Vocabulary

to sift the wheat from the chaff – библ. отделить плевелы от пшеницы ( выбрать из текста наиболее важную, существенную информацию)

to jot down - сделать краткую запись

in tabulated form – в колонку

topic sentences – подзаголовки абзацев внутри статьи

to obscure - затушевать, сделать неясным

The New Workforce

A century ago, the overwhelming majority of people in developed countries worked with their hands: on farms, in domestic service, in small craft shops and (at that time still a small minority) in factories. Fifty years later, the proportion of manual workers in the American labour force had dropped to around half, and factory workers had become the largest single section of the workforce, making up 35% of the total. Now, another 50 years later, fewer than a quarter of American workers make their living from manual jobs. Factory workers still account for the majority of the manual workers, but their share of the total workforce is down to around 15% - more or less back to what it had been 100 years earlier.

Of all the big developed countries, America now has the smallest proportion of factory workers in its labour force. Britain is not far behind. In Japan and Germany, their share is still around a quarter, but it is shrinking steadily. To some extent this is a matter of definition. Date-processing employees in manufacturing firms, such as the Ford Motor Company, are counted as employed in manufacturing, but when Ford outsources its data processing, the same people doing exactly the same work are instantly redefined as service workers. However, too much should not be made of this. Many studies in manufacturing businesses have ahown that the decline in the number of people who actually work in the plant is roughly the same as the shrinkage reported in the national figures.

Before the first world war there was not even a word for people who made their living other than by manual work. The term “service worker” was coined around 1920, but it has turned out to be rather misleading. These days fewer than half of all non-manual workers are actually service workers. The only fast-growing group in the workforce,in America and in every other developed country, are “knowledge workers” – people whose jobs require formal and advanced schooling. They now account for a full third of the American workforce, outnumbering factory workers by two to one. In another 20 years or so, they are likely to make up close to two-fifths of the workforce of all rich countries.

The term “knowledge industries”, “knowledge work” and “knowledge worker” are only 40 years old. They were coined around 1960, simultaneously but independently; the first by a Princeton economist, Fritz Machlup, the second and third by this writer.. Now everyone uses them, but as yet hardly anyone understands their implications for human values and human behaviour, for managing people and making them productive, for economics and for politics. What is already clear, however, is that the emerging knowledge society and knowledge economy will be radically different from the society and economy of the late 20^th century, in the following ways.

First, the knowledge workers, collectively, are the new capitalists. Knowledge has become the key resource, and the only scarce one. This means that knowledge workers collectively own the means of production. But as a group, they are also capitalists in the old sense: through their stakes in pension funds and mutual funds, they have become majority shareholders and owners of many large businesses in the knowledge society.

Effective knowledge is specialised. That means knowledge workers need access to an organisation – a collective that brings together an array of knowledge workers and applies their specialisms to a common end-product. The most gifted mathematics teacher in a secondary school is effective only as a member of the faculty. The most brilliant consultant on a product development is effective only if there is an organised and competent business to convert her advice into action. The greatest software designer needs a hardware producer. But in turn the high school needs the mathematics teacher, the business needs the expert on product development, and the PC manufacturer needs the software programmer. Knowledge workers therefore see themselves as equal to those who retain their services, as “professionals” rather than as “employees”. The knowledge society is a society of seniors and juniors rather than of bosses and subordinates.

His and hers

All this has important implications for the role of women in the labour force. Historically women’s participation in the world of work has always equaled men’s. The lady of leisure sitting in her parlour was the rarest of exceptions even in a wealthy 19^th-century society. A farm, a craftsman’s business or a small shop had to be run by a couple to be viable. As late as the beginning of the 20^th century, a doctor couldn’t start a practice until he had got married; he needed a wife to make appointments, open the door, take patients’ histories and send out the bills.

But although women have always worked, since time immemorial the jobs they have done have been different from men’s. There was men’s work and there was women’s work. Countless women in the Bible go to the well to fetch water, but not one man. There never was a male spinster. Knowledge work, on the other hand, is “unisex”, not because of feminist pressure but because it can be done equally well by both sexes. That said, the first modern knowledge jobs were designed for only one or the other sex. Teaching as profession was invented in 1794, the year the Ecole Normale was founded in Paris, and was seen strictly as a man’s job. Sixty years later, during the Crimean war of 1853-56, Florence Nightingale founded the second new knowledge profession, nursing. This was considered as exclusively women’s work. But by 1850 teaching everywhere had become unisex, and in 2000 two-fifths of America’s students at nursing schools were men.

There were no women doctors in Europe until the 1890s. But one of the earliest European women to get a medical doctorate, the great Italian educator Maria Montessori, reportedly said: “I am not a woman doctor; I am a doctor who happens to be a woman.” The same logic applies to all knowledge work. Knowledge workers, whatever their sex, are professionals, applying their knowledge, doing the same work, governed by the same standards and judged by the same results.

High-knowledge workers such as doctors, lawyers, scientists, clerics and teachers have been around for a long time, although their number has increased exponentially in the past 100 years. The largest group of knowledge workers, however, barely existed until the start of the 20^th century, and took off only after the Second World War. They are knowledge technologists – people who do much of their work with their hands (and to that extent are the successors of skilled workers), but whose pay is determined by the knowledge between their ears, acquired in formal education rather than through apprenticeship. They include X-ray technicians, physio-therapists, ultrasound specialists, psychiatric case workers, dental technicians and scores of others. In the past 30 years, medical technologists have been the fastest-growing segment of the labout force in America, and probably in Britain as well.

In the next 20 or 30 years the number of knowledge technologists in computers, manufacturing and education is likely to grow even faster. Office technologists such as paralegals are also proliferating. And it is no accident that yesterday’s “secretary” is rapidly turning into an “assistant”, having become the manager of the boss’s office and of his work. Within two or three decades, knowledge technologists will become the dominant group in the workforce in all developed countries, occupying the same position that unionised factory workers held at the peak of their power in the 1950s and 60s.

The most important thing about these knowledge workers is that they do not identify themselves as “workers” but as “professionals”. Many of them spend a good deal of their time doing largely unskilled work, e.g. straightening out patients’ beds, answering the telephone or filing. However, what identifies them in their own and in the public’s mind is that part of their job involves putting their formal knowledge to work. That makes them full-fledged knowledge workers.

Such workers have two main needs: formal education that enables them to enter knowledge work in the first place, and continuing education throughout their working lives to keep their knowledge up to date. For the old high-knowledge professionals such as doctors, clerics and lawyers, formal education has been available for many centuries. But for knowledge technologists, only a few countries so far provide systematic and organised preparation. Over the next few decades, educational institutions to prepare knowledge technologists will grow rapidly in all developed and emerging countries, just as new institutions to meet new requirements have always appeared in the past. What is different this time is the need for the continuing education of already well-trained and highly knowledgeable adults. Schooling traditionally stopped when work began. In the knowledge society it never stops.

Knowledge is unlike traditional skills, which change very slowly. A museum near Barcelona in Spain contains a vast number of the hand tools used by the skilled craftsmen of the late Roman empire which any craftsman today would instantly recognise, because they are very similar to the tools still in use. For the purpose of skill training, therefore, it was reasonable to assume that whatever had been learned by age 17 or 18 would last for a lifetime.

Conversely, knowledge rapidly becomes obsolete, and knowledge workers regularly have to go back to school. Continuing education of already highly educated adults will therefore become a big growth area in the next society. But most of it will be delivered in non-traditional ways, ranging from weekend seminars to online training programmes, and in any number of places, from a traditional university to the student’s home. The information revolution, which is expected to have an enormous impact on education and on traditional schools and universities, will probably have an even greater effect on the continuing education of knowledge workers.

Knowledge workers of all kinds tend to identify themselves by saying “I am an anthropologist” or “I am a physio-therapist”. They may be proud of the organisation they work for, be it a company, a university or a government agency, but they “work at the organisation”; they do not “belong to it.” Most of them probably feel that they have more in common with someone who practices the same specialism in another institution than with their colleagues at their own institution who work in a different knowledge area.

Although the emergence of knowledge as an important resource increasingly means specialisation, knowledge workers are highly mobile within their specialism. They think nothing of moving from one university, one community or one country to another, as long as they stay within the same field of knowledge. There is a lot of talk about trying to restore knowledge workers’ loyalty to their employing organisation, but such efforts will get nowhere. Knowledge workers may have an attachment to an organisation and feel comfortable with it, but their primary allegiance is likely to be to their specialised branch of knowledge.

Knowledge is non-hierarchial. Either it is relevant in a given situation, or it is not. An open-heart surgeon may be much better paid than, say, a speech therapist and enjoy a much higher social status, yet if a particular situation requires a rehabilitation of a stroke victim, then in that instance the speech therapist’s knowledge is greatly superior to that of the surgeon. This is why knowledge workers of all kinds see themselves not as subordinates but as professionals, and expect to be treated as such.

Money is as important to knowledge workers as to anybody else, but they do not accept it as the ultimate yardstick, nor do they consider money as a substitute for professional performance and achievement. In sharp contrast to yesterday’s worker, to whom a job was first of all a living, most knowledge workers see their job as a life.

Ever upward

The knowledge society is the first human society where upward mobility is potentially unlimited. Knowledge differs from all other means of production in that it cannot be inherited or bequeathed. It has to be acquired anew by every individual, and everyone starts out with the same total ignorance.

Knowledge has to be put in a form in which it can be taught, which means it has to become public. It is always universally accessible, or quickly becomes so. All this makes the knowledge society a highly mobile one. Anyone can acquire any knowledge at a school, through a codified learning process, rather than by serving as an apprentice to a master.

Until 1850 or perhaps even 1900, there was little mobility in any society. The Indian caste system, in which birth determines not only an individual’s status in society but his occupation as well, was only an extreme case. In most other societies too, if a father was a peasant, the son was a peasant. By and large, the only mobility was downward, caused by war or disease, personal misfortune or bad habits such as drinking or gambling.

Even in America, the land of unlimited opportunities, there was far less upward mobility than is commonly believed. The great majority of professionals and managers in America in the first half of the 20^th century were still the children of professionals and managers rather than the children of farmers, small shopkeepers or factory workers. What distinguished America was not the amount of upward mobility but, in sharp contrast to most European countries, the way it was welcomed, encouraged and cherished.

The knowledge society takes this approval of upward mobility much further: it considers every impediment to such mobility a form of discrimination. This implies that everybody is now expected to be a “success” – an idea that would have seemed ludicrous to earlier generations. Naturally, only a tiny number of people can be outstanding successes; but a very large number are expected to be adequately successful.

In 1958 John Kenneth Galbraith first wrote about “The Affluent Society”. This was not a society with many more rich people, or in which the rich were richer, but one in which the majority could feel financially secure. In the knowledge society, a large number of people, perhaps even a majority, have something more important than financial security: social standing, or “social affluence”.

The price of success

The upward mobility of the knowledge society, however, comes at a high price: the psychological pressures and emotional traumas of the rat race. There can be winners only if there are losers. This was not true of earlier societies. The son of the landless labourer who became a landless labourer himself was not a failure. In the knowledge society, however, he is not only a personal failure but a failure of society as well.

Japanese youngsters suffer sleep deprivation because they spend their evenings at a crammer to help them pass their exams. Otherwise they will not get into the prestige university of their choice, and thus into a good job. These pressures create hostility to learning. They also threaten to undermine Japan’s prized economic equality and turn the country into a plutocracy, because only well-off parents can afford the prohibitive cost of preparing their youngsters for university. Other countries, such as America, Britain and France, are also allowing their schools to become viciously competitive. That this has happened over such a short time – no more than 30 or 40 years – indicates how much the fear of failure has already permeated the knowledge society.

Given this competitive struggle, a growing number of highly successful knowledge workers of both sexes – business managers, university teachers, museum directors – “plateau” in their 40s. They know they have achieved all they will achieve. If their work is all they have, they are in trouble. Knowledge workers, therefore, need to develop, preferably while they are still young, a non-competitive life and community of their own, and some serious outside interest – be it working as a volunteer in the community, playing in a local orchestra or taking an active part in a small town’s local government. This outside interest will give them the opportunity for personal contribution and achievement.

Economist

Notes

too much should not be made of this – нe cледует особенно обольщаться этим

the lady of leisure – женщина, ведущая праздный образ жизни

to take a patient’s history – составить (записать) историю болезни пациента

that said – при всем при этом

Ecole Normale – учительский институт, педагогическое училище

сleric – a member of the clergy (men ordained for religious service)

to take off – to begin to grow

paralegal – лицо, обладающее знаниями в юриспруденции, но не являющееся юристом

highly-knowledgeable – высоко образованный, обладающий обширными знаниями

speech therapist – логопед

codified learning process – альтернативный вид обучения (кроме институтов, университетов и т.п., например, с использованием Интернета)

“Affluent Society” – “Общество благоденствия”

rat race – a ceaseless round of rushed, competitive activity (“крысиные бега”)

to suffer sleep deprivation – not to sleep enough

to cram – to study a subject for examination (зубрить); crammer – a book of questions and problems to help prepare for an exam

“to plateau” – to level off ; здесь: затормозиться в развитии и совершенствовании знаний; достичь предела в знаниях

Money Laundering

Banks are doing more than ever before to clamp down on money laundering. But is it enough?

In March, politicians in both Britain and America expressed dissatisfaction over their countries’ efforts to tackle money laundering. An influential committee of British members of parliament said that “the government should take co-ordinated, coherent and properly resourced action to fight money laundering if the United Kingdom, through the City of London, is to maintain its reputation as one of the most important international financial centres.”

In America, meanwhile, a report on money laundering by Senate Democrats criticised some of America’s biggest banks, including Citigroup, J.P.Morgan Chase, Bank of America and Bank of New York. In particular, the report criticised Citigroup, the financial-services giant that has done most to attract wealthy customers in far-flung corners of the earth, for failing to crack down adequately on money laundering by some of its Argentine clients. The bank subsequently admitted to “embarrassment” over its failure. “Too many banks in the United States, including some of the biggest, have been asleep at the switch,” claimed Carl Levin, the senator behind the report.

Revelations of what the British committee dubbed “the worst excesses of kleptocratic states” continue to undermine confidence in the determination of banks, and the ability of governments, to tackle the problem. For example, Citigroup was caught up in the corruption investigation surrounding one of its wealthy customers, Joseph Estrada, the ousted president of the Philippines.

Such high-profile cases have laid to rest any lingering doubts that money laundering – best defined as processing through the banking systems of the proceeds of crime, in order to disguise their illegal origin – is something that involves only drug dealers and unknown banks in banana republics, though such banks are certainly part of the story. Whether wittingly or not, many of the world’s best-known banks have become a central element in the process by which crooks clean up their ill-gotten gains.

Despite the recent blaze of adverse publicity, there is evidence that big banks are taking money laundering more seriously than ever before. Most of them can show that they are doing a great deal more than they did (even as recently as two years ago) to prevent the fruits of crime passing through their systems.The resources devoted to the task have grown rapidly, particularly the spending on technology to sift through money-transfer data for unusual activity. Citigroup, for instance, now has a 50-strong operation in Miami that is consistently watching out for suspicious activity.

Any further tightening up on money laundering faces big obstacles. Banks understandingly want to protect the privacy of their customers, and they face fierce competitive pressure not to ask too many questions. Moreover, new technology (such as anonymous electronic cash) may be making money laundering easier. Even worse, attempts to crack down may fall foul of genuine differences of opinion between regulators around the world about what, for money-laundering purposes, actually constitutes a crime.

Global business

Putting a value on money laundering is, by its very nature, a matter of ill-informed guesswork. The International Monetary Fund reckons that the amount of dirty money being cleaned through the world’s financial system is huge – between $500 billion and $1.5 trillion a year, equivalent to some 1.5-5% of gross world product.

Laundering has grown hand-in-hand with globalisation, and particularly with the lifting of capital controls and the development of international payment systems. These allow money to be shifted in seconds between banks in different parts of the world that may not even be aware of each other’s existence. The sums of money being transferred are huge. Bank of America, for example, sees nearly $1 trillion pass through its internal wires every day. The international payment system is crucial to the integrity and stability of the world’s financial markets. But it also provides big opportunities for crooks to hide their money by shuffling it around the globe.

Private banking is the laundering channel that has received most attention. Private banking’s clients tend to be wealthy people who want their affairs to be handled with discretion – not least because they need help in exploiting opportunities to minimise their tax bills. Traditionally, a bank that asked too many questions would find its customers taking their money elsewhere. So a “don’t ask; don’t tell” culture developed, in which money laundering was able to thrive.

The revelation in 1999 that the Bank of New York had become a conduit for billions of dollars of suspect Russian money drew attention to an arguably more serious issue, the use in money lauindering of “correspondent banks” – banks that have their own account at another bank. Dirty Russian money was washed through the Bank of New York’s systems via its correcpondent banks, including one called Inkombank.

Correspondent banking is crucial to the internatioanal payment system.But if money is paid into a foreign bank’s correspondent account at, say, Citigroup, it can be harder to find out about the source of the money (and its legitimacy) than if it comes through the private-banking route.This is especially true when there is “nesting” – i.e., when a foreign bank opens an account at another foreign bank which has a correspondent relationship with, say, an American bank. A nesting bank can give the advantages of correspondent status without the American bank even being aware of it.

To understand the complexity that it can give rise to, consider the difficulties of America’s Department of Justice during the recent ”Operation Casablanca”, as described in the Senate report. Investigations found that funds illegally laundered by illegal drugs traders had been wired to a bank account outside America. They asked the government of the bank’s country for assistance, only to discover that the bank and account to which the money was transferred were actually located in another country. Officials in that country then tried to seize the assets, but found that the bank had no buildings or branches there. The assets securing the bank’s obligations were once again outside the country. In the end, it turned out that the money was sitting in the bank’s correspondent account at a big American bank in New York.

For all the recent focus on big banks in established financial centres, banks in so-called offshore centres are still the main targets for anti-money-laundering efforts.

Offshore banks are more likely than onshore ones to be used by crooks. Many governments of small countries license banks largely because they are tidy revenue earners. They do not want to regulate these banks in a way that scares off customers. The recent Senate report in America raised particular concern about those offshore banks that are not subsidiaries of banks that have well-regulated onshore operations.

The worst offenders are “shell” or “brass-plate” banks, which have no physical presence in any location.

The new whitener

America passed the world’s first law explicitly directed at money laundering in 1986. The Money Laundering Control Act made it a crime for a person knowingly to engage in a financial transaction involving the proceeds of a “specified unlawful activity”.Ever since, America has been leading the global fight against it. The recent report to Congress has stimulated fresh discussion of new legislation in America, but the chances of any new laws making it to the statute book are slim. Britain, too, has been increasingly active, though its regulators have hitherto lacked the power to discipline offending banks. The FSA will get new powers later this year that will turn it into a criminal prosecuting agency, broaden the definition of money laundering to include the proceeds of all crimes (not just illegal drugs and terrorism), and allow it to write the rules defining what counts as money laundering.

The action is more intense, however, at the multilateral level – which is hardly surprising, for there is a limit to what can be done by a single country acting alone. Money laundering is intrinsically global. Cracking down on domestic banks, if it is not copied by jurisdiction elsewhere, may do little more than make those banks uncompetitive in the global marketplace.

Some of the multilateral moves have come from within the banking industry itself. Last year, 11 of the world’s biggest banks, including several embarrassed by past money-laundering revelations, signed up to the so-called “Wolfsberg AML Principles”, named after a Swiss town in which they were drawn up. These are a set of basic guidelines to avoid money laundering in private banking. The Basle committee of national bank regulators, which sets common international standards for bank supervision, recently said that it would also draw up agreed procedures for banks to use when deciding whether to accept a customer, and to help them in monitoring the activity taking place in their accounts.

The greatest progress, however, has been made by the OECD’s Financial Action Task Force (FATF), which was established in 1989. Last July, it published a blacklist of 15 jurisdictions, ranging from Russia and Israel to the Marshall Islands, that are “non-co-operative” with its money-laundering efforts. These efforts are based on 40 recommendations, which are in the process of being updated to take into account the growing involvement in money laundering of lawyers, securities firms, accountants and real-estate agents.

The British parliamentary report in March echoed the FAFT when it expressed concern at the “under-reporting of suspicious transactions by certain professional groups, in particular lawyers and accountants”, who are “often prime targets for money laundering”.

The FAFT is now mulling over how to punish the countries on its list, whether to add new countries to it, and, more happily, whether to remove from it those that have done what the FAFT asked of them. Its decisions will be made in June. The group’s actions have, however, already had a striking impact. Since the blacklist appeared, the number of filings (by banks operating in America) of suspicious activity reports (SARS) – i.e., a significant money trnsfer whose legality the bank is unsure about – relating to the 15 jurisdictions have doubled. At the same time, many of the blacklisted jurisdictions have fallen over themselves to do whatever mignt get them delisted. Only four countries have made no serious attempt at co-operation: Lebanon, the Philippines, Nauru and, by far the most significant, Russia. Although the anti-money-laundering bill has been tabled in the Russian parliament, it is not clear that it amounts to much.

Know your customer

There remain many obstacles to cracking down still further on money laundering. The first may be President George Bush. His administration seems more sceptical than its predecessor about the value of participating in multilateral initiatives. It remains to be seen whether this change of tone will lead to a real difference in approach, however. Second, there is a sheer difficulty of detecting money laundering. An official report in 1995 observed that looking for evidence of money laundering is not merely like looking for a needle in a haystack, but rather for “a needle in a needlestack”.

Increasingly, regulators think that merely reacting to their requests is not enough. They want the banks to play a proactive role in rooting out money laundering – which, say some critics, “turn banks into cops”. At the heart of this is an innocuous-sounding regulatory requirement to “know your customer”. This means finding out who it is that wants an account before they open it, where the money has come from, and what happens to it afterwards.

One obvious problem is that customers may not wish to be known in such a close fashion by their bank. InAmerica, there is typically a political outcry whenevr know-you-customer legislation is proposed, on the ground that it is a breach of privacy. Public opposition led to the withdrawal of such legislation in 1999. However, much of the thrust of the proposed laws was achieved anyway – through guidelines issued by the regulators last year.

Where the line between fighting crime and protecting customer’s privacy should be drawn is likely to be much debated over the next few years. The cost of searching for money laundering also imposes a limit on what can be done. Some staff are putting in so many extra hours at banks affected by recent scandals, trying to know their customers better, that they are getting to know their families less. Even trickier, the concerns raised about corresponding banking have created a new, and more elusive goal: to know your customers’ customers.

At the same time, technological developments may be making it harder for banks to know their customers, even if they try. Regulators are increasingly worried about the potential of anonymous electronic cash.

Looming largest of all is the lack of a consensus, even among the world’s richest, most powerful countries about what, for the purpose of fighting money laundering, should count as a crime.

This question is even more acute when it comes to tax evasion or avoiding government-imposed controls on capital movements, the two main reasons people have traditionally used offshore centres. Shoud taxes evaded be treated by banks as the equivalent of profits from crime? Some critics reckon that the hidden agenda behind the attack on money laundering is for big countries to make it much harder for their citizens to evade taxes by cutting off those offshore centres that offer low taxes from the international payment system.

As the banks increasingly become an arm of law enforcement, nobody should forget that much of the money flowing out of badly run countries may be genuine flight capital, not stolen cash. History counsels against too rigid a commitment to enforcing other countries’ definitions of crime. Those Jews able to get their money out of Germany during the 1930s broke the capital controls that were then in place. It would be sad if future victims of oppression were prevented from getting at their money by a wall of bankers-turned-sleuths.

The Economist, 2001

Notes

money laundering – “отмывание денег”: прием больших сумм денег сомнительного происхождения, проведение формальных операций с ними для придания им легитимности

have been asleep at the switch – were too passive on their jobs

high-profile cases – cases involving prominent people or high officials

to fall foul of – столкнуться с

a matter of ill-informed guesswork – можно только догадываться (о чем-либо) ввиду недостаточной информации

to table – to submit

FSA (Financial Services Authority) – независимая публичная организация, которая регулирует оказание финансовых услуг в Великобритании

electronic cash – the money chanelled through the Internet

the hidden agenda behind the attack on money laundering – the real purpose of the action

flight capital – финансовые ресурсы, помещаемые в иностранные ценные бумаги и другие активы из-за баязни обесценения национальной валюты, экономического и политического риска (“бегство капитала”)

to councel against – to advise not to do something

bankers-turned-sleuths – банкиры, превратившиеся в ищеек

America’s Future Management

Panic Ordering. DuPont – whose products are used in everything from medical equipment to clothing, carpeting, and paint – has been through countless economic swings. Managers there have learned to pay close attention to such macroeconomic factors as oil prices, currency fluctuations, inflation, and Federal Reserve policies. That’s how DuPont was able to figure out as far back as July, 2000, that business was deteriorating. DuPont cut back early, keeping layoffs and write-offs to a minimum. The main warning signals then: high energy prices, lackluster apparel sales, and government-reported declines in new factory orders.

Even for the most experienced hands, forecasting demand is an inexact science. At Massachusetts Institute of Technology’s Sloan School of Management, students and executives for years have played “the beer game”, where they take the roles of brewer, distributor, wholesaler, and retailer, and try to estimate demand across economic cycles. Nearly everybody gets it wrong – especially those who are farthest from the customer. The trick, says MIT Professor John D. Sterman, is to figure out how the ultimate customers are behaving and produce to suit them, not the manufacturers, distributors, or retailers in-between. So-called panic-ordering and other distortions only confuse everyone. Says Sterman: “If you are in the pasta business, you want to know how much pasta people are cooking and eating, not how much they are buying, and certainly not how much supermarkets and distributors are ordering from the factory.”

Gathering good information, of course, doesn’t guarantee acting wisely on it. Car makers, for instance, regularly get a better-than-average fix on overall demand as their in-house economists pour over such time-tested data as household formation rates and consumer confidence surveys. “The forecasting is pretty good,” says David J.Andrea of the nonprofit Center for Automotive Research. The problem, he says, is “industry behavior.”

Detroit still winds up during a slowdown with at least some excess inventory . Why? Each carmaker bets that its models will outsell the rest and produces accordingly. Later, too, the Big Three carmakers have sullied their profit margins and clouded forecasting by offering steep incentives to buyers. Much like the networking industry’s vendor financing, such market-distorting inducements make it tough to gauge real demand – even if the carmakers can boast of better results than, say, the producers of networking equipment.

Other companies, though, were able to use a sound forecast as an intellectual framework for smart decision-making. Eaton Corp., with $8 billion in annual sales and products that range from truck transmissions to circuit breakers for homes, started getting cautious when Adrian T.Dillon, Eaton’s chief financial and planning officer, warned of an impending: “short, sharp shock” in the economy.

Dillon’s insight did not save Eaton from the consequences of the downturn; no forecast can do that. But it did allow the company to cushion against the coming drop. As demand for its products shriveled, Eaton halted a stock-buyback program to save cash and pulled the plug on a couple of planned acquisitions. Although this year’s first-half earnings have plunged by 64%, the decline could have been steeper had the company not prepared its managers – and Wall Street – early on. In fact, Eaton’s stock is up 11%.

Fool’s Game. Sun Microsystems Inc. doesn’t rely on long-range forecasts in its purchasing but instead tries to buy supplies – often over the Internet – as needed. Its top operations and sales staffers meet weekly in supply-demand gatherings to make sure their work is balanced. And they try to ensure that their partners don’t get left in the lurch when demand moves south. Twice last year, Sun asked supplier Celestica Inc. to delay deliveries that Sun had ordered, but when it came time for Celestica to either take a charge for goods or deliver, Sun took them. “Sun treats suppliers more decently and they remember,” says Sun operations chief Marissa Peterson.

Regrettably for many in Silicon Valley, the ability to make accurate forecasts can depend on how well-established a company’s products are. Young industries on steep growth curves are almost always surprised by how well their poducts do in the first few years, and then they are taken aback when demand ebbs. Says Stanford University business strategy professor Kathleen M.Eisenhardt, “in a highly dynamic, ambiguous, and unpredictable market people are going to make mistakes. It’s inherent in the type of business.”

In many corners of Silicon Valley – and elsewhere – unpredictability is inevitable. One solution: keep innovating but develop sound service businesses to sell with products. “I break the world into two segments – one is creating demand and the other is servicing demand,” says Craig H.Muhlhauser, president of the cutting-edge power-storage systems maker, Exide Technologies. Building a “very robust service business,” he says, smooths out the rough spots between innovations.

No matter how well companies try to forecast demand, they will almost always be off the bull’s eye. Chaos is simply more the norm than orderly, predictable patterns. Indeed, Wharton School adjunct professor Paul J.H.Schoemaker argues that sticking too closely to a forecast is a fool’s game. Better to use scenario planning, in which you prepare to handle different sets of circumstances. “You can’t reduce the uncertainty, but you can manage it by having options,” says Schoemaker.

No business, of course, is recession-proof. But managers who understand that markets go down as well as up are a lot more likely to read the tea leaves correctly. Better to see the warning signs and ratchet down early than find yourself stuck with billions in equipment that suddenly no one wants. Just ask Cisco.

Business Week

America’s Future Management

(summary of the text)

Here is an example of how to write a perfect precis or summary:

Lessons from the Bust

1. Good information requires good judgement. Information systems can put the numbers in front of you in real time. But you need experienced managers with skepticism and judgement to figure out what it all means.

2. Stay Flexible. Using the Internet to forge closer links with suppliers and

customers, outsourcing nonessencial work, and contract manufacturing are ways to lower inventories and fixed overhead costs. Those management ideas are more important than ever in a downturn.

3. Know your customer’s customer. The further you are from the final customer, the harder it is to see a swing in the economic cycle. The trick is to monitor consumption by the end users and produce to their needs.

4. Look beyond a backlog in orders. Basing a forecast just on order backlogs is a fool’s game. In boom times, your customers may double - or triple- order to avoid shortages. You need to track your customers’ revenues.

5. Planning goes only so far. Predicting the future with precision is nearly impossible. Forecasts based on consumer confidence and economic output are important, but avoid tying yourself to one economic world view. Instead, consider a range of possibilities and prepare for all of them.

6. Don’t just sell them; serve them. Building a service business can bring long- term contracts that poduce more predictable streams of revenue and income. Product service can be a life-saving fallback when times get tough.

Notes

panic-ordering – панический объем заказов (больше, чем обычно) в ожидании серьезных изменений в конъюнктуре в связи с разными событиями

pasta – макаронные изделия

to wind up with – окончиться чем-то

the Big Three carmakers : Chrysler, Ford and General Motors

the demand moves south – the demand decreases

power-storage system – энергонакопительная система

to be off the bull’s eye – to miss the target ( bull’s eye – “яблочко” мишени)

to read the tea leaves – to predict, forecast ( “гадать на кофейной гуще”)

Unit 9