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How industry leaders plan to face 2014’s economy head-on

As the economy crawls toward recovery, opportunities abound for leaders with the right mindset.

Consumer confidence rates are down. GDP growth is sluggish. Federal spending is an absolute mess. And the pundits would have you believe the end of the civilized world is one bad regulation away. It’s enough to make any business leader want to throw in the towel.

It’s been five years since the financial crisis, and the sensationalism has long lost its appeal. The economic fire and brimstone has yet to appear. That’s why, for our 2014 economic outlook, SmartCEO turned to the region’s industry leaders — folks who are in the trenches, solving problems and forging new paths — to help us prepare for what lies ahead. Their advice? Confront your challenges head-on, and take control of your own future.

A Q&A with John A. Fry, president, Drexel University


In the face of financial pressure, Drexel goes back to business basics

By Lindsay Eney

“Colleges and universities represent one of the largest economic engines in Philadelphia,” says John A. Fry, president of Drexel University. “We’re one of the largest employers and attract tens of thousands of students and visitors from around the world.”

But with decreased government funding, uprisings over the cost of tuition and struggles to raise money, colleges and universities are taking another look at their books. “The name of the game in higher ed is how to generate tuition revenue with a reasonable discount,” Fry says. Drexel, with its largest student population ever, is focusing on partnerships and entrepreneurship, including Drexel Ventures, a subsidiary helping faculty and student entrepreneurs build their businesses. Fry advises other institutions to do the same.

How are other Philadelphia leaders conquering the economy?
Read more from:
• Richard P. Miller, president and CEO of Virtua
• Deirdre Connelly, president, North America pharmaceuticals, at GlaxoSmithKline
• Toni Pergolin, president and CEO of Bancroft
• Jonathan A. Brassington, CEO and founding partner of LiquidHub
PLUS: Economic predictions from Mark Zandi, chief economist at Moody’s Analytics

Click here to read more

Click here to read more

What has the economic climate been like in higher education for the past several years, both locally and globally?
John A. Fry: Despite 2008, [higher ed] has come out of it remarkably well. But this is a time of uncertainty. Can higher ed sustain growth? Society is pushing back on the price of going to college, and we’re going to see a lot of consolidation and disruption.

What changes will higher ed need to make based on the shifting economic outlook?
JF: We’ll see growth in partnerships, like ours with Burlington County College (BCC), where students fulfill their requirements and can transfer into Drexel [after two years]. When you go to BCC, you see their flag and the Drexel flag. Our faculty is coming to you, [so] you don’t pay room and board. Half your time in college being at community college rates, then two years at Drexel rates with a co-op … it’s a very cost-efficient model. There’s demand for that. You’ll see institutions stop duplicating themselves. You’ll also see institutions become much more aggressive about international recruitment because we have the best higher ed system in the world. Institutions are not going to make it with just the domestic side.

What other partnerships will make an influence on the bottom line?
JF: These institutions are very compelling economic entities, not only in and of themselves but also in terms of attracting outside capital. You’ll see more outsourcing, laying off costs of responsibilities on the private sectors.

[We’re working with] American Campus Communities developing residential projects. When the dust settles, they’ll have invested more than $350 million into University City and Drexel’s campus. We’re out of the housing business. American Campus Communities [will] build and run the properties. They’ll profit and we’ll get a ground lease, but our students are going to have really great housing.

What are some of the challenges you see colleges and universities facing with these changes?
JF: It’s true about higher ed being an ivory tower; it’s not just knowledge, it’s how they do things. Most places like to be singular; they like to do things the way they’ve always done it. They aren’t going to have that luxury anymore. If you’re a struggling private college and you need to replace your residences, why use your money if someone else can do it for you? On the other hand, you won’t have the same degree of control you used to. It’s a trade-off.

What economic challenges are public institutions facing that the private ones aren’t?
JF: There’s been a massive change in funding. If you look at state appropriation wallets, while it may be a significant number, it’s small in comparison to tuition and all the other sources. Governments aren’t stepping away from regulating [these institutions], but they are stepping away from funding them. That puts more pressure on public institutions to rationalize what they’re doing in the public sector. People are going to wonder whether it is being rationally allocated. Is the system set up in the most efficient way? I think the answer is no.

Which economic indicators do you watch in higher ed?
JF: The No. 1 indicator is household income, whether or not households will continue to want to invest in higher education. It has a significant financial impact on the institutions. The second is federal sources. The message is clear: the government is constrained, and we’re not going to see the growth we’ve seen in previous years for financial aid. The government is going to use financial aid as a lever to put pressure on reducing increases in tuition, room and board. The other major source is philanthropy. It’s tough right now to raise money, especially big money. All those sources are under pressure. To expect significant growth in those sources would be naïve.

What advice would you give to other leaders in higher ed preparing for next year and beyond?
JF: Go into full-scale communications mode. The more [everyone] understands what the campus is trying to do, the better off everyone will be. Start educating people [about] these larger trends and how the institution plans to cope.

They also have to get a lot more entrepreneurial. “We’ve always done it this way,” is as tired as can be. These traditions are old and meaningless. Institutions have to [take more risks], be willing to put aside accepted practices and adopt new things.

Like what?
JF: I don’t think there’s any magic in the four-year calendar for a typical undergraduate education. I think we’re going to see more of what we just announced with our law school, where you compress three years of work into two years. There’s going to be a reaction from the traditionalists, but we waste a huge amount of time with breaks and vacations. The campuses could be running full tilt 12 months a year, which they should be. There’s so much capital invested in these campuses, why wouldn’t you use them more than eight months a year?

Economy_2014_zandi From the expert: An economist’s view on higher education
I think higher education will be under some significant pressure. Not the world-class institutions like the University of Pennsylvania — they’re going to continue to do well, attract funding and get the best students from all over the planet. But second-tier universities are going to be under tremendous pressure. Kids and their families are going to rethink the value of education in the context of taking on student loan debt. Technology may play a significant role in the educational services industry. The movement to internet education is just beginning and is going to be a wrenching change for the educational system. Mark Zandi, chief economist, Moody’s Analytics


A Q&A with Tom Polen, worldwide president, BD Diagnostics, BD


Why BD Diagnostics invested in innovation and efficiency to reduce costs and increase speed

By Rin-rin Yu

BD Diagnostics’ medical devices, supplies, lab equipment and diagnostic tests reach patients and hospitals worldwide, and worldwide president Tom Polen powered through the past several years of economic change with dramatic organizational changes and adaptations to a new work environment. It was a lot of “blood, sweat and tears,” he says, but the results he’s seeing are putting his company in a good position for next year’s economic outlook.

What has the economic climate been like in your industry for the past several years?

How are other Baltimore leaders conquering the economy?
Read more from:
• Freeman A. Hrabowski III, president of UMBC
• Tom Polen, worldwide president of BD Diagnostics
• Jeffrey A. Rivest, president and CEO of the University of Maryland Medical Center
• Andy Bertamini, Maryland regional president at Wells Fargo
• Deborah Tillett, president and executive director of the Emerging Technology Center
PLUS: Economic predictions from Anirban Basu, chairman and CEO of Sage Policy Group

Click here to read more.

Click here to read more.

Tom Polen: It’s been extremely dynamic. In the developed markets of the U.S. and Europe, expense management has been a big focus. We’re seeing significant contraction in those areas where patient volumes visiting physicians are flattening out and reimbursement for medical services is going down. However, the emerging markets are investing in healthcare and expanding access. The question is: How can we serve them better?

“There needs to be focus on higher clinical outcomes at lower costs and investment in healthcare economics studies and tools. The industry has to adapt.”

How is the economic climate in your industry changing today?
TP: Specifically in the diagnostic industry, we’re seeing those effects creating challenges as customers are being reimbursed and from pricing pressures. In the emerging markets, it’s more cost-effective so it’s causing us to adapt. We’ve been really focused on investing in new levels of solutions for efficiency and outcome. Most of healthcare costs are labor costs. The industry used to be just focused on outcomes and spent more money on diagnostics tests for more accurate results, but now the bigger focus is on a lower-cost test that is highly automated and requires less labor. There’s a lot more investing in automation.

Another investment is in healthcare economists. It’s the No. 1 job they’re hiring. Healthcare economists look at quantitative data to show the relationship between investments and clinical outcomes at lower healthcare costs.

What sort of economic climate are you anticipating in 2014?
TP: I expect more flat patient volumes and reimbursement challenges in the developed world.

Which economic indicators do you watch in your industry?
TP: I look at healthcare spending in each major country that we participate in. Also at patient volumes — going to see physicians and how many tests are being ordered.

What will you do to prepare for next year’s economic climate, and how will you overcome the challenges it presents?
TP: We’ve been investing heavily in innovation that drives lower healthcare costs. There’s a lot of consolidation in healthcare, more than ever in the history of healthcare. Hospitals are buying up hospitals, so there are fewer and fewer as they are consolidated into larger entities. It changes the way testing is done because they consolidate testing as well.

We are also leveraging new breakthrough technology, such as molecular diagnostics. The molecular mass spectroscopy is changing the whole game. It used to take days to run a test, diagnose a patient and prescribe the right therapy, but now it’s just hours. The costs are much lower, and it’s a big change to patients.

“The emerging markets are investing in healthcare and expanding access. The question is: How can we serve them better?”

One other thing people are focusing on is using diagnostics to better inform patients and doctors how to use the treatment earlier and managing the disease at a lower cost very early. Diagnostics can play a large role in the market and innovation investment.

How does the Affordable Care Act affect your business?
TP: We see it continuing to put pressure on the healthcare system, specifically with significant reimbursement reduction and the shift from fee for service to fee for diagnosis.

Where do you see future growth for healthcare, and how are you shifting your strategic goals to take advantage of that growth?
TP: Innovation is where we’re getting good growth. But beyond innovation, we’ve been investing in emerging markets. We doubled our sales teams in China, the Middle East, Africa, Eastern Europe and Russia to expand our presence and have seen growth accelerate there. We also have unique products in that market. We used to sell the same products in the U.S. to the emerging markets, but they were too big, too expensive and didn’t meet the [needs of] local healthcare [providers]. Now we’re tailoring them with very positive success.

What advice would you give to other leaders in your industry on preparing for next year and beyond?
TP: The approach of the diagnostic industry historically is not an appropriate one moving forward. There needs to be focus on higher clinical outcomes at lower costs and investment in healthcare economics studies and tools. The industry has to adapt. Pharma would be much better recognized for its work if the diagnostic industry can show proof that its investments are worth the value.

A Q&A with Linda Hudson, president and CEO, BAE Systems, Inc.


Adjusting the lens: In the face of slowed government spending, BAE Systems, Inc., focuses on what it can control

By Mike Unger

With about 38,500 employees and more than $12 billion in annual revenue, BAE Systems, Inc., is one of America’s leading defense and aerospace companies.

As its president and CEO, it’s Linda Hudson’s job to ensure stability and growth in the company’s four main sectors — land and armaments, electronic systems, intelligence and security, and support solutions — despite forces often outside her control.

“We’ve got a diversified portfolio, primarily defense and national security and intelligence-oriented, but with a growing importance in commercial aviation and ships,” says Hudson, who plans to retire in 2014. “We’ve gone through the ups and downs of defense spending before, and you need to be agile and adapt.” The key, she says, is to focus on the factors you can control.

What has the economic climate been like in your industry for the past several years?

How are other DC leaders conquering the economy?
Read more from:
• Gail J. McGovern, president and CEO of the American Red Cross
• Thomas J. Deierlein, CEO of ThunderCat Technology
• Linda Hudson, president and CEO of BAE Systems, Inc.
• Herve Humler, president and COO of Ritz-Carlton Hotel Company LLC
• C.E. Andrews, CEO of MorganFranklin Consulting
PLUS: Economic predictions from Dr. Stephen Fuller, director of the Center for Regional Analysis at George Mason University

Click here to read more

Click here to read more.

Linda Hudson: There’s not one quick answer to that. Post-Iraq war and as we pull out of Afghanistan, the parts of our business that support traditional land warfare and soldier systems have been hit pretty hard. There was a tremendous buildup in that space as the Iraq war started, and that part of the business has been declining very rapidly over the past few years.

The rest of the business is doing quite well. There’s been strong demand for our support solutions business. If the government ceases to build a lot of new platforms, they have to maintain and support the ones that they already have.

Likewise, our intelligence business has also been doing well, with the increased emphasis on terrorism and homeland security and cybersecurity threats. Our electronics business has been stable to modestly growing over that time as well.

The last few years have been a bit of a mixed bag. Because we have such a large presence in the land combat arena, total sales have actually declined over the last three years.

What kind of economic climate are you anticipating for 2014 and beyond?
LH: For those people working in defense and the general national security space, 2014 is going to be a very challenging year. With all the uncertainties in Congress and the overhang of sequestration, it portends a very difficult path ahead for us because of the lack of clarity of how quickly Congress might get their act together and cooperate in a more consistent fashion.

How do you prepare for a future with so many uncertainties?
LH: We have that discussion quite a bit. What I tell our people is you can’t control those things that are uncontrollable, so let’s focus on the things that we can control. We can focus on maintaining close relationships with our customers so as this unfolds we are well positioned to provide whatever they need.

The other is to focus on our productivity and costs so that we can provide solutions to our customers that are as affordable as we can make them because they are challenged by the fiscal woes that the country is facing.

How do you prepare for the political events you can’t predict?
LH: Perhaps the chaos in Washington is a bit new, but it’s not unusual in this industry to have to anticipate and adapt as world events change. That is something we’ve done before.

We’re trying to look for areas that are countercyclical, like commercial aviation, where we’d like to have a bigger presence. In our ship business, we are building commercial ships, and we’d like to do more of that.

“If you go into a downturn prepared to hunker down and throw away all your investment spending and stop training your employees, you don’t come out the other end.”

Within the defense portfolio, there are requirements that are enduring, things like the need to maintain and support equipment. Yes, those budgets are under pressure, but we will continue to maintain and support the equipment we have in this country. We have the opportunity for international sales that build on our established presence with the U.S. military. Many countries in the world want to buy U.S. equipment.

Which economic indicators do you watch closely?
LH: We live and die largely by federal budgets. Of course, like every other American, we watch the general economic situation because the forces that happen in the general economy will be an indicator of what’s going to happen with defense spending.

How important is it for your company to be nimble and switch goals as economic situations and world events change?
LH: It’s critical. Agility and adaptability are something that we stress. A lot of that focuses on keeping an organization that’s lean and able to adjust, staying close to our customers, and continuing to invest in technologies.

What advice would you give to other leaders in your industry on preparing for next year and beyond?
LH: This, too, shall pass. This is the third downturn in my career. What is intriguing, when you look at prior downturns, is those companies who go into the downturn with an eye to what will happen after the downturn succeed. If you go into a downturn prepared to hunker down and throw away all your investment spending and stop training your employees, you don’t come out the other end.

National security is important to this country. It is not going to go away. Those that are ready to respond will be the winners in the long run. So we continue to invest in technology, we continue to invest in our people and, even though we’ve had to reduce our workforce, I think it’s important to invest in the people who remain, because we are so much more dependent on a smaller group of people for our future success. CEO

Contact us at editorial@smartceo.com.

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