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The CEO's Guide To Industry Trends In 2007: An Annual Virtual Roundtable With Capgemini's Experts

December 2006

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In today’s globally integrated corporation business planning must seem more an art than a science. With this in mind the staff of Executive Current invited Capgemini’s business sector leaders to weigh in and offer guidance to executives now toiling in company boardrooms with their business plans for 2007. You will find a common thread running through these conversations: prepare for change, use technology strategically, and leverage opportunities around the world. We hope you find this dialogue helpful.

Quick links:

• Telecom, Media & Entertainment
• Financial Services
• Manufacturing
• Life Sciences
• Consumer Products and Retail
• Energy, Utilities and Chemicals

Greg Jacobsen
Vice President, Telecom, Media & Entertainment (TME)

"Teenagers are an excellent glimpse of your future customers"

A recent Jupiter Research report found that three hours a week with print publications, but spend 14 hours per week online, about the same time they spend before their TV sets. The report showed that people between the ages of 15-24 are twice as likely as the “average” consumer to purchase and interact with music and video content online. As this generation becomes the mainstream consumer it is bound the change the business of TME not just in North America but also in Europe as broadband distribution begins to approach U.S. levels.

“Probably the most surprising development during 2006 was the emergence of several altogether new types of companies including YouTube and MySpace,” Jacobsen says. “The industry is still not sure just how to categorize these sites, whether they’re a creator of content or a distributor of content. I think they are actually both, and more,” he says. “And they signal a continuing evolution of the industry.

Mergers and consolidations continued to have a big impact in 2006 particularly “AT&T’s decision to acquire BellSouth was another market transforming signal because it brought the telcom landscape full circle,” says this 25 year industry veteran. Meanwhile, you know the world is going wireless when you see the billions of dollars being spent on bandwidth and infrastructure. “It’s still not clear what will fill all this capacity but everyone seems willing to continue to place big bets as News Corp.’s recent $580 million purchase of MySpace demonstrates.”

There are four trends that CEOs should watch in 2007 according to Jacobsen:

1. A shift from a subscriber-pays to advertiser- pays business model for enhanced wireless services and content
2. Television’s continuing transition from broadcast to Internet
3. Telcos transitioning from providers of dial tone to distributors of content
4. Internet service providers trying to become Telcos

“Service-Oriented Architecture continues to be the technology fueling these changes, and senior management need to spend time in 2007 to continue reviewing its impact within their companies.

“Company Boards and CEOs need to be bold in using technology to create new markets and competitive differentiation, because if you don’t your competitor will,” Jacobsen says. There is too much complexity and change in the industry to deal with all of it in-house he believes, and speed to market will increasingly separate winners and losers “so partner with a full-service technology provider who can bring consulting, integration, offshoring, and outsourcing expertise to your business.”

Shohreh Abedi
Vice President, Financial Services

"100,000 baby-boomers will begin retiring every day beginning in 2006, this should be a strategic red flag for Financial Service Companies"

“The first of the baby boomers reached age 60 in 2006 and over the next 25 years, this massive segment of population is going to retire about 10,000 people a day,” Abedi says. “This has significant and far reaching implications for the financial services market, but we don’t see the level of strategic initiatives, business process reengineering, broker/agent training, and technology enablement which is warranted. “

A close second on the surprise scale is the minimalist approach Abedi sees in the Financial Services industry to addressing the requirements of the Banking Secrecy Act (BSA), the Sarbanes Oxley Act (SO). “Many institutions have taken a tactical, people-intensive approach to meeting this burdensome legislation,” she says. Armies of compliance consultants are pouring over reams of data instead of using technology for better data management and the breaking down of silos within the company. “Do these companies really believe annual compliance by consultants will help them remain lean and compete with companies that take a surgical view and deploy technology to meet compliance demands?”

What trends does Abedi see in the Board rooms of market-leading companies?

1. Increased spending on business intelligence to gain more visibility within their operations
2. A move away from being transactional to dynamic entities centered on personalization and collaboration
3. Faster deployment of online platforms
4. An accelerated transformation to mobile infrastructure.

Finally, service oriented operations will continue to be an important trend, but in the broadest business process sense to make the company even more agile.

And her proposed CEO action-plan for 2007? “I’d start with offshoring, not just the commodity call center variety but as a tool for business process reengineering; this is closely tied to globalization, and I use the word in its positive sense as in providing additional knowledge-centered alternatives. Then I’d focus on the dramatic baby boomer retirement and compliance issues and use all the global tools available to drive company agenda and shape the future of your industry. Do that and your company will survive and thrive, take a more reactive approach and it will not. It is as simple as that. “

Gary Baldwin
Vice President, Manufacturing

"A continued drive in 2007 and beyond to innovate is a powerful way to make globalization work for your company"

Throughout 2006 Baldwin’s message to senior management of manufacturing companies has been: “Operational Excellence be your key focus area for continuing the efforts to drive out cost and improve efficiencies.” He does not expect his message will change much next year. To execute on the message Baldwin recommends that companies continue to look for ways to improve efficiency not only in operations but also in the front and back office, in the customer relations and finance functions.

Globalization, Baldwin believes, continues to level the business playing field and reduce the cost for entry by competitors; the sum of these trends means the pressures on manufacturers is remorseless. The National Association of Manufacturers reports that compared to America’s nine largest trading partners, American manufacturers face overhead costs (taxation, tort claims, natural gas, etc) that are 32 % higher. Together, these external costs have offset a large part of the 90% productivity growth generated by the manufacturing sector since 1990. “I think these pressures are here to stay for a while,” Baldwin says, “so manufacturers should continue to reduce costs and optimize their processes.” He would focus on improving the Product Life Cycle process through innovation and efficiency which requires a much deeper collaborative business model. “And I’d continue to keep a sharp eye over logistics because more and more products are manufactured off shore and the need for improved visibility in the supply chain is a must. Remember that logistics has an impact on the bottom line and also the top line through customer satisfaction.

It is not surprising to Baldwin, given the continuing pressures from globalization, that the issues uppermost on the minds of the CxOs he dealt with this year were foreign competition and customer retention. “I don’t expect that to change next year because the globalization story continues, it is part of the permanent transformation of the way business is done now,” he says.

A continued drive in 2007 and beyond to innovate is a powerful way to make globalization work for your company,” Baldwin says, “Which is why I tell CEOs to use their finance and customer relationship management functions to drive out additional cost from their business. The technology is there to support it,” he says pointing to the advances made by enterprise resource planning (ERP) systems that have moved increasingly into supporting strategic functions. “In most cases the investment in ERP has been made, so it is just a question of senior management making a decision and throwing their support around it. The second piece of advice from Baldwin is for CEOs to focus on innovation. “Innovation sparks productivity and market-share, and one sure way to achieve it through using a service-oriented-enterprise model for the business. That is where the markets leading companies are positioning themselves, and that is where you should begin to position your company now.”

Jean-Marc Neimetz
Vice President, Life Sciences

"The Pharmaceutical industry’s need to operate much more efficiently is a message that has been well known for a while, the difference is now it is getting real, and in 2007 the rubber has to meet the road"

Increased pressure from patients and payers, requesting access to innovative medicines at a reduced cost, a shortage of innovative drugs coming to market, and reduced market exclusivity for the one already marketed-these are the forces now driving the industry according to Neimetz. Adding to these forces, increased compliance requirements from Regulatory Authorities, the industry’s business model has to change.

“The pharmaceutical sector has traditionally maintained its growth rates and profits on innovation protected by patents,” Neimetz says. It costs close to one billion of dollars to bring advanced drugs to market, but even with patent protection, competition is so fierce that a new product does not remain unchallenged in the marketplace for even a year.

On the marketing side, the industry has developed a costly selling model based on large sales forces targeting the same high prescribers. Physicians are by now reluctant to even provide access to the sales representatives. A shift in how pharma markets and sells has to occur.

Lastly, there is a growing pressure from developing countries who are faced with major epidemics and diseases like HIV-AIDS, who cannot afford to pay the patent-driven prices charged by American and European pharmaceutical companies. Some developing countries (India for instance) now have a thriving pharmaceutical industry and will challenge the current model by systematically bringing to market generic drugs and by developing their ability to manufacture and innovate.

Other industry trends that CEOs should be aware of? “Payer pressure and patient empowerment are the critical external trends,” according to Neimetz. “Apart from costs, both are asking for more transparency and for outcome-based data to make informed decisions on treatment and their reimbursement. This challenge comes at the same time as the need to cut costs becomes more acute.

And then there are the internal complexities of the business: regulatory and clinical development complexity, the need to inject earlier into development commercial insights without limiting R&D creativity, managing the portfolio of componds, building key opinion leaders networks worldwide, dealing with pricing and reimbursement, …

All these trends have been known for a while and everyone has said it is time for the industry to change. This change has actually already begun and the transformation will accelerate in 2007.

What should CEOs be thinking about today? “Innovation and Sustainability of the bottom line,” Neimetz says without hesitation. “To achieve this, they need to focus on the full transformation of their corporation,” he says. Neimetz advises CEOs to challenge the way innovation is managed within their company, rethink their selling model, and streamline operations (e.g. by accelerating the use of shared services ). “Unless they can transform themselves , , pharmaceutical companies will have a lot of trouble sustaining the growth and profitability that has been theirs in the past. Future leaders in the industry will be defined by how rapidly they transform themselves and respond to the new reality,” Neimetz concludes.

Dave Holloman
Vice President, Consumer Products and Retail

"For a consumer products company today, a clear route to success is to think and act as a retailer"

Ask Holoman to pick one development in his business sector that surprised him this year, and he will tell you it is the emergence of enterprise resource planning (ERP) systems as a core strategic priority at his client companies. “Consumer product and retail industries have traditionally grown at less than the rate of inflation, but their commodity costs have grown much faster. This margin squeeze is not tenable and Capgemini has consistently advised its clients to go beyond the purely transactional use of ERP software,” Holoman explains. “Frankly, I was surprised at the speed with which this advice caught on during 2006. Client after client has begun thinking of ERP as a platform to gain competitive advantage and drive top line growth.”

Among the biggest transformational pressures for the consumer products companies is the speed with which retailers have pulled them deeper and deeper into their supply chain. Today they don’t just stock the retailer’s shelf, but price the shelf, and manage the shelf,” he says, “And the transformation won’t stop there. We tell our customer products clients they are soon going to own the shelf and they better start thinking of themselves as a retailer if they want to survive this industry change.”

This transformation has profound implications. Consumer products companies must change their go-to-market strategies, hiring patterns—they will need experts in space planning and merchandising, not just account managers—and they better get ready to deal with the financing issues that arise from the rise of scanners at checkout. “There is an accelerating trend for retailers to not pay its supplier for product unless the product goes through the scanner at the checkout, which means our clients can look forward to financing retailers right through the sales of their products.

These observations fashion Holoman’s advice for CEOs as they plan for 2007. “Plan to expand internationally to improve margins,” he tells them. “Growth rates are projected to be three to four times larger in China and India than in North America,” he says. “Be cautious, get your infrastructure in place, but go where the money is,” he advises. And continue to think of your ERP systems strategically, “make them your competitive edge.”

Douglas Houseman
Principal, Energy, Utilities, and Chemicals

"The trend for today and tomorrow is making electrical load follow supply versus today’s load dictating supply"

No matter how electricity is generated it must be sent to the consumer over thousands of miles of wires in the national grid. The grid looks pretty much the same as it has over decades, but technology is beginning to transform the way electricity is used. “Florida Power & Light has smart-meters in over a half-million homes, Houseman says, “That lets them switch the devices on and off remotely to balance power generation with demand,” he says. Customers do not notice anything until they see the power management credit applied to their monthly bill. “There you see a glimpse of tomorrow’s intelligent grid,” he says.

Houseman always believed a price inflection point would spark widespread use of smart-meters and other technology that aims to transform the way the grid works. “What surprised all of us this year is how the prices went through the inflection point and then just kept falling,” he says. Technology prices now are 20 percent less than they were in 2000, and utilities and regulators are scrambling to deploy it.”

Houseman’s advice to utility company CEOs planning for 2007? “I would tell them the time to start deploying technology is now. They can take advantage of reviewing over 400 smart-meter trials,” he says. There are 84 functional areas in a utility that can take advantage of this technology. In some areas a half-billion dollar investment in the utility might return a fifty-thousand dollar return; in another area the return might be seventy or eighty million dollars. “So the first thing to do is to prioritize where you want to start.”

The second area he would place on the Utility CEOs radar screen is a big red flag called PEOPLE. “Fully 70% of their most experienced field or engineering people won’t be there in 5 years. Thousands of years of experience are going to walk through the door due to retirement. How will you fill this gap, I’d want to know.” Houseman would advise the CEOs to begin looking at ways to capture the knowledge embedded in these people and then find ways to classify, index and distribute the knowledge to the next batch of workers to shorten their years-long learning curve.

He would advise CEOs to partner with a consulting firm to shorten the time to market and get ahead of the return on investment curve. How would he go about choosing a partner? “Look for one that has proven experience in strategy, constructing a business case, installation planning and management, engineering, software deployment and smart-meter operations. There aren’t many, but that is your road to success.”