International
Content
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CurrentResearch
A brief look at findings from recent McKinsey research projects
A world-class challenge for Japanese banking..................................................8 Value in Argentina ....................................................................................................11 The war for technical talent ..................................................................................14 A plan for German job creation .............................................................................16 Best practice in logistics........................................................................................19 Swiss drug makers: Facing the US giants......................................................... 22
A world-class challenge for Japanese banking
Japan’s banks are still struggling, and international benchmarks show just how far they have to climb before they become globally competitive (Exhibit 1). To match their rivals in the United States and Germany, McKinsey research suggests, these banks would have to change radically, tripling their earnings and cutting their expenses and assets by 25 and 55 percent, respectively.1 In the five years leading up to 1996, US banks posted an average return on assets (ROA) of 1.64 percent, German banks an ROA of 0.85 percent.
1
This article is adapted from chapter 3 of Yuko Kawamoto’s Banks’ Profitability Revolution (Tokyo: Toyo-Keizai, 2000).
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EXHIBIT 1
A tale of three countries: Part 1
Japan 3.57 4.98 0.85 1.11 0.19 Return on assets, percent
Source: Bank of Japan
Germany 9.90
United States
7.54 7.84
1.64 2.04
2.27
2.85
Profit margin, percent
Ratio of equity to assets
Ratio of expenses to profit
Meanwhile, Japan’s banks averaged only 0.19 percent. Their return on equity (ROE) was poor as well: they posted average returns of only 4.28 percent, compared with US and German banks at 20.84 and 11.22 percent, respectively (Exhibit 2). And Japan’s banks spent far more to generate earnings: a multiple of 9.9 times, compared with 2.85 times for US banks and 2.27 times for the Germans (Exhibit 3, on the next page). The problem is that Japanese banks have historically relied heavily on loans to generate profits. But in the five years to 1996, the average profit margin of these loans was only 1.11 percent, as against 2.04 percent for German banks and 3.57 percent for US ones. Japanese banks might look to their US rivals for lessons in diversifying income streams to broaden their earnings base. Risk-management skills at US banks, for example, are now well developed, and this allows them to earn higher returns by lending at rates that vary with the level of risk. Japanese banks could also increase their earnings by focusing more on the retail market and on small businesses, whose lending margins are higher. Moreover, Japan’s banks haven’t made as much progress in the home loan market as have their British, German, and E X H I B I T 2 A tale of three countries: Part 2 US counterparts. Default rates are generally low, Return on equity, percent so the Japanese should 25 United States 20 improve their performance 15 in this area. But the 10 Germany national Housing Loan 5 Corporation, which has 0 half of this market, charges –5 less than commercial –10 Japan –15 banks do, thus preventing –20 them from expanding their 1985 1980 1990 1995 1997 business.
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EXHIBIT 3
A tale of three countries: Part 3
Percent Japan 100.00 98.31 19.80 Germany 100.00 88.90 24.30 Personnel and administrative expenses United States 100.00 82.02 41.40 40.62 11.10 Current income Current cost Profit Current income Current cost
78.51 1.69 Current income Current cost Profit
64.60
17.98 Profit
Source: Bank of Japan
Japan’s banks have an enormous asset base, but their ROAs will improve very slowly indeed if they rely solely on increasing profits: at current levels, earnings would have to rise some 6.5 times to achieve ROAs comparable to international benchmarks. The banks could reduce their asset base by 55 percent if they wrote off bad loans, sold stock and real-estate holdings, slashed their lending to big companies, securitized corporate loans (which have low margins), reduced loans to overseas borrowers and local governments, and cut back on other kinds of lending and guarantees. Even if Japanese banks doubled their earnings, they would have to slash their equity capital by 59 percent to match the ROEs posted by banks in the United States. A reduction of this magnitude could force many Japanese institutions out of business. One dramatic move would be to
EXHIBIT 4
Someone has to pay, 1989–99
$ billion Loan loss: Government investment and loan programs Loan loss: Small- and medium-sized companies 67.3 100.00 40.4 163.3 Disposal of bankrupt banks Capital infusion 91.3 76.9 Cost to taxpayers of stabilizing private financial system Costs incurred because of lack of asset management skills Subsidy to Postal Savings and other public financial institutions 103.8 642.9
307.5
Subsidy for public financial system
Contribution of banking system to national economy1
Total cost to taxpayers
1Contribution of banking system = tax revenue tax refund risk-free interest income. Source: Bank of Japan; Japanese Ministry of Finance; Federation of Bankers Associations of Japan (Zenginkyo); McKinsey analysis
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transfer to a separate entity bad loans and equity that was acquired by the government through capital injections. The new organization would resolve the bad-loan problem and redeem state-owned equity. Although the efficiency and transparency of this approach is certainly appealing, the outcome of similar rescue attempts in Japan has been mixed. The government has consistently underestimated the resources that are needed to deal with the problem of bad loans, leaving the Japanese taxpayer to bear an extraordinary burden to support the financial system (Exhibit 4). Japan’s banks know what has to be done, but they find it easier to analyze the situation than to change it. They have little incentive to take drastic measures because if they did, most of them wouldn’t survive in their present form. Senior managers face the unpalatable prospect of losing their jobs; big, powerful corporations would see the end of their juicy credit lines. Despite some recent big mergers, Japanese banks clearly have not been motivated to go that far. —Yuko Kawamoto
Value in Argentina
In recent years, Argentina has made tremendous economic progress. Among other important points, it can boast of improvements in the productivity of both labor and capital. But for all these advances, a McKinsey study of 22 leading Argentine companies found that three-quarters of them are destroying value. A leading culprit: the high cost of capital for local companies. The study sample, representing 70 percent of the country’s stock market capitalization and including both local companies and subsidiaries of multinationals, focused on economic profit—the profitability that is generated by a company above its cost of capital. Although these companies collectively had operating profits of $15 billion, they had destroyed approximately $5 billion of their accumulated value, representing almost 20 percent of their invested capital during the five-year period from 1993 to 1998 (Exhibit 1, part 1, on the next page). In other words, their returns failed to match what investors could have obtained elsewhere given a similar level of risk.
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EXHIBIT 1
A Latin predicament
1 The high cost of capital is destroying value in Argentina . . . Accumulated value destroyed, $ million 1993 653 1994 776 830 1,059 263 1,245 4,826 2 . . . and elsewhere in Latin America Percent of invested capital created or destroyed, 1993–98 Invested capital, $ million United States 6.9 313,000 1995 1996 1997 1998 Total
Argentina’s economic situation resembles that of other Latin American states, but local companies destroyed three times more value on a percentage basis than did their Chilean counterparts during those years. Meanwhile, Brazil, which still has many stateowned companies, destroyed 46 percent of its invested capital. US companies, by contrast, generated value—about 7 percent of their invested capital (Exhibit 1, part 2).
Chile
–6.0
21,000
The challenge Argentine companies face in gener25,000 –19.8 Argentina ating returns above the –46.0 Brazil 31,000 cost of invested capital runs through the whole economy. The construcSource: Banco Francés; Bloomberg; Instituto Argentino de Mercado de Capitales (IAMC); Bolsa de Comercio de Buenos Aires; Standard & Poor’s; McKinsey analysis tion, energy generation, oil, steel, and telecommunications industries destroyed value amounting to at least 14 percent of their invested capital from 1993 to 1998. Banking, consumer goods, and gas distribution also had negative results, varying from 1 to 5 percent. The exception to this trend was the supermarket sector, which created value amounting to about 11 percent of its invested capital during this period. (Besides benefiting significantly from a surge in demand and geographic expansion, supermarkets extracted value from their vendors.) Local companies show returns on capital similar to those of the United States—returns clearly insufficient for a developing country, taking into account the economic growth of the years considered for this analysis—and the cost of capital is much higher. Argentine companies face two main problems in their efforts to create economic profit: this high cost of capital (Exhibit 2) and the heavy investments of the 1990s. The high cost of capital stems from the country’s elevated level of risk, real or perceived, and reflects external and internal problems, such as fiscal deficits and Argentina’s relatively fragile institutions and legal system.
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EXHIBIT 2
Not worth the risk
Percent Weighted average cost of capital (WACC) 20 15.9 15 10 8.5 5 0 1993 9.6 9.5 9.4 9.5 9.1 17.1 16.6 14.7 13.6 13.6 15.3 9.3 15 11.1 10 5 0 1993 10.1 12.6 11.5 12.7 12.3 10.7 13.3 12.9 12.5 12.1 12.6 9.6 11.6
Argentina United States Average
Return on capital employed (ROCE) 20
1994
1995
1996
1997
1998
1994
1995
1996
1997
1998
Difference between ROCE and WACC 6 4 2 1.6 0 –2 –4 –4.8 –4.5 –6 1993 1994 –3.9 –4.0 –1.0 –4.0 1995 1996 1997 –3.7 1.9 3.9 2.8 3.4 3.4 2.8
1998
Source: Bolsa de Comercio de Buenos Aires; Standard & Poor’s; annual reports; McKinsey analysis
As for the country’s other main problem—namely, heavy investment—both privatization and deregulation led Argentine companies to sink a good deal of money into infrastructure, equipment, and other assets between 1993 and 1998. Many of these investments, though certainly required to help companies remain in business, didn’t necessarily help to generate returns in the medium term. A great many major companies therefore show low returns on invested capital. Other factors also contribute to the underperformance of Argentine companies. The most relevant are the absence of a value generation culture among both managers and shareholders in Argentina, of management (that is, governance) mechanisms and tools to support the creation and nurturing of such a culture, and of incentive systems that would encourage the creation of value by companies. —Alejandro Preusche, Damián L. Scokin, and Eduardo M. Urdapilleta
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The war for technical talent
Two years ago, McKinsey’s War for Talent study1 crystallized the struggle of US companies to find, train, and keep good employees. A recent McKinsey survey, buttressed by case studies and client work, focused on 5,000 computer science and electrical engineering graduates at top universities.
Fewer middle-aged people . . .
The original report took its cue from a UN study projecting a 15 percent fall in the number of 35- to 44-year-olds by 2015. People who can fill technical jobs are in critically short Index: Number of 35- to 44-year-olds in the US = 100 in 1970 supply: according to the US 200 Bureau of Labor Statistics, 180 one-tenth of the more demanding technical openings 160 (such as those related to infor15% drop 140 mation technology and electri120 cal engineering) already can’t be filled within the relevant 100 time frame.
0 1970 1980 1990 2000 2010 2020
Source: United Nations
. . . mean that finders must look further afield . . .
Typically, both large and small companies have hired from big businesses, whose resources and training programs make them good sources of talent. At present, however, most Employee’s employees no longer work Employee’s first company current for a big business—they have company Percent of survey respondents And nearly already left! Size of
company1 Large Small
83 17
Pre1971
77 23
67 33
48 52
30% of these employees are currently involved with start-up groups within their companies
1971– 1991– All graduates 90 96 in sample
Employee’s graduation year
1
Large companies defined as having more than 500 employees; small companies defined as having 500 or fewer employees. Source: 1999 McKinsey engineering-alumni career decisions survey
1
See Elizabeth G. Chambers, Mark Foulon, Helen Handfield-Jones, Steven M. Hankin, and Edward G. Michaels III, “The war for talent,” The McKinsey Quarterly, 1998 Number 3, pp. 44–57.
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. . . and employees aren’t keepers anyway . . .
When companies, large and small, find qualified employees, they don’t stay for long. Half of those who graduated in the 1971–90 period left their first jobs within three to five years, Percent of survey respondents and among those who graduated from 1991 to 1993, more More than two-thirds leave 73 within 3–5 years than two-thirds did. Recent 52 graduates receive, on average, 40 Time spent at 42 2 first company 30 new offers a year.
29
3–5 years 0–2 years
?
22 20 23
1971–90
33
1991–93
42
Pre-1971
1994–96
Employee’s graduation year
Source: 1999 McKinsey engineering-alumni career decisions survey
. . . so you have to show people the money
What to do? The survey shows that though new employees of a company care about its training opportunities and reputation almost as much as do colleagues who have been there for upward of ten years, What factors tip the scale when choosing an employer? Index: Employees responding “important” or “very important”1 new employees care much Reputation, benefits, Total compensation, stock options, more than veteran ones about and training and getting rich quick Or salaries and stock options. Evidence from McKinsey client 100 work suggests that it would be 92 207 100 smart to give new employees what they want. Profits at paper New Veteran Veteran New plants run by really good manemployee employee employee employee (<1 year) (>10 years) (>10 years) (<1 year) agers are 94 percent higher 1 than average. More talented Indexed to 10-year tenure (veteran employee = 100). Source: 1999 McKinsey engineering-alumni career decisions survey young investment bankers are over twice as productive as their less talented colleagues. Top-quartile software developers are worth 5 times as much as the average of all their colleagues, and top-quartile salespeople are worth 14 times the average. Indeed, it appears that a modest improvement in talent can double the market capitalization of a software company. —Stuart Bodden, Maurice Glucksman, and Peter Lasky
2
Data gathered for the 360.Alpha Summit, in Austin, Texas.
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A plan for German job creation
Even in this age of globalization and modern telecommunications, executives are rediscovering timeless truths about the advantages of proximity. In the German city of Wolfsburg, Volkswagen (VW), the local government, and McKinsey are working together to create a new regional economic cluster—a concentration of companies and related institutions focused on a specific technological area. The project is designed to attract high-tech start-ups, suppliers, and other related companies to VW’s doorstep and thus to cut local unemployment in half, equivalent to the creation of 10,000 new jobs, by 2003. Here, in the home of the world’s largest auto plant, the partners have formed a technology center focused on the automotive industry. In addition to demonstrating corporate citizenship, Volkswagen hopes to gain from the creation of a vibrant entrepreneurial community and an improved local supplier base. At the same time, city officials want to combat high unemployment and a dwindling service and retail sector. VW has so far invested about $12 million in the project and the local government about $10 million. Wolfsburg, some 100 miles west of Berlin, lies close to the border with the former East Germany. It is a classic company town: about 50,000 people— more than half of the local labor force—work in VW’s offices and plants (Exhibit 1). Known as the home of the German Wirtschaftswunder and as the birthplace of the Beetle, Wolfsburg had a labor market in steady decline, with an unemployment rate of 18 percent by the late 1990s. In early 1998, Dr. Ferdinand Piëch, the chairman of VW, initiated the project to stimulate economic growth around the VW headquarters, and the “AutoVision” program was born. Since then, local unemployment has dropped to 11 percent, from 18 percent, though only part of the improvement can be attributed directly to the project. Nevertheless, about 1,300 jobs—some moved from other parts of Germany but almost two-thirds new positions—are credited directly to AutoVision. Corresponding to roughly 3 percent of local employment, they run the gamut from unskilled positions to top-level engineering slots. Economic clusters have existed since the artisan quarters of ancient times. More modern examples of spontaneous cluster growth include the toy industry in Nuremberg and the motion picture empire centered in Hollywood. And, as Silicon Valley demonstrates, clusters are ideal for high-tech sectors; proximity lowers many transaction costs and can foster a dynamic exchange
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of ideas as well as a concentration of talent. The success of a company in the cluster increases the value added of the overall network. One of the first moves of the VW project was to create an innovation campus where start-up ventures could be nurtured through “tech-farming.” By building a local entrepreneurial community, the campus fosters a flow of knowledge and investment opportunities. An annual nationwide business plan competition, under the brand name “Promotion,” helps generate business deals.1 The AutoVision partners also created a supplier park, which includes a simultaneous-engineering center where engineers from suppliers work directly with their VW counterparts on the development of new cars and components. Several EXHIBIT 1 suppliers have already built new assembly plants Wolfsburg: A true company town next to the main Volkswagen workforce in Germany, number of workers Volkswagen factory.
Wolfsburg 50,081 Emden 28,091 Ingolstadt1 Despite the expected Wolfsburg Kassel 15,427 Hannover benefits, AutoVision had Braunschweig Salzgitter Hannover 14,708 to overcome a certain Chemnitz 12,543 Neckarsulm1 Kassel Mosel amount of institutional Emden 9,991 questioning inside and Salzgitter 7,398 outside Volkswagen. Neckarsulm Braunschweig 6,618 Ingolstadt Before the cluster dynamMosel 5,900 ics could be truly ignited, Chemnitz 800 for example, it was necessary to convince VW engineers and purchasing executives that the Wolfsburg Volkswagen supplier park wouldn’t Founded 1938 Founded 1938 become a burden and 1999 population: 123,745 that the business plan City workforce 2: 84,000 VW workers in Wolfsburg: 50,081 competition would gener1 Audi plant (Volkswagen subsidiary). 2 ate promising ideas. The Estimated. Source: City of Wolfsburg; Volkswagen; McKinsey analysis city’s officials and various political parties were also wary of ceding control. AutoVision surmounted many obstacles by making sure that all affected groups took part in the project, whether as members of a steering committee or as sources of information or suggestions.
The 1,300 jobs so far created came from the 12 technology start-ups that emerged from the first business plan competition and the 7 manufacturing
1
See Ansgar Dodt, Lothar Stein, and Sigurd Strack, “Do-it-yourself Silicon Valley,” The McKinsey Quarterly, 1999 Number 3, pp. 60–9.
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EXHIBIT 2
European hot spots Specialization
1 Barcelona 9 2 Cambridge 3 Dresden 13 8 2 15 10 14 1 4 12 7 3 11 5 6 4 Grenoble 5 Graz 6 Helsinki 7 Jena 8 Livingston 9 Oulu 10 Poitiers 11 Munich 12 Nice 13 Stockholm 14 Toulouse 15 Ypres Software, electronic commerce Biotech, software Information technology, microsystems Telecom, microelectronics Automotive supplies Telecom Optics, biotech software System-on-chip design Telecom Entertainment, telecom Biotech, multimedia Software, electronics IT, telecom Electronics, aerospace Software
suppliers that had arrived in Wolfsburg by the end of 1999. The tally also includes 510 manufacturing and engineering jobs brought by 55 other suppliers attracted to Wolfsburg by the simultaneous-engineering center. To funnel the available local labor into jobs created by the project, AutoVision includes a human-resources agency, which acts as a bridge to put the longterm unemployed back to work and helps investors overcome the rigidities of the German labor market. Wolfsburg’s lagging service sector has also been targeted. Already, some jobs have been created in Volkswagen’s new Autostadt, the world’s largest brand park, combining VW showrooms and delivery centers with other themed attractions, including an IMAX cinema, an automotive museum, and a five-star hotel. VW has now begun to expand the AutoVision program to other locations in the former West Germany, such as Kassel and Emden. Interest in clusters is growing throughout Germany, where the unemployment rate is about 10 percent. Together with local authorities and companies, ThyssenKrupp, the country’s largest steelmaker, has initiated another cluster program, in Dortmund, in western Germany. Other examples can be found in Bavaria, North Rhine–Westphalia, and Saxony. A McKinsey study has identified a number of European growth regions (Exhibit 2). Most of these hot spots were found to result from individual initiatives by local or regional public-private alliances rather than from systematic national efforts. —Thomas Heuser, Peter Kraljic, and Martin R. Stuchtey
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Best practice in logistics
In modern logistics, information technology systems are as common as forklifts. But the best companies have gone beyond putting bar codes on their containers and tracking shipments by computer. According to a survey of more than 100 logistics services providers (LSPs)—companies that primarily offer shipping and warehousing services—and of manufacturers and retailers using their services, the best performers are investing in highly integrated systems across internal and external supply chains.1 This global survey, conducted in 1998–99 by McKinsey and the Department of Planning and Logistics at the University of Cologne (Professor Werner Delfmann), confirmed that IT expenditures alone can’t create or maintain a top-performing logistics service: once the fundamentals are in place, IT investment must create greater transparency and integration in both internal and external applications. The survey also suggested that shippers might outsource more logistics work to LSPs if their information systems provided higher-quality data.
EXHIBIT 1
Warehousing: Smart information technology applications make the difference
Percent of business units using IT applications for various purposes
High-performing LSPs1 Low-performing LSPs1
100 80 60 36 20 80 67 80 73
30
Dock scheduling Characteristics of high performers
Paperless vehicle Warehouse tour management optimization2
Automatic picking Automatic picking for standardized goods and processes only
Load planning
Prescheduled Advanced use of Real-time and dynamic technology—for optimization routing instance, scanners and for multiple radio data transmitters orders
Optimized load sequences
1Logistics 2 The
services providers. process of defining the optimal path for machinery to use when navigating a warehouse. Source: McKinsey information technology and logistics survey, 1998–99
1
The performance of these companies was measured by the quality and efficiency of logistics. The key criteria for quality were transport times, punctuality, correctness, and flexibility. For manufacturers and retailers, efficiency was measured through logistics costs (relative to the industry). For LSPs, it was measured directly through criteria such as utilization and employee productivity.
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EXHIBIT 2
Operational applications are critical for shippers
Percent of business units using various kinds of applications
High-performing shippers Low-performing shippers
74 63 65 57 69 53
50
33 28 17
Automatic order generation
Incomingorder registration
Automatic capacity checking
Order monitoring
Quality control systems
Source: McKinsey information technology and logistics survey, 1998–99
Basic operational IT applications are no longer a competitive advantage for LSPs or their customers. About 75 percent of all shippers surveyed use planning and scheduling software known as enterprise resource-planning (ERP) systems,2 and most have warehouse-management systems as well. LSPs that operate warehouses almost all use bar codes and warehouse administration systems. Even among the low-performing logistics providers, 80 percent use tracking and tracing systems for their transportation networks. One factor that separates the high- from the low-performing LSPs in warehouse operations is a greater IT emphasis on vehicle management. Some 80 percent of the top LSP performers (as opposed to only 30 percent of the laggards) use prescheduled and dynamic dock scheduling—the real-time routing of trucks and forklifts to different gates of a warehouse (Exhibit 1, on the previous page). Automatic picking (the programmed retrieval of goods from a warehouse) is also more common among the top performers (80 percent) than the low ones (20 percent). Another factor that sets the top performers apart is their use of ordermanagement IT. The survey showed that far more of the efficient shippers (79 percent) used links called electronic data interchanges (EDIs) to handle orders and to send customers or LSPs relevant information; among the less efficient shippers, only 47 percent used EDIs. Likewise, more than half of the efficient shippers have IT links with both their customers and LSPs, compared with 12 percent of the less efficient shippers.
2
See Dorien James and Malcolm L. Wolf, “A second wind for ERP,” The McKinsey Quarterly, 2000 Number 2, pp.100–7.
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LSPs benefit from strong links with their clients: the survey shows that 83 percent of the best (and only 8 percent of the worst) performers offer on-line booking. Furthermore, efficient shippers rate IT connections with their LSPs far more highly than do their less efficient counterparts. As for the handling of orders, the stars among the shippers stress integration and transparency in processes such as automatic capacity checking, the monitoring of orders, and the maintenance of quality control (Exhibit 2). Internal networking across departments is closely linked to success, especially in industries whose logistical needs are complex. Of the 11 topperforming shippers, 10 had connected all the relevant departments: sales, logistics, and production. None of the less efficient shippers had achieved this level of electronic integration. Smart IT investment makes a large difference in order planning. Most shippers—72 percent of the high performers and 56 percent of the low ones— use or plan to use sophisticated warehouse databases to retrieve and aggregate information quickly. Once these planning systems are in place, the high performers invest in customer analysis and in sales and purchase planning. Meanwhile, the lower-performing shippers (52 percent of them, as compared with 24 percent of the high performers) are struggling with IT infrastructure projects, such as efforts to shift from mainframe to client-server systems. The survey also found that shippers tend to outsource such tasks as warehousing and transportation to LSPs because they offer higher operational effectiveness (Exhibit 3), along with labor costs that are 20 to 30 percent lower. But shippers are reluctant to outsource the operation and, especially, the management of the EXHIBIT 3 integrated parts of the Logistics services providers win in the warehouse supply chain. All of the retailers interviewed see LSPs Shippers logistics as part of their Average time spent in warehouse, Frequency of damage or core business, and many by process, hours error, percent of shipments doubt that LSPs can pro11.5 vide enough information 0.79 to optimize processes 0.64 beyond company bor5.2 ders. Sophisticated, integrated IT systems can 2.7 2.0 help remove these doubts and persuade shippers to Goods Stock Damaged or incomplete outsource more of their received withdrawal shipments logistics, including wareSource: McKinsey information technology and logistics survey, 1998–99 housing, to LSPs.
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No matter how tasks are shared along the supply chain, the increasing level of IT integration—especially between high-performing shippers and the LSP stars—will probably improve the performance of both considerably. —Carl-Stefan Neumann, Jürgen Ringbeck, and Vinzenz Schwegmann
Swiss drug makers: Facing the US giants
During the past five years, the global pharmaceutical industry has experienced a golden age of wealth creation, defined as total returns to shareholders—that is, the value of stocks and dividends (Exhibit 1). Swiss companies, which outperformed both the global stock market benchmark and their European competitors, participated strongly in this trend. Nevertheless, it was US companies that increasingly set the benchmarks, not only in stock value, but also in underlying performance, such as the innovativeness of new therapies, the number of licensing deals,1 and sales of products launched.
EXHIBIT 1
The golden age of pharmaceuticals
Index: Total return to shareholders = 1 in 1993 11 10 9 8 7 6 5 4 3 2 1 0 1993
1
Warner-Lambert Pfizer Ares-Serono S&P Pharma Index Roche Novartis MSCI1 World Index
1994
1995
1996
1997
1998
1999
Morgan Stanley Capital International.
1
February 2000
See Murray Aitken, Sunitha Baskaran, Eric Lamarre, Michael Silber, and Susan Waters, “A license to cure,” The McKinsey Quarterly, 2000 Number 1, pp. 80–9.
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EXHIBIT 2
Market control is a strategic imperative
1994 40 Value: Market capitalization per point of market share, $ billion 35 30 25 20 15 10 5
Warner-Lambert AresSerono Eli Lilly Pfizer SmithKline Beecham Sandoz, Ciba Glaxo Wellcome Roche Bristol-Myers Squibb Novartis Merck Pfizer Inc.2 Glaxo SmithKline 3
2000
Market value,1 $ billion
200 150 100 50 25 10
0 0
1As 2 Merger 3 Merger
1
3 5 6 4 2 Size: Percent of global pharmaceutical market
7
8
of February 29, 2000. announced February 2000. announced January 2000. Source: International Marketing Services; Bloomberg; Datastream; company and analyst reports; McKinsey analysis
McKinsey examined the prospects of the Swiss pharmaceutical industry and what it must do to remain competitive in an increasingly global economy. Exhibit 2 presents a measure of size (the worldwide market share of leading global pharmaceutical companies) on the horizontal axis and a measure of performance (market capitalization per market share point) on the vertical axis. Although Swiss pharmaceutical companies performed reasonably well along each axis, the exhibit clearly shows that their leading US competitors have meanwhile pushed further up and off to the right and thus gained a higher degree of market control. A major factor likely to increase the value gap between the top league and the rest is the increasing importance of global blockbusters: the total global revenue of the top 25 prescription drugs is expanding rapidly compared with the rest of the market (Exhibit 3, on the next page). By 2002, US companies will sell about 85 percent of the top 25, with revenue of $2 billion to $4 billion each. The major losers will be their European, including Swiss, competitors. How should Swiss pharmaceutical companies respond? The first essential is to expand the marketing horizon toward co-development, co-promotion, and even out-licensing. The traditional mind-set was based on “selling my products out of my pipeline through my sales force in my markets.” Now, however, leading pharmaceutical companies will have to position themselves as the preferred partners of both competitors and research firms. Second, the rapidly increasing importance of the consumer-patient as a key health care decision maker will surely force European pharmaceutical
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EXHIBIT 3
Growing importance of blockbuster drugs
Global sales of top 25 products by originating region, percent 100% = Switzerland Japan $9 billion 7 7 $23 billion 8 2 41 Europe 43 86 49 50 39 $35 billion 8 3 $69 billion 0 2 12
United States
43
1986
1 Forecast.
1992
1997
20021
companies to develop and apply new marketing approaches, such as addressing consumers directly through advertisements,2 exploiting marketing opportunities on the World Wide Web, developing new uses for existing compounds, and managing much shorter product life cycles. Swiss pharmaceutical companies, for example, must lead the movement toward direct-toconsumer (DTC) advertising in Europe; weakness in this important area could leave even their regional home market wide open to competitors based in the United States. Third, the Internet will revolutionize the delivery of heath care and drive major changes throughout its value chain. Swiss pharmaceutical companies must therefore develop innovative electronic-commerce strategies to exploit excellent value creation opportunities and to make the moves needed to defend traditional sources of value. The most important threat these changes hold for Switzerland is the possibility that the country’s pharmaceutical companies might lose control of their destiny in the course of further consolidation and that their headquarters and important global functions could move elsewhere. Similar trends, it should be noted, are already having a serious effect in Scandinavia. To remain leaders in the pharmaceutical industry, Swiss companies should start to use external growth strategies such as licensing and comarketing, acquire skills in critical areas such as marketing, close the revenue gap in the United States (Exhibit 4), and selectively participate in the ongoing process of industry consolidation.
2
See Murray Aitken and Frazier Holt, “A prescription for direct drug marketing,” The McKinsey Quarterly, 2000 Number 2, pp. 82–91.
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EXHIBIT 4
Swiss pharmaceuticals must bridge the revenue gap
Percent 11 10 9 8 US market share 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 European market share
1Merger 2Merger
Pfizer Inc.1
Glaxo SmithKline2
Johnson & Johnson Merck Bristol-Myers Squibb Abbott Laboratories Roche AstraZeneca
Novartis Aventis
of Pfizer and Warner-Lambert announced February 2000. of Glaxo Wellcome and SmithKline Beecham announced January 2000.
Moreover, though Swiss pharmaceutical companies operate on a global basis, they still rely heavily on Switzerland, where they locate their headquarters and much of their R&D, global marketing, and production resources. Whether it is still appropriate, strategically or tactically, for these companies to maintain such high levels of activity there remains to be seen. Production in other European countries has much lower factor costs, and regions such as New Jersey (in the northeastern United States) are prime choices for pharmaceutical industry talent. Swiss pharmaceutical companies can respond to the challenge in several ways. Working together, they could increase the attractiveness of the Basle region for industry talent by developing pharmaceutical marketing campuses. They should also think harder about locating key activities in the United States, disaggregate infrastructure-related activities such as production and clinical development services, and either try to capture the leadership in these emerging service industries or allow other Swiss companies to do so. At the national level, Switzerland should make itself the Continent’s best marketing training ground for pharmaceutical companies by deregulating its health care market more quickly than other European countries are doing. Finally, to make it easier and more attractive for talented foreigners to work in
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Switzerland, it should enhance the tax advantages it grants them and improve educational opportunities for their families. If these moves are made in good time, Swiss pharmaceutical companies have a bright future in an increasingly competitive industry. —Eric Bernheim
Yuko Kawamoto is a consultant in McKinsey’s Tokyo office; Alejandro Preusche is a director, Damián Scokin is a consultant, and Eduardo Urdapilleta is a principal in the Buenos Aires office; Stuart Bodden is a consultant in the Houston office, Maurice Glucksman is a consultant in the London office, and Peter Lasky is a consultant in the New York office; Thomas Heuser is a consultant in the Cologne office, Peter Kraljic is a director in the Paris office, and Martin Stuchtey is a consultant in the Munich office; Carl-Stefan Neumann is a principal in the Frankfurt office, Jürgen Ringbeck is a principal in the Düsseldorf office, and Vinzenz Schwegmann is a consultant in the Berlin office; Eric Bernheim is a principal in the Geneva office. These articles can be found on our Web site at www.mckinseyquarterly.com/crweb/curc00.asp.
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CurrentResearch
A brief look at findings from recent McKinsey research projects
A world-class challenge for Japanese banking..................................................8 Value in Argentina ....................................................................................................11 The war for technical talent ..................................................................................14 A plan for German job creation .............................................................................16 Best practice in logistics........................................................................................19 Swiss drug makers: Facing the US giants......................................................... 22
A world-class challenge for Japanese banking
Japan’s banks are still struggling, and international benchmarks show just how far they have to climb before they become globally competitive (Exhibit 1). To match their rivals in the United States and Germany, McKinsey research suggests, these banks would have to change radically, tripling their earnings and cutting their expenses and assets by 25 and 55 percent, respectively.1 In the five years leading up to 1996, US banks posted an average return on assets (ROA) of 1.64 percent, German banks an ROA of 0.85 percent.
1
This article is adapted from chapter 3 of Yuko Kawamoto’s Banks’ Profitability Revolution (Tokyo: Toyo-Keizai, 2000).
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EXHIBIT 1
A tale of three countries: Part 1
Japan 3.57 4.98 0.85 1.11 0.19 Return on assets, percent
Source: Bank of Japan
Germany 9.90
United States
7.54 7.84
1.64 2.04
2.27
2.85
Profit margin, percent
Ratio of equity to assets
Ratio of expenses to profit
Meanwhile, Japan’s banks averaged only 0.19 percent. Their return on equity (ROE) was poor as well: they posted average returns of only 4.28 percent, compared with US and German banks at 20.84 and 11.22 percent, respectively (Exhibit 2). And Japan’s banks spent far more to generate earnings: a multiple of 9.9 times, compared with 2.85 times for US banks and 2.27 times for the Germans (Exhibit 3, on the next page). The problem is that Japanese banks have historically relied heavily on loans to generate profits. But in the five years to 1996, the average profit margin of these loans was only 1.11 percent, as against 2.04 percent for German banks and 3.57 percent for US ones. Japanese banks might look to their US rivals for lessons in diversifying income streams to broaden their earnings base. Risk-management skills at US banks, for example, are now well developed, and this allows them to earn higher returns by lending at rates that vary with the level of risk. Japanese banks could also increase their earnings by focusing more on the retail market and on small businesses, whose lending margins are higher. Moreover, Japan’s banks haven’t made as much progress in the home loan market as have their British, German, and E X H I B I T 2 A tale of three countries: Part 2 US counterparts. Default rates are generally low, Return on equity, percent so the Japanese should 25 United States 20 improve their performance 15 in this area. But the 10 Germany national Housing Loan 5 Corporation, which has 0 half of this market, charges –5 less than commercial –10 Japan –15 banks do, thus preventing –20 them from expanding their 1985 1980 1990 1995 1997 business.
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EXHIBIT 3
A tale of three countries: Part 3
Percent Japan 100.00 98.31 19.80 Germany 100.00 88.90 24.30 Personnel and administrative expenses United States 100.00 82.02 41.40 40.62 11.10 Current income Current cost Profit Current income Current cost
78.51 1.69 Current income Current cost Profit
64.60
17.98 Profit
Source: Bank of Japan
Japan’s banks have an enormous asset base, but their ROAs will improve very slowly indeed if they rely solely on increasing profits: at current levels, earnings would have to rise some 6.5 times to achieve ROAs comparable to international benchmarks. The banks could reduce their asset base by 55 percent if they wrote off bad loans, sold stock and real-estate holdings, slashed their lending to big companies, securitized corporate loans (which have low margins), reduced loans to overseas borrowers and local governments, and cut back on other kinds of lending and guarantees. Even if Japanese banks doubled their earnings, they would have to slash their equity capital by 59 percent to match the ROEs posted by banks in the United States. A reduction of this magnitude could force many Japanese institutions out of business. One dramatic move would be to
EXHIBIT 4
Someone has to pay, 1989–99
$ billion Loan loss: Government investment and loan programs Loan loss: Small- and medium-sized companies 67.3 100.00 40.4 163.3 Disposal of bankrupt banks Capital infusion 91.3 76.9 Cost to taxpayers of stabilizing private financial system Costs incurred because of lack of asset management skills Subsidy to Postal Savings and other public financial institutions 103.8 642.9
307.5
Subsidy for public financial system
Contribution of banking system to national economy1
Total cost to taxpayers
1Contribution of banking system = tax revenue tax refund risk-free interest income. Source: Bank of Japan; Japanese Ministry of Finance; Federation of Bankers Associations of Japan (Zenginkyo); McKinsey analysis
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transfer to a separate entity bad loans and equity that was acquired by the government through capital injections. The new organization would resolve the bad-loan problem and redeem state-owned equity. Although the efficiency and transparency of this approach is certainly appealing, the outcome of similar rescue attempts in Japan has been mixed. The government has consistently underestimated the resources that are needed to deal with the problem of bad loans, leaving the Japanese taxpayer to bear an extraordinary burden to support the financial system (Exhibit 4). Japan’s banks know what has to be done, but they find it easier to analyze the situation than to change it. They have little incentive to take drastic measures because if they did, most of them wouldn’t survive in their present form. Senior managers face the unpalatable prospect of losing their jobs; big, powerful corporations would see the end of their juicy credit lines. Despite some recent big mergers, Japanese banks clearly have not been motivated to go that far. —Yuko Kawamoto
Value in Argentina
In recent years, Argentina has made tremendous economic progress. Among other important points, it can boast of improvements in the productivity of both labor and capital. But for all these advances, a McKinsey study of 22 leading Argentine companies found that three-quarters of them are destroying value. A leading culprit: the high cost of capital for local companies. The study sample, representing 70 percent of the country’s stock market capitalization and including both local companies and subsidiaries of multinationals, focused on economic profit—the profitability that is generated by a company above its cost of capital. Although these companies collectively had operating profits of $15 billion, they had destroyed approximately $5 billion of their accumulated value, representing almost 20 percent of their invested capital during the five-year period from 1993 to 1998 (Exhibit 1, part 1, on the next page). In other words, their returns failed to match what investors could have obtained elsewhere given a similar level of risk.
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EXHIBIT 1
A Latin predicament
1 The high cost of capital is destroying value in Argentina . . . Accumulated value destroyed, $ million 1993 653 1994 776 830 1,059 263 1,245 4,826 2 . . . and elsewhere in Latin America Percent of invested capital created or destroyed, 1993–98 Invested capital, $ million United States 6.9 313,000 1995 1996 1997 1998 Total
Argentina’s economic situation resembles that of other Latin American states, but local companies destroyed three times more value on a percentage basis than did their Chilean counterparts during those years. Meanwhile, Brazil, which still has many stateowned companies, destroyed 46 percent of its invested capital. US companies, by contrast, generated value—about 7 percent of their invested capital (Exhibit 1, part 2).
Chile
–6.0
21,000
The challenge Argentine companies face in gener25,000 –19.8 Argentina ating returns above the –46.0 Brazil 31,000 cost of invested capital runs through the whole economy. The construcSource: Banco Francés; Bloomberg; Instituto Argentino de Mercado de Capitales (IAMC); Bolsa de Comercio de Buenos Aires; Standard & Poor’s; McKinsey analysis tion, energy generation, oil, steel, and telecommunications industries destroyed value amounting to at least 14 percent of their invested capital from 1993 to 1998. Banking, consumer goods, and gas distribution also had negative results, varying from 1 to 5 percent. The exception to this trend was the supermarket sector, which created value amounting to about 11 percent of its invested capital during this period. (Besides benefiting significantly from a surge in demand and geographic expansion, supermarkets extracted value from their vendors.) Local companies show returns on capital similar to those of the United States—returns clearly insufficient for a developing country, taking into account the economic growth of the years considered for this analysis—and the cost of capital is much higher. Argentine companies face two main problems in their efforts to create economic profit: this high cost of capital (Exhibit 2) and the heavy investments of the 1990s. The high cost of capital stems from the country’s elevated level of risk, real or perceived, and reflects external and internal problems, such as fiscal deficits and Argentina’s relatively fragile institutions and legal system.
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EXHIBIT 2
Not worth the risk
Percent Weighted average cost of capital (WACC) 20 15.9 15 10 8.5 5 0 1993 9.6 9.5 9.4 9.5 9.1 17.1 16.6 14.7 13.6 13.6 15.3 9.3 15 11.1 10 5 0 1993 10.1 12.6 11.5 12.7 12.3 10.7 13.3 12.9 12.5 12.1 12.6 9.6 11.6
Argentina United States Average
Return on capital employed (ROCE) 20
1994
1995
1996
1997
1998
1994
1995
1996
1997
1998
Difference between ROCE and WACC 6 4 2 1.6 0 –2 –4 –4.8 –4.5 –6 1993 1994 –3.9 –4.0 –1.0 –4.0 1995 1996 1997 –3.7 1.9 3.9 2.8 3.4 3.4 2.8
1998
Source: Bolsa de Comercio de Buenos Aires; Standard & Poor’s; annual reports; McKinsey analysis
As for the country’s other main problem—namely, heavy investment—both privatization and deregulation led Argentine companies to sink a good deal of money into infrastructure, equipment, and other assets between 1993 and 1998. Many of these investments, though certainly required to help companies remain in business, didn’t necessarily help to generate returns in the medium term. A great many major companies therefore show low returns on invested capital. Other factors also contribute to the underperformance of Argentine companies. The most relevant are the absence of a value generation culture among both managers and shareholders in Argentina, of management (that is, governance) mechanisms and tools to support the creation and nurturing of such a culture, and of incentive systems that would encourage the creation of value by companies. —Alejandro Preusche, Damián L. Scokin, and Eduardo M. Urdapilleta
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The war for technical talent
Two years ago, McKinsey’s War for Talent study1 crystallized the struggle of US companies to find, train, and keep good employees. A recent McKinsey survey, buttressed by case studies and client work, focused on 5,000 computer science and electrical engineering graduates at top universities.
Fewer middle-aged people . . .
The original report took its cue from a UN study projecting a 15 percent fall in the number of 35- to 44-year-olds by 2015. People who can fill technical jobs are in critically short Index: Number of 35- to 44-year-olds in the US = 100 in 1970 supply: according to the US 200 Bureau of Labor Statistics, 180 one-tenth of the more demanding technical openings 160 (such as those related to infor15% drop 140 mation technology and electri120 cal engineering) already can’t be filled within the relevant 100 time frame.
0 1970 1980 1990 2000 2010 2020
Source: United Nations
. . . mean that finders must look further afield . . .
Typically, both large and small companies have hired from big businesses, whose resources and training programs make them good sources of talent. At present, however, most Employee’s employees no longer work Employee’s first company current for a big business—they have company Percent of survey respondents And nearly already left! Size of
company1 Large Small
83 17
Pre1971
77 23
67 33
48 52
30% of these employees are currently involved with start-up groups within their companies
1971– 1991– All graduates 90 96 in sample
Employee’s graduation year
1
Large companies defined as having more than 500 employees; small companies defined as having 500 or fewer employees. Source: 1999 McKinsey engineering-alumni career decisions survey
1
See Elizabeth G. Chambers, Mark Foulon, Helen Handfield-Jones, Steven M. Hankin, and Edward G. Michaels III, “The war for talent,” The McKinsey Quarterly, 1998 Number 3, pp. 44–57.
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. . . and employees aren’t keepers anyway . . .
When companies, large and small, find qualified employees, they don’t stay for long. Half of those who graduated in the 1971–90 period left their first jobs within three to five years, Percent of survey respondents and among those who graduated from 1991 to 1993, more More than two-thirds leave 73 within 3–5 years than two-thirds did. Recent 52 graduates receive, on average, 40 Time spent at 42 2 first company 30 new offers a year.
29
3–5 years 0–2 years
?
22 20 23
1971–90
33
1991–93
42
Pre-1971
1994–96
Employee’s graduation year
Source: 1999 McKinsey engineering-alumni career decisions survey
. . . so you have to show people the money
What to do? The survey shows that though new employees of a company care about its training opportunities and reputation almost as much as do colleagues who have been there for upward of ten years, What factors tip the scale when choosing an employer? Index: Employees responding “important” or “very important”1 new employees care much Reputation, benefits, Total compensation, stock options, more than veteran ones about and training and getting rich quick Or salaries and stock options. Evidence from McKinsey client 100 work suggests that it would be 92 207 100 smart to give new employees what they want. Profits at paper New Veteran Veteran New plants run by really good manemployee employee employee employee (<1 year) (>10 years) (>10 years) (<1 year) agers are 94 percent higher 1 than average. More talented Indexed to 10-year tenure (veteran employee = 100). Source: 1999 McKinsey engineering-alumni career decisions survey young investment bankers are over twice as productive as their less talented colleagues. Top-quartile software developers are worth 5 times as much as the average of all their colleagues, and top-quartile salespeople are worth 14 times the average. Indeed, it appears that a modest improvement in talent can double the market capitalization of a software company. —Stuart Bodden, Maurice Glucksman, and Peter Lasky
2
Data gathered for the 360.Alpha Summit, in Austin, Texas.
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A plan for German job creation
Even in this age of globalization and modern telecommunications, executives are rediscovering timeless truths about the advantages of proximity. In the German city of Wolfsburg, Volkswagen (VW), the local government, and McKinsey are working together to create a new regional economic cluster—a concentration of companies and related institutions focused on a specific technological area. The project is designed to attract high-tech start-ups, suppliers, and other related companies to VW’s doorstep and thus to cut local unemployment in half, equivalent to the creation of 10,000 new jobs, by 2003. Here, in the home of the world’s largest auto plant, the partners have formed a technology center focused on the automotive industry. In addition to demonstrating corporate citizenship, Volkswagen hopes to gain from the creation of a vibrant entrepreneurial community and an improved local supplier base. At the same time, city officials want to combat high unemployment and a dwindling service and retail sector. VW has so far invested about $12 million in the project and the local government about $10 million. Wolfsburg, some 100 miles west of Berlin, lies close to the border with the former East Germany. It is a classic company town: about 50,000 people— more than half of the local labor force—work in VW’s offices and plants (Exhibit 1). Known as the home of the German Wirtschaftswunder and as the birthplace of the Beetle, Wolfsburg had a labor market in steady decline, with an unemployment rate of 18 percent by the late 1990s. In early 1998, Dr. Ferdinand Piëch, the chairman of VW, initiated the project to stimulate economic growth around the VW headquarters, and the “AutoVision” program was born. Since then, local unemployment has dropped to 11 percent, from 18 percent, though only part of the improvement can be attributed directly to the project. Nevertheless, about 1,300 jobs—some moved from other parts of Germany but almost two-thirds new positions—are credited directly to AutoVision. Corresponding to roughly 3 percent of local employment, they run the gamut from unskilled positions to top-level engineering slots. Economic clusters have existed since the artisan quarters of ancient times. More modern examples of spontaneous cluster growth include the toy industry in Nuremberg and the motion picture empire centered in Hollywood. And, as Silicon Valley demonstrates, clusters are ideal for high-tech sectors; proximity lowers many transaction costs and can foster a dynamic exchange
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of ideas as well as a concentration of talent. The success of a company in the cluster increases the value added of the overall network. One of the first moves of the VW project was to create an innovation campus where start-up ventures could be nurtured through “tech-farming.” By building a local entrepreneurial community, the campus fosters a flow of knowledge and investment opportunities. An annual nationwide business plan competition, under the brand name “Promotion,” helps generate business deals.1 The AutoVision partners also created a supplier park, which includes a simultaneous-engineering center where engineers from suppliers work directly with their VW counterparts on the development of new cars and components. Several EXHIBIT 1 suppliers have already built new assembly plants Wolfsburg: A true company town next to the main Volkswagen workforce in Germany, number of workers Volkswagen factory.
Wolfsburg 50,081 Emden 28,091 Ingolstadt1 Despite the expected Wolfsburg Kassel 15,427 Hannover benefits, AutoVision had Braunschweig Salzgitter Hannover 14,708 to overcome a certain Chemnitz 12,543 Neckarsulm1 Kassel Mosel amount of institutional Emden 9,991 questioning inside and Salzgitter 7,398 outside Volkswagen. Neckarsulm Braunschweig 6,618 Ingolstadt Before the cluster dynamMosel 5,900 ics could be truly ignited, Chemnitz 800 for example, it was necessary to convince VW engineers and purchasing executives that the Wolfsburg Volkswagen supplier park wouldn’t Founded 1938 Founded 1938 become a burden and 1999 population: 123,745 that the business plan City workforce 2: 84,000 VW workers in Wolfsburg: 50,081 competition would gener1 Audi plant (Volkswagen subsidiary). 2 ate promising ideas. The Estimated. Source: City of Wolfsburg; Volkswagen; McKinsey analysis city’s officials and various political parties were also wary of ceding control. AutoVision surmounted many obstacles by making sure that all affected groups took part in the project, whether as members of a steering committee or as sources of information or suggestions.
The 1,300 jobs so far created came from the 12 technology start-ups that emerged from the first business plan competition and the 7 manufacturing
1
See Ansgar Dodt, Lothar Stein, and Sigurd Strack, “Do-it-yourself Silicon Valley,” The McKinsey Quarterly, 1999 Number 3, pp. 60–9.
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EXHIBIT 2
European hot spots Specialization
1 Barcelona 9 2 Cambridge 3 Dresden 13 8 2 15 10 14 1 4 12 7 3 11 5 6 4 Grenoble 5 Graz 6 Helsinki 7 Jena 8 Livingston 9 Oulu 10 Poitiers 11 Munich 12 Nice 13 Stockholm 14 Toulouse 15 Ypres Software, electronic commerce Biotech, software Information technology, microsystems Telecom, microelectronics Automotive supplies Telecom Optics, biotech software System-on-chip design Telecom Entertainment, telecom Biotech, multimedia Software, electronics IT, telecom Electronics, aerospace Software
suppliers that had arrived in Wolfsburg by the end of 1999. The tally also includes 510 manufacturing and engineering jobs brought by 55 other suppliers attracted to Wolfsburg by the simultaneous-engineering center. To funnel the available local labor into jobs created by the project, AutoVision includes a human-resources agency, which acts as a bridge to put the longterm unemployed back to work and helps investors overcome the rigidities of the German labor market. Wolfsburg’s lagging service sector has also been targeted. Already, some jobs have been created in Volkswagen’s new Autostadt, the world’s largest brand park, combining VW showrooms and delivery centers with other themed attractions, including an IMAX cinema, an automotive museum, and a five-star hotel. VW has now begun to expand the AutoVision program to other locations in the former West Germany, such as Kassel and Emden. Interest in clusters is growing throughout Germany, where the unemployment rate is about 10 percent. Together with local authorities and companies, ThyssenKrupp, the country’s largest steelmaker, has initiated another cluster program, in Dortmund, in western Germany. Other examples can be found in Bavaria, North Rhine–Westphalia, and Saxony. A McKinsey study has identified a number of European growth regions (Exhibit 2). Most of these hot spots were found to result from individual initiatives by local or regional public-private alliances rather than from systematic national efforts. —Thomas Heuser, Peter Kraljic, and Martin R. Stuchtey
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Best practice in logistics
In modern logistics, information technology systems are as common as forklifts. But the best companies have gone beyond putting bar codes on their containers and tracking shipments by computer. According to a survey of more than 100 logistics services providers (LSPs)—companies that primarily offer shipping and warehousing services—and of manufacturers and retailers using their services, the best performers are investing in highly integrated systems across internal and external supply chains.1 This global survey, conducted in 1998–99 by McKinsey and the Department of Planning and Logistics at the University of Cologne (Professor Werner Delfmann), confirmed that IT expenditures alone can’t create or maintain a top-performing logistics service: once the fundamentals are in place, IT investment must create greater transparency and integration in both internal and external applications. The survey also suggested that shippers might outsource more logistics work to LSPs if their information systems provided higher-quality data.
EXHIBIT 1
Warehousing: Smart information technology applications make the difference
Percent of business units using IT applications for various purposes
High-performing LSPs1 Low-performing LSPs1
100 80 60 36 20 80 67 80 73
30
Dock scheduling Characteristics of high performers
Paperless vehicle Warehouse tour management optimization2
Automatic picking Automatic picking for standardized goods and processes only
Load planning
Prescheduled Advanced use of Real-time and dynamic technology—for optimization routing instance, scanners and for multiple radio data transmitters orders
Optimized load sequences
1Logistics 2 The
services providers. process of defining the optimal path for machinery to use when navigating a warehouse. Source: McKinsey information technology and logistics survey, 1998–99
1
The performance of these companies was measured by the quality and efficiency of logistics. The key criteria for quality were transport times, punctuality, correctness, and flexibility. For manufacturers and retailers, efficiency was measured through logistics costs (relative to the industry). For LSPs, it was measured directly through criteria such as utilization and employee productivity.
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EXHIBIT 2
Operational applications are critical for shippers
Percent of business units using various kinds of applications
High-performing shippers Low-performing shippers
74 63 65 57 69 53
50
33 28 17
Automatic order generation
Incomingorder registration
Automatic capacity checking
Order monitoring
Quality control systems
Source: McKinsey information technology and logistics survey, 1998–99
Basic operational IT applications are no longer a competitive advantage for LSPs or their customers. About 75 percent of all shippers surveyed use planning and scheduling software known as enterprise resource-planning (ERP) systems,2 and most have warehouse-management systems as well. LSPs that operate warehouses almost all use bar codes and warehouse administration systems. Even among the low-performing logistics providers, 80 percent use tracking and tracing systems for their transportation networks. One factor that separates the high- from the low-performing LSPs in warehouse operations is a greater IT emphasis on vehicle management. Some 80 percent of the top LSP performers (as opposed to only 30 percent of the laggards) use prescheduled and dynamic dock scheduling—the real-time routing of trucks and forklifts to different gates of a warehouse (Exhibit 1, on the previous page). Automatic picking (the programmed retrieval of goods from a warehouse) is also more common among the top performers (80 percent) than the low ones (20 percent). Another factor that sets the top performers apart is their use of ordermanagement IT. The survey showed that far more of the efficient shippers (79 percent) used links called electronic data interchanges (EDIs) to handle orders and to send customers or LSPs relevant information; among the less efficient shippers, only 47 percent used EDIs. Likewise, more than half of the efficient shippers have IT links with both their customers and LSPs, compared with 12 percent of the less efficient shippers.
2
See Dorien James and Malcolm L. Wolf, “A second wind for ERP,” The McKinsey Quarterly, 2000 Number 2, pp.100–7.
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LSPs benefit from strong links with their clients: the survey shows that 83 percent of the best (and only 8 percent of the worst) performers offer on-line booking. Furthermore, efficient shippers rate IT connections with their LSPs far more highly than do their less efficient counterparts. As for the handling of orders, the stars among the shippers stress integration and transparency in processes such as automatic capacity checking, the monitoring of orders, and the maintenance of quality control (Exhibit 2). Internal networking across departments is closely linked to success, especially in industries whose logistical needs are complex. Of the 11 topperforming shippers, 10 had connected all the relevant departments: sales, logistics, and production. None of the less efficient shippers had achieved this level of electronic integration. Smart IT investment makes a large difference in order planning. Most shippers—72 percent of the high performers and 56 percent of the low ones— use or plan to use sophisticated warehouse databases to retrieve and aggregate information quickly. Once these planning systems are in place, the high performers invest in customer analysis and in sales and purchase planning. Meanwhile, the lower-performing shippers (52 percent of them, as compared with 24 percent of the high performers) are struggling with IT infrastructure projects, such as efforts to shift from mainframe to client-server systems. The survey also found that shippers tend to outsource such tasks as warehousing and transportation to LSPs because they offer higher operational effectiveness (Exhibit 3), along with labor costs that are 20 to 30 percent lower. But shippers are reluctant to outsource the operation and, especially, the management of the EXHIBIT 3 integrated parts of the Logistics services providers win in the warehouse supply chain. All of the retailers interviewed see LSPs Shippers logistics as part of their Average time spent in warehouse, Frequency of damage or core business, and many by process, hours error, percent of shipments doubt that LSPs can pro11.5 vide enough information 0.79 to optimize processes 0.64 beyond company bor5.2 ders. Sophisticated, integrated IT systems can 2.7 2.0 help remove these doubts and persuade shippers to Goods Stock Damaged or incomplete outsource more of their received withdrawal shipments logistics, including wareSource: McKinsey information technology and logistics survey, 1998–99 housing, to LSPs.
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No matter how tasks are shared along the supply chain, the increasing level of IT integration—especially between high-performing shippers and the LSP stars—will probably improve the performance of both considerably. —Carl-Stefan Neumann, Jürgen Ringbeck, and Vinzenz Schwegmann
Swiss drug makers: Facing the US giants
During the past five years, the global pharmaceutical industry has experienced a golden age of wealth creation, defined as total returns to shareholders—that is, the value of stocks and dividends (Exhibit 1). Swiss companies, which outperformed both the global stock market benchmark and their European competitors, participated strongly in this trend. Nevertheless, it was US companies that increasingly set the benchmarks, not only in stock value, but also in underlying performance, such as the innovativeness of new therapies, the number of licensing deals,1 and sales of products launched.
EXHIBIT 1
The golden age of pharmaceuticals
Index: Total return to shareholders = 1 in 1993 11 10 9 8 7 6 5 4 3 2 1 0 1993
1
Warner-Lambert Pfizer Ares-Serono S&P Pharma Index Roche Novartis MSCI1 World Index
1994
1995
1996
1997
1998
1999
Morgan Stanley Capital International.
1
February 2000
See Murray Aitken, Sunitha Baskaran, Eric Lamarre, Michael Silber, and Susan Waters, “A license to cure,” The McKinsey Quarterly, 2000 Number 1, pp. 80–9.
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EXHIBIT 2
Market control is a strategic imperative
1994 40 Value: Market capitalization per point of market share, $ billion 35 30 25 20 15 10 5
Warner-Lambert AresSerono Eli Lilly Pfizer SmithKline Beecham Sandoz, Ciba Glaxo Wellcome Roche Bristol-Myers Squibb Novartis Merck Pfizer Inc.2 Glaxo SmithKline 3
2000
Market value,1 $ billion
200 150 100 50 25 10
0 0
1As 2 Merger 3 Merger
1
3 5 6 4 2 Size: Percent of global pharmaceutical market
7
8
of February 29, 2000. announced February 2000. announced January 2000. Source: International Marketing Services; Bloomberg; Datastream; company and analyst reports; McKinsey analysis
McKinsey examined the prospects of the Swiss pharmaceutical industry and what it must do to remain competitive in an increasingly global economy. Exhibit 2 presents a measure of size (the worldwide market share of leading global pharmaceutical companies) on the horizontal axis and a measure of performance (market capitalization per market share point) on the vertical axis. Although Swiss pharmaceutical companies performed reasonably well along each axis, the exhibit clearly shows that their leading US competitors have meanwhile pushed further up and off to the right and thus gained a higher degree of market control. A major factor likely to increase the value gap between the top league and the rest is the increasing importance of global blockbusters: the total global revenue of the top 25 prescription drugs is expanding rapidly compared with the rest of the market (Exhibit 3, on the next page). By 2002, US companies will sell about 85 percent of the top 25, with revenue of $2 billion to $4 billion each. The major losers will be their European, including Swiss, competitors. How should Swiss pharmaceutical companies respond? The first essential is to expand the marketing horizon toward co-development, co-promotion, and even out-licensing. The traditional mind-set was based on “selling my products out of my pipeline through my sales force in my markets.” Now, however, leading pharmaceutical companies will have to position themselves as the preferred partners of both competitors and research firms. Second, the rapidly increasing importance of the consumer-patient as a key health care decision maker will surely force European pharmaceutical
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EXHIBIT 3
Growing importance of blockbuster drugs
Global sales of top 25 products by originating region, percent 100% = Switzerland Japan $9 billion 7 7 $23 billion 8 2 41 Europe 43 86 49 50 39 $35 billion 8 3 $69 billion 0 2 12
United States
43
1986
1 Forecast.
1992
1997
20021
companies to develop and apply new marketing approaches, such as addressing consumers directly through advertisements,2 exploiting marketing opportunities on the World Wide Web, developing new uses for existing compounds, and managing much shorter product life cycles. Swiss pharmaceutical companies, for example, must lead the movement toward direct-toconsumer (DTC) advertising in Europe; weakness in this important area could leave even their regional home market wide open to competitors based in the United States. Third, the Internet will revolutionize the delivery of heath care and drive major changes throughout its value chain. Swiss pharmaceutical companies must therefore develop innovative electronic-commerce strategies to exploit excellent value creation opportunities and to make the moves needed to defend traditional sources of value. The most important threat these changes hold for Switzerland is the possibility that the country’s pharmaceutical companies might lose control of their destiny in the course of further consolidation and that their headquarters and important global functions could move elsewhere. Similar trends, it should be noted, are already having a serious effect in Scandinavia. To remain leaders in the pharmaceutical industry, Swiss companies should start to use external growth strategies such as licensing and comarketing, acquire skills in critical areas such as marketing, close the revenue gap in the United States (Exhibit 4), and selectively participate in the ongoing process of industry consolidation.
2
See Murray Aitken and Frazier Holt, “A prescription for direct drug marketing,” The McKinsey Quarterly, 2000 Number 2, pp. 82–91.
CURRENT RESEARCH
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EXHIBIT 4
Swiss pharmaceuticals must bridge the revenue gap
Percent 11 10 9 8 US market share 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 European market share
1Merger 2Merger
Pfizer Inc.1
Glaxo SmithKline2
Johnson & Johnson Merck Bristol-Myers Squibb Abbott Laboratories Roche AstraZeneca
Novartis Aventis
of Pfizer and Warner-Lambert announced February 2000. of Glaxo Wellcome and SmithKline Beecham announced January 2000.
Moreover, though Swiss pharmaceutical companies operate on a global basis, they still rely heavily on Switzerland, where they locate their headquarters and much of their R&D, global marketing, and production resources. Whether it is still appropriate, strategically or tactically, for these companies to maintain such high levels of activity there remains to be seen. Production in other European countries has much lower factor costs, and regions such as New Jersey (in the northeastern United States) are prime choices for pharmaceutical industry talent. Swiss pharmaceutical companies can respond to the challenge in several ways. Working together, they could increase the attractiveness of the Basle region for industry talent by developing pharmaceutical marketing campuses. They should also think harder about locating key activities in the United States, disaggregate infrastructure-related activities such as production and clinical development services, and either try to capture the leadership in these emerging service industries or allow other Swiss companies to do so. At the national level, Switzerland should make itself the Continent’s best marketing training ground for pharmaceutical companies by deregulating its health care market more quickly than other European countries are doing. Finally, to make it easier and more attractive for talented foreigners to work in
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Switzerland, it should enhance the tax advantages it grants them and improve educational opportunities for their families. If these moves are made in good time, Swiss pharmaceutical companies have a bright future in an increasingly competitive industry. —Eric Bernheim
Yuko Kawamoto is a consultant in McKinsey’s Tokyo office; Alejandro Preusche is a director, Damián Scokin is a consultant, and Eduardo Urdapilleta is a principal in the Buenos Aires office; Stuart Bodden is a consultant in the Houston office, Maurice Glucksman is a consultant in the London office, and Peter Lasky is a consultant in the New York office; Thomas Heuser is a consultant in the Cologne office, Peter Kraljic is a director in the Paris office, and Martin Stuchtey is a consultant in the Munich office; Carl-Stefan Neumann is a principal in the Frankfurt office, Jürgen Ringbeck is a principal in the Düsseldorf office, and Vinzenz Schwegmann is a consultant in the Berlin office; Eric Bernheim is a principal in the Geneva office. These articles can be found on our Web site at www.mckinseyquarterly.com/crweb/curc00.asp.
