Reconciling long term vs short term in a company's life

If it weren't for the difficulty to supplant the cash coming from public markets, one might be inclined to question the financial markets. It is not an isolated instance for the financial markets to be portrayed as mere obstacles confronting the otherwise strategic corporate executive with the imperative of delivering quarterly numbers at the expense of long term profitability in the publicly traded companies.

Ian Davis, the worldwide managing director of McKinsey & Co., is one more voice, among the few of this profile, to take exception with such views. Mr. Davis, in a 4/10/05 article with FT, strongly suggests that, in the well-run and managed company, the health of the company balances very well with long-term performance. Such an approach, the author says, encourages "management teams to understand how to look after the company today in a way that will ensure it remains strong in the future."

We are also reminded that share prices reflect the market expectations of future performance, and "in almost all markets around the world, 70 to 90 per cent of the stock market value can only be explained by the cash flows beyond the next three years."

Mr. Davis identifies the following indicators management teams should consider for the health of their companies:

• a robust and credible strategy;
• productive, well-maintained assets;
• innovative products, services, and processes;
• a fine repute with customers, regulators, governments, and other stakeholders;
• the ability to attract, retain, and develop high-performing talent.

Following such prescriptive indicators, Mr. Davis goes on to acknowledge that, in a recent survey, the majority of executives indicated they would forego "an investment that offered a decent return on capital if it meant missing the quarterly earnings expectations."

Among the offered suggestions, one is particularly interesting: "Companies must first identify investors who will support their strategy and try to attract them. [...] Management teams should then talk to these investors about the metrics the company has developed to track both performance and health, be they product development, customer satisfaction or retention of talent.

So, in other words, management should take care of both the sort-term and the long-term in companies, and communicate what they are doing.

A lesson from the markets

A couple of products coming from Sony are worth noticing for their potential to signal novel approaches to markets. One is Sony Cybershot DSCH1, the 5.1MP digital camera, and the other is Sony MZ-DH/RH line of minidiscs.

Both these products indicate some remarkable departures from several of Sony's directions. The lower pricing, about half of what Sony used to charge for its high-end new to market products, could be aimed at better positioning of the camera against Panasonic's Lumix, and the minidisc against Samsung's players and Apple's iPod.

The feature sets have also gotten less impressive than what we've come to expect. Except for the higher optical zoom and stabilization for the camera, and Organic EL Display for the minidiscs, several of the high-end/marketing driven gimmicks are gone. Among the missing features in the new lines are: the magnesium body, hi-def digital amplifier, and long battery-life in minidiscs, and the InfoLithium M battery as well as the Zeiss lens and the ability to use non-Sony memory supports for the camera.

So, besides the price adjustment, what else is there? Sony gave in and its minidiscs support now both MP3 and Atrac3plus direct playback. Moreover, the $6-1Gb Hi MD removable disc can store music-, and data-files of all types, thus enabling the player to become a storage device as well. Considering Sony's attachment to ways of protecting its content copyrights at all costs, this is no small change in a world where consumers want to freely move content among devices. As for its DSCH1 camera, this seems to offer a refreshing price vs. feature-set balance that takes into account both competitors' prices as well as the rise of consumer preferences for other brands, and maybe the diminution of its own following.

Since all these are product-events that must have been in the making at a time when Mr. Stringer, Sony's recently appointed non-Japanese CEO, was still the British executive of Sony's American entertainment operations, it is safe to assume that even the old guard at Sony had heard the message from the markets. However late, market capitalism seems to be alive and well and has finally taught a lesson that Sony's executives could not afford to ignore.

The To Do List at Sony should include the making its 1Gb Hi MD discs widely accessible, by lowering the price and licensing the standard out. In an increasingly commoditized world, the competitive game has not remained about engineering alone as much as great engineering and design followed by ubiquity and standards. In this sense, the expected truce in the next generation DVD media support is another sign that the folks in the big league get it.

Nota Bene: According to 54-year-old Ken Kutaragi, the "Father of the PlayStation," Sony executives had been too restrictive in controlling Sony content in a world where consumers of digital movies and music want hassle-free access.

He was of the opinion that Sony must revive its original innovative spirit. The Company also has been hurt by its insistence on making its content proprietary, Kutaragi said.

Mr. Kutaragi's latest creation, the handheld PlayStation Portable, is selling very well. An estimated 3 million have been sold since it was released in Japan in December and the United States last month. Considering his recent demotion, he has lost his board seat recently, Microsoft or Samsung could do well by making him an offer

The $100 Laptop

Several years have passed since the fee to narrow the digital divide in the US was added to our tax-laden phone bills. The results for education are mixed at best, though schools and libraries got their share of wiring and equipment. Now, a new initiative " that could revolutionize how we educate the world's children" is coming to the fore. It is known as the $100 Laptop, and it is the brain-child of a diverse and growing group including MIT faculty members at the Media Lab: Nicholas Negroponte (a founder of the Lab), Joe Jacobson (serial entrepreneur and inventor of e-Ink), and Seymour Papert (one of the world's leading theorists on child learning). In addition, there are three initial companies that have committed to this project: Google, AMD, and News Corp.

Professor Negroponte describes the $100 Laptop project in the following terms:

"The $100 Laptop will be a Linux-based, full-color, full-screen laptop, which initially is achieved either by rear projecting the image on a flat screen or by using electronic ink (developed at the MIT Media Lab). In addition, it will be rugged, use innovative power (including wind-up), be WiFi- and cell phone-enabled, and have USB ports galore. Its current specifications are: 500MHz, 1GB, 1 Megapixel. The cost of materials for each laptop is estimated to be approximately $90, which includes the display, as well as the processor and memory, and allows for $10 for contingency or profit."

At this time, the biggest challenge of the project is estimated to be "[M]manufacturing 100 million of anything. This is not just a supply-chain problem, but also a design problem." Governments in target countries will take care of the distribution and marketing aspects of the project.

If history is of any help, anyone recalls Larry Ellison's Next Internet Computer? That was a company whose objective, 5 years ago, was to provide cheap computing (under $500) to the US schools. Linux was around at the time, and so were Java, the internet, browsers, money, applications, etc. Beyond scale, and the burning desire of the governments to do well for their youth, what else could make $100 Laptop a success? Maybe the presence of News Corp among the initial corporate sponsors of the program?


For more info on the $100 Laptop, see: http://laptop.media.mit.edu

Intel's Otellini strikes at the US tax regime

Recently, Paul Otellini, Intel's to be CEO, has expressed his considerations about building a $3 Bn chip factory abroad due to higher taxes in the US relative to Europe and Asia. Mr. Otellini considers the 35% corporate tax his company would pay to the federal government too high in comparison to:

a) Israel, which offers a 20 percent capital grant, a 10 percent tax rate and a two-year tax deferral;
b) Malaysia offers a 10-year tax deferral;
c) Ireland offers a 12.5 percent tax rate.

When comparing operating costs in the US with the 3 alternatives above, Mr. Otellini stated: "The problem that we have and which the industry has is that it costs us $1 Bn more to operate inside the U.S. than outside of the country." It's not wages and capital; it's almost all attributed to tax benefits - or the lack thereof - in the United States compared to what is offered elsewhere." It is not easy to accurately calculate the TCO's/ROI's associated with each alternative since the raw numbers in the overseas alternatives present cost savings exceeding $1Bn, while having a factory built in the US, in close proximity to the most other Intel operations, would increase the ROI.

However, difficult a calculation this may be, Mr. Otellini may be onto something more than jettisoning the costs of the leader in a battered industry. Indeed, by looking at the Israeli alternative, one can gauge the real willingness of a country to become a premiere hi-tech place since Israel is offering to pay a premium while it experiences its own budget difficulties and quasi-war situation.