From the Knowledge@Wharton today blog.

Analysts are taking another look at the online social games industry after Zynga missed the mark in its second-quarter earnings report. The San Francisco-based creator of such popular online games as FarmVille and Mafia Wars had a dizzying market capitalization of $8.5 billion after its IPO last December. That has fallen to $2.21 billion following its latest results and outlook announcement last Wednesday. The firm’s second-quarter revenues were $332 million, lower than analysts’ expectations of $343 million.

The company, which claims 60 million daily active users, also lowered projected bookings for the year (the amount users pay up front for virtual goods they consume while playing) to between $1.15 billion and $1.23 billion from an earlier forecast of $1.47 billion. Zynga blamed its setbacks principally on “delays in launching new games [and] a faster decline in existing web games due in part to a more challenging environment on the Facebook web platform.” The firm’s share price has plummeted from about $15 in early March to about $3 at Friday’s close.

Zynga mainly hosts its games on Facebook, although recently the company began offering games on its own site to reduce its dependence on the social network giant. “Zynga can’t afford to put all its eggs in Facebook’s basket, but neither can it live without the enormous push that it gets from its Facebook relationship,” said Wharton professor of legal studies and business ethics Kevin Werbach in a previous Knowledge@Wharton article about the game developer’s prospects.

According to Eric Clemons, a Wharton professor of operations and information management, Zynga’s real problem is the lack of staying power that its products seem to have. He compares social games by Zynga and others to a fad like pet rocks — plain rocks that were sold by the millions in 1975 as “pets” in boxes before they quickly faded from view. In a bid to boost revenues, Zynga recently partnered with toy maker Hasbro to merchandise its games, but Clemons isn’t impressed by that, either. “Pet rocks were not followed by pet erasers” or other merchandising that were able to extend their lifecycle in any way, he notes.

Clemons points out what he sees as another shortcoming in Zynga’s business model: FarmVille players have to pay for plants, livestock or tractors to cultivate their virtual farms. “FarmVille never made any sense to me,” he says. “I have no use for games where you pay to improve your performance.” It could serve its purpose as a transient distraction from boredom, he concedes, but predicts that fickle users will require new distractions to keep them engaged. In fact, CityVille, which was launched after FarmVille, has already eclipsed FarmVille’s popularity, and the firm launched six new games last quarter.

In the previous Knowledge@Wharton article on Zynga, Wharton emeritus management professor Lawrence Hrebiniak warned of that very challenge. “Zynga’s business model depends on developing cool games and new titles to replace older ones,” he noted. “How long can Zynga do that? By the time [its] Facebook deal expires, Zynga may not be viable.”

This blog was previously posted in Knowledge@Wharton today blog: Zynga’s Potentially Losing Game

From the Knowledge@Wharton today blog.

It’s enough to give management at McDonald’s heartburn: On Monday, the company announced that its second quarter earnings fell 4.5%, reporting a profit of $1.35 billion compared with $1.41 billion a year earlier.  

McDonald’s is the world’s largest hamburger chain — it has 33,000 stores operating in 119 countries — and is viewed as a bellwether for the global fast food industry. Until recently, it also was seen by analysts as recession resistant, given the nature of its offerings — value-priced meals. What went wrong? According to Larry Hrebiniak, an emeritus professor of management at Wharton, the firm is suffering from the same conditions that “are plaguing other companies around the globe: a weakening global economy, especially in Europe; a stronger dollar worldwide, which in McDonald’s case cut an estimated seven cents a share from earnings; rising commodity costs; and increasingly frugal customers, not only in Europe but in Asia, Africa and the Middle East as well.”

Given those factors, and the likelihood that the recession will continue, the company does have cause for concern, Hrebiniak notes. However, he adds that sales in the U.S. during the same period were up 3.6%, and “investors are still hot for what McDonald’s is doing, with some Wall Street analysts espousing a ‘buy’ rating for the dividends-producing machine. Other food chains are also feeling the pressure, and McDonald’s is holding fast against the vast majority of them. The company shouldn’t relax, but it shouldn’t panic, either.”

The chain has made recent efforts to appeal to a wider array of customers, an article in The Wall Street Journal points out. In early summer, McDonald’s introduced a new Cherry Berry Chiller smoothie, and it launched a “favorites under 400 calories” campaign to attract more health-conscious consumers. And for the cost conscious, it plans to introduce value menus in Japan and Australia, while keeping prices as low as possible in other regions.

It also has expanded its specialty coffee drink offerings to lure customers away from higher-priced coffee houses, like Starbucks. According to one analyst, higher margin specialty drinks now account for 10% of McDonald’s sales in the U.S.

But Hrebiniak is not so certain that McDonald’s should stray very far from its roots in an attempt to capture more consumers. “What it should do is basically stick to its knitting and continue to do what it has always done best — control costs and provide low-priced meals that customers enjoy. A real danger would exist if the company tried to expand products in an attempt to be all things to all people. Selling high-priced coffees and exotic drinks may be exciting in the short term, even profitable, but the danger over the longer haul is that too many new, exotic products may eventually detract from the McDonald’s brand and put the company in increased competition with other established, well-known companies, such as Starbucks. Product variety is nice, but excessive product diversification also holds dangers.”

Meanwhile, the appeal of McDonald’s popular, longstanding offerings like its Big Mac probably won’t wane any time soon. Hrebiniak himself notes that he plans to eat one today.

This blog was previously posted in Knowledge@Wharton today blog: A Big Mac Setback

From the Knowledge@Wharton today blog.

Deirdre Woods, former associate dean and chief information officer at Wharton, made a point during her years as a senior manager of encouraging other women to advance in their professional careers. One thing has always surprised her, however.

Women who are offered promotions “generally feel they need to know 80% to 90% of their current job before they feel ready to step up into a new role,” she says. But if you are smart and knowledgeable, “probably somewhere closer to 40% to 50%” is all that you need.

Men, on the other hand, feel no such constraints. “Men will start thinking about their next promotion right after they start their new promotion,” says Woods, who is currently interim executive director of the University of Pennsylvania’s open learning initiative and has started her own consulting company. “I’m not sure if men are necessarily more ambitious, but they are much more overt about having a plan and moving forward.” She remembers attending a conference where another woman made the same point, in a different context: In government, the speaker said, “a six-term congresswoman doesn’t feel she is ready for the Senate yet, whereas a first-term congressman does.”

It’s not just a phenomenon in the non-profit sector, according to a report last May in the Wall Street Journal titled “The XX Factor: What’s Holding Women Back?” The article quoted an executive at Google saying that the company “must invest extra effort to persuade women engineers to nominate themselves for promotions…. Men jump at the chance, often before they are ready, and are often turned down.”

But women, the executive noted, “must be prodded.” Indeed, he tells them that by not putting themselves up for promotions, they are holding themselves back. “By the time a woman says she is ready, she was probably ready a year ago,” he said, adding that the company promotes women engineers at about the same rate as men.

Woods agrees. “Women tend to be ridiculously over-prepared for everything. But at a certain point, over-preparedness doesn’t get you moving forward. It doesn’t leave you open to other opportunities.” She suggests that women should be able to clearly define what type of job they want to do next. “They should be thinking about the next step even if it feels overwhelming.”

And “as scary as it seems,” she adds, women who do get promoted “should start signaling, at least to their bosses, that this isn’t the last thing they want to do. They should show they want to do a really good job in their current role, but that they also have ambitions.” In addition, she notes, men know that wandering around the office and chatting with their colleagues qualifies “as work. Talking to the boss, running into him or her at the coffee machine, having interactions – men understand that this is part of their work. Women don’t understand that. They think it’s a distraction from whatever they are supposed to be doing.”

Wharton management professor Matthew Bidwell suggests that there is “some evidence that women are held to a higher standard in the workplace than men, and that because women are stereotyped as less competent than men, any mistakes they make tend to reinforce those kinds of attitudes towards them as individuals. You can imagine that if this is the case, then it’s even riskier for women to take on that promotion.”

The Journal report was based on the comments of a task force set up to study the obstacles that women continue to face in the workplace. According to a McKinsey study quoted in the article, women get 53% of entry level jobs and “make it to ‘the belly of the beast’ in large numbers.” But then “female presence” drops sharply, “to 35% at the director level, 24% among senior vice presidents and 19% in the C-suite.”

The McKinsey study cited by the Journal article also noted that hiring and promoting talented women is important “’to getting the best brains’ and competing in markets where women now make most of the purchasing decisions.”

This blog was previously posted in Knowledge@Wharton today blog: Do Women Shy Away from Promotions?

From the Knowledge@Wharton today blog.

Thanks in part to the growth of mobile technology, it’s no secret that work is starting to seep into people’s home lives. But life is also seeping into the office, with an increasing number of employees setting aside a few minutes — or longer — during the workday to send personal e-mails, run errands or take a coffee break.

Those tasks were among the most mentioned in a recent survey by data protection firm Mozy. Other activities that respondents said they felt comfortable doing on company time included leaving early for doctors’ appointments or for a child’s performance at school.

The study of 1,000 employees and employers from the United States, Great Britain, Germany, France and Ireland also found that many managers are taking an increasingly relaxed attitude toward how workers structure their days, in part because the bosses assume — correctly, according to the study results — that many are putting in time outside the office to finish work tasks.

As the workday strays further from the traditional 9 a.m. to 5 p.m. structure, how do employees figure out when it’s permissible to slip in time for personal business — and determine what types of “life-related” tasks are acceptable?

“It’s a combination of factors,” says Wharton practice professor of management Stewart Friedman. “You’ve got to consider the work culture [and] the personal ethical standards and conscientiousness of the employee. The age of the employee probably has an effect as well.” But the most critical factor is the “social and political environment at work, what the expectations and assumptions are about how people are supposed to operate, and whether the emphasis is on results as opposed to how those results are achieved,” he adds.

Workers on an assembly line or in similarly regimented and location-dependent positions are limited in the amount of flexibility they have. “In the pre-Internet world and in the manufacturing-based economy, your physical presence was really the thing that mattered,” Friedman notes. “Performance management systems were created around the idea of time as the essential metric.”

That remains the traditional model and mode of thinking for many organizations, Friedman says. But he adds that managers should consider that it’s just as important for employees to be psychologically present. “It’s harder to be psychologically present when you’re distracted by the demands of other parts of your life. I think the principle to go by is that if [time for personal tasks on the job] helps you take care of things that matter to you – and that you are  responsible for in other parts of your life — an employer is going to want you to do that so long as you meet performance standards and deliver results in ways that create value for the company.”

Friedman knows of a company where employees have even been put in charge of their vacation time. Instead of earning a set number of days, “you take vacation when you need to, just in the way they trust [employees] on a daily basis to figure out when they need to check out to do other stuff.”

Moving toward a more flexible, less location-dependent method of accounting for a worker’s time requires a certain level of trust on both sides, in addition to a transparent, results-focused system to evaluate employee performance, Friedman says. “What you want are people who have a sense of responsibility for the outcomes that matter, and you engender that when you give people the authority to make decisions about when they get things done.”

This blog was previously posted in Knowledge@Wharton today blog: Taking a Long Lunch? When Doing Personal Chores on the Job Is OK

From the Knowledge@Wharton today blog.

Yahoo’s hiring of Marissa Mayer — a high-profile executive and innovator ensnared from rival Google — as its new CEO has all the trappings of a coup. But Wharton experts say Mayer will have to move quickly to win the search engine new users and advertisers, and to jump-start product innovation.

“Will Mayer be the one to finally work some magic at Yahoo and restore its glamour in the industry?” asks Wharton management professor Lawrence Hrebiniak, adding that he his happy with the choice. “She brings experience with, and knowledge of, consumer websites gained at Google, a good place to work and learn.”

Mayer’s last post in her 13-year Google career was vice president of the search giant’s local, maps and location services, overseeing product management, engineering, design and strategy. Yahoo credits Mayer — who made Glamour magazine’s 2009 list of “Women of the Year” — with heading up some of Google’s most successful innovations and launching more than a hundred features and products, including Gmail, Google News, and the “look and feel” of the Google experience.

“Marissa Mayer is a great win for Yahoo,” says Wharton operations and information management professor Kartik Hosanagar. “She’s from a relevant domain and is a star exec. She will provide good, positive PR and will help in recruiting some good folks back to Yahoo.”

Prior to Mayer’s hiring, Hosanagar told Knowledge@Wharton Today that Yahoo needed a leader with an “entrepreneurial spark” as CEO. “Marissa is close, but not quite that,” he says now. “She joined Google very early … but she’s been at Google too long and it’s not clear to me she’s the person who comes up with new product ideas and gets them done. I’d have preferred someone who has started and grown a company. Even Jack Ma [founder of Chinese business-to-business trading platform Alibaba.com] would have been a great choice. That said, I think Marissa is overall not a bad choice.”

Mayer will have to hit the ground running at Yahoo, which has struggled to maintain stable leadership at the top and seen a steady decline in revenue over the past few years. “Her focus will be on Yahoo’s core advertising business,” says Hrebiniak. Adds Hosanagar: “The one thing Marissa needs to do is to focus on developing a new winning product at Yahoo instead of financial reengineering, restructuring the organization and the like. Some of the latter is needed, but what will get Yahoo out of this mess will be a new product, much like [the introduction of the] iPod for Apple. Given her background, I think her focus will indeed be on products.”

Hrebiniak suggests that the work done by Mayer’s predecessor, interim CEO Ross Levinsohn, including settling disputes with Google and Alibaba, will allow her to focus on the advertising business.

Closing the Revolving Door?

But Mayer could face other distractions, as well as formidable hurdles to overcome, Hrebiniak points out. “Levinsohn’s being passed over may generate resentment among key managers and employees, which could [lead to] defections and other problems,” he says. “Google and Facebook, which have steadily been stealing Yahoo’s users and advertising revenues, aren’t going away. A frontal attack by Mayer is certainly anticipated and the two formidable foes will assuredly be prepared for Yahoo’s new assaults.”

Mayer is Yahoo’s fifth CEO in as many years, and “a revolving door itself creates uncertainty and possible confusion,” Hrebiniak notes. “Levinsohn, for example, was reportedly in the process of formulating and executing his version of a new strategy. Mayer may upset the apple cart with something new and different, creating confusion and a feeling of ‘here we go again.’”

Wall Street seemed to cheer the choice of Mayer, notes Hrebiniak, but adds that “only time will tell if the trust in her capabilities in a competitive marketplace is warranted.” Mayer has a lot going for her — including a baby boy due Oct. 7 — and has been named in four consecutive years starting in 2008 to Fortune‘s list of the “50 Most Powerful Women in Business.” As one of only 20 female CEOs of Fortune 500 companies, and Google’s 20th-ever employee, “maybe 20 is the magic number,” for Yahoo, says Hrebiniak.

This blog was previously posted in Knowledge@Wharton today blog: As Mayer Brings the Pizzazz, Yahoo Waits for the Magic

From the Knowledge@Wharton today blog.

Bruce McColl isn’t an engineer, and his responsibilities have a lot more to do with building brands than building bridges. But the much-celebrated global chief marketing officer for Mars nonetheless believes that the spectacular failure in 1940 of the original Tacoma Narrows Bridge – a suspension bridge in Washington state –offers valuable lessons for brand managers as they attempt to navigate the fractured, difficult, fast-shifting marketing landscape of the 21st century. 

“The real insight [from the collapse] is that the engineers on that project jumped in too eagerly with new technologies and new methods,” said McColl, who spoke during Wharton’s recent Future of Advertising Conference. “There were new variables and new techniques, and they weren’t yet tried and tested. They used them on a scale that they weren’t ready for.”

As McColl noted, while other, apparently more daring designs had preceded the Tacoma span — the groundbreaking Brooklyn Bridge in 1883, the even more enormous George Washington Bridge in 1931 and the stunning Golden Gate Bridge in 1938 — and while the Tacoma bridge basically followed the same blueprint as those spans, it failed anyway. It failed not necessarily because of its basic layout, or because of the inadequacy of its designer (indeed, the Tacoma project was headed up by Leon Moisseiff, who also designed the Golden Gate Bridge), but rather because the technologies and innovations used there — specifically, its elegant but narrow girders — simply pushed the envelope too far, too soon. Moisseiff’s design may have been a good fit elsewhere, but it wasn’t a good fit for blustery Puget Sound.

Construction workers became familiar with the bridge’s flaws early on, so that when the bridge collapsed into Puget Sound just four months after its opening (no injuries were reported), hardly anyone was surprised.

The lesson — not just for engineers, but for marketers — is clear, McColl said: Technology and innovation in and of themselves are not necessarily the answer to any single problem or challenge. Employ new technologies incorrectly, or put too much faith in innovations that aren’t yet fully understood, and failure — even catastrophic failure — is possible.

“In my job, I’m concerned with big, valuable brands,” McColl said. “I don’t want to see them destroyed because I jumped in too quickly with technologies that weren’t proven…. You look at the things that have been built, from the great pyramids to the wonderful Sydney Opera House, and there’s a massive difference in technology. But the laws of physics have not changed. Engineers and architects still contend with the same laws of nature, and we as marketers need to understand [this] as we apply technology to the laws of marketing.”

Of course, there’s a catch in that statement, McColl says: In marketing, there are no hard-and-fast laws of physics, especially now, as social media opens up vast new possibilities and poses enormously difficult new challenges. There is only the bottom line, which is what marketers must constantly keep in mind as they work to craft smart, modern marketing campaigns that may or may not rely heavily on social media or other new technologies to meet their sales targets.

While McColl joked that he has not always enjoyed success during his long and accomplished career — “It’s unlikely that any marketer can destroy a brand like those engineers destroyed that bridge, but Lord knows I’ve tried” – recently his Mars team hit a marketing home run. The successful campaign they launched in conjunction with the 2010 Super Bowl was a smart mix of new-age social media savvy and tried-and-true marketing methods, all powered by the company’s risky decision to use an elderly actress, long out of the public eye, to form the center of their campaign.

In the Super Bowl ad that kick-started what would prove to be a long-running profitable campaign, actress Betty White was shown playing football with a bunch of young men. White goes out for a pass, drops the ball and gets knocked flat. She returns to the huddle and is told by her teammate that she was playing like, well, Betty White.

Then White eats a Snickers bar, transforms back into who she actually is — a young man who just happened to be suffering form a lack of energy — and returns to the field, rejuvenated. The ad was funny, smart and modern. By the time the Super Bowl ad reviews were in the next morning, the Snickers ad was seen by many as the single most popular of the evening. Viewers loved the concept, the offbeat approach and, perhaps above all, White’s willingness to play along with the joke.

But McColl and his team never intended the Super Bowl ad to be a standalone piece, but rather the first step of a three-month campaign — one that would help them reach the 270 million people worldwide who have eaten a Snickers bar at least once in their life, as well as the 70 million who do so regularly, in order to keep their brand prominent and “top of mind.”

While the initial buzz about the ad kept Snickers in the news for a few days, the full impact of the campaign would be revealed in the months to come. A few weeks after Super Bowl Sunday, White ended up on Saturday Night Live, followed by appearances on Larry King Live and Oprah. Because of a 30-second ad and a good sense of humor, White was back. But Snickers — and Mars — may have been the bigger winner.

In total, McColl said, the White campaign generated a stunning 350 million media impressions. More importantly, those hits actually translated into sales: Revenues in the wake of the campaign shot up by double digits. “We found a way to do a campaign that could get amplified by the mass media,” McColl said. “It was a very interesting year.”

Even in the wake of that success, however, and even though he and his Mars colleagues know that social media did play a massive role in the campaign’s meteoric rise, McColl admits that it’s been difficult to figure out exactly how Facebook and Twitter influenced the sales jump, and why this campaign, unlike others, lit such a fire under social media users.

It’s easy enough to stand back and say that social media helped, McColl concluded. It’s not so easy, however, to figure out why it helped — and what lessons can be gleaned from a campaign that seemed to surprise even McColl with its results.

In other words, the laws of physics in social media marketing remain unknown, and likely will for some time to come.

“When you try to connect social media to all of this, unfortunately it’s like lightning in a bottle,” he said. “And these are just some of the factors we have to run through when we look at these new technologies. As mass marketers, we need to go out there and reach hundreds of millions of people, but we need to understand how these new technologies can help us achieve that. That’s the core that we’re talking about as we transform our growth agenda.”

This blog was previously posted in Knowledge@Wharton today blog: Social Media and Snickers

From the Knowledge@Wharton today blog.

Yahoo’s board is on borrowed time to fix its woes — a situation that was no doubt aggravated by the board’s decision not to name a new CEO at its annual meeting on Thursday. Wharton professors Kartik Hosanagar, Eric T. Bradlow and Waheed Hussain have advice for the board on how to ensure stable leadership and reposition the struggling company for growth.

Hosanagar, Wharton professor of operations and information management, states that time is running out for the company’s board. “They need to elect someone … who can bring back some of the entrepreneurial spark in Yahoo,” he says. “Traditional, seasoned management veterans are not the right candidates for Yahoo given all that it’s going through.”

Many expected Yahoo’s board to name interim CEO Ross Levinsohn to the top job, but now speculation is growing that the board is considering other candidates, too. Levinsohn, 48, took over as interim CEO in May from Scott Thompson, who quit after being accused of making false claims on his CV. Since then, Levinsohn has scored several victories, including making peace with Facebook last week by settling patent disputes. Also, Yahoo and Facebook agreed to form advertising and content-sharing partnerships. Finally, Levinsohn in May guided Yahoo’s decision to sell half its 40% stake in Chinese e-commerce firm Alibaba for $7.1 billion, ending tensions over how much value Yahoo can extract from that investment.

What should guide the Yahoo board as it picks the firm’s next CEO? “The last two Yahoo CEOs were outsiders, and it seems that Levinsohn is also essentially an outsider, having been at Yahoo for only two years,” says Hussain, Wharton professor of legal studies and business ethics, whose research areas include corporate governance issues. “You never know an outsider the way that you know one of your own executives, and you naturally have to take much more on trust.”

Hussain’s advice for corporate boards in general, including Yahoo, is to build better structures and processes for grooming leaders from within the corporation. “There is no hard and fast law that says internal leaders have less viable and transformational ideas than outsiders,” he says. “And in general, the devil you know is better than the devil you don’t know.”

Wharton marketing professor Bradlow says the new CEO must develop “a core niche strategy” to restore Yahoo’s fortunes. “[That person] should rebuild from the ground up by owning a segment of customers and branching [out] big from there.”

Bradlow has a specific to-do list: “Be willing to experiment,” he says, such as offering value-added services like web page layouts. His other suggestions: “Track much more than visits/sales to understand performance. Make sure you understand repeat visitation behavior, page depth and [other] things at the individual customer level.” Any company, including Yahoo, that tracks only aggregate behavior will miss out on important diagnostics showing whether a strategy is or is not working, he adds.

Hussain cautions against placing too much emphasis on just the CEO’s actions. “In the long run, the choice of a CEO is only one moderate factor among many that figure into making a company successful,” he says. “These decisions get an enormous amount of attention in the media, so boards tend to feel enormous pressure to do something dramatic. But it’s important to be realistic. You can only do so much to move an ocean liner in a short amount of time. Where it ends up depends a great deal on the seas and the winds.”

Shaky at the Top

Yahoo has had more than its share of instability at the top. Thompson, who quit after less than six months as CEO, had replaced Tim Morse, who had been at the helm for four months. Morse was named interim CEO last September after Yahoo’s chairman fired then-CEO Carol Bartz for what was widely seen as a failure in her efforts to boost the company’s fortunes.

Bartz, who had been CEO since 2009, had a little more than a year left on her contract when she was fired. Bartz had replaced Yahoo’s co-founder Jerry Yang, who had taken on the CEO role in July 2007. Yang had replaced then-CEO Terry Semel, a six-year veteran at the company, amid worries that Yahoo’s ad revenues were shrinking as business opportunities on the Internet were expanding.

Concerns over revenues persist to this day. Yahoo’s revenue has fallen steadily from $6.46 billion in 2009 to about $5 billion by 2011, although net income has grown in that period from about $600 million to a little more than $1 billion. “The major issue is that [its] growth is lagging the industry, especially [that of] Google, Facebook, etc.,” Hosanagar had noted in a Knowledge@Wharton Today report after Bartz’s exit.

Meanwhile, Yahoo’s shareholders seem to be losing patience. “You are behind the ball and you have been behind the ball, regardless of which CEO has shown up,” a shareholder told Levinsohn and other Yahoo executives at a Q&A session on Thursday, according to The Associated Press. “You don’t execute…. As a consumer, I have given up on this company.” Many still rue Yahoo’s decision not to sell itself to Microsoft four years ago for $47.5 billion. Back then, Yahoo’s share price was $33; Last week, it closed at $15.69.

This blog was previously posted in Knowledge@Wharton today blog: How Yahoo Can Search for its Growth Engine

Tim Harcourt | The Airport Economist

The world economy is used to surprises – usually on the downside. But one on the upside over the past year has been the reforms in Burma and the lifting of economic sanctions. The surprise reforms of the new Burmese government of President Thein Sein, the election of Aung San Suu Kyi to parliament and the latter’s call for Burma to open up to trade and investment have been monumental changes given Burma’s recent past. Australian Foreign Minister Bob Carr was one of the first foreign politicians to visit Burma since the new developments and other western nations have lifted sanctions and made (tentative) moves to invest in and trade with Burma under the new regime.

But what is the economic impact of sanctions and what happens to economies after sanctions are lifted? The economic evidence is mixed when looking at trade sanctions against South Africa, Southern Rhodesia (now Zimbabwe), Cuba, Fiji and now recently Burma. According to Yale University economist Philip Levy the economic sanctions against South Africa were more ‘psychologically hurtful’ to the apartheid regime than economically damaging, although there is evidence that disinvestment by major institutions like Chase and Barclays had more of an impact than trade sanctions. As in the case of Cuba and Southern Rhodesia, trade sanctions did not have as much impact as restrictions to foreign investment and in any case the economic distortions in the domestic economy (like South Africa’s apartheid labour market distortions) were as damaging as external sanctions. Levy believes that the collapse of the Soviet Union was the key factor in enabling the white minority government to start negotiating with Nelson Mandela and the African National Congress, making South Africa a ‘special case’ in terms of effectiveness of sanctions.

But what about Burma? Will it be a special case? It is clear that Burma has some big mountains to climb economically given the long days of military rule, isolation and the fact that it is a very poor and populous country. As the world’s leading Burma expert Professor Sean Turnell says: “Burma is paradoxically a resource rich but economically poor country.” One reason has not just been the isolation due to sanctions but also the enormous economic distortion of maintaining such a large military presence with no external defence purpose. According to Turnell, Burma kept “300,000 men under arms” (i.e. almost the population of Canberra) despite there being no obvious “genuine external threat”, which is similar to the economic burden placed upon South Africa of the vast bureaucratic apartheid apparatus (not to mention the ethical burden). The defence overhang for Burma has put its fiscal policy under serious strain and created inflationary issues dissuading investment. Maintaining the military apparatus in Burma has also created bureaucratic distortions, sucking away resources from much needed infrastructure, health and education, and handicapped Burma’s human capital development (creating too many idle low skilled soldiers and not enough farmers, teachers or other skilled workers).

The military overhang is the most pressing constraint on Burma’s return to any form of economic normalcy. But now Thein Sein has made some moves in the pro-democracy direction, what can Burma do straight away economically? Turnell has identified ‘low hanging fruit’ such as providing visas on arrivals for tourists, eliminating export taxes and import licences, allowing banks to lend to farmers, and deregulating interest rate ‘caps’ and other financial regulations. But at the end of the day, economic development must come in the agricultural sector and in resources and Burma needs to develop institutions in areas like banking and finance where there is almost no viable sector to speak of. And that’s all dependent on the capacity of Burma to reduce the military presence in the economy and society and create ‘room’ for other sectors. In a country where the armed forces have had so much control for so long, that’s a big ask.

So can Australia play a key role? Bob Carr gave Aung San Suu Kyi a strong assurance that Australia was willing and able to play an important role in Burma’s return to democracy and long term economic viability. Australia has a big role to play in infrastructure given the need for roads, rail, ports and telecommunications to serve its 62 million plus population, BHP Billiton can help in the development of oil and gas, and ANZ can play a similar role to its Pan Asian banking strategy in neighbouring Vietnam, Laos and Cambodia, and Australia’s education institutions can help with human capital development. But most of all Australia’s comparative advantage in agriculture, as well as our expertise in education and tourism, means we are well placed to help with Burma’s capacity building in the same was as we’ve helped the developing economies of Burma’s neighbours in the Mekong Delta. But it will be gradual and ‘softly, softly’ as the world investment community monitors the progress of the pro-democracy reforms.

It will take years to recover from what has happened in Burma since the 1960s, economically, politically and psychologically, but the lifting of sanctions and some luke warm (but positive) responses from investors and exporters (including from Australia) may signify some small steps to recovery on the new road to Mandalay.

Tim Harcourt is the JW Nevile Fellow in Economics and an adjunct professor in International Business Strategy, at the Australian School of Business, the University of New South Wales (UNSW) & author of The Airport Economist:  www.theairporteconomist.com.

Greg Wall | CSI Blog

A huge opportunity has opened up for co-operatives everywhere. The door is wide open. The timing is right. The global debt crisis is not going away. Pundits predict 10-15 years of slow global growth. Australian businesses, even in a more robust national setting, have to compete in this slow growth international economy. This is the chance for the global co-operative sector to demonstrate it can outperform other forms of business in challenging times in terms of growth, productivity, and the capacity to make the tough operational changes to stay competitive.

A major report handed down in the UK has shown this superior economic performance. The Co-operative Economy 2012  released last week reported that the sector had outperformed the corporate sector for the fourth consecutive year. The UK co-operative sector has grown by 21% since the start of the credit crunch in 2008 whilst the UK economy as a whole has stagnated. The co-operative financial services sector in the UK grew 12.9% from 2008-2010 compared to 8% for the rest of the sector. The growth rate of employee owned businesses is 50% higher than the UK economy (1.1% compared to 0.7 for the economy at large). The sector includes the John Lewis Partnership and we are fortunate to have ex-John Lewis Chair, Sir Stuart Hampson’s blog this week to tell us why their model is so successful.

This is further evidence that co-operatively owned businesses are more resilient in economic downturns than their conventionally owned counterparts. I would like to be able to report on the economic performance of Australian co-operatives with such clarity.

Fortunately, the United Nations International Year of Cooperatives has provided us with the opportunity to launch some sector initiatives and we have a mapping project for the Australian co-operative and mutual sector currently underway. The report is due in September. Co-operative Australia’s Top 100 list  of Australian co-operative and mutuals businesses, updated for 2012, is also due out at the end of this month.

This Saturday, 7 July, marks the most important day of the year for co-operative businesses – International Co-operative Day. This year is of particular importance given that 2012 also marks the United Nations International Year of Co-operatives, a landmark achievement for the one billion owners of co-operative businesses globally and the estimated 7.5 million Australian co-operative and mutual members. 

It is no accident that this is the first time that the United Nations has awarded a business structure with International Year status. In dedicating 2012 to co-operatives, the UN recognises the vital contribution of co-operative enterprises to global socio-economic development and to achieving the Millennium Development goals, in particular poverty reduction, employment generation and social integration; and we are very pleased that Australia’s Foreign Minister, Senator the Hon Bob Carr, will give a keynote address at the Development Co-operation Forum hosted by UN Secretary General Ban Ki-moon in New York this week (5 July).

In the IYC, the UN encourages Governments and regulatory bodies to establish policies, laws and regulation conducive to co-operative formation and growth. We believe that strong government support will go a long way to helping achieve these goals. 

The recognition of the role of co-operatives in Australian communities and the economy has recently gained momentum at the Federal level. Co-operatives received strong bi-partisan support in the House of Representatives on 25 June during the debate of the Private Members’ Bill tabled by Mr Luke Hartsuyker MP, Federal Member for Cowper. In addition, the passing of the Co-operatives Bill 2012 and Co-operatives National Law 2012 in the NSW Parliament marks a renewed commitment by Government to the co-operative sector. 

In launching the IYC 2012 Commemorative Coin in Australian Parliament House on 22 November 2011, the Minister for Employment and Workplace Relations, Financial Services and Superannuation, the Hon Bill Shorten MP noted: “We are the only nation in the world to produce a collectible coin celebrating the UN International Year of Co-operatives in 2012, as we recognise the impact of the co-operative business model on the burgeoning strength of the Australian economy on the world stage”.

Plaudits such as these are nice but the real opportunity of an International Year focusing on the co-operative model of business is the platform it provides for co-operatives, credit unions, customer owned banks, mutuals and other forms of member-owned business to showcase their economic and social achievements, and to raise awareness about the important role they play in providing a competitive marketplace and promoting social responsibility.

Australia’s IYC 2012 campaign has been fully funded by the industry – the co-operative members of Australia – and focuses on our vision for sustainable growth into the future.

The campaign aims to raise community awareness about socially responsible forms of business and the role they play in supporting local communities in Australia. I am proud of our ‘co-operative’ achievements as a sector this year, but the real game is the long term one. Charles (Chuck) Gould, Director-General of the global peak body for co-operatives, the International Co-operative Alliance, believes that the co-operative will be the fastest growing form of enterprise by 2020, and that 31 December 2012 marks a beginning not an end, of a ‘co-operative decade’.

 I am willing to place a bet that Chuck is right.

This post previously appeared in the CSI Blog: Open door beckons for rising stars of the global credit crunch – co-operatives

From the Knowledge@Wharton today blog.

We’re entering the next big wave of corporate social responsibility. At least that’s how Daniel Korschun, a Drexel University marketing professor, sees it.

The first wave of corporate social responsibility, known as CSR, was embodied in people like Sir Titus Salt, a British textile baron who improved conditions for workers toiling in what were then known as “dark satanic mills,” Korschun noted during a panel at this year’s Wharton Social Impact Conference. Salt brought them out of the economic darkness by providing housing, health care and a better way of life.

The second wave came during the 20^th century with the growing debate in corporate America over whether CSR should be considered an essential piece of good management or just a marketing tool to garner favor from communities, he said.

Today, “the debate is over,” noted Korschun, who acted as moderator of a panel focusing on innovation in corporate CSR. “We’re seeing the third wave of CSR, and companies are trying to incorporate CSR into the business model. That’s putting the onus on companies and management to find ways to innovate. It’s no longer enough to be somewhat engaged.”

Indeed, panelists at the session talked about how deeply involved companies have become with regards to giving back to society, either through philanthropy or sustainability efforts, and how far they still have to go in this effort.

Catherine Potter, a senior associate at consulting and management company Green Order, spoke about the environmental reality check her company has been able to provide to a client roster that includes General Electric, Pfizer and DuPont. GreenOrder focuses on how environmental innovation can actually make businesses more competitive and profitable, she said. “We’ll be the first to tell them, ‘Don’t just go … green for green’s sake.’ It should be rooted in business value.”

Building an enduring and effective sustainability platform, she added, takes many steps, but companies first have to understand what their core business model is, how they make money and how environmental sustainability plays into that. When clients come to GreenOrder, it’s usually the CEO who has bought into the idea of promoting green, “but the rest of the team thinks it’s hooey.” Yet buy-in at all levels is critical for making it work, Potter noted.

One example of a company that’s gone all in, she said, is General Electric, which GreenOrder has been advising since 2004. The multinational conglomerate, a global manufacturer of  everything from lighting to wind turbines, was able to cut more than $130 million in yearly energy costs while reducing greenhouse gas emissions and water usage.

Agencies in the public and private sector are coming to realize that CSR is not just about newfangled technology, but about changing behavior. For example, Potter pointed to utility clients who put in smart meters and devices for consumers to track energy usage. “It’s not going to work if you don’t engage people and figure out how to change their behavior,” she noted, adding that companies need to do more outreach to customers and make sure they have the information needed to form a realistic action plan.

Action is exactly what Chhavi Ghuliani, another speaker during the session, wants from all the players when it comes to environmental and social change. Ghuliani is a manager in advisory services for BSR, a consulting and research firm that works with 300 member companies all over the world to develop sustainable strategies for organizations, including everything from health education programs at a Bangladesh factory to creating green initiatives at a news organization.

In the past, Ghuliani said, companies viewed community investing and philanthropy as more important for brand recognition and boosting employee morale than for figuring into their core business operations. But today, it’s beginning to be seen more holistically. For example, he noted, BSR has completed a project with Bloomberg News to define what sustainability means, and was able to define what types of goods the company should be procuring to keep facilities running properly, while also focusing on what was the most sustainable. “As a result, Bloomberg saved $25 million in costs, but [the effort] also positioned them to be leaders in sustainability,” he added.

Figuring out which organizations are leaders in CSR, and which are falling behind, was another area BSR recently tackled by launching a new data service that compares CSR efforts among companies. Looking at two companies and comparing their energy efficiency is one example of this, noted Ghuliani.

This blog was previously posted in Knowledge@Wharton today blog: Corporate CSR: What It Means to Go ‘All In’