10 Famous ERP Disasters, Dustups and Disappointments

It's no wonder ERP has such a bad reputation: The recent history surrounding the complex and expensive enterprise software market is packed with tales of vendor mud-slinging, outrageous hype and epic failures.

By Thomas Wailgum

March 24, 2009 — CIO — The world of enterprise applications (ERP, CRM, BI and supply chain apps) may seem boring to those caught up in the hysteria over Twitter and iPhone applications, but there's plenty of drama to be found (even more than on an episode of "The Bachelor"): Troubled multimillion-dollar software deals that produce spectacular failures and huge spending nightmares; vendor marketing bravado that breeds cut-throat competition and contempt; and embarrassing and costly lawsuits over botched implementations and intellectual property breaches.

It's no wonder ERP has such a bad reputation among executives. All of this drama is, in fact, creating a nasty and very real ERP backlash. Consider CIO.com's brief and semi-chronological history of 10 ERP scandals as a warning if you're contemplating an upgrade or implementation.

1. Definitely Not a Sweet Experience for Hershey
Could a failed technology implementation (in this case SAP's R/3 ERP software) take down a Fortune 500 company (in this case Hershey Foods)? Well, it certainly didn't help Hershey's operations during the Halloween season in 1999 or make Wall Street investors thrilled.

In the end, Hershey's ghastly problems with its SAP ERP, Siebel CRM and Manugistics supply chain applicationsprevented it from delivering $100 million worth of Kisses for Halloween that year and caused the stock to dip 8 percent.

So I guess a failed technology project can't actually take down a Fortune 500 company for good, but it can certainly knock it around a bit.

2. Just Do It: Fix Our Supply Chain System!
What did a $400 million upgrade to Nike's supply chain and ERP systems get the world-renowned shoe- and athletic gear-maker? Well, for starters, $100 million in lost sales, a 20 percent stock dip and a collection of class-action lawsuits.

This was all back in 2000, and the horrendous results were due to a bold ERP, supply chain and CRM project that aimed to upgrade the systems into one superstar system. Nike's tale is both of woe and warning.

3. HP's "Perfect Storm" of ERP Problems
The epic tale of HP's centralization of its disparate North American ERP systems onto one SAP system proves thatone can never be too pessimistic when it comes to ERP project management. You see, in 2004, HP's project managers knew all of the things that could go wrong with their ERP rollout. But they just didn't plan for so many of them to happen at once.

The project eventually cost HP $160 million in order backlogs and lost revenue—more than five times the project's estimated cost. Said Gilles Bouchard, then-CIO of HP's global operations: "We had a series of small problems, none of which individually would have been too much to handle. But together they created the perfect storm."

4. A New Type of Freshman Hazing
Pity the college freshman at the University of Massachusetts in fall 2004: The last thing they needed was some computer program to haunt their lives and make their new collegiate experience even more uncertain.

But more than 27,000 students at the University of Massachusetts as well as Stanford and Indiana University wereforced to do battle with buggy portals and ERP applications that left them at best unable to find their classes and at worst unable to collect their financial aid checks. Said one UMass senior at the time: "The freshmen were going crazy because they didn't know where to go." After a couple of tense days and weeks, however, everyone eventually got their checks and class schedules.

5. Waste Management Trashes Its "Fake" ERP Software
Garbage-disposal giant Waste Management is still embroiled in an acrimonious $100 million legal battle with SAP over an 18-month installation of its ERP software. The initial deal began in 2005, but the legal saga commenced in March 2008, when Waste Management filed suit and claimed SAP executives participated in a fraudulent sales scheme that resulted in the massive failure.

Several months later, SAP fired back, claiming that Waste Management allegedly violated its contractual agreement with SAP in several ways, including by "failing to timely and accurately define its business requirements," and not providing "sufficient, knowledgeable, decision-empowered users and managers" to work on the project.

In the fall 2008, accusations were still flying about documentation, depositions and delays in bringing the case before a judge. And that proposed 18-month implementation now sounds like a dream scenario.

6. The Curious Case of Oracle Fusion Applications
Back in January 2006, Oracle boasted that it was halfway through the Fusion Applications development process. You might remember the hype about Fusion Apps: a killer enterprise application suite that combines the best features and functionalities taken from Oracle's expansive E-Business Suite, J.D. Edwards, PeopleSoft and Siebel product lines.

Oracle's master plan was to "build the next-generation of applications that are completely standard." More than three years later, we're all still waiting for the first generation of Oracle's suite of Fusion Apps. Guess what? We'll have to wait some more. How does 2010 sound?

7. Oracle, SAP and a Little Company Named TomorrowNow
If enterprise software maintenance wasn't so boring, the details of this sordid story would make Hollywood producers fight over the rights to shoot this movie. Here's a brief summary: In 2005, SAP bought TomorrowNow (TN), a small company thatprovides ERP software maintenance and services for Oracle's ERP products—at 50 percent off Oracle's prices. Of course, TN's services could work equally as well for SAP's products (but we were supposed to ignore that). We have come to find out that not everyone at SAP thought the TomorrowNow acquisition was a good idea.

Flash forward to 2007: Oracle alleges that SAP (via TN) "has compiled an illegal library of Oracle's copyrighted software code and other materials." A nasty lawsuit unfolded (and is still going strong) and SAP abruptly shut down TN in 2008.

Meanwhile, a former TN cofounder (Seth Ravin) formed his own TN-like company (Rimini Street) and has been scooping up all the former TN business. And, oh by the way, in addition to the Oracle ERP products his company already services, he's going to start offering half-off maintenance services for some of SAP's ERP products this year. (BTW: I've got the script ready if anyone in Hollywood is interested.)

8. Shareholder Pressure Halts SAP ERP Rollout 
All was not well with bedding-maker Select Comfort's multi-module ERP implementation of SAP's ERP, CRM, supply chain and other applications. So in 2008, with serious shareholder pressure to end the $20-million-plus project that was "indicative of extremely poor judgment by management" (charged one shareholder's SEC filing), Select Comfort did just that: It put the project on hold.

In this economic environment, is this just an incidental sign of the times or a sign of more things to come?

9. ERP + SaaS = Software Success or Bad Idea?
When CIO magazine surveyed 400 IT leaders about their ERP systems in early 2008, CIOs said they remained committed to on-premise, traditional ERP systems—despite aggravating integration and high-cost headaches.

The results weren't that surprising. CIOs have been reluctant to take chances storing the sensitive data (accounting, HR, supply chain) contained in their ERP systems in another company's data center. In the survey, just 9 percent of respondents reported using an alternative ERP model, which included SaaS applications.

That was then. This is now: SaaS ERP providers such as NetSuite have experienced greater acceptance of their house-your-ERP-data-offsite models, which in turn has allowed them to go from upstart to industry player.

10. A Legendary "Moon" on the High Seas
The details of the infamous "mooning" between SAP's Hasso Plattner and Oracle's Larry Ellison have become stuff ofurban legend. So what actually did happen? Well, during the 1996 Kenwood Cup sailing race, Ellison's sailing crew reportedly ignored Plattner's wounded sailing yacht (which had a broken mast and bloodied crew member).

Plattner did admit to mooning Ellison's crew ("I lowered my pants," he told Sailing World) for not helping with his injured crew member and battered yacht. But, alas, Ellison was not aboard that yacht. SAP and Oracle haven't stopped battling it out—on land or on water—since.

Other stories by Thomas Wailgum © 2008 CXO Media Inc.

Five Benefits of an MES

Five Benefits of an MES

Properly used, an MES can help reduce scrap, waste and inventory.

By David Blanchard

April 1, 2009

"Today's manufacturers are under tremendous pressure to develop high-quality products quickly and cost-effectively," observes Mark Symonds, CEO of Plex Systems Inc., a provider of software solutions for manufacturing companies. "OEMs are paring their supplier lists and the flagging economy makes it a tough time to be in business at all, much less make money at it. So how can manufacturers operate profitably in an environment like this?"

One way, Symonds suggests, would be to adopt a manufacturing execution system (MES), which makes shop floor information available to the rest of a company, allowing them to respond more rapidly to changing requirements and conditions. Symonds offers the following five potential benefits of an MES:

1. Reduce scrap and waste. Since setups tends to be quick and consistent, problems can be identified immediately and the process can be stopped, limiting the number of bad parts and wasted material, Symonds notes.
2. Capture costs more precisely. With an MES, labor, scrap, downtime, tooling and other costs can be captured directly from the shop floor as they occur, Symonds says. This makes the information more reliable and actionable for pricing new work and renegotiating unprofitable business.
3. Increase uptime. "It's really hard to make money if the machines aren't running," he says. "A modern MES will include integrated scheduling and maintenance. A job or part won't be scheduled unless the source inventory is available, the machine is properly maintained and the right tooling is ready.
4. Reduce inventory. Get rid of just-in-case inventory, Symonds suggests, because inventory records are constantly updated with new production, scrap, non-conforming material, etc. With an MES, he says, purchasing, shipping and scheduling people will know what material is really on hand.
5. Reduce "fire drill" costs. One manufacturer was able to idle three forklifts due to improved scheduling and visibility, he notes. "They no longer had to scramble to find material to keep a line running or to meet an emergency shipment. Their customer service and employee satisfaction also jumped dramatically."

Choosing the best wireless monitoring and control technology

Max explains how SNAP-based networks stack up against ZigBee.

By	Max Maxfield SYNAPSE WIRELESS

Like any networking technology, wireless sensor networks depend on an implementation euphemistically known as "the stack." Stacks aren't all created equal, and designers will opt for smaller and more portable stacks in some situations. Max examines one such self-forming network stack – Synapse's Wireless Mesh Network Protocol (SNAP) – and discusses how it compares to ZigBee.

When it comes to designing embedded computing applications that feature wireless capability, the choice of which underlying wireless architecture and wireless software stack are used affects two groups: embedded module creators and embedded module end users.

On the one hand, module creators are interested in the technical details and thus ask questions about specific technology features: What is the stack's memory footprint? How much memory will be left over for user applications? Does the stack's provider tie it to a particular microcontroller? How much time and what kind of resources will be required to integrate this wireless technology into the modules and get the underlying network architecture up and running?

On the other hand, end users focus more on the bottom line, asking questions related to practical concerns: How much will this cost? How easy will it be to create, debug, and deploy monitoring and control applications using this technology?

Wireless standards

As for determining which wireless standard embedded computing modules should use, a quick Internet search returns several potential technologies that may be of interest, with the main contenders being SNAP, ISA100, WirelessHART, and ZigBee.

The latter three technologies are designed by committees that face the usual challenges involved in standardization working groups. Multiple contributions and compromises have left these standards unable to take full advantage of the limited bandwidth provided by the IEEE 802.15.4 physical layer. Furthermore, both ISA100 and WirelessHART are just now coming to market.

For these reasons, this article will focus on comparing SNAP and ZigBee in more detail.

Porting the stack

The ZigBee specification is captured in thousands of pages of PDF documents. Taking this specification and creating a unique wireless protocol stack implementation would require many engineer-years of effort.

Alternatively, designers can turn to other engineers who have already performed this task. However, these engineers likely implemented the stack on the microcontroller of their choice, which is not necessarily the microcontroller that the designers wish to use. Re-porting such a stack to a different microcontroller is a nontrivial task because some services in the stack need access to the underlying hardware (timers, I/O pins, and so on), and this access might be hard-coded into the stack.

Figure 1 compares the ZigBee and SNAP stacks. Observe that the SNAP stack includes a Python virtual machine. The combination of SNAP and Python is referred to as SNAPpy. Wireless applications are compiled into processor-independent byte code that runs on the SNAPpy virtual machine. This means that the same application can be run on any processor without the need for recompilation.

Figure 1" pbsrc="http://images5.opensystemsmedia.com/?q=90&w=870&f=1&src=http%3A%2F%2Farticles.opensystemsmedia.com%2Ffmi%2Fxml%2Fcnt%2Fdata.cnt%3F-db%3DOSP_Articles%26-lay%3Darticles%26-recid%3D3678%26-field%3Dfigures%281%29" class="PopBoxImageSmall" title="Click to zoom" onclick="Pop(this,50,'PopBoxImageLarge');" src="http://images5.opensystemsmedia.com/?q=90&w=350&f=1&src=http%3A%2F%2Farticles.opensystemsmedia.com%2Ffmi%2Fxml%2Fcnt%2Fdata.cnt%3F-db%3DOSP_Articles%26-lay%3Darticles%26-recid%3D3678%26-field%3Dfigures%281%29" style="border-top-style: none; border-right-style: none; border-bottom-style: none; border-left-style: none; border-top-width: 0px; border-right-width: 0px; border-bottom-width: 0px; border-left-width: 0px; border-top-color: white; border-right-color: white; border-bottom-color: white; border-left-color: white; cursor: url(http://www.opensystemsmedia.com/external/PopBox/images/magplus.cur), pointer; width: 350px; ">

Figure 1 (click image to zoom by 2.3x)

The most recent incarnation of the ZigBee stack, known as ZigBee PRO, consumes more than 64 KB (the actual value depends on the implementation), thereby forcing module developers to use a more expensive 128 KB microcontroller, which is a significant consideration in cost-conscious deployment scenarios. By comparison, even though it provides full mesh capabilities, SNAP has a very small memory footprint of only 40 KB, thereby leaving more than enough space for user applications.

Written in optimized, portable, industry-standard ANSI C code, the SNAP software stack was designed from the ground up for portability. In particular, the Hardware Abstraction Layer (HAL) provides a layer of abstraction between the main body of the software stack and the physical world. This means that the process of porting the stack to a new processor requires modifications only to the "thin slice" of the HAL. The SNAP stack is already available on multiple processors.

Another fine mesh ...

In the case of mesh routing, network nodes in direct range of each other will communicate directly; when nodes are not in direct radio range, intermediate nodes will automatically forward messages to their intended destinations. If a node catastrophically fails for any reason, other nodes should automatically route signals around the failed node.

ZigBee end devices (the nodes with sensors and actuators) cannot forward traffic through the network. Instead, each ZigBee end device has to communicate either with the main coordinator or a local router (Figure 2). If a router fails, end devices associated with the failed node must be able to access another router in close proximity, which means routers must be located artificially close together. In contrast, all the wireless nodes in a SNAP-based network are peer-to-peer, and there is no need for special coordinator or router nodes (Figure 3).

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Figure 2 (click image to zoom by 1.3x)

Figure 3

Furthermore, it is often necessary for network nodes to be powered by batteries, in which case power consumption can be a significant problem. The solution is for the nodes to alternate between being awake for a short amount of time and then entering a sleep mode in which they consume dramatically less power. Unfortunately, ZigBee coordinator and router modules must remain awake all the time, which means they must be powered externally (Figure 4). On the contrary, a SNAP-based network can be configured to implement a sleepy mesh that can extend each node's battery life up to the battery's shelf life (Figure 5).

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Figure 4 (click image to zoom by 1.3x)

Figure 5

Creating and deploying applications

In the case of a ZigBee network, end users must create their applications in C/C++ or assembly language. This involves low-level communications with the stack via an API. Whenever a change is made to an application, it must be recompiled and then physically loaded into the target node(s). The end result can be seemingly endless iterations of laborious edit-compile-embed-run-debug cycles using a variety of special hardware and software tools. All of this requires a substantial amount of wireless and embedded programming expertise that most users simply do not have. The only alternative is to use an additional microprocessor (and memory) for sending AT commands to the ZigBee module, but this is an expensive option.

Conversely, SNAP-based networks are complemented by a software tool called Portal, which can be used to develop applications and deploy them over the air to the wireless nodes. Small, fast, and extremely efficient, Portal is seen by the network as just another node. The PC-running Portal may be physically connected to any SNAP node, which subsequently acts as a bridge to the network.

User applications are created in the form of easy-to-understand Python scripts, which comprise one or more SNAPpy functions. Any SNAPpy function in any node on the network can be called from Portal or any other node on the network. Similarly, any node on the network can invoke a SNAPpy script running on Portal.

Clicking on a node in Portal displays the application script running on that node. The user can then call up the source for that script, make a modification, and upload the new code into the target node over the air – all in a matter of seconds. Furthermore, debugging can be performed by means of print statements in the code, which provides almost instantaneous edit-compile-download-run-debug cycles.

The end result is that users can create applications and administer a SNAP-based network without actually having to know anything about wireless networks. This approach makes wireless technology accessible to a much broader range of embedded system module creators and users.

Clive (Max) Maxfield is the president of TechBites (www.TechBites.com), a marketing consultancy with clients ranging from small businesses to high-tech corporations, including Synapse Wireless. Max received his B.Sc. in Control Engineering in 1980 from Sheffield Polytechnic (now Sheffield Hallam University), Sheffield, England. Since that time, Max has designed everything from silicon chips to PCBs, and his articles have appeared in technical magazines around the world. Max is the author and coauthor of several books, including Bebop to the Boolean Boogie: An Unconventional Guide to Electronics, The Design Warrior's Guide to FPGAs: Devices, Tools, and Flows, and How Computers Do Math.

Synapse Wireless
256-852-7888
support@synapse-wireless.com
www.synapse-wireless.com

Next-generation wireless technology advances asset management

With billions of business assets left unmanaged, demand for more cost-effective connectivity systems is growing.

By	Scott D. Constien

Reducing operating expenses and improving productivity are goals on nearly everyone's mind right now. A new class of GPS-enabled, wireless-networked asset management modules with integrated tracking application software is changing the way assets can be located in organizations.

Asset tracking has long been considered a perfect fit for integrated global positioning and wide area data communications technologies. Fleet management and automotive tracking systems, the pioneer users of wide area networking technologies, leveraged circuit-switched data and text messaging along with evolving wireless Internet Protocol (IP) infrastructures as communications platforms for their demanding applications.

Today, the latest-generation architectures including GSM and GPRS are driving mobile communications and becoming relatively ubiquitous across the globe. Coupled with GPS chipsets that are smaller and less expensive than seemed possible five years ago, these elements make up some of today's tracking applications for fleets of all sizes. These developments have given rise to an emerging asset management market where billions of potentially connected assets exist.

Where the assets are

While numerous systems have come to market, providing developers and designers the ability to choose from a wide array of connectivity alternatives, several issues are inhibiting their broad-based adoption. For example, targeted assets tend to be nomadic, which means these devices are mobile but not necessarily in constant motion, nor do they always need regular communication. Instead, they tend to move only periodically, and as a result, location awareness is less real-time driven and more event or moment based.

As long as an asset is where it needs to be – when it is supposed to be there communications can be kept to a minimum, saving valuable power resources. These assets are usually remote and stored for extended periods of time, demanding little to no user interaction. Services such as asset maintenance and repair, security monitoring, and location-based asset tracking for accounting and operational provisioning are driving the demand for low-power assets and their connectivity.

With billions of business assets left unmanaged, demand for more cost-effective connectivity systems is growing. Until recently, three factors have limited the market feasibility of these systems: device cost, IT connectivity, and maintenance burdens. It is difficult for companies to justify broad-scale wireless asset management deployment when the tracking devices cost half as much or more as the assets to which they are attached. Furthermore, proprietary systems make it challenging to communicate with tracking devices from existing back-end applications when maintenance requires physical contact with every device.

Tracking building blocks

In terms of more practical concerns, asset management devices or tags must be capable of long battery life (on the order of months or years) and be rugged enough to survive the extreme environments in which they are often deployed. They must be easy to integrate into a corporate IT infrastructure that lends itself to an IP-based data transfer. Due to the pay-per-bit nature of cellular networks, transfer protocols must be optimized around packet size, ensuring effective cost-based performance.

Longstanding barriers such as size, performance, and cost (upfront and recurring) have impeded adoption of these systems. Until now, asset management devices have had to compromise on at least one of those dimensions, if not all three.

Tags such as the example shown in Figure 1 contain three fundamental building blocks: an applications processor, GPS module, and GSM/GPRS processor.

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Figure 1 (click image to zoom by 1.3x)

Because the GPS and GSM modules are the major power limiters, both must be used as little as possible to conserve valuable power resources. Low-power microcontrollers are the preferred applications processors for energy consumption reasons; however, they have limited processing and memory capability, which can severely reduce the potential for optimizing data transfer. Location-based services such as geo-fencing and “bread crumb trails” also can be constrained by lack of MIPS and memory capacity. More powerful applications processors are available but can diminish power efficiency while at the same time increasing total system cost.

Compounding these problems are the costs of changing an application to adapt to a dynamic wireless network environment. Devices intended for years of use in remote, out-of-reach locations must be flexible enough to allow changes to the operating parameters as well as the application itself.

Crossing the barriers

Early entrants in the marketplace have not been able to cross the cost and performance barriers due to the lack of access to market-leading GSM and GPS chipsets, along with their embedded software stacks. These key factors cripple competitive architectures from the point of design and integration through deployment and operation. An example might include the ability to access a tag in a remote facility, updating a particular parameter in software designed for a new business process. Remotely accessing the tag is a critical element for application efficiency and business operation. The ability to make changes to a wireless data connection in today's fluid communications network environment can be a daunting task.

Some GPS modules have targeted the navigation markets but do not directly address the challenges of low-power location with periodic tracking. Further aggravating the problem is the lack of back-end systems. Many great ideas have failed to reach the market because they could not overcome the challenges of scaling, remote provisioning, and device/application management.

Low-power innovation

The next generation of wireless asset management systems based on low-power hardware and service gateway hardware are overcoming these barriers and providing cost-effective alternatives that address energy, regulatory, and time-to-market issues. An example of this type of technology is Enfora's Enabler Low-Power Platform (LPP).

At first glance, this tag has appears to have all the same features as other typical designs: GPS, GSM/GPRS, and a microcontroller. (See block diagram in Figure 2.) However, it is built with energy efficiency in mind utilizing three devices from Texas Instruments, including a LoCosto GSM/GPRS processor, MSP430 microcontroller, and NaviLink 5.0 GPS receiver. When tightly coupled with value-added software, this tag delivers an advanced, fully integrated, low-power communications platform.

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Figure 2 (click image to zoom)

To help evolve next-generation wireless asset management systems, the platform distributes and optimizes responsibilities throughout the device. The MSP430 handles most of the power management, application, and I/O requirements. The GPS chip controls location-based services and is responsible for processing geo-fence calculations needed for advanced asset tracking services. If a fence violation is detected, the LoCosto processor takes over tracking responsibility while establishing, monitoring, and maintaining the IP connection. It also stores all connection parameters and hosts the TCP and UDP stack, enhancing overall operation. Transfer efficiency is achieved within the same processor by expanding on the transport. For designs that utilize rechargeable batteries, the GSM block also performs that task, reducing size, cost, and complexity.

Being energy efficient

In addition to the low-power hardware and breadth of device responsibility, it is important to ensure that next-generation systems provide flexibility and adaptability to create maximum efficiency. Additionally, these systems should offer current meters to give an indication of a device's battery life.

For example, the Enabler LPP keeps track of how much time was spent in the different operating states, providing an accurate report of how much current has been used and where the energy is being spent. Based on that information, the application can choose to alter the operating parameters. For instance, if the device is getting frequent indications of movement but the GPS readings do not show and confirm associated movement, sensitivity settings can be altered remotely, and a new battery life projection will be calculated.

Graphical user interfaces can help designers create use case studies that will predict how long a device will last in the field. By doing so, designers can quickly see the effects on battery life if they change reporting intervals, GPS tracking times, and sleep intervals. With the Enabler LPP, once a model is built, the application will automatically generate the script file needed to configure the device.

When this tag is used in conjunction with the Enfora Service Gateway Provisioner (Figure 3), the settings can be pushed to one or all devices in the field, simplifying maintenance, network tuning, and application performance. The software will store and forward configuration data to the devices, handle all protocol conversions, accept device data, and make that data available to standard database applications.

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Figure 3 (click image to zoom by 2.0x)

Connecting to the enterprise

Moving forward, asset management will play an ever-increasing role in corporate capital management and asset utilization. These wirelessly connected devices will help reduce operating expenses and improve business productivity. Through the Internet, this next-generation technology will enable powerful new levels of asset management and permit companies to connect a broader array of devices to their IT and accounting infrastructures.

Scott D. Constien is the VP of technology and CTO at Enfora, Inc., based in Richardson, Texas, where he is responsible for setting the company's technology direction. He played a key role in leading Enfora's technology migration from cellular digital packet data to GSM/GPRS product development. Prior to joining Enfora, Scott worked with INET Technologies and Texas Instruments Defense and Electronics Group. Scott graduated from the University of Texas in Austin with a BS in Electrical and Computer Engineering.

Enfora, Inc.
972-633-4400
sconstien@enfora.com
www.enfora.com

Monday, Mar. 23, 2009

China's Banks Become the Government's Foot Soldiers

By Bill Powell

In virtually every country now struggling to cope with the global economic downturn — with only one notable exception — there remains a single overriding priority: fixing what a senior official at the U.S. Federal Reserve Board earlier this year called "the transmission belt of the global economy" — the financial system that disperses capital, the raw fuel of economic growth.

The exception is China, where the country's major banks, all of which are state owned, are playing a critical role warding off the effects of what Beijing sees as an economic crisis wholly made in the U.S.A. China has, measured by market capitalization, the three largest banks in the world, and they along with their smaller rivals are now frantically pumping loans into the world's third largest economy. In December of last year, new renminbi loans in China totaled 772 billion, or $115.5 billion. In January that sum more than doubled to the equivalent of another $235 billion, and in February the banks pumped an additional $157 billion into the economy. (See pictures of Chinese business in Africa.)

In China, in other words, the 'transmission belt' is working just fine, at least for now. And that fact, most economists believe, means that Beijing will be able to cope better with the vicious decline in global economic activity than most of its western counterparts. Earlier this week, the World Bank lowered its official forecast for GDP growth this year from 8% to 6.5%. And though that's a meaningful decline in an economy that has been growing at around 10 per cent annually, "it could be a lot worse," says She Min Hua, bank analyst at Citic China Securities.

Because they are owned by the government, China's banks have in effect been deputized to fight in the war against the global slowdown. Last November China announced a stimulus package worth about $565 billion, and analysts estimate that as much as half of that will be funneled through the banks that Beijing owns. That means the banks don't waste much time asking questions — doing due diligence on the potential creditworthiness of borrowers; they just salute and move the money on to other state-owned companies who are getting the huge infrastructure contracts Beijing is now in the process of doling out. In January, for example, nearly 90 per cent of the $235 billion in new bank loans went to state-owned companies. "It is impossible for the private sector to penetrate these walls," Bao Yujun, chairman of the China Private Economy Research Center complained to the Economic Observer, a popular Chinese business publication.

There are risks, economists acknowledge, in both the overall surge in lending, and to where it's going. Though Chinese officials now tend to congratulate each other that their financial system is in so much better shape than the West's, the fact is, that's more a function of timing, not regulatory or managerial competence. At the beginning of this decade, China had to massively recapitalize its own banking system, because the major institutions were swamped with nonperforming loans. A big part of the reason for their problems: they tended to wave through loans to politically connected borrowers, whether they were building apartments in Shanghai or new cement factories in Shandong province.

What's happening now? Banks, again, are frantically doling out loans where the government wants them to go. Are they, in the midst of the current slowdown, laying the seeds for the next banking crisis in China, as some economists worry? Optimists point out, reasonably enough, that under the current circumstances, they could hardly be expected to do anything else; sure, some of the money doled out now might be wasted; but when throwing a lifeline to a drowning man, style points don't count. Zhou Xiaochuan, the chairman of the People's Bank of China, said recently that there are already "signs of stabilization and recovery" in the economy. Moreover, bank regulators, mindful of the last crisis, are forcing banks to raise capital, and increase their loan loss provisions. (Bad loans, according to the PBOC, amount to just which 2.5 per cent of total bank assets now.)

The question is, will that be enough protection when some of the current lending binge turns sour, as it almost inevitably will? Michael Pettis, a professor of Finance at Peking University's Guanghua School of Management, acknowledges that it's "very prudent" for the authorities to be forcing banks to increase protection against future losses, but nonetheless believes "skepticism about the quality of bank portfolios is still very much in order. I think it's extremely unlikely that we won't see a surge in [bad loans] over the next two years." Perhaps so. But Beijing has made it clear that the choice between an increase in bad loans down the road and propping up a flagging economy now is, in effect, no choice at all. Let the money flow.

How Google and P&G Approach New Customers, New Markets

How Google and P&G Approach New Customers, New Markets

10:18 AM Monday March 2, 2009
by Peter Sims

Tags:Customers, Product development, Strategy

When I worked with entrepreneurs and leaders in Europe, I often heard complaints like: "American companies have a habit of coming into Europe full of ambition, searching for big markets, but without fully understanding what it takes to sell a product, build a brand, or forge partnerships in each country."

It seems obvious: our assumptions become less valuable the farther our experiences are from our decisions and customers. Yet, these cultural traps always seem to cause frustration and agony and, regularly, steep losses or strategy restarts. Local hiring is just the beginning- we have to make sure we are solving the right problems for customers.

Leading companies such as Procter & Gamble and Google have realized that the more clearly you understand your customer or partner, and their context(s), the more likely you will be able to offer the right solutions, build the right business models and win through global expansion - in India, Mexico, China, Russia, or beyond.

Three approaches - bringing together strategy concepts and the emerging field of design thinking (being advanced notably at the Hasso Plattner Institute of Design at Stanford) - can help all firms grappling with these issues.

The three approaches:

1. Proactively understand customer needs and cultural norms unique to each country.

2. Use those insights to run low-fidelity, strategic experiments.

3. Use the resulting assumptions to drive the development of local business models, including product development, marketing and branding, sales and distribution, and manufacturing.

Google wrestles with these challenges every day around the world. Imagine searching for information on Google in China, where the character set is extensive. You can't just drop the United States product in - people wouldn't use it. So, Google uses ethnographic methods to understand users' needs, including shooting video tape of people searching. It learned how hard it was for the Chinese to get satisfactory search results, so they started experimenting with potential solutions. They built "Google Suggest" that would start to pop up search suggestions so that users would not have to finish typing queries, or by asking users, "Did You Mean?" They found that users really valued these tools and added them to their offerings. These innovations were the direct result of Google's consumer observation, understanding, and insight gathering methods, as well as their capability to run experiments.

Meanwhile, Proctor & Gamble's target market in Latin America is often low-income people, the middle 60% of wage earners - a far cry from its marketing employees, not to mention P&G execs. Perhaps not surprisingly, P&G experienced a number of product failures there during the 1980s. In one case, featured in the Game Changer by CEO A.G. Lafley andRam Charan, the company launched a detergent line in Mexico that marketers assumed would be a big hit because it saved customers money and valuable storage space. The product flopped. Why? Many of its customers there did manual labor and were very sensitive to perspiration odors as they bussed home from work. What gave them confidence that their clothes were getting clean was seeing their detergent foam - something the new product lacked.

Under Lafley, P&G launched a program to have its managers actually live with representative customers called"Living It." Dubbed "immersion research," P&G managers and even senior leaders spend time in low-income homes around the world in order to understand what matters to their customers in life, as well as their desires, aspirations, and needs. P&G has a bevy of statistics to suggest that improved insights and assumptions have led to more effective innovations - including laundry detergent with more noticeable suds.

These approaches are straightforward and make common sense, but they often run counter to established management norms. Importantly, consumer or partner insight gathering is very different from market research. The weaknesses of market research are by now common wisdom. Yet, understanding the sometimes-hidden needs of the market through customer observation through live-in immersion or video observation is just coming to the fore--and not a moment too soon.

Have you seen other examples of companies taking this anthropological approach? Where has it worked and where has it fallen short?

Prospects for a global deal on climate change: Three European views

Prospects for a global deal on climate change: Three European views

Will governments negotiate an agreement on reducing carbon emissions at the December 2009 UN Climate Change Conference?

MARCH 2009

In this video interactive, economists Nicholas Stern and Michael Grubb, along with European Commissioner Janez Potočnik, discuss their views on prospects for a global climate deal at the United Nations Climate Change Conference, to be held in Copenhagen in December 2009.

These interviews were conducted by McKinsey’s Matt Hirschland in Brussels on January 26, 2009. Watch the video, or read the transcript below.

Prospects for a global deal on climate change: Three European views

Will governments negotiate an agreement at the UN Climate Change Conference?

Launch Interactive

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Nicholas Stern: We have to make the agreement, which will guide the world economy after Kyoto, guide the international understandings on climate change after Kyoto. If we miss it, we will undermine confidence in the carbon markets, which will be of vital importance in getting this whole set of investments—which are necessary—going. So, 2009 is a vital year. What we see is the biggest technological opportunity that we’ve had for a very long time—as big as the railways, as big as electricity, as big as the motorcar, and most recently, information technology.

It’s the opportunity to go for low-carbon growth. And we understand, roughly speaking, what technologies are needed. Some of them will be very quick, like insulating houses, promoting energy efficiency, and that will put unemployed construction workers back into work now, this year. Others, like bringing forward infrastructure investment, take a little longer. Others like R&D have a still further lead time.

But we have to put these kinds of packages together. To take the opportunities of the kind I described, there are a number of things that we have to overcome. One is the idea that the economic crisis takes precedence over the climate crisis. That’s just confusion. That just misses the point about how we can put our policies on these two things together in a very constructive way.

So we can be much more energy efficient. We can insulate our homes and get unemployed construction workers back into work. Those are the kinds of ways in which we can put things together. So to say that first one and then the other is just analytical confusion. We have to look at what’s involved in doing both and see and recognize how one can support the other. So that’s one kind of objection that has to be overcome.

A second one is that there are always collections of vested interests, people who have a vested interest in the high-carbon economy. And that’s not just the oil producers. It’s also the people who make the cars, the people who are driving the coal industry, and so on. And they will understandably ask, “Well, what does all this mean for me?”

Well, it means reallocation. It means that we’ll be shifting away from those heavily polluting kinds of activities. That’s the point. There would be resistance from those who are benefiting from deforestation. We have to stop it. So there are bound to be people whose activities are threatened by these kinds of policies.

Now, the answer to that is to be constructive, to help with carbon capture and storage through markets for carbon; to promote development activities which do not put such pressure on the forests; to promote the retooling of the car industry so that the less-polluting cars become cheaper to produce and the demand for those cars starts to appear.

Thirdly, we really have to show developing countries—those of us who live in the rich world—that we ourselves mean business, that we’re not just asking them to do things and not doing things ourselves. In that discussion, we have to ask how we can support them in moving to a path of low-carbon growth. They recognize that that’s essential, but there’s nothing that they can see as a model. So we have to, indeed, provide examples as fast as we can but also help them through finance, for example, from trading schemes, through sharing of technology, through supporting the fight against deforestation.

So those are the three areas, I think, where I would place the strongest emphasis in overcoming what are genuine concerns by people who recognize the need for change but ask about the implications of change for them. And good policy helps to deal with those kinds of issues in a collaborative and supportive way.

It’s not there’s an opportunity to do it now. It’s that there are actual, real dangers in not doing it now—huge dangers in delay. [President] Obama is very clear on the challenges that we have. He’s been talking very clearly about the need for a green stimulus. He’s been talking very clearly about the scale of cuts which the US should commit to: 80 percent reductions between 1990 and 2050. Europe continues to move forward. China is now discussing its 12th five-year plan, starting in January 2011. And President Hu Jintao has argued that low-carbon growth must be a key theme,the key theme, in that plan.

We are seeing change in the world. The challenge is to move that change fast enough. I don’t know if we’ll move it fast enough, but at least the understanding of the hurry and the pressure, I think, is increasing in the political leadership around the world.

Michael Grubb: I think there’s quite a few big steps that need to be taken between now and Copenhagen. And that is still against a backdrop of my expectations being, say, a bit lower than some of the commentators out there. I mean, I think that there’s no question the US election has changed the atmosphere. It’s raised tremendous hopes—arguably, tremendous hopes lying on the shoulders of one certain new president. And the problem is this is actually a very complicated issue as well as a really tough politically one. And he has an awful lot of other things to worry about.

The US system overall is going to be stretched. So, I think the idea that the US will ride in like a sort of white knight and save the situation is kind of a bit far-fetched. What it has done is it’s reinvigorated the sense that at least the world’s talking—that everybody’s talking to each other—and, by in large, that all the major countries want to find solutions.

In terms of critical stakes, I think I would put two big ones before any others; one of which is that currently we’ve got the really odd situation where we’ve got an ongoing political process to try to set emission targets for most of the industrialized world and a separate political process with the US sort of indicating it’s probably willing to negotiate a target, but it’s not clear what that could be or remotely how it could get it through the political system in time for Copenhagen. There’s huge reluctance to set a target globally and then try to tell the US Congress, because it doesn’t work that way around terribly well.

So, I think the biggest thing is for the US to officially say it will rejoin the global group of industrialized countries that set quantified caps post-2012; and that it will sign up to the majority of the architecture involved in that and to some of the mechanisms behind that, including some of the flexibility.

And that last bit's also important because that’s where you get the international investment flows to help some of the poorer countries, you know, avoid some of the carbon lock-in. So, that’s a very big one. The other big one, intimately bound up with that, is: where’s China going? What will China really put on the table? Clearly, it cannot stay in the same position as the whole of the rest of G77. There’s got to be more differentiation. And what are different parts of the world going to sign up to here? And that’s, politically, a much bigger hurdle than most people realize. So, you know, those are the two big steps that I would say first.

A lot of people are wondering how the financial crisis is going to hit the climate change agenda. To be honest, I still find it very hard to read. You know, the easy thing to say is, “Well, it will distract everyone’s attention—much less willingness to spend money, et cetera.” Those are all true. Those are all very important. They’re going to make life more difficult. And I think particularly, just this distraction of senior-level political capital away from the climate issue onto other things.

But it is a lot more complex than that. I mean, first of all, don’t underestimate the power of institutional processes. There are already some in train that will require governments to send top diplomats, top officials to a crazy agenda of meetings this year—and to come back at the end of the year with a deal signed off by heads of state. You know, those processes had their momentum. They’ll continue. There’s a lot of work already—ground work—that’s been done.

And I think the joker in the pack is how the argument plays out about public expenditure as a way out of the recession—because we are unquestionably seeing politicians making the link, feeling under pressure to spend public money. How do they justify spending public money? Well, on something that’s good that the public wants, the world wants: green expenditure, jobs in the construction industry. You know, there is a genuine story to be told there.

And, like it or not, the climate issue does require a mix of public and private investment. And I think governments are going to find it easier to justify some of the public expenditure required, ironically, if it’s tagged with a green label. That said, overall willingness to spend government capital is going to be very constrained. So, it’s actually a matter of dovetailing. Can governments stitch these two big stories together so the solutions basically overlap a lot?

I think the question of how business is looking at the climate change agenda is quite hard to read because it’s quite schizophrenic in itself. I think what we see is a lot of companies—and not just recently, but for many years—who have been saying that this is a big, strategic challenge. But there’s going to be winners as well as losers. We want to be amongst the winners. That requires, you know, stepping ahead of the game.

We’ve seen constituents of business leaders emerge calling for stronger government action as well. Because, you know, actually, the kind of industries who quite like for other reasons to be stepping ahead realize there’s not very far they can go unless there are regulations which impose similar costs on others. But there’s definitely a lot of progressive force in industries.

On the other hand, what you also see is a time of retrenchment because of the credit crunch. And obviously, when rubber hits the road in terms of specific legislative proposals like the EU package, well, industries are going to lobby for what they can get. And they’re going to get as many free allowances as they can get. And that’s, kind of, what we’re there for. At the end of the day, businesses are there to make money. And they’ll be very constrained of how much they’re going to step outside that. So, you get this really schizophrenic attitude—including amongst companies within themselves. But, certainly, between companies in the same sector will come out and say different things. Or they’ll say one thing, and then you look at their investment portfolio and it doesn’t tally at all.

So, I think business is schizophrenic about this. I think it will remain schizophrenic. I think there’s probably quite a few business leaders who, in private, would be urging a new US administration—and other administrations—to get much tougher than they would really admit in public.

Janez Potočnik: The success is obviously getting a global agreement. I think it is obviously clear to everybody that this is a global challenge and we are breathing the same air and we don’t have any other choice than to deal with that together. But it’s also obvious that some of us are more responsible for this situation than the others. But that does not change the fact that, if we don’t work together—developed and developing [countries]—if we don’t commit to the same goal, then we will certainly not change the reality in which we are stuck.

So that’s broadly what we would like. We would like that, in Copenhagen, we would get a global agreement, in which major things would be agreed about how we deal with the questions of the future. I think it’s from everything: from understanding it, mitigating it, accommodating it, technologies, and so on. These are many of the issues. But certainly, there will be the issue of developing countries and developing technology for them. And I think many of these are commonly known.

So, I do believe that climate change, that this crisis, is certainly more of an opportunity for the changes which we try to do. But we have to be aware that we have systematically and consistently worked on the issues, some of which are certainly on our agenda for years—which are global climate change, energy, security. And though the financial crisis and economic crisis arrived, nothing has changed. None of these issues disappeared. They are still there on our plate. And when we do the measures, which are inside the short- or midterm addressing of the economic crisis—like stimulating investment or our consumption—we have to be careful that this is done in a way that, when we come out of the crisis, we are actually up to the challenges which we have consistently and systematically discussed before. There is no single way through that. So, you have to take care of the market mechanisms: cost, price; then you have to take care of regulation; then, for example, public procurement. It’s an important part of the deal. All the while you have to keep an eye also on the areas for which I’m responsible: technology, development, research. They are an important part of the answer.

So, all of that has to be dealt with in a consistent way under somebody who is in a policy-creation position. All of these issues have to be very clearly also in our focus when we try to prepare ourselves for the future, for the discussion in Copenhagen. Of course, we need international cooperation and, of course, relations between developed and developing countries if you want a kind of climate change diplomacy which is behind everything. It’s part of the thinking and the comprehensive approach which one would need to do.

In the technology area, there are just as many questions. I think energy efficiency is of course one of the utmost short-term focuses because it is obvious that it is the cheapest way and the fastest way to get some of the solutions which we would like. It is obvious that in the short run, we have to focus also on regulation and market conditions—and, of course, on the technologies which today are already developed, but some of them can’t reach the market, because they are simply too costly.

It’s also a question of energy prices. My personal belief is that all these changes which we talk about are hard to be done in a low-energy price kind of a system. But we can more boldly think of what technologies can help us bridging some of the troubles which we have today; from CCS [(carbon, capture, and storage)]—which is a bit closer, I would say, in time span—to fusion, which is probably the most distant. But there are many things in between, connected to various renewable solutions or questions which are related to the hydrogen fuel cell center, all that.

We work on all that because we simply believe that there is no magical solution at this very point. You can’t put, as people used to say, all your eggs in one basket. So, we simply spread them out. We believe that we have to work practically in all these directions with enough attention.

Getting an agreement is a win, not getting an agreement is a loss. Meaning that, everybody around the table has to understand that these negotiations will be difficult; that they will have to step into each other’s shoes and try to understand what are their problems. But I hope that the understanding from all is that we are actually living in the same world and have no choice, so we have to deal with climate change—and we have to deal with it now. It’s a one-shot chance. If we miss this chance, we really don’t know when there will be a second one with that level of opportunity. So, Copenhagen should be a success.