Chief Executive March/April 2015

MARCH/APRIL 2015

Navigating the NortheastA state-by-state status report

on the region, p. 46

Tesla Takes Nevada

Lessons from the states’ battle for businesses, p. 32

Additive Manufacturing

Get ready for the 3D revolution, p. 40

Surviving a Cyber Attack

What you can do to mitigate the risks, p. 52

Dow Chemical’s Andrew Liveris Maps

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March/April 2015 No. 275

FEATURES26 Cover Story

Andrew Liveris’ Winning Formula Dow Chemical’s CEO has a message for fellow U.S. manufacturers: Rethink your role in the evolving global supply chains and partner with others in training and developing the workforce you will need for the future. By J.P. Donlon

32 Manufacturing Revival “Gigafactory” Ripples Was wooing Tesla worth the huge incentives Nevada made to close the deal—and what, exactly, does that deal mean for the rest of the states vying for business? By Dale Buss

40 Manufacturing Technology 3D Is No Longer the “Next Big Thing.” It’s Here

Are you ready for the additive- manufacturing revolution?

By William J. Holstein

46 Economic Development Regional Report: The Northeast

In The Northeast, the Recession isn’t over yet. By Warren Strugatch

52 Cyber Security What CEOs Can Learn from the Sony Cyberattack You may not be able to eliminate risk, but you can mitigate it.

By Tom Pettibone

56 CEO2CEO Summit Growing Your Business in Uncertain Times

Part II of takeaways and highlights from the 2014 CEO2CEO Summit at the New York Stock Exchange

• CEO Roundtable: Why Capabilities are Critical for Successful M&A

• CEO Roundtable: Are You Ready for the Internet of Things?

CONTENTS

COVER ILLUSTRATION BY JOHN RITTER / PHOTOGRAPH BY BEN HIDER02 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015

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18 Chief Concern The CEO and Power

Are the two a dynamic duo or an odd couple? By Dr. Thomas J. Saporito

19 Risk Index CEOs Rank Privacy/Data

Security Top Personal Risk

20 Mid-Market Report Mid-Market Companies Gain Ground Performance, job growth and economic confidence all improved in the final quarter of 2014.

CONTENTS

04 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2015

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 275, March/April 2015. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306.

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22 Making Technology Work Corral That Runaway IT Project! By Tom Pettibone

24 Sonnenfeld Signposts How Big Mac Reacts to Attack By Jeffrey Sonnenfeld

65 CEO Passions Collector with a Cause John Rivers, passionate about antiques made in Charleston, is on a mission to keep them there. By George Nicholas

68 Executive Life Taking it to Extremes

Here are three ways to escape—or indulge in—winter’s chill. By Michael Gelfand

71 Flip Side Nut Job

What would a Korean executive’s über tantrum look like stateside? By Joe Queenan

72 Final Word Who’s Afraid of Public Sector Unions?

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EDITOR’S NOTE


AT OUR CEO2CEO Leadership Sum-mit last December, Dow CEO Andrew Liveris got a knowing laugh from the 85 CEOs in the NYSE boardroom when he quipped that when it comes to dealing with Washington, if one “isn’t at the table, you’re on the menu.” (See our cover story, p. 26.) One theme that rankled the normally unflappable Australian was regulatory overreach. “We’re getting diced with multiple agencies’ applying multiple regulations and then not talking to each other,” he said. “The regulatory burden is crippling the country. For example, the EPA is pummeling industry with a new set of ozone rulings” (National Ambient Air Quality Standards for Ozone). But it’s not just the EPA and the chemical industry. JPMorgan Chase’s Jamie Dimon has made similar noises about the mul-tiple and often contradictory regulatory positions affecting financial services as a result of Dodd-Frank.

More disturbing to Liveris and to most CEOs in the room is what the Dow CEO observed as “the philosophical position of this administration concerning regu-lation. [President Obama’s] view is that regulation keeps us all under control. If we didn’t have massive regulation, only bad things would happen—like subvert-ing child-labor laws by hiring 12-year-olds to work in factories. It’s exactly the opposite mindset most business leaders have, which is to bring all parties to the table early to [consider] risk-benefit anal-ysis before something like this becomes a proposal in some agency.” Should it take effect, the new ozone standard, he believes, could force a number of power companies to go off the grid in 2020. “I don’t know where the lights are going to come from, but this is what uncoordinated

action is; it’s just costly and bizarre.” The total cost of regulation in the U.S.

is difficult to calculate, but one estimate put it at $1.75 trillion in 2008, according to Richard Williams, vice president of policy research at the Mercatus Center at George Mason University. Total expenditures by the U.S. government were about $2.9 trillion in 2008. Thus, out of a total of $4.6 trillion in resources allocated by the gov-ernment, 38 percent of the total is for reg-ulations. If regulations always produced goods and services valued as highly as market-produced goods and services, this would not be a cause for alarm. But that is precisely what is not known. Agencies often resort to accounting gimmicks to justify costly regulations. They frequently include both direct and indirect benefits but compare them to only direct costs.

Regulation also impacts the job mar-ket. For example, regulation can create regulatory-compliance jobs at the expense of jobs that are more highly valued by the market. Companies complying with reg-ulations expend time and effort that they could have otherwise invested in growth. Thus, it is not just the cost of complying with regulations but also the foregone economic growth that should be included in agency estimates. Economists refer to this as the misallocation of resources—when capital and labor are directed to less productive or unproductive uses. This situation can have very real consequences for the economy.

Liveris urges all business leaders to join whatever associations or lobby groups they can and to enlist the support of their employees to push back. When employees fully realize that jobs are at stake, they can be powerful allies in right-ing the balance of this predicament.

Out of $4.6 trillion in resources allocated by the federal government, 38 percent of that total are for regulation.

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BY THE TIME DIRECT-SALES powerhouse Amway decided to expand into China in 1995, the company had an impressive track record at breaking into foreign markets. In fact, 50 percent of its revenues had been coming from overseas sales since the mid-’80s. Amway was not a novice to Asia, having already developed flourishing outposts in Hong Kong, Malaysia and Japan. Its business model—recruiting independent business operators to personally market its health, nutrition, beauty and home-care products to consumers—seemed to translate well wherever the company chose to bring it.

Such was also the case, at least at first, in China. Three years into the effort, Amway China was a rapidly growing $200 million operation for the Ada, Michigan-based company. Then, virtually overnight, the govern-ment enacted a game-changing ban on direct sales, a move that threatened to derail Amway’s fastest-growing mar-ket. Various reasons—ranging from preventing fly-by-night scams to con-cern that the motivational meetings and door-to-door sales efforts typi-cally employed in direct selling could be used to incite political unrest—were given for the drastic measure. Whatever the true cause, Amway China was now at a crossroads.

To continue to operate in China, the company would be forced to overhaul the direct-sales business model that had long been its pri-mary differentiator. Traditionally, Amway’s representatives—or Inde-pendent Business Owners (IBOs)—made money not only by selling the company’s products directly to con-sumers but also by recruiting and mentoring other people to join the IBO team. By squashing that com-pensation structure, the regulation in China was attacking the compa-ny’s very core. “They said, ‘Look, you’ve got to have physical stores if you want to be here,”’ recounts Steve


CEO WATCH

CEO INSIGHT / AMWAY’S STEVE VAN ANDEL

Lessons from ChinaBy Jennifer Pellet

How rolling with a regulatory setback turned into a win-win.

MARCH/APRIL 2015 / CHIEFEXECUTIVE.NET / 11

In 2013, observes Investor’s Business Daily, PAUL KRUGMAN critiqued the argument that extending jobless benefits exacer-bates joblessness, since people put off looking for work until their benefits run out. He asserted that it was based on dated research that "has not stood the test of time and is irrelevant...

given our current economic situation.” He went on: “Ask yourself how, exactly, ending unemployment benefits would create more jobs.”

Turns out it did create more jobs. Lots more. Economists from the University of Oslo, the Institute for International Economic Studies and the University of Pennsylvania looked at how the sudden end to this federal benefit correlated with job growth and found that “1.8 million additional jobs were created in 2014 due to the benefit cut."

Finally, a CEO who speaks out about regulatory overreach. JAMIE DIMON, grappling with huge legal costs and rising cap-ital requirements at JPMorgan Chase, said U.S. regulators were putting his bank “under assault.” “In the old days, you dealt with one regulator when you had an issue, maybe two,” Dimon told

analysts. “Now it’s five or six. It makes it very difficult and complicated. You all should ask the question about how American that is. And how fair that is. And how complex that is for companies.” Let’s ask Elizabeth Warren.

THORNS

ROSES

THORNS AND ROSES

Book of JoblessVan Andel, chairman of the company and the son of one of its founders. Amway was then, and still is today, primarily owned by the families of its two founders, Rich DeVos and Jay Van Andel. After some delibera-tion, the families decided to persevere, working within the new regulatory requirements to continue to operate in China.

The decision proved prescient—and continued to be so even after China gave Amway a license to return to a direct-selling model in 2006. “We opened stores as a requirement of being there, and as a result, we found out something surprising,” says Van Andel. “We discovered that our busi-ness owners loved it.”

Rather than seeing the stores as competition, Amway’s IBOs embraced them as places where they could bring customers to see the company’s entire line of products in person. “The great thing about the stores is that they’re

not so much places where people are going to actually go to buy products—although you can buy prod-ucts there—as they are brand centers,” says Van Andel.

“Our business owners take prospects there to see what we have and to show them the opportunity that becoming part of Amway can offer. It gives them credibility.”

Today, China is Amway’s largest market, accounting for more than $4 billion of its $11.8 billion annual rev-enue. What’s more, the company has taken the “experiential store” les-son to heart, literally opening up shops around the world. “We’ve expanded the concept to the point where we have about 1,000 stores,” says Van Andel. “Our business own-ers love them; they love bringing peo-ple there.”

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CEO CASE STUDY / APPIAN’S MATT CALKINS

CEO WATCH

Evolving Entrepreneurial Venture By Jennifer Pellet

The Challenge At age 26, you left a lucrative and successful career at a fast growing enterprise-software company—sacrificing millions in stock options—to start your own company. You didn’t have a business plan, fund-ing or even a concept. Instead, you had three partners who shared your enthu-siasm for taking on an entrepreneurial venture during the heady days of the dot-com boom. Together, you decided to tackle personalization—or the task of using algorithms to analyze data about people and the products and services they consume to enable companies like Netflix to tailor their marketing efforts to consumer preferences.

The Context As it happens, your venture launches on the eve of the dot-com economy’s demise. “It got taken out by the bubble burst, even though it was a meaningful industry,” recounts Matt Calkins, CEO of Reston, Virgin-ia-based Appian. Next, the company looked to market its algorithms to web portals like AOL as a way to tailor content to user profiles, but that idea, too, died on the vine. Fortunately, the company’s third effort finally bore fruit. “We jumped into business-pro-cess management,” says Calkins. “The idea was that instead of coding it, we would let you draw it like a flowchart and configure roles for people, then, we would automate the flowchart.”

The concept addressed a myriad

of frustrations companies using custom software face, from headaches related to integrating the software and training people on it to the likelihood that the pricey and complex software you just purchased and struggled to implement will soon be obsolete. “The typical IT infrastructure right now is a forest of silos, each requiring its own upkeep, which is incredibly expensive,” explains Calkins. “Instead of 100 silos, we want you to have one Appian platform where everyone par-ticipates. If you have 10 applications, you log into them as one and you participate with everyone else logged into their applications because they’re

also logged into the environment, not a silo.”

Because Appian continually updates the platform, companies can also run all of their custom applica-tions on every type of device currently in use—a BlackBerry, an Android or an Apple Watch. “Ten years from now, even if we consume applications in a totally different way, everything you wrote on the Appian platform will work in that new environment because we will keep it fresh,” prom-ises Calkins. Finally, when it’s time to update customized software, compa-nies can use Appian’s drag-and-drop tools to change the flow charts on

WHO Matt Calkins, Co-founder and CEO, Appian

CO-FOUNDERS Mike Beckley, Bob Kramer and Marc Wilson

WHAT

A leading provider of modern business process management solutions

PASTIME

Designing board games (Magnet, an abstract game of strategy, 2008; Sekigahara, a war game based on Japanese medieval history, 2011; Tin Goose, a business game based on commercial air travel, 2015)

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CEO CONFIDENCE

which the customized applications are based and the code automatically reconfigures, he adds.

The Resolution Today, Appian is a $350 million company with an impres-sive roster of clients, among them UPS, Starbucks, Amazon and the U.S.

government. Starbucks, for example, uses multiple applications on Appi-an’s platform, one of which involves conducting its North American store inspections on iPad devices. “They have hundreds of people whose job is to go to one Starbucks location after another and fill out forms, take pictures and give


January 2015 Marks a Nine-Year HighCEOS RESPONDING to Chief Executive’s CEO Confidence Index in January were more positive than they had been in the month of January for nine previous years. Confidence increased 9.2 percent over January 2014, and tripled results in January 2009, the period immediately following the financial crash that launched the Great Recession.

Confidence has yet to return to pre-recession highs, however. January 2004 recorded a high of 7.94 points out of a possible 10, while January 2005 recorded 7.55.

the manager tips on what is needed to be done better,” explains Calkins. “They used to do all that with pen and paper and drop it off in Seattle to be [tabu-lated]. Now they have instant scores and can make instant changes. Plus, the people who used to be form jockeys are connected to the conversations happening across the Appian platform inside Starbucks. It turns out that they are a gold mine of information.”

The Endgame Given the company’s rapid growth rate—sales doubled last year, according to Calkins—and steadily building customer base, an IPO could easily be in the offing. In fact, back when New Enterprise Associates invested $37.5 million in the company a year ago, some speculated that the capital injection was meant to pave the way for a public offering. However, Calkins says he plans to bide his time. “We want to establish the consciousness of our market before we try to sell our shares to the Street,” he says. “Right now, I still have to explain what an application platform is to peo-ple. I don’t think that will be the case in a year or two. I want to be at the point where when people hear, ‘Application platform,’ they say, ‘I love that market.’ Then I want to ride that wave.”

1

2

3

4

5

67

8

1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15

6.38

4.78

2.08

5.22

6.25

5.78

5.296.14

RECESSION

6.71


CEO WATCH

YAHOO’S PLAN to spin off its $40 billion stake in Chinese ecommerce firm Alibaba signals that the Internet company has succumbed to investor pressure to split into two, one contain-ing its 15 percent holding in Alibaba, and the other a legacy operating business and its stake in Yahoo Japan.

“There is no one in the world like Marissa Mayer,” writes Nicholas Carlson in his book, Marissa Mayer and the Fight to Save Yahoo. In 2012, she was 37, a wife, an expecting mother, an engineer and then, suddenly, the CEO of a $30 billion company. The chief correspondent for Business Insider, Carlson discovered in his reporting that the demand for stories on this Wisconsin-born former Google executive, who once aspired to be a schoolteacher, was almost insatiable. He admits that he is equally fascinated, so he wrote a book about her and the predicament she faces in reviving one of the Internet’s earliest start-ups.

Carlson is fascinated by Mayer’s many contradictions. Onstage, in front of thousands, she is warm and charm-ing. Privately, she is socially awkward and describes herself as “painfully shy.” She thinks of herself as a geek but hardly looks the part—with Hollywood actress good looks and a penchant for Oscar de la Renta couture. (She often hangs out with Vogue’s Anna Wintour.)

Widely admired by the public, she also has many enemies within the industry, who say she is robotic, arro-gant and absurd in her obsession with detail. By all accounts, however, she is very smart, very focused and extremely hard-working, having been known to put in 20-hour days on occasion.

When it went public in 1996, Yahoo co-founders and Stanford graduate students David Filo and Jerry Yang didn’t want to run the company. So the business was run by a series of CEOs with varying abilities and backgrounds. Back in the 1990s, Yahoo was the Internet. It was founded by a kid who hardly had a job and another who grew up in a commune. Neither

was sure that they wanted their project to become a business. Then, it became a $128 billion company in five years.

When Mayer joined Yahoo in July 2012, her timing couldn’t have been better. She came just as Yahoo’s stock price started climbing due to the company’s investment in a booming Chinese start-up called Alibaba. Investors piled in with little care for how well Yahoo’s core business was performing. It was a huge advantage for Mayer. Unlike most turnarounds she had air cover until the IPO of Alibaba, when investors would be forced to view Yahoo’s core business on its own.

As Carlson catalogues in his book,

Marissa Mayer started with great momentum. She fixed the culture. Her weekly FYI meetings added trans-parency. Yahoo revamped its product line-up and even won an award from Apple. She bought Tumblr. She avoided layoffs. Jerry Yang had publicly thanked her for saving the company. But difficulties emerged.

There was almost no revenue growth. Yahoo, which essentially invented the online-advertising

business, had been overtaken by Google, which devoured the

search business. “Despite her early bravado,”

Carlson observes in his book, “search

market share was shrinking quickly. Yahoo didn’t have any new hit products. Mayer had been blindsided by

the size and scale of Yahoo’s media

business. Yahoo mail was breaking down.”Then Eric Jackson, a

hedge fund manager, went public with a sum-of-the-parts

valuation that caught everyone’s attention on Wall Street. At the time, Yahoo had a market value of $33 bil-lion, but that figure, he argued, owed largely to its stake in Alibaba—which the company is now spinning off in a $40 billion transaction. Jackson argued that if you subtracted that position, the entirety of Yahoo’s core business, all its Web products and content sites had a market valuation of negative $4 billion. A company could theoretically buy Yahoo, sell off its Asian assets and absorb its business units free.

Disaffected shareholders took notice. Jackson’s sobering calculation seemed to be underscored when Alib-aba went public on September 19, 2014. Alibaba’s stock soared, but Yahoo’s dropped, suggesting that Yahoo’s core

Has Marissa Mayer Saved Yahoo?

By J.P. Donlon

YAHOO’S MARISSA

MAYER

CEO POV

Q:Given her recent announcement about splitting the company, can Marissa Mayer save Yahoo, assuming it is savable?

Nicholas Carlson: Yes, she can, but it’s still going to be extremely challenging, because now all the scrutiny will be focused on her activities to grow the core business. My book covered the period of time when she had air cover from the Alibaba holdings. Now it’s all on her. She needs to get revenue growing again and deliver on her original promise of turning Yahoo into a growth stock again. This will be a diffi-cult challenge. This will require coming up with one or more products or apps where the company can sell ads against them. This will mean coming up with a compelling story. She hinted at this in a recent earnings call where she talked about targeting “mavens”—active mobile and social media users who she says would give the company 23 percent per quarter growth. If she can do this, then yes, she can save Yahoo in the short term.

You write that Yahoo solved a problem that lasted only for a moment—that is, making the Internet easier to use. Apple, with its iPhone and Google, with Android, now occupies this space. So, where can Yahoo fit in, or does it need to place its bets elsewhere? In its early days, when Jeff Mallett was president and COO, his vision was that Yahoo was to be a con-sumer-friendly interface for the Internet. It's amazing to think that at one point we thought one com-pany could be the interface for the Internet. This made sense for a brief moment. It’s one reason why Yahoo became a $128 billion company. But this was before Google, eBay and Apple’s iPhone, which changed everything.

business was worth less than zero. Last September, Starboard Value Capital CEO Jeffrey Smith took a heavy position in Yahoo, urging management to split the company and merge with AOL. Mayer’s recently announced plan to spin off its Alibaba stake and split the company into an investment holding company and an operating company would appear to give restless investors what they want. However, it isn’t clear that Alibaba would be happy with the spin-off that would create a parallel shadow market of its shares—suggest-ing the Chinese ecommerce company would prefer to buy it back.

Chief Executive asked EVA Dimen-sions CEO Bennett Stewart to score the company in terms of its EVA/MVA (economic value add/market value add) since July 17, 2012 when Mayer took over as CEO. “Yahoo appears to have squandered the Alibaba value by selling too many shares at the IPO, by subjecting the proceeds to corporate

tax and by retaining half the proceeds for investments in which the market has no confidence. The core business is strug-gling,” Stewart says. “Bottom line, Yahoo is worth more dead than alive.”

The biggest criticism Mayer has faced is that she didn’t take advantage

of the Alibaba air cover by preparing a breakout growth strategy for the core business. For her part, Marissa Mayer likes to remind people that it took Steve Jobs five years to come up with the iPod after his return as CEO of Apple. True enough, but does she have Jobs’ creativity, or better still, will the market give her five years (two and half remaining) to pull something off?

Chief Executive’s J.P. Donlon recently spoke with author Carlson about Mayer and her prospects.

When Mayer got to Yahoo, she spent weeks examining what Yahoo could do—this is why she was hired. She came up with a plan to take Yahoo back to the future—help ride the transition to mobile, so to speak, to provide tools and products that made the mobile web easy and fun to use in the same way that Yahoo originally made the Internet easy to use.

The only problem was that a lot of other people are already doing that and doing that pretty well. Is Yahoo the right company to come up with the next great app? Usually those come from small venture-backed startups.

The rank and file at Yahoo respected Mayer’s intelligence and even took pride in her early days as CEO. But after awhile, they began to resent her Quarterly Performance Review (QPR) employee ranking system, which you say hurt company productivity. Yet her QPR system isn’t all that differ-ent from similar rank-and-yank systems at GE or P&G.There were senior people inside Yahoo saying [that] the company was getting lazy, fat and slow. Before she got there, it took 18 months to launch a new version of Yahoo email. After she got there, they were doing it in three months. When she came on board, she promised the board that she would cut costs and improve Yahoo’s talent. But for whatever reasons, she did not want to do massive layoffs, and a lot of people think that that was a big mistake. She could have done that really quickly, reset the company, hired up from there and taken advantage of the air cover from Alibaba to relaunch the business.


BY THE BOOKCan Marissa Mayer deliver on her promises?

➼


Instead, she opted for this system, where instead of firing a lot of people at once, she forced managers to put their teams on a curve. No matter how well-performing a team might be, someone on that team was going to have to be in the lower buckets. If one didn’t end up in the top two buckets, it limited one’s ability to get promoted or transfer to a new group. The result was a widespread drop in morale inside the company.

It reached a point where about a year in, employees became fed up with the system. I open the book with a scene in November of 2013 where the employees are gathered for a company meeting in the cafeteria. They want to ask her hard questions, submitted anonymously through Yahoo’s internal Internet system. For example, they want to know if Mayer herself is ranking her own executive reports this way, and will these people face being phased out, as well?

Instead of answering these ques-tions right away, Mayer sat on stage and read from her favorite children’s’ book, Bobbie Had a Nickel. It was a very odd moment for lots of people in the company. It wasn’t clear what she was trying to say by reading this book. People didn’t get it. Bobbie gets a nickel and he can buy things; or in the end, he goes and spends it on a merry-go-round and has a wonderful experience. She was trying to say that she values experiences above all else in life and that her experience at Yahoo so far had been wonderful. People were saying, “This isn’t about you. Why aren’t you answering our concerns?” Maybe she isn’t the quickest to reflect on some of her decisions and consider that she may have misjudged the situation.

fascinating. Mark Zuckerberg, Face-book’s CEO, is naturally quiet, but he’s learned to be a bit more extroverted like a politician. [Google’s CEO], Larry Page, is not like that at all, but he’s never even pretended otherwise; he hired people to do it for him.

What are the lessons for board directors?The big lesson for boards of directors is being realistic about what your com-pany is and where it is in its lifecycle. At the time Mayer was hired, Yahoo was past the stage where it should have been trying to be a growth company anymore. A less risky, more optimization-oriented approach may have been better. Take what you have, get the most you can out of it and tell shareholders that’s what you’re going to do for them. Unless you are Steve Jobs, it’s very hard to become a young company again. But I even wonder if the ghost of Steve Jobs could have done a better job than Mayer’s done. It’s such a challenge.

What are the lessons for CEOs—not just big CEOs, CEOs at all levels? There are two. Mayer was hired by activist investor Dan Loeb and board director Michael Wolf, both of whom wanted her to make the company into a Facebook, a Google or a fast-grow-ing Internet highflier again.

Within a year, however, both of those people were off the board, and she found herself reporting to a new board. What really matters is who you work for now, who your share-holders are. Mayer quickly realized that shareholders wanted something different from her than what Loeb and Wolf wanted from her. The people who hire you aren’t always the ones who turn out to be your real bosses.

The other lesson from her expe-rience is to be as clear as possible about what your plan is. So, at this point, many shareholders want her to split the company. They want to limit her ability to acquire big companies and merge them into Yahoo. What Mayer needs to do is to just be forth-right and tell everyone what’s coming; and if investors don’t agree, they can sell out. Investors like clarity.

CEO WATCH

Most CEOs would admit that not all [of] their hires work out, but May-er’s hiring of Googler Henrique De Castro as COO and his subsequent firing after 14 months at a parting cost of $109 million must be a particularly expensive mistake even by Silicon Valley standards. It was a doozy. While reporting for the book I learned that De Castro asked Mayer, and Mayer asked the board, not to vet De Castro because it would be bad for his career if it didn’t work out. Board directors, who went along with this, later regretted not vetting him more thoroughly.

This underscores a greater short-coming Mayer had when it came to hiring senior executives on her team. Mayer quickly became a global busi-ness celebrity. She could easily have used that celebrity power to identify people who she thought were the best in the world and recruit them to join her at Yahoo. Instead, what happened is that people tended to identify Yahoo as a place where they wanted to go, and they approached Mayer directly. These are glitzy people, from Katie Couric to Kathy Savitt, who was hired as a CMO, to Henrique De Castro, to others. Perhaps being an introvert it wasn’t natural for her to leverage her-self the same way a Sheryl Sandberg would have. And yet she can get up on stage and really broadcast effectively to people in large groups. It’s interact-ing with people on a one-on-one basis where her shyness is evident.

By contrast, when you meet Sheryl Sandberg, [COO of Facebook], she bores into you with her personality. It’s like meeting the Secretary of State of a large nation. She’s like Bill Clinton. Tim Armstrong, [Chairman and CEO] at AOL, is the same way. But Marissa Mayer is not like that and I find that

“ What Mayer needs to do is just be forthright AND TELL EVERYONE WHAT’S COMING.”

FEDA434787_ChiefExecutiveFP4C_Jan2014.indd 1 12/1/14 6:03 PM


CHIEF CONCERN

The CEO and Power

Are the two a dynamic duo or an odd couple?

By Thomas J. Saporito

POWER IS A WORD that is often spoken synonymously with the office of CEO—for better or for worse. By dictionary definition, power is “the ability to act or produce an effect.” Simple enough. Yet, when it comes to how power plays out in leadership positions, understanding the dynamics can mean the difference between leading effectively and falling flat. Here are four forces that stand out:

1. Overestimating the power of the office.As we all know, things don’t just hap-pen when you say so. It is humbling to realize that we aren’t as powerful as we think, that the office of CEO itself does not create a rod of power. To get things done, a leader needs levers—an aligned team that owns and collectively drives the agenda. Also critical are key cham-pions throughout the organization who will support the plan. Creating these levers out of the gate can help set up a leader for success.

2. Underestimating the power of the office.While leaders can overestimate their power to drive change, they can also underestimate their power when it comes to communication. When a CEO says something, people tend to hear it at higher decibel levels than what may have been intended—making it even more crucial to choose words and actions carefully.

On the flip side, this can make the

case for the CEO who finds his power with a more reflective approach rather than risking saying too much too soon. I see Apple’s Tim Cook displaying this type of leadership. Commenting on Cook’s reflective leadership style in The New York Times article, “Tim Cook: Making Apple his Own,” Jonathan Ive, Apple’s head of design says that Cook projects “quiet consideration.” Cook di-gests things carefully, with time, which “testifies to the fact [that] he knows it’s important,” says Ive.

3. Understanding how power influences communication. Just as CEOs may underestimate the “volume” of their words or actions, it’s also true that what is said to a leader can be skewed by the position itself. Examples include telling the CEO what he or she wants to hear or assuming that the CEO must know all since he or she has ascended to the top post. Communication to the CEO may also be motivated by fear or conversely, driven by the person’s own agenda. Leaders must sort through what people tell them and why, and then develop trusted resources on their team who

have a pulse on the organization and can

provide perspective.This dynamic can also

create another paradox for CEOs: when you most need honest communi-

cation and feedback, you are least likely to receive it. And yet, the office re-quires, in fact, depends upon, authentic dialogue in order to be effective. It can indeed be lonely at the top. This is why it’s so critical to create and nurture a framework in which open conversation is possible. Without this capability, a CEO lacks what he or she desperately needs to lead effectively.

4. Distinguishing between power over and power through. How a CEO uses his or her power has a significant impact on how quickly and effectively he or she produc-es results. Depending on how it’s used, power can either shut down or accelerate change. On one hand, power over people limits, stifles and stumps initiative. On the other, power through people liberates, invigorates and inspires creativity. The latter is more conducive to enacting change.

Like so many things, the dynamics of power and the CEO are at the same time complex and simple. The savvy CEO knows that understanding and leveraging these nuances can go a long way toward being effective at the top.

DR. THOMAS J. SAPORITO is chairman and

CEO of the consulting firm RHR International.

This article is part of a series on leadership.

RISK INDEX

Due to their high profiles, CEOs face heightened risk from credit card and other personal data and privacy breaches.

Privacy/Data Security Remains the No. 1 Personal Risk Concerning CEOs

CEOS TAKE CYBERSECURITY PRECAUTIONS The majority of CEO respondents take some type of precaution to protect themselves and their families from privacy/data security risk, with “updating security software on computers” (76 percent) the most popular measure taken. Next came “keeping passwords secure and varying them by site,” followed by “having sophisticated passwords” (71.9 percent).

15% MORE CEOS CHOSE PRIVACY/DATA AS NO. 1 CONCERNThe majority of CEOs responding to the latest “personal risk” survey stated that privacy/data security is their No. 1 risk, rating it 6.6 out of 10. Fifteen percent more CEOs chose this as their chief risk today than did three months ago. Liability threats and geopolitical/terrorism were the next most important concerns (rated 4.3 and 4.2 out of 10, respectively). CEOs expressed the least amount of concern for physical threats (home invasion, kidnapping, etc.) and from risk of physical damage caused by natural disasters, rating them 3.6 and 3.4, respectively.

The survey is conducted by Chief Executive, in partnership with PURE Insurance.

PRIVACY/DATA SECURITY: HIGHEST RISK, LOWEST COMFORT LEVELCEOs felt most comfortable with their ability to protect them-selves and their families from physical damage and natural disasters, rating their comfort level 7.6 out of 10, compared with 7.3 for liability threats (such as lawsuits) and 6.9 for physical threats to themselves and their families. CEOs rated their comfort with being able to mitigate geopolitical/terror-ism risk at 5.9. They were least comfortable with their ability to protect themselves and their families from privacy/securi-ty threats, rating their comfort level 5.5 out of 10.

CEOs’ Attitudes About Privacy/Data Security

Actions CEOs Take to Protect Their Personal Data

Have updated security

software on all my family's

computers

Keep my passwords secure and vary them

by site

Have sophisticated

account passwords

Have insurance coverage for these

specific risks

Utilize an active

monitoring service

YES76.0%

YES75.2%

YES71.9%

YES57.9%

YES40.8%

Risk to personal data is a matter of the measured risk versus the cost in dollars, time, inconvenience. Not all data should be evaluated at the same risk level. Tailor your mitigation to the risk.”

CEOs’ Top 5 Personal Risks and Their Level of Comfort With Their Ability to Mitigate Those Risks

Comfortable with Level of Protection C

onsi

der

Issu

e a

Hig

h R

isk

Physical Damage

and Natural Disasters

Physical Security/Family

Security

Geo-Political/Terrorism

Liability Threats

Privacy/Data

HIG

H

LOW

HIGH

LOW

Consider Privacy/Data Security a

High Risk

Comfortable with Level of ProtectionFrom Privacy/Data

Security Threats

3 Months Ago Today

57.3%

66.0%

36.7%

55.0%


UP 8.7%

UP 18.3%


MID-MARKET REPORT

MID-MARKET COMPANIES CAPPED

OFF A YEAR OF SOLID GROWTH WITH

A STRONG FOURTH QUARTER. Seven-ty-three percent of firms reported positive revenue growth as compared with 2013, when just 59 percent saw positive growth, according to The Middle Market Indicator, a quarterly business performance and eco-nomic outlook survey by the National Center for the Middle Market.

Companies were also optimistic about the year to come, with nearly three-quarters expecting revenue increases in 2015, up 10 percent from Q3 2014. Improved prospects brought a corresponding bump in the num-ber of companies planning to make capital expenditures, which rose significantly for the first time since the fourth quarter of 2012. In Q4 2014, more than two-thirds (68 percent) of mid-market leaders reported that they would invest in expansion during 2015. Specifically, 24 percent of firms plan to add a new plant or facility, half intend to introduce a new product or service and 43 percent hope to expand domestically.

Mid-Market Companies Gain GroundPerformance, job growth and economic confidence all improved in the final quarter of 2014.

More Firms to Make Capital Investments The number of mid-market leaders who plan to make capital investments has increased for the first time since 4Q 2012.

ADDITIONAL INVESTMENT ALLOCATION

HOLD IT FOR CASH

INFORMATION TECHNOLOGY

CAPITAL EXPENDITURES

(PLANT OR EQUIPMENT)

HOLD IT FOR

INVESTING

ACQUISITIONS

CAPITAL EXPENDITURES

(FACILITIES)

HR (MORE PERSONNEL)

HR (TRAINING &DEVELOPMENT)

OTHER

Revenue Growth Over Past 12 Months The mid-market sector’s revenue growth significantly outpaced that of the S&P.

Mid-Market Leaders’ Economic Confidence Building confidence in local and national economies does not extend to the global economy.

GLOBALECONOMY

NATIONALECONOMY

LOCALECONOMY

57% 53%65%

73% 76%81%

4Q 2013 NOW

Employment Growth Strong and Continuing to Grow Mean total year-over-year employment growth jumped to 5 percent, doubling since Q4 2013.

PAST 12 MONTHS NEXT 12 MONTHS

3Q '14 4Q '13 4Q '14

7.2%

4.9%

S&P 500 MID-MARKET COMPANIES

1.0%

2.0%

3.0%

4.0%

5.0%

20%

12%

15%15%

12%

10%

7%

7%

2%

Source: National Center for the Middle Market at Ohio State University

68PERCENTAGE

OF COMPANIES THAT WILL

EXPAND IN 2015

WHAT MOST COMPANIES ARE

LIKELY TO INVEST IN

UP 14%

NEWPRODUCTS SERVICES

&

FIRMS REPORTING POSITIVE REVENUE

GROWTH IN 2014

SNAPSHOT

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.

CohnReznick is an independentmember of Nexia International

cohnreznick.com

Joe Torre2014 National Baseball Hall of Fame Inductee

025D-CR-14_CEO Magazine.indd 1 9/12/14 11:40 AM

INFORMATION TECHNOLOGY proj-ect failures cost companies millions in new technology expenses, manual workarounds, additional customer service and reputational damage. What’s more, failure rates are high.

The Standish Group’s latest report reviewed 3,555 technology projects with labor costs of $10 million or more and found that a whopping 41 percent were complete failures (abandoned or started anew). Some 52 percent were assessed as “challenged”—way over budget, behind schedule or failing to meet user expectations. The bottom line? Only 7 percent could be consid-ered successful.

A look at three IT undertakings that went massively wrong offers some insights into what CEOs and companies can do to spot runaway projects early and take steps to get them back on track.

McDonald’s Fails to “Innovate”In 2002, McDonald’s pulled the plug on its five-year $1 billion “Innovate” project and wrote off $170 million. Conceived two years earlier, the project intended to allow corporate management to see inventory and sales figures at any of 30,000 stores at any time. It would give them an instantaneous birds-eye view of the entire system—from crew-member scheduling to cooking oil quality and temperature.

Management claimed the decision stemmed the need to reduce capital spending for the decision. Howev-er, the issue was likely sheer size, a plan to replace virtually every major back-office system. Plus, it was techni-cally unrealistic to attempt to connect 30,000 stores in real-time—many in locations where little or no broadband connectivity existed.

Avon’s Broken “Promise”In late 2013, after four years of devel-

opment, Avon Products cancelled the “Promise” project, writing off $125 million in the process. Using a new SAP back-end system and a tablet-enabled e-commerce front-end ”Promise” in-tended to allow sales agents to showcase products on tablets, immediately check inventory and place orders online.

When piloted in Canada, basic functions, such as logging-in, saving orders and checking inventory did not work. “Promise” performed so poorly that many commission sales agents left the company, prompting manage-ment to cancel the entire project.

FoxMeyer Fails at ERPFoxMeyer Drug went from profitabil-ity to bankruptcy in one year and was eventually sold to archrival McKesson for $80 million. Many blame its de-mise on problems with an ambitious $100 million ERP system the company installed. Implementation required extensive SAP modifications and caused real-time integration issues with software from different vendors. When the launch failed, orders were incorrect, some shipping twice and some never shipping at all. There was no fallback plan; management had “bet the company” and lost.

Lessons from FailureCEOs can avoid debacles like these by being wary of: PROJECTS DRIVEN BY IT The proj-ect should be steered by a business executive singularly responsible for its success and ROI. Both McDonald’s and FoxMeyer’s business executives seemed detached from the project de-tails. THE LESSON Do not start projects if users don’t have the time or interest to participate. MEGA-PROJECTS McDonald’s $1 bil-lion “Innovate” was so huge, complex and technically unrealistic that failure was nearly inevitable. THE LESSON Projects transforming several busi-

ness units simultaneously should be broken into smaller chunks so that problems are contained. BIG-BANG PROMISES If nothing will be implemented until “the end,” you are cruising for a disappointment. THE LESSON Break the project into small-er chunks—with tangible mid-project deliverables every 30-60 days—that management can see and touch. LACK OF EXECUTIVE SUPPORT If you or your executive committee is luke-warm about the project, its success will be challenged. THE LESSON Top management must be “sold” and on board to fully support projects. EXCESSIVE OVERTIME The quickest and easiest fix for troubled projects is overtime, which often goes unnoticed. THE LESSON A spike in project overtime is a red flag. LACK OF METRICS Cost and per-son-hour budget overruns suggest project slippage. THE LESSON Use metrics granular enough to provide monthly budget variances. MISSED MILESTONES Missed mile-stones are another red flag. THE LESSON Milestones must be clearly defined and weeks apart, rather than months or quarters. SCOPE CHANGES Delaying or can-celing features and functions signals issues. THE LESSON If you hear “we removed that function to make this milestone,” dig further.

Corralling Runaway IT Projects

MAKING TECHNOLOGY WORK


By Tom Pettibone

TOM PETTIBONE is the managing partner of Transition Partners.

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SIGNPOSTS

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.


WHEN DON THOMPSON stepped down as CEO of McDonald’s, the company did not cloak the transition in innuendo by waxing on about the character of this beloved, loyal, experienced official. The simple truth was ev-ident: McDonald’s was losing ground and the board was not confident in his ability to fix things. How refreshing that the decision was not concealed by corporate speak, nor was an outside activist’s involvement required.

McDonald’s stock price had languished while that of direct competitor Burger King’s was strong and the stocks of new entrants like Shake Shack, Five Guys, Burgers and Fries, In-N-Out Burger and Smashburger soared. In fact, 12 hours after Thompson stepped down Danny Meyer, founder of 14 year-old Shake Shack, fired up his burger chain on the New York Stock exchange with a $1.7 billion value, doubling its IPO price of the day.

Meanwhile, in a January 23 earnings report, McDonald’s reported its first dip in same store sales in 12 years and the fifth straight quarter of dropping sales revenues. Plus, profits in the last quarter of 2014 had plummeted by 20 percent compared with the same quarter a year prior.

The causes of McDonald’s decline are many, including poor food quality (Con-sumer Reports recently cited its burgers as the worst in the nation), contaminated processing plants; uneven price position-ing and supply-chain problems. Following the culture of notoriously humble CEOs, Thompson did not effectively get out in front of these troubles with an inspiring, new brand image and systemic overhauls.

Having invested in great bench strength, McDonald’s was able to turn to a trusted official ready to take control. It’s a path the company has been down seven times in a

dozen years, thanks to similar performance slips by an earlier CEO, the unexpected death of two previous CEOs and unplanned exits of two leading succession candidates. New CEO Steve Easterbrook may be a superb choice, having led a triumphant turnaround as a brand steward and past, top operating exec-utive in Europe. He also engineered the very successful introduction of genuine, organic healthy foods in the core menu, as well as championed modern, attractive store designs and promising digital strategies.

Wouldn’t it be great if other firms that made missteps could be this forthright in responding to faults ? In the past two years, we’ve seen disruptive, CEO-succession sur-prises at GM, Walmart and Oracle presented as business as usual, as well as politically motivated abrupt transitions at Pfizer and Citigroup that were shrouded by misleading rumors about CEO performance. Apple’s investor relations people tried for months to reassure people that Steve Jobs was fine, even as its CEO fought for his life.

By contrast, current Ford CEO Mark Fields launched “The Road Ahead” campaign in 2008, where he and executive chairman Bill Ford showed footage of closed Ford plants and devastated towns, admitting that management mistakes were partly to blame. In 2001, Anne Mulcahy, rescued the once-troubled Xerox in part by building trust through candor in acknowledging problems to employee groups. As she put it, “The most uncomfortable feel-ing, actually, would have been for them to hear something that did not ring true regarding the seriousness of the issues.”

Sure, McDonald’s has made missteps. However, they should be saluted for addressing the problems objectively, fairly and directly—with contingency plans.

New CEO Steve Easterbrook may be a superb choice, having led a triumphant turnaround as a brand steward.

How Big Mac Reacts to Attack: Recovering from Missteps By Jeffrey Sonnenfeld

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ADow Chemical’s CEO has a message for fellow U.S. manufac turers: Rethink your role in the evolving global supply chains

and partner with others in training and developing the workforce you will need for the future. By J.P. Donlon


COVER STORY

Andrew Liveris’s Winning FormulaANDREW LIVERIS, 60, has run Dow Chemical, a very large and complex $57 billion company, for more than a decade. It has 201 sites in 36 countries, with six operating divisions making petrochemicals, specialty chemicals and agricultural chemicals. Dow is a company in transition.

Two generations ago, Dow had the capital and the R&D to invent products entirely on its own. Products like Saran Wrap, Styrofoam, Ziploc bags and Scrubbing Bubbles were all Dow from start to finish but have been long since sold-off. Today, it’s working on things like self-healing materials and printable batteries. Barron’s Andrew Bary said that “Dow

Chemical could be one of the industry’s best growth stories.” The company, which boasts a market cap of $60 billion,

has an underappreciated asset base that includes a large petrochemical division that benefits from low domestic costs for natural gas and related liquids. Liveris began implementing a program of divestitures of lower-return operations. Although its shares were up 20 percent in 2014 and over 50 percent from 18 months ago, the company has been under pressure to improve its performance since activist investor Third Point Capital, led by Daniel Loeb, re-vealed a stake in January of 2014. Resisting Loeb’s criticism

➼

Dow Chemical’s CEO has a message for fellow U.S. manufac turers: Rethink your role in the evolving global supply chains and partner with others in training and developing the workforce you will need for the future. By J.P. Donlon


Andrew Liveris’s Winning Formulathat Dow needs to be broken up in order to realize value, Liveris, nonetheless, has stepped up his program to sell businesses worth between $4.5 billion and $6 billion by the end of 2015. (Liveris also agreed to add two directors chosen by Third Point to Dow’s board.)

The Darwin, Australia-born Liveris is a well-estab-lished senior CEO statesman and is a familiar figure in the corridors of power in Washington. He is a co-chair of President Obama’s advanced manufacturing partner-ship and a director of IBM. He was chairman of the U.S. Business Council until he was succeeded by Jeff Bezos at

the end of last year. He is also a big fan of the periodic table of the elements in “that chemistry’s an enabler for human life.” He adds, “chemistry is a personal passion but it is also a wonder. It enables us to sustain 7 billion people on this fragile planet, and it will go to 9 billion. How have we done that? Chemistry provides a solution, whether it’s clean water, affordable medicines, affordable housing—all this comes from chemistry.”

Following are excerpts of Liveris’ conversation with Chief Executive Editor-in-Chief J.P. Donlon at the CEO2CEO Summit on restoring American competitiveness.


COVER STORY

I am optimistic [that] we might get something done in this Congress.

What one thing do you most hope for? Corporate tax reform or something else?Let’s start with the word “certainty.” We all need some degree of certainty in order to plan our businesses. So how does one get certainty in Washington? For starters, we look for more fiscal responsibility and stability, including entitlement reform and government reform, such as some degree of Bowles-Simpson. Maybe all this is unlikely, but we all violently agree with corporate tax reform. The OECD average today is 25 percent. We’re now one of the highest tax jurisdictions in the world. Twenty years ago, we were one of the lowest, but everyone else has zoomed past us. The current tax code is a leaking sieve, to say the least, so if we can plug those loopholes, stay revenue neutral [and] work the S-corporation rate, that will be a great landing spot.

Not too long ago, serious people dismissed talk of a manufacturing revolution in the U.S., saying that the sector was headed for extinction;

40,000 factories shut down between 2000 and 2010, and 5.5 million manufacturing jobs were lost. You’ve said that thanks to entrepreneurs in the natural gas world—the shale-gale phenomenon—manufacturing has revived, and so it has. But what do manufacturing leaders really need to do to make sure this development can be sustained and that it’s not just a will-o’-the-wisp? Entrepreneurial action and its ability to pivot, according to the world we face, is one of America’s greatest attributes. Manufacturers, for far too long, did not really display agility when global competition disrupted supply chains. We are in a different world. We’re traveling at the speed of flight. We are so connected to the information age without realizing that we’re still at the dawn of it. The smarter companies have figured out their place in the global supply chain and have adjusted their service and product models accordingly. For example, of the top 20 chemical companies in the world in 1990, 17 of them disappeared by 2010. Dow is one of the survivors because we were able to pivot on a global scale, which is no easy thing. It’s not for the lighthearted.

Q:After you and fellow members of the Business Roundtable recently met with the President, you said you sensed a change in tone since the elections. What exactly is different?

ANDREW LIVERIS: A one-liner I got from another CEO is that “You’ve got to go to Washington because if you’re not at the table, you’re likely on the menu.” Without sounding naïve, I do think there is an opportunity here. We met with John Boehner, Mitch McConnell, the new Senate leader and the President. They were saying much the same thing. Given that this is the President’s last two years, this is his chance to put a stamp on the American economy, which he hasn’t done, really.

For their part, the Republicans clearly understand that now that they control Congress and have a presidential run to think about in 2016, they’ve got to show that they can govern. Each side has different motives, but the result may be good for America because we all agree that America must continue to grow the economy.

Relatively speaking, ours is the best-performing economy in the world; but we’re still underperforming, given our historic growth rate. Weeks earlier, I was with the President in China and had a private conversation with him there. I think he’s serious about working with the other side. It’s going to be a skill set that he hasn’t shown, but


another three-to-five million in the supply chain.

The biggest issue we have is training a new skilled workforce to deploy against that value add, and for me, that is the key topic in manufacturing today. We need technically trained people at the German skill level, in automation, robotics and fine-precision manufacturing. This is the world that we’re in today and we’ve got to adjust to it, and frankly that’s what I spend my time on.

Considering that there are easily 4.7 million manufacturing jobs going unfilled, what steps should companies take to deal with the skills gap?Create your own supply chains. We have these sites you talk about. A third of them are in the U.S., some of them [are] very large locations. We hub and speak to the community colleges. We work with them on curricula changing, if necessary, to suit the requirement for the modern worker. I use community colleges

because that’s where most of the deficit is, in the trades. It’s in the highly skilled operator of complex chemistry. There’s such a shortage of skilled people, especially in the U.S. Gulf Coast for example, that companies are poaching each other

Talk about wage inflation—go to the U.S. Gulf Coast, Houston and Louisiana. So we do our own training. At the President’s Advanced Manufacturing Partnership (AMP), which I co-chair, this was one of the three topics that received attention at the national level. Big companies are involved with AMP, but we will help small companies get into the mix. We’re going to hub-and-spoke this across the country to put in place national training centers where small companies can participate. Through this (concept) we can convince high school kids, and even middle school kids—that the trades are noble professions. Not everyone should be a double Ph.D. in economics. In fact, there’s not much demand for that, except maybe here at the New York Stock Exchange.

✱

You have to bet your company, whether it’s small, medium or large, against these global forces. Who has replaced some of these American and European enterprises in the top 20? State-owned enterprises. They have a very different model. Their model is simple—employ people. Jobs are the quintessential issue of our time. As they emerge and globally compete, they don’t use EVA analysis or ROC; they get subsidized capital, subsidized labor, subsidized energy—subsidized everything—because jobs are the greater good.

In our industry, we stopped innovating, if you think of innovation as the quintessential aspect of manufacturing in all of its forms, whether it’s making a smart phone or making a chemical product. So, if they’re commoditizing faster than you innovate, they will run over you. Manufacturing today means you’ve got to innovate faster than they commoditize you.

This should be an American advantage because we run the intersections of research, universities, start-ups, finance and supply chains of small, medium and large scale better than anyone. Manufacturing now employs 12 million people in this country— almost one million more than it did in 2010. The energy tailwind, shale-gale, has been an enabler, an American entrepreneurial action. We’re in the fourth wave of investment in value and in energy—it’s terrific. In the chemical industry alone, and Dow’s part of this—$130 billion of value-add facilities will create 1 million new jobs in the next five years, and this means

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COVER STORY

useful. We made a big decision five years ago to cull down the number of universities we work with in terms of research partnerships. We found we were trying to be everything to everyone and it was not satisfactory.

We culled it down to 15 in this country but went deep with all of them. By deep, I mean a quarter of $1 billion for five years. We also helped them rebuild their research engine because many of their chemical-engineering facilities are not very good. Out of this change, we generated a whole new, lightweight-materials platform.

We’ve introduced smart coatings. These are coatings that can literally absorb emissions in a room like this. For example, if the paint used on these walls were “smart” paint, it could absorb harmful emissions in the room

so you wouldn’t have to breathe it. The next generation of smart coatings will reduce viruses transmitted in the air. Imagine this [technology] applied in hospitals of the future.

These research collaborations are generating patents through the roof, but that’s not how we measure it. It’s the percent of margin that comes from new product. This is an investment headwind very few companies can bear. We spend $1.8 billion a year, $200 million of that in serendipitous or creative areas. Then, we grab business ownership. Once it gets through that first part of the pipeline, individual businesses have to sponsor it.

So our business operates like a hub of startups. They have to make the case to us why that research is of value to them, but they don’t have to pay for it.

“Manufacturing today means you’ve got to innovate faster than they commoditize you.”

In 2013, Booz and Company, now Strategy&, conducted a study of R&D spending and found no discernible link between the amount of spending and financial performance of the spender. How do you measure outcomes against your R&D? And what advice would you give to CEOs for doing a better job at managing the relationship between R&D and outcomes?

It seems like you’re spending a lot of time inside our boardroom, J.P., because it is an incredibly difficult thing to achieve. I personally have spent a lot of time with some of the best innovators in the country and in the world. What I learned is that no one has the definitive answer. The common denominator, of course, is always the people quality. Google provides open areas for rollerblading and cafeterias with free food. At Dow, we’ve replenished our facilities around the world, creating similar environments to encourage interaction and spontaneity.

In our industry, we’ve got to re-discover creativity. Call it serendipitous research if you like. This is why we find partnerships very

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IT MAY BE DECADES before the world knows whether Tesla and its battery-powered cars comprised a game-changing industrial revolution or more of a pipedream, and if Nevada gave away too much of its economic future to obtain the company’s battery-making “gigafactory.” However, Tesla’s decision to build a five-million-square-foot mega-operation near the airport 25 miles east of Reno already has roiled economic-development expectations across the country and reset the arc of American manufacturing.

Nevadans are giddy as they watch Tesla move the earth around a 1,000-acre plot in the desert. They’re understandably keen on the economic prospects of thousands of people working at Tesla at promised average wages of around $25 an hour. They’re also hoping for positive economic knock-on effects that they expect to

grow over the decades as the plant turns out up to 500,000 battery packs a year. The amount would be more lithium-ion batteries for electric cars than will be made by the rest of the world combined.

For his part, Tesla co-founder and CEO Elon Musk likes the location for several reasons. It’s close to the company’s assembly plant and major customer base in California. It’s near the nation’s only known deposits of lithium. Plus, he got a fantastic deal. Nevada threw open the doors to the state treasury to promise Tesla an astounding incentive package worth $1.3 billion, ranked as the tenth-largest such lure ever used by any state. The final sweetener seemed to be Nevada’s promise to move heaven—as well as earth—to clear any regulatory obstacles.

“The gigafactory will mean nearly

$100 billion in economic impact over the next 20 years,” Governor Brian Sandoval said after a two-day special session of the state legislature in September essentially handed Musk the keys to a Nevada economy that had been wheezing along on gambling, mining and tourism for way too long. At the signing ceremony, Sandoval added, “Isn’t this a great day for Nevada? This is as big as it gets.”

But lots of questions remain about a deal that is supposed to grow the Nevada economy by 80 percent during the next few decades. Some question whether Nevada can possibly supply all the skilled labor necessary. Some worry about the coming stresses on Reno-area infrastructure that won’t be met because the necessary public funds have been incentivized away. Others bemoan the inflationary effects on construction costs and operations


MANUFACTURING REVIVAL

“GIGAFACTORY” RIPPLES

Was wooing TESLA worth the huge incentives Nevada made to close the deal—and what, exactly, does that deal

mean for the rest of the states vying for business? By Dale Buss


State of the States States are upping the ante on winning site selection wars

Key Takeaways

All About Location For Tesla, strong incentives and proximity to California were a draw

Hurdles Ahead The company will need to build an EV market to deliver on its profit potential

1Growth Gamble Nevada is betting on Tesla’s success—and on burgeoning EV battery demand

2 3 4

for other companies that may want to follow Tesla there as suppliers or retailers that want to tap into a population that is sure to burgeon beyond its current 225,000.

Actually, many are saying that Nevada got fleeced. “No matter how you slice it, the deal makes utterly no sense,” says Richard Florida, director of the Martin Prosperity Institute and professor of business and creativity at the Rotman School of Management, University of Toronto. “It is just one more example of a government giveaway for a factory that would have been built anyway.”

Gambling on GrowthEven beyond this critique lies the prospect for the ultimate disaster: After Nevada gave away the farm to Tesla, will the world really need all those batteries that are supposed to be streaming out of the gigafactory several years from now? Following a half-century of technological development and almost as many years of promotion by environmentalists, government policymakers and progressive politicians, the market for electrified vehicles (EVs) remains extremely anemic overall. Sandoval and other Nevada government officials placed a huge bet on the technological, economic and social vision of Musk. But is what the industrialist sees ahead clairvoyance—or illusion?

“The reality is that there are numerous big gambles occurring here,”

says Brett Smith, an analyst for the Center of Automotive Research in Ann Arbor, Michigan. “Realistically, the EV is not ready for prime time. The high-volume, battery-powered vehicle is a long way off despite the success of the [Tesla] Model S. For the most part, it isn’t a viable alternative right now.”

One thing is for sure: There’s no turning back for Nevada. It beat out four other states—Arizona, New Mexico, Texas and California—to land the Tesla plant after Musk promised it would put the state at the forefront of a new era of manufacturing. Nevada’s desire eclipsed even strong public pushes by Governors Brown and Perry of California and Texas, respectively, to add Tesla to the many economic jewels already on their state belts.

Tesla’s exact commitment is $5 billion in investment in the first four years and then another $5 billion in equipment purchases from 2019 to 2028, plus an attempt to generate “up to” 6,500 jobs eventually. In exchange, Nevada doled out $1.1 billion in sales tax plus real and personal-property tax abatements. It has no individual or corporate income tax—meaning that Tesla essentially will operate tax-free in Nevada for at least a decade. The state threw in $195 million in transferable tax credits that Tesla can sell to other businesses. Musk also wrangled a discounted electricity price even though he claims the factory will generate all of its own power from renewables, meaning that Tesla will be able to tap into the state’s power

TESLA TECH The new factory will make batteries for vehicles assembled in neighboring California

grid, buy electricity at a discount and then sell its self-generated power for a premium.

The sheer and mostly successful audacity of Tesla’s demands already promises to up the ante the next time another company wants a big greenfield site, a fairly regular occurrence amid the continuing renaissance in domestic manufacturing. Jaguar Land Rover, for example, has indicated it now plans to set up a U.S. factory to better compete with the many other luxury brands that make cars in America.

“This deal, where you’re not going to pay state taxes for an extended period of time, has usually only been on the table in highly economically distressed areas,” says Larry Gigerich, managing director of Ginovus, an Indianapolis-based economic-development consulting firm. “Now we’ll see companies say to states, ‘Give us a tax-free period like Tesla got.’”

Questions also lurk about exactly how much the gigafactory can expect to expand the Nevada industrial economy. Clearly, as Musk has noted, the diamond-shaped complex will become a tourist attraction. It will spark surrounding hotels and restaurants, set off a boom in house construction in Reno and fuel local service businesses to support the rising Tesla workforce. But no matter how large, the complex isn’t likely to

serve as the platform for concentric circles of new supplier factories in the area because a battery plant is much more self-contained than an auto-assembly operation, which forms the hub of an extensive supply chain, Florida noted.

Moreover, early in his hyping of the gigafactory, Musk talked about it as the home for a research facility

as well as a manufacturing plant. However, the likelihood is that most of Tesla’s technological development will still occur at its headquarters in Palo Alto, California, smack in the middle of Silicon Valley, while Tesla’s final assembly plant remains nearby in Fremont, California.

Tesla actually broke ground at the Reno site in July and began shoving around some dirt, with Musk explaining that he was still keeping his options open on a final site decision. That claim strained credulity in many. But the hoopla around the gigafactory was largely a matter of trusting the credibility of the South African-born entrepreneur. He could drive a hard bargain because of what his accomplishments and because, with Steve Jobs gone, no other industrialist or technologist could spin future scenarios quite like Elon Musk.

Indeed, Musk’s record for building businesses on brand-new ideas is almost unparalleled in modern times. A native South African who emigrated to the U.S. from Canada as a college student, Musk co-founded PayPal more than a decade ago. Since then, he also established SpaceX, a company that was nearing planned flights of space tourists in 2015 before other companies’ fatal accidents in late 2014 seemed to set back the notion of the privatization of space. Musk also owns the largest-capitalization solar-energy business.

There’s also Tesla. Musk’s EV startup launched the $70,000-and-up, all-electric Model S and the car became the “it” thing for celebrities and the wealthy, outlasted other EV startups and began changing the equation for existing car companies. The Model S became the highest-rated car ever by Consumer Reports and spooked the German luxury-car brands into crash programs to launch their own electric vehicles after initially they had demonstrated indifference about the technology. It helped that Musk kept



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painting pictures of a rosy future for EVs and aggressively defended his car and his company against every skeptic, from Wall Street to the news media.

Energizing EVsNow with the gigafactory it is building along with Panasonic, Tesla is bidding to dominate what Musk sees as a certain burgeoning of global demand for lithium-ion batteries that power the new generation of plug-in hybrids and all-electric vehicles. He has said that bringing the costs of these batteries down by 30 percent would be crucial to fielding EVs at mainstream prices that are necessary for popularizing the technology. Tesla itself plans a “Model III” sedan in 2017 with a 200-mile range and a starting price around $35,000.

The obstacles remain daunting. The company itself still hasn’t recorded an annual profit based on standard accounting principles. “Tesla is throwing around big numbers, and I’m sure that something of a large magnitude is going to occur there,” says Scott Kupperman, founder of Kupperman Location Solutions, based in Lake Forest, Illinois. “But I’m not sure it will pan out the way they say it will. It’s an industry with a lot of volatility and a product [version] that hasn’t been made before.”

And Musk still has to overcome what is essentially an aversion to EVs held by most Americans who aren’t wealthy or trendy enough to afford a Model S, which can easily be outfitted to demand a price of $70,000 or more. Tesla’s U.S. sales have actually leveled off lately as Tesla diverts resources to new markets, such as China. Plunging gasoline prices and continual improvements in the fuel efficiency of internal-combustion engines keep pushing general-market demand for electrified vehicles out at least several more years. GM and others now plan to compete with the Tesla Model III with their own new, mainstream-

TESLA CHOSE to site its battery factory in Nevada, but its selection process also may have changed the economic-development calculus for another state: California.

There could be big advantages for Nevada in landing the gigafactory beyond the factory itself. “It gives Nevada a chance to talk about manufacturing where they didn’t have that before,” said Ginovus’ Gigerich. “And in Reno they can say that they will be able to support industrial production in close proximity to California but not have to do the production there.”

Already in the wake of Tesla’s announcement in September, Nevada has “had a pickup of interest in the state” by other manufacturers and is counting on Tesla’s and Panasonic’s bringing at least some suppliers with them to Nevada, said Steve Hill, executive director of the governor’s office of economic development. At the press conference, Tesla CEO Elon Musk “called Nevada the ‘get-it-done state,’ and that’s about as good as any marketing campaign we could hope to have had.”

California also may benefit from being in the derby for the gigafactory even though it didn’t win. Companies from around the world saw Musk invite California as a late entry and observed the state’s trying to knock down some inherent obstacles in its economic-development structure—

such as the extraordinary length of time required for some environmental permits. In the end, the California legislature didn’t convene the special session necessary to hammer out an incentive package acceptable both to Tesla and the politicians, even though Tesla is headquartered and makes its cars in the state.

The hullaballoo over adding California to Tesla’s “considered” list also raised the profile of a significant new effort by the state—rated for several years running at No. 50 in the Chief Executive ranking—to make itself more attractive to native and outside businesses. Gov. Jerry Brown launched a “California Competes” initiative that sunsetted some existing tax incentives under an enterprise-zone program and instead provided an estimated $180 million through June 2015 in tax credits to businesses either threatening to leave California or interested in moving there. The idea was to target funds to high-impact projects or risk potential losses of employers.

“I do think California, where it chooses, now can play a bit more in pursuing business under California Competes,” Gigerich said. “But still, at the end of the day, when you line up all the tax and regulatory factors, I don’t see more companies making that decision for the state unless it has to have a California address in its name.”

CALIFORNIA DREAMING?


DESERT DISCOUNT Tesla claims renewables will supply the factory’s energy

priced EVs Meanwhile, Toyota has abandoned its recent cooperation with Tesla on an EV and instead is betting big on hydrogen fuel cells as the alternative fuel of the future.

“Reducing costs by 30 percent, as Musk claims the factory will do, isn’t alone going to open up EVs to that vast majority of the auto market who still want gasoline-powered cars,” says Smith of the Center for Automotive Research. “And the factory isn’t going to be at that efficiency level when it opens its doors because it won’t be at anywhere near capacity for a long time.”

Indeed, ultimately, Musk may have to count only on social, cultural and regulatory pressures—generated by alarm over climate change and his ability to get people to believe in his vision of the future—in order to create

“demand” for his all-electric cars in a marketplace where they couldn’t survive on their own.

But in the here and now, Reno-ites are scrambling to take advantage of their godsend. Law firms and CPAs are sniffing for new space around town, as well as manufacturers, and land costs are rising. “It was just like a rocket took off when rumors started swirling about Tesla,” says Brian Armon, managing partner of the Cushman & Wakefield commercial real-estate office in Reno. “Animal spirits are strong right now.”

IN WRAPPING UP the deal with to locate a giant EV-battery factory near Reno, CEO Elon Musk gained one last, very important concession: a measure making it legal for Tesla to sell directly to Nevada residents without having to go through a traditional dealer of the type that all existing automakers use.

For Musk, it was critical. Many aspects of Tesla’s business model differ from those of the U.S. auto industry, including an investor base that remains enthused despite the lack of profits, allowing competitors open access to certain older elements of the company’s IP and a CEO who picks nasty fights with journalists. However, one difference near and dear to Musk’s heart is his desire to forge a direct path to consumers.

Musk believes that his cars are marketed, sold and serviced far more effectively in a one-on-one relationship with the customer. So from coast to coast, Tesla has been tangling with politicians, state officials and auto-dealer associations to get its way.

“It was important to Tesla, and part of it is because there’s some market in Nevada for their vehicles,” says Steve Hill, executive director of the Nevada governor’s office for economic development. “Tesla also wanted to use [the agreement] as a

template for their efforts in other states.”

Every state has different laws protecting the automotive-franchise system, so essentially Musk must fight 50 different battles on this front. Participants in this struggle suggested that a potential template has emerged in Ohio and Texas, where dealership interests agreed that the state could grandfather existing Tesla stores, but that no other Tesla outlets could open unless they are actual dealerships.

Auto dealers aren’t happy that, in addition to fighting for his preferred business model, Musk also has been denigrating the traditional dealership-franchise model that has been a bedrock feature of the U.S. auto industry for many decades.Musk wasn’t the first to attack the dealership system as adding unnecessary costs and layers to automotive retailing. Several years ago the industry’s old-guard automakers, led by GM and Ford, tried mightily to diminish the dealer role in a number of experiments—all of which eventually fizzled.

Dealer interests maintain that the franchise system is the best way to retail cars in America because intra- and inter-brand competition among local dealerships helps keep prices low. As independent business owners with skin in the game, dealers are said to work more effectively as a protective buffer between manufacturer and consumer than would salaried middle managers for the automakers. Also, their enterprises contribute hugely to local economies. That latter is why auto dealers also are especially influential with state legislators.

“We don’t take a position on specific state legislation, but we believe the dealer model is pro-consumer and should be strengthened whenever possible,” says Jonathan Collegio, vice president of public affairs for the National Automobile Dealers Association.

The Icing on the Cake— A Deal to Deal Direct



DIRECT DEALERTesla CEO Elon Musk

won the right to bypass dealerships and sell directly

to consumers in Nevada

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MANUFACTURING TECHNOLOGY

IS NO LONGER THE “NEXT BIG THING” …IT’S HERE

BUSY CEOS MAY BE forgiven for trying to tune out the noise and hype that technology suppliers try to generate. Remember the Y2K craze? But every once in a while, a technology reaches what Andy Grove, the first hire and ultimately chief executive of Intel, called the “strategic inflection point.” The technology’s cost falls dramatically and its performance rises equally dramatically. Grove was referring, of course, to semiconductors. But to-day, the same phrase applies to an entirely different field—Three-dimensional (3D) Manufacturing, also called Additive Manufacturing because parts and

Key Takeaways

Sophistication Surge3D—or additive—manufacturing is moving beyond the making of prototypes onto the actual production floor

Moving Down the Cost Curve 3D manufacturing is growing less expensive even as performance improves

Liberating Design 3D frees designers from limits of tradi-tional techniques

1

2

3

IS NO LONGER THE “NEXT BIG THING” …IT’S HERE

products are built one layer at a time by printers.

The evidence can be glimpsed at Pratt & Whitney, which has been developing 3D manufacturing techniques for 25 years. In a room at its headquarters in East Hartford, Connecticut, four big machines almost soundlessly print out 600 plastic parts a year—to be used as prototypes or for tooling and support for other metal parts. But now, the company says it is ready for the first time to place dozens of 3D-manufactured titanium and nickel parts on its PurePower geared turbofan jet engines. Engines with additively manufactured parts have been flight-tested and will power Air-bus and Bombardier aircraft entering passenger service in the second half of 2015. The parts include fuel-bypass manifolds, mounts, fittings, brackets, oil nozzles and airfoils.

The strides that Pratt, a unit of United Technologies, and GE’s engine unit are making are attracting wide attention because jet engines are among the most precise and powerful machines in the world, and they are subject to incredible heat and stress.

“It’s like when IBM started in the per-sonal computer business in the 1980s—the engine-makers have embraced the new technology and given it legitimacy,” says Howard Kuhn, a 3D expert and Distinguished Collabora-tor Award winner at America Makes, also known as the National Additive Manufacturing Innovation Institute, based in Youngstown, Ohio.

Aerospace isn’t the only sector demonstrating the power of 3D manufacturing. However, in other industries, small- to medium-sized businesses often lead the way. In the medical field, Oxford Performance Materials, a $10 million-a-year com-pany, uses 3D manufacturing to make pieces of the human cranium out of a high-performance plastic and custom-izes them to fit the heads of patients

who suffer head injuries. Likewise, in the dental field, Align Technology, a $660 million-a-year company, uses 3D manufacturing to offer custom-ers largely invisible plastic spacers customized to each individual’s set of teeth. In other dental settings, patients can watch an implantable tooth be printed before their eyes.

In short, 3D manufacturing is breaking out of the prototype stage, where it has lingered for many years, to full-fledged manufacturing. Wohlers Associates, a top consultancy in the field, says 34.7 percent of the global market for additive manu-facturing is now devoted to making parts for final products, as opposed to prototyping, molding and various

types of tooling. That’s up from just 4 percent in 2003. Using 3D to make production parts passed the $1 billion mark globally in 2013 and about 38 percent of that activity was in the U.S.

“We are seeing companies push the limits of additive manufacturing to new levels and apply the technology in entirely new ways,” says Terry Wohlers, president of Wohlers, based in Fort Collins, Colorado.

The reasons that 3D is suddenly catching on are many and varied. The costs of printing machines have dropped, and the machines are more automated and efficient. Also, scientists and engineers have made progress in understanding how var-ious metals, plastics and composite materials can be made from powders and then bonded with lasers and other tools. Designers are recognizing that they can develop parts and not worry about whether the parts can be manufactured through traditional techniques, which is allowing them to craft parts that are dramatically different in appearance. Furthermore, companies are realizing they don’t need long manufacturing runs for specialized spare parts, as in military uses, because parts can be made on an as-needed basis. A 3D printer has even been sent to the International Space Station so that astronauts and scientists can print replacement parts rather than having them blasted up from earth.

This change has come about so fast that many CEOs of small- and me-dium-sized industrial companies now find themselves at a loss. “If you’re a CEO of a small or midsized company and you are not seriously investigat-ing and investing in 3D printing and additive manufacturing, chances are you are placing your company in a significant, competitive disadvantage,” says Avi Reichental, chief executive of 3D Systems in Rock Hill, South Carolina. “You will be disrupted by


other companies that compete with you because they will have these capabilities.”

Of course, Reichtental has good reason to be a 3D evangelist. His company, which expects $650 million in sales in 2014, is one of the larg-est suppliers of additive parts and machines, along with such players as Stratasys and ExOne. His arguments that SME’s should take steps to get into the 3D game are compelling. He points out that SME companies that lack the resources and scale of the aerospace giants can catch up rapidly.

“The good news for smaller compa-nies is that they don’t have to start where Pratt & Whitney started,” says Reichental. “Smaller companies can instantly stand on the shoulders of the Pratts that have been refining the knowledge for a quarter of a century. That should be their starting point. In the age of ubiquitous information and connectivity, nobody has to start from scratch.”

How can SME CEOs shortcut the learning process? The first step, experts agree, is for a leader to show personal interest in additive manu-facturing by attending trade shows, visiting potential vendors, seeking out university or government programs—

like America Makes—and tapping the expertise of consultants who may educate him or her. The process has to start at the top because the execu-tives in any company who manage the manufacturing process are inherently conservative. They understand exist-ing processes and existing equipment, and they know how to make all of it perform to acceptable levels of quality. However, they generally do not want to rock the boat.

Reichental says a CEO should identify an internal champion within the company to lead the push toward 3D manufacturing. One set of possi-ble internal allies are designers, who understand that 3D manufacturing will allow them to innovate parts in dramatically new ways. They no longer have to worry that a part is not “manufacturable” with traditional casting or forging techniques. With 3D, they can design sleeker parts and products that can be dramatically more effective, often at the same or lower cost.

But Scott Defelice, CEO of Oxford Performance Materials, based in South Windsor, Connecticut, says that finding an internal champion may be difficult. The people in charge of manufacturing will not want to devote


How to Jump-Start Your 3D Efforts

TAKE A PERSONAL INTEREST in 3D

technologies that might be relevant to your business. Tap consultants, go to trade shows, visit potential suppliers and in general, demonstrate to your organization that you’re serious. Learn enough to challenge other executives and get them out of their zones of comfort.

TO GET “BUY IN,” seek internal

champions to help push 3D and give them time and resources to explore the new technologies.

IF INTERNAL CHAMPIONS are

not available, consider consultants, university programs and government programs like America Works or the Ohio Third Frontier program to introduce new ideas into the company and convince internal constituencies that 3D can be transformative. This is called “open innovation.”

DON’T TAKE SUDDEN PLUNGES and buy big

pieces of 3D equipment. Start by buying additively made parts and simple machines to speed your company’s learning curve.

BUILD UP THE SKILL SETS of your key

employees, such as engineers and machine operators, by encouraging them to take courses at community colleges or other entities that offer 3D training.

NOW

THEN

3D IN ACTION The 3D-manufactured version of this Pratt & Whitney part is sleeker, more refined and requires less material.


SIAS813-ManateeMan-CEG-m.indd 1 2/4/14 4:49 PM

the time and energy to study a new, disruptive technology, he warns. “The guys who are making the plant run are probably not going to be your in-ternal innovators. But if the CEO just takes the word of his internal guys and they don’t go down the [3D] path and five years down the road they find themselves losing market share, that’s a substantial strategic mess.”

Ultimately, most experts seem to agree, a CEO will need to introduce outsiders, such as consultants, sup-pliers, university experts and other players, into a company’s 3D delibera-tions. The fancy term for that is “open innovation.” “We would advise the CEOs of SMEs to look outside their own four walls for experts and solu-tions to help them achieve their goals in the 3D printing market,” says Paul Musille, an associate program manag-er at NineSigma, a Cleveland-based in-novation advisor. “This can accelerate the R&D process and speed the time to market.”

Once a CEO gets the company solidly focused on 3D, it does not sensible to make any wild leaps. “It’s just like anything that’s new,” says consultant Wohlers. “It requires some tender, loving care. If you don’t give it the attention it deserves, you can buy the wrong equipment or go down the wrong path.”

Because there are so many different


types of industries and so many differ-ent 3D techniques, there is no one sa-cred path for a CEO to take. Therefore, it makes sense to set targets for the company and to embrace experimen-tation. The experts suggest buying some parts from a 3D supplier and buying a few inexpensive 3D printers to start developing a knowledge base. Getting the right set of skills on board is another key factor—and may re-quire some strategic hiring and firing.

“CEOs have to find the right people to take the technology and leverage it,” says Emory Wright, vice president of operations at Align Technology. “They need to make sure that [they] fit very well together.”

CEOs who get the formula right can transform their businesses or create entirely new ones. That’s what Align, based in San Jose, California, has done. It built its business on the back of 3D techniques, reaching the $660 million sales level in its most re-cent fiscal year. Its products, which it calls aligners, are pieces of clear plas-tic that a patient wears in the mouth to move teeth into better positions. Over time, as a patient’s teeth shift, he or she gets new aligners that continue the gradual shifting process, perhaps more than a dozen times.

The company uses technology similar to computer-aided design (CAD) to take pictures of a patient’s

Smaller companies saw the potential for the 3D technology and have converted it into a manufacturing platform.

mouth, but then it uses an additive manufacturing technique called stere-olithography to create molds that are exact replicas of the patient’s teeth. A piece of plastic is thermoformed over the mold, becoming the aligner, and the mold is then thrown away. But the company would not be able to get the accuracy it needs without the step involving 3D.

“Everything we make is different,” says Wright. “When you are making something different every time, addi-tive manufacturing is now a technolo-gy that can do that.”

Because Align built its business on the basis of 3D technologies over the past 15 years, it did not have to overcome internal resistance. It’s an example of how small and mid-sized companies, which are not hemmed in by large capital investments that big companies make in plant and equip-ment, can move faster and disrupt their competitors.

“For a company like GE to make a change in its manufacturing methods, from the traditional to the 3D world, is a big investment, not only in technol-ogy but also in people and cultural change,” explains Wright. “But small-er companies saw the potential for the technology like we did and have converted it into a manufacturing platform.” That’s the ultimate payoff for going up the 3D learning curve.

—EMORY WRIGHT, V. P. of Operations, Align Technology


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In The Northeast, the Recession isn’t over yet. By Warren Strugatch

RECOVERY? Not in the Northeast. The Northeast lags the nation in post-

recession recovery. Real GDP increased just 1 percent in 2013, the last full year for which data is available. As a whole, that year the nation grew 1.8 percent. Slow job gains have frustrated efforts to bolster economic growth despite such positive signs as falling unemployment and rising personal income.

The news isn’t all dour. “There is quite a bit going on in the Northeast,” states a report from Wells Fargo Securities’ Economics Group, which hails job growth in New York City and Boston. Strong gains have been made in technology in these cities and elsewhere. At the same time, traditional employment strongholds as publishing, legal services and financial services have faltered. New jobs created in such fields as home health care, hospitality

and retail have bolstered employment metrics but hampered income growth; many are low-paying McJobs.

Mapped out by state GDP growth, the region’s overall performance is visibly lame. Despite those gains in New York and Boston, the Mid-Atlantic states show the slowest real GDP growth of any region in the nation. Delaware, whose revenue-forecasting practices during the slow recovery are raising corporate eyebrows, paced the limping pack with 1.1 percent GDP growth. The District of Columbia actually slipped, posting .5 percent negative growth. New England fared slightly better. Vermont led its neighbors with a 1.9 GDP growth. Maine and Connecticut, bringing up the rear, share a .9 percent expansion pace.

The numbers for 2014, when they arrive, should be better. Nationally,

the economy expanded in the second half of 2014 at its fastest rate in more than a decade. Hopefully, some of that progress will shine a warmer light on the Northeast. Meanwhile, economic-development advocates in the region cheer each positive news announcement with maximum enthusiasm, hoping the bottom has at last been reached—and that the only way out is up.

DELAWARE’S BEEN ADDING jobs, but unemployment is still rising. The reason might be the long-term drop in labor force participation. Delaware enjoyed stronger job growth than its neighbors in recent years, but


ECONOMIC DEVELOPMENT

The NortheastREGIONAL REPORT

#23 Plagued by Unemployment

DELAWARE

two-thirds of the new positions are part-time or short term.

While Delaware led the region in GDP growth in 2013, business leaders worry that the state’s gimmicky revenue projection models will eventually lead to shortfalls. Meanwhile, forecasts show fall-offs in professional and business job growth midway through 2015. DuPont’s decision to exit Wilmington for a new headquarters in the burbs rattled business leaders without seriously affecting the job rate. Corporate recruitment and retention efforts are small but potentially attractive. “I think Delaware is underrated,” says Dan Breen, relocation advisor and executive VP at Jones Lang LaSalle in Parsippany, New Jersey. “Their incentives are better than people think—for the right projects.”

Education is a divisive topic: nearly 40 percent of students have “choiced out,” leaving public schools depleted and underfunded. Increasingly,

relocating executives put their kids in private schools—or buy homes across the border in Pennsylvania. “An executive considering relocating here better take a hard look at the public schools,” says Bob Byrd, a partner with Wolf Block Public Strategies Delaware. The Tax Foundation ranks Delaware’s state and local tax burden 15th highest out of 50 states and ranks it 13th in business tax climate. Delaware spends over $43 million a year on incentive programs.

THE GRANITE STATE is still below pre-recession job levels. Jobs are returning—s-l-o-w-l-y, but two-thirds of the new jobs pay below-average wages. Manufacturing, traditionally the state’s breadwinner, is declining, but it still

dominates the labor market. After five straight years of diminishing job totals, the sector is expected to start adding jobs this year, albeit at a barely-there .4 percent rate.

Dennis Delay, economist at the New Hampshire Center for Public Policy Studies, says the state struggles with declining rates of in-migration and an aging work force. This year through 2020, he projects 2.5 percent real economic growth, while the annual job growth will remain under 2 percent. Most new jobs will be in professional and business services, followed by hospitality, leisure services, education and healthcare.

Government efforts to promote the state to employers and/or to foster job creation have come under criticism; last year, a state audit deemed over half the state’s tax credits issued were awarded erroneously or without documentation; expect incentives to be awarded more cautiously now. The Tax Foundation


Delaware

New Hampshire

Maine

Vermont

Rhode Island

Maryland

Pennsylvania

Connecticut

Massachusetts

New Jersey

New York

District of Columbia

23

24

36

39

40

41

42

44

46

47

49

x

42

40

44

51

51

15

6

24

12

7

3

35

No

No

No

No

No

No

No

No

No

No

No

No

54,871

38,119

42,121

43,015

45.381

40,057

43,935

45,012

39,133

46,925

38,921

45,832

8.7

8.5

8.93

8.5

9

8.25

9.99

9

8

9

7.1

9.975

RankBest/Worst

States 20141GDP

Rank 20132Right toWork4

Education Quality (K-12)/

Post-Secondary5GDP Per

Capita 2013 ($)2Top CorporateTax Rate (%)3

Quality ofState Service5

HQ Incentives5

Jobs Incentives5

Green Incentives6

B

A

B+

A-

B-

B-

B+

A-

B

B

B

C+

B+

C

C

C-

C+

B

C+

B+

C

A

B+

C+

A-

B-

C+

C-

C

B-

B-

C+

C

A

B+

C+

B

B

B

A

B

A

B

B

A

B

B

A

B / A

B+ / B+

B+/ B

A- / B

B- / A-

B+ / B+

B+ / A

A- / A

C / A

B / B+

B / A

C- / A

How The States Stack Up

Sources: 1 Chief Executive Best & Worst States for Business 2 Bureau of Economic Analysis 3 Tax Foundation 4 National Right to Work Committee/National Right to Work Legal Defense Committee 5 Dan Breen, Jones Lang LaSalle; Dennis Donovan, WDG Consulting; Andrew Shapiro, Biggins Lacy Shapiro & Co; Joseph Lacy, Biggins Lacy Shapiro & Co; Andrew Mace, Cushman & Wakefield 6 DSIRE Database of State Incentives for Renewable Energy

#24 On a SlowGrowth Track

NEW HAMPSHIRE


ranked New Hampshire’s state and local tax burden 43rd highest out of 50 states and ranked it 8th in business tax climate. New Hampshire spends over $39 million in incentive programs.

WHEN PRIDE MANUFACTURING of Burnham announced it was bringing Lincoln Logs manufacturing from China to Maine, state business advocates cheered long and hard. The deal, however, hardly reversed the state’s persistent manufacturing decline. Once accounting for one in every three Maine jobs, factory work now represents 1 in 12—and most are in shrinking industries.

Heavily reliant on forest products, Maine has struggled for years to bolster declining wood and paper product sales. The Pine Tree State’s aging population and relative lack of inbound migration stunt workforce growth. New governor Paul LePage came into office promising to cut income taxes; critics worry he’ll raise sales taxes to cover the difference.

Charles Cogan, a professor at the


WHO Phil Grucci, CEO of Fireworks by GrucciWHAT Pyrotechnics companyWHERE Long Island, NYSITE HISTORY Fireworks by Grucci was originally founded in 1850 in Bari, Italy by Angelo Lanzetta. Lanzetta and his family immigrated to U.S. in 1870 and set up in Elmont, Long Island. After a brief relocation to Miami, his descendants returned to Long Island in 1929 and built a munitions factory in Bellport. The factory was leveled by a 1983 explosion that

killed three family members. In 2013, the company purchased a 20,000-square-foot office building in Bellport for under $3 million. They manufacture fireworks in a leased factory on a military compound in Radford, Virginia.WHY NEW YORK “About 65 percent of our market is in the New York tristate area. Access to the city’s marketing and public relations channels is invaluable.”BOTTOM LINE “It’s the community. My family lives here. Many aunts, uncles and cousins live here. Many of our employees live here. We couldn’t find this talent in other communities.”

WHY WE’RE HERE / NEW YORK tax. “The payroll tax has been scuttled, at least for now,” says William Driscoll, vice president of the Associated Industries of Vermont, a manufacturers’ trade group. Driscoll’s association and other trade groups continue to press for tax reform and energy-rate restructuring.

The closing last winter of the Vermont Yankee power plant left a sour taste among manufacturers.

“This was a big missed opportunity” to lower rates, Driscoll said. The Tax Foundation ranks Vermont’s state and local tax burden 9th highest out of 50 states, and the state came in at No. 45 in business tax climate. Vermont spends more than $407 million a year on incentive programs.

THE RHODE ISLAND ECONOMY is healthier now than it was at this time last year, but the Ocean State continues to face “significant uncertainties and challenges,” according to the New England Economic Partnership. While unemployment continues to drop, Rhode Island’s current level remains third-highest in the country. Along with New Hampshire, it is one of two Northeastern states still below pre-Recession employment levels.

The state suffers from slow growth in key industries, including manufacturing, construction, information, financial services, trade, transportation and utilities. Older and less-educated workers are marginalized in the state’s largely stagnant economy.

Leadership has been problematic. Rhode Island “has been disserved by successive government administrations,” asserts site selector Dennis Donovan, a partner at WDG Consulting in Bridgewater, New Jersey. “Taxes are too high, the regulatory burden is too high and it’s too bureaucratic.”

University of Southern Maine’s Muskie School of Public Service, and a former state economist, says economic growth picked up in 2014. He sees signs of renewed hiring this year in professional and business services, education, health care and tourism. “I think 2015 will be a fairly solid year for job gains in Maine,” he told the Bangor Daily News.

“I think we will be most of the way back in 2015.”

The Tax Foundation ranks Maine’s state and local tax burden 14th highest out of 50 states and ranks it 29th in business tax climate. Maine spends over $504 million a year in incentive programs.

VERMONT’S UNEMPLOYMENT RATE is among the lowest in the nation, and

“Help Wanted” signs are popping up. Vermont Economy Newsletter projects 6,000 new jobs this year, but the state’s population is falling and younger workers aren’t moving in.

Vermont faces a $100 million shortfall this fiscal year and employers worry the state will impose a payroll

#40 Lacking Leadership

RHODE ISLAND

#36 Coming Out of the Woods?

MAINE

#39 No Jobs Problem Here

VERMONT


Last fall, voters sent state treasurer Gina Raimondo to the governor’s mansion after she succeeded in cleaning up her state’s pension-system mess. Having campaigned on promises to reignite a sputtering economy, the 43-year-old new governor will now be held to it by business leaders. “She is talented, educated and smart,” says Dennis Roberts, a lawyer, ex-attorney general, and son of a former governor.

“I have faith in her.” The Tax Foundation ranked Rhode

Island’s state and local tax burden 8th highest out of 50 states and ranked it 46th in business-tax climate. Rhode Island spends over $356 million a year on incentive programs.

AS A CANDIDATE FOR GOVERNOR, Maryland’s Larry Hogan campaigned on a pro-business platform, promising to “get the government off our backs and out of our pockets, so we can grow the private sector, put people back to work and turn our economy around.” During the race, he called for better state corporate recruitment and job-creation programs and promised an overhaul of the Department of Business and Economic Development if elected. Expect Maryland’s business leaders to press him to make good on his promises—and perhaps reverse his opposition to completing the Purple Line, the $2.45 billion light rail project that many consider key to the region’s economic future.

Historically, Maryland has not been aggressive with incentives. “I don’t get the sense [that] they are very pro-business,” says Dan Breen. The Tax Foundation ranked Maryland’s state and local tax burden 7th highest out of 50 states, and ranked it 42nd in business-tax climate. Maryland spends at least $554 million a year on incentive programs.

PENNSYLVANIA’S ECONOMIC

RECOVERY continues to lag the national pace. Jim Glassman, head economist at Chase Commercial Banking, sees the Keystone State’s economy as “on the mend” and forecasts a moderate expansion pace for the rest of this year.

The Federal Reserve Bank, in regard to Philadelphia’s Survey of Business Conditions, showed most businesses are seeing “an uptick” of activity, leading the Fed to anticipate continuing strengthening through-out 2015. The state’s soft employment market recovered significantly last year, falling below 6 percent for the first time since the Recession.

Fall-off in global energy prices continues to hold back the pace of new drilling, but Pennsylvania benefits from past natural gas exploration, and local industries enjoy access to cheap natural gas. Glassman forecasts a 2.8 percent annual growth rate through 2017. Economic development efforts have cut back in recent years; the popular Pennsylvania First program is now unfunded, and replacement programs have not impressed many. Says Dennis Donovan: “People aren’t thinking about Pennsylvania as much, perhaps, as they should.”

The Tax Foundation ranks Pennsyl-vania’s state and local tax burden 10th highest out of 50 states, and ranks it 24th in business tax climate. Pennsylva-nia spends more than $4.8 billion a year on incentive programs.

CONNECTICUT IS DOING OKAY, but it could be doing much better. The Consti-tution State’s major cluster, the financial

WHY WE’RE HERE / PENNSYLVANIA

WHO Jason Wolfe, CEO of GiftCards.comWHAT Internet payment transfer companyWHERE Pittsburgh, PennsylvaniaSITE HISTORY While newly homeless, Wolfe launched an early Internet coupon business in 1995, working at desk space offered by a friend in an apartment used as an informal incubator. Tapping GiftCards.com cash flow, he rented an apartment. Then, in 1999, he moved into a shared office suite in Foster Plaza in Green Tree, a Pittsburgh suburb. In 2000, he expanded into a 5,000 square-foot private office in the same building. After the dot-com bubble burst, Wolfe accepted a North Dakota state economic development incentive offer and relocated to Beulah, North Dakota, setting up inside a converted warehouse. In 2006, he returned to Pittsburgh and purchased his current headquarters, a 5,000-square-foot building inside a former union hall.WHY PENNSYLVANIA “Western Pennsylvania has a lot going for it. I see great opportunity with the Marcellus shale being a big part of the economy. Pittsburgh has a thriving technology sector. Operating costs are low. There is a great work force and people will relocate here.”BOTTOM LINE “My son is here in Pittsburgh. I am divorced and my ex-wife is here. I am going to stay in my son’s life.”

#41 Lukewarm on Business

MARYLAND

#42 Lagging theNation

PENNSYLVANIA

#44 Financial SectorFaltering

CONNECTICUT

sector, was hammered by the Great Recession. It continues to recover fitfully.

A soft housing market has delever-aged many thousands of households and businesses. Forecasters look for the weather to break in 2015, calling for 35,000 new jobs (Moody’s) or a more tempered 25,000 (New England Eco-nomic Partnership). Economic stimuli include financial hiring, construction starts and increased orders for the F-35 jet fighter program.

However, Wall Street restructuring, Dodd-Frank regulatory restrictions, casino retrenching and a well-educated but chronically tight job market are hampering the state. “Connecticut is seen as having a surplus of workers juxtaposed with a shortage of worker skills,” says Edward Deak, the partner-ship’s Connecticut forecast manager.

“Restraints on the financial-services industry will likely be a challenge for Connecticut,” says Chase forecaster Jim Glassman. “The slow mend in the state’s commercial real estate market is a reflection of the slowly recovering economy.”

The state’s generous but complex incentive programs can intimidate; Connecticut “has good programs, but there are so many incentives [that they are] complicated to figure out,” says site

selector Donovan. The Tax Foundation ranks Connecticut’s state and local tax burden 7th highest out of 50 states and 41st in business tax climate. Connecticut spends more than $860 million a year on incentive programs.

THE MASSACHUSETTS ECONOMY is in Year 5 of an expansion that began just as the last recession was ending. Job growth in Massachusetts will continue accelerating over the next couple of years before stabilizing in 2018, ac-cording to a New England Economic Partnership forecast.

While the commonwealth’s tech-nology-driven growth continues to fuel prosperity, its aging work force causes concern. Increasingly, job growth will be in non-manufacturing jobs, partic-ularly education, health services, pro-fessional and business services, leisure and hospitality.

Business groups like the Boston Chamber of Commerce want to expand charter schools, “close the achievement gap,” and strengthen connections be-tween employers and students. They’re



WHO Antwanye Ford, CEO of EnlightenedWHAT IT consulting firmWHERE Washington, D.C.SITE HISTORY Targeting office locations within the capitol’s HUB Zone program, Antwayne Ford opened his IT business in 1,000 leased square feet across the street from the White House in 1999. Four years ago, he moved to the corner of 15th and L, next to The Washington Post building. Enlightened occupies about 8,000 square feet over three floors.

WHY WASHINGTON DC “We’re near the center of government, where we need to be. Our clients are largely government agencies. We meet with legislative staffers all the time.”BOTTOM LINE “I grew up in D.C. and went to college here (George Washington University). It’s a big deal to me to go back to the high school I attended and give out scholarships or to go back to GW and recruit interns. When kids find out I’m from D.C., they’re motivated. They don’t see me as foreign to them.”

WHY WE’RE HERE / WASHINGTON, D.C.

also focused on tax-reform proposals, reining in unemployment insurance taxes and reducing health care costs. To bolster global positioning, business leaders call for expanding international connections at Logan Airport and fund-ing improvement to the Port of Boston.

Incentives? Massachusetts “feels they have a stranglehold on the phar-maceutical industry and they haven’t done much” spending to welcome relocators, asserts Dan Breen. The Tax Foundation ranks Massachusetts’ state and local tax burden 11th highest out of 50 states and ranks it 25th in business-tax climate. Massachusetts spends more than $2.26 billion a year on incentives.

BY MANY ACCOUNTS, the Garden State’s economy is rocking. So why all the wanderlust? Mercedes made headlines this winter when it accepted a $23 million incentive package from Georgia and bid farewell to Montvale. Households have been antsy, too; New Jerseyites led the nation in outmigration in 2014, the fourth time in the last five years that they’ve captured this dubious honor. Behind the exodus are such factors are high costs of doing business: taxes, fees, real estate costs and payroll. Professional services are scaling down.

Still, 2015 will be “a positive year,” according to the New Jersey Business & Industry Association. In a survey last fall, 40 percent of companies the NJBIA surveyed said their profits rose in 2014, with 45 percent anticipating higher sales in 2015. Plus, 44 percent of companies spent more in 2014 than in the previous year, a rate they expect to continue this year. Furthermore, 22 percent expect to hire this year, twice the rate of future downsizers.

Executives surveyed listed health care benefits and taxes as major con-

#46 Job Growth Continues

MASSACHUSETTS

#47 MovingOn Out?

NEW JERSEY


cerns, while fretting that government will reach into their pockets to make up budget shortfalls. New Jersey’s eco-nomic development programs generally earn glowing reviews. The state “has some of the strongest incentives you’ll see in this country,” says Joe Lacy, man-aging director of Biggins Lacy Shapiro & Company, based in New York, Prince-ton and Chicago.

Jones Lang LaSalle’s Breen says, “Grow New Jersey has been very well received by the business community.” Others blame application complexity for scaring off aspirants. Infrastructure improvements and more competitive labor costs will please business owners and chiefs, but don’t expect them short-term. The Tax Foundation ranked New Jersey’s state and local tax burden 2nd highest out of 50 states and ranks it 49th in business tax climate. New Jersey spends more than $675 million per year on incentive programs.

DERIDED FOR STIFLING REGULATIONS,

archaic permitting and bureaucratic logjams, New York ranks behind only California as Chief Executive readers’ worst state in which to do business. (To be fair, most states in the Northeast cluster near the bottom.)

Taking aim at widely held percep-tions, two-term governor Andrew Cuo-mo last year slimmed the state’s corporate income tax system and estate tax, pruned some red tape and revamped the state’s economic-development efforts, most noticeably touting “Start-Up New York” with a $160 million marketing budget. His administration’s signature economic-de-velopment offensive, the program offers 10-year tax write-offs to execs willing to move onto government-specified cam-puses of the state university system. Alba-ny claims it’s already created 2,100 new jobs while attracting 40 companies.

The verdict is mixed. New York “offers an impressive range of incentives, and it’s an easier sell these days,” says Dennis Donovan, a partner at WDG Consulting, a site-location advisory firm in Bridgewater, New Jersey. Other relocation advisors wonder why their clients now have to go back to college to benefit. Mike Durant, New York State chapter president for the National Federation of Independent Businesses, likes Governor Cuomo’s direction but warns that heavy taxes and regulatory strangleholds remain.

“New York has not addressed the major issues affecting its business climate,” he told the Rockland County Times. Case in point: the Scaffold Law, a worker’s compensation liability he says is the country’s most onerous. Gover-nor Cuomo’s year-end decision to ban fracking, which is legal across the border in Pennsylvania, won him praise from environmentalists but scorn from many business leaders. The Tax Foundation ranks New York’s state and local tax bur-den No. 1 in the nation and ranks it 50th in business tax climate. (Both rankings were determined pre-Cuomo tax cuts.) New York spends over $4 billion a year on incentive programs.

THE D.C. AREA, one of the nation’s fastest-growing metropolises, took a

huge hit last year. Washington’s GDP shrunk half a percent, as cuts in federal spending played dominoes on contractors, subcontractors, service companies and household spending.

The D.C. metro area, which includes the capitol, nine counties in Virginia, five in Maryland and one in West Virginia, has largely bounced back, and leaders are more intent than ever on reducing depen-dency on government spending. An influx of foreign, direct investment has capitalized a boom in commer-cial construction. “We’re not just a company town anymore, with gov-ernment the company,” says Harry Wingo, president of the D.C. Cham-ber of Commerce. “Diversification in Washington has been enormous.”

D.C.’s appeal as a cultural hub and its quality of life pull in a highly qualified and educated 25- to 34-year-old work force. New May-or Muriel Bowser is committed to implementing the five-year economic plan inherited from her predecessor, formulated with help from the D.C. Chamber, Georgetown University and other business thought leaders. Red tape, once synonymous with doing business in Washington, is becoming “less of a problem,” says Wingo. The Tax Foundation ranks Washington D.C.’s local tax burden 20th highest out of 50 states and ranks it 44th in business tax climate. D.C. spends over $94 million a year on incentives.

Governor Cuomo’s year-end decision to ban fracking, which

is legal across the border in Pennsylvania, won him praise from environmentalists but scorn from

many business leaders.

NEW YORK MINUTE

#49 Bringing InThe Bottom

NEW YORK

Bouncing Back

DISTRICT OF COLUMBIA

can do to mitigate the risk of a breach. The answer lies in analyzing all areas of vulnerability and consciously deciding what to protect—and to what degree.

Cyberattacks come from hackers who breach company firewalls and security systems, stealing data and/or disabling the computers. Some believe that hackers are stopped by robust firewalls and sophisticated detection software, but that is only a part of the solution. Hackers gain easy access through three pathways—people, processes and systems.

PEOPLE PROBLEMS

Most breaches (some say 80 percent) come through the “people route,” employees, subcontractors, suppliers and anyone else who has authorized access. It’s the easiest way. The “people route” includes:

1. Negligence. Many penetrations occur through simple negligence—misplaced or stolen laptops and cellphones or due to leaving passwords in plain sight. A hacker may ask to borrow your phone for

In a recent attempt to survey 580 CEOs about security, we received a response rate of less than 1 percent. Today, thanks to the impact of Sony’s cyber attack, we believe that number would be much higher.

While Sony’s breach spawned the broadcast of an embarrassing amount of sensitive data, it also shut down the company’s computers and put the company in limbo for several days. Sony tried to continue with manual systems but simply couldn’t keep up. Even worse, it was unable to pay actors, suppliers and employees. Sony had to suspend operations until the company could rebuild the computer systems and networks.

Known as “Destover,” this class of malicious software (“malware”) is dangerous because it disrupts computer—and company—operations by first copying data and then erasing the “Master Boot Record,” disabling the computer storage. Similar disruptions occurred


CY

BE

R S

EC

UR

ITY What CE Os Can Learn from

the Sony Cyber Attack

in 2012 at Saudi Aramco, where 30,000 terminals were shut down by the Shamoon virus, and in Iran, where the Stuxnet worm destroyed a thousand centrifuges in 2009.

To create further damage, the hackers posted online several un-released films that undoubtedly cost millions in production expenses. Plus, they exposed thousands of sensitive and embarrassing emails, movie scripts, HR data, salaries, legal reports, passwords and the personal information of hundreds of employees and actors.

The Sony experience comes on the heels of a recent breach at JPMorgan. In June 2014, hackers stole an employee’s password and deposited malware on the company’s servers. Over several months, they eluded the company’s sophisticated alarms by extracting a huge amount of data very slowly.

While one cannot address all security risks, there are things CEOs

All companies—not just big, public firms—are vulnerable to security breaches. Fortunately, there are measures CEOs can take to mitigate risk. By Tom Pettibone

A CLOSER LOOK at what happened to Sony suggests that the nature of the recent cyber breach was more serious than first thought. As the story continues to unfold, we may find out that the North Koreans are not the true hackers. However, regardless of the origin of the perpetrators, it is clear that the incident should serve as a wake-up call for board members and CEOs.


What CE Os Can Learn from the Sony Cyber Attack

an “emergency call.” These are by far the easiest and quickest ways hackers penetrate security barriers and insert malware in company systems, creating hidden pathways for instant or later access. It takes only seconds. 2. Disgruntled Employees. A disgruntled employee might simply hand over his passwords or lend the hacker his or her phone for a few minutes. Some believe the Sony hackers had inside help because they said, “Sony doesn’t lock their doors physically, so we worked with other staff with similar interests to get in.”3. The “Candy Drop.” The hacker provides free CDs or thumb drives to conference attendees. Ostensibly loaded with conference information, they are also infected with malware that the conference attendee unknowingly loads onto his laptop and subsequently onto the company’s computers. Free CDs and thumb drives may also be passed out by third parties in company classrooms, social functions and even company gyms. 4. Phishing. The hacker sends enticing emails with a “click on this offer” invitation. Once opened, the hacker uploads malware to the computers, unbeknownst to the employee. 5. Greed. A cash-strapped employee sells his access information to a hacker.

Employee and supplier awareness sessions and training are mandatory for people to understand the risks, the methods and their obligation and responsibility to protect company assets. They must be told the impact of failing to do so. Constant effort must be made to identify and resolve disgruntled-employee situations. Other people with access (contractors, suppliers, etc.) must be contractually bound to company security.

PROCESS ISSUES

Weak company processes are another major area of vulnerability that hackers frequently exploit. These include:

1. Weak network access controls. While it is recognized that strong network security controls frustrate ease-of-use, weak security controls are easily penetrated and provide ready access to hackers. Restricted access, robust firewalls, segmented and secure networks and applications, and diligent network traffic monitoring are the minimum measures companies should have in place to reduce risk.

2. Insufficient physical access controls. Hackers and thieves with ready access to company offices can easily steal equipment containing access codes and passwords. 3. Poor third-party security:• THE CLOUD. There are many stories of private data and photographs downloaded from insecure public and private clouds. Also, unintentional

“leakage” of data from one customer to another has been documented.• SYSTEMS DEVELOPMENT,

MAINTENANCE, TESTING AND

OPERATIONS. Third-party contrac-tors usually require access to compa-ny computers. Plus, sensitive data in the hands of third-party contractors is always a risk. Third-party security controls that are at least as strong as those for employees must be contrac-tually established. A restricted-de-velopment environment, as well as additional monitoring, may also be necessary.• INFRASTRUCTURE. Outside infra-structure providers must be governed by strong security controls. • FACILITIES. Third-party contractors who maintain your facilities (building personnel, cleaning people, etc.) must also be governed by strong security controls.4. Insufficient business-partner access controls. In today’s

All companies—not just big, public firms—are vulnerable to security breaches. Fortunately, there are measures CEOs can take to mitigate risk. By Tom Pettibone


CYBER SECURITY

integrated supply chain, business partners are connected electronically and pass forecast-to-order-to-cash data back and forth, over the wire, to company systems. Malware can easily be inserted in these transmissions. Companies must ensure that business partners maintain the same (or stron-ger) levels of security control and they must continually monitor data inputs. 5. Weak employee onboarding (vetting) and termination processes. Stopping the problem at the door is critical. Personnel with checkered backgrounds must not be allowed access to the computer systems. The access and information possessed by exiting employees must be immediately neutered.6. Poor personnel training and awareness. Employees, contractors and other personnel must attend frequent awareness and training sessions to be reminded constantly of their risk mitigation obligations, especially new people. All must be advised of new hacking techniques as they emerge.7. Poor equipment disposal processes. When disposed of, computers and mobile devices must be electronically “wiped clean” of all data, access and security codes. This is especially challenging for BYOD (bring your own devices) environments.

SYSTEMS SAFE-GUARDS

1. Weak cyber security:• A HACKING “INDUSTRY” EXISTS—

largely offshore with smart hackers and sophisticated computers that con-tinually “ping” thousands of networks, day and night, with random and

“continuous-learning” codes to unearth security holes. Called Advanced Persistent Threats (APT), sometimes the loot is used directly by the scan-ning party, but often it’s sold to other parties with a malicious interest in the victim. The scanners could be indi-viduals or maybe even a nation-state that can afford sophisticated “pinging” equipment and staff. One can reduce the risk of this type of penetration with superior network-monitoring tools and a skilled staff. • ONCE PLANTED, MALWARE MAY GO

ACTIVE IMMEDIATELY OR SIT DOR-

MANT UNTIL ACTIVATED. Sophisti-cated, up-to-date malware-detection software must be constantly run to sniff out the offending code and remove it. To the extent possible, applications should be discrete to contain damage and well-thought-out procedures must be in place to

contain damage if and when malware goes active. 2. Vulnerable Web and Customer portals. Hackers exploit security holes in web and customer portals, thereby gaining access to company computers. Robust firewalls, sophisticated network security software, discrete applications and skilled staff are necessary.3. Insecure mobile and teleworking access. Personnel must use secure Wi-Fi channels when communicating with company computers. Otherwise, hackers can sit nearby and piggyback on unsecure Wi-Fi channels to gain access to the logged-on devices and computers.

Often, successful penetrations are the results of not just one but two or more techniques. In addition, the actual data theft or disruption may take place days or weeks after the initial penetration and may continue undetected for some time. At Target, the data on 80 million credit cards was slowly copied over three weeks from production Target computers and staged in Target backup computers. It was subsequently transmitted undetected, in big batches at odd hours to offshore entities from Target’s backup computers. At Sony, the hackers used Sony’s PlayStation servers to distribute their loot. The JPMorgan data theft occurred slowly over three to four months in order to avoid detection.

Security breaches are now a way of life and are potentially very damaging. It’s not “if” you’ll get hit but “when” and “how badly.”

TOM PETTIBONE the managing partner of Reston, Virginia-based Transition Partners Co. (www.TPCO.us), an IT management consulting firm specializing in IT assessments, strategy, security, organization, governance, sourcing and turnaround.

In addition, the actual data theft or disruption may take place days or weeks after the initial penetration and may continue for some time—undetected.”

Candidates must be nominated and sponsored by their CEO and/or President.

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CEO2CEO SUMMIT / HIGHLIGHTS


GROWING YOUR BUSINESS IN UNCERTAIN TIMESPart II of takeaways and highlights from the presentations and roundtable discussions at the 2014 CEO2CEO Summit at the New York Stock Exchange. By Jennifer Pellet

P H O T O G R A P H S B Y B E N H I D E R

Keep it simple...if you overcom-plicate, you can destroy your business overnight.”

—ANDRA RUSH, RUSH TRUCKING

JEFF SILVER, CEO, COYOTE LOGISTICS

“To run a supply chain effectively, you need a coordinated leader heading up manufacturing, warehousing, distribu-tion and transportation. If you try to do any one thing without considering the others, you will be in bad shape.

“One of our clients called us to complain about our detention charges—which is when you start charging by the hour after a truck sits for two hours waiting to get loaded. He said, ‘This is ridiculous.’ I said, ‘I agree. If we never charge you a penny in detention, that would be wonderful. Let me send an engineer in to look at your process. But you have to prom-ise me that you’ll be able to implement change.’ Because if transportation is getting billed for $1 million for deten-tion, but they can’t turn around and bill production for not getting the trucks loaded, it’s all fruitless. Nothing will change.”

ERIK FYRWALD, CEO, UNIVAR

“You can’t be optimal with logistics without strong analytics. Three years ago, we distributed almost $10 million of product with thousands of trucks and individuals’ making decisions about how to dispatch them. You can’t imagine how sub-optimal that was compared to working with computers and algorithms.

“Look at how the best-in-class in

your industry handle logistics. We visited FedEx and UPS to look at their processes and what we could learn from them. It’s also important not to be afraid of forging alliances with companies that can help you rather than trying to do it all by yourselves.”

ANDRA RUSH, CHAIRMAN,

RUSH TRUCKING, DETROIT

MANUFACTURING SYSTEMS

“Keep it simple, but streamline is our solution to success. We do our own analytics. When I first started out, we had a business partner from France. They said they were experts at [an-alytics], but using their system was far too complicated. It was a bit like saying. ‘We want to go from New York City to LaGuardia airport but we want to use a spaceship and so we need to send a rocket scientist in case some-thing goes wrong.’ We had 20,000 backflush errors in three weeks. If you overcomplicate, you can destroy your business overnight.”

HOW TO MANAGE VALUE NETWORKS FOR SUPERIOR PERFORMANCE

ABOVE: Coyote Logistics’ Jeff Silver, Univar’s Erik Fyrwald, and Rush Trucking’s Andra Rush

CONCEPT Three panelists offer insights on how CEOs can improve their supply chains

FOR ADDITIONAL COVERAGE OF THE CEO2CEO SUMMIT, SEE

THE JANUARY/FEBRUARY 2015 ISSUE OF CHIEF

EXECUTIVE

➼


CEO2CEO SUMMIT / HIGHLIGHTS

BEYOND BUSINESSL Brands CEO Leslie Wexner is just as enthusiastic about philanthropic endeavors as entrepreneurial endeavors—perhaps more so.

LEFT: CE ’s Wayne Cooper, CE ’s J.P. Donlon, L Brands’ Leslie Wexner, CE ’s Marshall Cooper, Cardinal Health’s George Barrett, Columbus Partnership’s Alex Fischer

FOR MORE EVENT HIGHLIGHTS AND OUR COVER STORY ON L BRANDS’ CEO LES WEXNER, SEE THE JANUARY/FEBRUARY 2015 ISSUE OF CHIEF EXECUTIVE.[ [

AT DECEMBER’S CEO SUMMIT EVENT, L Brands’ CEO Les Wexner was honored with Chief Executive’s 2015 Lifetime Achievement Award in recognition of his visionary business leadership. Wexner is something of a legend in the retail world, having created and grown a litany of successful retail ventures, including internationally recognized brands like Victoria’s Secret, The Limited, Lane Bryant, Abercrombie & Fitch and Bath & Body Works. Over a career spanning more than 50 years, he forged an $11.4 billion company that today operates 2,942 specialty stores in the U.S., Canada and the UK.

But while Wexner’s successful business track record is well-documented, his considerable philanthropic endeavors are less known, says Columbus Partnership CEO Alex Fischer, who was among those who gathered in New York to participate in the award ceremony. “His business accomplishments—among other things, his creation of a store that has resulted in multiple reinventions and ancillary spinoff enterprises—alone make him

one of the greatest success stories of modern times,” notes Fischer. “What might be less obvious is that if there were an equivalent award for community leadership and philanthropy, or for development, master planning and architecture, he would also be the right choice. His greatest legacy beyond his family—in my opinion, actually greater than his business achievements—is the value structure that he's brought, taught and instilled in our community.”

Wexner serves as chairman of the Columbus Partnership, a membership organization he founded in 2002 to foster local economic development and support civic projects. What began as eight CEOs meeting informally has grown to include 52 members who meet regularly to discuss community issues, economic development strategy and civic matters. “We have a motto: ‘We leave our selfish interests at the door and we bring our community interests to the table,’” explains Fischer. “Our member CEOs give back, invest, roll up their sleeves and do good in our community and that all stems from what Les started.”

ABOVE: XLR-8’s Bob Nardelli, Microsoft’s Barb Edson

For information about Chief Executive’s

Smart Manufacturing Summit, visit

SmartManufacturing Summit.com

➼

UNLESS YOU’VE BEEN LIVING UNDER A ROCK, you’ve probably heard quite a bit about the Internet of Things (IoT). The buzz around employing advances in embedded sensors, processing, data analytics and wire-less connectivity to enable the type of machine-to-ma-chine communication that can revolutionize businesses has definitively become a roar. For manufacturers, the implications are huge. McKinsey estimates the IoT could unleash as much as $2.3 trillion in new economic value worldwide by the year 2025.

In fact, the IoT topped Garner’s Hype Cycle for Emerging Technologies last year, bumping Big Data off the peak. To some, this might sound like a potentially dubious distinction, given the somewhat negative connotations of the word “hype.” However, what occupying the pinnacle of Gartner’s Hype Cycle actually indicates is that the market has enormous expectations for an emerging technology. In making it to the peak, the IoT joins a venerable list of technologies with game-changing potential, including 3D printing, gamification, wearable user interfaces and cloud computing. In other words, expectations may be inflated, but the potential is undeniable.

Yet the excitement around the IoT’s capabilities is also a source of anxiety for business leaders, who face the challenge of getting their arms around yet another emerg-ing technology. For value creation to happen on the scale predicted by McKinsey, manufacturers must be ready to collect, analyze and capitalize on vast streams of data from customers, suppliers and even products themselves, all arriving at increasing volumes and speed.

Further complicating that formidable task is the fact that the term itself has yet to be clearly defined, agreed partic-ipants at a recent Chief Executive roundtable held in part-nership with Microsoft. “The hype on IoT is actually pretty

ARE YOU READY FOR THE INTERNET OF THINGS?

ROUNDTABLE

What CEOs need to know to compete in the next great wave of value creation in manufacturing. By Jennifer Pellet


Key Takeaways

1 2 3Size MattersThe IoT could generate $2.3 trillion in value by 2025

Beyond the HypeView IoT as an evolution rather than revolution

Data OverloadBreak adoption down into manageable steps


CEO2CEO SUMMIT / ROUNDTABLE

deafening,” noted Barb Edson, general manager, marketing, for Microsoft Cloud & Enterprise. “Yet, the reality is that there is not even a common definition for it.”

However, Edson went on to urge CEO participants not to let the murk-iness surrounding IoT—the cloud around cloud-enabled technol-ogy—to sour them on pursuing the business opportunities it represents. “Many people are scared of IoT from a business standpoint, and they really shouldn’t be,” she explained. “It’s not about ripping out and replacing existing systems. It’s about looking at which business processes you can really impact. Start small and you can have a big impact.”

IoT can be viewed as an evolution rather than a revolution, building on the infrastructure companies already have in place, she added, pointing out that most companies today are already gathering massive amounts of data on myriad devices. More of a concept than any one specific technology, IoT involves leveraging connectivity to efficiently collect and analyze that data

to make more informed business deci-sions, identify opportunities and pre-dict customer behavior more effective-ly. That can be as simple as a trucking company’s effort to automate mainte-nance of its vehicles (see sidebar: “M.G. Bryan: Curbing Breakdowns”) or as complex as an enterprise-wide endeav-

or to collect, integrate and organize sensor data from remote equipment across global supply chains.

Delving Into DataThose struggling to fully leverage con-nectivity should take solace in the fact that they are not alone. Most companies are early on the IoT learning curve. Several CEO roundtable participants expressed frustration about being unable to make effective use of the huge amounts of data flowing into their com-panies. “The ability to install sensors and get millions and billions of bits of

information is pretty straightforward,” noted Bob Nardelli, CEO of XLR-8. “The challenge that some of the smaller companies, and maybe even some of the bigger ones, are having is when you get to the data analytics. There’s the ques-tion, ‘Okay, I’ve got all these sensors. We’re recording all this data. We’re on

this thing called the Cloud. Now what do I do with it all?’”

“In our case, we have infor-mation, but we’re not using it to such an extent that it’s preven-tive,” agreed Erik Fyrwald, CEO of Univar. “It allows us to look back historically and say, ‘Oh, now we know why that

happened,’ but we’re not at the point where we can make sure something won’t happen again.”

Even companies like Federal Express, which is viewed as a fore-runner in real-time data collection and analytics, are struggling to take IoT’s capabilities to the next level. The com-pany has made great strides in forecast-ing accuracy since equipping drivers with handheld devices and compiling information on efficiency and customer dynamics in real-time.

“Now we’re trying to link all of that together to be more predictive in

FOR HEAVY EQUIPMENT MANUFACTURER M.G. Bryan, operating oil and gas fracturing vehicles, each of which typically costs more than $1 million, in remote, extreme environments (think no cell phone reception) has long been a challenge. The vehicles require a good deal of TLC, including oil filter re-placements every 200 to 400

hours and complete engine rebuilds after 7,000 hours of service, sometimes sooner. Mismanaged maintenance can be costly—downtime on a vehicle has a price tag of between $3,000 and $7,000 per day, not including lost product revenues.

Leveraging the power of the IoT to develop a scalable solution for remote asset management of its fracturing vehicles came as a real boon for the company, which can

now access and analyze in-field service information. Using mobile technology, the cloud-based system gathers control-system data to produce reports and dashboards on the condition of an individual vehicle’s drive train and fracking performance, as well as process performance and maintenance trends related to entire fleets.

Data is broken down into incredibly small packets so

that information can be sent even in areas with poor cel-lular coverage. Or—in cases where a connection can’t be found—stored in a gateway and sent once a connection is regained.

In addition to improving up-time and productivity for M.G. Bryan customers, the system has the poten-tial to collect data that will demonstrate the vehicles’ competitive performance to customers.

Curbing Breakdowns

THE IoT COULD UNLEASH AS MUCH AS [[ IN NEW ECONOMIC VALUE

WORLDWIDE BY THE YEAR 2025

$2.3 TRILLION

nature,” Cary Pappas of FedEx Tech-Connect told participants. “The ques-tion is, how do you take forecasting and make it a more exact science by overlapping better information, and how do you then boil that down to the things that are most crucial to your business? In other words, how do you simplify that [data] so it’s usable to the people who run our operations? We’ve got a ways to go before we get to where we want to be.”

While the sheer amount of data being generated and the possibilities that data represents can be daunting, the process can be broken down into more manageable steps, pointed out Sujeet Chand of Rockwell. “You gen-erate a lot of data in IoT,” he acknowl-edged, noting that crunching the data should begin before it ever reaches the Cloud. “It needs to be processed in layers. For example, data generated by a jet engine needs to be processed locally on the jet engine first and con-verted to what we call information, because any information you gener-ate directly on the jet engine while the plane is flying can be acted on instantly. The moment you move the data further away from the jet engine, the loop-closure time increases.”

After information, the next step is knowledge, which requires storing information and analyzing it using sim-ulations or other analytical processes, explained Chand. “An example would be predictive diagnostics or predicting failure,” he noted. “Once you have the knowledge, the next goal is wisdom, which comes from analyzing multiple jet engines and then figuring out how you redesign certain components to op-timize performance or pre-empt a type of failure that you see across hundreds

■ LEANDRE ADIFON Vice President Enterprise Systems Engineering & Advanced Technology, Ingersoll Rand ■ TED BILILIES Managing Director, AlixPartners ■ JAMES DEITCH CEO, Teraverde Management Advisors ■ J.P. DONLONEditor, Chief Executive ■ MARK DOHNALEK CEO, Pivot International ■ TOM DUNCAN CEO, Positek Tool ■ BARB EDSON General Manager, Product Management, Cloud & Enterprise, Microsoft ■ ERIK FYRWALD CEO, Univar ■ MELVIN GRAY CEO, Graycor

■ JOSHUA HEBERT CEO, Magellan Jets ■ FAROOQ KATHWARI CEO, Ethan Allen ■ DAN MONTGOMERY CEO, Fritz Industries ■ BOB NARDELLI CEO, XLR-8 ■ SUSAN NOVAKOSKI Director, Michigan Economic Development ■ CARY PAPPAS CEO, Fedex TechConnect

■ SUJEET CHAND CTO, Rockwell Automation ■ TOM PETTIBONE Founder and Managing Partner, Transition Partners ■ ASH SAHI CEO, CSA Group ■ JEFF SILVER CEO, Coyote Logistics ■ VICTOR SMITH Indiana Secretary of Commerce, Indiana Economic Development

Who’s Who

You generate a lot of data in IoT. It needs to be processed in layers.”

of engines. It has to be thought of in those layers or you get overwhelmed.”

That thinking resonated with Jeff Silver, CEO of the logistics trans-portation company Coyote Logistics. Five years ago, he noted, sensors on refrigerated trucks could tell you after the fact the temperature of beverages during transit. Today, the technology has advanced to the point where data is available in real-time—during transit. “When a load of orange juice is about to get ruined, you know about it imme-diately and have a fighting chance,” he says. “Over time, we’ll take it to the next level and be able to predict when those units will fail before they actually do.”

Ultimately, that’s one of the many

roads companies that embrace IoT will travel, improving efficiency by moni-toring and tracking the health of your assets. “IoT is really not as much about the technology—although advances in technology are what enables it—but about taking a step back and under-standing how you want to change your business,” says Edson. “It’s a busi-ness process evolution of what you’re already doing and a way to move your business forward in the digital age.”

—SUJEET CHAND ROCKWELL AUTOMATION


ABOVE: Univar’s Erik Fyrwald, Rockwell’s Sujeet Chand, XLR-8’s Bob Nardelli


EVERY YEAR, somewhere between 50 percent and 90 percent of mergers fail. Deals that once seemed full of promise fizzle, falling short of stated goals; and executives are left scratch-ing their heads, wondering what hap-pened. Take eBay’s purchase of Skype in 2005; eBay was sure the VoIP technology would speed the closing of deals, but ultimately, the capabilities didn’t match, and eBay sold Skype for a loss of more than $1 billion.

Then there are the deals that soar. Google’s purchase of DoubleClick for $3.1 billion in 2008 expanded its on-line advertising position into display ads and gave it access to DoubleClick’s relationships with Web publishers, advertisers and advertising agencies. Skeptics questioned the high price tag at the time; but today, DoubleClick accounts for a significant amount of Google’s profit and the deal has been heralded as a resounding success.

“So what distinguishes those that fail from the ones that succeed?” Ger-ald Adolph, senior partner with Strat-egy&, formerly known as Booz Allen, asked a group of CEOs gathered for a roundtable on M&A success.

The answer: those that are based on a strong capabilities fit, explained Adolph, also the co-author of Merge Ahead: Mastering the Five Enduring Trends of Masterful M&A. While post-merger integration is a key piece of the puzzle, the best integration planning can’t cure a deal that should

How can companies solve the integration challenge? By C.J. Prince

it in the newly acquired company. The second most successful ones were those companies that acquired a capa-bility that could then be leveraged to enhance their own capabilities.

These capabilities are like a successful company’s core DNA—a few distinct competencies that work together in a system that makes each company what it is. “If you are, in fact, a successful entity, that set of capabilities probably syncs up with a distinctive way in which you go to market—it’s your strategy, your positioning, your value creation, your metrics. It’s what we call your ‘way to play,’” says Adolph.

Adolph points to Danaher as an example of a conglomerate that ap-pears to be made up of very disparate,

never have happened. Only those M&A deals that either enhance each company’s distinctive capabilities systems or leverage those systems—or both—have a shot at real success.

In this context, a capabilities system is very specific: three to six mutually reinforcing, distinctive capabilities that are organized to sup-port and drive the company’s strategy, integrating people, processes and technologies to produce something of value for customers. A 2011 Booz Allen study found that even when two companies seemed to have direct overlap, if the capabilities fit was poor, there was almost a nine-point spread in performance in total shareholder value two years after the deal. “The traditional definitions of why we do things, of adjacency and of consolida-tion are inadequate,” Adolph noted. The most successful deals were those in which an acquiring company took a capability of its own and leveraged

WHY CAPABILITIES ARE CRITICAL FOR SUCCESSFUL M&A

ROUNDTABLE

The traditional definitions of adjacency have failed us and the traditional definitions of consolidation are inadequate.”

—GERALD ADOLPH STRATEGY&

don’t seem to have all that much in common. He recalled selling Com-pliance11, a compliance software company, to Charles Schwab in 2011, merging a technology company with a financial services firm. “Instead of running it like a software company, they run it more like a value-added service for their advisors,” he said.

“They still have 95 percent of the peo-ple working there three years later, and it’s growing. They’ve added more people to the business.”

Value Is a Two-Way StreetMaximizing capabilities can go both ways in a merger, noted Marc Rob-inson, senior executive advisor at Strategy&, who recounted the Pfizer takeover of his then-company, Warner Lambert. At the time, Pfizer’s consum-er business was about $500 million and Warner Lambert’s was $2.5 billion. “So it was kind of a reverse merger,” noted Robinson. “The CEO was very explicit. He said, ‘We don’t know what we’re doing in consumer. You have a very well-oiled machine in terms of marketing capabilities. You have to use

our infrastructure and backbone, but otherwise impart your learnings and your knowledge on us.’” On the phar-maceutical [side], it was just the oppo-site, with Pfizer leading the charge and working to absorb Warner Lambert. Robinson, who ran the consumer busi-ness, worked closely with his coun-terpart on the Pfizer consumer side to

deliver a clear message from the top. “We knew the march-ing orders. We set the tone, we communicated constantly, and it worked really, really well. Had it not been for that direction upfront, for the clarity of where the capabilities were going to be applied, it would have failed.”

Robinson admitted that he and many of his Warner Lambert colleagues were skeptical of the merger at the time. “But it turned into a great acquisition. It really brought a lot of value to Pfizer.”

Decisiveness made all the differ-ence, Robinson added, because the desire to win over the new company often leads to too much conciliatory kumbaya and not enough authori-tative leadership. “There has to be a clear, conscious delineation of when directive leadership will be applied and when it won’t. I’ve seen business leaders bend over backwards trying to be so collaborative and welcoming that the clarity of communication and decision-making isn’t set. From my experience, people would rather get clear communication with some ratio-nale. Even if they disagree, they can at least say, ‘All right, I know what to do. I understand the direction.’”

Alan Marash, CEO of performance improvement consulting firm Oriel STAT A MATRIX, had a similar experience—but with the opposite result—when the company purchased a business that was also focused on performance improvement—but in the service arena as opposed to manu-facturing, where Marash’s company had a strong foothold. “In hindsight, I think we made a tremendous tactical error of the important job of clearly


d

Key Takeaways

1 2 3Sync UpM&A must be based on the right capabilities match

Watch & LearnBe willing to learn from the newly acquired

Pursue ClarityClear leader-ship and strategy are critical

unrelated businesses, but which are actually linked by their conformity to the Danaher business system, a group of lean manufacturing methods and quality improvement processes that can be applied to acquisition targets. “The way they select candidates is not by high growth, high margin, an attractive market or any of that stuff, because when you see those things, you are observing where somebody else has an advantaged capability system,” noted Adolph. “Da-naher selects targets based on [fitting] with their capabil-ities system.” As a result of this tightly focused approach to acquisition, Danaher’s M&A pro-gram has helped raise its share price by a factor of 15 over a 16-year period, during which it made 31 transactions.

The bottom line? Clarity and spec-ificity from the start is critical, Adolph said. “If people come to you with vague words like attractive market and synergy, best practices and all of these kinds of things that you cannot reduce to leverage and enhancement, chances are you’re being dragged into a bit of an acquisition trap that might not play out the way you want.”

Tad Mitchell, CEO of WellRight, a maker of corporate wellness software, agreed that knowing precisely why you’re making a buy and staying focused on that end goal, can smooth integration, even when the companies

GOOGLE’S PURCHASE OF DOUBLE-CLICK FOR [[ HAS BEEN HERALDED

AS A RESOUNDING SUCCESS

$3.1 BILLION


CEO2CEO SUMMIT / ROUNDTABLE

defining the authority of the CEO who stayed on and perhaps trying to be too collaborative with her. It caused a great deal of disruption in the integra-tion within the business and a lot of problems with staff.”

Even when the synergies seem right, cultural differences can blow up into major personnel issues, which is partly what happened to the Bank of America acquisition of U.S. Trust, said Ted Henderson, managing director at U.S. Trust. Mergers are difficult, as a rule, in financial ser-vices because the market is intensely competitive. “Bank of America had a different culture than U.S. Trust and I think it was a classic example where the best people at U.S. Trust decided they were going to be better off elsewhere.”

When a foreign acquirer is involved, cultural differences only intensify the challenge of integration. Gould Paper’s sale of a 51 percent stake to Japan Pulp and Paper in 2010 is a case in point. The merger gave the two companies, which had almost no overlap as far as suppliers and cus-tomers were concerned, the ability to cross-pollinate supply resources and achieve greater global reach. But the two had very different cultures and JPP, as the acquirer, needed to under-stand that it could not simply apply Japanese principles to an American company. “In Japan, as you know, nobody gets fired, nobody quits. It’s a job for life. So the concept of somebody being unhappy and maybe going to a competitor is beyond their capability to understand.”

The Need for ScaleSome mergers are doomed because they happen as a result of pressure from stakeholders responding to a current trend. When the economy recesses, for example, people want to retrench and consolidate rather than

■ GERALD ADOLPH Senior Partner, Strategy& ■ WAYNE COOPER Chairman, Chief Executive Group ■ ANIL DIWAN President & Chairman, NanoViricides ■ HARRY GOULD, JR. Chairman & President, Gould Paper ■ CHARLES HELDRETH Chief Relationship Officer, Farm Credit of the Virginias ■ EDWARD “TED” HENDERSON Managing Director, U.S. Trust ■ ROBERT HUGHES President, Hughes Development ■ DANIEL JOHNSON COO, Pureflow

■ ALAN MARASH CEO, Oriel STAT A MATRIX ■ BRAD MEHL President, Boundless Markets ■ DOUG MELLINGER Partner, Clarion Capital Partners ■ TAD MITCHELL President and CEO, WellRight ■ MARC ROBINSON Senior Executive Advisor, Strategy&

■ LARRY SENN Founder and Chairman, Senn Delaney ■ JOHN THOMAS CEO, Physicians Realty Trust ■ ANTHONY TIVNAN President, Magellan Jets ■ MEETA VYAS CFO, NanoViricides ■ RICHARD ZUSCHLAG Chairman & CEO, Acadian Ambulance Service

Who’s Who

diversify or grow. That doesn’t neces-sarily mean the underlying deal is a good match. Higher costs of running a business can make consolidation necessary, too. “Like in banking, if you’re not big enough, with the new costs of regulation, you can’t survive, so you have to find somebody to buy you,” noted Larry Senn, founder and chairman of Senn Delaney, a Heidrick & Struggles global culture-shaping firm. “About a quarter of our work is around the cultural aspects of mergers and acquisitions, but I see another quarter as companies who never really did merge; they just came together and they’re still apart.”

In other cases, a company will bite off more than it can chew—and lose sight of the goal. Meeta Vyas, interim CFO of NanoViricides, recalled her time as CEO of Signature Brands, which was acquired by Sunbeam under Al Dunlap’s management. “He

did it exactly the wrong way,” she said, noting his purchasing three large companies in one day, without a solid plan for integrating them. “The sec-ond mistake he made was that I had gone around the company and rebuilt it in every way—and he never met me once after buying the company.”

Even with the best-laid plans, the integration can fail on the people end, said Doug Mellinger, managing direc-tor of Clarion Capital Partners, which has overseen numerous acquisitions by its portfolio companies. “For us, ultimately, it comes down to people and integration. Where we see these things just get murdered is if you don’t pick appropriate leaders.”

By starting with a focus on capabil-ities, CEOs can not only choose the right partners but also ensure that they preserve what is special about the company they’re buying—not to mention their own.

CEO PASSIONS

asset management holding company. Rivers began collecting when he

learned that the earliest known piece of Charleston furniture, a 1733 writing desk, had been sold to a museum in North Carolina. “I didn't like it because that writing desk represented Charleston's history,” he explains. He formed an advisory group to help him select what to buy. It includes the dealer who sold the writing desk, a museum professional and a consultant. All four members have to agree before a purchase is made.

Collector With a CauseJOHN RIVERS, passionate about

antiques made in Charleston, is on a mission to keep them there.

By George Nicholas

JOHN M. RIVERS, JR., whose family has lived in Charleston, South Carolina since the city’s founding in 1670, wants the antique furniture and decorative arts made by Charleston’s artisans to stay in the city. For the past 25 years, he’s been repatriating museum-quality objects that had been taken elsewhere and acquiring others so they’ll all remain in Charleston. The Rivers Collection now includes more than 250 historically significant items dating from the late 1600s. Rivers shows them to the public in a suite of rooms in the headquarters of his company, Rivers Enterprises, a leading real estate and

Charleston, America's richest city in the mid-18th Century, produced distinctive furniture in large quantities for its prosperous local clientele. Much of it was lost during the American Revolution when the British occupied the city, when Sherman's troops set Charleston afire during the Civil War and during seven other conflagrations, an earthquake in 1886 and Hurricane Hugo in 1989. Collectors in other markets snapped up what remained.

Rivers tracked down a dressing table that had crossed the Atlantic six times and survived three fires. An 1805 embroidery had been stored in a New York City attic for 100 years. He bought the only Charleston-made guns known to exist “out of a trunk of a guy's car going south from Greenville, South Carolina to a gun show in Florida.” The first piece he reclaimed was an 1850 teapot made from coin silver that was a wedding gift from a ship's captain to a couple married in Washington, D.C. “The teapot migrated to Kentucky where we found it and brought it back,” Rivers says. ➝

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CEO PASSIONS

1 Consider a “Collections” or “Valuable Articles” Policy. While homeowners policies do offer some protection for your valuables, specialist insurers can provide cost-effective coverage options designed specifically for art, antiques and other collectibles.

SAFEGUARDING YOUR COLLECTIONIt’s every collector’s nightmare—damage to, or theft of, a prized and possibly even irreplaceable item. While there’s no way to eliminate the threat entirely, you can take steps to ensure that you’ll at least be adequately compensated for any loss or damage that occurs, says JOAN SMITH, senior member advocate at PURE Insurance, an insurer specializing in high-net worth families, who offers these tips.

2 Update Your Appraisals. Your policy may provide for some fluctuation of value, but maintaining recent appraisals is the best way to ensure that you have the right amount of coverage.

3 Choose Your Mover With Care. Since damages occur most often during transit, use specialty firms who know how to pack and ship fine antiques, understand the need to allow pieces to acclimatize before unpacking and the importance of detailed condition reports.

4 Document Your Collection. Sales receipts, catalogue entries, appraisals, etc. should be kept in a secure location. Some companies, including PURE, offer concierge resources that can provide risk management advice tailored to your collection.

5 Shop Around. The specialty-insurance industry is fiercely competitive, so there’s a good chance that you or your broker can get better rates from high-quality carriers just by exploring your options and asking for competitive terms.


✱TREASURE TROVE Rivers, top, with his several of his antiques, including a writing desk, kettle stand and a vintage clock. Left, an embroidery rescued from an attic. Below, an 1805 silver horseracing trophy.

The collection includes an 1848 map of the Carolinas and Georgia that has no mention of Atlanta, which Rivers bought at a flea market. Also included is a desk that his family has owned since 1760 and which was used to store his toys when he was a child. The family has a notable history in Charleston and one of its ancestors was a Lord Mayor of London in 1753.

Rivers founded his company in 1987, following the sale of his family’s business, one of South Carolina’s pioneer television stations, which began broadcasting in 1953. The company’s properties include the Charleston Gateway Center office complex; Harbor Walk, a mixed-use development in Charleston; an industrial park; and the Chattooga Club, a 200-acre private club and residential community at the foothills of the Blue Ridge Mountains and the headwaters of the Chattooga River. Off-hours, Rivers is an active philanthropist and civic leader who keeps searching for additional pieces crafted by early Charleston’s artisans to add to his collection.

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EXECUTIVE LIFE

Taking it to ExtremesHere are three ways to escape—or indulge in—winter’s chill. By Michael Gelfand

VIEWED FROM THE DESPER-ATE CHILL of winter, there are really only two ways to look at a potential vacation destination: more or less. By more, we mean double-down and give in to the allure of the cold—defi-nitely an acquired taste. Whereas, by less, we mean escape to a place where warm sand, turquoise water and delicious ocean breezes wash away all memories of ice, snow and work.

Realizing that no single choice is necessarily best for everyone (and that going to extremes isn’t always the goal), we’ve decided to present three very different vacation desti-nations. One will literally take you to the frozen edge of the Arctic Circle to interact with the kind of nature that thrives amid ice; another brings you to a restored Colorado ghost town-turned-luxury spa, where hot springs and Rocky Mountain heli-skiing will

vie for your attention; and the last nes-tles you in the lap of Caribbean-style luxury, where fun and sun can cure all of your winter doldrums.

Arctic Kingdom’s Icy AdventuresThe word “safari” tends to conjure up gorgeous images of wildlife in a nat-ural habitat that involves the rolling grasslands, marshes and jungles of Africa. This is exactly the concept the pioneering folks at Arctic Kingdom want you to experience—albeit with a tundra twist—when you travel with them for a custom-tailored trip to the Arctic regions. As go-to logistical pro-viders of equipment and outfitting ser-vices for filmmakers and scientists in the Northwest, Arctic Kingdom is an Iqaluit, Canada-based firm that excels at shepherding small groups of hardy adventurers on weekend or extended

trips to camps on land and ice in the Northwest Territories and Greenland. They offer a variety of season-spe-cific excursions with personalized itineraries, such as going to see polar bears and migratory birds, taking hot air balloon rides above Baffin Island, scuba diving under (yes, under) gla-ciers or taking in the Northern Lights, among others. Not your typical walk-in-the-park stuff.

Depending on the trip, guests may stay in timber lodges with full ameni-ties (including on-site chefs), remote log cabins 100 miles from the nearest town, temporary tents or structures for extreme adventures or partner hotels for shorter, weekend trips. Their Taste of Arctic Spring (offered

ARCTIC ADVENTURES Hot air balloon rides above Baffin Island take travelers through giant columns of an iceberg on an Arctic Kingdom safari

from February through May) pairs you with local Inuit guides. You’ll travel on a sled pulled by a team of dogs across the frozen wilderness, ice fish for Arctic char and even, if you’re up for it, help build the igloo you’ll bed down in after viewing the Northern Lights. Similarly, their Taste of Arctic Summer (July through September) plants you on a sea-ice camp near Baffin Island where you’ll witness the soul-shifting migration of thousands of hungry whales that congregate at the icy edge of the bay. BEST ROOMS Depending on the trip you take, you will stay in a local partner hotel, a timber lodge, a remote log cab-in, a tent, or a yurt. The truly intrepid or authentic traveler, however, may prefer to build his or her own lodgings out of the copious amount of ice at hand—you guessed it, an igloo. With help from the pros, you cut blocks of ice and assemble your very own igloo, throw down a few caribou skins, light some candles and slide into the provided sleeping bag. You’ll be about as in-touch with the Arctic as it gets. 888-737-6818, www.arctickingdom.com

Rustic Rewards at Dunton Hot Springs What happens when a German billionaire focuses his attention on a 19th century ghost mining town in the shadows of Telluride that happens to be rich in natural hot springs? In the case of Dunton Hot Springs, the result is an absolutely stunning collection of 12 original miner cabins (appointed with antiques, modern comforts and luxurious amenities, as well); a tented, high-end suite for the more out-doors-inclined traveler; and a nearby sister camp (eight tented suites with river- or mountain-facing views).

All told, Dunton’s two main proper-ties—located in Dolores, Colorado—en-

compass more than 1,700 acres of pri-vate wilderness, providing no shortage of activities (some included, others a la carte). From fly fishing, mountain bik-ing, show shoeing, hiking and horse-back riding in the wilderness to snow mobiling, dog-sledding, ice-climbing and exceptional skiing at nearby Tellu-ride (plus heli-skiing direct from your cabin for the truly intrepid), you won’t find yourself wishing there was some-thing to do here. There’s even a boxing gym for those who relax by sparring. The best reason to visit, however, is the chance to submerge in the natural, sulfur-free hot springs of the blissfully updated bathhouse that the town’s old miners once enjoyed. Afterward, stroll down to the town’s old saloon (now a restaurant) for gourmet Alpine cuisine, followed by a peek at the scrolled sig-nature of Butch Cassidy who, the story goes, paid a visit after robbing a bank in Telluride. BEST ROOMS All of Dunton’s cab-ins are centered in “town,” whose focal point is a saloon, but the best of the bunch is the 740 square-foot Wellhouse (seasonal from $1,400-$1,900 nightly). This small but stylish one-bedroom cabin, which sits just opposite the saloon, features a large,

copper tub in its center, which is fed directly by water from the hot springs (there’s also a cold-plunge pool in a wooden barrel to accommodate any cryotherapy needs). In addi-tion, there’s a comfy king-size bed, a wood-burning stove, a private porch with mountain views and all-inclusive food and beverages (with exception of the reserve list), as well as some included on-property [email protected], 877-228-4674, www.duntonhotsprings.com.

Caribbean Comfort at St. Regis Bahia BeachApproximately a 35-minute drive from San Juan, the St. Regis Bahia Beach sits between El Yunque National Forest and the mouth of the Espíritu Santo River on Puerto Rico’s north-east coast. Known as AAA’s only Five Diamond Award resort in Puerto Rico,


MINING MINER’S PARADISE Dunton Hot Springs’ cozy cabins feature inspiring views and natural hot-spring fed baths just a stroll away.

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this former coconut plantation sits on 483 lush acres of property, in-cluding two miles of pristine, private beach. Among its notable features are an oceanside world-class golf course with fabulous views, a top-rated restaurant and a luxurious spa.

As far as outdoor activities are concerned, it’s hard to beat the Robert Trent Jones, Jr. oceanfront golf course,

which offers 18 holes (par-72) with fairways featuring views of the ocean, scenic lakes and mangroves that will delight even the most jaded of golfers. Other tempting attractions include nature trails, a bird sanctuary, tennis, art classes and a zip line that takes adventurers through the tropical can-opy of nearby El Yunque’s rainforest. The resort’s top restaurant, Fern, is a Jean-Georges Vongerichten creation that features notable dishes from his portfolio of renowned restaurants around the world.

Remède Spa, near the hotel’s main entrance, is all about pamper-ing and peacefulness, with seven secluded massage villas lining the spa’s garden, plus men’s and women’s steam rooms, sauna and hot and cold plunges. An incredible menu of treatments and services, including massage, skin, salon and well-being programs are readily

available, including cus-tomized treatments fea-turing indigenous, organic products. BEST ROOMS The 2,510 square-foot, bi-level Gover-nor’s Suite ($2,600 nightly) offers a second-floor terrace with beautiful ocean views. This low-rise Caribbean plantation-style building

fits in perfectly with the lush sur-roundings. The entire suite, which receives butler service and has a full kitchen and a dining room for six, is decorated with custom-designed dark cherry wood furnishings and original artwork. The master bedroom features a king-size bed layered with 300-thread-count Pratesi linens and a sleek marble bathroom with a huge rainforest shower connected to the private, outdoor terrace. 787-809-8000, www.stregisbahiabeach.com

The St. Regis oceanfront course boasts views that will delight even the most jaded of golfers.

PICK YOUR PEACE St. Regis Bahia Beach is all about pampering

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EXECUTIVE LIFE

FLIP SIDE

THE KOREAN “NUT RAGE” episode is truly one of the strangest events in the his-tory of commerce. According to varied press reports, on December 5, 2014, Cho Hyun-ah, the eldest daughter of Korean Air’s chair-man Cho Yang-ho, both verbally and physi-cally abused the first-class flight attendants on a Korean Air flight from South Korea to New York after they had the gall to serve her macadamia nuts in an unopened bag rather than on a plate. Imagine.

Some reports say that Cho Hyun-ah, executive vice-president in charge of inflight service on the airline, actually forced the attendants to kneel in front of her and apol-ogize. She also poked the cabin crew chief repeatedly with a binder and demanded that the plane return to the gate so that he could be thrown off. This sort of impromptu flight rescheduling is against the law just about anywhere. Since her outburst, Cho has since been indicted on charges of assault and forcing an airline to change its flight plans, as well as obstruction of justice for ordering company officials to intervene in the brou-haha. If convicted, she could get 15 years in prison. She also lost her job.

The incident caused a furor in South Ko-rea, where her father apologized publicly for not raising his daughter properly. It is also a serious blot on the image of family-con-trolled business empires in that country, which have long been criticized for nepo-tism on an epic scale.

Is it possible to imagine something like this happening in the U.S.? The kneeling,

the apologies, the humiliation and the getting shown to the

door? Yes, but probably

not because of the improper presentation of macadamia nuts. Here are a few scenarios where something like nut rage could happen on these shores:A highly placed Sony executive calls in the entire IT department and demands to know why computer security was so weak that North Korean hackers managed to delete all the company’s files, access private messages and just generally wreak havoc. “Get down on your knees, you IT dogs,” he screams at the terrified employees. “And whoever is responsible for that wisecrack about Obama getting leaked to the press can start packing his or her things right now.”The head of a humongous hedge fund calls in an array of portfolio managers, and starts working them over with telephone books. “Which one of you ding-dongs joked about front-running and did it in a company email?” he demands. “And if you dipsticks are going to trade on inside information, could you please not use my phone?”The owner of a legendary baseball fran-chise has to apologize for his son’s drafting another dud lefty from Japan. “I didn’t raise that kid properly,” he confesses mournfully. “If I had, he would have drafted a righty from the Dominican Republic.”The owner of a virtually extinct metro-politan newspaper calls in the entire staff and hisses, “Why didn’t somebody tell me about the Internet? About blogs, websites and the information highway? I’d like to smack you guys.”The head of a large oil conglomerate calls in his staff and starts slapping them with binders. Really, really thick binders. “$100- a-barrel gas till the cows come home, huh?” he shrieks. “What do I pay you guys for?”A mutual fund manager who shorted Apple at $7 makes his staff kneel before him and beg for forgiveness. “You guys are enough to drive a man to drink,” he mum-bles. “Pass the macadamia nuts.”

Is it possible to imagine something like this happening in the U.S.? The kneeling, the apologies, the humiliation and the getting shown the door?

Nut JobWhat would a Korean executive’s über tantrum look like stateside? By Joe Queenan

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IN ONE OF THE EARLY episodes of the Netflix series “House of Cards,” the an-tihero and majority whip of the House of Representatives, Frank Underwood (played with gusto by Kevin Spacey) battles the teacher’s unions. Conflict over an education reform bill triggers a national teacher’s strike, which leads to a top teacher union lobbyist punch-ing the majority whip in his office. In earlier scenes, union lobbyists possess extraordinary access to key policymak-ers and are even involved in crafting the bill’s language. Indeed, the public union appears to be the only constitu-ency the elected officials truly fear.

In his recently published work, Government Against Itself, Daniel DiSalvo, assistant professor of political science at City College of New York, charts the rise of public sector unions (PSUs) since the 1960s and why this powerful interest group poses a threat to U.S. democracy. Since 2009, more public sector employees (7.9 million) than private sector employees (7.4 mil-lion) belong to unions—even though there are five times as many workers in the private sector as in the public sector. DiSalvo’s central claim is that unionization and collective bargaining in state and local government impose significant costs on society while pro-viding few broadly shared benefits.

Unions are no longer the working class heroes that liberals imagine. They are not fighting to increase minimum wage for a workforce in poverty or to improve harsh conditions. They are

FINAL WORD

Who’s Afraid of Public SectorUnions?

lobbying on behalf of members who work in safe and well-paying jobs. In fact, members of PSUs are now among the most affluent retirees in the country due to the generosity of public pensions. Eight states pay, on average, a lifetime pension benefit of $1 million to retired workers, and 23 states pay more than $750,000. This does not include healthcare benefits.

PSUs enjoy intrinsic advantages over their private sector counterparts. Among other things, they vote for the politicians with whom their unions ne-gotiate. No private union can vote their bosses out of office. They are among the largest donors to candidates, most-ly Democrats, but sometimes Republi-cans, at the state and local level.

The unions that spearheaded the unsuccessful recall of Wisconsin Governor Scott Walker signaled the

opening salvo in a growing conflict between elected officials and unions. But it’s a conflict that should worry centrist democrats more than re-publicans. Organized government employees as an interest group drive government to grow bigger and cost more diminishing its ability to provide services at a given level of tax revenue. As the chart of public-sector unioniza-tion rates of states above shows, those states with the highest percentage are also those with the lowest ranking of competitiveness by CEOs in our annual Best and Worst States survey as indeed by others such as the Tax Foundation. Two pillars of Democrat politics, LaGuardia and Roosevelt, both feared that democracy would be compromised by the peculiar nature of public sector unionism. The debate is just getting underway.


Public Sector Unionization Rates by State, 2012

Total Union Membership: Public and Private, 1973-2013Organized labor in the U.S. has been transformed. It is no longer concentrated in the private sector, with blue-collar workers filling the ranks.

Source: CPS, Unionstats.com, Barry T. Hirsch and David A. McPherson

Percent Membership of Private Public Total

1973

1975

1977

1979

1981

198

4

1986

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

2010

2012

40%

30%

20%

10%

0%

States with the highest rate of public-sector unionization tend to rank lowest in Chief Executive’s Best and Worst States for Business ranking.

LOWEST 10 HIGHEST 10

NYRI

MA

NJ

CT

CA

MN

PA

ALMINM

TN

WY

AK

SC

ID

GA

VA

MSNC

20%

20%

40%

40%

60%

60%

80%

80%

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