HOEY ASSOCIATES

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HOEY ASSOCIATES

• www.hoeyassociates.ca

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HOW TO BENEFIT THE NEXT SEVEN KILLER CHANGE
DRIVERS

• by
• Eamon Hoey

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AGENDA

• The demographic shift
• Globalization
• The changing nature of work
• The evolving corporation
• Technology
• Regulation
• Defense and security
• Key Messages

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THE DEMOGRAPHIC SHIFT
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DEMOGRAPHIC SHIFT

• Creates more complex retail environment
• Pressure on urban development transportation
• Upward pressure on cost of health care /
  education
• Places pension funds at risk
• (particularly under- funded plans)

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DEMOGRAPHIC SHIFT

• Massive immigration will
• create social unrest
• plunge political leaders into the controversy of
  balancing special vs public interests
• slow southward migration
• force an increase in the retirement age to be
  used to meet labor force requirements

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DEMOGRAPHICS

• A persistent long term driver
• Interest rates, housing, popular tastes
• Boomers major economic power
• PQ lt25 of pop.
• Ont 40
• Fertility
• USA 2.08
• China 1.8
• CDN. 1.52
• Italy 1.19

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DEMOGRAPHICS

• Immigrants
• 61 of CDN pop. Growth
• 62 from Asia
• 59 choose Ontario
• Median age of worlds pop
• in 00 26.4 yrs
• by 50 37

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Generation Distribution in 2000
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IMPACTS

• What does demographic shift
• mean to you?

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Impacts Demographics Affects Everything

• Political
• Win the support of older people
• How much immigration?
• Social
• Immigration versus social balance
• Who will care for an aging population?
• Demographics affects everything!
• Markets
• Markets no longer homogenous
• Who are your customers? What will be their
  needs? How to best serve them?

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GLOBALIZATION
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GLOBALIZATION

• Has significantly altered Canadian and world
  economies. The pace will continue unabated.
• China Inc. and India are placing significant
  downward pressure on North Americas cost
  structure

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China Inc.The Worlds Factory

• 70 of metal golf club heads sold in N.A.
• 70 of worlds photocopiers
• 100M pairs of shoes/year for Adida, Reebok,
  Prima, Hush Puppy and others
• Exported no magnesium in 90 02 supplied 50
  of the worlds need its production cost is
  0.60/pd vs CDN 0.82

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India Inc.- The Worlds Back Office

• Cost to perform back-office functions are 60
  lower in India than in USA
• B of A outsourced 1,100 IT jobs to Bangalore
• 30 Indian radiologists interpret 30 CT scans a
  day for Massachusetts General Hospital
• In New Delhi 2,500 college trained Indians
  process claims for a major US insurance co.

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Our Three Canaries

• Countries with lower cost structures are placing
  pressure at the micro level
• Steel, Auto, Airlines are in decay suffer
• Failure to listen to their customers
• Labor costs not competitive
• Pension/health care obligations gt ability to pay
• Ops. labor contracts not efficient
• Gov. policies encourage status quo
• Level of taxation not sustainable
• Needs to be rationalized

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GLOBALIZATION

• At the micro level globalization will
  restructure
• the steel industry
• the automotive industry
• the airlines industry
• some commodity markets
• How long can Stelco / GM /Air Canada survive
  with their current cost structures?

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Steel Industry

• 30 US Steel Corps in Chap.11 past 5 years
• Since J.F.K. steel has
• Failed to modernize
• Hid behind tariff protection (8 30).
• Failed to rationalize
• Remains inefficient
• Failed US Gov. steel policy
• 12B in legacy costs Retirement/Health Care
  obligation

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Airline Industry

• Despite deregulation
• Failed to recognize customer needs
• Maintained Byzantine fee structures
• Did not resolve on time performance
• Stuck to old biz model, hub spoke, complexity
  and crunching
• Did not tackle costs structure labor and taxes

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Automotive Industry

• Since 1970 GM in steady financial decline
• 2002 2nd best sales year
• Ford declared 5.45B loss
• GM profits US 0.008/1.00 of revenue
• GMs 460K retire surviving spouses outnumber
  active employees 3 to 1
• GM pension/health care 1,400/car built
• To generate pension cash GM in 2002 flooded US
  market with discounts cant afford to cut
  production

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Automotive Industry

• Union contracts make labor a fixed cost
• Africa, Thailand and Lat. Amer. wages 1/10 of
  N. A.
• GM has not listened to its customers
• produces dull unreliable vehicles
• Churning out 50 more models than 1997

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Automotive Industry

• 2002 Ford had 130 types of car radios !
• N. A. plants have 20 overcapacity
• Dealer network not working
• 1930s Model has not evolved, family owned,
  inefficient, adds to cost

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GLOBALIZATION

• To compete, Canada needs to alter its cost
  structure significantly
• We will not be able to live forever on a low
  dollar and commodity revenues

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GLOBALIZATION

• Government needs to focus on
• health
• education
• security
• lowering personal taxes

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GLOBALIZATION

• Canadian managers need to alter their indulgent
  and wasteful practices.
• Labor needs to improve its productivity in order
  to preserve and create well-paying jobs.

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Labor Cost and Taxes

• Labor cost higher versus competitors
• CDN manufacturing productivity growth has
  remained at 2.1 for two decades worst in
  developed world
• Flight of jobs to India and China
• Taxes personal/corporate are a disincentive

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IMPACTS

• What does globalization
• mean to you?

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CHANGING NATURE OF WORK
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CHANGING NATURE OF WORK

• Manufacturing - still key component of our
  economy but no longer its backbone
• Western countries are increasingly reliant on
  knowledge
• Knowledge versus capital, land and labor, is the
  chief wealth creation tool

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CHANGING NATURE OF WORK

• Expect
• Intense competition to recruit and retain workers
• Change in corporate culture. New versus
  traditional worker
• End of old style management - command and control

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CHANGING NATURE OF WORK

• Knowledge workers
• See themselves as professionals, not mere
  employees
• Unisex
• Need and want constant training
• Highly mobile
• Non hierarchical - not motivated command and
  control

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IMPACTS

• What does the changing nature
  of work
• mean to you?

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EVOLVING CORPORATION
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THE EVOLVING CORPORATION

• OLD
• Master servant relationship
• Full-time for the corporation
• Efficient production
• Importance of brand
• Keep customer in the dark
• Sell them what we have
• Technology is industry centric

• NEW
• Knowledge/capital production
• Part-time employment
• Vertical integration not the norm
• Info customer power
• Empower customer with choice
• Sell to the customers need
• Technical knowledge widely available

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THE EVOLVING CORPORATION

• Significant shifts in ownership from
• privately owned (1870s) to widely held public
  corporations
• institutional investors (1970s) emerged as the
  new owners, block ownership

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THE EVOLVING CORPORATION

• Shift in structure from owner-manager control, to
  distinct top management control to alliances and
  syndicates.
• The task of managing a large corporation
  requires Superman CEOs (eg) Jack Welch, Andy
  Grove (Intel), Jean Monty (BCE)

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THE EVOLVING CORPORATION

• Management moving to collegial model. Power is
  shared. Top management is divided between
  deal-makers and operations
• End-of-the multinational organized globally along
  product/service lines

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THE EVOLVING CORPORATION

• In this new environment
• Who will represent and organize labor?
• Who will have ultimate corporate responsibility?

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IMPACTS

• What does the evolving
  corporation
• mean to you?

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DEFENSE AND SECURITY
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DEFENSE AND SECURITY

• 911 moved security and counter-terrorism to the
  1 preoccupation over trade
• A war-time mentality will serve to justify
  chipping away at individual rights, right of
  assembly, etc.

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DEFENSE AND SECURITY

• Conflict will
• stall economic growth
• create inflationary pressures
• place health, education and welfare on the back
  burner
• Right wing, rather than pragmatic solutions to
  our
• security
• health
• education
• economic issues

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IMPACTS

• What does defense and
  security
• mean to you?

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TECHNOLOGY
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TECHNOLOGY

• Movement to better and faster technology
• GigE broadband networks over fiber
• Bandwidth replaces computer power
• Packet vs circuit switching
• Wireless vs wireline
• More gadgets that create network traffic
• Demand driven by traffic at the desktop

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TECHNOLOGY

• Impacts
• Customers empowered by technology/internet
• Dissolving traditional boundaries that
  quarantined business
• Niche marketing vs mass marketing
• Redefine business process ex. customer support,
  financial reporting
• Changes conventional concepts re outsourcing,
  competition and customer relationships

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IMPACTS

• What does
  technology
• mean to you?

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PUBLIC POLICY
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PUBLIC POLICY

• During 1980s and 1990s public policy fostered
  open markets, free trade and competition
• G7 opened markets to competition
• WTO pushing for gt open markets

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PUBLIC POLICY

• Detailed regulation is thing of the past
• Financial services and professionals are in for gt
  degree of behavior-oriented regulation
• Regulators focused on ensuring the combatants
  play fair public interest
• Regulators continue in role of regulatory
  nannies

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Public Policy

• Will support regimes built around open markets,
  not regulation
• By 2010 will see abolition of foreign investment
  and protectionist rules
• Abolish inter-provincial trade barriers

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Regulatory - Telecom

• Climate in Canada vs USA will be more
  favorable towards ILECs
• CRTC will continue to be cautious when
  developing/implementing competitive policies
• CRTC will continue to be a weak agency lacking in
  people and power to do the job right
• Commissioners will be more attentive to consumer
  vs ILEC and new entrant issues

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DTH Cables Nightmare

• Bell ExpressVu, Star Choice
• Reached 2M customers (1.3 Bell)
• Place financial pressure on Rogers/Shaw
• Bell has opportunity of bundling the triple-play
• Bundling death spiral for Cable
• Movement to DTH fueled by consumer
  dissatisfaction wanting gt choice and savings

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Telecoes vs Cable

• Cable is preparing BCEs Nightmare IP
  Telephony over Cable
• Cables footprint does not include business
• Thus, Cable doomed to be a minor player with
  Telcos winning the high speed war

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Telecoes vs Cable

• Long term financials for Cable not encouraging.
  Debt will hamper their ability to compete with
  Telcos
• Cable family ownership not helpful

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IMPACTS

• What does public policy and
  regulation
• mean to you?

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KEY MESAGES
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KEY MESSAGES

• Canada willing participant in the globalization
  process, including the expansion of NAFTA.
• Canada leading player in South America

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KEY MESSAGES

• Canada will be sympathetic to calls for the
  political management of globalization
• Canada will want to mitigate its adverse effects
  and ensure its benefits reach less advantaged
  regions

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KEY MESSAGES

• Cornerstone principles for trade policies will
  continue, i.e.
• liberalization
• the dismantling of state owned enterprises
• subsidy reduction and a gt reliance on our primary
  trading partner

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KEY MESSAGES

• The heavy immigration needed to replenish our
  population will, if it is overwhelmingly from one
  region of the world, create civil unrest and
  political confrontation

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KEY MESSAGES

• Canada will promote
• immigration, especially Asian knowledge workers
• women in the workplace
• later retirement
• stemming the flow of workers South
• The movement away from manufacturing to
  knowledge based economy will alter the nature of
  work

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KEY MESSAGES

• Organizations who emphasize collegial leadership
  and individual responsibility will replace those
  who are vertically integrated and have a command
  / control structure
• Security rather than trade will dominate Canadas
  national agenda to the detriment of health,
  education and welfare

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KEY MESSAGES

• Management and worker reps will have to learn how
  to manage and represent the knowledge worker
• Technology will continue to increasingly intrude
  into our lives

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