries take the lead. Over the past three years, the number of available hotel rooms in the BRIC countries has jumped by almost 20 percent and we project that by 2025 there will be about 2 billion new middle-class consumers, most of them in Asia.
The major hotel chains are well aware of this trend, and virtually all have announced ambitious plans targeting emerging markets. However, virtually all those plans call for building upscale properties—basically ignoring the great potential that budget and mid-range customer segments offer. Thus the major chains face the great risk that strong local players will snatch the lion’s share of the high-profit mid-range customer segment—this is already happening in China. In other emerging countries, such as India and Indonesia, budget and mid-scale development opportunities still await the major chains.
The major chains can seize those opportunities by applying a three-pronged strategy for growth: choose the right countries and timing for development, manage scale effects locally, and adapt global brands and concepts to the local clientele. This paper takes a detailed look at each.Close
Financial institutions that choose innovation will be best positioned to preserve franchise and profits in the new regulatory environment.
With a harsh spotlight shone on banking practices, and legislators and regulators forced to act, banking reforms in the United States and Europe, together with the Basel III international regulatory framework, are aimed at increasing resilience by ensuring sufficient capital. In addition, regulators are enforcing behavioral changes in response to evidence that institutions are more focused on short-term profits than on long-term investment or credit risk.
While it is difficult to predict what will happen next, many of the potential outcomes for banks are unacceptable, and suggest a need for innovation and a reconfiguration of the value chain, at the very least. Five areas in particular should be prioritized:
- Bolster securitization capabilities
- Develop fee-based credit management services for well-funded corporations
- Step up participation in the corporate bond market
- Carve out a role in non-bank financing, such as crowdfunding
- Develop bundled offerings in retail banking based on investment banking concepts
Institutions that embrace the need to change will stand the best chance of emerging as winners.Close
- The right way to think about network optimization
Networks are complicated, and managing them requires an expansive strategic imagination.
The conventional way of looking at a network is through the direct-value lens: How much does it cost to run the network? Networks are a great deal more complicated than that, and managing them—or, more fittingly, optimizing them—requires an expansive strategic imagination.
No matter what kind of network one manages—hospitality, retailing, banking, leisure, telecommunications whatever it might be—once the network is built, it immediately begins its evolution. Even within a single local market, the network is evolving all the time. As the network goes through its life cycle, perspectives on sustaining it must change as well. The means for doing this are distilled in A.T. Kearney’s Network Optimization Tools, or KNOTs, comprised of eight elements, each focused on a strategic element of the network.
The English word knots translates as les nœuds in French, or nodes. This is an apt image for thinking about the symbiosis of the local and the networked—the balance of savoir-faire métier and savoir-faire local, of the collective intelligence of the network and the specific intelligence of the individual.
Think of KNOTs not as a laundry list of best practices used to build an optimal network but as electrons—each one discrete and at the same time interacting around the nucleus. A national bank develops financial products centrally, but the local branch manager manages the relationship with customers. The national bank maintains good relations with the regulators while the branch manager cultivates the good will of the town mayor. A manufacturer’s leverage with suppliers may be directly proportionate to its number of plants, yet procurement is not only about concentrated volume. It is also about expertise the manufacturer owns in a multitude of categories and brings to bear in the local nodes of its network.
A sobering counterexample is the flameout of video retailer Blockbuster, which channeled its energies into adding thousands of stores and tens of thousands of employees in North America and Western Europe only to be caught off guard by competitors such as Netflix and the rapid adoption of streaming video. In hindsight, Blockbuster’s history suggests an unbalanced emphasis on its real estate network and not enough on the customer experience. The result was catastrophic.
We organize our network nomenclature into three types: production networks, service networks, and distribution networks. La Poste, for example, is a production network in that it operates like a factory producing a product: collecting and distributing mail. Taxi companies, railroads, and airlines are other good examples of production networks. The nodes in these networks are more than just infrastructure. One must own the nodes or there is no business to manage. Closely related to the production network is the service network, typified by telecommunications and hospitality. A hotel network, for instance, cannot deliver a night’s sleep over the Internet. The consumption of its product is done at the local level even though each node in the network is supported by the expertise of the whole. The service is the network.
A distribution network is retail in all senses of the word, especially in its tailoring of products to meet the needs of local customers. Distribution networks are high touch and in certain ways are the easiest networks to think about in terms of nodes. The most familiar example, literally the most concrete, is a brick-and-mortar retail chain. Find a Wal-Mart, and its distribution center will not be very far away.Close
The U.S. shale gas market is out of balance, with production outstripping demand. When the glut ends, how will the market shake out?
Despite all the talk about shale gas development—the potential environmental consequences of hydraulic fracturing, the potential to replace coal with gas for generating electricity, the potential for the United States to export liquefied natural gas (LNG)—none of it addresses the bigger picture: The market is structurally out of balance, and it can’t stay this way. The technological triumph of shale gas has led to production that far outstrips demand, and if this were a normal market, price and demand shifts would have already delivered a quick rebalancing.
But shale gas is not a normal market and a rebalancing is not likely in this complex ecosystem where a wide array of players have diverging incentives and investment horizons. Over the past 20 years, gas prices have fluctuated between $2 and $15 per million BTU. At the low end, the producers are not viable, and at the high end, users of gas cannot afford to use it. Will we face more years of such fluctuations before achieving balance, especially since numerous decisions affecting that balance are still up in the air? And yet, bets must be placed now. Infrastructure must be built. With fortunes to be made or lost, these decisions must be as informed as possible.
If supply and demand were stable and investment cycles were shorter, it would be easy for market forces to align them. But the U.S. market for natural gas and NGLs is driven by several diverse and unpredictable variables: the global economy, oil prices, energy and environmental policies, a rise in the global gas supply, or technological advances that are still unknown. Although these variables could interact in any number of permutations, our analysis finds five scenarios that could capture a range of potential outcomes. The most likely scenario, which we call free markets, involves the least dramatic changes from current conditions. In this scenario, GDP growth is modest, oil prices remain within current trading ranges, LNG export becomes a reality, and no major global natural gas production or technological advance affects the balance of forces seen today.
We believe the price of natural gas in the free-markets scenario will find equilibrium by 2020 in the $6 to $7 range. Any lower than that and production from dry-gas wells would not be profitable and would not increase sufficiently to meet demand; any higher and demand from power plants will wane. But in this range, demand is high in all major sectors, leading to high margins for producers and strong capital investments.
Although the free-markets scenario is the most likely in our analysis, the outcome of global events and governmental actions could lead us down other paths. There are four other possible scenarios:
- Troubled times. A geopolitical event triggers a disruption in oil supply, sending oil prices up and the global economy into a double-dip recession. Natural gas demand collapses to 20 percent below the free-market scenario level.
- Limited export. The U.S. government decides to limit natural gas exports and provides support for other fuels in an effort to achieve energy independence, thus depressing natural gas demand.
- Global gas competition. Other major economies are successful in developing wet shale plays. As a result, demand falls for both LNG exports and ethane-based chemicals from the United States, challenging the overall economics of shale gas plays in North America.
- High output. Robust global GDP growth and lack of global shale developments lead to the highest level of U.S. natural gas demand.
These scenarios represent a combination of various, and sometimes drastic, supply and demand discontinuities.
In an environment that is likely twice as volatile today as it was 10 years ago, the Turbulence Index offers direction for managing in an era of volatility.
There has never been an age when people did not marvel at the pace of change in their lives. If the acceleration of change in our era is not unprecedented, there has certainly been nothing like it for at least a generation. A.T. Kearney’s Global Business Policy Council has developed a measure of volatility that quantifies just how volatile our age has become.
Our Turbulence Index portrays an interwoven world economy in which the volatility of external conditions doubled from 1999 to 2011. For strategic planners, operating environments became twice as difficult to predict, even in the near term. We call this “the 200 percent effect.”
This picture of extraordinary volatility quantifies what we all know intuitively about the growing influence of externalities on senior executives and the companies they manage. A decade ago, variables such as currency fluctuations and input costs had half the impact on corporate earnings that they do today.
The Index illustrates the macroeconomic uncertainty, financial instability, and unprecedented thirst for resources in an age of unpredictable energy and commodity prices. But bear in mind that the Index does not measure prices. It measures the degree of price movements—their volatility. It offers a foundation for analytics that, if approached systematically, can guide choices about resourcing, investment ideas, and talent management.Close
Green energy can lead to profits, but only with the right incentives and balance of price, technologies, capital, and operations.
Green energy is at the heart of all ecological strategies because it affects companies in three vital areas: environmental, economic, and social.
A company's core activities will determine the size of its energy footprint, but reducing greenhouse gas emissions, which have a sizable environmental impact, is an essential element for any sustainability pledge.
Economically, conserving energy can have a huge impact and mitigates risk around fossil fuel costs. After a company has picked the low-hanging fruit—the well-known, no-cost energy-conservation measures—the question becomes how to further reduce energy consumption, especially in an environment of volatile commodity prices and supply.
On the social front, the sustainability argument focuses on community impacts, such as how open-pit mining or hydroelectric dam construction can affect life in a small town or how energy projects can create jobs.
With this trifecta of factors in mind, many firms recognize the value of going green and want to build renewable-energy initiatives into their corporate goals without negatively affecting the bottom line. Yet, going green can positively affect a company's bottom line through energy efficiency and financially feasible renewable projects.Close
Amid ongoing instability in the global business landscape, the case for a continual strategic planning capability is unassailable.
As most people are painfully aware, few leaders—business or others—were able to foresee the chain of events in 2008 that plunged the world into recession. Of those who did foresee the meltdown, still fewer were able to prosecute a strategy to mitigate relevant risks. It is not surprising, therefore, that in a survey of global business leaders conducted last year by our Global Business Policy Council, more than half of all leaders were focused on improving their strategic-planning processes and tools.
While we can hope that the recession is increasingly behind us, few argue that the strategic outlook is any more sound or certain and the idea of negotiating unarmed the oncoming period of disruptive and potentially discontinuous political, social, economic, and commercial change without a strong and continual process for anticipating and preparing for change is simply untenable. But how to move to the next stage? While a great deal depends on the style of the leaders and the extent of commitment to empowering the planning process, a number of steps are useful in building a vigorous planning capacity that transcends corporate cultures and the nature of business. This paper discusses seven steps that stand out.Close
Interview with A.T. Kearney partners Vikram Chakravarty and Chua Soon Ghee on their latest book, Asian Mergers & Acquisitions: Riding the Wave.
Blanca Treviño, CEO of Softtek, discusses the future of global IT outsourcing and how Mexico can improve its competitive advantage.
A passionate advocate of service over labor arbitrage, Blanca Treviño has focused Softtek on adeptly undertaking complex projects and providing value, not just low costs. She is also a vocal proponent of sponsorship as a means of helping small- and medium-sized Mexican companies in the sector gain a toehold. At a recent A.T. Kearney conference on global competitiveness, Ricardo Haneine and Rodrigo Slelatt interviewed Mrs. Treviño for Executive Agenda to discuss the future of global IT outsourcing, the means by which Mexico can improve its competitiveness, and her aspirations for Softtek.Close
Ernesto Hernandez, President and Managing Director of General Motors de Mexico, discusses why he is optimistic about the future of Mexico's automotive industry.
At the recent A.T. Kearney conference, "Mexico as a Premier Source of Human Capital for Global Competitiveness," held in New York City, Ricardo Haneine and Brian Irwin sat down with Ernesto Hernandez, President and Managing Director of General Motors de Mexico, to discuss the common view of Mexico as a source of low-cost labor, the country's competitiveness, and what the future holds for its automotive sectorClose
In beauty, the customer experience is where the sale is won or lost, where interaction with the brand comes to life, and where the seeds of loyalty are planted.
As the beauty and cosmetics industry continues its global growth spurt, there is more of everything—more competition from new entrants in luxury and mass prestige, more distribution channels, and more customer touch points. While similar issues are plaguing most other industries, beauty is different. As a U.S. marketing executive in the beauty care industry so aptly puts it, "the time has passed when consumers were intrigued by brand alone."
In beauty, the experience at the point-of-sale (POS) remains the most important. It is where the sale is won or lost, where interaction with the brand comes to life, and where the seeds of loyalty are planted. To differentiate beauty products in a crowded and competitive environment, best practice companies have several things in common. There are five beauty secrets:
- Understand all aspects of the point-of-sale experience and its impact on brand performance
- Know what matters most to your end customers and retailers
- Identify the specific touch-and-feel experiences across geographies
- Ensure a consistent experience in all distribution channels
- Use the right organizational model and competencies to maximize the point-of-sale experience
This article discusses all five in more detail.Close
From the devastation of March 11, 2011, may come a new birth for Fukushima and Japan.
On the Richter scale, the quake is 9.0, the most powerful ever to strike Japan. Even as the aftershocks rumble, none of us imagines the approaching tsunami traveling behind the quake, across the Pacific, toward Japan's eastern coast. When the waves break, the news is immediately horrifying, and only grows more so. More than 20,000 people are dead or missing.
The catastrophe is not over. Three reactors at the Fukushima Daiichi nuclear plant flood and suffer core meltdowns. Radiation levels rise. An estimated 150,000 people move out or are evacuated while municipal officials impose a 20-kilometer exclusion zone around the power station. Around the world Fukushima becomes a household name for the worst possible reasons.Close
Growth is not limited to the almost mythical global giants with their vast resources. Regular companies are putting up incredible growth scores without a lot of fuss.
When "thought leaders" are asked about growth, they instinctively cite the same four or five companies. They love Apple, Amazon, Starbucks, and General Electric: mega-global behemoths with near-infinite power to attract talent, capital, and political goodwill. Listening to the conventional wisdom, you might think the only way to grow is to have billion-dollar investment programs pursuing multiple strategies under a celebrity CEO. Yet growth is not limited to the superstars. In fact, many of the largest companies in Australia and around the world are a fraction of the size of companies commonly profiled as case studies in growth. These are what we like to call "real companies"—versus the almost mythical status of the giants with their vast resources—and they are engaging in real growth based on real strategies.Close
How do the leaders stay consistently ahead of their markets while formerly thriving businesses fail?
What causes one leading company to stay consistently ahead of the market while another formerly thriving company flounders? The question is intriguing—and pressing, too, during these times of volatility. To explore the reasons and possible solutions, we conducted a study of industry champions. The result was a matrix that measures market success—a combination of growth in sales relative to market growth, and market share relative to the next largest competitor. Where BCG's matrix was created to help companies plan their portfolios, this matrix is used to chart a company's evolution and derive insights about its strategies. We call it the four seasons matrix:
- Spring. Companies that have outgrown their market but are not (yet) market leaders
- Summer. World leaders that have outgrown their markets
- Autumn. World leaders with below-average growth, gradually losing their positions
- Winter. Market followers that are growing more slowly than their market
We chose the axes of growth and market share because both metrics have a strong, proven relationship to long-term profitability and shareholder value. Combining those measures provides a solid basis for picking long-term winners.Close
Innovation is much more than a succession of grand themes and big ideas.
Not long ago, The Accor Group, a European leader in hotels, was looking for a way of distinguishing its brands among travelers by reimagining the decor of its rooms. Instead of a predictable experience, it wanted guests to enjoy almost infinite variation in room design. The challenges were many, not least that the physical layout of the rooms could not be altered. And another thing: The hotel chain wanted to pursue this innovative concept in branding while reducing its costs of construction and refurbishment by 50 percent.
A model existed for such an undertaking, and it came not from the hospitality industry but from the automotive business. Companies such as Volkswagen and PSA Peugeot Citroën are masters at design differentiation on a common platform. The Volkswagen Tiguan, for example, is built on the same platform as the Audi SUV. But the model of a common platform is not restricted to the factory floor. Rather, it is a process that extends across the value chain. It begins with a broad concept, continues with a multifunctional team overseeing design and development, building and testing prototypes, and finally rolling out a new automobile. The result is a kind of plug-and-play approach to building an entire car.
We applied the same approach to hotel rooms. Figure 1 illustrates our hotel value chain—from concept rooms, design, and prototypes to reference rooms and launch. Franchisees use an online room configuration tool to choose room designs and expedite assembly. Rooms are customized using plug-and-play modules of wall treatments, colors, patterns, furniture, accessories, and more.
This innovative approach to room design has been a huge success. We did not look at innovation as a succession of grand themes and big ideas—vision, principles, leadership, or culture—as many people do. Talking about it this way can lead one to pursue the perfect rather than the optimal. Instead, we viewed the project as the "practical work" of innovators as we endeavored to achieve optimal innovation.Close