IESE Business School

“It’s not about market dynamics,” said Kelly Hu, an associate at China-focused private equity firm Lunar Capital, “It’s about finding the right brands and the right products for the right market segment.”

Hu was speaking at the 16th Fashion & Luxury Goods Industry Meeting, celebrated at IESE’s Barcelona campus this month. The meeting was held in collaboration with ISEM Fashion Business School, and directed by Prof. Fabrizio Ferraro. Founding President of the Industry Meeting, Prof.Pedro Nueno, chaired a panel discussion. On a panel convened to share insights into changing industry trends in Asia as Chinese GDP growth slows were Raul Verdicchi, CFO Japan and South Korea for Ermenegildo Zegna, and Prof. Núria Mas.

Consumer tailwinds, said Hu, are stronger than sentiment suggests.

GDP growth is slowing but remains high at 6.5 percent. China is already the third largest global luxury market after the U.S. and Japan and several large fashion brands are flourishing there.

She listed examples including Moncler Asia with 42 percent growth in 2015 and Valentino China with 30 percent mainland China growth in the first six months of 2015. She also highlighted the case of I Pinco Pallino, the Italian designer children’s fashion brand. Following Lunar’s purchase of a controlling stake in it in 2014, she said, its sales in China increased by 250 percent in 2015.

This is an example of precision-targeting growing market segments, said Hu. Changing demographics are creating a bright future for children’s fashion since the Chinese government announced in 2015 that it was ending the country’s one-child policy. This would lead to 6 million more babies per year and an upturn for related sectors, she added.

Is China on Course for a Hard Landing?

Other factors in the Chinese economic outlook were addressed by Prof. Mas. Rising U.S. interest rates would hurt competitiveness in Hong Kong, due to China’s currency peg to the dollar, but she remained optimistic about the future.

“There’s going to be a soft slowdown, not a hard landing,” she said. The country still had “muscle” thanks to its sound fiscal debt position. China has used its reserves to control the exchange rate but still held reserves worth 35 percent of GDP. This, combined with its strong NIIP (Net International Investment position – the difference between its external financial assets and its liabilities) and current account surplus – gave it “room to maneuver” as it sought to create a new growth model.

Mas also pointed to changing demographic trends and noted the rising number of highly qualified graduates. She highlighted massive projected increase in middle-class families, which would create opportunities for companies.

Japan and South Korea: Looking Inward for Growth

Meanwhile, Japan is also undergoing major changes in its luxury goods market, which is worth 8 percent of the global total, said Raul Verdicchi. Growth has recently leapt to double digits. But what is driving it?

According to Verdicchi, Chinese shoppers visiting Japan are responsible for the surge, which started slowly in 2012 as a result of “Abenomics,” the economic policies of Prime Minister Shinzō Abe.

“80 percent of the market is Japanese shoppers. But it used to be 90 percent. Chinese visitors to Japan increased 80 percent last year,” he said. To adapt to this, distribution changes were needed including Chinese-speaking staff in stores in Tokyo. This Chinese-led growth, however, was not sustainable and companies must look closer to home.

Young Japanese shoppers are not conformists like previous generations, said Verdicchi. They are “sophisticated consumers” and want to define themselves through fashion choices. “The mission is to create, engage and retain Japanese domestic customers,” he added.

A similar challenge could be found in South Korea. Its luxury market, 4 percent of the global total, had been damaged by foreign shoppers staying away as a result of currency exchange fluctuations and MERS virus outbreaks.

“Chinese customers are returning,” he said. “But brands need to engage with domestic customer generation and retention.”

The IESE community around the world wants to express her shock and sorrow at the news of the tragic events that have taken place in Brussels.

Our hearts go out to all Belgian citizens, IESE alumni and students living in Brussels, and all Belgian alumni wherever they may be.

One of the lessons we teach at IESE is that courage and moral strength are vital aspects of leadership and that we must possess these virtues in hard times as well as good. Now is the time to call on these reserves of fortitude and strength. We must not be discouraged.

We pray for those whose lives were so tragically cut short, and for their families and loved ones – that they find the strength to face the future with hope.

In an age when the risks facing companies are becoming ever more complex and imminent, IESE Insight Review dedicates Issue 28 to the growing importance of Risk Management.

The cover dossier, titled “Managing Risks Effectively,” contains three articles tackling the subject from different angles of general management: strategy, corporate governance and stakeholder engagement. As guest editor Josep Tàpies writes, “It would be a mistake for board directors and senior management teams to respond to risk by shying away from their responsibilities.” Instead, he urges readers to follow the advice of these expert professors.

Philip Bromiley (University of California, Irvine) and Devaki Rau (Northern Illinois University) start by helping readers focus on strategic risks, offering nine practical suggestions to make the risk management process more meaningful and relevant, so it doesn’t turn into an empty, overwhelming paper-processing exercise.

IESE’s Gaizka Ormazabal describes the growing pressure on boards to oversee corporate risk and how companies are responding. His research testifies to a growing trend: the likelihood of directors to resign from their positions on the boards of risky firms, owing to the higher personal costs they are expected to assume in the wake of the global financial crisis.

However, running from risk is not the answer, as Witold J. Henisz (Wharton) makes clear in his article on corporate diplomacy. He advocates engaging with stakeholders constructively, highlighting the 12 risks to avoid when doing so.

Building Respected Companies

Elsewhere in the magazine, IESE Dean Jordi Canals casts a vision for making companies into respected institutions, so they contribute to the economic and social prosperity of our nations.

Alejandro Ruelas-Gossi (University of Miami) picks up on this theme. He proposes an alternative approach to business model development in a globalized world, away from low-cost competition and toward shared value based on strategic orchestration – the very thing that players like Airbnb, the subject of the magazine’s case discussion, do so well.

Alex Cruz knows all about this, having made a name for himself as CEO first of the low-cost European airline Vueling and soon of British Airways. It’s not enough to compete on cost with a commoditized product, he tells IESE’s José Luis Nueno in an exclusive interview. You have to deliver more, he says, continuously adapting to the challenges and opportunities along the way.

Finally, Dr. Rafael Matesanz provides further insights into operational excellence, this time from the standpoint of Spain’s National Transplant Organization. How they became No. 1 globally contains valuable management lessons for everyone.

Members of the Alumni Association and subscribers to IESE Insight Review – a quarterly research-based magazine, published in separate English and Spanish editions – can read all these articles using their membership credentials.

Those who are neither Alumni nor subscribers can access the premium content either by subscribing to the magazine or buying the articles.

IESE has launched a corporate website for participants, partners and faculty in Mandarin Chinese.

The corporate web, which showcases IESE’s global portfolio of top-ranked MBA and executive education programs, is now available in four languages: English, Spanish, Catalan and Mandarin.

Heralding the new offering as a move “completely aligned to IESE’s unique global vision, scope and reach,” Luis Go, director of corporate relations in Hong Kong and Taiwan, believes that a new era of “bridge-building” has begun for IESE.

“The new site, which is fully responsive, delivers a real sense of what IESE has to offer – not only across our suite of program offerings in Asia, but as a truly global business school. IESE has been active in Asia for more than three decades, working at the vanguard of management education and building strategic partnerships with world-class institutions such as CEIBS.”

IESE in Asia

IESE is seeing increasing traction in Asia, says Dongmei Song, IESE director of corporate development in China.

“We have a growing Asian alumni community of more than 800 executives. Each year we run a full program of learning sessions for Asian alumni.”

“Furthermore, we offer programs that target international and Chinese C-suite in collaboration with CEIBS, Harvard Business School and Wharton – programs that analyze the realities of doing cross-country business in Asia, and the challenges of setting direction at the helm of a Chinese organization. Common to our all of our program offerings is a broad, global perspective that is distinctive to IESE.”

The Global CEO Program, with a module in Shanghai, exposes CEOs to global trends, innovation that is shaping the global marketplace and new approaches. IESE also offers the Global CEO Program for China which empowers chief decision-makers to navigate across business disciplines and country borders.

The IESE MBA and Executive MBA run modules out of Shanghai, while the Global Executive MBA examines the challenges of doing business in Asia with modules in Bangalore and Shanghai.

MBA students can also travel to Singapore to build bridges with key recruitment decision-makers of companies in Asia with the IESE Asia Career Summit.

“Across our full suite of programs for MBAs, executive education and custom programs for teams and companies we are forging strong, strategic ties with a broad diversity of China and Asia’s top organizations,” says Song. “Our new website in Mandarin is an expression of our commitment to communicating globally, and a milestone in our consolidated and growing presence in Asia.”

After 15 years as Dean of IESE, Prof. Jordi Canals will step down and return to his former IESE position as a professor.

Jordi Canals will continue as Dean with the current Executive Committee until August 2016. At the same time, the President of the University of Navarra, Alfonso Sánchez-Tabernero, will set up an Advisory Search Committee that will help him gather ideas and reflections regarding the future of the school and the profile of the new Dean. The President plans to announce a decision in June, so that the new Dean will start at the beginning of the next academic year.

During Jordi Canals’ period as Dean, IESE has achieved several milestones, such as:

the launch of the fourth section of the MBA Program (2010);
the growth of the Executive MBA in Madrid (2005), in Barcelona (2008) and in Sao Paulo (2012);
the launch of the Global Executive MBA in New York (2014);
the expansion of IESE campuses in Spain: in Madrid (2004) and the new Barcelona Campus (2007);
the New York Campus (2010), the development of ISE and the new Sao Paulo Campus (2011); the Munich Campus (2015);
the launch of new associated schools in Latin America and Africa and the Africa Initiative (2009);
the growth of international executive programs – open and custom- and new executive programs in China, Poland and Kenya.

According to Prof. Canals, these initiatives are “the result of true teamwork between IESE faculty and staff, students and alumni. Moreover, they have a special meaning considering that many of them were undertaken in the middle of a deep economic crisis in Europe.”

Jordi Canals sent a farewell letter to the 44.000 IESE alumni and sponsoring companies around the world, thanking them for their commitment and support.

“It is a great honor to work at the University of Navarra and IESE, an institution with high ideals and the willingness to serve and have a deep and positive impact on other people, organizations and society.”

“Women often ask permission to take a day off, while men announce when they’ll be taking a vacation,” says Teri McCaslin, EVP, Chief HR and Administrative Officer of Continental Grain.

McCaslin was speaking at the Women in Leadership panel at IESE’s New York City campus. She was joined by Subha Barry, VP, General Manager, Working Mother Media; Leilani Garrido (Media AMP '16), Sr. Director, Human Resources, Univision, and Jennifer Allyn, Diversity Strategy Leader, PwC. IESE Professor Mireia Las Heras moderated.

The Humility Trap

Leilani Garrido opened with the observation that when a position opens up at Univision, women often question whether they are qualified to even apply.

Men, on the other hand, will send in their application, even if they lack the right credentials or experience.

“You don’t have anything to lose by trying,” she said. “Assume you’ll learn on the job, the way men do.”

Caught in what Allyn calls a “humility trap,” women are often loath to tout their own accomplishments.

“Your boss isn’t psychic,” she said. “You have to share the wonderful things you are doing.”

She suggests women invite a male “brag buddy” to review résumés or accomplishments on order to make them “bolder.”

Barry recalled how when she was working at Merrill Lynch, she and three female coworkers would meet for lunch regularly to talk about their accomplishments.

“It was then up to the other three to ‘brag’ on our behalf,” she said. Once the word got out, “we all did really well.”

Tackling Prejudice

Clearly much more needs to be done before gender equality is achieved at work, particularly at the executive level, said Alllyn.

Increasing diversity in senior leadership is a means of ensuring that employees of both genders have role models or mentors, she said.

That said, it’s key to be conscious of prejudices.

Women face a “difficult bind,” said Allyn, in that they need to “project both warmth and toughness.”

“While men can typically be decisive and blunt without sacrificing likeability, it’s a much harder feat for women to pull off.”

Barry added that the best leaders, whether male or female, employ empathy sometimes and toughness at other times.

“The trick,” she said, “is knowing when to use each trait.”

Trailblazers

Each of the panelists has dedicated significant time and effort into promoting equality at the workplace for men and women.

Allyn has partnered with HeForShe, a United Nations campaign seeking to get 1 billion men around the world to declare their support for women and girls.

Barry led an initiative to recruit and support women and minorities at Merrill Lynch and now evaluates the policies and cultures of hundreds of companies for Working Mother’s “Best Companies” list.

With limited funding, Garrido launched a competitive leadership education program for talented women throughout Univision.

In her own “male-dominated field,” McCaslin has long advocated for women and believes in “going beyond policies” to find individual answers to the difficulties of work-family balance.

“Come to your boss with a solution that will work for you, rather than presenting him or her with a problem,” she advises.

Last November, Hewlett-Packard carried out a major organizational restructuring – one which left the 77-year old company divided.

The American technology giant, one of the biggest in the Fortune 500 list, split into two completely separate and independent companies: HP Inc. and Hewlett Packard Enterprise.

The former is focused on PC business, printers and devices for both professional and home clients. The latter provides services such as servers, storage and networking to businesses. Each has a turnover of 50 billion euros and annual profits of around 4 billion.

“It was one of the most complex corporate splits to date. We were a company with 200.000 clients and partners, more than 300.000 employees in 170 countries,” explained Enrique Lores, president of imaging printing and solutions of HP Inc.

Speaking to MBAs at IESE, Barcelona this month, Lores is the man responsible for the division process of the legendary Silicon Valley company.

Are Two Better Than One?

Lores says that the split into two different business models – with distinct competitors – is designed to “regain the startup spirit;” a spirit that can be traced to the company’s roots, which go back to a garage in Palo Alto in 1939.

“It was our opportunity to create a new company to last over time. And – at the same time – create value for our shareholders.”

“Now we’re much smaller – and agile. And this means we can change our destiny,” says Lores.

HP had taken some relatively risky decisions in recent years that had taken them off track, he says.

One of these was buying Compaq – a mega fusion that came just as mobiles started to corner the PC market and laptop sales were going through certain challenges.

“We had to reinvent ourselves. It’s easier to address the needs of smaller clients when you’re at the same level,” says Lores.

“We wanted the heart of a startup with the muscles and brains of one of the leading technology companies in the world.”

From Printing Documents to Printing Emotions

One of the short to mid-term objectives of HP Inc. is to reconnect with millennials – a generation born into the technological age – but without the habit of printing. How? By making it possible to do so directly from their mobiles.

“We wanted to put the focus on the emotional experience of printing – not in the impression itself,” says Lores. “It’s about redefining what it means to print and give emotion to the printing.”

“The new generation looks for instant gratification and want to have the printed product in the moment – not when they get home. That’s why we’re exploring new formulas for printing on surfaces other than paper – like skin, or a wall.”

HP have also launched Instant Ink – an online program that aims to combat the two main complaints from users during the hour of printing at home: the price of ink and faulty ink cartons.

With Instant Ink, the user simply registers and for a small monthly fee, HP replaces the ink in their home whenever they need it. Lores shared that this service has grown more since its launch than Netflix or any other online service.

Profitable 3D

The business of 3D printing also presents opportunities for the technology giant. And this fall it plans to launch its first 3D printer. This, says Lores, will be “the fastest, the most precise and cheapest on the market.”

3D printing has revolutionized the manufacture of objects and allows for almost any object to be designed or printed in three dimensions from home. And it poses an economically attractive investment for the household.

With the drop in price of these printers, it will turn into a product of mass consumption – which will revolutionize the printing industry. “This will be the area of HP’s business with most growth in the coming 10-15 years,” says Lores.

“We’ve seen that while family strategy can change over time, the long-term perspective remains the same,” says Jan Frey, (MBA ’83).

Frey – a fifth generation member of the Henkel family – was one of the keynote speakers at the Family Business Conference, organized by IESE’s MBA Family Business Club and Career Services. He sits on the shareholder, personnel and family committees at the German multi-national, a market leader across the sectors of homecare, beauty care and adhesive technologies. And a family business.

Growing a small German family business to a multi-billion dollar, multinational business with a stronghold in three markets is the product of a “certain amount of flexibility,” says Frey.

In 1990, Henkel appointed its first external CEO. And again in 2009, an external chairperson was appointed to the shareholder committee and supervisory board – again disrupting four generations of family leadership and governance.

“You can’t have someone leading the company just because they’re family,” says Frey. “So we decided to try something different.”

This change of strategy has led to exponential growth and the expansion into new markets. It has also freed the family to focus on safeguarding the company’s values, mission and long-term vision.

Long-term Vision – From a Distance

The Henkel family now holds key roles in governance through the shareholder and supervisory boards. Being a family member, however, doesn’t automatically qualify individuals for membership.

To do so requires meeting strict criteria: intelligence, behavior and moral values are all considered to secure the long-term vision of the company.

“Short-term has never been our primary interest,” says Frey. The family still holds the majority of the company shares, but they are not permitted to sell them. “They are protected to ensure the long-term survival of the company.”

The Henkels have also taken a focus on “family governance” to instill values in the younger generations – with the ultimate goal of maintaining them in the company too.

“We have clubs which organize activities to ensure that the next generation learn about the company – and the family – from an early age,” says Frey. It’s essential that we “focus on the long-term vision and mission – and pass it on to the next generation.”

“This sense of legacy differentiates family businesses from others,” says IESE’s Family Business Chair and Strategic Management Professor, Josep Tàpies during the session. For Tàpies, family businesses are the “backbone” of the world’s economy.

“It’s their long-term vision and mission – deploying family governance that lets them do this,” says Tàpies.

Value Creation from Generation to Generation

They are “loyal to the values they stand for,” says Tàpies. And these are: generosity, commitment, humility, service and quality.

Tàpies also tackled the myths surrounding family businesses. “Despite what some people claim, family businesses aren’t all small. And they do last,” says Tàpies.

He used Spain to illustrate his point. Out of the top 2,254 companies with a turnover of over 50 million euros, 1275 are family businesses, of which 14 percent are third generation or more. Only 11 percent of the other companies are over 60.

“How do you maintain a business for over 60 years in today’s competitive market?” asks Tàpies. “It takes long-term vision to cross this gap and keep growing – like that found in Henkel.”

Advice from Frey for any family business looking to “professionalize” the board was to “make a family contract – and get all members to sign it.”

The next family business event at IESE will be the fifth Family-Owned Business Conference, in Barcelona, June 21.

Such is the speed and reach of exponential change in today’s Information Society, that high-tech companies – often cash-rich but more vulnerable to disruption – face the dual challenges of continuous innovation and business model evolution, or “simply disappearing.”

This was the message shared with an audience of IESE MBAs, AMP and PDG participants and alumni at IESE in Barcelona this week by Telefónica’s Chief Commercial Digital Officer, Eduardo Navarro.

You Have to Be Digital

“We realized five years ago that we would need to evolve our business model to keep pace with our changing world. The options were laid on the table. Telefónica could take the route of becoming an infrastructure company like Cisco. Or we could go down the path of becoming a pure Internet – an over-the-top – company.”

The third option was to become a digital telco, leveraging the connection, skills and people to deliver connectivity and more.

“We saw that we’d need to shift focus from offerings like voice to connectivity to service the shift to consumption and generation of data,” says Navarro. “It went beyond connecting people, as Nokia found out, to connecting things. And in this new era the agents of change are the Internet, cloud, big data, social networks and smartphones. Connectivity has become our new oxygen.”

Meeting this demand has meant replacing voice with new products like data, fiber, over-the-top television; a combination of “sustainable business without much growth” and innovation.

“People expect connectivity and pay a fee every month, but we have had to be able to create a layer of innovation.”

And it’s a change in tack that has paid off for Telefónica, where decreasing business in legacy services is “six times less important” than new business growth.

“It hasn’t come without challenges. Traffic growth year over year is at 60 percent which has an impact on capacity. Prices can’t increase – the demand is growing but prices are decreasing.”

Transformation and the capacity to meet continuous challenges is contingent on a “whole organization approach,” says Navarro. “You need to be led and supported by the chairman and the CEO – that’s the key for moving forward.”

What’s up With WhatsApp?

As Telefónica moves into a phase of positive growth, competitive disruption nonetheless remains a constant threat.

“Naturally we have looked at the possibility of WhatsApp replacing text messaging, and we’ve reviewed our options.”

Creating a similar service, says Navarro, is not a problem of technology. This issue is interoperability.

“Leveraging disruptive technology, creating apps, is not an option – whatever we created would need to be compatible with other service providers which is impossible.”

But the emergence of new services leveraging information and the sharing of data is a function of the changing marketplace, he acknowledges.

“We’re moving towards a new model of marketplace using the information society – one that is based on existing services or content that maps to demand. Airbnb is a model that doesn’t use hotels. Facebook is a communication platform that produces no content.”

What will differentiate Telefónica and undergird its value proposition as a company, says Navarro, is trust – and the protection of data.

Data is the New Currency

“New business is about getting information and processing it. In our new world data is the most important raw material – it’s worth more than money.”

The biggest issues facing business of today and tomorrow, says Navarro, are privacy and security.

“Information can only be lost once, as we’ve seen in the headlines this week. So how can we assume our data is protected?”

Navarro believes that telcos are in a unique position to leverage data protection services as a value proposition.

“We’ve understood that our main product is data. Human beings generate data all day, but the question is: who owns it? We take the view that users are customers. Our customers pay us so we have the responsibility to let them know about the data that’s being transferred. Transparency about data is fundamental.”

And in terms of inhabiting the same marketplace as emerging product and service providers, Navarro calls for a “level playing field.”

“We’d like to see that the same services are governed by the same rules, the same protection and the same rights.”

Innovation used to be driven by R&D people in labs. Today, innovation disrupts established business models at an unparalleled pace and scope. And companies need to react.

So says IESE Professor Stefan Stremersch addressing an audience of alumni and friends at the IESE campus in Munich last week. Stremersch pointed to the example of online rental marketplace Airbnb to illustrate his point.

“One in five accommodations in Brussels alone is booked through Airbnb,” said Stremersch. “Its market value is 25.5 billion dollars – making it a real threat to established chains like the InterContinental Hotel Group – worth only 10.5 billion dollars.”

So how can incumbents compete in the new digital order?

“In the age of disruption, innovation needs to be embedded in your company’s DNA,” says Stremersch.

And to do this, he advocates taking a “grassroots approach” to innovation.

From the Bottom up

The sales team, positioned at the bottom of most companies’ hierarchy, is most exposed to customers’ pain points, needs and objectives. Accordingly, these employees have the most valuable insights into which products or services the company could sell in the future. It’s here at the grassroots that innovation should be flourishing.

“Your sales people are the ones who best understand what your customer wants,” says Stremersch.

Grassroots innovation is a pan-organizational approach, leveraging the totality of your talent to crowd source creativity.

As a concept it departs radically from the “old school” or top-down management approach – an approach, says Stremersch that often engenders disengagement, low motivation and what he describes as a “class of followers that does not foster innovation and indeed, encourages your creative people to leave.”

And the advantages of inclusive innovation go far beyond harnessing creativity.

Grassroot Benefits

“It pays to let employees act more freely in their daily decision-making,” says Stremersch.

“Starbucks’policy of allowing employees to decide when and where to give out free coffee to customers is a win-win. Greater autonomy enhances the employees’ customer orientation just as much as his or her self-awareness. The result is increased autonomy and responsibility among staff.”

Then there’s the power of the crowd.

“The crowd is smart: what’s impossible for one is achievable for many. The crowd supplies a diversity of ideas and perspectives that drives quality.”

“Thinking as a crowd means that there are fewer restraints, with everyone freer to explore and express ideas.”

Today’s employees are increasingly looking for meaning in their work. Grassroots innovation is a powerful means of building engagement and a culture of personal involvement in organizations, says Stremersch.

“The team who created the video game, Angry Birds, went through a host of failures before they came up with their global hit. This success stems from a ‘band of brother’s approach and a sense of shared mission that binds co-workers around goals.”

Innovating at the grassroots is, nonetheless, built on process and structure.

Sowing the Seeds to Harvest Value

“You can’t harvest ideas without sowing the seeds and nurturing them first,” says Stremersch.

“And that means step-by-step process to maximize creativity, innovation and implementation.”

Stremersch advises using an IT platform to start your ideation phase to collect as many ideas as possible. Then moving to the maturation phase, which takes the best of the ideas and develops them while training and coaching involved employees. Once the ideas have been honed, the very best ones go to incubation. This is when the board decides which ones to implement.

“Many companies die due to overinvesting in too many projects. Selection is essential,” advises Stremersch.

Examples come from companies like Michelin, who have adopted relatively unorthodox tactics such as “innovation match-making” across their employee base.

In 2015 the German science and technology company Merck won the German Innovation Award for its innovative HR concepts. The jury honored “how innovation is experienced as a bottom-up initiative in the company”.

“Expertise,” warns Stremersch, “can kill innovation.” He advises boards, C-suite and senior executives to “trust your employees to be the change you need to survive disruption.”

With over 20 to 30 years of giving aid to emerging countries, what have we learned? What’s the best approach to eradicate poverty?

“We can see now that giving aid is not enough – we have to focus on long-term development to support developing markets.”

So says IESE Professor Alejandro Lago, co-director of the IESE Africa Initiative, who along with IESE Prof. Antonio Vaccaro addressed this and other key issues emerging markets face, at IESE Barcelona after the screening of the documentary Poverty Inc.

The documentary, which has already been screened in Harvard and MIT, shares narratives from people around the world affected by foreign aid and its unintentional side-effects on emerging local economies and families.

“What we’ve found is that long-term donations don’t work,” says Vaccaro.

As the Academic Director of IESE's Center for Business in Society and of the Social Innovation and Social Entrepreneurship Platform, Vaccaro leads many ventures with MBA and EMBA students to promote entrepreneurship in developing economies.

Act Local for Real Impact

“Imagine if we start donating shoes, what happens to the local cobbler? Who’s going to buy shoes if they’re given for free by foreign aid?” This was one example in the documentary that Vaccaro also uses in his class with second-year MBAs.

“We need to focus on building up local businesses from the grassroots level,” he says.

“The poor aren’t needy,” says Vaccaro. “They can – and want – to produce their own shoes locally,” agrees Lago. And to do this they need local businesses.

So what’s really holding Africa back? Lago says it’s the lack of local leaders. And IESE has been working for the last 15 years on educating leaders in Africa.

“Of course, it’s much easier for me to just go in and teach in Africa,” says Lago, “just like it’s much easier to send shoes, or clothes. But that doesn’t solve the real issue. African professors need to learn how to educate African leaders to build local African businesses. And take them global.”

Three Barriers to Break Down

Lago and Vaccaro identify three main poverty barriers that need to be addressed.

Firstly, there’s the lack of access to finance for mid-sized companies. “And these are the companies that create jobs and growth. Employing more than 20 or more people from the local community really makes a difference to the economy,” says Lago.

“I’ve seen a lot of MBA projects during the Nairobi module run into brick walls when they find that big banks only deal with governments or large corporations. And micro-finance NGOs only work with small enterprises.” This means that mid-sized companies get “stuck” and can only grow if family members or friends lend them money.

Lago points out that we’re all happy to donate money to Africa, for food, clothing or education. “But how many of you are willing to lend money to an African entrepreneur?” He says this calls for a massive shift in mindset and expectations from giving aid.

Secondly, property ownership and land is a very complex and uncertain territory, with virtually no legal documentation or registration of land agreements. “You might be able to buy or rent the land from the tribe’s chief – but without the paperwork, banks won’t lend you money.”

Another example of legislation being out of touch with reality is that “shanty town” buildings can’t be registered, as they are not made from official materials. This means that if your business is in a shanty town, you can’t register it because the building doesn’t officially exist.

The final barrier, says Lago, is the lack of facilities and resources to create businesses within the existing legal structures. Complex red-tape and bureaucracy hinders local entrepreneurs and startups from getting their business ideas off the ground.

So what is the role of aid – and what can you do to really help local communities in emerging markets?

Aid and Economic Development: an Odd Couple?

While the documentary provides a very polarized approach to aid, Lago argues that this isn’t about who is right or wrong. “We should all reflect on why aid and local economic development are incompatible in emerging markets.”

“Saying aid hasn’t worked is as naïve as saying policy hasn’t worked,” says Lago. “It’s not that aid isn’t working – it’s the way we’ve been using it up ‘til now that hasn’t.”

And if you’re thinking of making a donation, advises Lago, you should look at the content of a project and think about how it will affect the local market in the long-term.

“If we want to hold on to our leading position and to our wealth, we need to be able to keep innovating,” says German Chancellor Angela Merkel at the German Research Summit (Forschungsgipfel) 2016 in Berlin recently.

Merkel was joined by thought leaders and experts from business, science, and politics, including IESE Professor Sandra Sieber, at the Summit. This year’s topic was "Digitalization and its impact on business and society" — big data, industry 4.0 and artificial intelligence are changing our world.

Sieber argues that staying ahead of the pack requires long-term commitment.

“The days of business as usual are over,” warns Sieber. “If you’re really committed to transforming existing business models into digital strategies, then it’s time to take an outside-in approach.”

Sieber argues that Germany needs more business leaders prepared to “hack” their business models. And to do that big businesses need a shift in mindset and power.

The Spirit of a Startup

German automobile giant Daimler CEO Dieter Zetsche, says that taking risks and being willing to try new approaches are vital for future success. He pinpoints the spirit of a startup as one of the key elements that traditional big businesses lack.

“For us, digitalization is the greatest opportunity since the invention of the automobile,” says Zetsche.

“At Daimler we’ve launched several flagship startup style projects to develop models for the future of the company.” And employees at Daimler are empowered to question anything.

Sieber advocates that as well as taking risks and trying new approaches, a new – and explicit – culture of accepting failure must be adopted. “To drive innovation forward, employees must be allowed to commit and learn from errors,” she says.

Deutsche Telekom’s CEO Timotheus Höttges agrees that organizations need to shift from “thinking to making” — and accept mistakes as part of the process.

Customer Focused

Höttges sees data sharing and cooperation models as key to a new way of value creation. “Partner models will be yield models. And customer benefits will drive innovation more than technology,” he says. For this, design thinking will be vital for businesses. “That way we can best react to real customer demands.”

Big data and industry 4.0 will change manufacturing processes as well as tighten the relationships between manufacturers and customers, claims Höttges. “This will open up a wealth of new business opportunities for companies that successfully face the challenge.”

SMEs in particular will be affected most by this transformation, as the current issues with digitalization tend to be knowledge and infrastructure based.

The German Digital Agenda

To this end, the German government launched a variety of initiatives under the “Digital Agenda.” This aims to support businesses and create the infrastructure and legislation necessary to foster digitalization and promote digital literacy amongst Germans.

The educational sector will feel the effects of digital, as new emerging concepts filter through all walks and areas of life – from schools and universities to the workplace.

In this context, the role and self-perception of teachers may also change, predicts Sieber. “How, where and what we learn is changing,” says Sieber. “Professors will have to anticipate a lot more and like in the new approach in businesses, making mistakes on their way to new insights will be part of the process.” But all sectors will be affected by the possibilities of the digital age and what is at stake.

Merkel sees that “we are not lacking opportunities but we have to be realistic, the battle has not yet been won.”

The IMF recently tapped global growth projections down from 3.6 to 3.2 percent. And while the figures remain stronger than 2015, longer-term prospects will be threatened by strong economic headwinds.

Responding to this “new normal,” says Dean Jordi Canals, is contingent on adopting a “longer-term horizon:” one that will foster growth.

Canals’ remarks came at the opening of the annual International Advisory Board panel discussions at IESE in Barcelona. Joining him were distinguished board members from public administration, banking and business who each shared their expert perspective on the global economic outlook.

Tapping Into the Parity Opportunity

Patricia Francis, former chair of public sector transformation with the Government of Jamaica, kicked off the discussion highlighting the $28 trillion opportunity that gender parity represents globally. Francis, who was recently appointed interim lead coordinator of the United Nations secretary general's panel on Women's Economic Empowerment, said that the financial and digital inclusion of women could be the “fillip to get sustainability goals going.”

“Between 1990 and 2010 we saw a 28 percent reduction in poverty as a result of greater parity. We need to address challenges like the care economy, the wage gap, economic exclusion to tap into the $28 trillion opportunity that women represent in the global economy. Parity is everybody’s business.”

Chairman of Kerry Logistics and Singapore´s former Trade and Industry Minister, George Yeo agreed. He cited the example of Bangladesh, where “organic vitality driven largely by women is seeing the economy perform better than India.”

Yeo believes that this transformation could well spread across the developing world, driven in part by another game changer: digitization.

Digitization Versus Imbalance

“Access to the Internet is driving enormous transformation at an atomic level. Put a smartphone in the hands of an oppressed women, child or low-caste Indian and the world opens up before them.”

Leveraging digitization to enable contribution across underserved portions of the global community has to be squared, however, against what Yeo describes as “imbalances” in the power and political opposition to change.”

“Transformation means change and it means pain. Governments, with their four-to-five-year life cycles, are at odds to avoid structural reform because it causes pain. But the results – negative interest rates, ‘free money’ – do not promote fairness. They drive inequality and creating problems for the future.”

A Changing Epoque Calls for a Longer-Term View

Looking into the future and the longer-term outlook for the global economy too, was Michel Camdessus, former head of the IMF and governor of Banque de France. The IMF forecast is not “worrying,” said Camdessus. Downside risk, and a “myopic view of the economy” is creating not only a “new normal, but a new mediocre.”

“We have projected growth figures to 2050 of 3.3 percent – rising to 4 percent and 5 percent in Africa,” said Camdessus. However short-term tactics, a failure to successfully rebalance China, emerging non-economic risks might derail growth at any point. These must be addressed, he said, by “multi-lateral response” that will call for “enormous effort.”

“We are changing epoque. And that calls for a long-term view. It means looking into the future. It means reform, it means fighting inequality and it means creating opportunities for women. The markets know this and this is why we are seeing volatility. We must not allow this to become a self-fulfilling prophecy.”

Driving Growth in Emerging Markets

Adopting the long-term horizon was a view shared by a second panel of board members from the world of business.

The keys to driving growth in emerging markets were long-term strategy and an ability to remain flexible, said Ibukun Awosika, chairwoman of the First Bank of Nigeria. That and a “major need to stay close to the local market. And it’s critical to partner with local companies that share your values, regardless of size or reach. You want to associate your brand with another that reflects your corporate culture.”

This was a view shared by Andrea Christenson, member of the advisory at Cementos Molins. “We look to emerging markets for labor supply chain, and working with local partners in management is the key.”

Ermenegildo Zegna, CEO of Zegna Italy stressed the importance of changing tack in a global economy prone to transformation. “We have had to rethink our business model. Digitization is driving change. In China we are seeing 80 percent of sales via mobile.

The key is flexibility and cleaving to the knowledge that in tough times, good companies come out stronger.”

“If you want high returns have to face up high volatility, political, digital and cyclical challenges,” said Francesco Vanni d'Archirafi, CEO of Citi Holdings.

“This requires a long term perspective. Adopting a longer-term view in emerging, you will probably see even higher returns than in developed markets.”

Hans Ulricht Maerki, former CEO of IBM and board member at Swiss Re, agreed and called for renewed optimism. “Emerging markets are high growth markets. Global growth of 3.2 percent and Chinese growth at 6 percent remains a fantastic opportunity.”

Vanni agreed and urged MBAs in the audience to seize opportunity: “Exploit every resource available to you, from learning in a great school like IESE, to being flexible. And keep your outlook long term.”