Spring 2005


Assets
Published quarterly by UCLA Anderson School of Management

From crisis to opportunity

California: Clean & Green

"Out of crisis comes opportunity." So begins the text of a report penned by a team of UCLA Anderson students working with energy giant British Petroleum. Complete article>

The Cost of Doing Business Countrywide's Stan Kurland on California, Curriculum and the Cost of Doing Business

When he's not serving UCLA Anderson as one of the school's newest Board of Visitors members, Stan Kurland is president and chief operating officer of Countrywide Financial Corporation. Complete article>

Doing Business in California

Doing Business: California Style

Four of our distinguished alumni discuss the ups and downs of doing business in California. Complete article>

Anderson's Apprentice

UCLA Anderson's "Apprentice"

"I've seen what a difference it makes when classmates from an institution work at helping each other," says Kelly Perdew. "I believe that if UCLA Anderson alumni would do that one thing, it would have a huge impact on the school's reputation and greatly enhance the perceived value of our education. I'm committed to helping as many classmates as I can." Complete article>

 

California: Clean & Green

Students Assess Environmental Alternatives

"Out of crisis comes opportunity."

So begins the text of a report penned by a team of UCLA Anderson students working with energy giant British Petroleum.

The crisis in question? Air quality in Los Angeles. The opportunity? An Applied Management Research project to assess the marketability of hydrogen-fueled transportation options.

"BP is looking to LA as a potential first market for hydrogen-fueled cars and refilling stations," says Anderson second-year Jessamyn Vodonick, whose professional background is in consulting. She and her ecologically minded AMR teammates initiated the energy project with BP, as they all aspire to careers in alternative fuel. "California represents 10% of the U.S. auto market," she says. "If you can build a market here [for hydrogen fuel] you can build markets throughout the nation."

This Southern California market also comes with other opportunities ripe for the entrepreneurial environmentalist. Fully employed student Ingo Giani and his AMR teammates took the BCO track, or "business creation option" to launch G-Developments, a "green" development company set to create high-end custom homes with health and lifecycle cost benefits.

"The market has to be the driver, and that's where California comes into the picture," FEMBA's Giani says of green construction. "California is a trendsetter in any technology. There are a lot of creative people here who have resources and think progressively."

It was this kind of progressive thinking that motivated full-time students Vodonick and her teammates Naveen Halbhavi, Seth Jacobson and Laurent Quelin to put their management education toward an "alternative" cause. Their energy study marks the first time that Anderson and BP have joined forces, though BP does have a presence at UCLA's Chemical Engineering Department.

"We were already interested in pursuing an AMR project that focused on renewable fuels when we learned BP was exploring options to install a hydrogen filling station on campus," says Jacobson. Chemical engineering helped facilitate a meeting at BP and the Anderson team's varied skill set sealed the deal. Jacobson holds a masters degree in public policy from UCLA, with a focus on energy policy; Halbhavi holds a masters in chemical engineering and has worked for chemical companies; and Quelin has worked at various utilities and the Ministry of Transportation in France.

"I was very impressed with the team and the program," says Giorgio Zoia, hydrogen business development manager for BP America's Gas, Power, and Renewables Group. "We were looking for some marketing studies and felt this was a cost-effective place to start. Also, working with a university, we felt the ideas might be more fresh than those of an established marketing company."

The AMR team undertook a market-assessment and consumer study to determine California consumers' sensitivity to and understanding of alternative fuel options - and how readily average people may embrace new fuel technologies. The students interviewed customers at a local car wash and conducted surveys online.

"Up to this point, most research has been directed around alternative cars," Zoia says. "This study is designed to derive conclusions about the actual fuel. One thing we are trying to understand is the preferred way to introduce the technology in the marketplace."

The Anderson students turned to faculty advisor/adjunct associate professor Bob Foster and marketing assistant professors Sanjay Sood and Andrew Ainslie for guidance in creating and executing their study. The analyzed data will be used to advise BP on how to position itself strategically should it decide to take a hydrogen-based initiative to market.

Similarly, FEMBA's Giani is hoping his BCO will help the market transformation currently underway in "green construction." He and AMR teammates David Jefferson, Samuel Renwick, Sam Beizai and Rui Matos are working with faculty advisor Eric Sussman; they've completed extensive research that "clearly suggests" consumers are willing to pay a premium for homes with green building features.

"Until recently, ‘green' has not happened in the mainstream, because people thought it was more expensive," Giani says. "But people are beginning to focus on health issues, energy savings and quality of construction. The market transformation may still be in its baby shoes, but the wave is going to hit. When it does, we'll be ready to help satisfy the demand."

While upfront costs remain a market obstacle, Giani says access to environmentally friendly building materials is on the rise. And if positioned properly, health-conscious alternatives could eventually become the cost-effective norm, not the exception.

"There is a great opportunity to get in there and make a buck while doing something to help everybody," Giani points out.

Though not all members of the team are expected to stick with G-Developments once the academic requirements are met, Giani says he and teammate Jefferson are in conversations with Southern California developers who are interested in going green.

"The support infrastructure is developing and competition is increasing for these new products," he says. "In my classes at Anderson, I learned more on how to position these products, how to change the finances and creatively set up the business so the market would be the driver. The ultimate goal is to pitch to investors to raise the capital to do a green communities."

That result, he notes, would be the perfect combination of a management education and a passion for a cleaner California -- once again, creating opportunity from crisis.

 

Countrywide's Stan Kurland on California, Curriculum and the Cost of Doing Business

When he's not serving UCLA Anderson as one of the school's newest Board of Visitors members, Stan Kurland is president and chief operating officer of Countrywide Financial Corporation, a leading diversified financial services provider and member of the S&P 500, Fortune 500 and Forbes 500. Kurland is also chairman and chief executive officer of the company's main subsidiary, Countrywide Home Loans, Inc., a national leader in residential finance.

Keeping the "California" theme of this issue of Assets in mind, we asked Kurland to discuss California real estate, the advantages of diversification and his interest in serving on the UCLA Anderson Board of Visitors.

Our issue deals with doing business in California and doing business with California. Countrywide - as the name implies - has operations across the entire country and, in fact, globally. How much of your business, if any, is linked to the ups and downs of the California economy? Do the specifics of the California real estate market eventually impact other regions of the United States?

The fact is that we do operate across the United States and globally, so we're largely concerned with the national and global economies. On the other hand, our primary business is residential lending, and California has a disproportionate influence on the nation as a whole - particularly when it comes to real estate - so we also must keep close watch on the California economy. California represents just 12% of the U.S. population but, because of its higher-priced housing it represents 20% of the nation's housing market. This, in particular, creates a disproportionate influence on other regions.

Countrywide has expanded from its core business of residential mortgage finance into banking, commercial real estate finance and insurance, among its many other complementary offerings. How important is it to diversify a company's businesses?

First of all, Countrywide is pretty unique in terms of the history of the corporation. Almost every aspect of our business has been grown organically, even our diversified business segments. In some instances, such as with our bank and our insurance company, we bought small shops to gain entry into the market, and then we grew them into large-scale operations, brick-by-brick, just as we did our mortgage business.

As the mortgage industry has become more competitive, it has become increasingly more critical that we diversify our offerings to secure a greater share of the market.

What issues or risks needed to be taken into account before expanding into new territories? Why did Countrywide choose to diversify when they did - how much of the decision was based on Countrywide's position at that moment and how much of it was external factors in the economy?

Countrywide's diversification strategy has focused on areas that are synergistic with mortgage lending, like banking and insurance - offering complementary products for home owners, as well as services for our institutional clients.

Not only has our diversification taken us into ancillary businesses, but it also has involved significant product expansion. Today, product diversification is imperative for maintaining competitive advantage. Having a broad range of products and services also impacts our ability to attract the best sales force, because high-quality sales people thrive on having a rich product menu to offer their customers

Another key reason for our diversification has been our need to enhance our ability to grow earnings in any interest rate environment. Mortgage banking by its nature is cyclical. When interest rates are low, there is heavy mortgage origination activity - particularly refinances. But, as you know, refinance booms don't last forever. All of our expansion efforts have been designed to provide additional revenue. They are less interest-rate driven, which offers us greater long term earnings growth potential and stability.

Looking to the future, what are some of the financial issues in the California economy that Countrywide is concerned with?

Well, there are myriad concerns in California.

The most critical issue is the cost of doing business in California, which is higher than for other states. The high cost of doing business in California is an issue for most large firms that have the option of doing business in other states, where the business climate is friendlier and less expensive.

Most troubling to us is that California has one of the highest corporate tax rates and a very unfriendly workers' compensation system that requires companies to spend as much as seven or eight times more per employee than other states.

The repercussions of these high costs are being felt by California residents in the form of reduced job opportunities. Countrywide, alone, has created thousands of new jobs in states like Texas and Arizona that would have resided in California had it not been for the costly environment.

Are you concerned with the real estate market in California; is there a bubble about to burst?

I think California real estate is expensive but I don't think that we're looking at a bursting of a bubble for a variety of reasons.

We should expect a slowdown in home price appreciation, but nothing like the severe decline in home prices seen in the early ‘90s. We're not looking at the same issues at all. The ‘90s bubble-burst was more of a job-related issue resulting from the collapse of the defense industry.

There is a serious shortage of housing and new home starts in California, and much of it is attributable to problems in the state regarding the budget, which has hindered the development in suburban areas that we've had in the past. The lack of new housing starts creates increased demand for existing houses, spurring increased prices. It's a simple case of demand exceeding supply. The issue isn't going to be resolved anytime time soon -- it will take many years. Because of that I don't suspect we'll see housing prices coming down. There just isn't enough new housing being built.

And this is another issue affecting doing business in California -- the high cost of housing makes it difficult to bring in the entry-level talent from outside of the state. It's too hard for young people starting out to afford the housing here.

You've recently become a member of the UCLA Anderson Board of Visitors. What attributes
of Anderson motivated you to choose to become affiliated with the school?

There were a couple of things.

I'm very impressed with the quality and capabilities of UCLA Anderson graduates. I wanted to have an ongoing relationship with the school to ensure that Countrywide is in a stronger position to recruit top talent and to influence the development of a curriculum that closely aligns with our business needs.

I also have significant relationships with several of the members of the staff, particularly Eric Flamholtz [professor of human resources and organizational behavior], who is instrumental in assisting me in evolving our strategic planning and culture management processes at Countrywide. I also relish the opportunity to have some influence and contact with other members of the board.

In what ways would you like to influence the curriculum at UCLA Anderson?

First of all, I think very highly of the students coming out of UCLA Anderson; they have a great breadth of knowledge. We would like to see a little bit more in terms of research that could be applied directly back to the business community.

I'd like to see students cultivate the ability to effectively apply their theoretical knowledge to everyday business experiences and situations, and this can only be achieved through greater collaboration with the university.

 

Doing Business: California Style

Four of our Distinguished Alumni Discuss the Ups and Downs of Doing Business in California

Attempting to describe the business of California reminds one of the blind men and the elephant. You may know the story: five blind men approach the beast and each is asked to identify what they've come across. One tells of a giant tree, another a great wall, another a long snake, and so on.

California - naturally - is home to more UCLA Anderson alumni than any other state. It would take a book to present all the varied interests and stories of alumni doing business here. What follows are just a few tales taken from alumni toiling in some of California's key sectors:

Mark Leets ('96) - Entertainment

Mark Leets is the Chief Financial Officer for The Firm. The Firm's saga is a Vanity Fair tale. The company originally was founded to represent rock bands and other musical acts. Since then, it bought out super-agent Michael Ovitz's ill-fated attempt to form his own talent management company. Currently, their roster of stars ranges from Billboard chart toppers Linkin Park and Korn to box office megastars Leonardo DiCaprio and Cameron Diaz. Additionally, The Firm has moved into film and TV production, as well as book publishing. Their ancillary business interests range Pony athletic shoes to Virgin soft drinks.

In short, The Firm has its hands in almost every aspect of the entertainment industry, perhaps the business most associated with California in the eyes of the world. Leets' position as CFO gives him a qualified perspective to comment on the business of doing business here.

His initial reaction to a question about trends in California's entertainment industry is one of mild-but-real concern, as the cost of doing business here continues to rise. "When it comes to the movie business, and the episodic television business, most (or much) of it has moved to Canada. There is a phenomenal tax break offered up there and the Canadian government has created a real cottage industry," Leets says. "There are some rules that you must use Canadian citizens on the production, but it is so much more cost effective to shoot in Canada."

Leets sees the move literally across his balance sheets as the company's talent managers are always traveling north to spend time with a Laura Linney or a Leo DiCaprio as they shoot in Canada. "I don't see it going away," he says, noting that for a while Eastern Europe and Ireland also were destinations for film and television shoots that moved out of California.

On the other hand, the recording industry is not migrating outside of Los Angeles or California any time soon. "The recording studios are here; Burbank is big for recording studios, and there is no cost savings to moving the business out of state," Leets says. (New York and Nashville remain the other key music industry hubs.)

For consumers, the movie business is counter-cyclical, Leets explains. This means that the worse the economy does, the more people go to the movies, the $10 ticket cost offering a cheaper alternative to theater or concerts. The Firm owns several concert tours, including The Family Values imprimatur and the Project Revolution tour. "The concert bus has been bad lately," Leets says. "The prices are high and it is hard to fill a big place. But California stops do better sometimes than the rest of the country."

Technology has had a tremendous impact on the recording industry and much of that impact has been on the artists themselves. Leets emphatically points out that The Firm are artists' advocates and admits that's where his loyalties lie. Regardless, there is no denying that the digital distribution of recorded music has cut into record company profits (and thus artists' revenues). Whether it's the iPod or the ring tone business, people are finding new ways to listen to, share and acquire music.

Leets admits he isn't sure what the future holds. But he does believe there is a real need to find a way to redistribute the cast flows in the music business. He has seen the devaluation of many of the major record labels in the past few years and now wonders if artists even need big companies to distribute music.


Eric Anders ('91) - Entrepreneur/ Hospitality

Eric Anders is the co-founder and owner of Wood Ranch BBQ & Grill. The Agoura Hills, Calif.- based company counts nine locations (with a 10th currently under construction), featuring a menu that ranges from salads to wings to traditional ‘Q.

Anders' business is one where California's potentially mythical regulatory environment is a daily concern. But Anders doesn't see it entirely as a negative.

"I find that it is pretty challenging," he says. "It sets the bar high as far as business practices go. If you go outside the state, it is a lot easier to conform on issues such as employment practices, hiring and training, and workers compensation laws. There is such heightened interest in California; the penalties can be pretty heavy for not running a tight ship.

"People still consider California to be very entrepreneurial, with design-oriented thinking, with people who have ideas outside the box," he continues. "But the business environment requires tremendously strong systems to be in place to manage workers comp and liability insurance."

Even a chain as small as Wood Ranch BBQ & Grill has a director of risk management on staff, he points out. "You wouldn't necessarily need someone in that position outside the state. But with issues regarding wages, breaks and overtime issues complicating relationships between employers and employees - and in fairness some would say protecting employees -- we need a full-time person who is very well paid," Anders says.

And despite the new regime in Sacramento, Anders says he has seen little positive impact on policies to date. "The only thing we've seen in the last year is a slight improvement in workers' compensation but I don't know how much impact (Governor Schwarzenegger) had on that. It's still incredibly costly to do business here; there's not one area where you feel like you get a bargain in California."

Donning his entrepreneurs' hat, Anders says he doesn't believe California's regulatory environment smothers entrepreneurs when it comes to finding investors, however. "I haven't heard about it on a macro-level like that. A good story still sells and there are lots of potential investors and landlords looking for good tenants."

Economically, Wood Ranch's experience has been that people in California tend to eat out during the week more often than their counterparts out of state. One reason Anders puts forth may surprise you. "In California, grocery stores have done an awful job in competing with restaurant business," he says. "Grocery stores have done a miserable job in terms of convenience; in terms of giving people what they want at the right price point. The amount of money people spend on food continues to rise and that increase is going to restaurants

Chris Frank ('99) - Banking and Finance

Chris Frank is the market president and private bank executive for Bank of America's Southern California complex. His responsibility with Bank of America is two-fold: he runs the private banking division for high net worth clients and he also is responsible for overseeing all of the banks and lines of business the company does throughout greater Los Angeles. In this latter function, he assures that the bank operates with synergy, seeing to it that the investment bank, the commercial bank and the consumer bank all work together to maximize both BofA's opportunities and the experience of their clients. In addition, Frank handles community development and sees to it that the bank is involved in various non-profit endeavors in the community.

Most recently, he stewarded Bank of America's $100,000 gift to the UCLA Anderson Forecast, a relationship Frank believes not only benefits the high-profile research group, but the bank as well.

The issues facing the banking industry in California are more or less the same issues facing bankers and banks in other areas of the country, Frank says.

"We've seen a dramatic flattening of the yield curve and the resultant compression of spreads," he says. "Accordingly, to drive revenue growth, the industry needs to operate with a much greater focus on efficiency and customer service than ever before. As we've seen in the press on numerous occasions during the last year, the national regulatory environment is also driving enhanced and more focused compliance structures. Scale becomes increasingly important in this kind of an environment."

California, though, does present its own set of unique challenges. "The incredible diversity of our economy provides a fantastic opportunity for California banks to help finance the growth of hundreds of thousands of small and middle market businesses," says Frank. "Additionally, the changing face of our state demographics -- particularly in Southern California -- will continue to drive unique aspects of how we do business. This ranges from language skills and knowledge of cultural nuances to the types of products banking customers will demand more or less of in the future.

"We also have challenges," he continues. "In addition to the overall ease (or lack thereof) of doing business in the state, we are often at the leading -- and some times bleeding -- edge of regulatory policy. While this may result in benefits for some, it creates numerous inefficiencies and market frictions that ultimately can do more harm than good. We've seen this dynamic with recent legislation related to customer information and confidentiality issues as well as with a business' ability to charge fees for its products and services."

Consolidation also has impacted the banking industry in California, with mergers running the gamut from "good to weak," Frank says.

"In the past, we were an active participant in a growth-through-acquisition strategy," he says. "Today, for reasons both strategic and regulatory, our path to growth in the United States will be an organic one. We've chosen to focus on the most basic issue that exists: understanding and delivering products and services that delight our customers."

Frank says he is bracing for numerous issues that will face the industry going forward, but he points to the state's "affordable housing crisis," as the most critical. In addition, he says there is no question that California's regulatory environment has been stifling for business and banking, even citing California's interpretation of the Patriot Act as an example. The state's enforcement of the law has made it difficult for his company to share information from one unit to another.

Steve Smith ('96) - High Tech

Steve Smith ('96) is senior product manager for Filemaker, a software manufacturer (and wholly-owned subsidiary of Apple) whose products include a database program and a contact management program designed for small to medium-sized businesses. He works on the marketing side of the business, directing the interface between customers and the company, ensuring that the voice of the client is heard in an attempt to shape the product to fit customer needs. He also monitors his competitors and various market trends, feeding all information back to developers working to further the product.

Smith, though, is a Silicon Valley veteran. After earning his MBA, he went to work for Netobjects - an Internet software startup, where he did web design on Net Object Fusion, then a fast growing piece of software. He saw the company go through an IPO and achieve a market cap of over $1 billion. "That didn't last," he now says with a bit of a laugh. "I ended up being one of the last three employees when it was sold to a company in Jacksonville, Florida.

It's an oft-told tale, by now. Smith recalls a CEO in his 30s and a company full of hard working people who wore sandals and displayed Star Wars figures next to their keyboards. "There were a lot of late night pizza dinners and people poring over spread sheets calculating their stock options," he remembers. "There were also a lot of people looking for the next big idea, launching start-ups. It was a crazy time and you had the sense you were part of something historic and in many ways that has definitely born out."

According to Smith, there is a huge dose of reality in the Bay Area now. "Silicon Valley has gone back to fundamentals now. On one hand it's a lot harder to get seed capital, as most venture capitalists want to see proven revenues and a proven customer base before they give you money. Initial seed capital is almost like second-round money was a few years ago; now they want to see a company started with a track record.

"A lot of companies are doing big things right now," Smith points out. "The Internet has proven to be real, to provide real long-term revenue. Companies like Google had an IPO recently. Yahoo is growing like crazy. Overture, which was purchased by Yahoo makes money in advertising. A lot of the smaller players died off, but a lot of technology companies are doing well in software, not to mention thinks like entertainment and broadband technologies."

iPod is one excellent example of a hardware product that has blended the digital revolution with an integrated web experience through its iTunes store, Smith notes. "It's an emerging platform that you can't really neatly define. iPod and iTunes are selling an experience," he says.

Since the heady days of 1999, the high tech business has continued to spread to other areas of the country. Places like Northern Virginia, North Carolina and Texas are now hot spots for high tech. "But I definitely think there is something about California," Smith says. "There are mini-Silicon Valleys in other regions, but Northern California and Los Angeles remain the epicenters, if for no other reason than a lot of the bigger companies are still here."

Smith says he believes Silicon Valley is heating up again, noting that home prices there have recently gone up. But he says it is "definitely a hindrance" as the average house in San Francisco is now in the mid 600s, pretty much guaranteeing that buyers need two incomes. One way Bay Area workers are coping is commuting; Smith has co-workers driving in from as far away as Stockton, and "Bay Area companies pay more because they have to in order to attract talent," he says.

Ultimately, Smith sees and feels the changes in the industry and the area from what seems like a long time ago. "I think, for the most part, everyone feels like you can make a lot of money now, but you have to earn it. The gold rush mentality is gone. You've got to pick yourself up, put in the hours and outthink the competition. You're not going to get lucky. It's more skill than luck now."

 

UCLA Anderson's "Apprentice"

UCLA Anderson's "Apprentice" Gets Back to Reality

Any working person knows the intense pressure produced by a job interview; your livelihood is on the line. But very few interviewees have endured the televised scrutiny of a 15-week evaluation - let alone one that comes in the form of NBC's "The Apprentice." UCLA Anderson School of Management's own Kelly Perdew (MBA/JD '96) did more than just endure. He emerged as Donald Trump's single hire from among the 1 million applicants for the hit show's second season.

A unique experience to be sure, but the most significant lesson learned by Perdew during the process simply reinforced one he already knew: Be yourself. Be your best self.

"To succeed in your career, or anything else in life, you have to start by knowing who you are, by being honest with yourself," says Perdew. "Even when you desperately want that particular job, you must be truthful about what you can do. If you are not, it will work against you in the long run."

Looking back on the show, Perdew says he is proud of not losing control of himself amid the constant chaos of televised competition. He often drew on the advice and promise in a line from his grandfather's favorite poem by Rudyard Kipling: "If you can keep your head when all about you are losing theirs..."

He also kept in mind the public nature of "The Apprentice," understanding that his actions could be seen by anyone he would meet for the rest of his life. Perdew says he was ever cognizant that any negative behavior would make it on air, as reality TV thrives on conflict for its "entertainment value."

Perhaps less entertaining for audiences -- and more difficult to convey in a one-hour program -- was the actual complexity of the weekly challenges. But Perdew even had a strategy for that. After losing a Mattel task early on, he created a project manager's checklist and a set of guidelines that his team used as standard operating procedure. Thereafter, they won several competitions in a row.

The "Apprentice" highlight for Perdew was a Pepsi challenge in which he maximized the skills he gained in business school and honed after graduation. (Perdew raised $5 million in equity financing for three successful start-up firms; he sold one for eight figures.) His TV team designed a new Pepsi bottle and presented their marketing campaign to an audience of 400, including Pepsi's head of marketing and his staff. It was an exhilarating experience, Perdew reflects, but the television audience saw very little of it.

"Our Pepsi group was an effective team, which enabled us to generate great ideas with every member making significant contributions," he says. "The phenomenal synergy on that task was possible because it was the first time there was no infighting."

In coping with challenging team scenarios, Perdew says he drew from such UCLA Anderson studies as Samuel Culbert's course that stressed self-examination, the understanding of different personality types and how to get the best from your interactions with others. Perdew also says he used William Cockrum's SWOT analysis (strengths, weaknesses, opportunities, threats) every day.

Knowing who he is and what he can do prompted Perdew to take on "The Apprentice." Though he hadn't been watching the first season, family and friends repeatedly told him the show was designed for someone like him. Once he tuned in, he remembers thinking, "I could do that."

Perdew's winning strategy was to give everything he had to the team ("don't leave anything on the table"). His innate character traits, the business skills he learned at UCLA Anderson (and developed in his entrepreneurial ventures), and the military discipline gleaned from his years studying at West Point all came together in the season finale when he sat down with Trump and heard those famous last words: "Kelly, you're hired."

 

Anderson Assets welcomes input from alumni and the UCLA Anderson community for letters to the editor, articles, or ideas on themes.