World Business Academy Volume 21 • Issue 2 Rekindling the Human Spirit in Business June 4, 2007 Subscribe to All Sorry Jack, But Curve-Induced Firings Our Publications Hurt Profits World Business Academy publi- Part of former GE CEO Jack Welch’s legend rests on a cations are the leading source of pedestal of forced curve firings that he instituted during information on topics of concern his tenure. Underneath his so-called “Vitality Curve,” 10% to business today and tomor- of employees were allegedly fired each year. More than row: corporate governance, one GE executive has told your editor that after a year or sustainability, macro-economic two they found ways to circumvent the “rank-and-yank” trends, emerging concerns and system. opportunities, new models for profitability, and the role of fossil Now, Stephen Garcia of the University of Michigan has re- fuels in our firms and civilization leased findings that indicate that forced-ranking systems itself. We deliver — once or twice that require managers to evaluate the performance of an a week, direct to your desktop employee against other employees can hurt productivity. — information that will allow you to be more effective, efficient, “The use of rankings to scale employee performance rela- and responsible in commerce, so- tive to that of their peers, instead of using predetermined ciety, and your own personal life. goals, may negatively affect employees’ willingness to Click here to sign up for cutting maximize joint gains that will benefit the organization. edge information that will help Individuals will care less about performing better on a you and your business, for just given task and will, instead, shift their focus to perform- $150 a year. ing relatively better on a scale comparison — in other words, being surpassed in rank.” A similar forced ranking system has been used at various times by Cisco Systems, EDS, Hewlett-Packard, Microsoft, Pepsi, Caterpillar, Sun Microsystems, Goodyear, Ford, and Capital One. Continued on next page We Think You’d Like to Know… Russian trade with the U.S. rank among “easiest countries European Union, Q1 2007 ($ billion) 55 in which to do business” Russian trade with U.S., (World Bank, 2006) 3 in 99 same period ($ billion) 3 U.S. rank among “easiest to Number of financial restatements hire/fire workers” (World Bank, 2006) 3 by U.S. companies, 1997 116 % GNP spent on health care (E.U.) 8.5 Number of such restatements, 2006 1,876 % GNP spent on health care (U.S.) 14.9 Odds a random company % of U.S. healthcare expenses restated in 2006 1 in 10 that are “administrative” 31 World Business Academy The researchers found that “rivals ranked near the top of a standard are more competitive and less cooperative than those far from a standard. Only 25 percent of the study partici- pants were willing to maximize joint gains when they and their rivals were ranked Nos. 1 and 2, compared to 79 percent when ranked Nos. 101 and 102. However, when the rivals’ relative standing on the scale was not in jeopardy, participants uniformly behaved more cooperatively — 74 percent for Nos. 1 and 2 and 77 percent for Nos. 101 and 102.” For more information, see www.bus.umich.edu/NewsRoom/ArticleDisplay.asp?news_id=9730 Circuit City Cuts Costs and Invites Scrutiny Appliances are a tough business. Earlier this year, Circuit City announced its decision to cut costs by laying off 3,400 of its highest paid in-store personnel and replacing them one-for-one with lower paid workers. The veteran workers reportedly averaged $12 per hour. The Wall Street Journal reported that Circuit City gave the laid-off workers a small severance payment and told them that after a two-month hiatus they could re-apply for their old jobs at the company’s starting salary. Top executives were notably absent from the list of those replaced or hit with pay cuts. In FY07, Chairman/CEO Philip J. Schoonover took home compensation of $7 million. This included $8,000 in free merchandise under an “evaluation program,” and $6,000 for per- sonal “financial planning.” Schoonover and other officers also received a car allowance of $10,600 each. The Chairman of the House Labor and Education Committee said, “Clearly, workers who were loyal to the company for years and who earned $12 per hour were not the ones who were overpaid.” A key aspect of Schoonover’s strategy is to sell more high definition televisions. That may be harder to do without experienced salespeople to close information-intensive sales. Cir- cuit City’s stock price fell from $31 last year to $15, as of this week. According to Reuters, last week Circuit City “withdrew its previous guidance for the first half results. It cited substantially below-plan sales, mostly tied to large flat-screen and projection televisions in April.” Big Blue Goes Green, Helps Customers Cut Data Center Energy Costs Data servers and ancillary equipment burn $7.3 billion worth of electricity, according to Jonathan Koomey, a staff scientist at Lawrence Livermore Labs. IBM has spotted the profit potential in the environmental and renewable energy movement, and has a new initiative called “Project Big Green.” The company announced that it is “redirecting $1 billion per year across its businesses, mobilizing the company’s resources to dramatically increase the level of energy effi- ciency in IT. The plan includes new products and services for IBM and its clients to sharply reduce data center energy consumption, transforming the world’s business and public technology infrastructures into ‘green’ data centers.” 2 World Business Academy The first customer is PG&E, a company which has dramatically improved in many respects since emerging from bankruptcy. The Northern California utility expects to consolidate nearly 300 Unix servers onto 6 IBM machines, helping to reduce 80% of its energy and IT facilities consumption. IBM intends to double the computing capacity of its own data centers within three years while holding energy costs constant. That will save $500 million. Economist Magazine Publishes Survey on Business and Climate Change The current (June 2-8) issue of the Economist contains a valuable 15-page survey entitled “Cleaning up: How business is tackling climate change.” The conservative Economist declares: “These days, very few serious businessmen will say publicly either that climate change is not happening or that it is not worth tackling. Even Exxon Mobil, bête noire of the climate-change activists … appears to accept the need for controls on carbon emissions.” Exxon Mobil is far from the only leading U.S. company that has changed its tune. In Janu- ary of this year, 10 of corporate America’s largest companies formed the U.S. Climate Ac- tion Partnership (USCAP) and sent Congress and the White House a letter demanding swift federal action to combat global warming. The original group, which has since doubled in size, included GE, BP, Lehman Brothers, DuPont, Caterpillar, Duke Energy, and Alcoa. Their call for federal action stems from a desire to escape an expanding patchwork of state laws regulating carbon emissions. As Economist surveys usually do, this one informs and stimulates with a mixture of fact and opinion, sometimes laced with dry humor. We offer a few highlights: • In 2003, when figures were last tallied, U.S. utilities spent less on R&D as a percentage of sales than did the U.S. pet food industry, “which suggests there is scope for more investment.” • $4 trillion in investment funds, organized by Ceres and the Investor Network on Climate Risk, now discriminate in favor of cleaner firms. • As plug-in electric vehicles and fuel cell technology develop, utilities and oil companies may face turf wars. • GE’s wind turbine business has grown 20-fold to $4 billion over five years. • The U.S. could meet all its energy needs by covering 1.6% of its landmass with solar cells. • In China, two 500 MW coal-fired plants go online each week. • London’s mayor has proposed a £25 ($50) daily fee for driving SUVs in London. Low- emission cars will be free. The U.S. proportion of SUVs is 1,000% that of London’s. 3 World Business Academy • Big corporate emitters are beginning to put a price on carbon emissions and draw up their investment plans accordingly. • The Edison Electric Institute, the trade association for U.S. electric utilities, this year asked for regulation of utilities’ carbon emissions. Long-term investment decisions are difficult without the regulatory certainty that federal action would bring. • Last year $30.4 billion in carbon offsets were traded, up from $10 billion in 2005. • Many Western-financed carbon credits are going to China, to eliminate dangerous emissions that the Chinese government could easily and cheaply eliminate itself. • The best way to cut greenhouse-gas emissions is probably to set a carbon price through either a tax or a cap-and-trade system. Of the two, “a tax would be the bet- ter option. Unlike a cap-and-trade system which stipulates the amount of CO2 that may be emitted and allows the price to vary, a tax sets a price and lets [the producer] determine the quantity emitted.” © 2007, World Business Academy, 428 Bryant Circle, Suite 109, Ojai, CA 93023 • Academy Phone 805-640-3713 • Fax 805-640-9914 Website www.worldbusiness.org • Senior Editor, David Zweig, [email protected] • Phone 510-547-3223 4.