Revenues, sustainability and efficiency

A successful economic activity at its core is driven by an obsession: to raise revenues on a sustained basis through efficiency? But it is founded on integrity?

For example: It is a disgrace for a banker to say that our economy will suffer if it is founded on integrity; it is likewise a disgrace if the Aquino Administration does not deal with illegal gambling – even if it’s simply perceived? The administration was elected on the professed commitment to slay corruption – they have to demonstrate resolve, and that means being proactive to eliminate any tinge of illegal gambling?

It is not easy to create a culture that is credible; but it is a requisite to attain excellence, thus success. (And credibility can’t be overemphasized. Or why the CEO of HP had to go.) The late Teodoro Valencia was able to demonstrate that Luneta could be a clean and pleasant environment. And because he did, everybody supported the cause. The bottom line: he created a successful Luneta Park because he had the resolve . . . that snowballed into a culture?

Without the foundation of integrity, an economic activity is bound to flounder? How can an administration create a culture of efficiency absent integrity? Why do managers of (not self-sustaining) GOCCs have the nerve to defend their fat bonuses? A CEO of an enterprise founded on integrity can simply knock on the heads of subordinates to support the cause? George W. Bush as president was not well liked (not even by the writer) but he was right when he said: if you’re not with me, you’re against me?

And so in the case of the Aquino Administration it can knock on the heads of subordinates, for example: ‘Fix the perceived problem of illegal gambling. And tell me how soon; and let me know when you’ve fixed it!’ Christmas is coming, but fixing a problem has to be characterized by a true sense of urgency? Why the need for swiftness? Because driving the country’s revenues on a sustained basis through efficiency is a much more daunting challenge – or why we remain underdeveloped despite decades of trying? And so paving the way – to minimize if not eliminate distractions – for the administration to be able to focus and tackle a formidable task is an imperative?

It is encouraging that the administration has spelled out its priority infrastructure projects. It would be ideal if in fact they are aligned to a set of strategic industry initiatives that will drive economic output and raise GDP substantially. It is the kind of alignment that government can adopt from the private sector. Likewise the communications team can get the administration geared up for efficiency – and set a high performance bar – by making it a policy to update media on its efforts, for instance: ‘The president is expecting the cabinet to reconcile the JFC’s (Joint Foreign Chambers) proposal on the 7 strategic industries with its own by “x” time. He has simultaneously asked the cabinet to dovetail the infrastructure priority projects to support the eventual strategic industries by “y” time; and the program to ensure funding via PPP by “z” time.’ (And this is where strategic thinking and innovation come into the mix?)

The administration could also be transparent on the reality of its social programs to overcome poverty, thus: ‘The administration’s budget cannot fund all the requisite programs so we will prioritize which ones will get funded ahead of the others. And the president has asked the cabinet to announce this by “z” time. Since we cannot fund all the projects we have to continue driving efficiencies and cost savings. For example, the president wants to announce the abolition of non-performing GOCCs by “a” time. And every government agency will submit their “zero-based” budgets by “b” time, to which they must adhere to. The administration will also present and as importantly explain to Congress these initiatives and their timelines so that they could support and accelerate enacting the requisite legislations – for the nation to realize these ambitious programs.’ (It is encouraging that the Tourism secretary has presented to legislators the reality of our tourism industry, and how far behind we are from our neighbors; and thus what we must do to drive tourism.)

Governing is not easy. The CEO of a major European global company recently, when asked what the most critical requirement of the job is, without hesitation, said: “He or she must first decide if indeed they want the job”.

‘The breadwinner is a fisherman’

How can we all be demanding what’s on our wish lists as though we’re the kids of a tycoon? From justices to cause-oriented groups, it appears we Filipinos need to grow up? And until we do we risk being an ‘adolescent-economy’ – i.e., ‘there are times that try our souls’, and ‘biting the bullet’ is the option? (Disclosure: the writer had humble beginnings.)The writer continues to get education on the reality of an inclusive economy from his Eastern European friends – while recalling their socialist past.

Over late breakfast, after oversleeping following the mountain hike the day before, by the foot of a ski trail with friends and spouses (savoring the lush greenery and the tail end of summer) the writer commented that the scenery could be mistaken for Vermont or California or Nevada. And like many times before, they would talk about their prior life: ‘Ours is a town of 100,000, not a major city but not a small town either by our standards. The biggest employment was provided by our truck manufacturer (supplying Soviet Russia and satellite countries) that employed 10,000. And we also had an aluminum factory with a couple of thousand workers. The central planners typically would ascertain the industries a town would have – part of the promise of an inclusive economy. Today the truck manufacturer is down to 300 employees and is confined to axle production – after privatization that is the only product they reckoned they could be competitive in a globalized economy. (The writer chimed in that in Virginia given US military spending cuts over 6,000 jobs would disappear on top of 200 senior military and executive positions.) The aluminum factory was a mystery because we’re not near a raw material source. Fortunately, after privatization and our EU membership, it’s benefiting from the EU’s industry support – better access to raw materials; and as importantly, the larger EU market where they’ve demonstrated the ability to compete for foils, used in car insulation and food packaging – thus the business is thriving.’

And the writer contributed: His family lives in the suburbs with the same population size as theirs. It is locally known as a bedroom community of New York (one of several within commuting distance from Manhattan) and thus has developed an altogether different economy. Because these New York companies move employees in and out of the city, the housing market is an active component of the economy. And since some of the decision-makers live in the area, it is not surprising that a handful of Fortune 500 companies have moved their headquarters to the town – of course, justified by the high-cost of doing business in New York. And two European banks established trading floors, mirroring Wall Street. Financial, consulting and other service-related businesses have added to the local economy. The state university established a branch and is gaining from their strong partnerships with Fortune 500 companies. And a world-class university erected an extension hospital and created a healthcare industry. (In the case of the Philippines, the economic parameters are more like the town in Eastern Europe? If we are to pursue a competitive service-driven economy, the operative word is competitive: a service-driven economy must be designed to be globally competitive?)

And the friends continued: ‘We have two special high schools, one for math and the other for languages; and a university that is strong in chemistry, also an agriculture institute. In the past we had a military school. In a market economy we recognize that only those attaining competitive advantage would thrive. For example, given our farming capability, a big agribusiness investor put up a large-scale farm, with funding coming from the West. (It’s not quite like the 24,000 hectares they have in Brazil, the new agribusiness powerhouse; but not small-scale like we talk in the Philippines?) Also, because of our mountain lake we have an outstanding water source that spawned a beer brewery over a century ago. And today we are delighted that a Danish company has bought the brewery, producing popular global brands while upgrading the local brand and local brewing. And the impact on the economy is far greater – for example, today the beer company has a well-developed commercial capability and can compete with other global players. As you are aware newer businesses have also arrived – like food and beverage, dairy, alternative energy, among others’.

Clearly they have a totally different perspective of what an inclusive economy means – to them competitive advantage is the nirvana . . . despite the pinch they feel from the global recession. And even Fidel Castro would agree with them – ‘The Cuban model doesn't even work for us anymore?’

A new paradigm for our investors?

Beyond delivering the bottom line on a sustained basis for their businesses and championing CSR, our investors may want to take on a new paradigm – for example: nation-building is farther up the “value chain”? The old paradigm can’t be blame on anyone – it comes from our culture, history and tradition? But we can always be better?

As investors, they are as heeled, if not more, as economists to speak to the power of investment? It is laudable that our biggest investors are raising capital spending – but what can their new vision be?

The DTI secretary wants to showcase Makati, Ortigas and Bonifacio to attract foreign investors. We moved our commercial hub from Manila because of its density – to Quezon City to Makati to Ortigas to Bonifacio – but it appears we’re back to square-one, i.e., a CSR concern? Should we develop a truly 21^st century commercial hub – where the open spaces and greenery make it people- and eco-friendly? What about the other basics like parking and traffic management, and of course, power – i.e., they do raise productivity? In short, competitive advantage must be the yardstick? (Disclosure: Many years ago the writer’s regional team made investment decisions for an MNC. It really is a very simple undertaking: the host country ought to be a viable, competitive location for a regional if not global venture. And countries that have a 360-degree view of what it entails usually win out; and our neighbors do, consistently – and we Filipinos can develop a strong outward-looking mindset so that our perspective won’t be restricted and be competitive instead? For instance, the efforts of the Administration to make NAIA visitor-friendly is a good example – simple yet profound?)

It is for all to see that we need to double our gross investments (as a percentage of GDP) to elevate our competitiveness – and mirror the gains made by our neighbors? When and who can take us there? Our economic development is behind, not in years, but in decades? And so we need to get our GDP substantially up – or the requisite costs of social services spelled out by the various agencies to address poverty will remain a blue sky? And in that scenario the paperwork necessary to keep score against our Millennium Development Goals will remain just that, paperwork?

Strategic philanthropy is most welcome but we need investments geared for global competitiveness and innovation if we are to leapfrog economic development? Given the influence of our local investors to Philippine society, they could take up the cudgels for industry to move up the “value chain” – from delivering the bottom line on a sustained basis to nation-building, and beyond CSR as we know it?

It’s kind of the administration to leave a tag line for the benefit of our local investors while preparing for the trip to the US to drum up investments – that local investors will have first crack? Yet we can only invoke culture, history, tradition, nationalism, patriotism – and whatever else – to a certain point? Or the rhetoric could indeed relegate us to basket case of the region – i.e., characterized by massive poverty; and competing vested interests unwittingly reinforcing our crab mentality, taking the whole country down? Our instinct for inclusion may be meant to accommodate the best ideas from every constituency, but in pursuing a major economic activity it doesn’t work because it simply isn’t doable? Perfection is not of this world – continuous improvement is, or why to be holier than thou is folly?

Bottom line: It is imperative that we cover the shortfalls we’ve incurred over decades in capital, technology, talent and market – and our investors, in the name of nation-building, could play a crucial role in leading the endeavor: show us what the global economy can offer, and not be left behind?

Ideas, execution and confidence

‘Leadership means to deliver the bottom line on a sustained basis?’ And it is founded on ideas executed with confidence – and driven by clarity, conviction and commitment?

It is a delight to read about the leadership being exhibited by the Aquino Administration – that the executive secretary issued ‘Memorandum Circular No. 3 (or MC 3) directing the National Economic and Development Authority (NEDA) to formulate the Medium-Term Philippine Development Plan and the Medium-Term Public Investment Program for this year until 2016’; that ‘DOLE forged an agreement yesterday with the Joint Foreign Chambers of the Philippines (JFC) for the drafting of a so-called “code of conduct” for foreign and locally-owned commercial firms’; and that the finance secretary says that ‘the debt of the NFA is going to end with the National Government. It’s not going to go anywhere else because it’s guaranteed by the National Government. And therefore, the management of these types of entities must be improved and there must be a clear understanding of what really is the mandate of such entities’.

We need to continue to demonstrate clarity, conviction and commitment – given the magnitude of our challenges? In short, the marching orders from the president must be crystal clear so that there is no confusion and that the administration is fully committed to them? And that’s what leadership is about – because it is what it takes to deliver the bottom line on a sustained basis? There’s probably no textbook that spells it out precisely that way but successful leaders would be able to relate to it? And leadership is not learned from books but by doing?

At the end of the day leadership is about keeping it simple? Reagan and Clinton demonstrated it simply as: “It’s morning again in America” and “It’s the economy, stupid!” Obama, on the other hand, has not delivered the bottom line – i.e., unemployment remains at 10% and thus not surprising, the Republicans are anticipated to take control of the legislative branch. Who cares if a Republican administration was at the wheels when the huge surplus turned into a humongous deficit and the global financial system collapsed? That’s water under the bridge!

In the Philippines, the writer remembers the many leadership programs where we would focus on people- versus results-orientation. In US politics the people vote with their pocketbooks so at the end of the day the results-orientation comes down to people-orientation?

The Aquino Administration is looking at the NFA and other GOCC’s that are not self-sustaining (and to add insult to injury, the managers have the gall to say that they are not covered by government compensation restrictions and so they could award themselves fat bonuses?) and leadership demands that they be results-oriented and not people-oriented? Because if they succumb to people-orientation, they would be feeding into our crab mentality – i.e., it takes the whole country down?

Back to the MC 3, it pays to recognize that ideas are only as good as they are executed with confidence? There will be tons of ideas as various government agencies as well as other stakeholders chip-in their contributions to our economic plans. It follows that these ideas would be culled down to the vital few lest we find ourselves unable to execute? And this piece could be the disaster waiting to happen – i.e., ‘inclusive’ is the fatal blow?

‘Leadership means to deliver the bottom line on a sustained basis?’ And it is founded on ideas executed with confidence – and driven by clarity, conviction and commitment?

(The Center for Creative Leadership over almost 40 years have trained tens of thousands of leaders globally and continued their research on leadership. They introduced the concept of 360-degree leadership, i.e., a participant to the program has to come with the assessments of those around him or her, thus 360-degree, which they match with the individual’s profile and leadership tendencies. And the object is to recognize where one’s tendencies are at odds with those around him or her, so the leader knows where effectiveness lies.)

Chief of Staff

The 80-20 rule may not be instinctive to us but given the aspirations of the Aquino Administration, somebody could be keeping the president focused on the vital few initiatives that will deliver the bulk of these aspirations? James Baker was a respected Chief of Staff in the Reagan White House – and he could focus the president on delivering on his promises. (It’s not surprising how Tony Blair, then an MP, described his first meeting with Baker, at the time the Treasury Secretary: “I had a touch of that British raised eyebrow . . . and he sent me out . . . reeling and seeing star . . . Above all, he was smart”.) We may not agree with Reagan’s politics but as a leader he focused and delivered.

In fairness, it is a new administration and they’re still sorting out the cooks in the kitchen? And beyond the seriousness of our economic challenges, President Aquino has to deal with the politics of governing. Still, a good chief of staff can get the two elements of economics and politics in synch – i.e., keeping an eye on their common denominator. In short, the left hand ought to know what the right hand is doing.

For example, if the Administration is committed to aggressively driving our revenues (i.e., GDP, beyond tax collections) the chief of staff could be getting the president to focus on the strategic industries the JFC (Joint Foreign Chambers) offered; and reconciling them with the initiative from government?

The JFC appears to be lobbying for the mining industry, reminding us that their 7 strategic industries would equate to $75 billion in foreign direct investments. (Are there other offers we are missing that can match the magnitude of this option? It is important that we are not distracted by the ‘trivial many’ so that we can focus on the ‘vital few’?) At this level of investments, and if indeed we sharpen our pencils and pursue truly strategic industries and attain competitive advantage, their multiplier effect should generate over $100 billion in incremental GDP – that will more than match Thailand’s economic profile, and they have a prettier poverty picture than ours? But until we dramatically raise investments it is incongruous to expect meeting our MDG poverty-reduction goal – i.e., we can’t squeeze blood from a stone?

The administration could proactively deal with the JFC’s proposal (and truly move private-public partnership beyond rhetoric?) so that we can ascertain if indeed it will facilitate delivery of the president’s economic promise? For example, the chief of staff could get the JFC (and it would help if they have major local players within their task force) work with the DTI (and whoever else from the economic team) and come up with an actionable, joint resolution – and the sooner the better? But the efforts should be transparent so that the rest of society is kept in the loop? Of course there will always be conflicting ideas – but that’s precisely why focusing on the vital few is key? Every initiative (at every level) should be focused on its vital few – i.e., the 80-20 rule?

Several expressions of support are coming to fund the infrastructure initiative of the administration – and infrastructure is the requisite foundation of any set of strategic industries? The administration could figure out which of these funding options best fit its infrastructure and strategic-industries initiatives? It also means that if there are legislations that are either imperative or counterproductive to the cause the administration ought to call the leaders of Congress to Malacañang to get them on board?

We’ve recognized the imperative of stepping up investments? But how we manage generating them and executing the requisite strategic-industries initiatives are a much bigger challenge? And the media could play its role by constantly challenging the administration to get us focused on what matters? We can’t be copycats of Washington DC where the media plays off the left against the right because we have yet to find our place in the sun? (Of course, they could demonstrate how to handle a hostage-taking crisis like they did the other day?) We can play critics or apologists – but we have a job to do as a nation and we better get the job done?

Setting the performance bar

Wittingly or unwittingly we don’t want to set a low performance bar? We may want to psyche ourselves up to give us the confidence to face our challenges – but not to take refuge and ‘justify’ our shortcomings? Athletes do it all the time – psyching themselves up and digging deep into their inner strength – but not to take refuge and justify poor performance?

What we need is dogged determination? And that means setting a high performance bar for both the public and private sectors – higher than what we’ve set all these years, decades?

International agencies are eyeing us like an eagle – and we should be getting them off our back? Granted that we need funding facilities but we must not lose our focus, the North Star – that of winning. We can say that their watchful eye is ‘an insult’ – but only if we start winning? (Disclosure: the writer represented US AID/IESC in Eastern Europe – and all they wanted was for client countries to succeed!)

It is important that the Aquino Administration demonstrate full confidence in their plans – whether being scrutinized by Congress or international agencies or dealing with industry. The pilot flies the plane, not the navigators?

For example, should they be presenting a ‘must list’ as opposed to a ‘wish list’? And given government revenues are woefully inadequate the Administration must then flesh-up its must-list and present it to foreign investors – that it satisfies the acid test of reality and thus actionable? It must have clear-cut priorities starting with those that will give the biggest bang, not the trivial many? It appears that the JFC (Joint Foreign Chambers) are working on a roadmap to pave the way for the development of our strategic, competitive industries? How does the Administration reconcile them with those the DTI is working on? What about their timelines – a plan is only as good as it meets its timeframe? On the other hand, Congress ought to enact legislations to facilitate the realization of the Administration’s plans?

Bottom line: The Administration must demonstrate confident leadership and get critical sectors of society on their side? There will always be detractors but confident leadership should be able to deal with them – not let them derail plans, for example? The key is transparency – because it wins credibility and goodwill for the leadership?

Integrity likewise wins credibility. It is laudable that the Finance Secretary is telling banks that tolerating borrowers to circumvent tax regulations is unacceptable. It is in fact a disgrace! Are we then surprised why ours is a culture of corruption? (Disclosure: many years ago the writer’s team told a business owner in an Asian country that they could forget about partnering with an MNC if they could not straighten their books. Today his Eastern European friends are telling potential partners the same thing.)

Have we set the bar so law that even financial institutions – supposedly an engine of economic growth – are not promoting integrity? Are we then surprised why we are economic laggards? Competitiveness is what makes for a strong economy – not bogus bookkeeping?

How can a banker worth his salt say that our economy would suffer if it is founded on integrity? Where is the outrage? We must recognize when the compassionate heart ceases and crab mentality takes over – it takes the whole country down?

Failure is not an option - 2

When the global financial system collapsed there was no shortage of unsolicited advice. For example, there were talks about the beginning of the end of capitalism, or that greed never pays, or risk management can never be taken for granted. The unfortunate end of the hostage-taking crisis in Manila likewise generated tons of condemnation and unsolicited advice.

Every undertaking has a beginning and will have an ending. And linear thinking would typically proceed from the starting point. Yet breakthrough ideas come from a reverse-thought process – i.e., starting with the end in view. (It is counterintuitive and why recommendations from analysts could be rejected by bosses who are bottom line-oriented. More about being inclusive in future blogs.) And if we are to raise the performance bar and create a culture of excellence in order to become competitive, we must not take failure as an option – i.e., risk management is an imperative? In short, asking the question, ‘what is the worst-case scenario that will fail us’ is mandatory?

Simply put: (a) starting with the end in view and (b) crystallizing the worst-case scenario would lend itself to preempting failure – i.e., do lateral thinking and avoid being blindsided?

The writer remembers the first time he was shown around the factory of his Eastern European friends; and they were surprised that he did it rather rapidly – they were expecting him to linger and really take in the totality of the factory environment. And so the writer, because efficiency is the true measure – the end point – of a factory, said: ‘When a visitor walks into an efficient facility, there is no mistaking that it is an efficient facility’. And the swift response: ‘Yes, we have an inefficient factory! Will you help us make it more efficient? We have a cost issue; in fact we could not afford some of the quality requisites of ISO 9000, like water-treating, for example.’

What is their worst-case scenario? Quality issues could adversely affect product competiveness and thus depress sales and eventually profitability. And in that scenario, especially given their limited resources, the business could fold up. And so the writer suggested: ‘Try margins’ – start with the end in view and do lateral thinking. And their ‘aha moment’ came: ‘We have a margin issue, not a cost issue! (And the mindset guided the pursuit of new businesses, specifically, tapping state-of-the-art manufacturing technologies from the West; and thus the rapid profitable growth of the company.) And it started the efforts to define the businesses they should be in as well as the segments to target and compete; and by extension, the imperative of crafting a product development initiative.

The Aquino Administration is currently crafting its infrastructure development initiative – to establish the foundation for our strategic, competitive industries – and it will require a ton of money and thus the need for private participation. What is their worst-case scenario – that they will not generate the requisite level of funding to complete an ambitious program, for example? How must they prioritize the projects? Which ones will deliver the biggest bang for the buck – the 80-20 rule, e.g., power should be top of the list and pursued with utmost urgency? How will they proactively solicit private participation? How can they motivate the private sector to step up to the plate? What about foreign participation? In short, how do we solve a problem before it happens – before it becomes a disaster?

Of course, no one likes to be at the receiving end of unsolicited advice – but when beyond massive poverty we are the laughingstock of the region in many respects, we want to take stock and take it seriously?

Competitiveness and innovation

Have we finally moved competitiveness beyond the intellectual level? Is it also true of innovation? The farthest distance to traverse is not external but rather between the head and the heart? But once competitiveness and innovation get to the heart it is easier for them to come down to the gut – where they become instinctive? Or why Singapore and Hong Kong are atop the competitiveness ranking?

The writer used to confide with his Indian friends that they may be too smart for their own good! Before China became an economic power, India was well ahead with their economic infrastructure. Of course, they kept to a lot of restrictions and for many years their economy performed below its potential! Yet their strength in information technology became handy with the coming of Y2K. And given their low-cost structure global companies came over while India in turn was lifting certain currency restrictions. And beyond IT they have raised their manufacturing capability – for example, developing the world’s cheapest car. And the UK acknowledges India as their biggest manufacturer, and respects their ability to acquire iconic British auto brands! They have a ‘strong sense of innovation’ – which they define in jest as: ‘you have to be an innovator to simply survive in our country’!

The Chinese, on the other hand, are ‘natural entrepreneurs’? Negotiating with the Chinese while tough – i.e., it requires patience – would have a better than even chance that a win-win agreement could be had? Of course the Chinese have their weaknesses too – their exports are driven by cheap-priced consumer goods made from cheap labor, for example, which can’t be perpetual? (China will have to continue raising wages before labor becomes unhappy about the country’s economic profile? Which means the imperative of producing higher value-added products would also apply to them?) The Germans, on the other hand, has demonstrated their strength in industrial equipment or higher value-added products, and grew their economy while the UK, for instance, was entertaining a double-dip. Yet major Chinese companies have invested in the US – even buying respected US brands that suffered during the recession – and thus would have access to both US technology and the big US market. In short, it is not surprising that China has overtaken Japan as the world’s 2^nd largest economy . . . with India anticipated to move up next to China.

Like the Indians, we have demonstrated smarts too, but in global competition and in the global market, we need to move past the intellectual level and on to the pragmatic, real world? For example, we can intellectualize competitiveness and innovation but until we roll up our sleeves and actually compete globally by producing innovative and compelling products, we would remain marginalized? We better hurry and get our basic infrastructure up to competitive standards – a requisite to successfully embark on our identified strategic, competitive industries? Media should then hold the Administration’s feet to the fire?

Competitiveness and innovation ought not to be restricted by parochial instincts? For example, many years ago we concluded – when NBA players first came to Manila and demonstrated their brand of basketball – that a good small team would not measure up against a good big team? The same principle applies to capital, technology, systems and talent – the imperatives of competitiveness and innovation?

And in China, South Korea and Taiwan today, for example, they have brought in lots of these elements from the West. The point was driven again to the writer when his Eastern European friend proudly commented that (as he stepped out of the elevator one morning) he had to switch to English because the people he bumped into were not local employees – because he has tapped into Western capital, technology, systems, talent and then some!

That’s the global economy’s definition of inclusion – not narrow but truly global? A bit of reality not lost to one of India’s largest conglomerates – they have opened their search for the next CEO to foreigners?