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2012

As a number of sources pointed out last week, Apple received an important legal ruling in China. Proview International Holdings has been fighting with Apple over rights to the iPad trademark, and the company’s Shenzhen unit had requested a ban of iPad sales in that city. A Shanghai court rejected the request last week. The battle isn’t over, however, as both companies wait for tomorrow, when a court in Guangdong is scheduled to rule on Apple’s appeal of a lower court decision that the company’s 2009 purchase of the trademark from a Taiwan-based unit of Proview was invalid.

Now that’s all interesting enough, but what really caught my attention was an article in Businessweek noting that even if a company like Apple can become embroiled in legal battles with an obscure Chinese rival, that doesn’t bode well for other, smaller companies hoping to do business in China. So what can those other companies do?

The article’s author, Bruce Einhorn, offers some interesting advice. First of all, he writes, companies need to make sure the government is on their side. For instance, if a company does get caught up in a dispute with a local player, it would be nice to know they have government officials on their side who can make problems go away. To make sure they do have government backing, companies need to show goodwill by helping with state priorities such as promoting the development of smaller cities and less prosperous regions in China’s interior.

It sounds simple enough, but if necessary, companies need to buy their trademark. To figure out who owns what names, foreign companies often use specialists that monitor trademark registrations in China and other countries, Einhorn says. Once they’ve identified potential problems, companies then try to buy back the rights to those names. When negotiating with Proview for the rights to the iPad name, Apple worked through an intermediary, a company it set up to do the negotiations and buy the trademark, says Einhorn.

It’s also critical to remember to transfer the trademark properly. It’s possible this may have been a critical mistake for Apple, writes Einhorn. When concluding its deal with Proview, Apple may have neglected to get an agreement from the Chinese company to submit the deal to the government’s trademark office, part of the State Administration of Industry and Commerce, Einhorn writes. All that may have been missing is a signature.

All this reminds me of another post about working in China. While that one was specifically about steps multinationals need to take to safeguard the company’s IP in China, there was also some similar advice that—I believe—can go a long way toward helping companies do business in China.

Anil K. Gupta—a professor of strategy at the Smith School of Business, The University of Maryland at College Park, and a visiting professor in strategy at INSEAD—and Haiyan Wang— managing partner of the China India Institute--have conducted discussions with senior executives at several American and European companies. They now urge executives to cultivate relationships with the government and the media, especially at the local levels, in China.

While local governments in China may be eager to attract high-technology players and R&D operations, they also may strive to help local companies advance, Gupta and Wang say. In China, it will almost always pay to cultivate solid relationships with government officials and to keep making the case that protecting everybody’s intellectual property is the fastest route to creating an innovation-driven economy, they add.

Some of this advice sounds obvious. Then again, beginning to do business in China can be so overwhelming for some companies that it’s easy to see how some details can slip through the cracks. But it’s important to remember that details like who owns a trademark can make or break a company. And regardless of where business takes place, it never hurts to cultivate favor and develop relationships with local officials.

As companies continue to struggle with demand volatility and rapidly changing business demand patterns, they are forced to make changes to their business model. For example, you may have seen news yesterday that Procter & Gamble said it will cut 5,700 jobs—or 10 percent of its global workforce—by the end of 2016 as part of a four-year restructuring aimed at cutting costs by $10 billion. In a widely reported story, which I saw on The Washington Post, Chief Executive Officer Bob McDonald explained that the company is cutting 1,600 positions in the current fiscal year, and it will cut another 4,100 jobs during fiscal 2013

Procter & Gamble, the story notes, has experienced declining sales in the U.S. as consumers continue to spend cautiously. The company also has faced high costs for fuel, packaging, and other commodities. The cost-cutting strategy is an attempt to address those problems even as the company continues spending on initiatives it considers crucial to growth, such as marketing new products like the single-unit Tide Pods in North America and expanding Oral B in Latin America.

Of course, Procter & Gamble isn’t alone in facing those challenges. According to new research from The Hackett Group, many large companies expect to face significant challenges dealing with the increased volatility and elements of what the group calls the “New Normal.” The study found that as companies struggle to do more with less, they must focus on improving accuracy and timeliness of information so they can—in turn--improve decision-making, and leverage global standards, resources, and organizational models.

I wasn’t surprised to see that according to the group’s The “New Normal” Has Become the “Now Normal” Research Insight, 2012 Key Issues Agenda, CEOs believe increased demand volatility and uncertainty, cost of raw materials and energy, and availability of talent show no signs of slowing. Indeed, nearly 20 percent of the respondents expect to see 25 percent or more volatility in these areas over the next two to three years.

As is expected, revenue growth and improved operating margins remains a key priority, and the predominant opportunities for revenue growth—according to survey respondents—lies in emerging markets outside of Europe and North America. Furthermore, The International Monetary Fund estimates that 61 percent of global GDP growth in 2012 will come from Brazil, Russia, India, and China. That makes sense because geographic barriers to doing business have been dramatically reduced.

What I did find somewhat surprising was the focus companies now place on key business services areas, such as corporate finance, IT, HR, and procurement. According to respondents in The Hackett Group’s research, if their current plans are successful, companies will more than triple the level of globalization in these key areas within two to three years. By that time, more than a third of all companies in the study said they expect to have achieved a global operating environment.

It’s worth noting that The Hackett Group’s assessment is that the required changes are much more challenging than organizations realize, and that it will instead, take most companies five to10 years to reach their desired goals. Companies will need to holistically revise their business models to incorporate the capabilities needed to adapt to local or regional economic changes within a global operating framework, according to the group.

Has your company been continuing to expand globally, or are there plans underway to do so? If so, what do you think has been—or is—most challenging about globalization?

Reshoring, or moving manufacturing back to the U.S. from overseas, continues to be a hot topic. For example, at a recent “Insourcing American Jobs” forum at the White House, the President, Vice President, members of the Cabinet, and other Senior Administration Officials lead a discussion on ways to encourage U.S. companies to insource American jobs and make additional investments to help rebuild the economy.

There’s a great deal of merit to bringing manufacturing back to the U.S., or in some cases, to keeping it in the U.S. in the first place. As has been previously noted, wages in China and other low-cost countries have been rising quickly. Indeed, some analysts expect that in a few years, there won’t be much difference at all between wages in China and those of U.S. workers. At the same time, increasing fuel prices continue to push transportation costs higher. Finally, and perhaps most significantly, the overall total cost of ownership—ranging from labor and quality to inventory carrying and shipping costs—makes manufacturing in the U.S. (or at least closer to home) more appealing.

With all that in mind, I have been interested to see news that large companies are taking note of the situation, and are taking significant steps. For instance, last week, I saw a Reuters story reporting that executives at some large manufacturers now say they realize they moved production out of the U.S. too quickly over the past decades. Furthermore, they now see a competitive advantage to building their footprint in the U.S. For example, Boeing and General Electric now find that the benefit of lower wages overseas may be offset by higher logistics and materials costs, the story notes.

Speaking at an event organized by GE aimed at promoting the competitiveness of the U.S. economy, Jim McNerney, chief executive of Boeing, said that “lemming-like,” companies over the last 15 years extended their supply chains a little too far globally in the search for low cost. He added that in some cases, companies lost control over quality and service, and in some cases, companies also underestimated the value of workers in the U.S.

People will now see more manufacturing return to the U.S., partly for business reasons, and partly because companies want to be good U.S. citizens, McNerney said.

GE CEO Jeff Immelt said at the same event that GE’s thinking on the value of manufacturing in the U.S. versus offshore has evolved. Consequently, GE is essentially moving appliance manufacturing back from Mexico and China to Louisville, Ky., he said. When the company evaluated the business on a cost basis, U.S. labor is still higher, but it’s more competitive now than it has been. Additionally, both materials and distribution are less expensive in the U.S. So GE now sees an opportunity to bring jobs—certain jobs, but not every job—back to the U.S., he says.

Other companies also are reaching a similar conclusion. For example, Industryweek reported last week that Caterpillar recently announced it will shift production of small tractors and excavators from its Sagami, Japan, plant to the U.S. The company actually will build a new $200 million facility near Athens, Ga., to produce small track-type tractors and mini hydraulic excavators. That facility is expected to directly employ 1,400 people and generate another 2,800 jobs among suppliers and other supporting businesses, the article explains.

The decision to shift production from Japan to the U.S. is driven by the proximity to a large base of customers in North America and Europe, Mary Bell, head of the Caterpillar division, said in a statement noted in the Industryweek article. The company’s objective is to better serve those customers from this new factory. The Athens site was selected because of its proximity to the major ports of Savannah and Charleston, Bell said, as well as the region’s strong base of potential suppliers and skilled manufacturing employees.

Has your company reached similar conclusions? And if so, what action is being taken?

I’ve posted about critical drug shortages before. This time though, the situation is different because the news appears positive. As a Drugs.com story earlier this week notes, the U.S. Food and Drug Administration (FDA) has announced that it is “cautiously optimistic” that a feared shortage of a life-saving drug used to treat a form of childhood leukemia will be averted.

The drug, methotrexate, is used in combination with other drugs to combat acute lymphoblastic leukemia (ALL), which typically strikes children ages 2 to 5, and is the most common type of cancer in children. In high doses, the generic drug has been successful in curing patients as well as preventing recurrence. According to the drugs.com story, oncologists say that without the drug, a patient’s chance for a cure is reduced while the risk of recurrence rises.

The problem, as USAtoday reports, is that until just a few days ago, cancer specialists had predicted they could run out of methotrexate by the end of next week, says pediatric oncologist Michael Link, president of the American Society of Clinical Oncology. The shortfall came about when one of the four U.S. makers of methotrexate, Ben Venue Laboratories, shut down production late last year because of “manufacturing and quality concerns,” FDA spokeswoman Shelly Burgess says.

In a statement, Ben Venue said it’s working closely with the FDA to bring methotrexate back to market as soon as possible, and that the company understands “the urgent need” for the medication.

Valerie Jensen, associate director of the FDA’s drug shortage program, says in the same story that the FDA sees the companies that make methotrexate responding to this shortage--and they are planning some very large releases. Consequently, the agency plans to have the situation resolved, she says. In fact, the agency expects some good releases at the end of this month and continuing into March and beyond, Jensen says.

While federal regulations bar the FDA from discussing plans of specific companies, as that’s considered proprietary information, The Washington Post reported earlier this week on those plans. Mylan, The Post reports, says it’s working on increasing manufacturing capacity, which includes getting approval for that from the FDA. The company has an emergency supply of small vials of methotrexate, and plans to ship larger vials at the end of the month.

Another company, Hospira, temporarily boosted production to address the shortage, but then ran out of the active ingredient. It’s still producing some of the drug, but is trying to get more of the active ingredient.

Finally, Sandoz aims to ship some of the drug in late February. The company did not provide any details, The Post notes.

Dr. Peter Adamson, chairman of the Children’s Oncology Group, a network of 200-plus North American hospitals treating children with cancer, said FDA officials have been reassuring in discussions that this is not going to be a prolonged shortage. Nevertheless, Dr. Adamson also says, until the drug is actually delivered, nobody can be sure.

The problem of short supplies of various drugs and price gouging is growing, however there have been recent in-roads. To address the escalating shortage of life-saving medicines, President Barack Obama signed an executive order last October that gives the FDA greater authority to manage shortages as well as counter price-gouging. Specifically, the order instructs the FDA to increase staff dedicated to addressing drug shortages, to press drug manufacturers to be more forthcoming about expected production delays that may lead to drug shortages, and to direct the agency to give the Department of Justice information so it can investigate claims of price gouging for short-supply drugs. Since then, the FDA has headed off 114 drug shortages, says FDA spokeswoman Burgess.

What do you think? What else can be done?

 

You may have seen breaking news yesterday about counterfeit cancer medicines, and if you didn’t see it yesterday, the story continues to gain coverage today.

A widely published Associated Press story, which I saw on The Washington Post’s website yesterday, reports that Roche has been warning doctors and patients alike about counterfeit vials of its best-selling intravenous cancer drug, Avastin. Roche’s Genentech unit says the fake products do not contain the key ingredient in Avastin, which is used to treat cancers of the colon, lung, kidney, and brain.

The Wall Street Journal reports today that the Food and Drug Administration (FDA) is investigating, and has sent letters to medical practices in the U.S. that the agency says buy unapproved cancer medicines--and might have bought the counterfeit Avastin. Roche still is testing the vials of counterfeit Avastin to see what ingredients they contain, but a Genentech spokeswoman says the vials don’t contain Avastin, aren’t safe and effective, and shouldn’t be used.

Genentech also is warning doctors, hospitals, and patient groups that a counterfeit version of the medicine has been found in the U.S. The Wall Street Journal story reports that Genentech said it is asking health-care providers to report any suspected counterfeits to the FDA’s Office of Criminal Investigations.

The counterfeit Avastin was packaged in boxes and vials whose markings were clearly different from the authentic product, according to a Genentech spokeswoman in the WSJ’s article. In the U.S., boxes of authentic Avastin are labeled in English, say they were made by Genentech, and have a six-digit lot number with no letters. However, the counterfeit boxes had writing in French, identified Roche as the manufacturer, and had lot numbers on the boxes or vials starting with B86017, B6011, or B6010.

According to a Securing Pharma article today, on Friday, the FDA sent letters to 19 medical practices that the agency said had bought medicines from the suppliers of the counterfeit Avastin. The FDA’s letters warned the practices, based mostly in California--but also a few in Texas and Illinois—to not dispense the drug.

The FDA letters identified the counterfeit drugs’ suppliers as Quality Specialty Products (QSP), an overseas supplier that is also believed to operate as Montana Health Care Solutions. The letter said that QSP’s products are distributed by Volunteer Distribution, in Gainesboro, Tenn. According to Genentech, neither of those companies is authorized to distribute Avastin.

Finally, a Pharmaceutical Commerce article today notes that there really is a second issue here: obtaining product from unofficial if not actually illegal sources. In many cases, clinics purchase specialty pharmaceuticals like Avastin themselves for infusion into patients, rather than writing a prescription that gets filled by a local pharmacy. As the article explains, while that is a legal practice, it does fall outside the “normal channel of distribution,” as defined by various state drug-pedigree laws—and that’s one way counterfeit products can be introduced.

The problem, of course, is the amount of money that can be made. Avastin isn’t cheap. According to a Genentech spokeswoman, a 400-milligram vial of Avastin—that’s the size that’s been counterfeited—costs $2,400. Last year, Genentech’s sales of Avastin in the U.S. generated more than $2.5 billion, the spokeswoman said. When that type of money is at stake, some unscrupulous individuals will always try to profit illegally.

What do you think of the situation? Can it be stopped? Is the problem really that the clinics act outside the normal channel of distribution?

 

I posted yesterday about the proceedings at Kodak, and the need for continual innovation. I’m still thinking about the need for innovation, thanks to a couple of articles I saw on the SupplyChainBrain website.

The first article reports on the findings of a new study by UL (Underwriters Laboratories), which is available for download here. The study, Navigating the Product Mindset, is based on input from both consumers and manufacturers in China, India, Germany, and the U.S.--across the high-tech, food, building materials, and household chemicals industries. According to the findings, a majority of high-tech manufacturers believe that while product reliability is currently the key to success, staying ahead of innovation will be vital to future success.

But it’s the second SupplyChainBrain article that I found most interesting. It notes that according to new research from IDC Manufacturing Insights, manufacturers are investing in product innovation and added-value services as a means to compete and drive growth. The report, In Pursuit of Operational Excellence: Accelerating Business Change Through Next Generation ERP, notes that while cost containment remains important in today’s low business-growth economy, it isn’t considered to be as critical as initiatives that help manufacturers differentiate their offerings and drive competitiveness.

Pierfrancesco Manenti, head of IDC Manufacturing Insights, Europe, Middle East & Africa, says that while active cost management remains crucial, companies can only truly differentiate themselves by offering innovative products and services. Smarter processes and IT systems represent a substantial source of savings, differentiation, and agility, which help to allow informed decisions and establish a strong foundation for encouraging innovation where the company meets the customer, he says.

The research—which is based on surveyed responses from 378 manufacturers in the automotive, industrial machinery, high-tech electronics, and aerospace industries, across numerous countries—shows that manufacturers still consider products to be the key factor when it comes the means to drive growth. Indeed, innovation (cited by 63 percent of the respondents) and added-value services to products (cited by 58 percent of the respondents) ranked higher than expansion into emerging markets (cited by 42 percent of the participating companies). Tellingly, product innovation is valued even higher in some industries. For example, it was cited by 78 percent of the companies in the automotive industry, and also was cited by 75 percent of the respondents in the high-tech electronics industry.

That’s not to say, however, that cost containment isn’t still seen as a critical capability—because it is. But it’s important to note that according to IDC’s research, cost containment strategies have moved out of the plant and into the supply chain. So, for instance, optimizing production is a cost priority for only 11 percent of manufacturers, which seems to indicate that companies believe those savings may have been exhausted. On the other hand, reducing the number of suppliers (cited by 77 percent of the respondents) and shortening the supply chain (cited by 55 percent of the participating companies) now rank as the highest cost containment priority.

What I’d like to know is what you think. Do you see innovation as more important than cost containment? To be sure, controlling costs will always be a critical strategy, but has the need to be innovative become a higher priority?



You may have seen on either the WallStreetJournal or Businessweek today that Eastman Kodak announced it plans to stop supplying digital cameras and pocket video cameras, and will instead focus its consumer business on photo printing. In making the announcement, the company said it will seek to license its brand to other makers of the devices as it exits the camera business.

You may have been following the story, and if so, you know Kodak filed Chapter 11 last month. This move is expected to save more than $100 million a year in operating costs, and Kodak expects to book a $30 million charge from exiting the business.

Kodak’s consumer business will include online and retail-based photo printing, desktop inkjet printing, apps for Facebook, and camera accessories and batteries. On the other hand, the commercial business includes the digital and functional printing, enterprise services and solutions, and graphics, entertainment and commercial films units. Kodak said digital businesses now comprise about three-fourths of total revenue.

What’s ironic is that as was noted in a knowledge.whartonupenn article, the digital camera was originally invented at Kodak in 1975, but the company just couldn’t determine what to do with it. Since then of course, other companies have focused nearly exclusively on the technology, and Kodak has correspondingly suffered. So the question then becomes, how did this happen?

The answer is that when new technologies change the world, some companies are caught off-guard, says the article from The Wharton School, University of Pennsylvania. The flip side is that other companies see the change as an opportunity—and they seize it. Then there are companies like Kodak, which saw the future but simply couldn't figure out what to do, the article explains.

The problem is that adapting to technological change can be especially challenging for established companies like Kodak, Wharton experts say, because entrenched leadership often finds it difficult to break old patterns that were once the secret to success. Kodak’s history shows that innovation alone isn’t enough; companies must also have a clear business strategy that can adapt to changing times. Without one, disruptive innovations can sink a company’ fortunes, even when the innovations are its own, the article says.

In other words, Kodak didn’t recognize the need to move far and fast enough away from its core business model, says Scott Anthony in an article running on Industryweek. This demonstrates just how difficult it is to get transformation right, says Anthony, managing director and head of the Asia-Pacific operation of innovation consulting firm Innosight.

While it seems strange to be saying this, the challenge for other companies is to not be like Kodak. To help with that strategy, Anthony says there are several lessons to be learned from Kodak. I found two of them particularly intriguing.

First of all, don’t get trapped by your business model. The problem for Kodak was that the company focused exclusively on photography, Anthony says. So for example, Kodak changed Ofoto from a site where people shared photos to one where people would share updates about their lives, news feeds, and so on. The problem is that Kodak viewed this only as a means to get people to print pictures, Anthony says.

Secondly, Anthony says companies must start innovating before they are forced to innovate. The challenge, he says, is that when people have the freedom to change, they don’t feel the urgency. But this reminds me of the old adage “Prepare for war in times of peace,” because the general idea is applicable. If a company waits until there is a need for innovation, it may well already be too late.

What I’m most interested in, however, is what you think; either about Kodak in general or, specifically, the challenge to be innovative. Is your company innovative, or does it continue to tightly focus on its core business model?

 

If you’ve been following the rare earth metals situation in China, then you know the shortage could have an impact on numerous industries. According to research from PricewaterhouseCoopers (PwC), the manufacturing, chemicals, automotive, energy/renewable energy, aviation, metals, infrastructure, and high-tech hardware industries may all be seriously effected by a shortage of minerals and metals, which could potentially disrupt entire supply chains and economies. The automotive, chemicals, and energy sectors in particular may be hit hardest by what PwC terms, “a ticking time-bomb.”

The issue is that China mines more than 90 percent of the world’s rare earths, such as beryllium--a lightweight component used in high-speed aircraft, missiles, space vehicles, and communication satellites—and tantalum, which is used in mobile phones, computers, and automotive electronics. China also accounted for 60 percent of the world’s consumption by tonnage last year. At the same time, China imposed significant quotas last year to limit exports of rare earths. Finally, China also raised export taxes on rare earths to as much as 25 percent, on top of value-added taxes of 17 percent.

So far, companies in the auto, chemicals, and energy industries have already become concerned. For example, according to PwC research, 80 percent of automotive survey respondents are currently worried about reserves running out. Furthermore, companies in the renewable energy (78 percent), automotive (64 percent), and energy & utilities (57 percent) are all currently experiencing supply instability. Aviation, high-tech, and infrastructure sectors also expect to experience increasing supply disruption from now to 2016.

The situation is a particular concern for companies in the renewable energy industry. Last December, the U.S. Department of Energy (DOE) released its 2011 Critical Materials Strategy. The report examines the role that rare earth metals and other key materials play in clean energy technologies such as wind turbines, electric vehicles, solar cells, and energy-efficient lighting. The research found that several clean energy technologies use materials at risk of supply disruptions in the short term, but that risks generally decrease in the medium and long terms. However, according to the report, supply challenges for five rare earth metals (dysprosium, neodymium, terbium, europium, and yttrium) may effect clean energy technology deployment in the years ahead.

To help with the situation, DOE has developed its first critical materials R&D plan, provided new funding for priority research, convened international workshops that brought leading experts together, and participated in coordination among federal agencies working on these issues. The fiscal year 2012 spending bill also includes $20 million to fund an energy innovation hub focused on critical materials that will help to further advance the DOE strategy: Diversify supply, develop substitutes, and improve recycling, reuse, and more efficient use.

I’m also reminded by all of this that with every challenge comes an opportunity. As Malcolm Preston, PwC’s global sustainability leader, says, new business models will be fundamental to the ability to respond appropriately to the risks and opportunities posed by the scarcity of minerals and metals.

Preston also notes that with the need for new business models, a key challenge for business is how to draw the line between collaboration and competitive advantage. This is where strategic decision making meets sustainability. Getting this right, Preston says, will define the winners and losers of the future.

Of course, China isn’t the only source for these materials. Other countries and companies are at work to develop other sources. But that will take a while. In the meantime—at least for the next couple of years—it appears some industries will struggle with low supply levels. If your company is in one of those industries, does it have plans to address these supply challenges?