The podcast for enterprise leaders delivering timely insights for today’s global economy—and tomorrow’s competitive advantage.

The GET pulls business and management insights from today’s economic and societal developments to help global enterprise leaders move to the future with greater agility and performance. Offering timely conversation and analysis with renowned business leaders, The GET addresses the most pressing topics confronting global businesses and management.

The host of The GET is Christopher G. Caine, President of the Center for Global Enterprise (CGE). Available on Apple Podcasts, Spotify, or wherever you get your podcasts. Subscribe to The GET and look for new episodes on the second Tuesday of every month.

 

Special GET Release: “Global Inflation: Three Decisions CEOs Should Make”

Air Date: September 14, 2022
Play 23:29

CGE Moderator: Christopher G. Caine, President of the Center for Global Enterprise (CGE)
Special Host: Sam Palmisano, Chairman of the Center for Global Enterprise 
CGE Guests: Michael Spence, Nobel Laureate, former Dean, Stanford School of Business, and Kevin Warsh, former member of the United States Federal Reserve Board, and a distinguished visiting fellow in economics at Stanford University’s Hoover Institution

Countries around the world are experiencing the highest rates of inflation in decades. In fact, it has been more than 40 years since current inflation rates have been this high in the United States. Current CEOs and business leaders have little direct experience to draw upon to manage through this kind of general economic environment.  Apart from Warren Buffet, no current Fortune 1000 CEO has been serving long enough to have this “muscle memory.” What are the decisions CEOs should be making today, 90 days from now, and 6 months from now to manage through this inflationary situation?

 



Chris Caine: Welcome to The GET, the podcast for enterprise leaders, delivering timely insights for today's global economy--and tomorrow's competitive advantage. I'm Chris Caine, President of the Center for Global Enterprise. And today we have a timely and critical discussion for business leaders about inflation and its effects on global business. Sam Palmisano will be our special guest host today, and he's joined by Kevin Warsh and Michael Spence, both renowned economists and business experts. Countries around the world are experiencing the highest rates of inflation in decades. In fact, it has been more than 40 years since current inflation rates have been this high in the United States. Current CEOs and business leaders have little direct experience to draw upon about how to manage through this kind of general economic environment. With the exception of Warren buffet, no current Fortune 1000 CEO has been serving long enough to have this kind of muscle memory. Sam, thank you for piloting today's discussion and I'll turn it over to you.

Sam Palmisano: Thank you. And Kevin and Mike, thank you for joining us today. We really appreciate your time. There's been a lot written as we all know, given the inflationary environment and how we got there and maybe consensus is being formed. But if you don't mind, I'd like to start with where we are today versus how we got here and get your perspective on the issues that we face from a macroeconomic perspective, as well as your perspective or your view, as to where you see us headed. So, Kevin, let's start with you.

Kevin Warsh:I'd say inflation, as we sit here today, continues to eat the real economy almost everywhere in the world. There are a couple of exceptions, Japan, parts of China. Inflation is eating the real economy, eroding business and household confidence. And the funny thing about inflation Sam, is it camouflages the work that it does. Nominal growth for companies and revenue appears to be okay. And if you didn't know that this inflation monster was out there, things might have the appearance of being just fine. But the truth is, is that the variability and volatility of price levels is making it harder and harder for businesses and households to make decisions. In some sense, the oldest definition of inflation is my preferred one, which is: When every kitchen table and boardroom's talking about prices, it's too late. And so unfortunately, fiscal and monetary policy makers around the world really missed the plot on this one for a very long time. And so the harm to the economy is something that we're seeing and feeling, and is showing very little evidence of moderating anytime soon. Michael Spence: Well, I don't think there's any solution in the short run to the inflation problem. I mean, that's an open question how aggressive the Central Banks can or will be. But I think it's with us and I think you can confidently expect a sort of continuing and reasonably lengthy global slowdown. So, I would build that into my plans. There may be sectoral and, company specific exceptions. There always are in various environments, but this one is a pretty massive headwind. If I had to put a time horizon on that, Sam, I'd say, the next 18 months for sure. Longer term, there are both at the company level and at the economy level, potential solutions to this. We need productivity. We need unblocked supply chains. We need a whole bunch of things that changed the equation, the underlying macroeconomic equation. I think one of the reasons that Central Banks lost the thread, and Kevin may not agree with this, is we lived in a demand constrained world, basically the supply side was so elastic. Every time demand went up, the supply side responded. We had virtually no inflation and sometimes inflation below targets. Quite suddenly, we shifted to a dramatically supply constrained world. The labor market is not behaving the way it used to, et cetera. So, I would just keep that in mind when one's framing one's strategies and policies.

Sam Palmisano: Kevin, do you see this going long term as well? Do you see it as an 18-month kind of horizon that companies will be dealing with this inflationary environment?

Kevin Warsh:The national security gurus, counterparts to Mike and me, in the national security realm have an old saw, which is the price of stopping a dictator goes up over time. We see that evidenced in the situation in the Russian invasion of Ukraine. Same is true of inflation. It is more expensive and more difficult to dislodge the inflation risks now than 3-, 6-, 9-, 12- and 18-months ago. That requires harder decisions and gives fewer degrees of freedom for policy makers. So even though we see some headline prices of things like energy falling, there's a temptation to think that the peak of inflation and the problems of inflation are in the rear-view mirror. But if you look at the data, what you see is a broadening of products and services that are evidencing changes in price levels that would've been impossible to have imagined several years ago. So, this new level, the new sort of inflation problem, this new era of price instability, I think is with us, and it will require much more global coordination by monetary policy makers, better coordination between fiscal and monetary policy makers in countries to solve this. But like Mike, I'm not optimistic that there are any short-term fixes. And I think the other piece that Mike brought up is what are the sources of this? And I share his view that central bankers assume supply would always be there to match demand. And I also share his view that the turmoil of the last year with plague and war and the rest made that harder to believe. But my own judgment is that the sources of this inflation that were actually quite long in the making. I'll just give two simple points on that. One, in Jackson hole in August 2020, the Federal Reserve announced a regime change in policy. There was a shiny little toy that they called Fair Average Inflation Targeting, which they rolled out. But the bigger story, which some commentators overlooked at the time, was what they basically said is monetary policy will be inert. Monetary policy will wait until we achieve full employment. We'll wait until we achieve our 2.0% inflation objective. And then, and only then, will we consider doing something about it and in, so doing, I think the Federal Reserve and many other Central Banks decided to cast aside the one principle that we had agreed on for the last 40 years, which was monetary policy works with long and variable lags. So, we should not be waiting. We should be acting a bit preemptively. They decided as a matter of new doctrine to wait. And that was the catalyst. That was the proximate cause of the surge of inflation.

Kevin Warsh:But again, it's like the assassination of the Archduke [Ferdinand] causing the war. That was a catalyst. But I think the broader reasons for the global inflation problem are around the notion that Mike talked about. It was an intellectual error by many economists and many central bankers. That is, they assumed that the supply side would always be able to react to the demand side. They misunderstood that the period of about 30 years of a great moderation, inflation was going to be there forever. And in so doing, I think what they didn't appreciate was that there were long structural forces that were keeping prices down in and around globalization, in and around an emerging middle class. But those were not preordained. Those were not going to happen forever. And so, it was a confusion about what inflation was, how it came about that was intellectual in origin. And there were a series of other things done, like in Jackson hole in August of 2020, like problems of their own decision making at these organizations that made it true. How could it possibly be that only in March six months ago, interest rates in the United States were still at zero and the Federal Reserve was still buying Treasuries and mortgage-backed securities? How could it possibly be that only about a year ago, did the 19 members of the FOMC [Federal Open Market Committee] think that there would be one rate increase in 2020? And that 18 months ago, they thought there'd be no increases in the federal funds rate until 2024. That is a dangerous aggregation of views. And for institutions that we care about as much as Mike and I care about the Fed, we need to ask ourselves how the decision-making process, how the openness to risks and different ideas can be brought to the table.

Sam Palmisano: What about fiscal policy? I know the Fed has had a challenge here. I would agree with your statements that you're making about their management system missed the mark. But having said that, fiscal policy clearly has caused a lot of demand increases, as well as policies of Zero Covid in China it’s hit the supply side. Do you have a perspective, as far as the role of the governments in the environment we find ourselves today? Michael Spence: You know, I think we needed fiscal responses to buffer the shock of the pandemic. But to kind of summarize over a fair amount of territory, roughly speaking, my take on the macroeconomic situation is that after the great financial crisis, we underutilized fiscal and got the balance between fiscal and monetary support to try to make the economy recover wrong in the direction of excessive reliance on monetary policy and then excessively prolonged, assault on asset prices via quantitative easing in its various categories. And this time we just sort of did something different, but the fiscal side kicked in. Both with respect to buffering the shock of the pandemic and now with some important investment programs. But as Kevin just said, the monetary side didn't do the rebalancing in the other direction. And so, we had sort of two relatively powerful stimulus engines running at the same time, and that's not the right balance.

Kevin Warsh:There had been historically a very real division since 1951 in something called the Treasury Fed Accord between Fed policy and fiscal policy. During the ‘08 crisis in which I sullied my hands, those distinctions were less obvious as the fiscal and monetary authorities were working together, we'd say well, that's because it's a crisis and we have to. But if we go back to 2021 as an example, where the economy in the U.S was frankly booming and real economic growth was 5.7%, unemployment rate came down among the fastest rates in modern times. What did we find amid that economic boom? Not only that interest rates were kept at zero, but the federal reserve bought 54% of all the debt issued by Janet Yellen and the Treasury Department. If anything, that's a conflation of fiscal and monetary policy, not just in moderate economic times, but in boom times. Look how far we wandered from the crisis of ‘08 eight or the crisis of 2020. So, like your question suggested Sam, I put blame on fiscal and monetary policy much as Mike did, but there's an old quote from Justice Scalia, which comes to mind when he was asked about the Supreme Court in its role. He used to say, “We're not last to decide a case because we're right. We're right because we're last.” That as the Supreme Court eventually gets to look around and decide what to do. Again, I'd apply that to the federal reserve. I blame fiscal authorities for excessive spending that overly goosed demand and was not fiscally responsible. But the Federal Reserve gets to sit there last and observe what's happening. And here in this case, not only did they encourage, scream, call for the fiscal authorities to write these checks, they monetized it. They bought that so that the markets would never see that paper. That's the QE they did in 2021. So, while I think fiscal policy deserves an inordinate amount of blame for irresponsible spending well beyond what we needed to cushion the blow for hardworking Americans that were in tough times. To me, in some sense, I'll go back to Milton Friedman. Inflation is always a monetary phenomena, and I would put an asterisk in applying that to this moment, especially when the monetary policy is cleaning up the fiscal mess.

Sam Palmisano: I want to go to the corporate world, what you'd advise CEOs to deal with. But clearly, I think both of you are suggesting that the system that we have today is not coordinated. I could use a harsher term like it's broken, but I don't know that that's appropriate. But nonetheless, it's not coordinated for whatever sets of reasons and that's within the United States. And then you talk about coordinating the world to get through this thing and it becomes even more complex to try to solve that problem, which leads me to, now if you're advising--and you guys do this all the time so I know I'm not taking you out of your comfort zones here--but if you're advising as CEOs, what's happening in this business cycle, is if you're running a company anywhere in the world, you're setting the budgets for the next couple of years, both from the expense side of the house and capital allocation perspective. That's what's going on right now. So, they're making decisions and they have some planning assumptions. So what would you advise our colleagues to do? Michael Spence: The first thing I would do is go look at your accounting systems and make sure, you actually can deal with inflation. I've just run into repeated accounts by CEOs and founders saying there isn't anybody in the company that's ever experienced inflation. And when I looked at the accounting systems, they all presume there's relatively little inflation. Now this varies from business to business so that's item one. Second, I would anticipate a major, major slowdown in the global economy. I mean, go scrutinize the cost structure, set priorities with respect to absolutely critical investments that you need to make. But otherwise, tighten the belt, I guess is the sort of simple way to put it. And the third thing is I would look all over the place for productivity increases. We're going to have wage and price inflation. At the current prices, we can't hire enough teachers, nurses, airline personnel in various categories. I mean, this isn't just going to go away. Those folks have disappeared. They retired, they don't like it, it's dangerous and unpleasant work, et cetera. And so, I think the long run solution to this, and I think corporations that line up with this, will succeed better than their peers, as people really go after productivity. As you well know Sam because you've talked about it all the time, you just got powerful tools including the digital ones to get that done. So those are my three, expect a slow down, go look at your accounting and make sure you're not going to get fooled by your own information systems, tighten the belt and go after productivity. It varies from company to company. Some of it will be in supply chains, some of it'll be at the airport, et cetera. But I'd still, I think that's where I'd go.

Sam Palmisano: Well, Mike that’s sage advice. I'm going to add one little comment. The reason why there's no muscle memory on this thing [inflation] is because the CEOs and corporations, their stock price evaluated was appreciating based on revenue growth. So, the dynamic of capital allocation or investment alternatives all drove the top line, right. And that's what happened. And then you would say to people, you need to be focused on productivity as well. And their point of view was they didn't care. Money was cheap. They'd leverage up their balance sheets. They drove revenue growth and got rewarded for that by the investment community. So that's over in my opinion. We're going pass it to Kevin. Now that that's ended and all these young people, not like the old guys like myself who had to deal with this, but these young guys have never dealt with this. What are you going to tell them to do? Because they have a culture that they've created that the most important thing is spend for growth. So how would you advise them? They have to somehow change their culture and their management system. Like Mike's saying to now adjust to the new realities that they're facing.

Kevin Warsh:So, most policymakers in Washington, Central Bankers there and around the world, they seem to have as their baseline forecast a soft landing. The unemployment rate moves up to the low fours in the U.S, economic growth comes down a little bit, but stays positive. Interest rates only have to go up another hundred basis points from here and we have a soft landing. In which case, if they're right, most of our friends in the business world don't have to make major adjustments. I would not bet on that forecast. I would take the alternative and I'll build on a few of the things that Mike said. One, we've never seen this kind of radical fiscal and monetary policy create an inflation that looks like this. So Mike and I have to be humble about what our economic forecast looks in the next few years. But my own judgment is when we get to the bottom, when this economy on a global basis falls into a recession of which there's every bit of evidence to suggest that parts of the world are already there and the rest are playing catch up. I tend to be of the view that this period of weakness won't be as short lived as most recessions have been the last 30 or 40 years, in part because fiscal and monetary policy is exhausted. Fiscal and monetary policy won't be able to cushion that blow, won't be able to change the amplitude very quickly. So like Mike, I think there's a global recession on the come and I tend to think that it'll be longer lasting, even if I'm not sure how dark and negative it turns out to be. So, what to do? I would say in the near term, I would act with the urgency that Mike suggested. We don't have perfect clarity on what quarter global GDP turns down the rest, but it's coming. I'd say my first bit of advice is act soon. The place where I'm surprised that the financial markets haven't yet adjusted is their view on 2023 corporate profits. History is not a perfect teacher, but for U.S multinationals, when the dollar strengthens as much as it has, when energy prices have moved as much as they, when unit labor costs and employment compensation have moved as dramatically as they have since the 1970s, and interest rates, albeit from a low level, have moved up with this speed. Those all tend to be very bad for corporate profits. Yet the expectations for most U.S multinationals in 2023 show corporate profits will be a five or 10% from here. Well, it certainly could be true for those that can drive productivity as Mike suggested, but in aggregate that's a very benign profit picture given our sense, my sense of the state of the world. So, I think that's why I would act early and aggressively. And the final bit of advice is the overwhelming free money that's come since the ‘08 crisis for the most of the world's companies, they've tended to have a leveling effect. Sure, the companies that are best in a sector have been able to drive more productivity. But we've really been in a period with virtually no insolvencies. So, most companies have had access to capital and been able to hang around. That is not the world that I would expect in front of us. That is, those that are able to drive productivity, to distinguish themselves, their cost of capital will be relatively considerably better than the rest of their peers. And they'll have an opportunity in this period of economic weakness to really redefine their category, their company, and their objectives. So, I don't mean to sound like this is just some council despair from Mike and me. There's probably more hope, more upside, more opportunity among these dangers than there's been in a decade or two. And the best of companies are going to seize this period of distress and distinguish themselves by reallocating capital as you and Mike have said, and driving the efficient frontier of that productivity, which I don't think will creep down to the median company in their sector as quickly in this cycle as it has in the past.

Sam Palmisano: I would agree with you. I mean, if I was still working for a living, I would be doing exactly what you say. And I would build on what Mike was saying, which is fundamentally there are more tools that you have available today than we've ever had before. Now, the issue with tools driving productivity you know what is going to happen is that means you're going to reduce your workforce, right? And you're going to adjust your compensation systems. You can’t separate the two. Fundamentally, a lot of these issues that corporations have faced with these demands that have been placed on them by their workforces, whether we agree or disagree, and many people supported those because that's what their employees wanted. I think that's going to get back to reality because when you're faced with the alternative of having a job and not having a job, maybe some of those issues you had that you'd voiced an opinion on might become a little more muted. Not that that's good. I'm not espousing that, but that's about the reality we're going to face because companies at the end of the day are going to act in their own best interests and their own survival. And I'll reflect a little bit what worries me is the balance sheets. When the money was free, a lot of these people stretched their balance sheets to invest in top line growth. Whether it yielded or not, who knows? Maybe inflation masks some of that, what have you, right? And maybe there was some pricing power because of the supply issues and those sorts of things that they were dealing with. But as that ends, that balance sheet in your accounting system, as Mike referenced, is going to become every bit as important. As we used to say, cash is king. Well, let me thank you guys. We've had two incredibly intellectual colleagues with us today. They are the best in their fields. They were nice enough to spend their time with us and I hope you all learned as much as I did.

Chris Caine: You have been listening to The GET, sponsored by the Center for Global Enterprise celebrating 10 years of convening global enterprise leaders around the most important business transformation issues.

Episode 7: The Innovation Race: U.S., China, and?

Air Date: September 13, 2022
Play 29:28

Host: Christopher G. Caine, President of the Center for Global Enterprise (CGE)
Guests: Sam Palmisano, Chairman of the Center for Global Enterprise, and Board Chairman of America’s Frontier Fund; and Gilman Louie, co-founder and CEO of America’s Frontier Fund 

The United States has been an innovator and technology leader since the first integrated circuits were invented over 60 years ago. Through a combination of government investment, entrepreneurship, university-backed research, available seed funding and eager financial markets, the U.S. has led the world and set standards in most tech categories. But no lead is guaranteed and other nations, particularly China, are making rapid advances. In this episode, we explore where the “Innovation Race” stands today and the economic decoupling taking place between China and the U.S. that is forcing CEOs, business leaders, and other national leaders to rethink their investment and operating models.



Chris Caine:: Welcome to The GET, the podcast for enterprise leaders, delivering timely insights for today's global economy--and tomorrow's competitive advantage. I'm your host, Chris Caine, president of the Center for Global Enterprise (CGE) and on today's podcast we’ll discuss the global innovation race and how the U.S., China, and other nations are positioning themselves for leadership. The United States has been an innovator and technology leader since the first integrated circuits were invented over 60 years ago. Through a combination of government investment, entrepreneurship, university-backed research, available seed funding, and eager financial markets, the U.S. has led the world and set standards in a lot of technology categories. For example, computing processors, memory, biotechnology, software, personal computers, supercomputers, and platform business models. But no lead is guaranteed, and other nations, particularly China, are making rapid advancements in semiconductors, artificial intelligence, quantum sciences, robotics, and cybersecurity. Add to that, the economic decoupling taking place between China and the U.S. is forcing CEOs, business leaders, and national leaders to rethink their investment in operating models. Globally integrated enterprises and supply chains are having to restructure. National security planning is undergoing reassessment. And at the same time, a company, and country's, capacity for innovation has been shown to be a longstanding strategic advantage that raises economic growth, national security, and living standards for employees and citizens alike. To help us better understand where the innovation race is today and who the leading players are we sit down with Sam Palmisano, chairman of the Center for Global Enterprise (CGE) and board chairman of America's Frontier Fund, and Gilman Louie, co-founder and CEO of America's Frontier Fund. Sam and Gilman, welcome. Gilman, perhaps we can begin with you. What is the America's Frontier Fund and what's it trying to accomplish and who all is involved?

Gilman Louie:: Well, America's Frontier Fund is a nonprofit focusing around the U.S. development of deep technologies. We think it's critical that the U.S. continues its leadership, not only in the science and technology side, but the actual capacity to provide the technologies that the world is going to depend on for the next 20 years. And so, we brought together scientists, engineers, investors, government executives, as well as executives from the United States, to focus in on what we can do to rethink about how we do innovation in this country and how to unleash the capital markets in a way that's going to support the development of these new ecosystems that our country and the world's going to depend on.

Chris Caine:: It's really fascinating that you've chosen a nonprofit model. I don't know if that's a prevalent approach or not. It seems to be a little bit unique, but as a nonprofit can the fund really move the needle in this race to the top. And how will the fund manage the returns for its public and private investors?

Gilman Louie:: Well, first of all for us to be successful in returning investment to the United States we had to demonstrate, particularly to investors, that investing in the U.S. is more profitable than investing in other countries, particularly authoritarian countries. In doing so, we have to not only show the path of what the opportunity sets are, but we also have to build out the ecosystems that the U.S. has so enjoyed in the last technology revolution again in the next technology revolution. And so, as a not for profit, we could bring many other kinds of tools to the table. And besides the tool of using venture capital, we can actually work with the U.S. government, state and local governments to actually think through what are the appropriate policies that are going to allow innovation to flourish. Many of the activities that we need to do to unleash all of the U.S.' capabilities, not just the coastal cities, but the heartland as well. We need to have the right clusters of support, the legal frameworks, the teams of individuals, not just the science and technologists, but the workforce to be able to use these technologies in a way that's going to create the new engine of production and manufacturing, as well as software and other technical areas that the U.S. wants to lead in.

Chris Caine:: So, Sam, as a technology leader all your life and as an active investor now in technologies and national capabilities, is the return issue for a nonprofit organization like the fund unique and harder to explain to people, or do they get it?

Sam Palmisano:: My observation is that people get it. I'll start with the board in the sense that these people are passionately committed to the country in the U.S.’s leadership and they come from a background of how do you get that done. They've also had a wealth of experience in knowing what works in existing models and where it needs to be enhanced because there are existing models that work. I mean Gilman's the founder of In-Q-Tel before this. There's DARPA. There are other things that work, but they work in a way that tends to be more specifically defined versus broadly defined. And so, the reason why we felt this was very important is because some of these research areas go back to our background at IBM. The cycle of time for these things could be 10 to 15 years--quantum sciences, the material science around semiconductors, those sorts of things, the tooling, et cetera, et cetera. So, you need the combination of this vision of a fund that can do the technology roadmaps. But at the same time, when these technologies are commercially viable you need the private sector to do what it does. I mean we want to get involved with private investors when this stuff's ready to be commercialized, not when it has five or six or maybe 10 years of more R&D involved because you're waiting to see when it becomes more commercially viable. So fundamentally, I think what Gilman's architected here--and he is the genius behind all this, and he just recruited all of us to help--is this model that basically takes the best of what's required from the long term research perspective, but also participates with the VC world and the private equity world so that when these things are commercially viable, they would take over and then the market would do what the market does so well.

Chris Caine:: So, Gilman, you have had a long tenure working in this space between the private sector and the public sector, and you've seen lots of successes and I'm sure you've seen lots of frustrations as well, but this concept of frontier technologies is an interesting one. Can we talk a little bit about what kinds of technologies the fund is considering or will consider as frontier technologies and maybe what are the top five frontier technologies you both think people should be focusing on? Well, our list is a universal list. I think every country in the world that wants to innovate has the same focus areas because everybody realizes that these really are the keys to unlocking, not just economic, but environmental as well as national security kinds of requirements all built around these kinds of critical technologies going forward. So, the obvious first technologies, microelectronics, because without state-of-the-art microelectronics you can't have advanced communications. You can't do the next generation of computing. Our cell phones don't work. Our critical infrastructure is just brought down to the knees. So, leading the next generation of market electronics is going to be really important, particularly as we approach Moore's Law. The current technology has a logical life. We've enjoyed the fruits of Moore's Law for the last 20 years. It's coming to an end. We need a new foundation of technology. Second area I think everybody's very excited globally, are the opportunities and capabilities in the promise of artificial intelligence. Now, today we use narrow artificial intelligence to solve very specific problems. But as this technology matures and becomes much more generalized the capability of how it will transform our lives, not just in how we make things or how we solve problems, but every part of our lives, from how we learn to how we live, how we take care of our health, all that with the human machine teaming is going to be transformative. The third area is going to be advanced manufacturing. This idea that we will have to move supplies to points of low-cost labor overseas and travel thousands of miles of ocean to go seek out the ability to produce and manufacture goods. It's an idea that's coming to an end. I think with advanced manufacturing, with robotics and digital design, we can now manufacture very close to the points of consumption, which will again unlock the workforce to actually begin to produce goods. That's just not how do we produce more of the same, but that is specialized and personalized. Advanced materials are critical for all the things that we're going to be building out. And I would also say that two other areas are all areas of biology and energy production and storage. I think particularly as fusion discoveries are taking place on literally a weekly basis. We just recently had an admission in one of our labs on a fusion reactor. That's technology that is fastly going to be approaching us and could transform how we think about energy globally

Chris Caine:: Sam, thoughts on frontier technologies?

Sam Palmisano:: Well, I think they're the right areas of focus. As Gilman said, they are the ones that are going to keep the U.S. ahead of the rest of the world. We talked about China, but also there's some partners that China has that will try taking advantage of these technologies. But fundamentally the key, and I think in some ways, competition is good Chris because it's the wakeup call. I mean, if you think about it, Gillman and I were talking about this, during the pandemic the supply chain issues were all over the board. How it's impacted everything from consumer electronics to automotive, not just the computing or the IT world. Pre-pandemic, I think this would be a harder thing to sell. But the U.S. has woken up to the fact that these things are really, really strategically important for the country from a national security perspective, from the lifestyle of our population's perspective, from future employment and stand of living perspective. So, I think the world has awaken now to this reality, which is the plus. Now the key is, how quickly we can respond? And this is where Gilman jumped on this thing. I mean he put this together in less than a year. Literally less than a year and got this thing funded and going. And now we're off to trying to actually build it into the operations we all hope it'll be. But my guess is if we went back in time, Chris pre-pandemic, this would've been a harder sell.

Chris Caine:: So, let's talk about the investor side. Sam, you very well articulated what types of investors are interested in the longer-term development research and what types of investors are more interested in the commercialization and going to market activities of an investment. Just in the last nine months, the U.S. government has opened up a huge volume of investment into our country and just with three pieces of legislation--the Infrastructure Bill last November, the Chips Act in July, the Inflation Reduction Act just a couple of days ago. That amounts to about $1.5 trillion in new investment going into the United States in certain areas of innovation and technology. That's an enormous amount. That's about 6.5% of the U.S.' GDP. That taken in contrast with China and their approach to investment in public sector, economic development, such as their five-year plans. There's been some interesting research from Stanford recently about the impact that China's five-year plans have on the markets and in different segments. Sam, you have worked directly with countries and governments over decades, and you've seen the commitment that other governments have made to compete against the United States or partner with the United States. I've just talked about the investment that the United States has put into its economy and its technology developed just within the last nine months. The question I really have for both of you is staying power. We live in a society where priorities seem to build up quickly and then fade quickly and the staying power of a government investment sometimes diminishes, or at least the commitment to that investment diminishes. Could you both talk about the competitive differences between the United States and China and other countries for that matter, after they're done with the inputs, the investment, what their track record is for committing to the execution of the opportunities.

Sam Palmisano:: Well, the issue isn't the amount of money. You could take the $1.6 trillion and you could say that China two years ago out spent the United States. So, you'd say, well, gosh they're already out spending us, and they have this five-year plan. However, it's not the amount, it's how you focus the amount. And that gets back to a strategy that Gillman and I will call your technology roadmaps these 10-year, 15-year technology roadmaps. That's where you need to continual focus. Now, having said that you also need some successes. You need short term successes to demonstrate in the United States to your constituency or the taxpayer, that this is actually working. My opinion is in the past these big initiatives, they fall apart because there's been short term issues in the startup phase and then it becomes politicized. When it becomes politicized money doesn't get appropriated. Even though they've passed these bills, nothing's appropriated yet. I mean, it's got to be put into the budgets, and that happens in that next phase of this process here. We should focus on the aggregate amount of money, but I think that can be misleading. If we are clever about how we look at these technology roadmaps, there's a way to differentiate the United States and our Western allies. I'd add to that, our complimentary partners are very, very important in this game and get some short-term success going. And maybe that's the Chips Act where you get some short-term success going and then therefore the society or the taxpayer sees that it makes sense for the amount of money the U.S. is spending. But again, Gilman's seen this from the government side, but he knows it quite well.

Gilman Louie:: I think we should put the $1.6 trillion in context, right. I mean the $1.6 trillion is large sum of money, but it's an amount of money that is necessary just to level the playing field. China's going to put $2 trillion in deep technologies over the next five years. It's just on deep tech versus our $1.6 trillion spread across infrastructure and many other technologies as well. The most important thing on the capital side of what it’s going to take to build out this technology and the staying power, the staying power is going to be much more important for industry and for the markets to support, right? Government money is a great catalyst. It’s great to get things started or to level out the playing field, but at the end of the day, it's the U.S. capital markets. It's $45 trillion that's flowing, and unfortunately, a lot of that capital is flowing to China. We just had a venture fund raised $9 billion for deep technology investment in China. And that's a U.S. venture fund. It's our pension funds and our endowments are funding many of the technologies that China is dependent upon this capital to build out. So, at one level, the battle, the competition between the two countries, it's actually competition over capital. Now there's some advantages of top-down governments, right? They can move very fast. Xi can just think, or his team can think about something, and they can go off and implement. But top down isn't always the most effective way to get things done. I mean, we believe in a market economy. We believe that innovators and entrepreneurs and companies should work together and compete with each other to create the best technologies and make it available to the widest possible market that's out there. We don't pick national champions. We don't anoint individuals to lead sectors. You have to earn it here in the U.S. and in the West. And our view is, well it may feel good to have the short-term plans, but the big power of the United States and its allies is that vision. There's a reason why innovation happens here at the rate it's been happening over the last 50 years because anybody can be an innovator. And Sam's right about these roadmaps because these are hard technologies, but I would say to U.S. investors, wouldn't you like to have had the portfolio in the late 1990s when we were doing deep tech investing and had Intel and Applied Materials and Nvidia and Apple and Amazon and Google in your portfolio. Those companies were created here. We were willing to have the patience to invest in those technologies in the eighties and the nineties and early 2000. And then we got spoiled because all of that foundational technology allowed investors to invest on the apps layer, fabulous software only investments. And they could be productive as long as the foundational technology was still in its leadership. But as Sam was saying, we're getting our wake-up call.

Gilman Louie:: The wakeup call isn't just microelectronics. When Hauwei took the lead in 5G, that was not the Chinese’s only move. It was also because of our neglect to go after, in a very aggressive way, to invest in 5G infrastructure even though we led the world in 4G LTE. And now we're trying to figure out a way to get back. We can't allow that to happen again in all these new technologies.

Chris Caine:: As you both are talking, I'm thinking that your business model for the fund is even more important. You have assembled all the different stakeholders who are necessary to go from vision to investment to development into execution. And let's hope it can be as successfully performed. Let's talk about other countries if we could. Are there other countries beyond the U.S and China that you both consider to be noteworthy and that we should be paying attention to?

Gilman Louie:: First, we have to look at the Indo-Pacific region, right? You have countries like Japan who leads the world in manufacturing and has been doing so over the last 30 years and can continue on advanced manufacturing to be the engine of those capabilities in those technologies. You have India with immense software resources and great talent, who quite frankly is the engine for many of our software companies come from India. Israel has unbelievable talent in microelectronics and microelectronics design. The UK, you think about Google's Deep Mind, well that technology came from the great university systems that came from the United Kingdom. France, and then its aerospace capabilities. And let's not forget places like Brazil and Chile, which also has great, immense technical, particularly on the software capabilities. So, this is the area where the whole world gets to partner. The U.S. can't do this alone. It's not just because we need the rest of the markets. It's because we believe that if you do innovation in a way that's not designed to support autocracies and is done, as a ground swell of where talent and ideas can brew together to create the great recipes for success, rather than this top-down approach. I think the rest of the world will gravitate to a much more democratic model of technology development, leadership, and trust. Because at the end of the day, these technologies are put into the critical infrastructure of information, of how we depend on food production and on our energy and you have to think about whose technology do you really, really trust. Is that technology that's done in an open way, like open science and open society and open technologies, or is it a black box enclosed, and held captive to the whims of a particular government's leadership. Those are the choices we get to make. Every country now is participating. And I think people are beginning to realize around the world that it does matter where the origin of these technologies come from and whether or not they get to participate as partners or are they simply somebody that they're trying to take advantage of their markets.

Sam Palmisano:: I think a nonprofit can actually facilitate some of these initiatives. It takes a long time to get governments to come together and collaborate and do specific things. That's not the initiation phase, but the specific things that mature in these technologies. So that I think there's a role here for AFF (America's Frontier Fund) to take likeminded partners who believe what Gilman articulated, his vision of why we think an open society is so important and bring people together. Maybe we can accelerate that cause there's a mechanism. When you go through the fund itself where it will invest and then the other side of this fund where people in the private sector could also invest, not just the government entities, I believe there could be a mechanism strategically to start to accelerate this connection.

Chris Caine:: We spoke earlier about the decoupling of the U.S. and China economies in part, not totally, but in part and with that decoupling it seems to me comes a new imperative, if not opportunity, for partnership. We're seeing almost an economic cold war developing. And with that development, different countries are going to be creating different partnerships with each other. And I think the frontier technologies that you both in the fund are focused on provide a real opportunity for new partnerships that are valued based on the future, as opposed to litigating or adjudicating past disputes. But any thoughts about the criticality of partnerships other than the organizing model that the America's Frontier Fund has used, are there other models or partnerships that make sense?

Gilman Louie:: Well, there are many kinds of partnerships, right? I think for the United States, the critical partnerships between technology companies and the markets are actually state and local. Think about it. Five cities over the past decade generated 90% of the innovation jobs. They're San Diego, San Francisco, San Jose, Seattle, and Boston. The rest of the country did not participate in that economic benefit. But yet look across the country, there's at least 30 centers of technology excellence built around research universities. So, one of the things we have to do is unlock that talent, that capacity, and we need to work with state and local governments to build out these new centers. That's why you’re finding chip fab facilities and places like Ohio and in Phoenix, in Taylor, Texas, because these are the places that we're trying to unlock. I think the other kind of partnerships our international partnerships. The Quad-- India, Japan, Australia, the United States--Europe, the EU, these are very important alliances, not just from a national security point of view, but more importantly from an economic point of view. One of the critical things why U.S. tech has been successful over the decades is when we build a foundational layer of technology, we open it up so that other countries, that other companies, can build their technologies on top of those foundations. These ecosystems are allowed to flourish globally. And you look at our competitor China, right? Their technologies are those platforms open? Are they transparent? Do they make their code inspectable? Do they encourage other countries to build their technologies on top of their technologies? Do they license their IP so other people can benefit? Our hope is not to contain, but to help China actually participate in a much more rules space, open ecosystem around technologies because this is something that the whole world can benefit on. But if you go down the path of this tight control of who gets to use the technology and what citizens can use their technologies for and whether or not government influences even down at the board levels. That's not a long-term viable model that we think that the rest of the world can actually win off of.

Sam Palmisano:: Think about the evolution of the tech industry. If you think about the evolution, it started with lockdown proprietary systems. We were all in that model. What changed and drove innovation? Open source. And open source came along, and it created a platform where communities of technologists could build. Academics could build. There were protection rates for IP, so people were encouraged to innovate. And the companies that took advantage of that thrived and those who did not take advantage of it, missed out on a lot of those opportunities. But my point being is that this is the model that we think is the most successful model from an economic perspective, from an innovation perspective and countries will have a choice. They can choose based on the model Gilman and I are describing, or they could choose a more proprietary model. And they might think that China's a better bet on a proprietary model. And that will be the choices that they make. The U.S. needs to make sure that the critical partners choose our model. And you can't restrict partners that have great technology from our model. When you understand strategically that the open source, open platform wins long term, you need to partner with people that have buy into that and maybe compromise on some of these other issues that we hear a lot in the news these days.

Chris Caine:: More evidence that the nonprofit operating and business model of America's Frontier Fund probably is more flexible and makes more sense. Congratulations gentlemen. Before we close, we like to use the last minute or so to give our listeners one strategic insight to consider. We call it our emerging critical issues. In one word or one phrase, tell us what emerging issue do you see on the horizon that business leaders need to put on their radar? Gilman, why don't we start with you?

Gilman Louie:: Risk. Business leaders need to focus on risk. When you invest, is your dollar worth more here than in someplace else? Is a real long-term value promising to your stakeholders going to yield in a way that has long-term benefits economically, not just for your company, but for the ecosystem that you're a part of. If you don't understand risks and you're just, focused on short term gains, you'll continue to make bad decisions.

Sam Palmisano:: Chris, I was going to use the exact same word. Whether you're a company like IBM or you're an individual investor, it's the same point you're assessing your risk because you're risking capital in this early-stage technology. Where do you want to partner on that risk? We all understand that in the past, the short-term funds in China, China did quite well. Given the most recent policies in China, I don't know that I'd make that bet. You say, well zero Covid is great for society, and maybe it is except it destroyed the economy which destroyed your companies and destroyed your valuations. Let's take another area. Social media companies were the rage in China five years ago. Now the government's shutting them down. Do you want to be an investor in those firms that are being shut down because somebody gave an expression of an opinion? These are risk factors that I think people have to take into consideration, as they look at the future.

Chris Caine:: Thank you both. It's evident that it is a good thing you two are working together since you answered the critical issues moment in exactly the same way. I want to thank you both for your time and your insights today. We really appreciate you coming on The GET. You have been listening to The GET sponsored by the Center for Global Enterprise celebrating 10 years of convening global enterprise leaders around the most important business transformation issues.

Episode 6: The Data Enterprise: Managing for Growth and Trust

Air Date: August 8, 2022
Play 26:00
 
Companies are becoming data enterprises with data-infused business models that are reinventing how decisions are made. This is creating opportunities and challenges for business leaders, but also bringing increased scrutiny to ensure that new digital technologies such as artificial intelligence (AI), machine learning, and algorithms address concerns around whether companies can be trusted with these new capabilities. To help CEOs navigate this new terrain, we sit down with Ken Chenault, Chairman and Managing Director of General Catalyst and former Chairman and CEO of American Express, and Jon Iwata, Executive Fellow at Yale School of Management and former IBM Senior Vice President and Chief Brand Officer.
 


Chris Caine:: Welcome to The GET, the podcast for enterprise leaders, delivering timely insights for today's global economy--and tomorrow's competitive advantage. I'm your host,

Chris Caine:, president of the Center for Global Enterprise and on today's podcast we'll discuss the challenges and responsibilities companies face as they increasingly rely on data and digital technologies to make critical business decisions. For the past quarter century companies have worked to become digital. Today, business models are increasingly grounded in constantly flowing digital data, reinventing how decisions are made. Companies are becoming data enterprises with data-infused models capable of providing organizations with more agility and resilience to turbulent economic and societal events. This is creating opportunities and challenges for business leaders, but also bringing increased regulatory scrutiny to ensure that new digital technologies such as artificial intelligence (AI), machine learning, and algorithms address concerns being raised by societal stakeholders around whether companies can be trusted with these new capabilities. Today, our conversation will be about the data enterprise, managing for growth and trust. To help CEOs and business leaders better understand these developments and navigate this new terrain, we sit down with Ken Chenault, Chairman and Managing Director of General Catalyst and former Chairman and CEO of American Express, and Jon Iwata, Executive Fellow at Yale School of Management and former IBM Senior Vice President and Chief Brand Officer. Both Ken and Jon are leaders in the Data & Trust Alliance (D&TA), a non-profit organization that brings together leading businesses and institutions from across multiple industries to learn, develop and adopt responsible data and AI practices. Ken and Jon. Welcome. Thank you for coming.

Ken Chenault: Great to be here Chris.

Chris Caine:: Ken, perhaps we can begin with you. Just before the pandemic, you and Sam Palmisano had conversations with CEOs about the benefits and risks of leveraging data and AI. At that time, what was on the minds of these CEOs?

Ken Chenault: Well, I think what's very important Chris, is you talk about data enterprises. The reality is that every company is now involved with data and the digital transformation and Sam Palmisano and I, in our conversations with CEOs what became crystal clear is that every one of them was betting their company's future on data and AI one way or another. And I think we're all watching the issues embroiling some big tech companies. Issues like trust, privacy control, transparency. And I think there was an emerging realization from across a range of industries that the data enterprise issue was not just an issue for tech companies. It was an issue for all companies. And we had to figure out how to use data in a responsible way, because I think, as we all know and have seen, bad things could happen. And what we thought was we needed to bring companies together in a consortium of like-minded companies to accelerate their learning. And so, we put together a working group in March of 2020 made up of senior executives from the core of 12 companies and that's how we started the Data & Trust Alliance and it's based on a common principle. Every enterprise has an essential obligation to be a responsible steward of data and AI. And I think what's important here in our conversations with CEOs was one, we said we want to be pragmatic, and we don't just want to study issues. And one of the first things that we focused on, for example, was to create anti-bias safeguards for HR functions in evaluating vendors. And this was a significant exposure, and this work filled the gap. We now have 24 companies, some of the largest companies--Walmart, Nike, IBM, UPS, CBS, Mastercard, American Express, of course, General Catalyst. And I think what's critical here is that I think companies have woken up to the need to become digital. And there's an understanding, increasing understanding, that their companies are essentially data enterprises.

Chris Caine:: So, it sounds like Ken what you're suggesting is it's a business model that has arrived for companies, but the recognition of what needs to change from a management perspective may not have caught up with the actual operational reality.

Ken Chenault: Absolutely Chris. We're in the early innings of this. And part of what we're trying to do in the Data and Trust Alliance is to frankly, anticipate what are some of the issues rather than just be wholly reactive. And I think what's also important here is we’re getting CEOs from a range of industries to focus on this issue. And I think that's going to make a major difference going forward.

Chris Caine:: So clearly companies feel that there's a growth opportunity for the use of these digital technologies and becoming data enterprises as you described. Jon, maybe you could talk a little bit about the work of the Data & Trust Alliance and the specific activities that it's focused on to Ken's point to produce practical learnings and management assets for companies to adopt.

Jon Iwata:: We've been operational since September of 2020. As Ken mentioned, our first project was somewhat surprising to some members of the Alliance because you might think that we would focus on customer applications, the use of consumer or customer data, but instead we focused on HR functions and their use of data and algorithms and machine learning across the spectrum of workforce decisions. I think that was a very useful choice because it was both an unaddressed need, as Ken mentioned, and pragmatic in that it resulted in these safeguards to be used by procurement departments and HR departments of our member companies. That was a taste of the kind of work that we do. We have only one KPI that was set by the CEOs who formed the Alliance. The KPI is adoption by practitioners within the companies. That has been very clarifying as we select projects and we go about developing them, not only is the Alliance cross industry, but the people that I work with week-to-week, month-to-month, are cross-functional. So, representing the American Expresses and Starbucks and CVS Healths on a day-to-day basis are chief legal officers, chief innovation officers, CTOs, line of business general managers, chief privacy officers, and yes, chief data, chief analytics officer. The fact that we have so many different views into our projects has turned out to be a great benefit. So, we have a cross industry view, a cross functional view. I think it makes the work, very pragmatic. I'll give an example of one project that's in full development right now. We're calling it New Diligence. It's a riff off of due diligence. The premise is this: Our member companies are acquisitive. It's fair to say that most of the companies they are targeting for investment or acquisition have as their primary value drivers, data algorithms and AI. The question was when they drop in their investment bankers and lawyers to conduct due diligence, do those teams have the new criteria, the questions to ask, what to inspect both for the value drivers and also, the new risk factors. And the member companies said actually, they've had some recent bad experiences with acquisitions that did not go so well. And the root cost turned out to be this new blind spot. They didn't know what to look for, what to ask for to evaluate these acquisitions. And so, for the past six months we've been working with over 12 M&A teams of our member companies to hammer out algorithmic due diligence, data due diligence, and responsible culture diligence that will then be added to their due diligence criterion processes. I think last point I'll make here Chris is we're seeing the need for a new kind of literacy. We saw it with the HR functions and procurement. They did not understand these concepts. They did not understand the terminology. Or the impacts or the regulatory environment. And we saw it again with the M&A departments. And I think this is a pattern we're going to see as these companies become as you've put it, and as Ken described, data enterprises. It will require among other things, new literacy.

Ken Chenault: One of the points that I just emphasize is, 25 years ago when people woke up to, we need to focus on digital. We need to really understand the internet. Some CEOs thought that they could delegate the work to a single executive or unit and that would solve it. And I think it's taken years for companies to recognize that this was a systemic shift and meant the whole enterprise had to transform. And so, I think what's critical with the Data & Trust Alliance is that companies are getting involved from the start and they're staying involved. And they now understand that you can't assign this to a single unit or person, the whole company needs to be focused on this.

Chris Caine:: So, I'd like to dig deeper on that. You and Jon have both said this is--my phrase--the new organizing principle for the enterprise. And as a management organizing principle clearly it seems like these 23 companies who are members of the D&TA have their attention and you have their buy in, but I would think there are a number of our listeners who are probably wondering if this data enterprise is really a new business phenomenon. So, I'd like to just dig into that a little bit Ken with your experience, which is you led American Express for years, and it is perhaps one of the most data-infused companies operating in the world. Are things really that different today, in the concept of this data enterprise. And as I heard you explain the migration to awareness, I was thinking a lot of companies didn't appreciate how they needed to automate their processes. But it sounds to me like you and Jon are taking this to a new level of sophistication, which is, it's not about automating and connecting them, it's really about organizing and creating a new management principle. So maybe you could talk a little bit about your American Express experience.

Ken Chenault: Yeah, I think American Express is an example of a data enterprise company. And what I think is very important is, that I think American Express has understood, 25 years ago, we created in essence an internet division and digital division. And we didn't take an integrated approach. The view was as part of the digital transformation, we needed to focus our energies. And in the early 2000s, I took over as CEO in 2001, one of the things that became crystal clear to me was that we were so dependent on data that we had to get the entire company engaged and involved in the digital transformation. And it went to the point, Chris, that I even had our board trained because my point to them was, how can you make decisions on how data is being used if you don't understand some of the basics and driving that down through the organization, frankly, took years. There is now, I think, a greater level of accountability and a greater level of integration because what happened in a lot of companies is the assignment went to the head of technology and the view was you deal with it. And we changed that and said, we've got to have the processes. We've got to have the platform. We've got to have the management awareness and we have to have the accountability. And that has made, I think, a fundamental difference for American Express because the reality is once we started to look at the company, in essence as a data enterprise, it frankly allowed us to leverage not only the data synergies, but the strategic synergies across our business.

Chris Caine:: Yeah. And from a management standpoint, as you've said, it increases interdependencies and accountability across the function. And that is probably a journey that many companies are going to be on for quite some time. That's not easy work.

Ken Chenault: That is not easy work at all. And that is why I think, you know, one of the realizations we all need to have is, the progress and the speed of change is incredible. And when we think of the emergence of AI and machine learning and the impact that has, the reality is that the role of the CEO is one that they have to be a leader in this area in the company. They can't delegate that responsibility to someone else. And I got to tell you that some CEOs are increasingly realizing this. But I think we're frankly in the early innings of the data enterprise.

Chris Caine:: Some CEOs I would imagine are really excited about all this and some are scared.

Ken Chenault: You got it. You got it, Chris.

Chris Caine:: As a corollary to the American Express reference, I'd to talk a little bit about what you're doing now as Chairman of General Catalyst, a VC firm. And today's startups, I imagine you see are both centered and organized around the power of data and AI as their core business value or value drivers. But as the Chairman of General Catalyst, what are you seeing in the startup and entrepreneurial community? Do they appreciate these phenomena as much as the D&TA is articulating it?

Ken Chenault: What I would say frankly is, again with the startups we're in the very early innings in all candor. What I do think is important is that one General Catalyst is a member of D&TA, and one of the reasons why we are a member is we believe that we've got a special opportunity and responsibility to help founders understand what their responsibility is and the importance of the data enterprise. So, one of the concepts that we're very focused on with our companies is a concept we call responsible innovation. And what that is is, they've got to consider the impacts, not only of technology, but the impacts of data and how it affects their clients and customers, and also the risks that are there. One of the things that we are very focused on and are working obviously closely with Sam and Jon and the other companies that are involved in D&TA is to understand what are the impacts of AI and machine learning? What are the impacts of how they use data and to do it from the beginning as they're creating the company and we're finding founders are being responsive.

Chris Caine:: That's great. The title of our session in conversation this morning is managing for growth and trust. Jon, I'd like to talk a little bit about the trust side of things and surveys indicate that levels of public trust in companies is at very low level across the board, down with other institutions unfortunately in society. How can the enterprise leader ensure their organization is viewed as a trusted steward of the data they have and the data they acquire?

Jon Iwata:: Part of it's been touched on. It's transparency and making it very clear what data is being collected, how it's being used, how it won't be used. Now we have to add to it, not just data transparency, but I would say algorithmic transparency as well. And that ranges from when am I actually interacting with an AI or an automated system? Disclosing that. Making the system so called explainable these machine learning driven systems and applications are often called black boxes because they're not programmed or coded completely. They learn through interaction and through more data you know. Why should I trust the recommendation coming from the system? Why should I act upon the recommendation? How should I factor it into my own decision making? That's a different level of trust. That's not, are you misusing my data? That's trust in the intelligence of the system itself. So, it's a whole new realm of trust. The other thing I would add to that, Chris, is what's at stake here. And if you think about the digital era. What were some of the big stories that we still may remember, those of us who lived through that? You might think of Equifax or Target and customer data breaches. You might think about, you know, slow download times or websites that weren't very responsive, right? Those were impacts. What's at stake in the data enterprise. Think of Zillow. What's the difference there? You had algorithms, making critical business decisions that were very bad business decisions. Hundreds of millions of dollars there. Think about algorithmic systems making or helping doctors make diagnosis decisions in treatment decisions. Or managers hiring candidates or promoting people or paying people. Extending loan approvals or denying credit. These are not denial of service attacks, or my website is slow, or my app is not competitive. These are very important decisions. Some of them literally life or death. And that's why I think the Data & Trust Alliance was so named. I mean, it didn't take 20 years for these CEOs to say, oh, this isn't just using technology for business advantage. The stakes are much higher, and we better get it right from the start.

Chris Caine:: So, let's talk about growth. Governments around the world, for instance, the EU, are proposing new regulations to create guidelines for the use of AI systems. Will these new rules in both of your opinions disrupt how companies are developing and deploying systems for growth of their businesses and what level of impact do you see if it is?

Ken Chenault: I think Chris, I’d back up a little bit. What's important here, and what we're trying frankly also to do with the Data & Trust Alliance, is to put some self-governance in place so, in fact, regulations are not put in that will have an unintended consequence. It's too early to tell what some of the impacts will be. But clearly what I think is important for companies is we're all focused on growth, and we should be focused on growth. What we also need to do is we've got to focus on how to use data in a responsible way. How in fact, to use AI in machine learning, to anticipate what could happen. The concern I have is things are moving so quickly that I think it's very difficult to write regulations that, in fact, will deal with the real issues. So, businesses have a responsibility to be proactive in talking to regulators about what they're doing and what the issues are, so we don't have these unintended consequences. But the reality is you hit it exactly and Jon talked about it. This is all about trust. What I would also say from a regulatory standpoint that they are more reactive and when you're reactive, you're acting in the past, you're not thinking about what will happen in the future. What we have to do is change that dynamic. And I would say one of the real challenges that is out there is can businesses work cooperatively as they're doing in the Data & Trust Alliance going forward because I think the private sector, their role needs to change and we're going to have to govern ourselves. Or else the government has no choice because when the consumer is harmed, they have to act.

Chris Caine:: I think we've seen this throughout the course of business, certainly in my professional career, where, as you say, regulation, public policy is a lagging response to the pace of change and technology advances. And it is an opportunity for leaders in the private sector to both educate their public officials about what's happen and what are the pluses and the minuses that come from that change. So, it's a real opportunity for companies who choose to be leaders, but they have to be leaders in both the external realm, as well as the internal and commercial realm.

Chris Caine:: I want to thank you both for your time and your insights today. Before we close, we always like to give the last minute to talk about issues that you all see over the horizon. We call it our emerging critical issues moment. So is there one word or phrase, tell us about an emerging issue you see on the horizon that business leaders need to put on their radar. One word or phrase Jon let's go to you first.

Jon Iwata:: My phrase is one that I learned by working with these companies over the past 18 months. That term is algorithmic safety.

Chris Caine:: All right, Ken.

Ken Chenault: If you don't mind, Chris, I have two. The first one may be old, but the importance of trust. The second one for me, is workforce transformation. I just think that with the post pandemic issues, thinking through how to meet the needs of workers, not just whether they're remote or physical, but also, very importantly how are we training and re-skilling our workers?

Chris Caine:: We certainly seem to be in a new phase of societal development and clearly business development. So, thank you both for your thoughts on that. We'll come back to these in future shows.

Ken Chenault: Thank you, Chris.

Chris Caine:: You have been listening to The GET sponsored by the Center for Global Enterprise, celebrating 10 years of convening global leaders around the most important business transformation issues.

Episode 5: Restructuring Business Models in a U.S-China Decoupling Economy

Air Date: July 12, 2022
Play 22:03
 
For the last 40 years, the United States and China, the two largest economies in the world, have been leading forces for global economic integration. Today, both are signaling their interest in decoupling major parts of their economies from the other. The impact on the global economy is to be determined, but the need for CEOs and business leaders to assess the impact of this decoupling is immediate. To discuss the challenge and perhaps the opportunity this decoupling presents, we sit down with Doug Haynes, managing partner of Council Advisors, and Dave Kappos, partner at Cravath, Swaine & Moore and former Director of the U.S. Patent and Trademark Office.
 


Chris Caine: Welcome to The GET, the podcast for enterprise leaders, delivering timely insights for today's global economy--and tomorrow's competitive advantage. I'm your host, Chris Caine, president of the Center for Global Enterprise. Today we're going to focus on restructuring business models in a U.S-China decoupling economy. For the last 40 years, the United States and China, the two largest economies in the world, have been leading forces for global economic integration. Today, both are signaling their interest in decoupling major parts of their economies from the other. The impact on the global economy is to be determined, but the need for CEOs to assess the impact of this decoupling is immediate. In addition, the pandemic has driven home the danger of merely building business models that rely primarily on low-cost suppliers located half a world away. Business is now operating in a new global environment, reshaped by dramatic shifts in customer behaviors, regulatory restrictions, and capital markets. The enterprises that will succeed in this environment are the organizations that find new ways of doing business to develop happy and loyal customers. To discuss the challenge and perhaps the opportunity this decoupling presents to CEOs and business leaders, we sit down today with Doug Haynes, managing partner of Council Advisors, and Dave Kappos, partner at Cravath, Swaine & Moore and former Director of the U.S. Patent and Trademark Office. Doug and Dave, welcome. Doug perhaps we can begin with you. You have worked a long time with business leaders and with CEOs, in particular on a global scale, how serious an impact does a decoupling of the two largest economies in the world have on a company's business model?

Doug Haynes: Well Chris, in your introduction you said what challenges does this present and maybe what opportunities and I'll be frank and say, I think that the challenges far outweigh the opportunities. If we think about businesses having maybe four components here, one would be the markets you serve, another would be physical goods supply chain or value chain. A third would be services supply chain or value chain. And then the last, which has become much more important is the software or the intellectual property supply chain. The decoupling of these economies and a lot of the knock-on effects of what's happening in the geopolitical realm, at the moment have in my view, almost entirely negative effects on all of the above. Let me take the stance of a U.S. company for a moment, but we could look at it from the perspective of a Chinese company or European company as well. While accessing the domestic market likely won't change, accessing other markets is going to become more expensive. It will simply cost more to reach other markets. There'll be more regulatory barriers. There'll be likely more need for intermediates to support your business model locally, and all of which adds time and cost. Similarly, supply chains that had been global over the last two or three decades are now fragmented. When I say supply chains, services supply chains, physical good supply chains, and even software supply chains. That fragmentation also adds time and cost. The cost is not just in the form of increasing use of higher wage rate areas or higher factor cost areas, but there's also more loss, and more storage costs and more transit related costs. The markets are going to be more expensive for international companies, multinational companies. Markets will be more expensive to access other than home markets and supply chains will become more expensive to operate. Labor, goods, fees, and losses are all going to add up. So, as I said, it's very difficult to find something good in here. The area that I think is the least certain are the services and software supply chains. As consumers in the west, we're already feeling the impact of the disruption of physical supply chains. Delays, stockouts, higher prices on everything from energy to automobiles to even basic home goods. The sequence of recent events makes the services and software supply chains a little more interesting because we now live in a world where people who are not tied to physical assets, can work very effectively in a remote fashion. And as a result, those supply chains are much more fluid.

Chris Caine: Dave, Doug mentioned IP (Intellectual Property) and a changing environment that represents to a CEO their business model. But for the last number of decades, we've had what I would call, and you might have a different point of view on this, a harmonization of intellectual property rights around the world. With a decoupling economy, does the environment for a CEO dealing with their IP as a core business component change. If so, what's the impact going forward for a CEO and a decoupling economy between China and the U.S. who have huge patent portfolios.

Dave Kappos: I would say it's probably a decoupling in the economies in general will manifest itself in the IP world. I'll give you an example. We've worked for a long time, the U.S. has and other countries, to encourage China to put place a biopharma intellectual property regime that’s similar to those in Europe and places like Japan and Korea and the U.S. that enables generics and research-based biopharmas to coexist and to each have a constructive place in the marketplace. With decoupling now, I see the regimes in China and the West drifting from one another. And therefore, less ability to work back and forth. So, if the CFDA is working on different timelines and using different criteria, then the FDA here in the U.S., how do the agencies constructively use the data that each one is producing? For the deals that I work on as another example, it's very common to have a China license to a biopharma IP to make a biologic or drug, and then a rest of the world license. But that then requires the trading back and forth of the two licensees of regulatory data because if something happens with a drug in China, you need to know about it in the rest of the world in order to be able to reflect it for the benefit of patients and the safety of patients. If we can no longer have assurance of being able to move regulatory data back and forth it's kind of chaos actually. I'm not sure how we're going to manage that in the legal regime or in the business regime.

Chris Caine: So the sharing of data and information between countries in a decoupled economy or a decoupling world, the trust of the data being held by another country is going to now create another dimension for a CEO to factor into and make it very difficult to have a smooth operational execution. There are a lot of fundamentals. We touched on some, of a business that are going to need to be reassessed and maybe even changed in a decoupling economy. But Doug and Dave, if you had to think of the top two aspects of a business that you would encourage CEOs to bear down on right now given these trends of a decoupling global economy and perhaps a tension between the United States and China as it relates to regulatory compliance and regulatory oversight, what would the top two fundamentals of a business be that you would advise the CEOs to double down.

Doug Haynes: It's very difficult to pick two, but in the spirit of picking two, I would say risk management and supply chain robustness or security. And those are related, but they're different. Let me start with supply chain security. Supply chains got very lean over the last few years, and that was a very good thing in terms of productivity, and you know, efficiency, rapid movement of good services at a low cost. Events of the last few years have exposed just how lean those supply chains became by very little redundancy, a lot of sole source agreements. Many supply chains just simply weren't robust and not only did COVID expose this, but then now geopolitical instability and decoupling are exposing it further and you can see the businesses that actually had built robustness into their value chain differentiated from those who hadn't. And the ones that had built robustness in looked like higher cost operations. Now today, they look like operations that can actually deliver for customers and I think we're going to see a return to a more robust way of management. I'm distinguishing risk management from having a robust supply chain because I'm looking at it from a financial point of view, the commitments made to shareholders, the commitments made to employees. The strength of the financial foundation of a company. The last few years have exposed companies who maybe carried additional costs, but they carried additional costs because they were managing for risk scenarios that other people just sort of looked at and said, well, it'll never happen. And then a lot of things that people couldn't imagine happening happened, and many companies were caught out and some companies have even failed as a result.

Chris Caine: Dave, any thoughts?

Dave Kappos: Yeah, you know what I look to Chris is for CEOs to bear down on right now, and this is advice I'm giving to folks, is don't depend on your trust based IP-related relationships. So, your joint R&D programs, you need to start looking at ways to re-shore those or friend shore them or be prepared to move them quickly. Tech licensing, joint ventures, if you’ve got those that you're working on or that you're currently using in China as the country's decouple, you're going have less trust and less assurance to move data knowledge depends on those JVs and tech licensing relationships and R&D relationships. You have less assurance that you can move the stuff around the products of those relationships. You need to be prepared to move the relationships as well. That's where I would have CEOs bearing down right now.

Chris Caine: The rise and value of intangible assets in business over the last 30 years has been enormous relative to the value of tangible assets. And I think Dave, you and Doug both touched on the fact that things like software and IP are now, in many cases, the core assets of an enterprise and the ability to both protect but deploy those assets with agility in a decoupled economy changes dramatically. Any thoughts on that, the deployment of intangible assets and not only their efficiency, but how you protect them in a more decoupled environment.

Doug Haynes: I'm going to sound for a minute like I'm not a fan of the growth of intangible assets, but that's not the case. I was surprised when I did a little research and found that, and I'm going to use U.S data here again. U.S. publicly traded companies, if you go back to 1980 where the rise of intangible assets in the business model began, 80% of U.S. publicly traded companies produced a profit consistently. Meaning that they were basically profit producing enterprises. If you roll that forward to 2020, U.S. publicly traded companies only 20% produced profits routinely. Over this period of time, as intangible assets have grown, as the core of business growth has been prioritized over profitability varied dramatically. The reason I raise this is that I think that this intangible asset economy we live in carried with it a real change that goes beyond just what the company delivers and what the nature of the employees are. But also, what the basic proposition to shareholders has been. I do think, and I'm sounding a little doom and gloom as I say this, I do think that same period of time was the period of time when the economy and companies truly globalized and it isn't surprising that growth was prioritized over profitability when the building of intangible assets tends to wash through the income statement, not get registered on the balance sheet. So, it's a, very, very different model. I think what we're seeing in the market just in the last few months is a reflection of a return to attention on profitability and the belief that long term growth will not continue at the rate that it has been. And those, I think have a very profound impact. The good news for companies is that intangible asset-based businesses, if managed for profitability can become very profitable very quickly. But we're seeing a big pivot taking place literally as we speak and it's affecting everything from the largest companies in the world all the way to startups. And there's just a change in stance about how to manage these businesses and what objectives to deliver to shareholders.

Chris Caine: Dave, you spent a lot of time advising companies about their intangible assets and both how to leverage them and also how to protect them. Any thoughts about the intangible asset environment in a decoupling economy?

Dave Kappos: Yeah, I would focus on data there Chris. You know, we've gotten so used to sharing data on a global basis, but we're now seeing the effects of decoupling with China putting in place very different data protection regimes from the U.S. and even Europe to an extent where now, I have to actively advise clients in deals to avoid data based in China because you can't be sure how to handle that. Whether you'll be in compliance with Chinese law or whether you will literally be committing felony crimes that can result in your executives getting arrested in China. So, this is very serious stuff that's a direct byproduct in the data world of decoupling. In inconsistent legal regimes that are so inconsistent in fact, that compliance with one almost guarantees non-compliance with others.

Chris Caine: As this decoupling takes place, and it won't take place entirely, there'll probably be more strategic sectors in the Chinese economy, in the U.S. economy that will decouple, but some sectors that will remain integrated or at least connected. But other countries around the world who will be viewing this as separation, will try to figure out how to advantage themselves accordingly. In the cold war era, these were called the nonaligned nations who wanted to end up in between the two geopolitical philosophies and powers that organized the world. And now maybe we have an economic cold war in nonaligned countries or countries will want to be able to make the best of both the U.S. and Chinese economy. India, Brazil, South Africa, a number of countries who have tried to steer a path toward economic neutrality. And Doug, back to your point about a return to profitability. Let me ask you now that you are a CEO, and you have to figure out how to invest next year's Capex in funding or expenditures for your company. Given this environment, where would you invest your Capex funds in order to advance your profitability as opposed to just focusing on growth?

Doug Haynes: I think the answer is really different depending on the sector you're in and the nature of your model. So, for a natural resource company or a heavier manufacturing company, you get a very different answer than you would get for say a software company. I do think there are a couple of common themes. I think we're going to see countries with more stable political environments and more stable international relationships become a lot more attractive. So as an example, and I'll take the software end of the spectrum. If you were to look at the growth in programming jobs, particularly in what you would call more modern platforms like AWS and .net, Eastern Europe captured an unfair share of that growth over the last five or 10 years. If you've got any application that is written native to AWS, you can more or less bet that you've got programmers from Russia and the Ukraine somewhere in that code because on a cost quality basis it's been such an advantaged group. We're seeing right now flight from those countries in two forms. One is companies pulling out and those range from U.S. companies to European companies, to even Eastern European founded third-party consultants that are software producing are diversifying and moving out of those countries. And then second, we're seeing programmers flee on their own. It is estimated that Russia has lost a hundred thousand programmers who have simply left Russia without their companies having left because of what I mentioned before with the ability to work remotely and developers having access to development environments that are fully remote you know, a hundred thousand developers have just individually abandoned their home country to work somewhere else. That sort of instability is going to be a very big deterrent for investment from countries that are geopolitically unstable or viewed as countries that can become unstable. So, for an example, I'll use Eastern Europe again, at the moment Armenia is a stable alternative to Russia, but I think the fear of Armenia becoming unstable in the future will keep it from enjoying much of next year's growth.

Chris Caine: Dave, intangible assets are characteristically profitable. Any thoughts about this return to profitability and if you were investing Capex money where you would do it, given the environment we're seeing?

Dave Kappos: Yeah, high margins continuing for IP heavy companies in the 70% gross profit range or higher, which remains enviable. What I am telling companies in terms of investment is right now it needs to be on people and projects that are not dependent on countries that are decoupling. Because if you have dependencies on those countries, you've got really risky dependencies to deal with. And, of course, the IP is all about the result of people's minds, the things people think about and work on whether it's programmers or scientists. If they're in China and their thinking is going to be captured there and the results of it not useful outside of the country, you have to ask yourself the question of what value you're getting from further investment there. Planning ahead in a decoupling world, not even that far ahead, just next year would tell you ought to be really careful about making investments and, putting your investments in places where you're confident you'll be able to use them.

Chris Caine: Well, the environment for CEOs and business leaders clearly is trickier than it was five years ago. And it seems to me that it's only going to get trickier going forward, at least for the foreseeable future. Thank you both for your thoughts and insights today. You've got great experience on being both leaders of enterprises, but also advising them. But before we close, we like to use the last minute to give our listeners some strategic insights to think about. And we call it our emerging critical issues moment. So, what I ask each of you to do is in one word or one phrase, please tell us what emerging issue do you see on the horizon that business leaders need to put on their radar? Dave, why don't we start with you?

Dave Kappos: Yeah, sure Chris. I would use one-word DeFi (Decentralized Finance). We thought it was like a fringe libertarian thing five years ago when we started thinking about it in the legal world. It's becoming mainstream and holds tremendous promise in a lot of respects. So, one-word DeFi.

Chris Caine: DeFi, Doug.

Doug Haynes: The word that I would pick is culture. In an environment where you're going to have a lot of changes in the configuration of a business' supply chains, when you've got rapid changes in customer attitudes. You've got rapid changes in your employee base. I think we're going to see continued high turnover of employees. The only glue that holds a company together is culture and it's one of the most important assets of an intangible based business. It's an asset that's often undermanaged and under tended.

Chris Caine: All right. Listeners, you heard it here first DeFi and culture. Doug, let me thank you and Dave for your time today and your insights. We really appreciate you sharing with our listeners on The GET. You've been listening to The GET sponsored by the Center for Global Enterprise, celebrating 10 years of convening global enterprise leaders around the most important business transformation issues.

Episode 4: Managing Brand Identity and Strategy When Driven by Geopolitical Events

Air Date: June 14, 2022
Play 23:40

An unprecedented number of companies have supported economic sanctions against Russia in response to its invasion of Ukraine—in several cases going beyond what the sanctions call for. In the past, companies have rarely taken public positions that could hurt profits. That has changed and the public—and employees–now expect global brands to do the right thing. Shelly Lazarus, Chairman Emeritus, Ogilvy, and Jon Iwata, Executive Fellow at Yale School of Management and former IBM Senior Vice President and Chief Brand Officer, help business leaders navigate managing brands and marketing strategies when driven by geopolitical events. 



Chris Caine: Welcome to The GET, the podcast for enterprise leaders, delivering timely insights for today's global economy--and tomorrow's competitive advantage. I'm your host, Chris Caine, President of the Center for Global Enterprise. And today we sit down with Shelly Lazarus, Chairman Emeritus of Ogilvy, and Jon Iwata, Executive Fellow at Yale School of Management, and former IBM Senior Vice President and Chief Brand Officer, to discuss managing brand identity and strategy when driven by global events. It seems we have an unprecedented number of companies that have supported economic sanctions against Russia in response to the invasion of Ukraine--in several cases, companies going beyond what the sanctions actually called for. While companies have been sensitive to environmental, social, and governance issues (or ESG) in the past, they typically have taken positions that have not hurt their profits. That has changed. And do we now have a public that expects global brands to do more than the traditional ESG moves? Are we entering a new era of corporate responsibility? Shelly, can we begin with you and get your thoughts and then Jon.

Shelly Lazarus: I think the simple answer Chris, is yes, we are. I recently came across a statistic that reported that almost 40% of consumers are boycotting at least one product or service based on what they believe the company’s or brand’s point of view is. All CEOs say their companies are market driven. The market is speaking and they're saying the consumers care. I think what happened in Ukraine is interesting in that this was almost an easy one because it was so blatant. It was an unprovoked attack a nation. There is real evidence of war crimes. I think companies came forward and pulled out beyond sanctions. The only question now is does the public think that these companies are doing enough? We're in a new time. I think if for no other reason, the internal audience, the employees of companies are demanding that their companies take a stand. That they express a point of view. And I just think there's no choice anymore. We are in an era where everyone is paying attention to what companies are doing beyond just the profits that they produce.

Chris Caine: It's really a good start with this topic Shelly. Thank you very much. The concept of everybody paying attention to something, we'll come back to in a second, but Jon, your thoughts.

Jon Iwata: I heard somebody say recently with regard to this topic, don't confuse the new with the rare. I think what is new here is what Shelley was mentioning, the expectations. I would broaden it to all stakeholders. I think there has been a generational shift here. So, whether they are putting on the hat of consumer or the hat of institutional investor or potential employee or citizen, they do expect different things. Perhaps more advanced things of the companies they choose to work for and buy from and invest in, and so forth. Companies have to respond to this in order to compete. Compete for talent. Compete for business, et cetera. My perspective, as you mentioned, is with IBM for 35 years, and in our history, I would say this is not new. The idea of a company not only taking positions, but doing something about its business operations, its policies, based on its values, based on its beliefs, is not new.

Jon Iwata: And in that regard, it may be rare today. And a whole new generation of CEOs are beginning to realize that is now part of the job.

Chris Caine: Shelley, you raised the point about everybody's paying attention. Internal workforces have always been paying attention to what their companies have been doing, but they've generally gotten their information from the company itself. I think you both have tremendous insights and experience on how leaders of companies, CEOs, and others, communicated with their workforce, whether that workforce was domestic or global. And yet today's world, everybody's paying attention because they have so many different avenues of information. Could we talk a little bit about the pressure and the changed environment on CEOs and enterprise leaders for knowing that their decisions are transparent in many different ways, from many different sources, and therefore their company's workforce has different ways to determine what their company is doing and how comfortable they feel with that. Jon, to your point about values, maybe being able to interpret values the way they want, being influenced by outside sources of information flows, but any thoughts on both the internal connected workforce and the concept that Shelly has put on the table, which is everybody's paying.

Shelly Lazarus: You mentioned transparency, Chris. I mean everything may seem to be transparent, but everything isn't necessarily accurate. That doesn't stop people from having the conversation. It used to be that the leadership of an organization would communicate to the people, tell them what was going on and it was accepted there would be Q&A and people would go back to work. These days people are in constant communication about what's going on and it's instantaneous. You better participate because it's happening around you, through you, and being sure that people are getting the information that you want them to have is critical. Back to Ukraine and Russia. I think Jon you're at Yale now. I know Jeff Sonnenfeld just contacted people in Russia to actually authenticate whether brands who said they were stopping doing business in Russia were actually still present on the shelves and in the lives of the people in Russia. And that happened like in a three-day period of people going out there and commenting on, ‘I still see this product on shelves.’ ‘This this product is still available.’ And companies are being held to account in ways they probably can't even control because we all know how long it takes to get from the purchase through the supply chain, to the actual shelf. And here we have people who are commenting in real time on promises that have been made by companies. I just think it's the way the world is. And it makes some people crazy. But you can't deny reality. And my feeling is always, you better get into the conversation with everybody because it's going on around you.

Jon Iwata: What I would add to that is it's not just the information that shapes the beliefs and perceptions of the stakeholders we care about. It's their ability to use social media and use the new platforms to their advantage in mobilizing and activating support for their views. Look, the fact that companies have had special interest groups or factions of the workforce who are trying to get management to pay attention to them and do something, it's not new. What is new is the fact that their ability to draw so much more attention to get so many other people to join them, to amplify their voice, to sign on, to do things is new. And in that regard, a lot of CEOs are ill prepared to understand these new forces that command their attention.

Chris Caine: How far does the CEO have to go in order to satisfy the stakeholders who are paying attention to the company and the company's role in societal trends, and in this case geopolitical trends? It used to be that a company could take an action and the action could be measured and the measure would be considered good enough. But it seems today that we have companies who are being asked to take stronger and stronger positions. And I would think from a management perspective, calibrating how much is enough or where do the parameters of the right position start, and stop is an interesting leadership conversation. Strong positions, are they going to be required by external stakeholders in a way that they haven't been required in the past?

Shelly Lazarus: I'm not sure that they haven't been required. The ability for a group of employees to express how they feel has gotten much more sophisticated and powerful. You just have to look at Disney. I don't know what actually went on within the company, but you had this feeling that you had this group of employees that were just pushing and pushing the CEO to come out and make a statement to the point where his judgment, I guess, was that he had to do that or he would lose the trust and belief of his employees, but with enormous consequence. And so, to me in the current world, that is a great example of being pushed to the point where you have to make a decision because the employees, or one of your constituents, feels so strongly about something that if you fail to do, you're going to lose their trust and belief in you.

Chris Caine: And so, what's the impact of that on the brand, right? Shelly, you have worked your entire career around brands and the importance of creating a brand identity and being consistent with that identity that you choose to create. Can your brand identity get away from you when you end up in situations like Disney, which you've just seen.

Shelly Lazarus: I think it can. For sure it has had an impact on the brand. It was in the news. Top of mind. The trick is to be able to walk the line, to be able to come out at a point where people are nodding with you that, of course, this is the right thing to do. But it's really hard. When you have the kinds of issues that are confronting the world today, where CEOs are expected to take a stance. That's one where I would guess it got away from them a bit and their brand is seriously impacted by what they did.

Chris Caine: Jon thoughts?

Jon Iwata: I think part of this is consistency and authenticity. My understanding of the Disney situation very early on was that the new CEO departed from prior practice in deciding explicitly not to speak out, either as a CEO or as a brand, on particular subjects. And because this was not consistent with what stakeholders, let's start with their employees, were used to, this doesn't seem right, and I think that's a factor here. This idea of whatever you stand for as a brand, as a company, are you consistent in talking about it, and what you say most importantly, in what you do. You think about brands like Nike and Colin Kaepernick? You think about brands like Chick-fil-A. These are brands that are not neutral and whether you like them or not, whether you support them or not, do you know what they stand for and do they consistently behave in a way that reflects their values and reflects their point of view. I think where brands really get themselves crosswise is when they don't have a point of view, they don't have values, at least values that they take seriously in their decision-making in their practices and policies.

Chris Caine: So, consistency and authenticity are two guiding principles for sure.

Shelly Lazarus: Just to add to Jon's point, I think the most challenging thing for CEOs now is trying to figure out which topic subjects are appropriate for them to have a point of view. Because you do see these sorts of flatfooted examples of companies that sort of had nothing to do with a particular subject or no connection to it, who all of a sudden pop out and make a statement about Black Lives Matter or some other topic that they haven't been connected to in any way. But I'll give you another example from right at this moment. I'm on the board of Organon, which is a pharmaceutical company that is focused on women's health. And so, when the Supreme Court opinion was leaked, they felt a need because of what they do, and what they stand for. The CEO felt a need to come out and make a statement in support of women's ability to manage their own health and wellness. And I don't think it would have been appropriate for any number of companies to necessarily come out with a statement about Roe v. Wade, but when your whole reason for being is tied to women's health I think it's completely appropriate. And you have to come out with a statement on that topic when that topic is raised.

Jon Iwata: Part of the Yale work I'm doing on the how of stakeholder capitalism I've talked to a lot of CEOs on this very question. And they say they don't have a very good mechanism in place, process, method, framework, or even philosophy. I asked them, how do you decide today? And they said, it's not good either we react because the pressure builds, or the voices get loud, or some member of the executive committee pounds their fist on the table because they personally feel something needs to be done. Or not. Or the CEO decides because of their own worldview and their own values. Ultimately, it's a question of materiality. Materiality by its nature is judgment of relevance and significance. It's not a rule. And what's material to the company? The company's business. The company’s risks. What's material to the stakeholders who matter to the company? David Kenny [CEO of Nielsen] came to Yale last week and was asked this question by the MBA students and David's said on certain issues it's clearly material to Nielsen, his company because they stand for trusted data representative of America. And on the census controversy, on voter access, they clearly feel this is material and they will speak out and take very strong stands and file court briefs and everything else. But on a whole range of other issues, including the Supreme Court leak on abortion, which happened the same week David went to Yale. He said, ‘this is a matter for employees, between Nielsen and employees. And we will likely not say something publicly because it's not material to Nielsen's business model.’ and the MBA students for what it's worth seem to accept that as a very reasonable approach.

Chris Caine: Yeah, I think the scope that a CEO has to make those judgments around, geographically as well as topically, it's just becoming increasingly more complicated, more complex. Let's take, for example, the things we've been talking about with Disney and Florida and Roe v. Wade, clearly impending, emerging issues in the United States. But what is the responsibility of a global company where you're operating across the globe and we have existential challenges, such as climate change and, the protection of the Amazon Rain Forest? How far does one have to go in order to be true to the values, be authentic, be consistent with something that is as relevant to everybody in the world as that, yet as geographically targeted as being maybe outside your corporate headquarters country. The functional expertise that needs to exist to have a management model for those kinds of decisions, Jon, as you've just alluded to in your questions to CEOs, do those corporate models, management models exist today? From your perspective, do companies have a new management model from which to deal with this both expansive global environment of issues, but then also the speed at which, and the calibration of which to know when to engage and when not.

Shelly Lazarus: I'd say not at all. Jon's characterization of how most companies, global or not, are operating these days is completely consistent with my own experience. I think we're in a new time and I think figuring out how we're going to navigate through these issues. I think to another point Jon made before the most important thing is consistency. You may be able to interpret, have some local issues that you have to deal with, but there should be if you're a global company, there needs to be a global set of values and beliefs that everyone buys into and focuses on. I can't think of the number of times that a global company has gotten in trouble because some local person has made a statement, again back to social media where we're all on all the time, and everybody's reading what everybody says, when someone in a particular country, a particular person in a particular country says something that just is inconsistent with what everyone believes the company stands for or takes a position that is uncomfortable for other people in the world. I think the way to deal with it is back to the question you asked Chris, which is, do we have a process in place? Do we have a system? How are we going to handle it? Who's going to decide? And I think these are questions that have yet to be answered in most companies that I know.

Chris Caine: CGE was founded on the principle of trying to help CEOs move to the future and have management best practices for operating in a global economy. Jon, if you had to think about the expertise that would be required to stand up a function inside an enterprise to deal with this accelerating and expanding rubric that a CEO has to deal with regarding societal issues and brand values and, company positions, what would be the skill set that you would go out and find to populate a new function within your company to address that?

Jon Iwata: Well, I've been asking them that. Then the list is a combination of soft skills and hard skills. On the soft skill side, the words empathy, active listening, comes up a lot. On the hard skill side, I hear a lot about creative problem framing, creative problem solving, because they see this as, CEOs like to solve problems, but often the problem comes by stakeholders. So, you have the customer. And then you have employee. You have government and regulators, and so forth and we're well-organized to deal with stakeholders, but when they come together and often conflicting interests, we aren't organized in a way that is helpful here. And we're not used to doing that and across multi-stakeholder world. So, bringing it together, maybe you can't expect one person to possess all of these skills, but you can commission a team. You can assemble a team that doesn't just play defense, meaning look out and what issues can bite us hard, and work out our position statements. They could certainly do that. But the team that also thinks about the differentiation of the company and the brand, the unique capabilities of the company, the competitive advantages, the comparative advantages, its history, its values, and looks for places to lead. I will just give a few examples here. Apple could have been playing defense on privacy and data because they can evade that. They can't de-select that as an issue. They could play defense, let's lobby, let's take positions, let's fight regulation, but whatever motivated them it certainly does appear that they found a space that serves many stakeholders’ interests. And they are doing more than issuing a statement. They are rallying their platform, their brand, their ecosystem, their influence to take a leadership position in an area, data and privacy. And I think a team that understands stakeholder interests, that frames problems differently and solves them creatively, I think a lot of CEOs said, that's what we need.

Chris Caine: I want to thank you both for sharing your insights and your experience with us. At the end of our program, we like to give our listeners some strategic insights to think about. We call it our emerging critical issues last minute. And so, let me ask you both, in one word or one phrase, to tell us what emerging issues do you see on the horizon that a CEO needs to put on their radar?

Jon Iwata: Algorithmic safety. Everyone's used by now to data and privacy and cyber attacks and because of everything we've gone through in the past 25 years with the collection of personal data and what can go wrong with that, also the benefits of it. And then there is AI and people jump right to the future and have these fears about sentients and Skynet and destruction of all jobs. I would say there's something much nearer term here that represents a real opportunity for business and societal value, but also a lot of problems, a lot of threat to trust, a lot of harm, and that is algorithmic safety. So, all of these algorithms that are taking advantage of all that data, they are determining who gets hired, who gets the interview, who gets the credit score, who gets the offer, who gets into the university. All of these things are being determined, not by some futuristic AI. It's being determined by algorithms. And CEOs, if they’re not on top of this, they will be in about 20 minutes.

Chris Caine: Shelly?

Shelly Lazarus: I would say the nature of work, broadly. I think the conversation about where we're going to work, how we're going to work, what we're going to do as we work. We are at the very beginning of that conversation. I think one thing that COVID has certainly done is open everyone's minds to what it actually means to go to work. And I think the divide between older people and gen Z is huge. One thing I'm pretty sure of, they're not going to be a lot of people in the office on Friday anywhere. But where we go from there, I think is going to be a critical conversation. I've heard young people say that they never want to come to the office. And they don't know why they have to. And so, if Facebook's going to give them the opportunity to work remotely all the time, then they're going to go with Facebook. Now, that's an extreme example, but I think dealing with this topic, it's the topic for today. It's the topic for six months from now. And I suspect it will still be the topic for five years from now.

Chris Caine: There you go. Our final minute: algorithmic safety and the nature of work, the collision between the two. Pay attention if you're a business leader. Shelly, John, thank you very much for your time and insights today. You've been listening to The GET, sponsored by the Center for Global Enterprise, celebrating 10 years of convening global enterprise leaders around the most important business transformation issues.

Episode 3: Business Continuity in Turbulent Times

Air Date: June 14, 2022
Play 25:24

The world is experiencing numerous disruptions–geoeconomics, geopolitical, technology, climate change, etc. While turbulence and disruption are constant pressures on business, throw into that mix the fact that the pace of business keeps accelerating and its clear why companies are viewing data as the engine that powers more and more operations, enabling flexibility and agility. Yet, many businesses struggle to identify and protect the critical information they need for operations. Joining us to discuss how CEOs can ensure business continuity in turbulent times are Samuel J. Palmisano, CGE founder and Chairman, former IBM Chairman, and Karen Evans, Managing Director, Cyber Readiness Institute.

To learn more about the non-profit Cyber Readiness Institute and for free resources and guides, go to BeCyberReady.com.



Chris Caine: Welcome to The GET, the podcast for enterprise leaders delivering timely insights for today's global economy--and tomorrow's competitive advantage. I'm Chris Caine, your host, and President of the Center for Global Enterprise. And today we sit down with Sam Palmisano, founder and chairman of the Center for Global Enterprise and former chairman and CEO of IBM, and Karen Evans, Managing Director of the Cyber Readiness Institute and former U.S. Department of Homeland Security, chief information officer, to discuss business continuity in turbulent times. Sam, Karen welcome.

Sam Palmisano: Thank you for having me today. It's a pleasure to be here.

Chris Caine: Right now, the world is experiencing numerous disruptions from a number of different vectors. Geo-economic. Geopolitical. Technology. Cybersecurity. Climate change, et cetera. While maybe not new to business, disruptions or turbulence are constant pressures on business and its ability to operate. Throw into that mix the fact that speed is an expectation that keeps accelerating in our society and in our daily lives and its clear why companies are viewing data as the engine that powers more and more business operations, enabling flexibility and agility. Yet, many businesses struggle to identify and protect the critical information they need to keep their operations running. Let’s focus on how CEOs ensure business continuity in turbulent times. What are the mistaken assumptions about business continuity that enterprise leaders need to correct? Sam, can we begin with you? The first thing I believe, if you look at this thing over time, that business leaders have been challenged by is the associated costs within their operations to actually create a resilient company itself. And they look at the cost and they look at tradeoffs associated with costs.

Sam Palmisano: In some cases, they'll consider insurance. In some cases, they'll say I'll just risk it. ‘This might not happen to me’, et cetera. The other issue is the smaller companies, quite honestly, that just don't have the resources. It's not even a cost question. They don't have the talent to do the things that are necessary to create a resilient enterprise. In the past, people would say, well okay, I'll take the risk. But that was before they entered into this digital journey in this data-driven enterprise model that you've mentioned in your introduction. Now, the implications of a disruption to their operations relative to their brand and the value of their brand are much more significant than they were in the traditional world. Let's call that the analog world versus this connected, digital data-driven world. It's much more significant today than it was in the past.

Chris Caine: So, we're in a transition phase where enterprises have organized themselves for a lot of decades around an analog capability and yet the digital overlay has been fast and furious, allowing some companies to accelerate even more and other companies having the need to catch up. Karen, thoughts on the mistaken assumptions that organizations might have as they strive to create business continuity.

Karen Evans: We could continue to play on the analog version and pulling that out into a digital version. I think some of the mistakes that are made are plans that you had in place with the previous capabilities that CEOs think that those plans are still going to work and if you don't test those plans, or you're relying on your staff to say, ‘yeah, these plans will work.’ You don't want to be in the middle of a crisis to find out that there's a big gap in your plan. The other part is that a lot of small businesses haven't even thought about what should be in a plan or how do I do a plan or maybe somebody else is doing it and I just have to make a phone call. I think the most critical thing is when the crisis happens, who is the first phone call that you make?

Chris Caine: You each have touched on a couple of decisions that every CEO and every business leader has to make, which is how do I invest my resources and into what? The investment question about business continuity is a really interesting one and one that I think, Sam probably based upon your experience, people have had to make tradeoffs traditionally about where to invest and when to invest. What do you think the essential steps are that you would recommend to a CEO or to a business in order to deal with business continuity in today's world, which is consumed by those vectors we talked about at the beginning?

Sam Palmisano: Well, first of all, Chris, the vectors that you've described are much more dramatic than they ever were in my career as a CEO. So, let's kind of level-set there. We have many issues to deal with, but not nearly the ones that our colleagues now are managing through. So, I have great respect for the balls that they're juggling every day. But I think fundamentally it depends on which element of your company. They are different. If you take supply chains, which are fundamentally key, especially as you get to this business to consumer model where you want to meet the service levels that people have accomplished in retail or home delivery and those sorts of things, you need to really look at your supply chain from a perspective of redundancy. Historically, people optimized around scale. So therefore, i.e., China is a manufacturing factory of the world. Forget the geopolitical and mentions associated with what I just said. In today's world, no one would want a centralized response to their key suppliers. You'll want to have some distributed model for multiple reasons. One is obviously resiliency. In case you do get into disruption, which could be climate by the way, it doesn't have to be some geopolitical issue. But in addition to that, you want to be closer to the actual markets that you're serving. Because if you think about the service levels, people are going to be trying to deliver as they make this transition to a data-driven enterprise, you need to deal with the geographic distance, not only in a pandemic, but just a normal operation, almost what we call in Telcom, the last mile. So, when you look at supply chains, it's a combination of those two. When it comes to your IT infrastructure, again, it's different, right? Because you should have always built into your IT infrastructure resiliency and redundancy and backup and recovery. If you were a bank or a large retailer, you were expected never to go down, never to fail. So large enterprises obviously have done that within their IT infrastructure. However, small businesses don't have the resources to do those sorts of things, but they can partner. They have the flexibility to partner with people who do have the resources. In today's environment, let’s talk about cloud. There are large cloud providers, whether it's Amazon, Microsoft, Google, IBM, where a small company could get some level of redundancy and availability that might be hard for them to achieve on the own. I mentioned those two different points because in ways they're different. One is one you would actually optimize your own supply chain with your partners. And the other was, if you don't have the resources and you can't do it yourself, then find a partner and do it with them.

Chris Caine: That's great. Karen, you lead the Cyber Readiness Institute, and maybe you can tell us a little bit about that, but clearly, cyber readiness for small and medium businesses is different than a large enterprise. How would you advise small and medium business owners and CEOs, to take steps to build their resilience and their business continuity either before or after a problem arises?

Karen Evans: Thanks for asking me about, CRI, the Cyber Readiness Institute. I am very excited about the opportunity to work with small and mid-sized businesses, especially as it relates to business continuity because I think the opportunity is there. Sam hit on a couple things that I thought were really critical about the geographical locations of where small businesses are and how their distributors work. I've had an opportunity as I've taken on this role to talk to some small businesses that when COVID hit they didn't even realize that some of their distributors for their products came from overseas. When they were trying to buy from a local, mid-sized person, that person was getting their products from overseas.

Karen Evans: They had to re-engineer the whole piece because they didn't even realize how a lot of this was working. Sam hit on this too, and I started smiling. I'm sure you could see it when he brought up the last mile. Those of us who have been in this forever, know that you can have these great plans, but if you can't hit that last mile in order to be able to deliver the service, if the goods can't get there, if the telecom can't get there, or if the service can’t get there, these plans are for naught. I think a lot of what's happened, and where CRI really plays, is trying to take all these really complicated issues and make it pretty simple for them to be able to say, ‘Hey, what is your key service? And who helps you provide that? Is it a local distributor?’ Everything that you need to make that service work. Do you know where it comes from? And if you don't, then here are some questions you can ask the people who you are buying these things from in order to be able to have what Sam said is more resilience, like backup. How does this work? And how long. Can I actually continue to run my business in an alternate fashion if all these other things stay down because they're beyond my control? And then what am I going to do to re-engineer the business?

Chris Caine: There's so much on the minds of CEOs and small business owners about risk. Clearly everybody is dealing with third parties, whether it's your supply chain partners, your distribution, colleagues, or your customers in some cases. So much risk comes from third-party relationships how can organizations better manage their third-party risk? If there were two things that you would advise a business owner to do tomorrow, relative to managing or beginning the process of managing, what would they be?

Sam Palmisano: Think about it this way. You should view your third parties no longer as vendors. You should think in today's world, of your third parties as an extension of your enterprise. Let's call that a partnership relationship. So, since they are an extension of your enterprise, all your internal processes and procedures that you have for your internal organization relative to resiliency and security, and those sorts of things, you should apply through procurement to your partners. And that's whether it's the go-to-market model, Karen reference distribution, or is the supply model. I talked about supply chains, but regardless of the front end or the back end, if you think about your business, think about this as a partnership. Now, if they're a partner, an extension of your organization, you're going to have in place certification and audit just like you have for your entire enterprise. My point being, is if you deal with them as partners and they're extensions of your brand and what you represent to your customers for services into the marketplace, you'll reorient yourself to how you deal with them versus just having procurement drive costs out of their businesses to give you a better price. You should think about this strategically now versus perhaps how you thought about it in the past. It's no longer just a cost agenda because it drives your brand and your revenue model. If you can fulfill the promise that you're offering through this extension of the ecosystem.

Chris Caine: So, it's no longer a transaction. It's now an ongoing relationship that is, conveying data and, other information critical to your operations.

Sam Palmisano: It's a transformation of procurement. If you think about historically, we've all done this. I mean IBM is an example of that. We all centralized procurement to drive costs out of the business through our extended resources that we worked with every day. And we had thousands of suppliers around the world. Thousands of go-to-market models, partners around the world, but it was a cost driven model. You have to reorienting yourself. Think about it, as we talk about it at CGE, the Frontside Flip. It's now your brand, your customer, and your revenue model. And when you think about your revenue model, you can't afford an outage, or you can't afford some breakdown in those processes. So, if you strategically rethink this, you'll have a completely different orientation and approach.

Chris Caine: Yeah, that's really great. Karen?

Karen Evans: I'm listening to Sam and I'm thinking of applying some of this stuff from government, but then turning around and saying, okay, so how does a small business CEO, actually make this happen? Because they're the partner, they're the extension. They're part of the business enterprise that Sam is talking about. And how do you get a certain level of assurance from that group where a lot of the innovation comes from, right? And they have a lot of trade-offs that small businesses have to look at, and it shouldn't be cost. Cost shouldn’t be a driver. So, when you take a look at, okay, what is the basic levels? It really comes down to every entity, every part of you is using technology. So, technology is embedded in everything we do. I mean, it's just there. It's a given and it's gotten wrapped around cybersecurity, but it's really about how do I use the technology as a partner.

Karen Evans: And that's what we're talking about in this brand piece. And so, CRI offers four core basic capabilities that we think small mid-sized businesses, if they actually implement our program, that there'll be good business partners in this enterprise. That this relationship is going to be really good. For example, we have passwords, and we talk about passwords, and we talk about multi-factor authentication (MFA). If you blow up, and you look at all of the things that could happen to a supply chain or an enterprise, it comes down to somehow somebody got a phishing email, right, which is another area that we look at, and they thought it was real. And some of the internal information from one of your suppliers or partners gets passed onto an adversary. And that adversary now can capitalize off of that and we can have a ransomware attack. And now the whole relationship, that whole ecosystem, ends up being disrupted. Some of the simple things which, in the technology world, they call cyber hygiene, but in the business world, to me, it makes sense on how you set things up. So why wouldn't you want to have good passwords? Why wouldn't you want to train your people? Why don't you want to have this culture of a cyber leader or risk management within a small business from the get-go so that you can end up being a good partner with the larger companies in that supply chain. Cause you could end up being the one with the most innovative, coolest thing that one of our partners needs to have in the supply chain and if you don't have these basic four core pieces down that we call being cyber ready, you could be hacked. You could have a ransomware attack and now you're shut down. You have no revenue and you've affected everybody upstream.

Chris Caine: When I hear you both talk and recommend action steps for business leaders, what I'm thinking about is before we were all connected through digital technology, every business knew what to do. If they had a fire, if the doors that didn't close. They knew what to do in the physical world. What I hear you saying is do the same kind of thought process you did when you were just operating in the physical world and bring it to the digital and connected world and do it as quickly as you can because you have more reach, but you also have more risk. We've seen recently, extreme examples of economic disruption based upon business incontinuity, colonial pipeline and other incidents that have come from the cybersecurity space. The cost to the economy is one thing and the cost to the business itself is another. But it's certainly gotten the attention as appropriately it should from government officials and government regulators who are now turning their attention to what can they do through regulation, to address some of these outages. How should business leaders, be addressing and thinking about that emerging regulatory investment that government is starting to establish in their attempts to mitigate the business disruptions that come from some cyber attacks like the ones I've mentioned.

Sam Palmisano: I mean, first of all, governments have a role to protect society and they're trying to do that extremely well. The problem is the capability that government has in many of these areas. As you know, I was on the cybersecurity command center with NSA. I co-chair the Obama commission on cyber security. So, we've been through all their processes and their capabilities. So, I say this as a knowledgeable person, although I was not a government employee. They don't have the capability on their own to establish pragmatic regulation that the business community or private sector can adopt. So therefore, and we recommended this in all of our recommendations, The only way to do this well is to collaborate with the business community. And you can have some research organizations or academia could also be helpful, but if you don't do this together, they'll come up with regulations written by staff lawyers that cannot be implemented. And they might be great from a legislative perspective or maybe an executive order perspective, but they're not practical in the marketplace. So, you need to have that combined entity. My opinion, having worked with all these organizations on definitions of what is a cyber hack back to the old days of the command center and NSA. So, before you regulated, you need the definition, and you can never agree on the definition between a national security threat and just some road kid who's a hacker. So, I would suggest those interested parties to come up with approaches and regulations, to have that skill set come together. I mean Karen has been part of the government as well.

Chris Caine: Karen, you were on the inside. How effective and how efficient is government at actually partnering with the private sector to get outcomes, not just collaboration?

Karen Evans: I knew you guys were going to ask something along these lines. There's a lot that is happening. You should think of the government as an extension of your enterprise, as well as your partnership. The other complexity to this is where do you sit in society as a business? What is your business actually doing, which adds a level of complexity to this? So, if you're in what is designated critical infrastructure, such as Colonial Pipeline, which they were, how does that work? And then if you're not--and I'll give you a great example, and this is what the government is working on--is if you're a power company and you have a Department of Defense base right within the same neighborhood and then there's a hospital and a power outage, and it's not even from a nation state, a hurricane comes through. How do you determine who gets the lights on first? It's a life and death situation. If we're at war and there's a hospital and there's a DOD base there, like how does that work? And so, this gets back to the overall business continuity that we were talking about in business resilience and where do these businesses that are key around hospitals and defense, how do they all play in order to bring up a government service? We see that things have accelerated so fast in Congress. I worked with Congress a lot. They want to be able to say that they did something to help solve the problem. That's really what everybody's trying to get to, is how do we solve this and how do we make the nation better? And it's a global problem because how do we work with all our international partners to be able to do this as well? To Sam's point, there are a lot of people who want to regulate, put things in place. What you're going to end up driving is a compliance culture versus a risk management culture, a partnership culture. You'll have these unintended consequences and I saw it firsthand when we were doing it within the federal government for federal systems. We would have people who would produce the best reports in the world. Everything would look great across the board. And they were the first ones to get hacked. So, you could pay $350,000 to $500,000 for all these documents and you’d be the first one that was hacked because they’re not reflective of the culture that has to change within the organization. And that’s why I get really excited about CRI because it’s focused on the human behavior. And we can say a lot of things about well, we can put the regulations in, and this is how we’re going to measure it, and here’s the penalties we’re going to put on it. But you want information to be going back and forth The one piece I think that Sam hit on is the national security aspect. Private industry is going to see a lot more than the federal government's ever going to see cause they're a global operation, the way that they run things. But what they need is the context around what they're seeing because they can see a whole bunch of, you know, ‘Hey, I'm knocking on a bunch of doors,’ but the government can put the context around that and say, don't worry about that. You might have 50,000 of these particular incidents, but oh, by the way, you've got 10 over here. And these key strategic companies with these key strategic supply chain partners, these are the ones you have to worry about. And that has to come from what Sam is saying is the partnership and the government and industry looking at them as an extension of each other.

Sam Palmisano: If I can just add to what Karen just ended on. The solution to what she was saying was information sharing between the private sector who sees it first and the appropriate government agencies who have responsibility to secure our society. That leads to a whole set of legal issues. Right? They all start with who can I hold liable? If I share the information, am I now going to be sued because I was hacked. Finally, after gosh, 10 years or so, CISA (the U.S. Cybersecurity and Infrastructure Security Agency) now has come up with a way to share information. But my point is, when you take a simple goal was sharing information, when you put it against this matrix of all these disparate parties, you need someone to establish leadership. Now CISA has done that by the way. I mean, I've been retired 10 years, I was on the task force 15 years ago and they finally have come up with a mechanism because that's just the nature of all this independent interaction from multiple parties of interest, you know, litigation firms, trial lawyers, et cetera. That makes simple things like to share information for the good of society very hard to get done.

Chris Caine: I think if we saw one thing from the pandemic and I know we saw many, is the awareness that the interdependence between government and the private sector is so strong on daily life, even when it's not recognized by the respective parties. So, I think what we've been talking about today is we're all in this together. And we have to create strategies and partnerships to get the outcomes we seek, which is a more secure, more continuous, and a more resilient economy and business. We like to use the last minute of our podcast for a quick thought about how to create strategic insights for our listeners. And we call our last minute, the Emerging Critical Issues moment. In one word or one phrase, could you tell our listeners what emerging issues do you see on the horizon that business leaders need to put on their radar? Sam?

Sam Palmisano: Economic decoupling, a phrase.

Chris Caine: That's good. All right. Karen?

Karen Evans: Resilience. Re-engineering, re-looking at your business processes.

Chris Caine: Great. Well, that's even less than our one minute, but we'll take it. And so, I just want to say thank you both for coming today, sharing your insights and your time with us. We'll take the two one-minute sparklers and we'll come back to those in future podcasts. Thank you very much for listening and for being with us today Sam and Karen. You have been listening to The GET sponsored by the Center for Global Enterprise, celebrating 10 years of convening global enterprise leaders around the most important business transformation issues.

Episode 2: Supply Chain Strategies to Manage Turbulent Geopolitical and Societal Developments

Air Date: June 14, 2022
Play 17:37

First, the global pandemic. Now, it’s the crisis in Ukraine and the COVID supply chain developments in China. Supply chains have certainly been getting a lot of attention—and a lot has not been positive. The good news is enterprise leaders understand the critical role of supply chains more than ever, and the public has a new appreciation of how supply chains affect so many facets of daily life. How can we build better, more resilient supply chains that are agile and able to quickly address unforeseen, yet catastrophic events? Samuel J. Palmisano, CGE founder and Chairman, former IBM Chairman and Michael Spence, Nobel Laureate, and former Dean of the Stanford School of Business, join us to discuss strategies for managing supply chain in turbulent times.

To learn more about digital supply chains, go to the Digital Supply Chain Institute (DSCI), dscinstitute.org.



Chris Caine: Welcome to The GET, the podcast for enterprise leaders, delivering timely insights for today's global economy, and tomorrow's competitive advantage. I'm your host, Chris Caine, president of the Center for Global Enterprise. Today, we're going to focus on the topic that most consumers never concern themselves with, and frankly, a lot of business leaders underplayed the strategic bet. Supply chains, specifically strategies for managing critical supply chains in turbulent times. First, it was the global pandemic. Now it's the crisis in Ukraine and the COVID and supply chain developments in China. Supply chains have been catching a lot of attention in the last few years. And a lot of that attention has not been positive. The good news is enterprise leaders understand the critical role of supply chains now more than ever. And the public has a new appreciation for how supply chains affect so many facets of their daily life. The big question of course, is how can we build better, more resilient supply chains that are agile and able to quickly address unforeseen, and in some cases, catastrophic events. To discuss the changing role of supply chains and how business leaders can transform their organizations, we're fortunate to have with us today, Sam Palmisano, founder, and chairman of the Center for Global Enterprise and former chairman and CEO of IBM. And Michael Spence, Nobel Laureate and former dean of the Stanford school of business. Sam and Mike, thanks for joining us today. Sam, how about if we start with you, what do organizations need to do to change their supply chains-to be more flexible and to be able to adjust quickly to these oncoming and very diverse global events?



Sam Palmisano: Well, Chris, thank you. And it's great to be with you today. I’d like to go back quickly on the current design of supply chain. So what drove the current design? It was a cost model and obviously needed a quality in your products, but it was cost driven models. When a cost driven model you're going to drive scale. A larger scale and scale economics should have a lower cost per unit. Therefore you're going to drive your competitive and it was significant. And it all companies drove that and inventory turns and cash management, all those things that are very, very important to a company, or a result that that model drove the design of the supply chains. That worked for decades quite honestly, to get costs out and quality up in the supply chains. What happened is they're not resilient and they're not flexible because you have a scale model. You have a concentration model trying to be in the factory of the world. That's what that results in, in a scale model. So therefore what's going to have to happen is that companies are now designed for resiliency and customer service, which is going to be higher costs, but if they can drive value to their customers, then therefore they could price for that cost because they've created a valued relationship. It could be service levels. I mean, there are models for this today. If you look at retail and everybody loves the fact that you order online and you get stuff the next day, whether it's Amazon or whatever it happens to be, that's great, but that's set the expectation from the consumer of the service levels that are required. So if you could design for agility, which means you have to address the last mile problem, you have to get it from the factory or the distribution center or the port to the house. And that's where the complication is. That's a design. It's not just near shoring, but it's nearshoring for the value you can generate for your customers or your clients, not just near shoring, because you're concerned about resiliency and political risk.

Chris Caine: Mike, you've worked in the supply chain area and its relevance to economic development and economic policy for years. Thoughts on supply chain resilience and the ability for global leaders and company leaders to design more resilient and agile?

Mike Spence: I think we're at the end of this long period in which we used huge amounts of underutilized productive capacity around the world, in the developing countries. and it was cost-driven, and that was deflationary and delivered astonishing, quality products all over the world at relatively modest prices. The relative price of these goods kept declining in a world that saw, rising prices and lots of other areas. Why do I think that's over? Because there isn't another China, because India is not going to go down that road because the African countries, I don't think can, fill in the gap as China, becomes a really a pretty high, middle income country and moves to different things. And finally, we shouldn't forget. then in the course of this very successful development in China and India and Indonesia in a number of countries, we've created tens of millions of new middle-class consumers. So the demand side of the global economy doesn't look anything like what it looked like 25 years ago. It's A) huge and B) it's located in a different place. So I think what's going to happen is first, we're going to have inflation. Second. let me make a prediction just to make this colorful. I think at 10 to 15 years, manufacturing broadly will not be labor intensive and the same will be true of much logistics. If that's true, I expect the movement to be toward the final market, because there are advantages in terms of, knowing your customer and whatnot, that Sam understands way better than I do. So I think that's one of the things that we're going to see.

Chris Caine: We were talking about, the end customer, like you were alluding to that, and Sam, you were talking about the last mile. What's been enabled that we see in many companies that we work with is business model that they've never been able to use before, or never chosen to use before, direct to consumer or direct to customer. And it's almost impossible to have a complete, competitive advantage there if you haven't quite figured out the last mile. And we see that today. So are there innovations in the last mile, Sam and Mike, that you see coming, or. are there barriers that are so strong that a concentrated effort to overcome those barriers would be important for industry to apply itself to,

Sam Palmisano: Well, I think go back to where it was before the cost model, right? And the reason why you did the things that you did, you're trying to optimize the cost, right? So there are four, whether that was logistics or shipping or all elements of that, to get it to wherever it had, whether that was a storage. Or your house, whatever it happened to be. So therefore, as a company, because you were managing your costs, you had partnerships in your supply chains saying you would use distributors or logistics companies or FedEx, UPS, whomever you could outsource to those guys, to do those sorts of things for you. However what's changed? Well, everybody wants to pick on Amazon, but that model has made everybody rethink this, and they've run an end-to-end integrated model. They have the end view of the consumer and the need to the goods that are coming on with, they're not the manufacturer nor case or the aggregator, but nonetheless, you do the same thing with Ali Baba. And then you add the payment system called Ali Pay. You see this end-to-end integration. So my point is that what are the elements of the integration that allowed them to have these service levels, but still maintain competitive costs? Well, in the distributed centers, it's called robotics. I mean, there aren't a lot of people running around in those distribution centers. I know people talk about this as far as unionization. But to me, it was like a semiconductor facility. You gonna utilize 15 people, the 400,000 on IBM. It's all going to be replaced by technology. You get to the efficiency of the trucks and yes, they were large and expensive in the past because you had your scale model, but now you have these prime trucks everywhere. They're going to become EVs and self-driving, back to Mike's point long-term. So there are lots of innovation you can actually get to the manufacturing element of this. So if we were designing, called 3d printing today, which can be done with 3d printing. So you don't have these big manufacturing centers that go to a distribution center that goes to the store or wherever it happens to be, you can print it on the spot and those kinds of things. So Mike's right. They're going to drive huge innovation, lots of productivity, but also disruption. So if you are a traditional company that's not used to operating in this model, it's going to be complicated. It's not an easy transition to get from where they are today. After a hundred years of doing whatever they did to where they need to be like what Mike saying the next 15 or 20. Mike, any thoughts?

Mike Spence: I completely think Sam's got this. Right. And it's important. I would only add that when other code at the world and what's going on in, rejiggering the supply chains. One of the things that strikes me is this global explosion of entrepreneurial activity, around the internet. I mean, we now have an estimated 6.5 billion people on the mobile internet, which we didn't see coming, 15 years ago. And so you've got in a growing number of places around the world, China, India, Latin America, and so on. This is largely digital. Ecosystems that do the financing, that make it possible for people to innovate, in these relatively coordinated data-driven environments and so on. I guess in addition to this integrated model, which is pretty powerful, if I were in the, world of, thinking how we're going to get through to consumers, I'd be trying to think about what's my place, in these growing highly dynamic, digital ecosystems that are blossoming, like weeds, all over the world.

Chris Caine: So you both have talked about the necessity and the power of technology to deliver supply chains that are more agile and more resilient, but where are the gaps in management? Sam, maybe we can talk to you on this first, which is, you know, it's one thing to have the tools. It's another thing to have the management processes and the management aptitude to utilize the tools in the most effective way. Where are the gaps in management of transforming a supply chain? And let's just call it, from my existing model to a direct to customer model, whether I'm a B2B or B2C company.

Sam Palmisano: Well, I think Mike started with it. If you look at these entrepreneurial companies, are you looking at people that have become a very, very successful in this digital data-driven world that's all mobily interfaced with the phone, right? They have a completely different management system than a traditional company, like an IBM or a FedEx, or go through the whole list, General Motors or Ford pick anybody you want. Our management systems are a hundred and something years old, right. And these guys, including the big ones who have scaled, this hyperscalers, whether that's Netflix, Spotify, Amazon, et cetera, they have a completely different management. And their management's designed for speed agility, but heavily skill-based, it's not as vertical. We had silos and those sorts of things. I don't want to go design a management system on the podcast, but having said all that, if you look to the future, if you're a traditional company, you should model the innovators that Mike's alluding to. And don't discount them because they're small. Look at their management system, look at their skills development, look at their processes and controls all those sorts of elements that they have and decide what is right for you. Obviously, you can't just go to that day one, you have a hundred years of history, but you have to make that transition in some way.

Chris Caine: I'd like to, start to close out our conversation about supply chains with government. We've certainly in the last two years, seen governments involved, support intervention and supply chains become very pronounced around the world. Governments are trying to deal with shortages of simple things like toilet paper, all the way to complex things like semiconductors. And they don't want to be in a position of having their citizens and, or their, population, wanting for even the most basic things that we're seeing right now in the United States, like baby formula. So what's needed from government leaders to achieve greater supply chain resilience and efficiency, and maybe what isn't, or shouldn't be needed?

Sam Palmisano: First of all, if you define a supply chain end to end, right? The individual consumer to the actual component, they get to the manufacturer that is the supply chain, and it's global and there's nothing the regional government can do about that fact. It's always been this way. It's not going to change because they give a nice speech or they tweet it doesn’t matter. That's what it is. So if you're going to be able to solve yourself in a crisis, like we've had, you need it and, and view, which means you need collaboration, which means you need information flows, which means you mean data flows. It means you have to be able to deal with some of the privacy implications. All the things that they are doing to regulate their world is impacting their ability to optimize- and the pandemic or in a global disruption, like a war, all those things. So that I'm not saying that they're necessarily not well-intended because as they look at these very narrow elements of this, like information flows and information sharing and data privacy and those kinds of things, there's a need in certain areas, for sure. But at the end of the day, if you are going to optimize your economy, for the world that we're going to live in that requires interconnection and growth for you to sustain your standards of living or to grow your standards of living. You have to have this end-to-end view. Now where I come from, which I know many people have heard me say before, all governments in the world do not have the skills and capability to do these things, whether it's in cyber or information flows or data. It doesn't matter in these current technologies. None of them have the skills or the capability. To have them overseeing things where they don't have the capability or the knowledge is ineffective. And we ought to just understand that. And if we wanted to be constructive about it, we would assemble people who have the backgrounds to work with governments. It's a partnership, but they need to rely on people in the private sector, the academic community, people that have the knowledge, because the things that they design have all these unintended consequences, that when something occurs, it disrupts an element of the supply chain, impact society. And they just don't have the perspective of what's required. You look at some of the things that happened, during the pandemic and all that, it's because the people that were overseeing it had no experience or background. Zero. And you wonder why they can't solve the problem. So you put a bunch of people in the room that don't know how it works, and guess what you get, you get policy, you get stuff. They understand cause they're lawyers, none of it's going to work. Totally. In fact, in many cases it even makes it worse. Michael Spence: The global supply chains are a massive decentralized system. And probably in the past, we never had a way of really understanding all parts of it. But I think now we do, in digital data and I think, Sam's right. the governments don't know how to do this. They don't know what they're looking for. But a coalition of knowledgeable people from global businesses, could come together and agree that this system, is, because of this massive decentralization, is opaque. Right? If you asked yourself in the middle of the pandemic, what would you forecast? How would you forecast the blockages that we've seen, longer duration? Lots of people would have bits and pieces, but they're not assembled. There's no big data system that says this system is starting to get creaky. There’s going to start to be blockages or congestion in the system. I think that's a solvable problem. If it's true. By a kind of global private sector initiative, like the Center for Global Enterprise.

Sam Palmisano: I think you have some research underway.

Chris Caine: I think we do. So before we close, we like to use the last minute or so to give our listeners some strategic thoughts and insights about what they should be considering. We call it our emerging critical issues. So I asked you, Mike and Sam in one word or one phrase, tell us what emerging issues do you see on the horizon that business leaders need to put on their radar.

Sam Palmisano: I would just say, overzealous governments and that means, unfortunately, business leaders have to do something none of us like to do, which is get engaged, in a constructive way. I mean, not a political way. Don't form a PAC and write checks and all those crazy things, don't get in the middle of the West- China relations. That's not your role. You don't understand this stuff anyway. But my point is that in a constructive way, engage or to help these guys try to solve the problem versus trying to just pass some piece of legislation that gets them two points in a poll,

Chris Caine: Mike, one word or one phrase. Michael Spence: I think, what is your digital strategy, really?

Chris Caine: All right. Thank you for those. We'll come back to those in future podcasts. I want to thank you both for your time. You've been listening to The GET sponsored by the Center for Global Enterprise, celebrating 10 years of convenient global enterprise leaders around the most important transformation business issues.

Episode 1: Restructuring Economic Relationships and Business Models Driven by the Ukraine Crisis

Air Date: June 14, 2022
Play 23:41

The Ukraine crisis is driving a restructuring of economic relationships and business models.

With unprecedented economic sanctions against Russia, global business leaders are having to adjust to new rules governing critical economic and business relationships. Is this a permanent reshaping of global economic relationships and financial systems? Samuel J. Palmisano, CGE founder and Chairman, former IBM Chairman, and Michael Spence, Nobel Laureate, and former Dean of the Stanford School of Business, share their views and offer advice for business leaders.



Chris Caine: Welcome to The GET, the podcast for enterprise leaders, delivering timely insights for today's global economy and tomorrow's competitive advantage. I'm your host, Chris Caine, president of the Center for Global Enterprise, and today we will focus on how the Ukraine crisis is restructuring economic relationships and business models across the world. With the unprecedented economic sanctions against Russia, global business leaders are having to adjust to new rules, governing critical economic and business relationships. The Ukraine crisis has sent the oil, commodity, agriculture, and stock markets reeling, and there is the potential for additional sanctions- as well as no end in sight to the conflict. The question business leaders must ask is, “Is this a permanent reshaping of global economic relationships and financial systems?” To share their views and insights for business leaders, we are fortunate to have with us today, Sam Palmisano, founder and chairman of the Center for Global Enterprise and former chairman and CEO of IBM and Michael Spence, Nobel Laureate, and former dean, at the Stanford School of Business to discuss restructuring economic relationships and business models driven by the Ukraine crisis. Sam and Mike, welcome. Mike, perhaps we can begin with you. Are the strict economic sanctions in place today a temporary measure, or are we witnessing the start of a redesign of global economic and financial relationships?


Michael Spence: I would say the best guess is they're temporary. at least in this extreme form. This is an attempt to counter Russian aggression as perceived in the West without engaging in direct military conflict other than by the Ukraine. And we've seen sanctions before and they've been withdrawn. I would be very surprised if these sanctions become a permanent feature of the world. Having said that I don't think anybody should conclude that in the world after the Ukraine war with more and rising geopolitical tensions, is going to revert to the way it was several years ago, that's just not going to happen. And there's an important element of that in potential repeated use of sanctions. At least as long as the United States has as high a level of control over the global financial system and financial flows as it has now.

Chris Caine: So Sam, from your perspective I know as a CEO at IBM, you dealt with sanctions and you had to navigate IBM's business around different constraints and restrictions and post by governments. Do you see these sanctions as temporary, or do you see them as, at the beginning of a restructuring of the environment that business leaders have to operate in?

Sam Palmisano: I’m where Mike is. I think at the end of this, they won't be as severe, but I imagine that in the negotiation, hopefully the war does end at a reasonable timeframe, like soon, but in those negotiations you could imagine there's going to be some easing or adjustment to the sanctions. I can't imagine that the parties are going to accept it as they are. And that will be part of the settlement process. I could be naive about that, but I think that's a reasonable assumption. Now, having made that assumption there's certain things that have occurred that aren't going to, reverse themselves like Europe's dependency with energy. There are structural investments occurring right now in places that you never thought would have occurred To at ports of entry, LNG facilities, billions, and billions of dollars. I've never seen Germany in our experience move so quickly and there's been phenomenal with the pace that they've moved. Once they make those investments and they get alternate sources, whether that's north America or the middle east that's that's not going to be reversed. There's just too much capital investment that's going to occur. Now there are all these complications with that with climate change and all those sorts of things, but they have to, in the short term, solve the energy problem. I also think a significant part of that is as we were looking at this from an IBM perspective as foreign direct.

Sam Palmisano: I mean, there was a lot of foreign direct investment into the Russian Federation and we participated in that benefit. Quite honestly, our business grew nicely there because of foreign investment, more so than the local economy, which was mostly energy driven. So having said all that, I think that companies are going to rethink foreign investment for a very long time. It doesn't mean they won't change, but we always at IBM, we looked at one of the criteria was stability of government. And no one can conclude that the administration now in the Russian Federation is a stable environment where one would like to invest.

Chris Caine: So a number of the largest economies in the world have chosen not to participate or to participate partially in the economic sanctions that the G7 and Europe and the U S and Japan have levied on Russia accordingly. That in and of itself forces CEOs to think about those investment flows in those decisions about where to invest in the constraints that are going to be put on their freedom of operation, because of those decisions that China and India and a couple of other countries have made with large economies in their own. Think about 12 to 15 months out- what advice would you give to CEOs as they grapple with the new operating and financial restrictions and additional fallout from the Ukraine crisis, and adding to that complexity, the economic and political dynamics taking place with China, the world's second largest economy,

Michael Spence: So let me endorse something Sam just said and maybe extend it. I think the trigger for a pattern of diversification that we're going to see over a long period of time is the European energy operation to reduce its dependence on Russian fossil fuels. But I don't think it'll stop there. We are living in a world that's become shocked. Where the shocks are pretty severe. They come from climate change, geopolitical tensions, blockages, and supply chains that are much, much longer than we thought before, et cetera. It's not just in speaking to the leaders of corporations that this'll become probably a strategic priority, but it's going to be back ed up by it becoming a national priority in a lot of countries, and they're not going to sit around and wait for the private sector to decide this. When we look forward, we should anticipate that diversification is going to become an important part of strategy at multiple levels. And then the scenario, we all hope doesn't happen is the one in which the world economy gets divided up into sectors. So what Chris, what you just said is there's a whole bunch of countries that don't want to go down that road, right? China's one of them, China doesn't want to be caught in the spill over of the sanctions from Russia. Nobody sensible in China wants to get cut off from the global economy and global technology and so on. Now that may end up being the outcome

Michael Spence: You know cause they're kind of caught in a hard place vis-a-vis their support of Russia, but they are not violating the sanctions at the moment in a way that would invite the spill over effect. I don't think it's very easy to know there's a very large part of the world that doesn't want to get caught up in some kind of battle between the United States and Europe now on the one hand and China on the other. And I think that resistance will start to have some considerable effect because the individually, they may not be very important to economies, but collectively, as in the Cold War, you can't afford to just ignore them. I guess if I were in the position of trying to make strategy at the corporate level, the first thing I would do is to try to get a sense of which way the wind is blowing with respect to these forces that are dividing the world into sort of two camps and then a bunch of people who don't want to join one of those camps visibly.

Chris Caine: Yeah, we saw the non-aligned movement for many decades during the Cold War. And I guess Mike, I I'd ask you and Sam to think about the concept of an economic cold war. Are we moving into a phase of economic cold war, but before we get to that, Sam, advice for CEOs over the next 12 to 15 months, about how to make strategic investments and decisions?

Sam Palmisano: I think I'm not going to align quite honestly with Mike and I'd come in from a little different perspective. When we were at IBM, when we launched, the world was globally integrating one of the assumptions we made, I used to say this actually publicly in speeches, that as long as the developing world doesn't have a coup or a war and they just engage with the global economy, they're going to grow They did this for decades guys, by the way, and the world became economically interconnected. I don't think anybody wants the world to disconnect completely. It would hurt their own economies. And at the end of the day, I make the assumption that political leaders understand they need economic growth to sustain the standard of living for their people. Now sometimes you hear the rhetoric, and you wonder about that, but I think most of them get it at the end of the day. So therefore they're not going to disconnect. However, and Mike alluded to this, they're going to be areas where they're going to define themselves as areas that are strategically important to their national security. And that's where the tension, in my opinion, is going to occur. And you're going to have now the west, and I can give some examples of this versus really China, because you could argue. India's okay, but they're not China when it comes to investments, some of these future technology areas. So fundamentally that's where the tension I believe is going to occur. So there could be a huge elements of the economies that can stay interconnected. In many ways, China can continue to be the world's factory. In many of those spaces, textiles, materials those kinds of things, consumer products, what have you, but if you get to like quantum computing or artificial intelligence or cyber, those kinds of things or biosynthetics, it's going to be a whole different world. And this is where if you watch semiconductors right now, if you watch what's going on, clearly everybody's reallocating their resources to local supply, redesigning their supply chains. Not only does the U S have a $51 billion act called the innovation act, which was the chips act. There's also a bill in the EU for 40 billion euros to do a similar thing. And there's collaboration going on now between Germany and the U S in ways that they should collaborate in these spaces, because it doesn't make a lot of sense that they were done with investment when it comes to the future of semiconductors. Anyway, you're starting to see this stuff, start to align as my point with our strategic. Semiconductors dependence on Asia, especially Taiwan, et cetera, et cetera. So I don't think it's going to be a huge disconnection. I knew there's a lot of discussion around that. I just think it hurts everybody's economies and therefore their populations if they totally disagree.

Chris Caine: So this concept of an economic cold war, you think we're moving into one- end economic relationships are going to be redesigned to adjudicate a macroeconomic cold war by governments, separating on geopolitical discussions or is that a construct that you don't see materializing?

Sam Palmisano: It depends what industry you're in above. If you were the technology industry, you're going to have to understand these things and the implications to how you align your resources. But if you're in consumer package goods, Yeah, it doesn't matter. If they're going to put a tariff on a t-shirt and a sneaker- I could be naïve, I just don't think so. I do think though, in those other areas are going to protect your intellectual property. They're going to make trillions of dollars of investments and those sorts of things to maintain leadership or get leadership if you're coming from behind. It's not as macro in my opinion, I think it's going to become more micro as you look at this thing over time. Not if I stand back from it and decide how I would play it, if I'm in the technology industry, you're going to have to align your investments to the realities of what's happening here in, in those, four or five segments that I've outlined you can't escape that, right? You can't have the two biggest markets of the world, the two biggest research centers of the world, the technology leaders of the world, deciding not to cooperate and you don't have to adjust, they're going to have to adjust. So the idea of the old days of somebody putting the fabricator, foreign Western company, an IBM or an Intel in mainland China, I think that's over. I don't see that happening

Michael Spence: I agree with Sam. think there are sensitive areas. Some of them are so sensitive and this is not new that for military and defense purposes, they just be cordoned off and controlled. But what's new is this sort of broader tent we have a, kind of a strategic competition underway between China and the United States. And that's not going to go away. That's inevitable. These two countries don't trust each other and their motivations. The goal of China is to catch up and they're doing a pretty good job of it. And the goal of the United States probably should be not to fall behind through under investment. Now there are a couple of ways to play this game. And I'm really just elaborating on what Sam said. There's a relatively benign form of strategic competition in which both countries you know, sort of work at, it's not maybe totally efficient. But if the America competes act the investment in the semiconductors that China made in China 2025 and a whole bunch of other programs, you could get Sputnik like accelerations in the development of beneficial technologies. When it gets ugly is when you try to sort of tie up the legs of the competitor by denying them compete key inputs. And at the moment which way this competition goes, the benign form- or take the American side, for example I think there's a fair number of people in Washington where the international agenda is being driven as far as I can see by national security things way more than in the past, relative to economic considerations. I think there's a subset of people that think you know, we can keep China in the technological rear view mirror for. I don't think that's possible and it's not therefore a reasonable goal. But that doesn't mean we have to help them. I think the best form is as we compete is bottom line is people who have to make significant investment decisions are going to live in a world in which countries are going to put restrictions on them or penalties or change the incentive structure or whatever. You don't get to go in your office and decided on your own anymore and that's just a reality of the way the world works. Chris. you asked the question “ Is there any sort of governance structure of an international kind that's going intervene and steer us in the right direction?” I think the simple answer to that is no. Almost all the international institutions at this point just aren't functioning at a level that would make that possible. Not the G 20, not the UN, not the IMF and World Bank. I think it's unrealistic. So this is going to be decentralized nationalism in a very complex, much more complex global environment than we're used to.

Chris Caine: Yeah, it seems like we have re-entered a period where economic and political alliances are reshaping. And to your point, the multilateral institutions that grew and created international rules for trade and international law have been either atrophying or becoming bypassed by state players, so making the environment for choices by CEOs, even more complicated and to Sam's point, CEOs really have to increase their knowledge of national agendas.

Sam Palmisano: We used to do these global forums with leaders, CEOs, and also state politicians and Government leaders as well annually around the world. But fundamentally the conclusion even back then was the structures as they were weren't working, and dependent upon your view, either they weren't structured correctly and needed to be transformed, or the other view, which was more cynical, was they didn't have the skills. Either way they weren't working, and there was this a yearning for some entity to emerge to do this, what was going to be required in the future. Now this is like 10 years ago-and it's only gotten worse from that point in time. And none of us see that emerging, at least in the business community that I'm involved in, very few people see any entity emerging as we had after World War II.

Michael Spence: One of the things that's going to happen in addition to diversification pressures, I think- which is just self-defense, right- Mario Draghi said here in Italy, we're too dependent on Russian gas. It's just simply true. He described it as imprudent- that was a bit of an understatement. But in addition I think what you're going to see is pressure to bias your relationships, investment, and trade toward what I call reliable trading partners. This is what Janet Yellen calls fringe shoring. And so I think that this does push us a little bit into the direction of the kind of spheres of influence structures that we talked about before.

Chris Caine: Yeah. It comes down to a geopolitical question of do you trust that political relationship you have with another country so that it transfers over to economic assurances and guarantees? So let's talk a little bit about investment flows. You both have talked about certain sectors that are going to be more focused on and restricted than others. Aerospace and defense, new energy sources, artificial intelligence, space, spaces become a huge investment, sector for companies as well a all some to be sector for companies both as well as governments, certainly semiconductors communication technologies all seem to be highly competitive and sensitive sectors yet food and maybe logistics and maybe some of the other more staple sectors, maybe less so. Where do you see investment flows, Sam and Mike, going in these sectors that would be pronounced enough to create new markets and opportunities over the next five years, given the context, we've just been describing?

Sam Palmisano: I'll start with a couple of different perspectives when I know better is technology versus others, there's going to be a massive amount, both in the energy transition, as well as the other areas you've alluded to Chris, and investment and heavily oriented around R and D. There are several proposals, I'm more familiar with the West, well, I knew China spent a trillion dollars in these areas I'm referring to , two years ago alone. That was more than Europe in the United States combined needless to say, so there's going to be a significant amount of investment. The difference today, versus the past, ss that the amount of money that's required to do the research and development for whether it's in say semiconductors or the energy transition, these are significant amounts of money you can't expect the private sector on its own to take that much risk. So therefore there has to be a model created whereby the private sector and the private markets can work with the government, so that there's this comfort level on the risk associated with the investments that are required. You see it every day in the energy transition. Chris, I can get more detailed semiconductors and things, but you see it every day where all the physicists know and the geophysicist know what it takes to makes the transition, the allocation, That capital is a political decision. There could be a rational plan that gets you through this transition so you don't have $6 a gallon for gas, by the way, and same time invest in the long-term technologies that are required, that aren't scalable today to make the transition, but that's just driven by politics. It's not driven by, of the models that exist. So my point is that the way you get around that is you have to create a different model because the current models aren’t working.

Michael Spence: Yeah, I think it's a very important point. This is going to feel different. Maybe we underestimate the importance of the state, even in the United States. In the past, in terms of these upstream investments that produce the human capital in some of the science and technology, then then this extraordinary system we've had turns into things that are useful, product, services and so on and builds on those technologies. So I think that fundamental model isn't going to change, but the magnitude as Sam said, of the government's needed participation, especially if we're in some kind of race with a, with a strategic competitor is going to have to be very large. and you're starting to see it in the numbers in the America Competes Act or whatever, the Senate and the House keeps calling it different things, and it hasn't passed yet. But we're going to get some version of that because that's one of the few areas where we have bipartisan agreement on the energy transition. It is political with an international dimension too. The estimates of the incremental investment that's required to get this done per annum are $3.5 trillion. Now that doesn't overwhelm the global economy, which is approaching a hundred trillion dollars but

Chris Caine: It's a lot of money.

Michael Spence: It's a lot of money. Probably half of it has to come from government, if it's gonna work. Businesses can't deal with the externalities and the risk as Sam said, but we live in a world right now in which productivity trends have been declining. We have significant headwinds coming from a bunch of sources, climate change, China slowing down, supply chain congestion. We have inflation rising, interest rates, in sovereign debt over hangs from the great financial prices and then the pandemic. And you ask yourself the question are we really going to come up with $3.5 trillion a year in that kind of environment and what has to happen? Oh, by the way, I didn't mention aging populations in three quarters of the world's economies measured by GDP. These are pretty big headwinds when you see them together. So I think some of the things corporate leaders have to do is, make a really realistic assessment of the environment that they're going to operate in. Everything I just said. I don't think is a permanent condition, I actually am a bit of an optimist on getting a productivity surge from the digital technologies eventually. But this is going to be a really tough environment for the next half a decade or so.

Chris Caine: Well thank you both very much before we close. We like to use the last minute or so to give our listeners some strategic insights to think about and we call it our emerging critical issues moment. So let me ask you both for one word or one phrase. Please tell us what emerging issue do you see on the horizon that business leaders need to put on their radar?

Michael Spence: So I thought about something Sam said a which is it depends on the industry you're in. And then I asked myself the question what's the one thing that virtually everybody has to deal with? And my answer to that is the energy transition. It's got to be a critical part of it- literally everybody's strategy.

Chris Caine: Sam?

Sam Palmisano: Designed for disruption.

Chris Caine: All right. Very good. Thank you both very much for your time. It was great to be with you and we'll come back to these two topics and our emerging critical issues moment for future shows. Sam, Mike, thank you very much for your time and your insights today. You've been listening to The GET, sponsored by the Center for Global Enterprise, celebrating 10 years of convenient global enterprise leaders around the most important business transformation issues.

The GET is presented by the Center for Global Enterprise, celebrating 10 years of convening global enterprise leaders around the most important business transformation issues.

All production and marketing for The GET is provided by SANDOW Design Group.

Our theme music is by Duzzy Funlop.