Is Russia Risky?

Two Top Investors Disagree(March 30)

East Capital says it s no worse than other !eveloping econo"ies# Carnegie $on!er thinks it s "ore volatile By Kevin Crowley Europe's two best-performing equity fund managers over the past decade invest in Russia from offices three blocks apart in tockholm! "heir assessments of the riskiness of Russian stocks are miles apart! #eter Elam $akansson runs East Capital %roup's Russia &und' with ()!* billion +,-!. billion/ in assets! 0f you had invested ,)1'111 in the fund )1 years ago' it would have been worth ,*.'.11 as of 2ar! )3! "hat return' an average of -4 percent annually' makes it the best-performing European stock fund that has more than ,311 million of assets' according to 2orningstar! +25R6/ "he second-best performer was Carnegie &onder's Russia fund' run by &redrik Colliander! 7 ,)1'111 investment in Colliander's fund )1 years ago would be worth ,.1'.118a -- percent annuali9ed return! "he same ,)1'111 investment in the tandard : #oor's 311-stock inde; in -11) would now be worth ,)-'*11! <espite such returns' investors remain wary of the 2oscow market! "he evidence= the market's relatively low price-earnings ratio' a measure of how much investors value a company's potential profit growth! "he 2ice; 0nde; of Russia's >1 largest publicly traded firms has a p-e of *!?' while Bra9il's Bovespa 0nde; has a p-e of ))!4! "he main e;changes in China and 0ndia as well as the @! ! and the @!K! have priceearnings ratios of )? to )4!>' according to data compiled by Bloomberg! $akansson of East Capital says that perception is wrong= "he country is no more risky than other emerging markets! 7s investors come to agree with his view' he says' they will be willing to pay higher prices for Russian stocks' helping Russia outperform Bra9il and other emerging markets by at least -3 percent! A"here's definitely risk when you invest in emerging markets' including Russia' but 0 don't see a reason for having a lower p-e than Bra9il'A says $akansson' ?B' sipping tea in his )?th-floor office overlooking snow-covered central tockholm! A"he ama9ing thing is' people are not perceiving this!A Carnegie &onder's Colliander says corruption and corporate governance issues make the Russian economy inherently more volatile than emerging economies such as Bra9il! Colliander says Russian stocks ought to trade at a )3 percent discount to

those in rival economies' still an improvement from current levels! A"he present government has its own interests' messing with the economy in so-called strategic sectors'A such as oil and gas' says Colliander' ?.' who has managed Carnegie's ,BB? million Russian fund since -111! A0t's Russia risk!A <ifferences aside' both managers e;pect %a9prom and Cukoil to benefit from higher oil and gas prices and are buying stock in such banks as berbank! %a9prom' which accounts for about one-si;th of the 2ice; 0nde;' has a p-e ratio of 3!)' less than half European rival Royal <utch hell's +R< 7/ p-e of )1!?! 0nvestors have little confidence in the company's management' Colliander says' because officials at Russia's Energy 2inistry use the company Afor their own purposes!A %a9prom sold a *!? percent stake in 6ovatek' Russia's second-largest gas producer' for ,) billion less than its market price last month! ADhy in hell would you do thatEA Colliander says! Even so' he thinks governance problems are priced into the stock and says high oil prices boosted by political tensions in 6orth 7frica should help it rise over the ne;t si; months! $akansson' who has run his fund since )**B' says the biggest threat to Russian growth today is from a potential global economic slowdown8as opposed to the late )**1s' when the country's economic problems were internal! Colliander' unlike his crosstown rival' is still wary of Russia's propensity to cause its own problems! ADe always get reminded of this special Russian issue'A he says! A omething happens every two or three years! 0t's difficult to say what it's going to be ne;t time' but something's going to happen! 0t always does!A

%ow to Turn &tock &peculators into Investors

Tweaking circuit 'reakers or !e"an!ing (urther tra!ing !isclosures won t take the casino out o( )all &treet# Instea!* pu'lic stock ownership shoul! 'e treate! "ore like a private invest"ent By %reg Blonder 0magine opening a bakery with your cousins! Fou work )B-hour days to build a loyal following of bread-and-pastry connoisseurs8only to discover that cousin Goey is treating his partnership shares like a roulette wheel! $e pulls out cash when the bakery is under stress' instead of pulling together with the family to save the business! $e pledges his shares to a competitor to buy a boat! "hen Goey repurchases them in time to vote cousin Eddie out of the kitchen! 6o one in their right mind would tolerate this kind of behavior' even from your favorite aunt's son! But it's standard operating procedure in the public stock market' where far too many investors behave like cousin Goey' caring more about lining their own pockets than building valuable companies! $ow can we turn speculators back into investorsE "he wrong way is to impose additional market circuit breakers' as was recommended last month by the A&lash CrashA panel of the @! ! Commodity &utures "rading Commission and the ecurities and E;change Commission! "he same goes for further trading-disclosure rules! 7nd bonus restrictions and salary caps! "hese treat symptoms' not the root cause' which is an imbalance between stockholder and company financial-value systems! "he solution can better be secured by treating public stock ownership more like a private investment! Companies erve "hree Hital 2asters 7ll companies serve three masters= their investors' their customers' and their employees! 7ll are essential in their own way! Dithout customers' you have no revenue! Dithout employees' there are no products or future profits! Dithout shareholders' there's no capital or liquidity! Dithout a doubt' private shareholders deserve a seat at the table! "heir cash' e;pertise' and patience provide companies with the time and resources to succeed!

0n the last few decades' however' the period for which the average public stockholder hangs on to shares has dropped from around seven years to Iust a few months! Cike Goey' these AinvestorsA aren't loyal to the company' its employees' or its customers! "hey care only about its stock price! "hey seek all the gain with none of the responsibilities! Dhy should they dominate our economic systemE Even after the financial system meltdown' 0 still believe in open markets! But as a matter of public policy and wise economic stewardship there is no reason to treat drive-by investors any better' say' than we treat gamblers at the track! De must encourage investors to carefully evaluate the long-term prospects of a company8 before they invest8so the stock price will reflect its true enterprise value' uncolored by speculation! 0ssue Cong-"erm and peculative tock $owE Create two classes of shares for all listed public companies! Class 7 shares would have to be held for at least one year after purchase! Class B shares could be traded freely! 5nly Class 7 shares would qualify for long-term capital gains treatment! +%ranted' active traders in B shares would rarely qualify for long-term gains' but this distinction would mark a bright line between the classes!/ ince market cycles often run for five years' and companies value stable financing during hard times' 0'd prorate the long-term capital gains ta; from -1 percent +at one year/ to 3 percent +if held five years or longer/! econd' only Class 7 shares would qualify to receive dividends! 0f you're not investing in the long-term health of a company' you don't deserve a share of its long-term accumulated wealth! "hird' only Class 7 shares could vote! Drite 5ff ABA Cosses as %amblers 2ust &inally' Class B capital losses would be treated as gambling debts are8deductible only in the current year and only against other short-term Class B gains! 0f you are rolling the dice on stocks more frequently than once a year' you are gambling with the shares' not investing in the strength of the 7merican economy! %iven today's modern financial platforms' the e;change of stock into these two classes could be completed within three years! "he changes would be minor' at best' if the body politic were willing! 7 simplified version of the e;isting Rule )?? applies

to Class 7 restricted stock! 7nd with the EC's universal cost-basis tracking mandate +section 41?3/ phasing in starting this year' capital gains calculations will be nearly automatic! 6ew listings might choose to issue only Class 7 shares' letting Class B shares wither away! 0 bet %oogle +%55%/8among other big-name initial public offerings8would have Ioined the A7A camp! 0t's time for Goey to class up or get out of the kitchen!

%ow +'out &haring ,our &heri((?(+pril -)

It s calle! cross./uris!iction colla'oration* an! it s saving local govern"ents an! private organi0ations "illions 'y ena'ling the" to share resources By teve Rohleder Gust think about it= <oes every town in 7merica really need its own police force' fire department' and dog catcherE 2ust every municipality have its own back-office administrative bureaucracy for purchasing supplies and equipmentE 5r might there be room for merging some of these functions among adIacent communities to save costsE 7s local governments across the country grapple with huge budget shortfalls' some are trying a novel approach to saving money without making drastic service cuts! By merging' coordinating' consolidating' and contracting services with neighboring Iurisdictions' local governments are finding new ways to stretch their budgets and share the cost of public services! 7nd cross-Iurisdiction collaboration' as the practice is becoming known' is not limited to government organi9ations! 0n many cases' participating agencies are reaching out to corporations' nonprofits' citi9ens' groups' and other stakeholders to leverage their skills and capabilities to achieve new economies of scale! "his gives all interested parties a Aseat at the tableA and a role to play in setting priorities and identifying outcomes! 2ost important' citi9ens of communities that are collaborating with their neighbors will reap longterm benefits without having to bear the pain of cuts in services and government programs in the short term! Dhen Fou Can't "a; or hrink 7nymore "he scope of cross-Iurisdictional models varies from two small California towns' Burlingame and $illsborough' sharing a fire chief to save ,)11'111 a year to the @!K!'s uffolk County trying to save ,311 million per year by outsourcing most of its services! 7 5ctober -1)1 study by 7ccenture that included more than *1

domestic and international case studies' interviews with public-sector leaders' and data analysis shows an urgency among government leadership to make changes before the budget levee breaks! %overnments cannot shrink anymore' ta; anymore' or dissolve! $ence' they must collaborate! 0t's no surprise that ilicon Halley' the center of technology innovation' has been taking a close look at this creative approach! 2ore than two do9en local governments in the region have Ioined forces with B1 private-sector groups' corporate and nonprofit alike' to identify specific issues that affect the quality of life of local communities! "ogether' through such groups as Goint Henture ilicon Halley 6etwork' government and business are tackling comple; challenges' from economic development to emergency preparedness! 7nd they are working in unison to design more comprehensive' yet more affordable' solutions by reducing duplication! "he budget for all ilicon Halley local government entities totals more than ,)? billion! 7 recent study indicated that a regional operation-center approach could save ilicon Halley municipalities between ,-31 million and ,311 million per year 8by 9eroing in on ,3 billion in spending where significant scope e;ists for crossIurisdiction collaboration to deliver back-office functions' such as human resources' information technology' procurement' and accounting! Combining *)) Responses 7round the country are many e;amples of cross-Iurisdiction collaboration! By coordinating or consolidating such services as police' fire' and transportation' many cities in California have significantly reduced wasteful duplication in recent years! &or instance' the City of Cupertino has contracted its police services to the anta Clara County heriff's office' saving millions of dollars annually! anta Clara County sheriff officers patrol the City of Cupertino and respond to *)) emergencies to reduce ta;payer costs for police services! 0n 2orris County' 6!G!' five towns and boroughs8<over' 2ine $ill' Dharton' 2t! 7rlington' and Rockaway8merged five municipal courts into a single regional court' targeting lower costs per court session for a proIected savings of ,-!43 million over )1 years! 0n the same county' the 2orris County Cooperative #ricing Council enables some -11 city and county government entities' such as school districts and police departments' to pool their purchasing power to receive better prices on such goods and services as vehicle purchasing and maintenance and repair!

0n 5regon' 2etro serves as a cross-Iurisdictional regional body for -3 cities in the #ortland area with economic development' transportation' waste disposal' and environmental and cultural services! 0n %eorgia' the cities of #reston and Deston merged with Debster County in -11* to eliminate duplication of services and reduce costs to serve the public! haring 0nfo "ech upport 7nother good e;ample can be found in 2ichigan' where the cities of 7nn 7rbor and Chelsea have signed a contract to share information technology resources! @nder the agreement' 7nn 7rbor will provide Chelsea with technology support for the city's software and hardware' management of its website' and content and technology for its local television station! %overnment collaboration is also emerging in southeastern #ennsylvania' where five counties have Ioined forces in pursuit of a regional application for an energyefficiency and conservation block grant! "he counties aim to add partners and programs over time' form a regional institution to operate a loan fund' support clean technology' assist local governments with energy efficiency plans' and measure the performance of public facilities! 2ost of us have been conditioned to believe that concentrating e;clusively on cutting and spending trade-offs within traditional local government frameworks is the only way to trim government budget deficits! 0t's time for local' county' and regional government leaders to build cross-Iurisdiction partnerships for more effective governance at lower cost! 0f they do' everyone will benefit! teve Rohleder is group chief e;ecutive of 7ccenture's $ealth : #ublic ervice operating group' responsible for 7ccenture's services globally to health-care providers' payers' and plans as well as services to government and public-sector clients in the defense' public safety' human services' revenue' postal' customs' and finance and administration sectors! Rohleder is a speaker and industry spokesperson who has testified before Congressional committees on such topics as homeland security' government reform' and the need to create a <igital "echCorps! $e served as 7ccenture's chief operating officer prior to assuming his current position in -11*!

)hy %ewlett.1ackar! Di! the Right Thing

The co"puter "aker has revitali0e! its 'oar! o( !irectors# %1 !eserves congratulations* not the harsh criticis" I&& has !ole! out By Beverly Behan &or nearly a decade' $ewlett-#ackard +$#J/ has served as the poster child for boardroom dysfunction! &rom director wiretaps to chief e;ecutive dismissals' this board's had it all! Can anyone disagree with the statement that $# should remake its board of directorsE 0nstitutional hareholder ervices has condemned the computer maker's chairman Ray Cane and CE5 Ceo 7potheker for their roles in identifying new directors' but in fact both 0 and $#'s shareholders should embrace Cane and 7potheker for having the courage to tackle this nasty issue and for coming up with a terrific roster of new board talent that includes 2eg Dhitman' former CE5 of eBay +EB7F/' #at Russo' former CE5 of 7lcatel-Cucent +7C@/' and humeet BanerIi' CE5 of Boo9 : Co! 0nstead 0 ' the country's foremost governance watchdog' has recommended that shareholders withhold their votes for $# directors to protest the Adirect involvement of the company's CE5 in the selection process for new board nominees!A 0 's stance on $# is the classic Aforest for the treesA scenario! 7potheker's hefty compensation package and the past dramas of the $# boardroom led 0 to sound alarm bells over procedural irregularities that appear to amount to little! 2eanwhile' 0 lost sight of the bigger picture of what $#'s board has Iust accomplished! "he Red &lags Cet's take a look at what all the fuss is about! 0 implies that 7potheker employed the old imperial CE5 tactic of populating the boardroom with buddies! But did heE Certainly' the director recruitment process at $# involved two red flags!

&irst' the board created an ad hoc committee to identify director candidates rather than using the nominatingKgovernance committee8to whom this Iob is assigned by the company's charter and stock e;change rules8and gave 7potheker a seat on the ad hoc committee! "his is' indeed' very unusual! "he 0 report indicates' however' that $#'s nominatingKgovernance committee vetted any prospective directors recommended by the ad hoc committee and director appointments required approval of the full board! 7s such' there appear to have been several checks and balances in place on the CE5's involvement in the process and plenty of opportunities for independent $# directors to vote down 7potheker's candidates! econd' one of the new $# directors sits on a board in Europe with 7potheker' and some of the other candidates had been customers of 7# + 7#/' where 7potheker worked from )*BB to -1)1! uch associations always raise independence concerns! 0 actually recommends' however' that shareholders all should vote in favor of the new director nominees8likely viewing them as not only strong board candidates but also sufficiently independent to warrant an endorsement! 0 recommends that shareholders vote only against members of the board's nominating and governance committee! 5verlooking the Real 0ssue 0 suggests there is something sinister about the fact that Athe new CE5 was involved from the earliest stages of the process!A But in fact' at the outset of director recruitment activities' it would be bad practice for a nominatingKgovernance committee not to gather the CE5's views about the skills and e;perience the board needs! 2oreover' if a CE5 has recommendations on well-qualified board candidates who seem to fit the criteria for new directors' why shouldn't he put their names forward for considerationE 0 ' however' takes the e;treme position that Apermitting the CE5 to influence the identification and appointment of outside directors runs contrary to best practices!A 7s for the director recruitment process itself' any CE5 constitutes a vital part of that process despite the stock e;change safeguards8in place since the fall of Enron8 that transfer power for director recruitment to independent members of the board! 2ost directors will tell you that the CE5's character and capabilities are pivotal to their decisions to accept board invitations= <o prospective board members genuinely believe this CE5 has what it takes to make the company successfulE 0s this CE5 someone they can work with as a board memberE 5r do they doubt this CE5's abilitiesE 5r believe he or she will be less than forthright or is otherwise

lacking in integrityE 0 suggests that Aa CE5's participation in the appointment of directorsA is problematic! 0n fact' it is fundamental! #erhaps the most troubling aspect of 0 's position on $#' however' is that it overlooks a larger shareholder issue= the fact that so many boards fail to revitali9e themselves! ome become entrenched' passively renominating directors year after year regardless whether they say anything relevant in board meetings! $#' on the other hand' has stepped up to this thorniest of issues by saying farewell to four long-serving board members and fielding an impressive team of new directors that should delight shareholders! "he company is essentially giving this board and its new CE5 a fresh start' aimed at overcoming this company's past boardroom problems! &or that' the $# board deserves a great deal of credit!

)hich CE2s 3et &houl!? ?(+pril 4)

Corporations are wise to prepare (or 'u"py post.recession /ourneys# Chie( e5ecutives shoul! think Mother Teresa6not &un T0u By <ov eidman 5ne of the most frequent points 0 heard at this year's Dorld Economic &orum in <avos cropped up during offline discussions in which business leaders revealed that they were eager to lead their organi9ations on a Iourney! "he undertakings they described sound less like the linear traIectory most businesses follow quarter-toquarter and much more like the curvilinear Iourneys we pursue in life! Each time 0 heard this message' 0 would raise a question= $asn't your organi9ation endured a bruising ride for the past three years' during the worst economic crisis since the %reat <epressionE "hese chief e;ecutive officers8let me refer to them as an amalgam named A$owardA8responded by nodding wearily' with a hopeful gleam! ADe sure have'A $oward would say! ABut if we commit to this Iourney to significance' it will prevent us from lurching from crisis to crisis and help us generate sustainable business value in ways that our competitors cannot!A $oward gets it because $oward is transforming his organi9ation from a AcanA company to a AshouldA company! Ganuary's Dorld Economic &orum clearly laid out the stakes for -)st century business! "he conference's theme' A hared 6orms for the 6ew Reality'A stressed that we have entered a new reality! De live in an interconnected world' an ethically interdependent world! "hat means that norms +i!e!' tangible business practices based on shared values/ reign' not Iust rules! Business sustainability is no longer

about what organi9ations can and cannot doL it is about what organi9ations should do! 6ormative means Ashould!A ARisk'A A0nnovation'A and A%rowthA $oward is choosing the right path forward as he8like every other global leader8 stands at a fork in the road! Dhen 0 ask $oward why he has committed to this Iourney' he responds with terms like Arisk'A Ainnovation'A and Agrowth!A 0 think of the Einstein quote= ADe can't solve problems by using the same kind of thinking we used when we created them!A $oward has figured out that he cannot lead his organi9ation to sustainable success in the -)st century by himself! $oward recogni9es that he needs help to address some of the biggest problems8intensifying global competition' looming talent shortages' dwindling natural resources' ongoing geopolitical volatility8and he can get that help by connecting with his employees' value-chain partners' governments' communities' and even the environment through shared values! 6ot every CE5 is a $oward' however8at least not yet! 2any leaders are not certain we have confronted a fork in the road! "hey are not even sure they need to lead their organi9ations on a Iourney! Dhen some business leaders see any signs of improvement in the economy' notes Dorld Economic &orum presenter and innovation and technology e;pert <on "apscott' Athey have a natural inclination to fall back on old ways and conclude it is business-as-usual!A "hese e;ecutives +let's call them &uture $owards/ remain unconvinced that the world and the global economy are undergoing a structural change! "hey hope AnormalA business conditions will return as soon as this cyclical hiccup concludes! "he Gourney 6ot "aken "his is a natural response! 7fter all' it takes time to respond to a structural change! &uture $owards also tend to point to one of the following reasons to e;plain why they are not taking the same Iourney as $oward= )/ "he Iourney matters less than other strategic imperatives! "he fact that the world's most important gathering of leaders chose as its theme A hared 6orms for the 6ew RealityA suggests otherwise! o do 0! 7s a CE5 who has promoted principled performance since )**?' 0 have witnessed a sea change in responses to this business philosophy' which was often deemed Atoo soft!A "hat resistance has

largely disappeared on the heels of corporate scandals such as that of Enron' as well as the mortgage-underwriting shenanigans that helped spark the global economic crisis! -/ De are in the grip of bad ideas' false assumptions' and wrong values! 0n other words' our thinking and -1th century habits of thought and behavior are getting in the way of responding to the new realities that require attention in the -)st century! &or e;ample' our -1th century focus on Ahow muchA +how much product can we manufactureL how much revenue can we squee9e into this quarterL how much market share can we takeE/ frequently obscures AhowA questions +how can we create sustainable relationships with trading partnersL how can we forge deep and meaningful connections with our peopleL how can we out-behave the competitionE/ "he AhowA questions more accurately frame what is necessary to thrive in the -)st century! "his grip marks a tough-but-common obstacle during times of change8 one that requires leaders to distinguish between past and present' as well as between right and wrong! >/ "he Ashould worldA contains intangibles that are difficult to measure! "his is true! Fet $oward views this as a challenge' rather than an insurmountable obstacle! 7 growing number of businesses are overcoming this measurement difficulty to the delight of their shareholders! "he mantra that we can't manage what we can't measure has echoed through companies for the past century! Fes' the key competitive differentiators of the -)st century8employee and organi9ational behavior' talent' innovation' ethical leadership' and organi9ational culture' among other assets8are less tangible and more amorphous than say' factories' office equipment' internal controls' C7%R' Ebitda' and compensation packages' but that's changing! 0n fact' $owards and their companies are developing these measures on their Iourney right now' which 0 wrote about in A@pgrade to the $uman 5perating ystem!A 0n addition to the progress of new and better cultural' behavioral' and human metrics' we see more and more e;amples and calls for $owardesque leadership every day! "he A"yrannyA of hort-"ermism 0n a 2arch Harvard Business Review article entitled ACapitalism for the Cong "erm'A <ominic Barton' 2cKinsey : Co! global managing director' challenges fellow leaders to fight the AtyrannyA of short-termism! 5ne way Barton does so is by

pointing out that nearly .1 percent of all @! ! equity trades are conducted by AhyperspeedA traders' many of whom hold stocks for Aonly a few seconds!A E;ecutives' Barton suggests' might find new ways to filter input from shareholders while giving more weight to those who favor a longer-term' buy-and-hold approach! #aul Bulcke' CE5 of 6estlM +6E 6/' an avowed Atrue believer in a principle-based approach to businessA describes shared norms based on specific global principles as Athe very ingredients we need to fuel development!A Cisco +C C5/ CE5 Gohn Chambers asserts that Agreat companies have very strong and great cultures! 7 huge part of a leadership role is to drive the culture of the company and to reinforce it!A Chambers also credits his success as a leader with his decision to leave behind the command-and-control model for a more collaborative leadership mode' one that he says Ameans 'letting go' by involving others in decision making' listening to ideas' finding common ground' and striking compromises!A @nilever +@6/ CE5 #aul #olman has spoken out against the pressures of shorttermism by encouraging those he leads to measure success in terms of progress' rather than in terms of an end state! 7sked to identify his leadership models' #olman passes over un "9u and 2achiavelli +embraced by the 6eutron Gacks and Chainsaw 7ls of yesterday/ in favor of %andhi' 6elson 2andela' 2other "eresa' and Man's Search for Meaning author Hiktor &rankl! #olman quotes the <alai Cama to describe the style of leadership needed in the -)st century= A0f you seek enlightenment for yourself Iust to enhance yourself' you missed the purpose! 0f you seek enlightenment for yourself by helping others' you are with purpose!A 0 agree! $oward is committed to a Iourney to create an organi9ation rooted in values and pursuing significance! By pursuing significance' $oward believes his organi9ation should achieve success! 0t doesn't take an Einstein to see that $oward's choice is enlightenedL it takes only the courage and conviction to embrace thinking that reflects -)st century realities!

)here )ill ,ou 7e in $ive ,ears?

I( you !rea! (acing this 8uestion* you re in goo! co"pany# 7ut you have to answer it# $ear not6we can help By 7my %allo Posted on Harvard Business Review: March 18, 2011 8:30 M 2ost people have been asked that perennial' and somewhat annoying' question= ADhere do you see yourself in five yearsEA 5f course it is asked most often in a Iob interview' but it may also come up in a conversation at a networking event or a cocktail party! Knowing and communicating your career goals is challenging for even the most ambitious and focused person! Can you really know what Iob you'll be doing' or even want to be doing' in five yearsE Dhat the E;perts ay 0n today's work world' careers take numerous twists and turns and the future is often murky! A&ive years' in today's environment' is very hard to predict! 2ost businesses don't even know what's going to be required in two or three years'A says Goseph Deintraub' a professor of management and organi9ational behavior at Babson College and co-author of the book' "he Coaching 2anager= <eveloping "op "alent in Business! Dhile it may be difficult to give a direct and honest response to this question' Deintraub and "imothy Butler' a senior fellow and the director of Career <evelopment #rograms at $arvard Business chool' agree that you need to be prepared to answer it! 7nd you need to treat any conversation like an interview!

AEvery person you talk to or meet is a potential contact' now or in the future'A says Deintraub! "he first step is knowing the answer for yourself! A0t's a very profound question! 7t the heart of it is 'where does meaning reside for meE'A says Butler! Fou have to clarify for yourself what you aspire to do with your career before you can communicate it confidently to others! Be introspective &iguring out the answer to this question is not an easy task! A"he real issue is to do your homework! 0f you're thinking this through in the moment' you're in trouble'A says Butler! 0n his book %etting @nstuck= 7 %uide to <iscovering Four 6e;t Career #ath' Butler cautions that you need to be prepared to do some serious introspection and consider parts of your life that you may not regularly think about! A0t starts with a reflection on what you are good at and what you are not good at'A says Deintraub! &ar too many people spend time doing things they are not suited for or enIoy! Deintraub suggests you ask yourself three questions= )! Dhat are my valuesE -! Dhat are my goalsE >! Dhat am 0 willing to do to get thereE "his type of contemplation can help you set a professional vision for the ne;t five years! "he challenge is then to articulate that vision in various situations= a meeting with your manager' a networking chat' or a Iob interview! 0f you don't know' admit it Even the deepest soul-searching may not yield a definitive plan for you! "here are many moving parts in people's career decisions8family' the economy' finances8 and you may simply not know what the ne;t five years holds! ome worry that without a polished answer they will appear directionless! "his may be true in some situations! A&or some people' if you don't have the ambition' you're not taken seriously'A says Deintraub! But you shouldn't fake it or make up an answer to satisfy your audience! "his can be especially dangerous in a Iob interview! aying you want #:C responsibility in five years when you have no such ambitions may land you the Iob' but ultimately will you be happyE ARemember the goal is to find the right Iob' not Iust a Iob! Fou don't want to get it Iust because you were a good interviewee'A says Deintraub!

Know what they're really asking Butler and Deintraub agree that while the five-year question is not a straightforward one! Butler says that hiring managers rely on it to get at several different pieces of information at once! "he interviewer may want to know' 0s this person going to be with us in five yearsE A"he cost of turnover is high so one of my biggest concerns as a hiring manager is getting someone who will be around'A says Butler! "here is another implied question as well= 0s the position functionally wellmatched for youE "he interviewer wants to know if you'll enIoy doing the Iob! Deintraub points to another possibility= A"hey are trying to understand someone's goal orientation and aspirational level!A 0n other words' how ambitious are youE Before responding' consider what the asker wants to know! &ocus on learning and development Fou run the risk of coming off as arrogant if you answer this question by saying you hope to take on a specific position in the company' especially if the interviewer is currently in that position! Butler suggests you avoid naming a particular role and answer the question in terms of learning and development= Dhat capabilities will you have wanted to build in five yearsE &or e;ample' A0 can't say e;actly what 0'm going to be doing in five years' but 0 hope to have further developed my skills as a strategist and people manager!A "his is a safe way to answer regardless of your age or career stage! AFou don't want to ever give the impression that you're done learning'A says Deintraub! Reframe the question Research has shown that it's less important that you answer the e;act question and more important that you provide a polished answer! Enter the interview knowing what three things you want the interviewer to know about you! @se every question' not Iust this one' to get those messages across! Fou can also shorten the timeframe of the question by saying something like' A0 don't know where 0'll be in five years' but within a year' 0 hope to land several high-profile clients!A Fou can also use the opportunity to e;press what e;cites you most about the Iob in question! A0n any competitive environment' the Iob is going to go to someone who is genuinely interested and can articulate their interest'A says Butler! 1rinciples to Re"e"'er Do9

N &irst' do the contemplative work to develop a personal answer to the question N @nderstand what the interviewer is trying to gather from your response N horten the timeframe of the question so you can give a more specific and reasonable reply Don t9 N 2ake up an answer you don't believe in N #rovide a specific position or titleL instead focus on what you hope to learn N &eel limited to answering the narrow question asked 8 broaden it to communicate what you want the hiring manager to know about you Case tudy O)= Know where you thrive Bob $alsey found out about the opening of associate dean of Babson's undergraduate program the same way everyone else at the school did8through an email announcement! $e had been on the faculty as a professor of 7ccounting for )years and recently had taken on the role of chair for that department! #rior to his academic career' he had been in the corporate world' holding a C&5 position at a retailing and manufacturing company and working as the vice president and manager of the commercial lending division of a large bank! "he associate dean Iob appealed to him because it was similar to the positions in which he'd thrived in the corporate world! Reflecting on his years of e;perience' Bob knew he most enIoyed being in a supporting role' rather than the top gun! Dhile an associate dean position is often seen as a stepping-stone for those who eventually want to become dean' Bob wasn't interested in that! $e didn't want to be the center of attention' now or in the future! #lus everyone at the school loved the current dean' <ennis $anno' and Bob knew it would be unpalatable for him to talk with the nominating committee about eventually unseating <ennis! Dhen asked about his future plans' Bob was clear= A0 said' '0'm not coming in with any designs on becoming dean! 7nd if <ennis leaves' 0 will keep the train going until we get a new dean! 0 have always been a terrific number two! 0 am the person who can make your number one a success!'A Goe Deintraub' the e;pert from above and a member of the committee' said it was clear that Bob was passionate about the role' and the committee was impressed with his candor! $e said that under other circumstances Bob might have appeared to be

lacking aspiration' but in this case his response simply told them he was the right person for the Iob! ADhen people really want a Iob' they tend to overpromise! 0 figured it doesn't do me any good to get in under false e;pectations'A says Bob! A2y motivation in taking this Iob was to work alongside and learn from <ennis!A $e has been serving as associate dean for close to a year now and has found the satisfaction he was looking for! Case tudy O-= Be honest about the future "hree years ago 2argaret Juandt was working as an $R generalist at Bristol 2yers quibb when a former colleague who worked at Citi%roup called to ask if she was interested in applying for a generalist Iob! 7t the time' 2argaret wasn't sure she wanted to continue along the generalist track! he knew she eventually wanted more specialty e;perience! A0 went into $R to be an $R professional' not to be a generalist'A she says! But her contact told her there would likely be other more speciali9ed opportunities in the future' so she decided to apply! <uring an interview with Brian' the H# of the division that she would be supporting' he asked her' A<o you want to run $R somedayEA Brian was a highly ambitious senior e;ecutiveL as the H# of Commercial #ayment olutions' he held full #:C responsibility! 2argaret answered' A0 don't know!A he could see Brian react immediately= A$is whole body language changed and he sat back in his chairA! he then qualified her response' A7spirationally yes'A she said' Abut 0 also love teaching and research! 0'm a young woman in my childbearing years and 0've worked with enough women in $R to know that we don't always get to do what we aspire to! 0t's really hard for me at this point in my career to look more than three years out!A Brian paused for a long time and then said' A"hat's one of the most honest answers 0've heard!A 7fter the interview' 2argaret was concerned she might have blown it' but she was happy with her decision to be honest! A0 don't lie in interviews'A she says! 2argaret got the Iob and soon after she was hired Brian confessed that he had been concerned about her answer at first! But as he reflected on it' he reali9ed how much sense it made! 0t showed him that 2argaret was both thoughtful and serious about her career! 2argaret was the $R generalist to Brian's division for ). monthsL then' as she'd hoped' she was promoted to her current' speciali9ed role managing a global leadership development program for high-performing managers!

1atent re(or"?(+pril

:)

The spluttering invention "achine

+"erica;s patent syste" has pro'le"s< a new law woul! (i5 only a (ew &5R all 7mericaPs an;ieties about its decline as a superpower' its deficits and its weak economy' it can still be proud of its strength as an innovator! 7mericans make four times as many patent applications per head as Europeans! #atents spur innovation and lay the foundations for future growth' by assuring inventors that they will reap the rewards of their effort and by publicising their discoveries! But worries have grown that e;cessive patenting may now be having the opposite effect= businesses and other researchers may be discouraged from innovating in areas that depend heavily on prior discoveries' for fear of being sued for patent infringement! Besides making it too easy to bring patent lawsuits' it is argued' 7merica hands out patents too readily= an often-quoted e;ample is the one granted to 7ma9on for its Qone-clickR online-shopping button! Cast year the upreme Court restricted the scope of such business-process patents' but not by enough to satisfy critics!

Big technology companies complain of Qpatent trollsR8companies that buy lots of obscure patents and then bombard alleged infringers with lawsuits! +"he QtrollsR argue that by making patents valued they are helping to create a market in invention that will encourage inventors!/ urging patent activity has overwhelmed the @ #atent 5ffice' which is taking ever longer to process applications +see chart/! 7fter years of failed attempts to remedy the situation' on 2arch Bth the enate passed the biggest overhaul to patent law since the )*31s! 0ts bill would give the patent office the right to set its own fees' and keep all the proceeds +the "reasury swipes some of these now/' so it can hire enough e;aminers to cut its backlog! 0t would also align 7merica with international practice by granting patents to the first person to file them! 6ow' they are awarded to the first to invent a product or idea! "his was intended to give small inventors a fair chance against big companies better equipped to file applications! But businesses complain about having their patents challenged' years after they were granted' by people claiming to be the original inventor! Barack 5bama' who includes patent reform in his grand campaign to make 7merica more competitive' has praised the bill! 0t now has to pass in the $ouse! But even if it becomes law it will not please all the many businesses and other organisations that file patents! ome think it will still be too easy and potentially lucrative to bring lawsuits for patent infringement! 5thers wanted it to be made easier to challenge patents! Gosh Cerner' an economist at $arvard Business chool' faults the bill for not giving third parties a means to obIect to a patent before it is granted! 0t does create a process for opposing a patent afterwards' as in Europe' but some say it will still be too burdensome for the challenger! "hose hoping for a broader crackdown on business-process patents will also be disappointed!

Europe is seeking to improve its patents system' too! 5n 2arch *th finance ministers from -3 of the -. European @nion countries agreed to the creation of a single European patent which would not need separate validation at national level8 which has been a glaring gap in the single European market! + pain and 0taly for years did their best to block it because patents would have to be translated only into English' %erman and &rench!/ "he plan must now be approved by the European #arliament! Bruno van #ottelsberghe' an intellectual-property e;pert at olvay Brussels chool of Economics and 2anagement' says this will slash the cost of a European patent to Iust a few times the cost in 7mericaL it now costs about )3 times as much! Even so' he complains that national patent offices will still issue patents independently' which may undermine the value of those of the European #atent 5ffice! 7 unitary patent will not make Europe a hotbed of innovation! But it will help! 7nd despite the flaws in the new laws' the attention to patent reform on both sides of the 7tlantic is good news for business!

+ special report on glo'al lea!ers

Cra0y.talking 'o((ins
The surest way to wiel! in(luence is to invent so"ething use(ul D$E6 trying to generate new ideas' Qyou have to make sure people feel 5K about saying cra9y things'R says 6athan 2yhrvold! $is firm' 0ntellectual Hentures' seeks to profit from inventions! 2r 2yhrvold does not need the moneyL as a former chief technology officer of 2icrosoft he already has sacks of it! But he believes that Qinvention is the closest thing to magic we have!R 2r 2yhrvold convenes Qinvention sessionsR' each one including thinkers from a variety of fields! $e puts them in a room with gallons of coffee and lets them bounce ideas around! 7ssistants record the conversation and Iolly it along by proIecting relevant scientific papers onto a screen! 2r 2yhrvold' a physicist by training' takes part with gusto! Because he is brainy and well connected +investors in his firm include 2icrosoft' 0ntel' 7pple' %oogle' ony and 6okia/' other brainy people are happy to attend his pow-wows! 6o idea is too outrageous to receive a hearing! 5ne participant suggested killing malarial mosquitoes with laser beams! Everyone laughed! But then

they started thinking about it and realised that laser technology is much cheaper than it was' thanks to Blu-Ray players and laser printers! 7 working prototype was built in -11B! "he firm is now looking for a partner to manufacture it! 7mong other things' his team has designed a nuclear reactor that would use nuclear waste as its fuel! "his' he says' would squee9e -1 times more power out of uranium than current technology does! $e and Bill %ates set up "erra#ower' an energy firm' to develop the idea! "his is the kind of ambitious and risky bet that the world has to make if global warming is to be curbed' says 2r 2yhrvold! 0f it comes off' he will make another fortune! 0f not' he has plenty of other ideas! 2r 2yhrvoldPs firm illustrates some useful principles for those who want to foster innovation! &irst' as technology grows more comple;' advances depend less on individual inspiration and more on collaboration! "he more that the millions of scientists in the world talk to each other' the more good ideas will emerge! "he number of patents granted has risen from *11'111 in )*B3 to )!*m in -11B! 2r 2yhrvoldPs firm is based near eattle' but flies in scientists from far and wide and maintains a subsidiary in 0ndia to tap the torrent of innovation there! 0ts boffins in Bangalore are working on proIects ranging from a red laser to preserve food to a <67 nano-machine to deliver drugs to precisely the right spot in a patientPs body! "he second principle is that profits matter! 0nvention has many mothers' of which money is probably not the most important! 0nventors tinker because that is what they love doing! 6ecessity' famously' plays a role! But inventors also want to live well! "he profit motive is a crucial source of discipline! 0t is one thing to make a battery-powered carL quite another to make one sufficiently cheap and powerful for people to buy it! Fet the market for ideas is far from perfect! Capital is impatient! "here is plenty of venture capital for ideas that promise returns in the short or medium term' but longer-term research and development depends heavily on governments! 0t is typically funded on a charitable basis= Q%ive me the money and youPll never see it again'R as 2r 2yhrvold puts it! $e favours a more businesslike approach' involving a more liquid market for investors to buy and sell ideas! uch a market' he thinks' would attract billions of dollars for new inventions! $is ideas are controversial! 0ntellectual Hentures' as well as generating its own ideas' buys sheaves of patents from others! ome people in ilicon Halley fear that 2r 2yhrvold will use his portfolio of patents to sue technology firms for allegedly

infringing them! But 2r 2yhrvold denies any intention of becoming what Halley folk call a Qpatent trollR! $e runs a number of funds that allow patient investors to take a punt on a basket of ideas that may produce a long-term pay-off! "his generates immediate rewards for inventors who sell their patents' thereby encouraging innovation' he argues!

0nvented threats ?(+pril =)

765"$ER day' another scary story about how China is taking over the world! "his latest one is about how China is +gasp/ becoming more focused on innovation! "hatPs supposed to be a problem because economic leadership derives from the ability to innovate! China cannot continue to grow at its current pace forever +and surpass 7merica as the world's largest economy/ without innovating! 7fter a while its low rate of population growth will become an issue' so it must rely on doing more with less to support its aging population! 7nd there appears to be a large-scale industrial policy underway' designed to turn the Chinese into innovators! !n 200", a#out 300,000 a$$%ications for uti%it& $atents were fi%ed in 'hina, rough%& e(ua% to its tota% of invention $atents, which have #een growing s%ight%& faster than uti%it& fi%ings in recent &ears) But even if *ust ha%f of 'hina+s tota% fi%ings in 201, are for invention $atents, the nationa% $%an ca%%s for a huge %ea$, to one -i%%ion, #& 201,) B& contrast, $atent fi%ings in the .nited States tota%ed s%ight%& -ore than /80,000 in the 12 -onths ended in Se$te-#er, according to the $atent office) 'hina+s $atent surge has #een evident for &ears) !n 0cto#er, 1ho-son Reuters issued a research re$ort, forecasting that 'hina wou%d sur$ass the .nited States

in $atent fi%ings in 2011) 2!t+s ha$$ening even faster than we e3$ected,4 said Bo# Ste-#ridge, an inte%%ectua%5$ro$ert& ana%&st at 1ho-son Reuters) 6et if the trend is not sur$rising, the a-#ition of the 'hinese $%an is stri7ing) 1he docu-ent indicates, for e3a-$%e, that 'hina intends to rough%& dou#%e its nu-#er of $atent e3a-iners, to ",000, #& 201,) 81he .nited States has 9,300 e3a-iners): 2aybe China will become the world's leading innovator' but that will be hard to accomplish before it develops its own consumer culture to test and market new ideas! 0t will be very hard to anticipate what new products or techniques a foreign culture's market will demand! "aking an e;isting product and making it cheaper is one thing' but coming up with a new one +that people actually want/ is hard8 especially when the direction of innovation is determined by the government! 0t is said that necessity is the mother of invention! 7 demand for a new product or a new' better technique for making an e;isting product frequently serves as the muse for most successful innovations! But traditionally +with the notable e;ception of space e;ploration and defence technologies/' national pride and the need to be bigger and grow faster have not been as reliable a source of inspiration! Cots of patent filings do not mean more products or techniques that are useful or demanded! + ide note= does the sudden interest in filing patents mean China plans to become more respectful of international intellectual property rulesE/ But even if China does become the centre of innovation' does that make other countries worse offE DouldnPt 7merican consumers' retailers and distributors also benefit from new' cheaper productsE 2ight some new Chinese innovation inspire follow-on 7merican innovationE 7merican innovations have long enriched other countries and created employment opportunities abroad! "here's no reason Chinese innovation couldn't have the same effect on the 7merican economy!

online.coupon (ir"s

3roupon an5iety
The online.coupon (ir" will have to "ove (ast to retain its i"pressive lea! %R5@#56 has arrived in China! 5n 2arch )4th the online-coupon firmPs new site there8a Ioint venture with "encent' the countryPs biggest internet company8began offering daily deals such as .3S off the regular price of a trip to an indoor hotsprings resort! 0nitial signs were that Chinese consumers will rush to snap up %rouponPs offers' as they have in many other parts of the world! 0n -11* %roupon was a virtual nobody' confined to Iust >1 7merican cities' with )-1 employees' -m subscribers and Iust ,>>m in revenues! By the end of -1)1 it had become a global success' with more than ?'111 staff' 3)m subscribers in 343 cities worldwide and ,.41m in revenues! Fet amid all the e;citement over the QworldPs fastest-growing company everR' as some have breathlessly described %roupon' words of caution can increasingly be heard! Even 7ndrew 2ason' the firmPs habitually cheerful boss' seems to harbour

doubts! QBy this time ne;t year' we will either be on our way to becoming one of the great technology brandsR' he recently wrote in an internal memo' Qor a cool idea by people who were out-e;ecuted and out-innovated by others!R 2ore fundamentally' the whole idea of Qdaily dealsR may have serious flaws! "he basic idea is nothing new! Consumers sign up to receive offers from local firms by e-mail each day' ranging from restaurant meals to pole-dancing lessons' at discounts of up to *1S! But %roupon made virtual coupon-clipping e;citing by' first' having offers e;pire after Iust a few hours and' second' cancelling them if they do not attract a minimum number of buyers +the QgroupR in %roupon/! 7lthough this rarely happens' it induces buyers to spread the word among friends and family' boosting the uptake! "he daily fren9y has already spawned new phrases' such as Q%roupon an;ietyR8Qthe preoccupation and feeling of an;iousness and not being able to sleep knowing that a new %roupon will be released after )amR' according to "he @rban <ictionary' a website which tracks such coinages! @nlike lightly staffed but equally hyped internet firms such as &acebook and "witter' %roupon needs an army of salespeople to negotiate deals with local businesses in each city it covers' and a further platoon of bright young copywriters to churn out the witty' whimsical e-mail pitches it sends out to consumers! Dhat makes %roupon really stand out' however' are its margins! 0t typically charges businesses half of the discounted price of a voucher! Henture capitalists say they have never seen such impressive numbers! "his goes a long way towards e;plaining why the start-up was able to raise a whopping ,)!) billion in financing and why' in <ecember' %oogle was willing to pay an even more astounding ,4 billion for it! 2r 2ason walked away from the deal and has started the process of getting a public listing! "his decision may come to haunt him! %rouponPs position is not as unassailable as it appears from its rapid growth and huge market share8more than 41S in 7merica' according to neTtup Research' which analyses tech firms! "o ward off competition' neTtup reckons' %roupon will be forced to lower the share of revenue it keeps from its deals! Deals a !i"e a !o0en &or starters' almost anyone can set up a daily-deals site! 7nd many already have! "here are hundreds of clones in 7merica alone' most specialising in certain product categories! "o help overwhelmed consumers' there is even a service' "he <ealmap'

which lists all the daily deals available in a city! 2ore dangerously for %roupon' big online firms have begun to enter the fray! 0n <ecember 7ma9on invested ,).3m in Civing ocial' the marketPs number two' which is said to be in talks to raise a further ,311m! 7nd &acebook' the worldPs biggest social network' will soon start testing local discounts! 0n addition' %roupon cannot rely on the Qnetwork effectsR that have given companies such as &acebook and eBay' the worldPs biggest online-auction site' an almost unassailable lead= the more users such services have' the more valuable they become' thus attracting even more users! 0n the case of %roupon the network effects are comparatively weak! Being the biggest kid on the block is certainly an advantage= a long mailing list attracts better merchants' which pull in more consumers! But both businesses and consumers can easily switch to other sites! %rouponPs managers are aware of all this! Rob olomon' its chief operating officer' agrees that the barriers to entering the daily-deals market are low and the network effects weak! $owever' he believes that' with the right strategy' the company can create competitive barriers to shore up its dominant position! 5ne way it is doing so is to make better use of all the data it collects' for instance to personalise deals and help local businesses design their %roupon offers! Cast year the firm hired as chief data officer an e;ecutive from 6etfli;' a film-rental business noted for its datamining skills! 0n 7merica %roupon already tailors some offers depending on the se;' location and buying history of a subscriber! "he ne;t step is for %roupon to become a broader Qplatform for local commerceR' in the words of 2r olomon8a bundle of services that make that market more efficient! 0n 7merica it has already started testing virtual storefronts where a cityPs businesses can organise their own deals! 0t is said to be working on a smartphone application that alerts consumers to a local businessPs special offers whenever they walk past its real-life storefront! Besides having to keep one step ahead of its many competitors' there is another reason why %roupon needs to grow into a broader local-commerce operation= the daily-deals phenomenon' despite its remarkable recent growth' may have its limits! 7lthough 2r olomon claims that *3S of local firms using %roupon come back for more' independent research comes up with markedly less impressive numbers! Cast summer @tpal <holakia of Rice @niversity interviewed )31 businesses that had done %roupon promotions! 5ne-third said they did not make any money from them' and ?-S said that they would not do another daily deal! "he reasons for such numbers are various! Businesses grumble that the deals attract

mainly bargain-hunters who do not spend more than the couponPs face value and do not become repeat customers! 7lthough these problems may be fi;ed by designing the promotions better' there are some longer-term worries! tudies have repeatedly shown that price discounts erode brand value' says 2r <holakia! "hey may be good for giving businesses some e;posure but the benefit of this is likely to wear off after a few such promotions! 2r olomon will have none of this' calling 2r <holakiaPs survey unrepresentative and insisting that %roupon has a queue of new companies keen to sign up! Even so' there is a risk that local businesses' having given %roupon a try' will abandon it! $ow the behaviour of consumers will evolve is harder to predict! o far the hunger for online coupons seems insatiable! %rouponPs best customers are young' female city-dwellers' who tend to be avid followers of fashionL but fashions change! 2r <holakia has already seen signs of what the @rban <ictionary will probably call Q%roupon fatigueR! <oes this mean that %roupon will go the way of 6apster' &riendster or 2y pace' all of which had meteoric rises before crashing and burningE "his is clearly a risk! But with its powerful momentum' strong management and hefty financial backing' the firm certainly has a chance of becoming the dominant platform for local service businesses to pull in the punters' much as 7ma9on has come to dominate online shopping for all sorts of physical goods! 0f so' though' daily deals will probably be Iust one of %rouponPs offerings!

Internet start.ups

+nother 'u''le?(+pril --)

&o"e tech start.ups look over.value! Q0 C76P" decide what 0 like poking more= you' or these bubbles'R says bubbleblowing Kim Kardashian' a reality-"H star' in a new application for &acebook +see right/! Cameo tars' the company responsible for this innovation' lets &acebookers send to their online friends clips of minor celebrities mouthing generic greetings! Besides enriching the worldPs culture' the firm may also make a fortune! But gloomy types wonder if the profusion of highly valued internet start-ups with lighter-thanair business plans is evidence of a different kind of bubble! &or the first time since -111' internet and technology entrepreneurs can raise seed capital with little more than a half-formed idea and a do9en #ower#oint slides! Q"here is probably a bubble in the number of start-ups'R says 7lan #atricof' a venture capitalist' though he is not yet convinced that there is irrational e;uberance in later-stage valuations!

Fet valuations have certainly risen' especially for the leading firms in this latest' QsocialR phase of the digital revolution! %roupon' a two-year-old firm that offers group discounts to online consumers' reportedly turned down an offer potentially worth ,4 billion from %oogle' prompting analysts to ask if %rouponPs founders had lost their coupons! 7 secondary-market auction of shares in &acebook in <ecember had a minimum offer-price ..S higher than the price reportedly paid in a similar transaction three months earlier! "witter is valued at ,>!. billion' up nearly fourfold in a year! "he number of deals with +pre-investment/ valuations of at least ,)11m is also increasing' according to Cooley' a law firm +see chart/!

"here are differences between today and the dotcom bubble of a decade ago! "hen it was initial public offerings that were overpriced! "oday' although the 0#5 market is reviving' it remains a shadow of its former self! 0nstead' the main way for the owners of a start-up to cash out is to sell their firm to a bigger one' such as Cisco' %oogle' &acebook or even %roupon! "hese tech-savvy firms ought to be less gullible than the stockmarket investors of )***! But their owners may now be so wealthy that they care less about value for money than the coolness of owning the 6e;t Big "hing! "he emergence of an active secondary market in shares of start-ups yet to go public has allowed founders and early investors in firms such as &acebook and "witter to bank fortunes without waiting for a traditional e;it by 0#5 or acquisition! "hese secondary-market prices feed hype about what these firms might be worth' were they to list on the stockmarket! 6ot many shares are availableL many punters are chasing them! 7nd those punters tend to be outsiders' such as fund managers and private-equity firms' who may not understand the tech business as well as insiders

do! "hen there is the growth in QangelR investing' by rich individuals and small funds that provide seed capital to start-ups too small to interest a venture-capital firm! "hese angels make many small investments +say' ,)11'111 a time/' in a strategy critics call Qspray and prayR! "hat could certainly account for a bubble in start-ups! 5ne prominent angel' Chris acca' has reportedly paused his investing on the ground that valuations have become overblown! 5ther investors say this is alarmist nonsense! Q&or every firm that gets funded at a higher-than-normal valuation' a hundred are getting financed at a normal one'R says Ron Conway' a well-known Qsuper angelR who has invested in many highprofile start-ups! 2oreover' many young firms can tap into a thriving onlineadvertising market that was but a dream when the dotcom boom turned to bust! "odayPs entrepreneurs also have a deeper understanding of the industries they are trying to transform' says 6ick Beim of 2atri; #artners' a venture-capital firm! &ewer of them are engineers! 2ore are Qambitious non-technologists with a business ideaR to change industries such as media' advertising' financial services or fashion! "hese industries are concentrated in 6ew Fork' which is why the new boom is as much in 2anhattanPs ilicon 7lley as in CaliforniaPs ilicon Halley! 2r Beim reckons this industry e;pertise will mean that start-ups in Qsocial commerceR' where there is a clear revenue model from the start' are more likely to succeed than those in social media' where no one knows where the profits will come from even when millions use the service +eg' "witter/! "hree of the leading socialcommerce firms' %roupon' %ilt %roupe +a lu;ury-goods seller in which 2atri; has invested/ and Uynga +a social-gaming firm/' are increasing their revenues faster than any start-ups in history' says 2r Beim! "hat is why this time may be different! 5f course they say that during every bubble!

2nline shopping

&elling 'eco"es socia'le

E.co""erce is 'eco"ing "ore social an! "ore connecte! to the o((line worl! "$5 E who cherish privacy will recoil in horror' but for digital e;hibitionists it is a dream! 7t wipely' a web start-up' users can now publish their purchases! Dhenever they swipe their credit or debit card +hence the servicePs name/' the transaction is listed on the site8to be discussed by other users! Q"urn purchases into conversationsR is the firmPs mantra! wipely is among the latest entrants in the growing field of social commerce! &irms in this market combine e-commerce with social networks and other online group activities! "hey aim to transform shopping both online and off! 7ngus <avis' wipelyPs boss' points out that the internet has already disrupted the content industry! Commerce will be ne;t' he says! "he first generation of e-commerce sites' which hit the web in the late )**1s' were essentially digitised mail-order catalogues! Debsites like Epinions collected user reviews and recommendations' but they did not sell anything8and many collapsed during the dotcom crash! 5nly 7ma9on brought together selling and social feedback' to great effect! By means of collective filtering' it made suggestions based on other buyersP purchases! "he second generation of e-commerce firms is quite different! &ew emerged from ilicon Halley! 0ndeed' they tend to have offline roots' and sometimes seek to drive customers to actual shops! 2any make their money from flash sales8brief offers of steep discounts on products8that are advertised to registered members!

"he pioneer of flash sales' Hente #rivMe' grew out of the &rench apparel industry +the name means Qprivate saleR/! Even today' its centre of gravity is offline' says Gacques-7ntoine %ranIon' Hente #rivMePs boss' who founded the firm in -11) along with seven partners! $undreds of designers' photographers and hairstylists organise its online sales events! 7fter a slow start' Hente #rivMe has been growing quickly! 0ts five local sites in Europe have more than )-m members and are e;pected to bring in about (B11m +,) billion/ in revenues this year! Hente #rivMePs success has inspired others! "he best known is %ilt %roupe' which emulates the sample sales of lu;ury retailers in 6ew Fork' where it is based! %ilt is smaller than Hente #rivMe! 0t has only -!3m members and e;pects to turn over between ,?11m and ,311m in revenues this year! %ilt wants to become a platform for all sorts of social commerce' says usan Cyne' its boss! 0t recently launched several local sites in 7merica' offering Qdeals of the dayR! %ilt %roupe is straying into the territory of another clutch of city-based e-commerce sites' which facilitate collective buying! Every day these sites offer the service of a local business8a restaurant meal' a spa-treatment' the rental of an e;pensive car8 at a discount of up to *1S +they generally keep half of the sale price/! But a deal is struck only if a minimum number of members pounce! Buyers thus have an interest in spreading the word' which they do mostly on social networks! >ntil they !rop 2any such sites have sprung up! "he most successful is %roupon +a combination of the words QgroupR and QcouponR' which buyers print out to pay for their service/! 7lthough the firm launched only in late -11B' it already operates some ->1 local websites in -* countries and boasts )3m subscribers! &lush with money from investors' it has embarked on a global land-grab' buying %roupon clones in other countries' such as %ermanyPs City<eal! %roupon is more about people than technology! 0t grew out of "he #oint' a Chicagobased website that offers tools to organise collective action! "he firm employs a worldwide sales force of nearly -'111 to identify interesting local merchants and )31 writers to describe the offers! 0t wants to be the company that finally allows small businesses to participate in e-commerce' e;plains Rob olomon' its president! Fet it may be a third generation of social-shopping sites that really deserves the label' says ucharita 2ulpuru of &orrester Research! "he latest batch of firms try to build their business on top of the Qsocial graphR= the network of friends spun on social networks! "hey make use of virtual currencies and the growing popularity of

smart-phones' which can track consumersP location! 2odCloth' which sells clothing from independent designers' has an active forum on &acebook and lets customers vote on which products the site should stock! Cocker9' another upstart' pays members Qpoint9R if they watch videos with advertisements' invite friends and do things with them! "hey can then use this currency to obtain discounts! imilarly' hopkick rewards consumers for offline activities such as visiting stores and scanning products with their smart-phones! &or the new generation of e-commerce firms' the offline world is as important as the online one! wipely is a good e;ample! By uploading transaction data' the startup makes it easy for customers to tell their friends how they are spending their money in the real world' something they probably would not do if they had to type all the data in! 7t the same time' customers can keep those transactions secret that they do not want to share! Dill making shopping more social really disrupt commerce as much as 2r <avis e;pectsE 0t is hard to predict whether the second and third generations of ecommerce sites will continue their rapid growth! Consumers may tire of flash sales' as they did of online auctions! Even collective buying may have its limits! 5ne of %rouponPs biggest problems is that tens of thousands of local firms want to be featured' but each of its sites offers only one deal per day! "he outfit has started to personalise some of its sites' meaning that different users will see different deals depending on things like age' se; and interests! But if personalisation goes too far' and users see only the sort of things they already knew they wanted' this kind of shopping could become less fun! Dhatever the fate of individual firms and sales models' e-commerce is bound to become more social' predicts onali de Rycker of 7ccel #artners' a venture-capital firm! Retailing has several persistent problems= the high cost of attracting visitors' the low probability that they become buyers and the difficulty of getting them to come back! ociable e-commerce offers potential solutions to all of them! o e;pect your favourite site to add social features' whereas many of the pioneers will end up with arrows in their backs' as innovators often do!

"he &orgotten 2illions?(+pril -3)

By 1+>? @R>3M+A 2ore than three years after we entered the worst economic slump since the )*>1s' a strange and disturbing thing has happened to our political discourse= Dashington has lost interest in the unemployed! Gobs do get mentioned now and then 8 and a few political figures' notably 6ancy #elosi' the <emocratic leader in the $ouse' are still trying to get some kind of action! But no Iobs bills have been introduced in Congress' no Iob-creation plans have been advanced by the Dhite $ouse and all the policy focus seems to be on spending cuts! o one-si;th of 7mericaPs workers 8 all those who canPt find any Iob or are stuck with part-time work when they want a full-time Iob 8 have' in effect' been abandoned! 0t might not be so bad if the Iobless could e;pect to find new employment fairly soon! But unemployment has become a trap' one thatPs very difficult to escape! "here are almost five times as many unemployed workers as there are Iob openingsL the average unemployed worker has been Iobless for >. weeks' a post-Dorld Dar 00 record! 0n short' wePre well on the way to creating a permanent underclass of the Iobless! Dhy doesnPt Dashington careE #art of the answer may be that while those who are unemployed tend to stay unemployed' those who still have Iobs are feeling more secure than they did a couple of years ago! Cayoffs and discharges spiked during the crisis of -11B--11*

but have fallen sharply since then' perhaps reducing the sense of urgency! #ut it this way= 7t this point' the @! ! economy is suffering from low hiring' not high firing' so things donPt look so bad 8 as long as youPre willing to write off the unemployed! Fet polls indicate that voters still care much more about Iobs than they do about the budget deficit! o itPs quite remarkable that inside the Beltway' itPs Iust the opposite! Dhat makes this even more remarkable is the fact that the economic arguments used to Iustify the <!C! deficit obsession have been repeatedly refuted by e;perience! 5n one side' wePve been warned' over and over again' that Qbond vigilantesR will turn on the @! ! government unless we slash spending immediately! Fet interest rates remain low by historical standardsL indeed' theyPre lower now than they were in the spring of -11*' when those dire warnings began! 5n the other side' wePve been assured that spending cuts would do wonders for business confidence! But that hasnPt happened in any of the countries currently pursuing harsh austerity programs! 6otably' when the Cameron government in Britain announced austerity measures last 2ay' it received fawning praise from @! ! deficit hawks! But British business confidence plunged' and it has not recovered! Fet the obsession with spending cuts flourishes all the same 8 unchallenged' it must be said' by the Dhite $ouse! 0 still donPt know why the 5bama administration was so quick to accept defeat in the war of ideas' but the fact is that it surrendered very early in the game! 0n early -11*' Gohn Boehner' now the speaker of the $ouse' was widely and rightly mocked for declaring that since families were suffering' the government should tighten its own belt! "hatPs $erbert $oover economics' and itPs as wrong now as it was in the )*>1s! But' in the -1)1 tate of the @nion address' #resident 5bama adopted e;actly the same metaphor and began using it incessantly! 7nd earlier this week' the Dhite $ouse budget director declared= Q"here is an agreement that we should be reducing spending'R suggesting that his only quarrel with Republicans is over whether we should be cutting ta;es' too! 6o wonder' then' that according to a new #ew Research Center poll' a maIority of 7mericans see Qnot much differenceR between 2r! 5bamaPs approach to the deficit and that of Republicans! o who pays the price for this unfortunate bipartisanshipE "he increasingly hopeless unemployed' of course! 7nd the worst hit will be young workers 8 a point

made in -11* by #eter 5rs9ag' then the Dhite $ouse budget director! 7s he noted' young 7mericans who graduated during the severe recession of the early )*B1s suffered permanent damage to their earnings! 7nd if the average duration of unemployment is any indication' itPs even harder for new graduates to find decent Iobs now than it was in )*B- or )*B>! o the ne;t time you hear some Republican declaring that hePs concerned about deficits because he cares about his children 8 or' for that matter' the ne;t time you hear 2r! 5bama talk about winning the future 8 you should remember that the clear and present danger to the prospects of young 7mericans isnPt the deficit! 0tPs the absence of Iobs! But' as 0 said' these days Dashington doesnPt seem to care about any of that! 7nd you have to wonder what it will take to get politicians caring again about 7mericaPs forgotten millions!

+ Crisis That Markets Can;t 3rasp

By BE$$ &2MMER "$E risks are clear enough in hindsight! "he "okyo Electric #ower Company built its &ukushima <aiichi nuclear power plant' nearly ?1 years ago' to withstand a powerful earthquake 8 but not one as big as the *!1-magnitude quake that struck on 2arch ))! 5r the tsunami that followed! 6ow' the terrible QifsR accumulate' as Gapanese engineers work to bring the stationPs reactors under control! "he ultimate price' in human life' may not be known for years! "he details of this catastrophe were unforeseeable' leading some to conclude this was a black swan event 8 something so wildly une;pected' so enormous in its impact' that it seems to defy our understanding and e;pose the fragility of our knowledge of the world! $ow could anyone have predicted thisE 7nd yet in -11.' "okyo Electric #ower' or "epco' escaped a disaster at its huge Kashiwa9aki-Kariwa nuclear power station' on the opposite side of Gapan' when that plant was damaged by a 4!B-magnitude earthquake 8 three times as large as what the plant was designed to withstand! "epco basically lucked out last time! o perhaps a bigger question is whether the markets 8 in which we have come to place so much trust 8 can put a true price on outsi9e risks like this!

2any have compared the events unfolding in Gapan with *K))' $urricane Katrina' the financial collapse of -11B and -11*' the B# oil spill' and the uprisings in the 7rab world 8 in that all have shown the limits of the collective wisdom of the marketplace! &or a moment' all the swans seemed black! 7nd those swans seemed blacker still when viewed through the lens of todayPs hyperkinetic global markets! Q"here are an ama9ing number of crosscurrents in the world economy right now' more than 0Pve seen in -3 years'R said hawn Reynolds' a co-portfolio manager at Han Eck 7ssociates in 6ew Fork! Cike everyone else' corporate e;ecutives' economists and financial analysts in "okyo' 6ew Fork' Condon and beyond struggled last week to wrap their heads around the scale of this disaster! But' as they so often do' the analysts quickly fell to work assessing the implications for companies' markets and economies! 7t times' it was almost surreal= 5n "uesday' Cas9lo Birinyi' a prominent stock market analyst based in Destport' Conn!' e-mailed around a succinct report titled Q6uclear 2eltdowns at a %lance!R "his is what happens on Dall treet! 0f youPre not immersed in the culture' it might be hard to understand the cool calculus that is applied to world events' however dire those events might be! 7fter the quake hit on 2arch ))' the C6BC anchor Carry Kudlow told viewers' Q"he human toll here looks to be much worse than the economic toll' and we can be grateful for that!R $e later apologi9ed! 7s the week wore on' and prices were gyrating on everything from a share of 0!B!2! to a ton of copper' everyone was making back-of-the-envelope calculations! "here is still no clear consensus about how far the economic shocks will reverberate! 2any analysts are guessing 8 and then second-guessing 8 how the disaster will play out in northeast Gapan! "he first' tentative analysis seemed painfully obvious= the Gapanese economy' already weak' perhaps already in a recession before calamity struck' will become even weaker! 5n &riday' the %roup of . industriali9ed nations took the rare step of intervening on the worldPs foreign e;change markets to stem a sudden rise in the value of the yen! "he currency had soared all week against the dollar 8 the e;act opposite of what you might e;pect! But Gapanese companies and investors were bringing their money home' to pay for huge rebuilding costs! 7fter its most harrowing week since the )*B. market crash' the "okyo tock E;change found its footing on &riday! But it was a week like few others on the e;change= the 6ikkei --3 stock inde;' GapanPs equivalent of the <ow Gones industrial average' fell 4!- percent on 2onday' plunged )1!3 percent on "uesday'

rebounded 3!. percent on Dednesday and sank )!? percent on "hursday! 0t closed up -!. percent on &riday' at *'-14!.3! "he loss for the week totaled )'1?B points' or )1!- percent! 0& you happen to visit a Dall treet trading floor' walk over to the nearest Bloomberg terminal' type QDR "R and hit the green key that says Qgo!R DR " 8 that is short for Qworst'R as in' Qworst-case scenario!R "he program enables Dall treet types to measure the level of risk in their investment portfolios under a variety of scary circumstances modeled on past crises' including the attacks of ept! ))' -11)' the bankruptcy of DorldCom in -11- and the devaluation of the "hailandPs currency' the baht' in )**.! uch Qwhat ifR scripts are the stuff of modern Dall treet! Everyone runs them! Entire schools of financial analysis are devoted to e;amining historical market patterns in the belief that those patterns can predict the future! uch analysis' of course' depends on 8 and perhaps even encourages 8 our belief that tomorrow will be much like today! 7nd all that despite the fine-print caveat on your ?1)+k/ statement that reads' Q#ast performance is no guarantee of future success!R 6assim "aleb' the author and market theorist who populari9ed the phrase Qblack swanR in his -11. best seller' argues that we have psychological biases that blind us to the enormous role played by rare events 8 like a *!1-magnitude earthquake! 7nd yet we rely on history for guidance! 5n Dednesday' 2r! BirinyiPs research firm sent out another report' this one titled Q !: #! 311 Enters 2odest Correction!R $is firm predicted a slight decline in the 7merican stock market! Q0f the averages hold'R the report said' Qthe !: #! 311 will bottom at )'->- on >K>)K))!R 5n &riday' the !: #! 311 closed at )'-.*!)*' down )!* percent for the week! Dhatever else they may be' markets are immensely comple; counting machines! "hey assign values to products' whether computer chips or potato chips' based on the canny appraisals and gut beliefs of people around the planet! &rom day to day' it is often hard' if not impossible' to know e;actly why a certain price moved the way it did! "hose daily movements are often Iust the white noise of global capitalism! "hen there are stretches of e;treme volatility' periods when no one quite seems to agree about where anything is going! "hat may be part of what occurred last week= in the face of such a disaster' not even a short-term trend could congeal!

7s yet' no one has reliable numbers about the scope of the destruction' said 7l "obin' who heads the property practice at 7on Risk olutions' the risk management brokerage business of the 7on Corporation! "he human toll' the economic toll 8 Qno one knows the answer to that question'R he said! %iven such uncertainty' the markets could remain even more volatile than usual' said 2ohamed 7! El-Erian' chief e;ecutive of #imco' the worldPs largest bond manager! Q"he market right now is trying to wrap its arms around the enormity'R he said! "he verdict is not yet in! 2r! El-Erian divided market strategists into two camps! "he first' he says' views the events in Gapan as Qmore than Iust a massive human tragedyL it also has significant implications for the global economy!R "he second' he says' believes that the effects of this disaster' however heart-rending' will be transitory for most of us! But he doesnPt yet know which camp is right! Q0 donPt understand it fully yet'R he said' Qbut 0 am worried about it!R Big economic questions remain unanswered! $ow would a severe slowdown in Gapan' the worldPs third-largest economy' affect the rest of the globeE $ow will Gapan' which is already deeply in debt' pay for the reconstructionE ome are already arguing that the enormous' high-cost task of rebuilding could' over time' snap Gapan out of its long economic funk!

27RKE" strategists pride themselves on being able to digest vast quantities of data quickly! "hey tend to be practical and versatile people' the kind who can put aside emotions and philosophical questions when business calls! 5n "hursday' a sunny t! #atrickPs <ay in 2anhattan' Gonathan %olub' the chief equity strategist for the giant wiss bank @B ' said he was trying to master some of the intricacies of nuclear technology! Q6ow 0 find myself talking about fuel rods and cooling pools'R he said! 0t was' he said' not an uncommon type of e;perience= Before the financial crisis' even many people on Dall treet didnPt quite know what a credit default swap was! Before long' everyone was throwing around terms like QswapsR and QC!<! !R 2r! %olub said he felt for the people of Gapan! $e then went on to say' at a news briefing' that once the current market volatility subsided' this crisis should have only a marginal impact on 7mericaPs economy and stock market' whose prospects

were quite good! $e predicted that the !: #! 311 would reach )'?-3 by the end of the year! till' because supply chains have gone global like so much else' the disaster has already had a very real impact in the @nited tates! Cast week' ubaru slowed operations of its auto plant in 0ndiana because it could not obtain key parts from Gapan! %eneral 2otors said it would shut a truck plant in Couisiana because of a shortage of parts! "he semiconductor industry has also slowed because Gapan is a maIor supplier of silicon wafers and other components! <espite its position as the worldPs 6o! > economy' Gapan actually accounts for a relatively small 8 and shrinking 8 amount of the worldPs collective economic output! 0t contributes about * percent of global gross domestic product' down from about )B percent in the )**1s! 7nd because of the rapid acceleration of the so-called BR0C countries 8 Bra9il' Russia' 0ndia and China 8 and of other emerging markets' GapanPs contribution to growth of global %!<!#! is marginal! Cakshman 7chuthan' the managing director of the Economic Cycle Research 0nstitute' a private forecasting group with an e;cellent track record' says that GapanPs economy' which he believes is already in recession' wonPt appreciably affect the direction of the economy in the @nited tates! "he disaster' however' Qensures that Gapan is in a recession'R he said! 7ll of this' of course' assumes that the nuclear disaster' already the biggest since Chernobyl' doesnPt get too much worse!

"$E financial markets have always had a difficult relationship with nuclear power' largely because the costs 8 and potential risks 8 associated with nuclear plants are so huge! <ay to day' nuclear power is cheap! But it is unclear how to accurately assess the cost of disposing of nuclear waste over the long run 8 or' perhaps' the cost of disasters like the one in Gapan! Robert 6! tavins' a professor at the Kennedy chool of %overnment at $arvard and director of the universityPs environmental economics program' has studied this issue for years! 0n an article in the centennial edition of the 7merican Economic Review in &ebruary' #rofessor tavins said that economists had not yet solved the Qtragedy of the commons'R the quandaries that arise when many people' acting in their own self-interest' ultimately pose a threat to the common good! &or instance' how should we allocate environmental costs to power producersE $ow should the environmental costs of various fuels 8 fossil or nuclear 8 be calculatedE

o far' the markets seem to have failed to provide an answer to all of those questions! 7 6ational Research Council study last year tallied up environmental costs for various fossil fuels but did not even try to do so for nuclear power because the Qpower-plant risk modeling and spent-fuel transportation modelingR required was beyond the scope of the councilPs study! 0n the @nited tates and elsewhere' governments have capped the liability of nuclear power producers! 7s a result' #rofessor tavins said' QFou can argue that the markets have never really had a chance to price nuclear power!R 0n the face of black swans 8 also known as fat-tail events' for the way their occurrences are distributed along a probability curve 8 market pricing may be impossible! 2artin Deit9man' another $arvard economist' wonders' for e;ample' how Dall treet or anyone else could place an accurate price on the risk that an asteroid would crash into a maIor population center! 0n a controversial mathematical proof called' perhaps appropriately' the <ismal "heorem' he found that QitPs very hard to make reliable inferences about rare events on the tails of probability distributions!R 0s the nuclear disaster under way in Gapan such a rare event' one that economists cannot accurately priceE 0t is too early to say' #rofessor Deit9man said! Q0t might be!R 0" has been more than >1 years since "hree 2ile 0sland' and -3 since Chernobyl! 0n the ensuing years' one nuclear plant was completed in the @nited tates and shut down before ever going into commercial operation! "hat was the horeham plant' on Cong 0sland' which cost roughly ,4 billion! 0ts fate was decided in )*B*' when state officials concluded that Cong 0sland could never be evacuated in case of a disaster! "he &ukushima accident has already caused a temporary slowdown in the nuclear industry! 5fficials in 0ndia and China said last week that they would re-evaluate their plans for building plants! %ermany announced that it would temporarily shut seven nuclear plants that went online before )*B1! "he European @nion made plans to test all the other nuclear power plants within its member countries! 0n the @nited tates' #resident 5bama' who has promoted building new nuclear power plants' asked the 6uclear Regulatory Commission last week to review the safety of all @nited tates plants! $owever imperfectly' the market will pass Iudgment!

2r! El-Erian of #imco says the outlook is unusually uncertain! 0nvestors' like everyone else' should understand that the world is a risky place! QFou need to use a whole range of approaches to understand the market in a situation like this'R he says' Qand you need to be humble!R 7nd' perhaps' accept a sober reality= the ne;t black swan is out there somewhere!

tress "est for the %lobal upply Chain?(+pril -C)

By &TEDE ?2%R "56F #R5#$E"' a senior vice president for operations at $ewlett-#ackard' was awakened at >=>1 a!m! in California and was told that an earthquake and tsunami had struck Gapan! oon after' 2r! #rophet had set up a virtual Qsituation room'R so managers in Gapan' "aiwan and 7merica could instantly share information! 2r! #rophet oversees all hardware purchasing for $!#!Ps ,43-billion-a-year global supply chain' which feeds its huge manufacturing engine! "he companyPs factories churn out two personal computers a second' two printers a second and one datacenter computer every )3 seconds! Dhile other $!#! staff members checked on the companyPs workers in Gapan 8 none of whom were inIured in the disaster 8 2r! #rophet and his team scrambled to define the impact on the companyPs suppliers in Gapan and' if necessary' to draft backup plans! Q0tPs too early to tell' and wePre not going to pretend to predict the outcome'R 2r! #rophet said in an interview on "hursday! Q0tPs like being in an emergency room' doing triage!R "he emergency-room image speaks volumes! 2odern global supply chains' e;perts say' mirror comple; biological systems like the human body in many ways! "hey can be remarkably resilient and self-healing' yet at times quite vulnerable to some specific' seemingly small weakness 8 as if a tiny tear in a crucial artery were to cause someone to suffer heart failure!

<ay in and day out' the global flow of goods routinely adapts to all kinds of glitches and setbacks! 7 supply breakdown in one factory in one country' for e;ample' is quickly replaced by added shipments from suppliers elsewhere in the network! ometimes' the problems span whole regions and require emergency action for days or weeks! Dhen a volcano erupted in 0celand last spring' spewing ash across northern Europe and grounding air travel' supply-chain wi9ards were put to a test' Iuggling production and shipments worldwide to keep supplies flowing! But the disaster in Gapan' e;perts say' presents a first-of-its-kind challenge' even if much remains uncertain! Gapan is the worldPs third-largest economy' and a vital supplier of parts and equipment for maIor industries like computers' electronics and automobiles! "he worst of the damage was northeast of "okyo' near the quakePs epicenter' though GapanPs manufacturing heartland is farther south! But greater problems will emerge if rolling electrical blackouts and transportation disruptions across the country continue for long! "hroughout Gapan' many plants are closed at least for days' with restart dates uncertain! 7lready' there are some ripple effects worldwide= for e;ample' a %eneral 2otors truck plant in Couisiana announced on "hursday that it was shutting down temporarily for lack of Gapanese-made parts! 2ore made-in-Gapan supply-chain travails are e;pected! Q"his is going to be a huge test of global supply chains' but 0 donPt think it will be a mortal blow'R says Kevin 5P2arah' an analyst at %artner-72R Research! Q0 think that over all wePll see how resilient and quick-learning these networks have become!R "$E good news for the worldPs manufacturing economy is that the sectors where Gapan plays a vital role are fairly mature' global industries! Consider computing and electronics! &or maIor components' like semiconductors' production is now spread across several countries! By contrast' in the early )**1s' virtually all ?B4microprocessors 8 the engines of the most powerful personal computers of the time 8 were made at a single 0ntel factory near Gerusalem! GapanPs importance in the semiconductor industry as a whole has receded in recent years' as more production has shifted to outh Korea' "aiwan and even China! Gapan accounts for less than -) percent of total semiconductor production' down from -B percent in -11)' according to 0$ i uppli' a research firm! till' Gapan produces a far higher share of certain important chips like the

lightweight flash memory used in smartphones and tablet computers! Gapan makes about >3 percent of those memory chips' 0$ i uppli estimates' and "oshiba is the maIor Gapanese producer! But outh Korean companies' led by amsung' are also large producers of flash memory! 7pple' like all maIor companies these days' treats its supply-chain operations as a trade secret! But industry analysts estimate that 7pple buys perhaps a third of its flash memory from "oshiba' with the rest coming mainly from outh Korea! "he lead time between chip orders and delivery is two months or more! 7 leading customer like 7pple will be first in line for supplies' and it has inventories for several weeks' analysts say! o there will be little immediate impact on 7pple or its customers' but even 7pple will likely be hit with supply shortages of crucial components in the second quarter' predicts %ene 2unster' an analyst at #iper Gaffray! "he field of buying and shipping supplies has been transformed in the last decade or two! %lobali9ation and technology have been the driving forces! 2anufacturing is outsourced around the world' with each component made in locations chosen for e;pertise and low costs! o todayPs computer or smartphone is' figuratively' a @nited 6ations assembly of parts! "hat means supply lines are longer and far more comple; than in the past! "he ability to manage these comple; networks' e;perts say' has become possible because of technology 8 0nternet communications' R&0< tags and sensors attached to valued parts' and sophisticated software for tracking and orchestrating the flow of goods worldwide! "hat geographic and technological evolution' in theory' should make adapting to the disaster in Gapan easier for corporate supply chains! Q0n the past' when you had a disruption' the response was regional'R says "imothy Carroll' vice president for global operations at 0!B!2! Q6ow' itPs globali9ed!R 2ost anything can be tracked' but it takes smart technology' investment and effort to do so! 7nd as procurement networks become more comple; and supply lines grow longer 8 Qthin strands'R as the e;perts call the phenomenon 8 the difficulty and e;pense of seeing deeper into the supply chain increases! Q2aIor companies have constant communications and deep knowledge of primary suppliers'R says <avid B! Foffie' a professor at the $arvard Business chool! Q0tPs in the secondary layers of suppliers 8 things that are smaller' barely noticed 8 where the greater risk is!R

0ndeed' supplies of larger' more costly electronic components' like flash memory and liquid crystal displays' tend to grab the most attention! But' says "ony &adell' a former senior 7pple e;ecutive who led the i#od and i#hone design teams' Qthere are all kinds of little speciali9ed parts without second sources' like connectors' speakers' microphones' ' batteries and sensors that donPt get the love they deserve! 2any are from Gapan!R Cacking some part' even if it costs Iust dimes or a few dollars' can mean shutting down a factory' 2r! &adell adds! 7 recent analysis by 0$ i uppli' taking apart a new 7pple i#ad-' identified five parts coming from Gapanese suppliers= flash memory from "oshiba' random-access memory for temporary storage from Elpida 2emory' an electronic compass from 7K2 emiconductor' touch-screen glass from 7sahi %lass' and a battery from 7pple Gapan! &urther down the supply chain lie raw materials! "rouble for a supplier to a companyPs parts supplier can cascade across an industry! &or e;ample' reports that a 2itsubishi %as Chemical factory in &ukushima was damaged by the tsunami have fanned fears of a coming shortage of a resin 8 bismaleimide tria9ine' B" 8 used in the packaging for small computer chips in cellphones and other products! "wo Gapanese companies are the leading producers of silicon wafers' the raw material used to make computer chips' accounting for more than 41 percent of the worldPs supply! "he largest is the hin-Etsu Chemical Corporation! 0ts main wafer plant in hirakawa was damaged by the earthquake' and the factory is down! Q"he continuing violent aftershocks are complicating the inspection work'R said $ideki 7ihara' a hin-Etsu spokesman in Gapan' on &riday! QRight now we canPt say how badly it was damaged or how long it might take to get started!R hin-Etsu does have factories outside Gapan! QBut the most advanced manufacturing and silicon-growing processes are done in Gapan'R says Klaus Rinnen' a semiconductor analyst at %artner! 7nd growing silicon ingots' which are then sliced into wafers' is a lengthy' delicate process that will be hampered by power failures or other disruptions' he says! Big chip makers like 0ntel' amsung and "oshiba typically hold inventories of silicon wafers for four to si; weeks of production! QBut after that' it will get tougher'R 2r! Rinnen says! "$E Gapan quake' some e;perts say' will prompt companies to re-evaluate risk in their supply chains! #erhaps' they say' there will be a shift from focusing on

reducing inventories and costs' the Iust-in-time model' pioneered in Gapan' to one that places greater emphasis on buffering risk 8 a Iust-in-case mentality! 7dding inventories and backup suppliers reduces risk by increasing the redundancy in a supply system! 0t is one way to enhance resilience' e;perts say' but there are others! "hey point to an e;ample that is well known to supply-chain mavens! 0n )**.' there was a fire at a plant of one of "oyotaPs main suppliers' 7isin eiki' which made a brake valve used in all "oyota vehicles! Because of the carmakerPs Iust-in-time system' the company had Iust two or three days of stock on hand! o the fire threatened to halt "oyotaPs production for weeks! But "oyota and teams of suppliers in the companyPs supply-chain network worked round the clock for days to design and set up alternative production sites! "oyotaPs assembly plants reopened after being shut down for Iust two days! Q"hat kind of resilient capability' 0 think' is what wePll see in Gapan over the weeks and months ahead to put these supply chains back on their feet'R says Charles $! &ine' a professor at the loan chool of 2anagement at the