The case on Italy and its main macroeconomic problem was our first case today. Low productivity, stagnant GDP growth , high public debt - all resulted in the plummeting of their global competitiveness.
- Italian miracle – the way Italy emerged from WW-II
- Industrial boom bought prosperity to North and central regions
- Shifted focus from agriculture to manufacturing – textiles, machinery, food processing
- Used proximity to sea for exporting goods worldwide
- Post war years – one of the fastest growing economies in the world (except for a recession in 1964-65)
- Government presence in economy increased following a nationalization initiative – in South state owned 70% of industry; Oil, energy and telecom were state owned
- Negative point was – artificial jobs and lack of lack of western management styles
- By 1986, Italy’s GDP/capita was 9% higher than UK
- Collapse of Soviet Union removed one of Italy’s most important trade partners
- Series of corruption charges in 1992, resulted in uncovering of serious system of bribing
- Money was siphoned off from public sector enterprises to political officials
- 1992, Italy signed the Maastricht treaty – set criteria for membership to EMU
- Govt under Giuliano Amato, initiated major economic and institutional reforms
- 1993-99 privatization raised 100 billion Euros
- Budget cuts, tax increases and privatization - budget deficit fell to 2.7% in 1997 ( below the 3% required to join EMU)
- Jan 1, 1999 onwards monetary policy under ECB and Euro was accepted as common currency
- Positives : World’s leading tourist destination, more heritage sites than any other country, good quality of life
- Negatives : Stagnation, 24th out of 25 EU countries, impact of past practices of over spending and devaluations was showing up
- Over spending:
- Thru 1980’s deficits ran over 10% of GDP, with public debt-GDP ratio of over 120%
- High debt - huge interest payments of 70 billion euros, no leeway to use spending to boost economy
- Devaluation:
- Thru 1980’s and 90’s repeated devaluation made exports cheaper
- Resulted in high inflation and ire of Germany and France (their largest export partners)
- These two were like drugs – weaning away was not easy; no focus on competitiveness
- In Labor
- Rigid labor market , impossible to fire or transfer employees, powerful unions
- Attitude towards employment was study, does not mater whether you pass of fail, 6 years in university, get a job, no firing, no transfer, retire ! It is their right !
- Consultant for reforms was killed in 2003 by far-left Red Brigade; resulted in some reforms leading to unemployment falling to 7% from 10%
- In business
- Fared poorly in ease of doing business, over regulated markets
- In 2006 and 2007 passed a package of reforms resulted in more stores, reduction in prices and savings of $713 per year for each family
- Criticized for low scale of liberalization
- In Education
- No competition, plagued by “patronage, cronyism and secure tenue”
- Competition with other universities was radical
- Change in process by having admission exams – but all universities have exam on same day !
- In geographies
- Strong local loyalties than national loyalties
- South was worse than North – South’s GDP/capita was 67% of that of North; higher organized crime in South
- Strong family ties made people stay close to family in local region no movement to other locations
- Poor infrastructure, not updated since 1975
- In public services
- Wide spread civil service backwardness
- High inefficiencies in health care spending same hospital buys at widely varying prices
- Poor coordination in many law enforcement agencies three numbers to call in case of accident
- In Business
- Predominantly SME than large conglomerates
- Average firms employed only 9 compared to EU average of 16, in 2001
- Could be because of strict labor laws if your employ more than 15
- Family owned enterprises big strength, knowledge and skills passed within families from one generation to another.
- Focus on specialization resulted in directing limited resources to what they did best
- SME resulted in little FDI
- Banking was only sector which consolidated
- Since family owned businesses competed in same region for years, they hated each other; hence low chances of consolidation
- In Politics
- Fractiousness of political system resulted in coalition politics; and hence not able to initiate reforms
- Politicians tenure was so precarious, they focus on short term political concerns at the expense of long term good
- Large part of government energy is spent to remain in office
- Largely bipolar politics; average Italian does not know what is the truth
The issue is this: joining the EU helped or hurt Italy ? I think it helped them a lot. Though it made exports expensive and a spike in domestic prices, the inflation otherwise would have been much higher. Govts hands tied – as it had no option of devaluing the currency, cannot change interest rates or raise taxes (as rich will move away elsewhere); so only option left is to change labor rules, reduce spending, improve health and schools; which if they do, they will not get elected; hence the great ITALIAN IMPASSE !
By Early 2007, things were showing signs of improvement; GDP had picked up over 2006 @ ~2%, reflecting recovering exports and domestic consumption. Some felt that the stagnation of last 5 years was actually a structural shift that the industry was making - showing results slowly now. Exports share was falling, but export prices was increasing - for example shoes sold halved but revenues increased in 10 years. Shift to higher value added segments, moved low cost production to low-cost countries. The challenge continues - how to preserve the cherished aspects of the traditional Italian life, yet manage growth through changes in taxes and labor reform? Not easy issues to resolve !
The strategy session was one of the three cases, where we discuss competitive dynamics. Analysis of successful firms over long periods of time, shows that the half life of a competitive advantage is just about three years - after which the competitive advantages fades. What this means is this: companies have to renew itself over and over again. This is true only of competitive advantage - the impact of others like being in a particular industry, or part of a corporate remains the same over long periods of time. Strategy guys would love this !
We discussed the case of the high intensity sweetener market, where the established player Nutrasweet was threatened by a new comer from Europe, Holland Sweetener Company (HSC). As the patents were expiring, HSC felt that they can compete and take some market share from Nutrasweet -which could respond in one of two ways - launch a price war or treat it as normal competition. Unfortunately, HSC was a classic example of a poor entrant - no distinctive choices (me too product), did not create any additional WTP (Willingness To Pay), and doubtful lower cost. Which meant no competitive advantage, and hence no new value created.
Techniques to be used while entering a market:
- Competitor analysis
- what are their Goals
- what are their Capabilities
- what is their strategy
- what are their Assumptions
- Qualitative considerations
- Quantitative approach
And in doing so, it is important to maintain dynamic consistency - doing today what's required to succeed tomorrow. It is almost like a chess game, where we should be able to look far out into the future, understand the effect your entry into the market will create and have a plan to exploit it.
The last case is a sad and depressing case of Shell and its problems in Nigeria. Shell had set up oil wells in one of Nigeria's delta regions called Ogoni region and had a deal with the governement to extract oil. The problem was Nigeria was ruled by a dictator who had no quams of human rights. The problems started when Ken Saro-Wiwa, an educated person from the Ogoni region started a peaceful movement to ask Shell/Government to pay for the destruction of the region. He started the Movement for the Survival of the Ogoni People (MOSOP), which disrupted the oil production at times. To cut the long story short, when Shell requested the help of the Government to solve the law and order issues, the Government jailed Ken Sara-Wiwa, conducted a shabby trial and sentenced him to death ! For those of you who want more details see the links given here:
http://en.wikipedia.org/wiki/Ken_Saro-Wiwa
http://www.youtube.com/watch?v=htF5XElMyGI
http://www.youtube.com/watch?v=16kP9rEQz1Q
What is Shell's responsibility here is the question ? In most cases, organizations will have a stated view that they will not get involved in political issues - but the line between what is political and what is support of the local community gets blurred very easily and more so in countries ruled by dictators who do not take care of its own people. Where does Shell draw the line ? It is a moving target, it is question of judgment and companies should have a long term view.
The manner in which Shell reacted to the death sentence on Ken Sara-Wiwa is also questionable. Shell should have had enormous infuence on the Nigerian government, which solely depended on Oil to survive. Instead of using its influence in private, it issued a press statement expressing sympathy to the families of those arrested and reiterated its stand of not getting involved in the legal proceedings in a sovereign state - looks like the lawyers were in control there, because they were legally correct. Once, Shell's position was known, it only strengthened the rulers in Nigeria, who went ahead and executed Ken Sara-Wiwa.
In spite of this execution, Shell decides to go ahead with its LNG facility in Nigeria in 1996. Lawsuits were filed in the US against Shell and there was shareholder activism related to environmental issues. In 2006, there were many attacks against Shell in Nigeria resulting in loss of production. The Nigerian court orders Shell to pay US $1.5b for environmental damages in the delta, and of course Shell appeals. Later in 2006, Nigerian government revokes the license to Shell and as of May 2010, Shell facilities in Ogoni region remain closed.
Of course this is a very controversial topic and after the class there were many small discussions going including during dinner.
Played Tennis today for about an hour or so. It was quite cold but very refreshing. More later ...
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| From Left: Partha, Ramesh, Uday, Sanjay |
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