Contemporary International Problems Essay Example for Free

Contemporary International Problems Essay The United States of America experienced various disputes and wars in its history. Some of these armed conflicts do not only take place within their boundaries because there are also some battles that they have to fight in another country’s territory. The reasons for engaging in such warfare may either directly or indirectly involve the U. S. However, one thing is sure, that in the country’s every participation there is a certain interest that its officials want to fulfill. This kind of situation is what exactly took place in the U. S. ntervention in the Vietnam War. The U. S. government wants to achieve a certain national interest that will work for their benefits. The Vietnam War started in 1954 when the Communist-led parties of the Vietnamese Nationalist and the Vietminh army defeated the French forces. France was forced to recognize North Vietnam as communist while leaving the Southern part of the country as non-communist. Nevertheless, the U. S. did not approve this situation especially the establishment of communist leadership in North Korea. President Dwight D.  Eisenhower ordered the establishment of political machinery in South Vietnam. This includes creating a government that replaced the French leadership as well as deploying military advisers that will train the South Vietnam army. The Central Intelligence Agency of the U. S. also employed psychological warfare in order to weaken North Vietnam. The United States government explicitly expressed its participation and commitment in the Vietnam War when they ordered continuous air bombing in North Vietnam by means of the Tonkin Golf Resolution. The war ended in January 1973 through a diplomatic agreement that resulted in the U. S. withdrawal from Vietnam in exchange for the release of U. S. prisoners (Rotter, 1999). The intervention of the U. S. in the Vietnam War is part of their national interest of establishing democracy in different countries and controls the spread of communism. During the Cold War two conflicting forces are involved namely: the Communist bloc and the Democratic bloc. The U. S. leads the Democratic group, which is why they are doing all the necessary means to combat communism. Their intervention in the Vietnam War is an effort to stop other Asian countries from following the principles of communism especially since Ho Chi Minh is the one leading the Northern part of the country (Rotter, 1999). The American government believes that communism is an enemy because it defies every value and principle that the U. S. upholds such as: free trade and democracy. In relation to this the operations of the U. S. against the Communist bloc is largely dependent upon their belief in the Domino Theory. The Domino Theory is similar to a set of dominoes wherein toppling one of it will result for the others to follow suit. In the same manner, Vietnam represents the first domino that toppled down. The U. S. deemed that if they will not intervene in the Vietnam War other countries in the Southeast Asian region would also adhere to communism (Rotter, 1999). Another reason for U. S. involvement in the Vietnam War is their goal of influencing other countries to follow the path of democracy and adhere to the values and principles that the U. S. stands for. By doing so, the U. S. ould be able to win their battle with the soviet bloc and at the same time establish their position as the world’s superpower. The U. S. government encouraged other countries to follow their ideals by giving military and economic aid to them. This is observable when they helped France in maintaining its Indochina colonies. The U. S. also applied the Domino Theory in acquiring more countries in their side. They think that by showing other countries the development of France, they would choose democracy over communism, as this would entail more benefits for them (Rotter, 1999). The U. S. intervention in the Vietnam War clearly shows that the country tend to intervene in others’ affairs in order to accomplish their national interests. The U. S. government used the resources that they have in order to pursue their objectives. They took advantage of the conflicts that is happening in the other parts of the world so that they could defeat the soviet bloc and control the spread of communism. In doing so, they were able to emerge as one of the most powerful countries in the world.

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Chemistry Textbook Notes: Solutions Chapters 13 & 14: LH 1. Define soluble, solution, solvent, solute, suspension, colloid (p.395–398) Soluble- capable of being dissolved solvent0 the dissolving medium in a solution solute- the substance dissolved in the solution suspension- a mixture in which the particles in the solvent are so large that they settle out unless the mixture is constantly stirred or agitated colloid- a mixture consisting of particles that are intermediate in size between those in the solutions and suspensions forming mixtures known as colloid dispersions 2. Most of the time when people talk about solutions, they are referring to solids that have been dissolved in water. Describe a different type of text=solution">solution (see Table 13–1) Solutions are not limited to the liquid state, they can occur in all three main phases, gas, liquid, and solid. For example, the water in the air is a liquid solute dissolved in a gas solvent; solid solutions include brass, which is made from combining zinc with copper 3. Describe two examples of colloids (see Table 13–2). A colloid consists of small particles 1nm to 1000nm in size that are suspended in a solid, liquid or gas. Examples include common products such as gel, a solid network extending throughout a liquid, or liquid aerosol, or otherwise known as fog 4. What is the Tyndall effect? What can it be used to distinguish between? The Tyndall effect is used to distinguish between a solution and a colloid; a colloid scatters light, like fog scatters the lights of a car, while a solution does not. 5. Describe an experimental method that could be used to classify a sample as a solution, colloid, or suspension. Allowing the sample to sit for an extended period of time will reveal the suspension, as it needs to be stirred or agitated to maintain its shape. A colloid then can be differentiated from a solution by shining light through it and seeing if it scatters 6. Define electrolyte and nonelectrolyte. Electrolyte- a substance that when dissolved will conduct an electric current while Nonelectrolyte- a substance that when dissolved will not conduct an electric current 7. Define saturated, unsaturated, and supersaturated solutions. Saturated solution- a solution that contains the maximum amount of dissolved solute unsaturated solution- a solution that contains less solute than a saturated solution Supersaturated solution- a solution that contains more dissolved solute than a saturated solution contains under the same conditions

Innovators Dna

(Continued from front flap) is the Horace Beesley Professor of Strategy at the Marriott School, Brigham Young University. He is widely published in strategy and business journals and was the fourth most cited management scholar from 1996–2006. is a professor of leadership at INSEAD. He consults to organizations around the world on innovation, globalization, and transformation and has published extensively in leading academic and business journals. is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School and the architect of and the world’s oremost authority on disruptive innovation. â€Å"Businesses worldwide have been guided and in uenced by e Innovator’s Dilemma and e Innovator’s Solution. Now e Innovator’s DNA shows where it all starts. is book gives you the fundamental building blocks for becoming more innovative and changing the world. One of the most important books to come out this year, and one that will remain pivotal reading for years to come. † Chairman and CEO, salesforce. com; author, Behind the Cloud â€Å" e Innovator’s DNA is the ‘how to’ manual to innovation, and to the fresh thinking that is the root of innovation.It has dozens of simple tricks that any person and any team can use today to discover the new ideas that solve the important problems. Buy it now and read it tonight. Tomorrow you will learn more, create more, inspire more. † Chairman of the Executive Committee, Intuit Inc. â€Å" e Innovator’s DNA sheds new light on the once-mysterious art of innovation by showing that successful innovators exhibit common behavioral habits—habits that can boost anyone’s creative capacity. † author, e 7 Habits of Highly E ective People and e Leader in Me Having worked with Clayton Christensen on innovation for over a decade, I can see that e Innovator’s DNA continues to stretch our thinking with insights that cha llenge convention and enable progress in the important cause of innovation . . . so critical to competitiveness and growth. † retired Chairman of the Board and CEO, e Procter & Gamble Company Also by Clayton M. Christensen: Bestselling Author of e Innovator’s Dilemma You can be as innovative and impactful— if you can change your behaviors to improve your creative impact. In e Innovator’s DNA, authors Je Dyer,Hal Gregersen, and bestselling author Clayton M. Christensen ( e Innovator’s Dilemma, e Innovator’s Solution) build on what we know about disruptive innovation to show how individuals can develop the skills necessary to move progressively from idea to impact. By identifying behaviors of the world’s best innovators—from leaders at Amazon and Apple to those at Google, Skype, and Virgin Group—the authors outline ve discovery skills that distinguish innovative entrepreneurs and executives from ordinary managers: Associati ng, Questioning, Observing, Networking, and Experimenting.Once you master these competencies (the authors provide a self assessment for rating your own innovator’s DNA), the authors explain how you can generate ideas, collaborate with colleagues to implement them, and build innovation skills throughout your organization to sharpen its competitive edge. at innovation advantage can translate into a premium in your company’s stock price—an innovation premium—that is possible only by building the code for innovation right into your organization’s people, processes, and guiding philosophies. Practical and provocative, e Innovator’sDNA is an essential resource for individuals and teams who want to strengthen their innovative prowess. (Continued on back flap) 100092 00 i-vi r1 rr. qxp 5/13/11 6:52 PM Page i THE INNOVATOR’S DNA 100092 00 i-vi r1 rr. qxp 5/13/11 6:52 PM Page ii 100092 00 i-vi r1 rr. qxp 5/13/11 6:52 PM Page iii THE INNOVATORâ €™S DNA MASTERING THE FIVE SKILLS OF DISRUPTIVE INNOVATORS Jeff Dyer Hal Gregersen Clayton M. Christensen H A R VA R D B U S I N E S S R E V I E W P R E S S BOSTON, MASSACHUSETTS 100092 00 i-vi r1 rr. qxp 5/13/11 6:52 PM Page iv Copyright 2011 Jeff Dyer, Hal Gregersen, and Clayton M.Christensen All rights reserved Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to [email  protected] harvard. edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163. Library of Congress Cataloging-in-Publication DataDyer, Jeff. The innovator’s DNA : mastering the ? ve skills of disruptive innovators/ Jeff Dyer, Hal Gregersen, Clayto n M. Christensen. p. cm. ISBN 978-1-4221-3481-8 (hardback) 1. Creative ability in business. 2. Technological innovations. 3. Entrepreneurship. I. Gregersen, Hal B. , 1958– II. Christensen, Clayton M. III. Title. HD53. D94 2011 658. 4'063—dc22 2011008440 The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Publications and Documents in Libraries and Archives Z39. 48-1992. 100092 00 i-vi r1 rr. qxp /13/11 6:52 PM Page v Contents Introduction 1 Part One Disruptive Innovation Starts with You 1 The DNA of Disruptive Innovators 17 2 Discovery Skill #1 41 Associating 3 Discovery Skill #2 65 Questioning 4 Discovery Skill #3 89 Observing 5 Discovery Skill #4 113 Networking 6 Discovery Skill #5 133 Experimenting Part Two The DNA of Disruptive Organizations and Teams 7 The DNA of the World’s Most Innovative Companies 157 100092 00 i-vi r1 rr. qxp 5/13/11 6:52 PM Page vi vi CONTENTS 8 Putting the Innovatorâ €™s DNA into Practice 175 People 9 Putting the Innovator’s DNA into Practice 93 Processes 10 Putting the Innovator’s DNA into Practice 215 Philosophies Conclusion: Act Different, Think Different, Make a Difference 235 Appendix A: Sample of Innovators Interviewed Appendix B: The Innovator’s DNA Research Methods Appendix C: Developing Discovery Skills Notes Index Acknowledgments About the Authors 241 245 249 261 269 283 295 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 1 Introduction I It’s the lifeblood of our global economy and a strategic priority for virtually every CEO around the world. In fact, a recent IBM poll of ? teen hundred CEOs identified creativity as the number-one â€Å"leadership competency† of the future. 1 The power of innovative ideas to revolutionize industries and generate wealth is evident from history: Apple iPod outplays Sony Walkman, Starbucks’s beans and atmosphere drown traditional coffee shops, Skype u ses a strategy of â€Å"free† to beat AT and British Telecom, eBay crushes classi? ed ads, and Southwest Airlines ? ies under the radar of American and Delta. In every case, the creative ideas of innovative entrepreneurs produced powerful competitive advantages and tremendous wealth for the pioneering company.Of course, the retrospective $1 million question is, how did they do it? And perhaps the prospective $10 million question is, how could I do it? The Innovator’s DNA tackles these fundamental questions— and more. The genesis of this book centered on the question that we posed years ago to â€Å"disruptive technologies† guru and coauthor Clayton Christensen: where do disruptive business models come from? Christensen’s best-selling books, The Innovator’s NNOVATION. 1 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 2 2 INTRODUCTIONDilemma and The Innovator’s Solution, conveyed important insight into the characteristics of disr uptive technologies, business models, and companies. The Innovator’s DNA emerged from an eight-year collaborative study in which we sought a richer understanding of disruptive innovators—who they are and the innovative companies they create. Our project’s primary purpose was to uncover the origins of innovative—and often disruptive— business ideas. So we interviewed nearly a hundred inventors of revolutionary products and services, as well as founders and CEOs of game-changing companies built on innovative business ideas.These were people such as eBay’s Pierre Omidyar, Amazon’s Jeff Bezos, Research In Motion’s Mike Lazaridis, and Salesforce. com’s Marc Benioff. For a full list of innovators we interviewed whom we quote in this book, see appendix A; virtually all of the innovators we quote, with the exception of Steve Jobs (Apple), Richard Branson (Virgin), and Howard Schultz (Starbucks)—who have written autobiogra phies or have given numerous interviews about innovation—are from our interviews. We also studied CEOs who ignited innovation in existing companies, such as Procter & Gamble’s A.G. Lafley, eBay’s Meg Whitman, and Bain & Company’s Orit Gadiesh. Some entrepreneurs’ companies that we studied were successful and well known; some were not (for example, Movie Mouth, Cow-Pie Clocks, Terra Nova BioSystems). But all offered a surprising and unique value proposition relative to incumbents. For example, each offered new or different features, pricing, convenience, or customizability compared to their competition. Our goal was less to investigate the companies’ strategies than it was to dig into the thinking of the innovators themselves.We wanted to understand as much about these people as possible, including the moment (when and how) they came up with the creative ideas that launched new products or businesses. We asked them to tell us 100092 00a 001-0 14 INT r1 go. qxp 5/13/11 9:53 AM Page 3 3 Introduction about the most valuable and novel business idea that they had generated during their business careers, and to tell us where those ideas came from. Their stories were provocative and insightful, and surprisingly similar. As we re? ected on the interviews, consistent patterns of action emerged.Innovative entrepreneurs and executives behaved similarly when discovering breakthrough ideas. Five primary discovery skills—skills that compose what we call the innovator’s DNA—surfaced from our conversations. We found that innovators â€Å"Think Different,† to use a well-known Apple slogan. Their minds excel at linking together ideas that aren’t obviously related to produce original ideas (we call this cognitive skill â€Å"associational thinking† or â€Å"associating†). But to think different, innovators had to â€Å"act different. † All were questioners, frequently asking questions that punctured the status quo.Some observed the world with intensity beyond the ordinary. Others networked with the most diverse people on the face of the earth. Still others placed experimentation at the center of their innovative activity. When engaged in consistently, these actions—questioning, observing, networking, and experimenting—triggered associational thinking to deliver new businesses, products, services, and/or processes. Most of us think creativity is an entirely cognitive skill; it all happens in the brain. A critical insight from our research is that one’s ability to generate innovative ideas is not erely a function of the mind, but also a function of behaviors. This is good news for us all because it means that if we change our behaviors, we can improve our creative impact. After surfacing these patterns of action for famous innovative entrepreneurs and executives, we turned our research lens to the less famous but equally capable innovators aro und the world. We built a survey based on our interviews that taps into the discovery skills of innovative leaders: associating, questioning, observing, networking, and experimenting. To date, we have 00092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 4 4 INTRODUCTION collected self-reported and 360-degree data on these discovery skills from over ? ve hundred innovators and over ? ve thousand executives in more than seventy-five countries (for information about our assessments for individuals and companies, go to our Web site: http://www. InnovatorsDNA. com). We found the same pattern for famous as well as less famous leaders. Innovators were simply much more likely to question, observe, network, and experiment compared to typical executives.We published the results of our research in Strategic Entrepreneurship Journal, the top academic journal focused on entrepreneurs (details of our study are reported in appendix B). 2 We also published our ? ndings in an article titled â€Å" The Innovator’s DNA,† which was the runner-up for the 2009 Harvard Business Review McKinsey Award. We then turned to see what we could learn about the DNA of innovative organizations and teams. We started by looking at BusinessWeek’s annual ranking of innovative companies.This ranking, based on votes from executives, identified companies with a reputation for being innovative. A quick look at the BusinessWeek lists from 2005 to 2009 shows Apple as number one and Google, number two. OK, intuitively that sounds right. But we felt that the BusinessWeek methodology (executives voting on which companies are innovative) produces a list that is largely a popularity contest based on past performance. Indeed, do General Electric, Sony, Toyota, and BMW deserve to be on the list of most innovative companies today? Or are they simply there because they have been successful in the past?To answer these questions, we developed our own list of innovative companies based on curre nt innovation prowess (and expectations of future innovations). How did we do this? We thought the best way was to see whether investors—voting with their wallets—could give us insight into which companies they thought most likely to produce future innovations: new products, services, or markets. We teamed up with HOLT (a division of Credit Suisse Boston that had done a similar analysis for The Innovator’s 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 5 5 Introduction Who Is Classified as an Innovator?Perhaps one of the most surprising findings from the past thirty years of entrepreneurship research is that entrepreneurs do not differ signi? cantly (on personality traits or psychometric measures) from typical business executives. a We usually meet this ? nding with skepticism, since most of us intuitively believe that entrepreneurs are somehow different from other executives. Note that our research focused on innovators and, in particular, innovative en trepreneurs rather than entrepreneurs. Here’s why. Innovative entrepreneurs start companies that offer unique value to the market.When someone opens a dry cleaner or a mortgage business, or even a set of Volkswagen dealerships or McDonald’s franchises, researchers put them all in the same category of entrepreneur as the founders of eBay (Pierre Omidyar) and Amazon (Jeff Bezos). This creates a categorization problem when trying to ? nd out whether innovative entrepreneurs differ from typical executives. The fact is that most entrepreneurs launch ventures based on strategies that are not unique and certainly not disruptive. Among entrepreneurs as a whole, only 10 percent to 15 percent qualify as â€Å"innovative entrepreneurs† of the kind we’re discussing.Our study includes four types of innovators: (1) start-up entrepreneurs (as we described earlier), (2) corporate entrepreneurs (those who launch an innovative venture from within the corporation), (3) prod uct innovators (those who invent a new product), and (4) process innovators (those who launch a breakthrough process). Our process inventor category includes folks like A. G. La? ey, who initiated a set of innovative processes at Procter & Gamble that sparked numerous new product innovations. In all cases, the original idea for the new (continued) 00092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 6 6 INTRODUCTION business, product, or process must be the innovator’s idea. While these different types of innovators have numerous similarities, they also have some differences, as we will show in the chapters that follow. a. This is evident in the conclusions of numerous studies on entrepreneurs, including the following: â€Å"After a great deal of research, it is now often concluded that most of the psychological differences between entrepreneurs and managers in large organizations are small or non-existent† (L.W. Busenitz and J. B. Barney, â€Å"Differences Between E ntrepreneurs and Managers in Large Organizations,† Journal of Business Venturing 12, 1997). â€Å"There appears to be no discoverable pattern of personality characteristics that distinguish between successful entrepreneurs and non-entrepreneurs† (W. Guth, â€Å"Director’s Corner: Research in Entrepreneurship,† The Entrepreneurship Forum, winter 1991). â€Å"Most of the attempts to distinguish between entrepreneurs and small business owners or managers have discovered no differentiating features† (R. H. Brockhaus and P. S.Horwitz, â€Å"The Psychology of the Entrepreneur† in The Art and Science of Entrepreneurship, 1986). Solution) to develop a methodology for determining what percentage of a ? rm’s market value could be attributed to its existing businesses (products, services, markets). If the ? rm’s market value was higher than the cash ? ows that could be attributed to its existing businesses, then the company would have a gr owth and innovation premium (for our purposes, we’ll just call it an innovation premium). An innovation premium is the proportion of a company’s market value that cannot be accounted for from cash ? ws of its current products or businesses in its current markets. It is the premium the market gives these companies because investors expect them to come up with new products or markets—and they expect the companies to be able to generate high profits from them (see chapter 7 for details on how the premium is calculated). 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 7 7 Introduction It is a premium that every executive, and every company, would like to have. We unveil our list of the most innovative companies—ranked by innovation premium—in chapter 7.Not surprisingly, we found that our top twenty-five companies include some on the BusinessWeek list—such as Apple, Google, Amazon, and Procter & Gamble. These companies averaged at least a 35 percent innovation premium over the past five years. But we also learned that companies such as Salesforce. com (software), Intuitive Surgical (health care equipment), Hindustan Lever (household products), Alstom (electrical equipment), and Monsanto (chemicals) have similar premiums. And as we studied these ? rms in greater detail, we learned that they are also very innovative.As we examined both our list and the BusinessWeek list of innovative companies, we saw several patterns. First, we noticed that compared to typical companies they were far more likely to be led by an innovative founder or a leader who scored extremely high on the ? ve discovery skills that compose the innovator’s DNA (their average discovery quotient was in the eighty-eighth percentile, which meant they scored higher than 88 percent of people taking our discovery skills assessment). Innovative companies are almost always led by innovative leaders. Let us say this again: Innovative companies are almos t always led by innovative leaders.The bottom line: if you want innovation, you need creativity skills within the top management team of your company. We saw how innovative founders often imprinted their organizations with their behaviors. For example, Jeff Bezos personally excels at experimenting, so he helped create institutionalized processes within Amazon to push others to experiment. Similarly, Intuit’s Scott Cook shines at observing, so he pushes observation at Intuit. Perhaps not surprisingly, we discovered that the DNA of innovative organizations mirrored the DNA of innovative individuals.In other words, innovative people 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 8 8 INTRODUCTION systematically engage in questioning, observing, networking, and experimenting behaviors to spark new ideas. Similarly, innovative organizations systematically develop processes that encourage questioning, observing, networking, and experimenting by employees. Our chapters on bui lding the innovator’s DNA in your organization and team describe how you too can actively encourage and support others’ innovation efforts.Why the Ideas in This Book Should Matter to You Over the last decade, many books on the topic of innovation and creativity have been written. Some books focus on disruptive innovation, such as Clayton Christensen’s The Innovator’s Dilemma and The Innovator’s Solution. Others, such as Ten Rules for Strategic Innovators (Govindarajan and Trimble), Game Changer (A. G. La? ey and Ram Charan), and The Entrepreneurial Mindset (Rita McGrath and Ian MacMillan), examine how organizations, and organizational leaders, encourage and support innovation. Others look more speci? ally at product development and innovation processes within and across firms, such as How Breakthroughs Happen (Andrew Hargadon) and The Sources of Innovation (Eric von Hippel). Other books on innovation look at the roles individuals play in the innova tion process within companies, such as The Ten Faces of Innovation and The Art of Innovation (both by Tom Kelley of IDEO), or A Whole New Mind (Daniel Pink). Finally, other books like Creativity in Context (Teresa Amabile) and Creativity (Mihaly Csikszentmihalyi) examine individual creativity and, more speci? cally, theories and research about creativity.Our book differs from the others in that it is focused squarely on individual creativity in the business context and is based on our study of a large sample of business innovators, including some big-name innovators such as Jeff Bezos (Amazon. com), Pierre Omidyar (eBay), Michael Lazaridis 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 9 9 Introduction A Disclaimer . . . Sort of We think it is important to remember three signi? cant points as you read The Innovator’s DNA. First, engaging in the discovery skills doesn’t ensure ? nancial success. Throughout the book, we tell stories of people who were manifestly successful at nnovating. We focus on the success stories because we are all more naturally drawn to success than failure. However, in our sample of ? ve hundred innovators, only two-thirds launched ventures or products that met our criteria of success. Many were not successful. The innovators developed the right skills— questioning, observing, networking, and experimenting—that produced an innovative venture or product, but the result was not always a ? nancial success. The point is that the discovery skills we describe are necessary, indeed critical, for generating innovative business ideas, but they don’t guarantee success.Second, failure (in a ? nancial sense) often results from not being vigilant in engaging all discovery skills. The more ? nancially successful innovators in our sample demonstrated a higher discovery quotient (scored higher on the discovery skills) than less successful ones. If you fail with an innovation, it may be that you didn’t as k all the right questions, make all of the necessary observations, talk to a large enough group of diverse people, or run the right experiments. Of course, it is also possible that you did all these things but an even newer technology emerged or some other bright innovator came up ith an even better idea. Or maybe you just didn’t excel at executing on the idea or have the resources to compete with an established ? rm that imitated your invention. Many factors can prevent a new product or business idea from gaining traction in the market. But the better you are at asking the (continued) 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 10 10 INTRODUCTION right questions, engaging in the right observations, eliciting ideas and feedback through networking with the right people, and running experiments, the less likely you are to fail.Third, we spotlight different innovators and innovative companies to illustrate key ideas or principles, but not to set them up as perfect exa mples of how to be innovative. Some innovators we studied were â€Å"serial innovators,† as they had developed quite a number of innovations over time and appeared motivated to continue doing so. Others bene? tted by being in the right place at the right time to make a critical observation, talk to a key person with particularly useful knowledge, or serendipitously learn from an experiment. They made an important discovery once, but they might not necessarily be apable or motivated (perhaps due to financial success) to continue generating innovative ideas. In similar fashion, we have found that innovative companies can quickly lose their innovative prowess, while others can quickly improve it. In chapter 8, we show that Apple’s innovation prowess (as measured by its innovation premium) dropped dramatically after Jobs left in 1984, but then jumped up dramatically a few years after he returned to lead the company. Procter & Gamble was a solid innovation performer before La? ey took the helm, but increased its innovation premium by 30 percent under his leadership.The point is that people and companies can change and may not always live up to our lofty expectations. (Research In Motion/BlackBerry), Michael Dell (Dell), Marc Benioff (Salesforce. com), Niklas Zennstrom (Skype), Scott Cook (Intuit), Peter Thiel (PayPal), David Neeleman (JetBlue and Azul airlines), and so on. The premise of our book is that we explain how these big names got their â€Å"big ideas† and describe a process 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 11 11 Introduction that readers can emulate. We describe in detail five skills that anyone can master to improve his or her own ability to be an innovative thinker.Ask yourself: Am I good at generating innovative business ideas? Do I know how to ? nd innovative people for my organization? Do I know how to train people to be more creative and innovative? Some executives respond to the last question by encouragin g employees to think outside the box. But thinking outside the box is precisely what employees (and executives) are trying to ? gure out. We’ve even watched some executives answer the â€Å"How do I think outside the box? † question with another equally generic (and unhelpful) answer, â€Å"Be creative. † If you ? d yourself struggling with actionable answers to these questions, read on to gain a solid grasp of ? ve skills that can make all the difference when facing your next innovation challenge. All leaders have problems and opportunities sitting in front of them for which they have no solution. It might be a new process. It might be a new product or service. It might be a new business model for an old business. In every case, the skills you build by putting into practice the innovator’s DNA may literally save your job, your organization, and perhaps your community. Indeed, we’ve found that if ou want to rise to the highest levels of your organi zation— to a business unit manager, president, or CEO position—you need strong discovery skills. And if you want to lead a truly innovative organization, you likely will need to excel at those skills. We hope that The Innovator’s DNA will encourage you to reclaim some of your youthful curiosity. Staying curious keeps us engaged and our organizations alive. 3 Imagine how competitive your company will be ten years from now without innovators if its people didn’t find any new ways to improve its processes, products, or services. Clearly, your company would not survive.Innovators constitute the core of any company’s, or even country’s, ability to compete. 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 12 12 INTRODUCTION How The Innovator’s DNA Unfolds Like a pocket-sized map in a foreign place, our book serves as a guide to your innovation journey. The first part (chapters 1 through 6) explains why the innovator’s DNA matte rs and how the pieces can combine into a personalized approach to innovation. We put ? esh onto the â€Å"think different† slogan by explaining in detail the habits and techniques that allow innovators to think differently.The chapters in part one give rich detail about how to master the specific skills that are key to generating novel ideas—associating, questioning, observing, networking, and experimenting. The second part (chapters 7 through 10) ampli? es the building blocks of innovation by showing how the discovery skills of innovators described in part one operate in organizations and teams. Chapter 7 introduces our ranking of the world’s most innovative companies based on each company’s innovation premium, a market value premium based on investors’ expectations of future innovations.We also provide a framework for seeing how the innovator’s DNA works in the world’s most innovative teams and organizations. We call this the  "3P† framework because it contains the discovery-driven building blocks of highly innovative organizations or teams—people, processes, and philosophies. Chapter 8 focuses on building-block number one, people, and describes how innovative organizations achieve maximum impact by actively recruiting, encouraging, and rewarding people who display strong discovery skills—and blending innovators effectively with folks who have strong execution skills.Chapter 9 shows innovative team and company processes that mirror the ? ve discovery skills of disruptive innovators. In other words, innovative companies rely on processes to encourage—even require— their people to engage in questioning, observing, networking, experimenting, and associating. Chapter 10 focuses on the funda- 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 13 13 Introduction mental philosophies that guide behavior within innovative teams and organizations. These philosophies not only gu ide disruptive innovators but also get imprinted in the organization, giving people the courage to innovate.Finally, for those interested in building discovery skills in yourself, your team, and even the next generation (young people you know), in appendix C we guide you through a process of taking your innovator’s DNA to the next level. We’re delighted that you’re starting or continuing your own innovation journey. We have watched scores of individuals take the ideas in this book to heart and who describe how they have dramatically improved their innovation skills as a result. They continually confirm that the journey is worth taking.We think you’ll feel the same way once you’ve finished reading about and mastering the skills of a disruptive innovator. 100092 00a 001-014 INT r1 go. qxp 5/13/11 9:53 AM Page 14 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 15 PA R T O N E Disruptive Innovation Starts with You 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 16 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 17 1 The DNA of Disruptive Innovators â€Å"I want to put a ding in the universe. † —Steve Jobs, founder and CEO, Apple Inc. D to generate innovative, even disruptive, business ideas? Do I know how to ?nd creative people or how to train people to think outside the box?These questions stump most senior executives, who know that the ability to innovate is the â€Å"secret sauce† of business success. Unfortunately, most of us know very little about what makes one person more creative than another. Perhaps for this reason, we stand in awe of visionary entrepreneurs such as Apple’s Steve Jobs, Amazon’s Jeff Bezos, and eBay’s Pierre Omidyar, and innovative executives like P A. G. La? ey, Bain & Company’s Orit Gadiesh, and eBay’s Meg Whitman. How do these people come up with groundbreaking new ideas? If it were possible to discover the inner O I KNOW HOW 17 100092 01 0 15-040 r1 go. xp 5/13/11 9:56 AM Page 18 18 DISRUPTIVE INNOVATION STARTS WITH YOU workings of the masters’ minds, what could the rest of us learn about how innovation really happens? Ideas for Innovation Consider the case of Jobs, who was recently ranked the world’s number-one best-performing CEO in a study published by Harvard Business Review. 1 You may recall Apple’s famous â€Å"Think Different† ad campaign, whose slogan says it all. The campaign featured innovators from different ? elds, including Albert Einstein, Picasso, Richard Branson, and John Lennon, but Jobs’s face might easily have been featured among the others.After all, everyone knows that Jobs is an innovative guy, that he knows how to think different. But the question is, just how does he do it? Indeed, how does any innovator think different? The common answer is that the ability to think creatively is genetic. Most of us believe that some people, like Jobs, are simply born with cr eative genes, while others are not. Innovators are supposedly right brained, meaning that they are genetically endowed with creative abilities. The rest of us are left brained—logical, linear thinkers, with little or no ability to think creatively.If you believe this, we’re going to tell you that you are largely wrong. At least within the realm of business innovation, virtually everyone has some capacity for creativity and innovative thinking. Even you. So using the example of Jobs, let’s explore this ability to think different. How did Jobs come up with some of his innovative ideas in the past? And what does his journey tell us? Innovative Idea #1: Personal Computers Should Be Quiet and Small One of the key innovations in the Apple II, the computer that launched Apple, came from Jobs’s decision that it should be quiet. His conviction resulted, in part, from all the time he’d spent 00092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 19 19 The DNA of D isruptive Innovators studying Zen and meditating. 2 He found the noise of a computer fan distracting. So Jobs was determined that the Apple II would have no fan, which was a fairly radical notion at the time. Nobody else had questioned the need for a fan because all computers required a fan to prevent overheating. Getting rid of the fan wouldn’t be possible without a different type of power supply that generated less heat. So Jobs went on the hunt for someone who could design a new power supply. Through his network of contacts, he found RodHolt, a forty-something, chain-smoking socialist from the Atari crowd. 3 Pushed by Jobs, Holt abandoned the ? fty-year-old conventional linear unit technology and created a switching power supply that revolutionized the way power was delivered to electronics products. Jobs’s pursuit of quiet and Holt’s ability to deliver an innovative power supply that didn’t need a fan made the Apple II the quietest and smallest person al computer ever made (a smaller computer was possible because it didn’t need extra space for the fan). Had Jobs never asked, â€Å"Why does a computer need a fan? † and â€Å"How do we keep a computer cool without a fan? the Apple computer as we know it would not exist. Innovative Idea #2: The Macintosh User Interface, Operating System, and Mouse The seed for the Macintosh, with its revolutionary operating system, was planted when Jobs visited Xerox PARC in 1979. Xerox, the copier company, created the Palo Alto Research Center (PARC), a research lab charged with designing the office of the future. Jobs wrangled a visit to PARC in exchange for offering Xerox an opportunity to invest in Apple. Xerox didn’t know how to capitalize on the exciting things going on at PARC, but Jobs did. Jobs carefully observed the PARC computer screen ? led with icons, pull-down menus, and overlapping windows—all controlled 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 20 20 DISRUPTIVE INNOVATION STARTS WITH YOU by the click of a mouse. â€Å"What we saw was incomplete and ? awed,† Jobs said,â€Å"but the germ of the idea was there . . . within ten minutes it was obvious to me that all computers would work like this. †4 He spent the next ? ve years at Apple leading the design team that would produce the Macintosh computer, the ? rst personal computer with a graphical user interface (GUI) and mouse. Oh, and he saw something else during the PARC visit.He got his ? rst taste of objectoriented programming, which became the key to the OSX operating system that Apple acquired from Jobs’s other start-up, NeXT Computers. What if Jobs had never visited Xerox PARC to observe what was going on there? Innovative Idea #3: Desktop Publishing on the Mac The Macintosh, with its LaserWriter printer, was the ? rst computer to bring desktop publishing to the masses. Jobs claims that the â€Å"beautiful typography† available on the Macintosh would never have been introduced if he hadn’t dropped in on a calligraphy class at Reed College in Oregon. Says Jobs:Reed College offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully handcalligraphed. Because I had dropped out and didn’t have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can’t capture, and I found it fascinating. None of this had even a hope of any ractical application in my life. But ten years later, when we were designing the ? rst Macintosh computer, it all came back to me. And we designed it all into the Mac. It 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 21 21 The DNA o f Disruptive Innovators was the ? rst computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, it’s likely that no personal computer would have them. 5 What if Jobs hadn’t decided to drop in on the calligraphy classes when he had dropped out of college?So what do we learn from Jobs’s ability to think different? Well, first we see that his innovative ideas didn’t spring fully formed from his head, as if they were a gift from the Idea Fairy. When we examine the origins of these ideas, we typically ? nd that the catalyst was: (1) a question that challenged the status quo, (2) an observation of a technology, company, or customer, (3) an experience or experiment where he was trying out something new, or (4) a conversation with someone who alerted him to an important piece of knowledge or opportunity. In f act, by carefully examining Jobs’s behaviors and, speci? ally, how those behaviors brought in new diverse knowledge that triggered an innovative idea, we can trace his innovative ideas to their source. What is the moral of this story? We want to convince you that creativity is not just a genetic endowment and not just a cognitive skill. Rather, we’ve learned that creative ideas spring from behavioral skills that you, too, can acquire to catalyze innovative ideas in yourself and in others. What Makes Innovators Different? So what makes innovators different from the rest of us? Most of us believe this question has been answered. It’s a genetic endowment. Some people are ight brained, which allows them to be more intuitive and divergent thinkers. Either you have it or you don’t. But does research really support this idea? Our research con? rms 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 22 22 DISRUPTIVE INNOVATION STARTS WITH YOU others’ work th at creativity skills are not simply genetic traits endowed at birth, but that they can be developed. In fact, the most comprehensive study con? rming this was done by a group of researchers, Merton Reznikoff, George Domino, Carolyn Bridges, and Merton Honeymon, who studied creative abilities in 117 pairs of identical and fraternal twins.Testing twins aged fifteen to twenty-two, they found that only about 30 percent of the performance of identical twins on a battery of ten creativity tests could be attributed to genetics. 6 In contrast, roughly 80 percent to 85 percent of the twins’ performance on general intelligence (IQ) tests could be attributed to genetics. 7 So general intelligence (at least the way scientists measure it) is basically a genetic endowment, but creativity is not. Nurture trumps nature as far as creativity goes. Six other creativity studies of identical twins con? rm the Reznikoff et al. esult: roughly 25 percent to 40 percent of what we do innovatively stem s from genetics. 8 That means that roughly two-thirds of our innovation skills still come through learning—from first understanding the skill, then practicing it, and ultimately gaining con? dence in our capacity to create. This is one reason that individuals who grow up in societies that promote community versus individualism and hierarchy over merit—such as Japan, China, Korea, and many Arab nations—are less likely to creatively challenge the status quo and turn out innovations (or win Nobel prizes).To be sure, many innovators in our study seemed genetically gifted. But more importantly, they often described how they acquired innovation skills from role models who made it â€Å"safe† as well as exciting to discover new ways of doing things. If innovators can be made and not just born, how then do they come up with great new ideas? Our research on roughly ?ve hundred innovators compared to roughly ? ve thousand executives led us to identify five discover y skills that distinguish innovators from typical executives (for detail on the research 00092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 23 23 The DNA of Disruptive Innovators methods, see appendix B). First and foremost, innovators count on a cognitive skill that we call â€Å"associational thinking† or simply â€Å"associating. † Associating happens as the brain tries to synthesize and make sense of novel inputs. It helps innovators discover new directions by making connections across seemingly unrelated questions, problems, or ideas. Innovative breakthroughs often happen at the intersection of diverse disciplines and ? elds.Author Frans Johanssen described this phenomenon as â€Å"the Medici effect,† referring to the creative explosion in Florence when the Medici family brought together creators from a wide range of disciplines—sculptors, scientist, poets, philosophers, painters, and architects. As these individuals connected, they created new ideas a t the intersection of their respective fields, thereby spawning the Renaissance, one of the most innovative eras in history. Put simply, innovative thinkers connect fields, problems, or ideas that others ? nd unrelated.The other four discovery skills trigger associational thinking by helping innovators increase their stock of building-block ideas from which innovative ideas spring. Speci? cally, innovators engage the following behavioral skills more frequently: Questioning. Innovators are consummate questioners who show a passion for inquiry. Their queries frequently challenge the status quo, just as Jobs did when he asked, â€Å"Why does a computer need a fan? † They love to ask, â€Å"If we tried this, what would happen? † Innovators, like Jobs, ask questions to understand how things really are today, why they are hat way, and how they might be changed or disrupted. Collectively, their questions provoke new insights, connections, possibilities, and directions. We fou nd that innovators consistently demonstrate a high Q/A ratio, where questions (Q) not only outnumber answers (A) in a typical conversation, but are valued at least as highly as good answers. 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 24 24 DISRUPTIVE INNOVATION STARTS WITH YOU Observing. Innovators are also intense observers. They carefully watch the world around them—including customers, products, services, technologies, and companies—and the bservations help them gain insights into and ideas for new ways of doing things. Jobs’s observation trip to Xerox PARC provided the germ of insight that was the catalyst for both the Macintosh’s innovative operating system and mouse, and Apple’s current OSX operating system. Networking. Innovators spend a lot of time and energy ?nding and testing ideas through a diverse network of individuals who vary wildly in their backgrounds and perspectives. Rather than simply doing social networking or networking for resources, they actively search for new ideas by talking to people who may offer a radically different view of things.For example, Jobs talked with an Apple Fellow named Alan Kay, who told him to â€Å"go visit these crazy guys up in San Rafael, California. † The crazy guys were Ed Catmull and Alvy Ray, who headed up a small computer graphics operation called Industrial Light & Magic (the group created special effects for George Lucas’s movies). Fascinated by their operation, Jobs bought Industrial Light & Magic for $10 million, renamed it Pixar, and eventually took it public for $1 billion. Had he never chatted with Kay, he would never have wound up purchasing Pixar, and the world might never have thrilled to wonderful animated ? ms like Toy Story,WALL-E, and Up. Experimenting. Finally, innovators are constantly trying out new experiences and piloting new ideas. Experimenters unceasingly explore the world intellectually and experientially, holding convictions at bay and testing hypotheses along the way. They visit new places, try new things, seek new information, and experiment to learn new things. Jobs, for example, has tried new experiences all his life—from meditation and 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 25 25 The DNA of Disruptive Innovators living in an ashram in India to dropping in on a calligraphy class at Reed College.All these varied experiences would later trigger ideas for innovations at Apple Computer. Collectively, these discovery skills—the cognitive skill of associating and the behavioral skills of questioning, observing, networking, and experimenting—constitute what we call the innovator’s DNA, or the code for generating innovative business ideas. The Courage to Innovate Why do innovators question, observe, network, and experiment more than typical executives? As we examined what motivates them, we discovered two common themes. First, they actively desire to change the status quo .Second, they regularly take smart risks to make that change happen. Consider the consistency of language that innovators use to describe their motives. Jobs wants to â€Å"put a ding in the universe. † Google cofounder Larry Page has said he’s out to â€Å"change the world. † These innovators steer entirely clear of a common cognitive trap called the status quo bias—the tendency to prefer an existing state of affairs to alternative ones. Most of us simply accept the status quo. We may even like routine and prefer not to rock the boat. We adhere to the saying, â€Å"if it ain’t broke, don’t fix it,† while not really questioning whether â€Å"it† is â€Å"broke. In contrast, innovators see many things as â€Å"broke. † And they want to ? x them. How do innovators break the status quo? One way is to refuse to be dictated by other people’s schedules. Just glance at an innovative executive’s typical calendar a nd you will ? nd a radically different schedule compared to less inventive executives. We found that innovative entrepreneurs (who are also CEOs) spend 50 percent more time on discovery activities (questioning, observing, experimenting, and networking) than CEOs with no innovation track 100092 01 015-040 r1 go. qxp /13/11 9:56 AM Page 26 26 DISRUPTIVE INNOVATION STARTS WITH YOU record. That translated into spending almost one more day each week on discovery activities. They understand that ful? lling their dreams to change the world means they’ve got to spend a signi? cant amount of time trying to discover how to change the world. And having the courage to innovate means that they are actively looking for opportunities to change the world. Embracing a mission for change makes it much easier to take smart risks, make mistakes, and most of all, learn quickly from them.Most innovative entrepreneurs we studied felt that mistakes are nothing to be ashamed of. In fact, they are an expected cost of doing business. â€Å"If the people running Amazon. com don’t make some signi? cant mistakes,† Jeff Bezos told us, â€Å"then we won’t be doing a good job for our shareholders because we won’t be swinging for the fences. † In short, innovators rely on their â€Å"courage to innovate†Ã¢â‚¬â€an active bias against the status quo and an un? inching willingness to take smart risks—to transform ideas into powerful impact. In summary, the DNA of innovators—or the code for enerating innovative ideas—is expressed in the model shown in ? gure 1-1. The key skill for generating innovative ideas is the cognitive skill of associational thinking. The reason that some people generate more associations than others is partly because their brains are just wired that way. But a more critical reason is that they more frequently engage in the behavioral skills of questioning, observing, networking, and experimenting. These are the catalysts for associational thinking. Of course, the next question is, why do some people engage these four skills more than others?The answer is that they have the courage to innovate. They are willing to embrace a mission for change and take risks to make change happen. The bottom line is that to improve your ability to generate innovative ideas, you need to practice associational thinking and more frequently engage in questioning, observing, 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 27 27 The DNA of Disruptive Innovators FIGURE 1-1 The innovator’s DNA model for generating innovative ideas Courage to innovate Behavioral skills Cognitive skill to synthesize novel inputs QuestioningChallenging the status quo Taking risks Observing Associational thinking Networking Innovative business idea Experimenting networking, and experimenting. That will likely only happen if you can somehow cultivate the courage to innovate. As innovators actively engage in their discove ry skills over a lifetime, they build discovery habits, and they become de? ned by them. They grow increasingly con? dent in their ability to discover what’s next, and they believe deeply that generating creative insights is their job. It is not something to delegate to someone else.As A. G. La? ey declared, â€Å"innovation is the central job of every leader—business unit managers, functional leaders, and the CEO. †9 The Innovator’s DNA We’ve just told you that the ability to be innovative is not based primarily on genetics. At the same time, we’re using the DNA metaphor to describe the inner workings of innovators, which suggests that it is. Bear with us for a moment. (And welcome to the world of innovation, where the ability to synthesize two seemingly opposing ideas is the type of associating that produces novel 00092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 28 28 DISRUPTIVE INNOVATION STARTS WITH YOU insights. ) Recent developments in the ? eld of gene therapy show that it is possible to modify and strengthen your physical DNA, for example, to help ward off diseases. 10 Likewise, it is metaphorically possible to strengthen your personal innovator’s DNA. Let us provide an illustration. Imagine that you have an identical twin, endowed with the same brains and natural talents that you have. You’re both given one week to come up with a creative new business idea.During that week, you come up with ideas alone, just thinking in your room. By contrast, your twin (1) talks with ten people— including an engineer, a musician, a stay-at-home dad, and a designer—about the venture; (2) visits three innovative start-ups to observe what they do; (3) samples five â€Å"new to the market† products and takes them apart; (4) shows a prototype he’s built to five people, and (5) asks â€Å"What if I tried this? † and â€Å"What would make this not work? † at least ten times eac h day during these networking, observing, and experimenting activities.Who do you bet will come up with the more innovative (and usable) idea? My guess is that you’d bet on your twin, and not because he has better natural (genetic) creative abilities. Of course, the anchor weight of genetics is still there, but it is not the dominant predictor. People can learn to more capably come up with innovative solutions to problems by acting in the way that your twin did. As figure 1-2 shows, innovative entrepreneurs rarely display across-the-board strength in observing, experimenting, and networking, and actually don’t need to. All of the high-pro? e innovative entrepreneurs in our study scored above the seventieth percentile in associating and questioning. The innovators seemed to hold these two discovery skills more universally. But the innovators we studied didn’t need world-class strength in the other behaviors. It certainly helped if they excelled at one of the four skills and were strong in at least two. If you hope to be a better 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 29 29 The DNA of Disruptive Innovators Discovery Skill Strengths Differ for Disruptive Innovators To understand that innovative entrepreneurs develop and use ifferent skills, look at ? gure 1-2. It shows the percentile rank scores on each of the ? ve discovery skills for four well-known founders and innovators: Pierre Omidyar (eBay), Michael Dell (Dell), Michael Lazaridis (Research In Motion), and Scott Cook (Intuit). The percentile rank indicates the percentage of over ? ve thousand executives and innovators in our database who scored lower on that particular skill. A particular skill is measured by the frequency and intensity with which these individuals engage in activities that compose the skill.FIGURE 1-2 High-pro? le innovators’ discovery skills pro? le 100 90 Percentile rank 80 70 Mike Lazaridis Pierre Omidyar Scott Cook Michael Dell Noninnovators 60 50 40 30 20 10 or kin g Ne tw en tin g Ex p er im in g bs er v O ni ng io ue st Q As s oc iat in g 0 As you can see, the pattern for each innovative entrepreneur is different. For example, Omidyar is much more likely to acquire his ideas through questioning (ninety-fifty percentile) and (continued) 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 30 30 DISRUPTIVE INNOVATION STARTS WITH YOU bserving (eighty-seventh percentile), Dell through experimenting (ninetieth percentile) and networking (ninety-eighth percentile), Cook through observing (eighty-eighth percentile) and questioning (eighty-third percentile), and Lazaridis through questioning (ninety-sixth percentile) and networking (ninetyeighth percentile). The point is that each of these innovative entrepreneurs did not score high on all ? ve of the discovery skills. They each combined the discovery skills uniquely to forge new insights. Just as each person’s physical DNA is unique, an innovator’s DNA comprises a uni que combination f skills and behaviors. innovator, you will need to ? gure out which of these skills you can improve and which can be distinguishing skills to help you generate innovative ideas. Delivery Skills: Why Most Senior Executives Don’t Think Different We’ve spent the past eight years interviewing scores of senior executives—mostly at large companies—asking them to describe the most novel and valuable strategic insights that they had generated during their careers. Somewhat surprisingly, we found that top executives rarely mentioned an innovative business idea that they had personally generated.They were extremely intelligent and talented individuals who were accomplished at delivering results, but they didn’t have much direct, personal experience with generating innovative business ideas. In contrast to innovators who seek to fundamentally change existing business models, products, or processes, most senior executives work hard to efficien tly deliver the next thing that should be done given the existing business model. That is, they 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 31 31 The DNA of Disruptive Innovators I’m Not Steve Jobs . . . Is This Relevant?OK, so you’re not Steve Jobs. Or Jeff Bezos. Or any other famous business innovator. But that doesn’t mean you can’t learn from these innovators. You can get better at innovating, even if most of your innovations are somewhat incremental in nature. We’ve seen it happen, and we’ve seen that it can make a difference. We’ve seen a pharmaceutical executive practice a questioning technique (see chapter 3) each day to identify key strategic issues facing his division. After three months, his boss told him that he’d become the most effective strategic thinker on his team.Within six months, he was promoted to a corporate strategic planning job. â€Å"I just improved my ability to ask questions,† he told us . We’ve seen MBA students in our classes use the observing, networking, and experimenting techniques to generate entrepreneurial business ideas. One got the idea for launching a company that uses bacteria to eat pollution from networking with someone he met at a neighborhood barbeque. Another observed that the best English speakers in Brazil were people who watched American movies and television. So he launched a company that sells software that helps people learn English by watching movies.Many innovative ideas may seem small, such as a new process for effectively screening job recruits or a better way to build customer loyalty, but they are valuable new ideas nonetheless. And if you come up with enough of them, they will de? nitely help you advance in your career. The point is this: you don’t have to be Steve Jobs to generate innovative ideas for your business. work inside the box. They shine at converting a vision or goal into the speci? c tasks to achieve the de? n ed goal. They organize work and conscientiously execute logical, detailed, data-driven plans of action.In short, most executives excel at execution, including the 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 32 32 DISRUPTIVE INNOVATION STARTS WITH YOU following four delivery skills: analyzing, planning, detail-oriented implementing, and disciplined executing. (We’ll say more about these skills later in the chapter and in chapter 8, but for now we need only note that they are critical for delivering results and translating an innovative idea into reality. ) Many innovators realize that they are de? cient in these critical skills and, consequently, try to team up with others who possess them.For example, eBay founder Omidyar quickly recognized the need for execution skills, so he invited Jeff Skoll, a Stanford MBA, and Meg Whitman, a Harvard MBA, to join him. â€Å"Jeff Skoll and I had very complementary skills,† Omidyar told us. â€Å"I’d say I did more of the creative work developing the product and solving problems around the product, while Jeff was involved in the more analytical and practical side of things. He was the one who would listen to an idea of mine and then say, ‘Ok, let’s ? gure out how to get this done. ’† Skoll andWhitman professionalized the eBay Web site, added ? xed-price auctions, drove international expansion, developed new categories such as autos, and integrated important capabilities such as PayPal. Why do most senior executives excel in the delivery skills, but are only above average in discovery skills? It is vital to understand that the skills critical to an organization’s success vary systematically throughout the business life cycle. (See ? gure 1-4). For example, in the start-up phase of an innovative venture, the founders are obviously more discovery-driven and entrepreneurial.Discovery skills are crucial early in the business life cycle because the company’s key task is to generate new business ideas worth pursuing. Thus, discovery (exploration) skills are highly valued at this stage and delivery (execution) skills are secondary. However, once innovative entrepreneurs come up with a promising new business idea and then shape that idea into a bona fide business opportunity, the company begins to grow and then must pay attention to building the processes necessary to scale the idea. 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AM Page 33 33 The DNA of Disruptive Innovators The Discovery and Delivery Skills Matrix:How Innovators Stack Up To test the assertion that innovative executives have a different set of skills than typical executives, we used our innovator’s DNA assessment to measure the percentile rank of a sample of highpro? le innovative entrepreneurs (founder CEOs of companies on BusinessWeek’s list of the top one hundred most innovative companies) on both the ? ve discovery skills (associating, questioning, observing, net working, experimenting) and the four delivery or execution skills: analyzing, planning, detail-oriented implementing, and self-disciplined executing. We averaged their percentile rank scores across the ? e discovery skills to get an overall percentile rank, and then did the same thing across the four delivery skills to get an overall percentile rank. We refer to the overall percentile rank across the ? ve discovery skills as the â€Å"discovery quotient† or DQ. While intellectual quotient (or IQ) tests are designed to measure general intelligence and emotional quotient (or EQ) assessments measure emotional intelligence (ability to identify, assess, and control the emotions of ourselves and others), discovery quotient (DQ) is designed to measure our ability to discover ideas for new ventures, products, and processes.Figure 1-3 shows that the high-pro? le innovative entrepreneurs scored in the eighty-eighth percentile on discovery skills, but only scored in the ? fty-sixth perc entile on delivery skills. In short, they were just average at execution. We then conducted the same analysis for a sample of nonfounder CEOs (executives who had never started a new business). We found that most senior executives in large organizations were the mirror image of innovative entrepreneurs: they scored around the eightieth percentile on delivery skills, while scoring only above average on (continued) 100092 01 015-040 r1 go. qxp 5/13/11 9:56 AMPage 34 34 DISRUPTIVE INNOVATION STARTS WITH YOU FIGURE 1-3 Discovery-delivery skills matrix 100 (Percentile score) 75 Discovery skills Founder CEOs at innovati

The State Owned Commercial Banks In China Finance Essay - Free Essay Example

Sample details Pages: 20 Words: 6095 Downloads: 8 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Since the latest Chinese banking reform started from 2001 focus on the ownership transformation via foreign participation and stock listing, there is a great progress for the Chinese Big Four state-owned commercial banks (SOCBs) in their operational efficiency and profitable results. The paper reviews the process of Chinese banking reforms and compares the banking efficiency of nine typical Chinese commercial banks before and after their IPOs empirically (through DEA approach). Using data from 2005 to 2009 of nine banks and analysis them, the objective of this paper is to find out whether the Big Four state-owned commercial banks (SOCBs) are more efficient after their ownership reform than before, and to conclude what is the implication of this ownership reform in Chinese banking system. Don’t waste time! Our writers will create an original "The State Owned Commercial Banks In China Finance Essay" essay for you Create order Key Words: Chinese SOCBs; Ownership reform; Banking efficiency; Data envelopment analysis (DEA) Since Chinese economic reform and open up started in the year 1978, Chinese modern banking system went through a great transformation and achieved a great improvement. After the year 1978, Chinese economic reforms have been focused on Chinese economic transformation from a planning economy to a market-based economy (Chen, Skully and Brown, 2005). As for Chinese banking system, the reform point is the ownership transformation via foreign participation and stock listing. In the year 2006, Bank of China (BOC) and Industrial and Commercial Bank of China (ICBC) became the first two listed banks in China, which also created a history-the largest scale of IPO around the world at that time. By the end of the year 2009, there were 14 listed banks in China, including Chinese Big Four state-owned commercial banks (SOCBs). Among the 14 listed banks, six of the top seven commercial banks listed i n Shanghai and Hong Kong stock exchange. When China participated in the World Trade Organization (WTO) at December of 2001, Chinese government promised to totally open up its national banking market for all the qualified foreign banks and other foreign financial institutions. In order to cope with the immediate challenges from international financial institutions, the recent banking reform in China was aim to transform the Chinese banking system from a monopolistic and centralized structure to a multi-ownership and competitive banking system (Wu, 2006). With the faster development of banking reform, the problem of banking efficiency has become a focus in modern finance. The banking efficiency indicates the comparison relationship of inputs and outputs, or cost and income during the banking operational business. In other words, banking efficiency refers to the effective allocation of banking resources, which is the combination of banks competitive ability, input-output ability and sustainable development ability. In addition, the banking efficiency is an essential index to measure the performance of banks, the usage of resources, standard of banking management, and ability of sustainable development. On the background of recent banking reform and worldwide financial crisis, the objective of this paper is to compare the bank efficiency of nine typically Chinese commercial banks before and after their IPOs empirically (using DEA approach), to find out whether the Big Four SOCBs are more efficient after their ownership reformation, and to conclude what is the implications of this banking reform. The paper will mainly use Data Envelopment Analysis (DEA) to conclude the efficiency lever of nine mainly Chinese commercial banks over the period 2005-2009, especially focus on the Big Four SOCBs. Among them, Bank of China (BOC, established in 1912), China Construction Bank (CCB, established in 1954) and Industrial and Commercial Bank of China (ICBC) were the biggest w inner after world financial crisis, and replaced the western top financial institutions to be the worlds first three most profitable banks since the year 2008. The aim of this paper is twofold. First of all, it reviews the process of Chinese banking reforms and the methods people used to analysis the efficiency of commercial banks around the world. Secondly, we examine the efficiency of Chinese commercial banks, especially the four state-owned commercial banks (SOCBs), to find out whether the four SOCBs are more efficient after their IPOs than before, and to conclude what is the implication of Chinese recent banking reform. The structure of this paper is organized as follows: Chapter 1 gives a brief introduction of the background and objective of this paper; Chapter 2 reviews the literature on the studies of banking efficiency; Chapter 3 discusses the process of Chinese banking ownership reform especially the latest one; Chapter 4 describes empirical model we use to analysis t he banking efficiency- the Data Envelopment Analysis (DEA); Chapter 5 describes the data we choose and empirical modeling results; Chapter 6 will discusses conclusion and implications of the whole paper. Chapter 2 Literature Review 2.1 About banking efficiency Banking efficiency can be viewed as the ability of social financing that commercial banks could possess under the condition of security, profitability and liquidity. Banking efficiency includes micro efficiency and macro efficiency, and the former is the object of study in this paper. According to western banking management theory, micro efficiency in banking indicates the comparison relationship of inputs and outputs of commercial banks. In most of studies, banking efficiency is briefly showed as: efficiency = outputs/ inputs. Throughout those studies, there are about three efficiencies in the banking efficiency theory analysis: scale efficiency, scope efficiency and X efficiency (John, Iftekhar and Paul, 2005). Specifically, scale efficiency indicates the improvement of labor productivity or the decline of average product cost, which all stem from the same proportion addition of whole production factors. The scale efficiency can measure the effe cts of inputs of banks on cost saving, while scope efficiency stands for the efficiency of the diversity on products and services, which measures the effects of diversity business of banks on cost saving. The scale efficiency and scope efficiency are the definitions from neoclassical economics, which are all used depends on their external features. According to the neoclassical economics, the direct reason of scale efficiency and scope efficiency is that the large scale and diversity business create more market power, which could decrease the products prices and raise service prices. In the mean time, it is convenient to adopt advanced technology. The X efficiency was put forward aim at the internal situation in banks itself. Harvey Leeibenstein, one of the most famous American economists, put forward the X efficiency theory in 1966 after he studied the factory efficiency in developing countries. Harvey Leeibenstein suggested that firms may own allocative economic efficiency at a ny circumstances. Since it does not have a clear characteristic, it is called X efficiency. The effect of X efficiency theory is based on the information asymmetry and incomplete of labor contract. Under this assumption, the economic efficiency is not a result of the enterprises as a whole decision-maker, but a result of their internal strategy (Fu and Heffernan, 2007). Recently, X efficiency has became a popular topic in efficiency research (Fu and Heffernan, 2007). In this paper, we define the banking efficiency as the comparison relationship of inputs and outputs, or of cost and income during the banking operation business. In other words, banking efficiency refers to the effective allocation of banking resources, which is the combination of competitive ability, input-output ability and sustainable development ability. 2.2 Review on banking efficiency When it comes to measuring banking efficiency, most of the studies before were mainly included three parts: the consequen ce of mergers and acquisitions around banks (Berger and Humphery, 1992; Rhoads, 1993); the contrast of private banking ownership, public and foreign banking ownership (Hasan and Marton, 2003); and the effects of access and deregulation over foreign institution (Chen, 2001; Claessens, 2001). Recently, however, researches on banking efficiency have transferred to compare efficiencies among different commercial banks (including both SOCBs and JSCBs) or to test the coherence among different frontier methods such as SFA and DEA approach (Weill, 2004; Bos and Kolari, 2005). Since the year 1980, with more and more intense competition in banking system, all banks around the world aimed to improve their competition ability and enhance their banking management. Those studies on banking efficiency have transferred to the internal resource allocation in banks, and the X efficiency was paid attention to in theory (Leeibenstein, 1966). At the same time, the relative researches were more depend on the frontier efficiency analysis. Farrell (1957) firstly studied the firm efficiency from micro aspect, and firstly introduced the definition of frontier efficiency function. The main idea of frontier efficiency is that defining all the possible outputs external frontier based on a series of inputs observations. The frontier efficiency is a relatively valid definition, which is now become the most general approach in the micro efficiency research area. The frontier efficiency analysis on banking efficiency comprises the parametric methods and non-parametric methods (Ariff and Luo, 2008). The most popular parametric methods are Stochastic Frontier Approach (SFA), Distribution Free Approach (DFA) and Thick Frontier Approach (TFA), while the most familiar non-parametric methods are Data Envelopment Analysis (DEA) and Free Disposal Hull (FDH). Among these methods, the methods used in this paper-DEA is viewed as the most frequently used approach (Wei and Wang, 2000; Zheng and Zhan g, 2004; Chen et al., 2005; Fu and Heffernan, 2007; Ariff and Can, 2008; Lin and Zhang, 2009). The most controversy problems in the studies of financial institution efficiency are two aspects: the one is how to define and compute the inputs and outputs of banks; the other is how to make sure the best business boundary to evaluate banking performance. There are three methods for measuring inputs and outputs of banks: production method, intermediate method and profit-output method. Berger and Humphrey (1997) indicated that neither production method nor intermediate method is perfect, they should supply each other: production method is better on analysis the overall standard of banking efficiency and intermediate method is suitable for measure the efficiency of branches. Ferrier and Lovell (1990) demonstrated that considering the operational cost of banks, production method is good to research the banks cost efficiency, while intermediate method can be used to analysis the econom ic difference of different banks. The early studies in banking efficiency mostly focus on scale efficiency and scope efficiency. In European, Dietsch (1993), Zardkoohi and Kolari (1994) indicated that economy of scale plays an important role in banking sector. And in US, studies proved that the average cost of banks is relatively associate with some evidence of scale efficiency (Berger, Hunter and Timme, 1993; Gilbert, 1994; Mester, 1987). Apart from studies on the European and American banks, researches of banks in developing economies, such as in China and India, have become increasingly popular after 1990s. A wealth of information is to be found in the statistics literature, they generally point out that the whole efficiency of Chinese commercial banks has been improved generally after a series of banking reforms since the open up reform in 1978, and the joint-stock commercial banks (JSCBs) were more efficient than those state-owned commercial banks (SOCBs) by about 10 to 20 p ercent (Wei and Wang, 2000; Zhang, 2003; Zheng and Zhang, 2004; Chen, 2005; Fu and Heffernan, 2007; Ariff and Can, 2008; Lin and Zhang, 2009). According to one of the popular classification on banking efficiency, the banking efficiency can be divided into scale efficiency (SE) and technical efficiency (TE). According to Laurenceson  ¼Ãƒâ€¹Ã¢â‚¬  2001 ¼Ãƒ ¢Ã¢â€š ¬Ã‚ ° and Zhao (2008), the inefficiency of the joint-stock commercial banks (JSCBs) mainly because of their unsuccessful on scale efficiency. As for the reason of the inefficiency of state-owned commercial banks (SOCBs), pure technical inef ¬Ãƒâ€šÃ‚ ciency (PTE) should took responsible for it (Wei and Wang, 2000; Kumbhakar and Wang, 2005). When it comes to the influence of banking reform, apart from improved efficiency concluded by Chen (2005), Berger, Iftekhar and Zhou (2009) indicated the effectiveness of bringing in foreign institutions for banking operational performance enhancement. In addition, the WTO participation of China was found to be related to a decline in overall efficiency, scale efficiency (SE) and pure technical efficiency (PTE) (Kumbhakar and Wang, 2005; Fu and Heffernan, 2007; Hu et al., 2008). In the meantime, factors that affect banking efficiency had also been explored (Zhang, 2003; Chang and Chiu, 2006; Wang and Tan, 2007; Yao et al., 2007; Ariff and Can, 2008; Fu and Heffernan, 2007; Hu et al., 2008). As for the relationship between stock listing and enhancement of banking efficiency, Liu and Song (2004) proved that among those joint-stock commercial banks (JSCBs), listed banks, such as China Merchants Bank of China (CMBC) and Pudong Development Bank (PDB), had a higher efficiency score than average efficiency score. In addition, Lin and Zhang (2009) observed that listed banks had better performance than those non-listed banks. Since most of the Chinese commercial banks were listed on the Hong Kong and Shanghai stock exchanges over the year 2006 and 2007 , the post-IPO data were available. In recent years, a large amount of studies have paid attention to Chinese banking efficiency to obtain an understanding of the process of Chinese banking reform since the year 1978. Sehrt and Park (2001) demonstrated that Chinese banks are inefficient, and the banking ownership reform started from 1990s has not substantially raise the operational performance and banking efficiency of Chinese banking. In terms of Data Envelopment Analysis (DEA), Wei and Wang (2000) tried to empirically conclude the scale efficiency (SE), pure efficiency (PE) and technical efficiency (TE) of Chinese mainly commercial banks within the year 1997, their results proved that the state-owned commercial banks (SOCBs) do suffer technical inefficiency. According to their work, the average technical efficiency of the SOCBs was 62.39% and was much lower than the newly established commercial banks, which the average efficiency of 84.59%. Similarly, the empirical results of C hi, Skuly and Brown (2005) concluded that the scale economies of joint-equity commercial banks (JSCBs) were better than that of state-owned commercial banks (SOCBs). Using DEA approach, Zhao (2000), Qin and Qu (2001), Chen (2002), Zhao et al. (2002), Zhang (2003), and Liu (2004) also confirmed that Chinese SOCBs do suffer inefficiency. To conclude, studies on banking efficiency always focus on the relationship between inputs and outputs. There are three ways to measure the indicators: production method, intermediate method and profit-output method, the first two are usually adopted. Stochastic Frontier Approach (SFA) and Data Envelopment Analysis (DEA) are the most popular approaches in computing banking efficiency. Chapter 3 Process of Chinese banking reforms Chinese financial system has a long history, but the modern Chinese banking system was created after the year 1948, when Peoples Bank of China (PBOC) established. There were two banking reforms since Chinese modern banking system set up: the first banking transformation started from the economic reform and open up in 1978, and the latest banking ownership reform began after China entered World Trade Organization (WTO) at the end of 2001. The Chinese modern banking system was initially created following the socialist banking system in the former Soviet Union. At that time, Chinese owned a mono banking system, which concentrate all the roles of central banking and commercial banking to the Peoples Bank of China (PBOC). So PBOC, established in 1948, acted as a central bank and the only commercial bank in China for a long period (Dai, 2003). Following the economic reform and open up in 1978, there were several state-owned commercial banks (SOCBs) founded. Peoples Bank of China (P BOC) was divided into two parts: the central bank part and the bank with commercial operation part. The central bank part was still named Peoples Bank of China (PBOC), but the commercial operation part was changed into state-owned banks. Among the state-owned commercial banks, the Bank of China (BOC, established in 1912), China Construction Bank (CCB, established in 1954), Agriculture Bank of China (ABC, established in1979), and Industrial and Commercial Bank of China (ICBC) made up the Chinese Big Four state-owned commercial banks  ¼Ãƒâ€¹Ã¢â‚¬  SOCBs ¼Ãƒ ¢Ã¢â€š ¬Ã‚ °, which initially owned some lending function separated from PBOC and eventually became the core part of modern Chinese banking system. Big Four were focus on different aspects of Chinese social hierarchy: the Bank of China (BOC) was mainly focus on foreign exchange business, the China Construction Bank (CCB) was mainly provide services to the large constructions in urban area, the Agriculture Bank of Chin a (ABC) was mostly concentrate on rural finance, and the Industrial and Commercial Bank of China (ICBC) was responsible for industrial and commercial activities in urban areas. In the year 1985, the Big Four were allowed to compete in all sectors. Until the middle of 1990s, Chinese banking system was dominated by the PBOC and Big Four. At that stage, some non-state commercial banks and joint-stock commercial banks  ¼Ãƒâ€¹Ã¢â‚¬  JSCBs ¼Ãƒ ¢Ã¢â€š ¬Ã‚ ° were gradually allowed to run business throughout China. Before the year of 1986, all Chinese banks were under the direct leading of the Ministry of Finance and Peoples Bank of China (PBOC). The state-owned enterprises (SOEs) like Big Four were not set up for profit purpose, but played essential social roles in the whole Chinese economy (Subal C.K and Dan W, 2007). After 1978, banking reforms turned its point into Chinese economic transformation from a planning economy to a market-based economy (Chen, Skully and Brown, 2005). The structure of Chinese modern banking system could be illustrated as Figure 1, which is a pyramid structure (Enrico G and Rubens P, 2009). The top of pyramid is represented by Peoples Bank of China (PBOC), the central bank of China. Banks on the second layer are the state-owned banks, which make up the core power of Chinese banking system. It can be divided into state-owned commercial banks (SOCBs) and state-owned policy banks. In addition, joint-stock commercial banks (JSCBs) and city commercial banks are also the significant bank types in the Chinese banking system. Figure 1 Structure of Chinese Banking System In order to raise competition ability after joining WTO and with the foreign financial institution access, Chinese second banking reform started and enhanced after the end of 2001. During this reform, the Chinese government unloaded more than 2.6 trillion yuan of non-performing loans (NPLs) from the three biggest SOCBs (CCB, BOC and ICBC) during the year 19 99 to the year 2005 to restructure Chinese financial system and then pushed the ownership banking reform to the last phase, ownership restructuring via stock listing and foreign merger acquisition. In the year 2003, the Chinese Banking Regulatory Commission (CBRC) changed its guidelines to encourage external investment, and this encouragement worked. As a result, all the four biggest SOCBs attracted a large amount of foreign investment from world top financial institutions, such as Royal Bank of Scotland (RBS), Merrill Lynch and Bank of America (BOA). In October 2005, China Construction Bank (CCB) became the first listed SOCB, and this listing trend was followed by Bank of China (June 2006) and Industrial and Commercial Bank of China (October 2006). The initial public offering (IPO) of ICBC (almost $22 billion) was larger than any other IPOs issued in New York, London and Tokyo. By the year of 2009, the last SOCB, Agriculture Bank of China (ABC) finished its listing process. This t ime also witnessed the listing of other joint-stock commercial banks (JSCBs) such as China Mingsheng Bank (CMSB) and China Merchants Bank of China (CMBC), which also had significant impact upon the financial markets (Yao et al., 2008). During the process of listing of Chinese commercial banks, how to deal with the non-performing loans (NPLs) was the most important step. Over this banking reform, the Chinese government has unloaded over 2.6 trillion yuan of NPLs from the three biggest SOCBs (CCB, BOC and ICBC) during the period 1999 to 2005. Table 1 below indicates the amount and proportion of NPLs in major Chinese commercial banks from the year 2005 to 2009. We can see during this period, the whole amount of NPLs decreased from 1313 billion yuan (2005) to 497.3 billion yuan (2009), which achieved a great progress for dealing with NPLs. Specifically, the percentage of NPLs in state-owned banks dropped from 10.49% (2005) to 1.80% (2009), which made it possible for the listing in st ock exchange of state-owned banks. Table 1: NPLs in Major Chinese Commercial Banks (Billion yuan and %) Years 2005 2006 2007 2008 2009 All banks 1313 8.61% 1255 7.09% 1268 6.17% 560.3 2.42% 497.3 1.58% State-owned commercial banks (SOCBs) 1072 10.49% 1053 9.22% 1115 8.05% 421 2.81% 362.7 1.80% Joint-stock commercial banks (JSCBs) 147 4.22% 117 2.81% 86 2.15% 65.7 1.35% 63.7 0.95% City commercial banks 84.2 7.73% 65.5 4.78% 51.2 3.04% 48.5 2.33% 37.7 1.30% Sources: China Banking Regulatory Commission (CBRC) 2005-2009, Bank scope (2005-2009) and authors calculation. Influenced by the world financial crisis started in 2008, share prices of Chinese commercial banks dropped at first. However, as the national economy developed, Chinese banking stocks recovered rapidly (Luo et al. 2011). In the early of 2009, Chinas three largest SOC Bs had replaced the American and European financial giants and become the three largest commercial banks in the world, which measured by the market after they were listed on the Hong Kong Stock Exchange (HKSE) and Shanghai Stock Exchange (SSE) only two years later. Thanks to their nature of risk-averse, Chinese listed SOCBs were not influenced too much by financial crisis and turned out to be the least affected financial institutions by the current financial crisis among all other large banks in the world. However, in the process of continued step of globalization, the commercial banks need to adjust corporate structure, accelerate their business innovation, cut operational expenditures and improve their risk management ability to make them healthy and powerful in the future (Luo et al. 2011). Chapter 4 Empirical model 4.1. Data Envelopment Analysis (DEA) Data Envelopment Analysis (DEA) is the main pattern of non-parametric method originally put forward by Charnes, Cooper and Rhodes in 1978, while Sherma and Gold(1985) first applied DEA to the efficiency evaluation of a bank branch. In 1993, Yue and Berger used DEA to analysis the efficiency among banks again. And in the year 1997, Berger and Mester did the research on the scale of bank, the form of organization and standard of capitalization using DEA approach. DEA is a system analysis method, which is aim to synthesize different indicators and make it an overall indicator, and then use this overall indicator to evaluate the overall situation. As a non-parametric linear programming approach, DEA needs no estimation parameters, and could have an objective result, which makes it a perfect method to analysis the efficiency of banking system. DEA does not need the clear relationship between inputs and outputs; it just uses the linear programmi ng to find the relative valid sample, and uses the plane combined by the relative valid decision-making unit (DMU) combination as the efficiency frontier. If the DMU at last hit the efficiency frontier boundary, it is efficiency with the value of 1; and if the DMU eventually lands inside the efficiency frontier boundary, it is relative inefficiency with the value between 0 and 1. DMU stands for the decision-making unit, which is estimated by the ratio of the weighted outputs over the weighted inputs. Every DMU is an entity responsible for converting multiple inputs into multiple outputs (Wu. 2006). Charnes, Cooper and Rhodes (CCR) model is an input-orientated DEA model, which means measuring the ratio of reduced inputs under a certain output. When it comes to commercial banks, it is easier to control their inputs rather than outputs. So it is better to use an input-orientated DEA model to measure banking efficiency. However, there also exist some drawbacks on DEA approach. When d ata is incomplete, the results from DEA will not the reliable explanation. According to the returns to scale, Data Envelopment Analysis (DEA) includes two models: the Charnes, Cooper and Rhodes (CCR) model and the Banker, Charnes and Cooper (BCC) model. CCR model refers to the DEA approach under the assumption of constant returns to scale (CRS), while BCC model stands for the DEA approach with variable returns to scale (VRS). The paper will use both CCR and BCC methods to analysis the banking efficiency and then compares their results. If the two results under different assumption are similar, it stands for the banking efficiency has no relationship to bank scale, otherwise, it is related to returns to scale. 4.2 The Charnes, Cooper and Rhodes (CCR) model CCR model is one of the DEA approachs estimated under the assumption of constant returns to scale (CRS), which developed by Charnes, Cooper and Rhodes in 1978. It uses the linear programming to obtain the efficiency fronti er and computes the relative efficiency in each decision-making unit (DMU). If the DMU at last hit the efficiency frontier boundary, it is efficiency with the value of 1; while the other DMU at last inside the efficiency frontier boundary is relative inefficiency with the value between 0 and 1. CCR can be expressed as following: Minise ÃÆ'Ã… ½Ãƒâ€šÃ‚ ¸Ãƒâ€šÃ‚ ¼Ãƒâ€¦Ã¢â‚¬â„¢ Subject to ÃÆ' ¢Ãƒâ€¹Ã¢â‚¬  Ãƒ ¢Ã¢â€š ¬Ã‹Å"XijÃÆ'Ã… ½Ãƒâ€šÃ‚ ·j ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã‚ °Ãƒâ€šÃ‚ ¤ ÃÆ'Ã… ½Ãƒâ€šÃ‚ ¸Xik i=1, ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦, m ÃÆ' ¢Ãƒâ€¹Ã¢â‚¬  Ãƒ ¢Ã¢â€š ¬Ã‹Å"yrjÃÆ'Ã… ½Ãƒâ€šÃ‚ ·j ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã‚ °Ãƒâ€šÃ‚ ¥ yrk r=1, ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦, s; ÃÆ'Ã… ½Ãƒâ€šÃ‚ ·j=1, ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦,n Where xik and yrk are the ith input and rth output of the kth decision-making unit (DMU), and ÃÆ'Ã… ½Ãƒâ€šÃ‚ · is a non-negative vector of variables. The simple express of Cooper and Rhodes (CCR) Model is based on the assumption that decision-m aking units (DMUs) were acted under constant returns to scale (CRS). 4.3. The Banker, Charnes and Cooper (BCC) model Considering the variable returns to scale (VRS), Banker, Charnes and Cooper (1984) gave up the constant returns to scale (CRS) assumption to measure the efficiency under different returns to scale. The value of scale efficiency in BCC model can compare the technical efficiency of a bank under constant returns to scale and variable returns to scale. If there is no difference between these two results, it stands for the bank inefficiency does not come from the scale factor. Otherwise, the inefficiency of that bank comes from the scale inefficiency. The relationship can be showed as following: TECRS= TEVRS* SE Or SE= TECRS/ TEVRS As shown above, TECRS stands for the technical efficiency value under constant returns to scale (CRS); TEVRS stands for the technical efficiency value under variable returns to scale (VRS). Under the BCC model, the technical ef ficiency can be classified as pure technical efficiency (PTE) and scale efficiency (SE). It is convenient to tell how much inefficiency of commercial banks comes from pure technical inefficiency, and how much from scale inefficiency. 4.4 Variables of Inputs and Outputs under DEA approach In general, there are three methods for measuring inputs and outputs of banks: production method, intermediate method and profit-output method. Under production method, banks are viewed as the service provider to account holders. This assumption need to measure the output under the amount of dealing transaction, which is private and difficult to obtain. The production method is more suitable for study the efficiency of branch of banks. When it comes to intermediate method, financial institutions are treated as the media for savers and investors. Under this assumption, the deposits of savers, salaries and assets are banks inputs, and loans and currency amount are the outputs. The main default o f intermediate method is the neglect of risk. The third approach is the profit-output method makes the operating income as output and the deposits as input. The problem is that the operating income stands for the real cash input, but cannot completely reflect the operating performance. This paper chooses to combine the production method and intermediate method to select the input and output indicators. Specifically speaking, the input variables include deposits, number of employees and fixed assets of commercial banks. And the output indicators include loans and net incomes of those banks. All of three inputs are strongly correlated to the two outputs, and the two output variables are correlating each other. Table 2 below demonstrates the variables of inputs and outputs in this paper. Table 2 Variables of Inputs and Outputs X1 X2 X3 Y1 Y2 Deposits Employees Fixed assets Loans Net incomes Chapter 5 Data and Empirical results 5.1. Data Description All the data for the study in this paper are obtained from the Almanac of Chinas Finance and Banking (2005-2009), Chinese Statistical Yearbook (2005-2009) and Bankscope (2005-2009). The sample was composed of nine listed commercial banks: Industry and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC), China Construction Bank (CCB), China Investments and Trust Bank (CITIC), China Bank of Communications (CBC), China Mingsheng Bank (CMSB), Shenzhen Development Bank (SDB) and China Merchants Bank of China (CMBC). As showed above, there are three methods for measuring inputs and outputs of banks: production method, intermediate method and profit-output method. In this paper, we choose the combination of production method and intermediate method to select the input and output indicators. The input variables include deposits, number of employees and fixed assets of commercial banks. And the output variables choose loans and net incomes of these 9 commercial banks. The software for the computing the result is DEA Excel Solver developed by Zhu in 2003. 5.2 Empirical results Table 3 describes the inputs and outputs of the 9 Chinese mainly commercial banks in the year 2009. The data for efficiency analysis compose of all 9 banks over the period 2005-2009. According to the table, in the year 2009, Industry and Commercial Bank of China (ICBC) owned the largest scale both in fixed assets (117850.53 billion yuan) and deposits (97713 billion yuan), while Agricultural Bank of China (ABC) had the largest number of employees (389827). As for the output variables, ICBC also owned the most amount of loans (40614.44 billion yuan) and net incomes (1672.48 billion yuan). In general, the 4 state-owned commercial banks had the larger scale than those 5 joint-stock commercial banks both in inputs and outputs. Table 3 Inputs and Outputs of Chinese Commercial Banks: 2009 (billion yuan) Bank Deposits Employ ees Fixed Assets Loans Net Incomes ICBC 97713 389827 117850.53 40614.44 1672.48 ABC 74974 440830 88811.55 30149.84 738.09 BOC 58878 262566 77711.53 19680.85 929.65 CCB 80013 301537 96233.55 35113.15 1387.26 CITIC 13419 24180 17750.31 6649.24 192.66 CBC 23728 79122 32949.08 13285.90 373.32 CMSB 11254 12301 14040.87 6584.10 166.00 Sources: Almanac of Chinas Finance and Banking (2005-2009); Chinese Statistical Yearbook (2005-2009) Table 4 presents the estimated CCR efficiency scores for the 9 commercial banks in 2005-2009, while Figure 2 presents the efficiency of the Big Four SOCBs in this period. The results of DEA-CCR model are shown below in Table 5, while Table 6 indicates the efficiency of Chinese Listed Banks before and after IPOs under DEA-BBC model. Table 4 Efficiency Scores of Chinese Commercial Banks: 2005-2009 (CCR) DMU 2005 2006 2007 2008 2009 Average ICBC 0.80 0.80 0.87 0.94 0.97 0.88 ABC 0.73 0.81 0.87 0.91 0.99 0.87 BOC 0.82 0.90 0.90 0.97 1.04 0.92 CCB 0.73 0.74 0.80 0.97 0.98 0.85 CITIC 0.91 0.95 0.91 0.98 1.01 0.95 CBC 0.82 0.83 0.88 0.87 0.93 0.87 CMSB 0.90 0.78 0.81 0.88 0.90 0.86 SDB 0.82 0.83 0.88 0.88 0.90 0.87 CMBC 0.81 0.83 0.83 0.81 0.84 0.83 Sources: Almanac of Chinas Finance and Banking (2005-2009); Chinese Statistical Yearbook (2005-2009). Figure 2 Efficiencies of the Big Four SOCBs (2005-2009) It can be concluded from Table 4 that during the year 2005-2009, the average efficiency scores of Big Four SOCBs were lower than that of the other commercial banks. However, it is clearly that in the year 2008 and 2009, the efficiencies of state-owned commercial banks were higher than th at of joint-stock commercial banks. According to Figure 2, during the period of 2005 to 2009, the efficiency of the Big Four SOCBs all witnessed a huge increase. Agricultural Bank of China (ABC) is the last SOCB listed on stock exchange. After its ownership reform finished in 2009, the efficiency of ABC rushed to 0.99, about 25% higher than that in 2005. Table 5 Efficiency of Chinese Listed Banks before and after IPO CCR DMU One year before IPO IPO year One year after IPO ICBC 0.80 0.85 0.86 ABC 0.81 0.85 0.87 BOC 0.90 0.93 0.90 CCB 0.74 0.78 0.80 CITIC 0.95 0.98 0.91 CBC 0.83 0.90 0.88 CMSB 0.78 0.80 0.81 SDB CMBC 0.81 0.84 0.83 Sources: Almanac of Chinas Finance and Banking (2005-2009); Chinese Statistical Yearbook (2005-2009). Table 6 Efficiency of Chinese Listed Banks before and after IPO BCC DMU One year before IPO IPO year One year after IPO ICBC 0.94 0.99 1.01 ABC 0.91 0.95 0.97 BOC 0.97 1.04 1.01 CCB 0.97 0.98 1.01 CITIC 0.98 1.01 0.99 CBC 0.87 0.93 0.90 CMSB 0.88 0.90 0.92 SDB CMBC 0.81 0.84 0.85 Sources: Almanac of Chinas Finance and Banking (2005-2009), Chinese Statistical Yearbook (2005-2009). It is obviously to be seen from tables above is that, after the recent banking reform, there is a great progress of banking efficiency for Chinese state-owned commercial banks (SOCBs). Taking Bank of China (BOC) as an example, before its IPO year (2006), the banking efficiency was 0.82, which was a medium level among all the nine commercial banks. However, after it was listed in 2006, the efficiency of BOC increased rapidly over 0.9, and even reached 1.04 in 2009. Compared with the other commercial banks, BOC is now an outstanding international bank with high operational efficiency. As for the other three SOCBs, there is a same trend as BOC. By the end 0f 2009, ABC, the last listed SOCB owned the efficiency of 0.99, which get rid of the fortune of low efficiency and low competition ability. According to table 5 and table 6, the DMUs under CCR a nd BCC approach are different, which stands for that the efficiency of these commercial banks comes from the scale efficiency. Since the preparation of listing for the SOCBs, they did a lot of works including expanded their scale. The banking efficiency of the Big Four was clearly increased as the result of IPOs. The empirical results above indicate that stock listing is an effective way for commercial banks to improve banking efficiency. It can be seen that the average efficiency of SOCBs after IPOs year was about 6 percent more than that before IPOs. So we could confirm that the recent banking reform in China had achieved its expected objective. Since the banking reform focus on the ownership transformation via foreign participation and stock listing, there is a great progress for the Big Four state-owned commercial banks (SOCBs) both in their operational efficiency and in profitable results. Chapter 6 Conclusion and Implications The paper uses DEA approach to analysis the banking efficiency of nine commercial banks, and compares the efficiency scores before and after their IPOs. Since the process of Chinese banking reform started in 2005, the Chinese banking system has developed impressively, especially the Big Four SOCBs. After their IPOs, the Big Four achieved a great progress in the operational efficiency. Nowadays, the SOCBs still dominate the Chinese banking market. Since the world financial crisis happened in 2008, Chinese SOCBs became the top profitable commercial banks around the world, which turned out to be the least affected financial institutions by the current financial crisis. In the year 2009, CCB, BOC and ICBC replaced the American and European giants to become the first three largest commercial banks in the world measured by market after they were listed on the Hong Kong Stock Exchange (HKSE) and Shanghai Stock Exchange (SSE). In this paper, we evaluate the efficiency of 9 listed commer cial banks over the period 2005-2009, to compare the operational banking efficiency of SOCBs before and after their IPOs. We use the Data Envelopment Analysis (DEA) to measure the banking efficiency, and both CCR model and BCC model are adopted. As the empirical results shown above, we can find out that Chinese SOCBs have benefited a lot from the latest banking reform. After this transition, they have developed a range of competitive strategies in both domestic banking market and overseas market. It is overwhelming evident that a well-functioning financial system is important for a countrys economic growth. 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