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Awarding prizes for non-innovation

By Rutger-Jan van Spaandonk

On 6 December of last year, Eskom received the Financial Times Global Energy award for Power Company of the Year 2001 because, according to FT: “Eskom has proved its ability to provide the world’s lowest cost electricity to its customers while developing economical, efficient and safe methods of combustion of very poor quality of coal“.

This remarkable feat has not received much attention, but now that Eskom is using the cost advantage in its advertising campaign, the time has come to examine its claims – and the basis for FT’s decision – in more detail.

In its advertisements, Eskom proudly compares the price of a unit of energy (kWH) in South Africa to that in other countries, concluding that South Africa has the lowest electricity prices in the world. To share their data with you: South Africa – 2.43 US$ cents, Finland – 3.52 US$ cents, Italy – 7.92 US$ cents and the USA – 7.54 US$ cents.

However, if you look at Purchasing Power Parity (PPP is a measure of the relative purchasing power of different currencies; it is measured by the price of the same goods in different countries, translated by the exchange rate of that country’s currency against a “base currency”, the int$) the story looks rather different: South Africa – 6.45 Int$ cents, Finland – 3.52 Int$ cents, Italy – 10.85 Int$ cents and the USA – 7.54 Int$ cents. All of a sudden, South Africa’s electricity is 80% more expensive than in Finland, the lowest cost country.

But is it fair to use PPP numbers, you might ask. Yes, it is. Especially since Eskom in its latest annual report indicates in another, more outdated comparison of electricity prices, that “relative purchasing power of the respective currencies is not reflected in these values”. You would not put in this disclaimer if you felt that it did not matter.

It is questionable whether the so-called lower prices are the result of Eskom’s strategy or competences. The Deputy Minerals and Energy Minister Susan Shabangu has admitted herself that the low prices are the result of cheap coal, previous exemption from tax (Eskom started paying taxes in 2000) and dividends, and the fact that there is overcapacity and the existing capacity has been depreciated already. Other sources claim that the low return on assets of around 11% – which should be closer to 16% to attract foreign investors – also contributes to the electricity prices being lower than they ‘should be’.

So, we should expect the prices to rise when Eskom has to start adding capacity, or attract private capital. Bear in mind that Eskom already asked for a 7.4% increase (2% points above inflation) to be allowed at the end of last year, although the NER only approved 6.2%.

The second claim to fame pertains to Eskom’s skill at combusting coal. Eskom generates 95% of electricity consumed in South Africa (the rest is imported) of which 92.5% is generated by coal-fired power stations.

The last time I checked, scientists were still convinced that the global climate is changing due to the increase of greenhouse gases in the atmosphere, which is largely caused by using carbon-based fuels, and of which coal seems to be the most polluting.

This is the reason why governments, utilities, oil companies, car manufacturers and the likes are looking for alternative energy sources. To foster innovation and encourage these attempts, prizes should be awarded for advances in the field of fuel cells, solar and wind energy, or even nuclear power (such as Eskom’s pebble-bed modular reactor project) – not for better burning of coal.

Clayton Christensen showed very convincingly in his seminal 1995 book “The Innovator’s Dilemma” the difference between firms that focus on sustaining technological change versus the ones that do disruptive technological change. Companies in the first category incrementally improve the technology that form the basis of their business model (such as using coal as fuel in power stations), whereas truly innovative firms break the mould by using completely new, paradigm shifting technologies, and over time ‘creatively destruct’ the businesses in the first category.

What is more, the author shows that the performance of disruptive technologies in the beginning under performs the existing technologies (think solar energy), and that they are only applicable in small and emerging markets (think fuel cells), and thus not attractive to incumbent companies and their customers. Therefore, a company’s decision not to invest in disruptive technology often seems very rational!

All in all, electricity in South Africa is not as cheap as we are led to believe, and we should brace ourselves for substantial increases. Furthermore, Eskom needs to be careful not to fall in the trappings of sustaining technological change. But if they ever do, they will have a trophy from the Financial Times to show for it.

Rutger-Jan van Spaandonk is the founding director of FutureForesight Group, a boutique strategy consultancy. He can be reached via mailto:rj@futureforesight.com.

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Posted in the category: Insight

Assessing South Africa

By Clifford Modiselle

Historically, psychometric assessments have a bad reputation, mostly due to such assessments being conducted under a veil of secrecy as to their purpose and use. Pre-1994, in particular, corporates did pretty much as they pleased, and assessments where frequently used as much to promote certain people inside organisations as to keep other types out.

At the time, no legislation existed to govern the assessment of employees, or the processes and procedures to be followed when conducting such assessments. This changed with the promulgation of the Labour Relations (LRA) and Employment Equity (EEA) Acts in 1995 and 1998 respectively. The EEA specifies that tests must be reliable, fair, accurate and not biased against any group. Around this time the Health Professionals Council of SA also started to make its presence felt and took a strict approach to how these assessments where used by corporates.

The above changes notwithstanding, people are still suspicious of assessments based on previous experiences where they were not told what was being assessed or how the assessment would be used, and were not provided with feedback.

Further, most assessment tools are developed in the US or Europe and are not standardised to the South African population.

There is also still a lack of understanding about how psychometric assessment tools are used and how they work. Individuals are frequently not told what a test is assessing for, many companies do not link these assessments to competencies for specific jobs, and individuals do not know or understand how the tools link to the work environment.

So what are we testing for?

On an individual level, assessments can be used to recruit the correct individuals and ensure that individuals are appropriately placed within an organisation. If an organisation has clear competencies mapped to each specific role it can correctly recruit to fill that role.

Secondly, assessments can be used to identify raw talent. Skills and resources are rare and thinly spread in South Africa. Using psychometric assessments, organisations can identify talent, recruit and train it to fill the gaps it has.

These tools can also be used for self-development and career guidance. Sharing of information about the tests and their outcomes is critical here – individuals cannot know what areas they need to develop if that information is not shared with them in a constructive fashion.

On a broader level, these tests can be used to assess teams – either by revealing which team members are strong in which areas in an existing team and ensuring that future recruitment fills skills gap, or when building a team by providing an understanding of the people involved.

Taking a step up, an organisation can use these assessments to conduct pro-active risk identification and management. For example, assessing an individual before moving them into a high-risk environment to determine their suitability. It can also manage talent effectively by using these tools to identify potential future leaders. A further aspect is cultural mapping and refining, which ensures that individuals being brought into the organisation are suited to its culture and environment.

Lifting the veil

A comprehensive education campaign is needed at an industry and organisational level, from the top down, to demystify assessments tools and the assessment process. Additionally, companies need to communicate more effectively – people come to us for tests not knowing why they’re being assessed. Thirdly, it is critical that testing organisations and HR departments select assessment tools that are appropriate to the local environment and comply with local legislation. These tests then need to be appropriately matched to what is being tested for – different tools are needed for recruitment versus career development. Lastly, and very importantly, there is a lot of work we can do in terms of research and development to develop tests around SA norms that are sensitive to the uniqueness of the South African context. Education systems were not equal in the past and educational imbalances exist, it is important that assessments take this into consideration.

Clifford Modiselle, co-founder and director, Joint Prosperity

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Posted in the category: Insight, News

The Google Story of how Larry and Sergey grew up

Google StorySocial phenomena happen, and the historians follow. So it goes with Google, the latest star shooting through the universe of trend-setting businesses. This company has even entered our popular lexicon: as many note, “Google” has moved beyond noun to verb, becoming an action which most tech-savvy citizens at the turn of the twenty-first century recognize and in fact do, on a daily basis. It’s this wide societal impact that fascinated authors David Vise and Mark Malseed, who came to the book with well-established reputations in investigative reporting. Vise authored the bestselling The Bureau and the Mole, and Malseed contributed significantly to two Bob Woodward books, Bush at War and Plan of Attack. The kind of voluminous research and behind-the-scenes insight in which both writers specialize, and on which their earlier books rested, comes through in The Google Story.The strength of the book comes from its command of many small details, and its focus on the human side of the Google story, as opposed to the merely academic one. Some may prefer a dryer, more analytic approach to Google’s impact on the Internet, like The Search or books that tilt more heavily towards bits and bytes on the spectrum between technology and business, like The Singularity is Near. Those wanting to understand the motivations and personal growth of founders Larry Page and Sergey Brin and CEO Eric Schmidt, however, will enjoy this book. Vise and Malseed interviewed over 150 people, including numerous Google employees, Wall Street analysts, Stanford professors, venture capitalists, even Larry Page’s Cub Scout leader, and their comprehensiveness shows.

As the narrative unfolds, readers learn how Google grew out of the intellectually fertile and not particularly directed friendship between Page and Brin; how the founders attempted to peddle early versions of their search technology to different Silicon Valley firms for $1 million; how Larry and Sergey celebrated their first investor’s check with breakfast at Burger King; how the pair initially housed their company in a Palo Alto office, then eventually moved to a futuristic campus dubbed the “Googleplex”; how the company found its financial footing through keyword-targeted Web ads; how various products like Google News, Froogle, and others were cooked up by an inventive staff; how Brin and Page proved their mettle as tough businessmen through negotiations with AOL Europe and their controversial IPO process, among other instances; and how the company’s vision for itself continues to grow, such as geographic expansion to China and cooperation with Craig Venter on the Human Genome Project.

Like the company it profiles, The Google Story is a bit of a wild ride, and fun, too. Its first appendix lists 23 “tips” which readers can use to get more utility out of Google. The second contains the intelligence test which Google Research offers to prospective job applicants, and shows the sometimes zany methods of this most unusual business. Through it all, Vise and Malseed synthesize a variety of fascinating anecdotes and speculation about Google, and readers seeking a first draft of the history of the company will enjoy an easy read. –Peter Han, Amazon.com

Buy the Google Story by David A Visa from Kalahari.net if you live in South Africa

From Publishers Weekly If Google’s splashy IPO and skyrocketing stock haven’t revived the dotcom sector, they have certainly revived the dotcom hype industry, judging by this adulatory history of the Internet search engine. Billionaire founders Larry Page and Sergey Brin, their countercultural rectitude imbibed straight from the Burning Man festival, are brilliant visionaries dedicated to putting all information at mankind’s fingertips and “genuinely nice people” who “didn’t care about getting rich.” Their company motto, “Don’t Be Evil,” is not just PR boilerplate rendered in fantasy-gaming rhetoric, but a deeply-pondered organizing principle. Washington Post reporter Vise, author of The Bureau and the Mole, and researcher Malseed give a serviceable rundown of the company’s rise from grad-student project to web juggernaut, its innovative technology and targeted advertising system, its savvy deal-making and its inevitable battles with Microsoft. But while they raise the occasional quibble about controversial company policies, they generally allow Google’s image of idealism to overshadow the reality of a corporate leviathan. Worse, the bloated text feels like the product of an overly broad web search: anything with keyword Google-executives’ speeches, seminar talks, informal Q and A sessions with students, company press releases, legal documents, SEC filings, even the company chef’s fried chicken recipe-comes up, excerpted at inordinate and rambling length, drowning insight in a flood of information.

About the Author: David A. Vise is a Pulitzer Prize-winning reporter for the Washington Post and the author of three books, including the New York Times bestseller The Bureau and the Mole. Mark Malseed, who has contributed to the Washington Post and the Boston Herald, has won high praise for his research efforts on Bob Woodward’s recent books, Plan of Attack and Bush at War.

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Posted in the category: Insight, Reviews

South Africa's mobile habits uncovered

It’s official: South African men are bigger talkers than women when it comes to cell phones in their cars. 57% of men interviewed in a major new study admitted to talking on their cellphones while driving, compared to 37% of women.

The study forms part of the year-long Mobility 2005 research project undertaken by independent research organisation World Wide Worx, with the backing of First National Bank, Cell C, Sentech and the Mobile Institute. In the sixth phase of the study, entitled The Impact of Mobile Technologies on the South African Consumer, released today, a nationally representative sample of 2400 South Africans took part in telephonic interviews over a three-month period during the first half of 2005.

“The interviews were conducted with landline users who also own cellular phones, resulting in a sample that represents the upper two-thirds income brackets of cellphone users,” says Peter Searll, director of Plus 94 Harris, which conducted the field work for this phase on behalf of World Wide Worx.

The research unveils fascinating patterns in cellphone usage, and a detailed picture of a very satisfied market.

“One of the most significant findings of the consumer research was that South Africans love their cellphones,” says Arthur Goldstuck, MD of World Wide Worx. “Across half a dozen dimensions we rated, people were extremely satisfied with the impact of their cellphones on their lives.”

The highest satisfaction rating was with the impact of cellular phones on family security: 94.8% of respondents gave a positive rating. Impact on the user’s own sense of security and satisfaction with cell phone’s performance were tied at a 94.3% positive rating, followed by impact on personal life at 93.6%, satisfaction with network service at 93.2% and Impact on working life bringing up the rear, but not by far, at 92.1% positive.

This is clearly the market segment that keeps the cellular manufacturers in business: just over half of respondents said they had obtained a new handset in the past year. Of those who obtained new phones, half again said they would again obtain new handsets in the coming year.

What happened to their old phones? The biggest proportion – 44% of respondents – passed it on to family members.18% kept it as a spare, 14% sold it, 10% gave it to a friend, and 5% simply threw it away. No less than 6% said their previous phone was stolen.

Age was found to be a major differentiator of the way South Africans use their cellular phones, particularly in the choice of contract versus pre-paid accounts. While 33% of all users in this market segment are on contract and 64% on pre-paid, only 8% of those in the 16-19 age group are on contracts, with 90% on pre-paid. This doubles to 17% on contract in the 20-24 age group, with 78% on pre-paid. Contract use rises steadily through the age groups until it peaks in the 46-49 age group, at 40%, and then begins to decline again.

More than half the respondents cited free or cheap phones as the reason for choosing their form of contract, pointing to a dramatic market shift if current regulatory proposals to scrap contract incentives become law. Average expenditure among contract users was R384 per month, and among pre-paid users R134, again indicating the impact that would be made on the market should there be a further shift to pre-paid. Not surprisingly, expenditure is lowest in the 16-19 age group, rising steadily to a peak in the 35-44 age group, and then dropping steadily as age increases – confirming the old stereotype that yuppies are the most enthusiastic cellphone users.

“While an ‘age gap’ exists between revenue and usage, we found that adoption and planned adoption of non-voice applications, like picture messaging, cellphone banking and 3G, are strongest among younger people,” says Searll. “The answer is probably to increase education of cellphone usage and technology among older users.”

But there is one area where older users need no education: leaving cellphones on during meetings. The most guilty group here is the 20-24 age group, with 19% leaving their phones on during meetings, and the percentage declining steadily through the age groups to 10% for those aged 55-64.

Nokia is far and away the first choice of cellphone brand for South African phone users, with Motorola and Samsung in distant second and third place.

87% of respondents have a bank account and, of these, 13% have tried cell phone banking. Almost two thirds of those who have tried it, however, have only done so to request a balance. Despite this, almost half of those with bank accounts believe cellphone banking is safe, and almost two thirds regard it as convenient, suggesting powerful growth in this area in the coming years.

“FNB is very pleased with the take up of our cellphone banking offering, which was launched in March this year. It highlights the positive response and interest in cellphone banking as shown in the research results” says Len Pienaar, CEO of Mobile & Transact Solutions, FNB. “This sets the tone for cellphone banking going forward.”

Finally, about those men on their cellphones in their cars: it’s not entirely positive for women. While men are more likely to keep their mouths moving with their cars, they are slightly more responsible than women in doing so. 72% of men who use their cellphones while driving do so with hands-free kits, while only 66% of the women who talk while driving do so hands-free.

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Posted in the category: Technology

The Masquerade Ball during the Typing Revolution

Naseem JavedIt’s New Year’s Eve. The music and dancing has completely stopped. In silence strange things appear, fancy dressed harlequins and charlatans running around taking cover in confusion; the population at large is already at the gates, screaming slogans, demanding Honesty and Integrity while the Typing Revolution charges on with thunder…. klika-ta-klick, klika-ta-klick,. . What happened? How did we arrive here?

by Naseem Javed

First, let’s go to the dance party:

Corporations, dressed up like Charlatans and Harlequins, have done enough dancing; shareholders are no longer fooled by fancy images, fake identities with silly names, making fun of their investments. Everyone demands honesty from every aspect of the business empire. It’s all about trustworthiness.

In January 2003, ABC Namebank International completed a global survey. A list of 5000 major international corporations was compiled and each corporate name was analyzed for its marketing power, image, ownership and trustworthiness in four categories.

Suitability: how truly a name describes itself and the nature of it’s business.

When names are totally irrelevant to the business, they often mislead or confuse shareholders and consumers alike. This large group of corporate names is an interesting mixture of mumbo-jumbo, strange name identities, projecting weird, non-related, connotations, confusing and conflicting with the actual business itself. These types of names often appear to be intentionally deceptive about the size, quality or marketing reach of the corporation. Dressed up like Harlequins or sometimes as Charlatans with fancy logos, spinning circles, bright color schemes with shooting stars they only create fear and doubt among already burned investors. 83% names failed this acid test of name suitability.

Personality: how a name stands out among other competitors with honesty.

When names are borderline silly, nonsensical, overly creative, too trendy, projecting a short life expectancy, they scare everyone. This group of accidental names only makes fun of shareholders’ money. Business can sometimes be all fun but corporate image making is a very serious business. 47% failed.

Registrability: how the corporation globally owns a name with its identical DotCom.

When names are tangled in trademark litigation worldwide they only become a liability and an expensive burden to the corporation, bleeding marketing and advertising dollars. Companies in this group each have hundreds or, at times, thousands of similar and identical names in the global marketplace. E-commerce, with all its vengeance, only crushes these names on search engines. Customers and shareholders can hardly find the right company at the right time. 85% failed

Respectability: how a name matches its real image with actual goals and results.

When image is credible and matches the projected goals, shareholders feel comfortable and consumers trust the corporation. This small group of shining stars have one of a kind, unique, powerful, global name identity and image. The name clearly identifies with their goals and what they do. This creates respectability and clearly provides them with ongoing trustworthiness. 93% failed

The research classified the corporate name identity of the global multi-nationals in the following four categories:

Deceptive Corporate images appearing to intentionally confuse shareholders. Names projecting false marketing goals or financial capabilities. “Global Monopoly Inc”; “MarchFirst Inc.”; “e-Corporation”; “Global Crossing”; “WorldCom”, “MCom”.

Ghosts: Images originating from the early part of the last century, or prior, projecting futuristic image. Re-invented logos under antiquated names confuse the marketplace. “e-Steel”; “St. Peter’s Online Bank”; “Devine E-Commerce”. “e Eaton”
Ghosts: Images originating from the early part of the last century, or prior, projecting futuristic image. Re-invented logos under antiquated names confuse the marketplace. “e-Steel”; “St. Peter’s Online Bank”; “Devine E-Commerce”. “e Eaton”Alphabetti Soup: Names that simply drown in the soup, making it impossible to decipher the nature of its business, tricking the marketplace. “XPGHRT INC”; “FUGTI”; “AIGTNA”; “BOOBOO INC”; “3 INC”. “HIH”

Stars: One of a kind, unique, powerful, globally protected, with an identical DotCom. This group represents 7% of the 5000 tested. “SONY”; “TELUS”; “MICROSOFT”; “PLAYSTATION”; “FOUR SEASONS HOTEL”. Malpractice of “Corporate Identity” created this accidental naming.

Further compounded when voodoo accounting met voodoo branding. A silly name with a hundred million dollar rollout campaign became the standard. Package designers abandoned the noble profession of corporate naming to other big dollar maneuvers, becoming experts in corporate governance, IPOs, and other strange areas, in the name of branding. Voodoo that is.

Secondly, what about the Typing Revolution?

Right now, we are heavily engaged in a war of global e-commerce where everyone is forced to type absolutely correctly. Particularly a businessname. whitehouse.gov takes you to Lincoln’s bedroom, while dotcom will take you to Lolita’s. So, type in the morning, the afternoon, the evening, in cars, elevators, bedrooms, restrooms, boardrooms, dining tables, picnic tables and sometimes all day in the office too. The same fingers that did all the walking on the Yellow Pages have now learned tap dancing. klika-ta-klick, klika-ta-klick. . . Ole!

  • There were similar major revolutions during the entire last century. Namely,
  • “Print Society” – forced reading and literacy.
  • “Radio Society” – listening, dialogue and music.
  • “Telephone Society” – conversation, spiel, telemarketing.
  • “TV Society” – better sofas, centrality of the living room, visual knowledge.
  • “Computer Society” – organization and planning.
  • “Telecom Society” – globalization and surfing.
  • “Cyber-Society” – decentralization, intellectual-anarchy.
  • “Broadcast Society” Be prepared, it’s next, fueled by Anchoring and Broadcasting from everybasement in the globe. Make-up, lights, camera, action. Hello, CNN.

Today it’s all about searchability controlled by spelling and cognitive associations. Listings have gone through the roof: A two-inch directory of the past is now a two-mile thick book. Masses with their strained memorability are frustrated with typing twisted names with strange dashes and slashes while evolution of brain is simply stuck slightly ahead of Jurassic Park. The brain has no incentive to work hard.

Positioning of a name for maximum impact in global e-commerce is the new game. One hour on the Net takes you through enough artwork created during the entire last century by all the logo shops of the world combined. No one really cares about logos. Name is what everyone talks about, remembers, types, chats about, refers to, calls, praises or curses. Think of Yahoo. Can you recall their logos or colors? How about E-Trade, Amazon or Kazaa? There are hundreds of other businesses that you are already typing in daily, simply by name.

The Morning After The Party:

Forget the hangover, corporate image-makers and brand agencies have only hurt themselves by ignoring the correct methodologies required for proper naming. Agencies asking sub-contractors to hire free-lancers to do their brainstorming and focus groups are over. Exercises to pool 5000 names over five months for few millions to come up with a Phooffs are finished.

Extreme exercises with executives locked up in a boardroom, in the dark, each with a flashlight, making letter signs to form words while the other half tried to decipher, now lost along with their OINGA, BOINGA names.

If this is the end of logo design then what’s the future for Corporate Identity Services? Corporate image-makers have only hurt themselves by ignoring proper naming. Yet, this offers a great leadership opportunity for providing well-executed name identity, under the guidance of “Masters of Naming Architects”. After all, there never was a shortage of great names just lack of expertise and wisdom.

Next: Seven Remedies from The Brand New Laws of Corporate Image

  • Naseem Javed is founder of ABC Namebank International, a world-renowned authority on corporate nomenclature, and author of two major books, he can be contacted via email.

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Posted in the category: Strategy

Technical trends: Mining sector talks innovation

WADIM SCHREINER, managing director of Media Tenor, analyses the findings of the company’s survey into media coverage of innovation.

The South African mining industry is the sector that communicates most frequently about innovation, while ‘giant’ unlisted companies get more media coverage on innovation than JSE companies, according to the Media Tenor/Idea Engineers Innovation Media Survey. The survey delivers an analysis of all statements made on JSE-listed companies, non-listed ‘giants’ as well as the CEOs of listed and non-listed companies in the South African media.

Highlights from the Innovation Media Survey include the following findings:

* Of a total of 270 818 statements made in the media on corporate organisations or industries, 55 733 featured the mining industry (21%).
* This was followed by the banking industry (29 880 statements or 11%) and retail (19 788 statements).
* IT (19 260), insurance (16 574) and financial services (15 574) followed in positions four to six.

Interestingly, industries such as the IT and automotive industries, which both rely heavily on new technology and innovation, did not receive higher than average (1% of total communication) coverage.

The survey highlights the fact that very often successful media coverage of innovation requires a strong driver in the form of a visibly active CEO, as in the case of Sasol. The survey also flags issues around the manner in which innovation, research and development (R&D) and sustainability topics are reported by companies to the media.

R&D is generally a very large investment, and companies need to achieve a secondary return from that investment. If a company reports effectively into the media, innovation can contribute significantly to brand equity and general image in the market place, offering a valuable secondary avenue of return.

However, for this return to become a reality, companies need to seriously examine the ways in which they are delivering innovation information to the media.

If a journalist feels that innovation reporting is largely a matter of company hype, then that says a lot about the type of information he is getting. The survey clearly indicates that the art of communicating R & D and innovation to the media needs to be re-examined. The simple press release – which is impersonal and probably one of hundreds sent to the media – is set to fail. Instead of a press release companies need to engage the media on a one-on-one and truly informative level.

Innovation reporting also needs to focus more strongly on the bottom line link between innovation and R & D drives and the overall company strategy. Businesses need to clearly define why the company has invested in innovation, what the expected return is for the company itself, as well as returns for suppliers, distributors and clients / customers.

The Media Tenor / Idea Engineers Innovation & Sustainability Media Survey performs two distinct functions. On the one hand it clearly lays out the need for an increasing focus on innovation within the South African economy, and within its associated media environment. On the other, it highlights a strong need for companies to re-examine the manner in which they report innovation issues to the media.

South African organisations, be they commercial or governmental, have to focus more on innovation. Innovation is a clear point of competitive advantage for our economy. In this context, the survey shows a strong need for an overhaul of the process companies go through when reporting their innovation objectives and successes into the media. Smart organisations – those that have a clear and definitive approach to innovation – will certainly achieve a considerable secondary return on their investment through their engagement with the media around the topic.

Innovation is a critical component of modern business. Indeed, cross-organisational innovative ability has, in recent years especially, powered the growth and competitive edge of the global economy’s best performers.

Innovation, in all its many forms, is a strategic and operational factor relevant not only to commercial entities, but also to government. In South Africa, in particular, government faces a unique range of challenges when it comes to service delivery that meets the needs of newly democratised country.

Wadim Schreiner is managing director of Media Tenor. He can be contacted by e-mail at wn.schreiner@mediatenor.com or phone him on 012 346 6422.

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Posted in the category: Insight, News

The need for speed

By Arthur Goldstuck

Speed is the hidden factor behind the slow-down in growth of online retail in South Africa. According to latest World Wide Worx report, “The Goldstuck Report: Online Retail in South Africa 2004”, the number of retail web sites has grown from 215 at the end of 2001 to more than 700 at the end of 2003. But the growth in online sales has been nothing as spectacular. Indeed, it is slowing down. Online sales by retailers – which exclude property, cars and travel – increased by 35% in 2003, but are expected to grow by only 25% in 2004. A total of R341-million in online retail sales was achieved in 2003 – a mere 0.14% of the overall retail market in South Africa.

Moreover, the market is dominated by the top eight online retailers, who between them account for about 80% of all online retail sales in South Africa. The dominant online retailers are Pick ‘n’ Pay Home Shopping, Kalahari.net, Woolworths Inthebag, Netflorist, Cybercellar and Streetcar.com, with the MWEB ShopZone dominating the market in online shopping malls, followed by Digital Mall.

Growth for these players is steady, but not as strong as in past years, when an annual doubling of turnover could be expected. However, most of them are healthier than at any time in the past, and most are generally profitable on an operational level.

The report includes in depth interviews with nine key executives in the e-commerce arena, and reveals the strategies behind the success stories in South African online retail. Most of these pinpoint lack of access to decent bandwidth at decent prices as the single biggest obstacle to growth.

There are suggestions among telecoms providers that South Africans can now get all the bandwidth they need, but this is a rather disingenuous standpoint. Firstly, the highest bandwidth that is close to affordable for existing Internet users is 512Mb per second, supplied by both Telkom in its ADSL offering and Sentech in its MyWireless service. But both are in fact expensive – starting at R680 excluding VAT, and that VAT charge is a real cost incurred by consumers, as opposed to the input cost that businesses can claim back from SA Revenue Services.

This is one of the reasons behind the slower than expected uptake of ADSL, which is hugely popular among small business but a tough budgeting decision for consumers. Another factor is that neither ADSL nor MyWireless are as widely available as their marketing messages would suggest. The former, because only certain exchanges support ADSL, and at a certain distance from those exchanges; the latter, because the roll-out by Sentech has to occur on a site by site basis, meaning that it is some years from general national coverage.

Cost and access are the main factors, but there are others, such as the matter of speed. The reality is that neither of these options represents true broadband. According to Broadband Daily, while the Federal Communications Commission says that connections with speeds exceeding 200 kbps in at least one direction are broadband connections, this definition is not accepted by the more technically-minded.

“Some hard-nosed high-speed junkies say that broadband begins at 1.5 Mbps. Some policy advocates, who mostly promote a technology overhaul that benefits tech suppliers, say broadband doesn’t begin until speeds reach 10 Mbps, and is ideal at 100 Mbps,” says Broadband Daily. “The truth is, broadband is relative. For the dial-up user, 200 kbps is broadband, or at least broader band. For the mobile phone user, 200 kbps over a handset is super-fast, at least for now. Cable keeps setting the gold-standard for broadband speed, with most cable companies upping the throughput rates to 2 Mbps, 3 Mbps and even 5 Mbps to keep pace with cheaper, but still-slower DSL competition. Phone companies vow to try to keep pace with cable, but 1.5 Mbps is the prevailing rate for DSL.”

The maximum theoretical speed for ADSL is 8Mbps, with 2Mbps the maximum commercially available in a country like the United Kingdom.

This puts our ADSL service’s “broadband” in neat perspective: DSL services in the United States are offered at three times the speed of Telkom’s ADSL precisely because it is important for the service to be seen as “true broadband” and to be compared to equivalent offerings. Similar access speeds in South Africa require heavy investment in leased lines, at a cost that is accessible only to corporates.

Can we blame Telkom for wanting to make huge profits on phone as well as data services? Of course not. If the telecommunications authorities say that is what they are allowed to do, that is what they will do. But it is time for the telecommunications authorities to understand the damage they are doing to competitiveness in South Africa by not acting more decisively on deregulating the market more effectively.

Online retail may be a tiny market, insignificant economically. But it is strategically important, and it is a benchmark of the performance inhibition that results from the telecommunications framework. A healthy telecoms regime would result in a healthy online retail environment. But it would also advance the health of so many other sectors of the economy, and hence the wealth of the nation.

Arthur Goldstuck is editor of The Big Change and managing director of World Wide Worx. He led the research for “The Goldstuck Report: Online Retail in South Africa 2004”. He can be contacted by e-mail on mailto:arthurg@internet.org.za

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Economic trends: The consumer is still king

By Craig B Pheiffe

Recently released consumer and producer inflation data (for May) was again better than expected, prompting market economists to further reduce their expectations for inflation and interest rates later in the year. The latest monthly Reuters economic poll released on 1 July reflects this revised thinking and market watchers are now evenly split on the prospects for an interest rate hike later in the year. The renewed strength of the rand in late June and early July has reinforced the thinking that inflation will continue to be restrained in 2004 and 2005 and that a tightening of monetary policy will not be required. Tito Mboweni, the Governor of the SA Reserve Bank, has been fairly adamant that CPIX, the Bank’s target inflation measure, will not exceed the upper target limit of 6% this year. Until fairly recently market consensus had indicated a brief period of above-limit CPIX growth later in the year that would necessitate a small measure of policy tightening. The strong rand, some reprieve on the oil price front and the slower-than-expected pick up in inflation so far this year has changed the perceptions of some.

The Bureau for Economics’ (“BER”) Q2 inflation expectations survey, released at the time of the June Monetary Policy Committee (“MPC”) meeting, shows that financial analysts expect the CPIX to average 5,1%, 5,6% and 5,6% in 2004, 2005 and 2006 respectively. These numbers mirror the expectations portrayed in the monthly Reuters survey and indicate that those closer to the markets are fairly optimistic on the inflation outlook. That optimism is not entirely shared by “Business people” and “Trade union officials”, the other two categories of respondents in the BER’s inflation expectations survey. The business respondents expected a 6,6% to 7,1% range for CPIX over the next three years, while the labour respondents expected inflation to average 6,4% to 6,5% over the same period.

While not substantially so, all of these estimates for CPIX are above the upper limit of the inflation target. The Governor places substantial emphasis on inflation expectations as a self-fulfilling inflation mechanism and he remains concerned that increases in labour remuneration continue to be in excess of productivity gains, and this has implications for future inflation. Figures quoted by the Governor in his MPC statement indicate that wage settlements in collective bargaining agreements are expected to average between 7,5% and 8,5% this year. While this is lower than the increase in the average nominal remuneration per worker of 8,6% in 2003 and 9,5% in 2002, it will nevertheless add to the pressures on domestic production prices. Wage increases are just one link in the inflation chain but overly-high inflation expectations do leave the door open for the Governor to tighten policy, even if it is only for a short period to moderate inflation expectations.

The argument of “will he or won’t he increase interest rates” is largely academic. Any tightening in monetary policy in the near future is likely to be limited. South Africans will continue to enjoy a level of interest rates substantially lower than those that have historically prevailed in this country. Following government’s fiscal prudence over the last decade and the introduction of the inflation target, the “Ten years of freedom” slogan can be extended to include the freedom from excessive inflation and highly-restrictive interest rates.

Consumers are enjoying this newfound freedom and are exercising their right to exercise their wallet. Consumer confidence is at an all-time high and this is reflected in the FNB/BER consumer confidence index which jumped to +17 points in Q2 from -10 points in Q1. In June new passenger vehicle sales were 30% higher than in May and 16% higher than in June of the previous year. For the first half of this year, cumulative sales of new passenger cars were 20% higher than over the same six months of last year. The strength in consumer spending has also been manifested in the sales of retail goods. The methodology of collecting retail sales data has recently been revised by Statistics SA but the latest available numbers continue to portray fairly robust sales growth. In January, February and March, real retail sales grew at an annual pace of 6,7%, 7,1% and 5,5% respectively. Consumer borrowing has also increased as interest rates have been reduced and this has helped to finance consumption to a degree. Ultimately, the increased pace of borrowing will have to be reigned in by higher interest rates but for now consumers are enjoying their new “freedom”. Local retailers are consequently just as jubilant.

Craig B Pheiffer is Chief Investment Strategist at Sasfin Frankel Pollak Securities. For information on the impact of these trends on specific shares, contact him by e-mail on; cpheiffer @sasfin.com

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Technical trends: Success depends on more than technology

By Ben van Niekerk

Governance as critical as effective development tools…

As the use of IT within organisations matures, for many non-technical executives, application development still seems a very hit-and-miss affair. There is a frustratingly high incidence of IT project failures, where projects are either abandoned or delivered way over budget and without the required functionality.

It’s rarely the technology that is to blame for this failure. IT managers are often at a loss as to how to improve things when the best available tools are already in use. There is great pressure to buy new technologies to help developers become more productive, and yet coding only takes up 20% of the entire application development lifecycle. Productivity improvements may have little effect other than getting to failure faster if they are not combined with improvements in the process of development.

Research from the Butler Group indicates that the answer lies in the introduction of a formal, documented application development strategy such as model driven architecture (MDA). MDA for the first time brings the concept of governance into the application development paradigm – and governance must be an essential component of any application development process.

Corporate responsibility for applications means that failure is a potentially greater problem than ever before. The United Kingdom’s 1999 Turnbull Report on corporate governance stresses that companies will be liable if they do not consider the internal and external risks to their systems. Directors could be held personally accountable if the potential risks of large-scale application development projects have not been properly assessed, and this provides a clear mandate for formalizing the application development strategy.

The business reality typically faced by application development teams is that the whole IT environment is highly complex, pressures are considerable as business demands delivery within specific time frames, and the gap between technical skill and business acumen persists. In this context, formal methodologies are often seen as a burden on the development process. However, a methodology is an encapsulation of successful development, and therefore can provide a guideline to repeat the success in future.

But methodologies still don’t solve the problem outright. With application development, no two programs are the same, and any method has shortcomings in one or another scenario. This demands that application development teams apply methodologies within an environment of flexibility and compromise to cater for the potential idiosyncrasies of specific projects.

Many of the issues surrounding the development of successful applications relate as much to the people and the process as to the technology that is used to develop and write code. Organisations need to encourage better project management skills in order to control projects more tightly.

Butler Group also stresses that business management and executive sponsorship is an essential contributor to success of almost any project, whether it is the implementation of a packaged application or the development of a new system. However, organisations still devolve much responsibility for IT projects to the IT department; while the actual development requires skilled practitioners, the success of the project is more dependent on clearly conveyed requirements, and executive enthusiasm and contribution.

Application development within the enterprise is complex and requires a dynamic approach that combines available technology with proven methodologies, committed teams comprised of technical and business-savvy members, and a willingness to innovate within the definitions of project guidelines. It’s not an easy combination, but it is one that will greatly mitigate the chances of project failure.

Ben van Niekerk is product manager at Compuware Corporation, a provider of software and technology services. You can contact the South African subsidiary on +27 11 516-2900

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The M&A Effect on Human Capital

By Chris van Melle Kamp

Open, honest and effective communication with all employees from the moment that the merger is announced is imperative because people are often insecure and anxious about their future within the new company.

Any information that can be shared with employees in terms of the vision of the new company will help to limit confusion. It is particularly important to provide key managers with as much information as possible about their roles in the new organisation to promote a greater sense of security. Every effort should be made to maintain an orderly, rational process.

Great products and services don’t develop and sell themselves, and the people behind these successes must be systematically identified and assessed for fit in the new company.

The baseline for all these evaluations is the overall vision and strategy of the new company. The new leadership must include those who are capable managers in their own right and also have the right skills and experience to propel that strategy.

Companies must clearly define and then maintain a steady focus on the strategy of the combined enterprise. Reaffirming the business case for the merger or acquisition, and identifying those who will be important in executing the strategy, will help identify who should stay on board. Once the company has determined who these people should be, it should make an effort to retain them by implementing a variety of retention tools, including compensation and quality of life issues.

For mergers that are subject to regulatory approval, the process can exact an additional toll on a human level as well as a business level. Beginning to merge as soon as the merger is announced is therefore critical to the future success of the combined company.

The culture that emerges from a merger ideally should not represent the legacy of either individual company but should be compatible with the vision and goals of the new company. Defining the vision as well as the culture in which it will be realised in day-to-day operational terms is a complex process. Critical decisions must be made about the more obvious elements that comprise the personality of a company as well as the less obvious idiosyncratic elements, such as dress and communication.

All of the integration activity must be addressed in a merger – all myriad of cultural, systems and compensation elements – must be accomplished efficiently if the new company is to hit the ground running and retain the key people.

From the point of view of building a formidable board of directors – both adding and replacing directors and implementing best practices – a merger or acquisition can present a rare opportunity.

Companies should resist simply throwing boards together to create a bigger board – it is better to properly plan well ahead of time for the board that will best help fulfill the vision of the merger, than to take the path of least resistance early on and then be saddled with the consequences. Planning against a matrix of best governance practices as well as a company’s specific strategic goals is still the best way to shape the new board.

Chris van Melle Kamp is a partner at Spencer Stuart, a leading privately held, global executive search firm at the forefront of transformation in South Africa.
He can be contacted at Spencer Stuart on +27 (11) 880 2217

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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