Archive for March, 2010

Judge: No Gene Patents

Wednesday, March 31st, 2010

U.S. District Court ruled this week that seven patents related to two genes linked to breast and ovarian cancer held by Myriad Genetics are invalid. The court sided with the ACLU and the Public Patent Foundation in ruling that the patents were “improperly granted” because they involved a “law of nature.”

Writing on the decision this week on his blog Incentivize!, Smeal’s Dan Cahoy says:

What is dramatic about this decision (a copy of which can be downloaded from the ACLU Web site) is that U.S. District Court Judge Robert Sweet based his determination on a finding that claims drawn to purified DNA are mere products of nature that are not patentable.  If it were to stand on appeal, the decision would have a significant impact on the biotechnology industry, which has invested much in DNA patents.

Last year on this blog, Cahoy, a patent lawyer and associate professor of business law, outlined the case, saying that it highlights “aspects of our innovation system that many believe should be reformed”:

In the end, it is possible that this case will spark a change in the law regarding human gene patents.  In fact, it has gotten progressively harder to patent genes, but for reasons different than advanced in this case. … Whatever the outcome of this particular case, it’s yet another battle being fought over an innovation system that has been under attack for some time.  Intellectual property legal reform is a notoriously slow process, but this case may have pressed the accelerator down just a little bit more.

Tags: Business Law, Cahoy, Health Care
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Open the Skies

Monday, March 29th, 2010

“The European Union and the United States agreed Thursday to expand a three-year-old accord that allows airlines to operate more freely across the Atlantic,” The New York Times reports. “The move will increase access to each other’s markets and narrow differences over environmental regulations, but industry executives were disappointed that no agreement was reached to remove the remaining barriers to foreign ownership and control of airlines.”

In a 2008 op-ed in The Atlanta Journal-Constitution, Smeal’s Terrence Guay argued in favor of allowing foreign ownership of U.S. airlines, calling the ban archaic and hypocritical.

From Guay:

Relaxing the restrictions on foreign ownership would allow British Airways and other foreign carriers to serve U.S. locations that are underserved now. It also would avoid the reduction in routes and elimination of cities served when two U.S. carriers merge. And for anyone dreaming of decent meals and better service—even in economy class—foreign airlines have a lot to offer, as almost anyone who has flown abroad can attest.

So why isn’t this already happening? One reason is that the Federal Aviation Act of 1958 requires that, for airline corporations, 75 percent of the voting interest must be held by U.S. citizens, and two-thirds of its board of directors must be U.S. citizens. Such restrictions seem absurdly arcane 50 years on, in a far more interdependent global economy than was the case during the Eisenhower administration.

… Perhaps most important is the message of hypocrisy that protectionism over the U.S. airline industry sends to the rest of the world. At a time when our own trade representatives are demanding that other countries open their financial, retail, and other service industries to competition from U.S. companies, we refuse to open our airline market to others. Yet this is the best strategy to improve the financial health of U.S. airlines, while allaying the concerns of travelers in smaller cities and their elected representatives who justifiably fear that a merger between any two major U.S. airlines will adversely affect choice and cost. This kind of foreign aid would be a win for the airline industry, air travelers, and U.S. trade policy.

Tags: Globalization, Guay, Hospitality and Travel, International Relations
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A Service Tip

Friday, March 26th, 2010

“The Elysian hotel in Chicago, which opened in December, has adopted a no-tipping policy, a move that breaks with standard practices across the high-end- and luxury-hotel market,” according to The Wall Street Journal.

“I just don’t think it’s luxurious to always have to be thinking about having to tip people for doing the jobs they do every day,” The Journal quotes Elysian’s CEO, David Pisor, as saying. “We try to eliminate your need to have to have extra cash on you to get someone to do something.”

However, according Smeal’s Bill Ross, who recently co-authored a study on tipping and service levels, “Customers may be more comfortable with the idea of no-tipping at first, [but] they may feel otherwise if the service suffers because of it.”

In a recent paper, Ross and his co-authors, Robert Kwortnik, Jr. and W. Michael Lynn of Cornell University, look at the concept of “buyer monitoring,” which is using tipping as a means for customers, instead of managers, to reward and monitor service as a way to motivate and incentivize service workers to deliver better service.

They examine the effectiveness of voluntary tipping by observing two industries: leisure cruises and restaurant dining. Their results show that cruise ships with voluntary tipping policies received higher service ratings that those with a no-tipping policy. And they find similar evidence in a restaurant setting.

In addition, the researchers note that servers’ expectations and motivations may lead them to perceive the relationship between service and tip size as stronger than it actually is. They observe that the stronger this perception is, the more likely servers are to engage in service-enhancing behavior, which proves that tipping provides an incentive for the delivery of good service.

“Managers in service industries should think twice before abandoning voluntary tipping policies,” the researchers conclude.

Adds Ross: “Managers need to ask themselves how to use tipping to get their service employees to perform better. Smart restaurants and cruise lines structure the tipping decisions far less to do with cost and far more to do with how they want the experience to work for their customer.”

Tags: Hospitality and Travel, Ross
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U.S. Removes Some Draft Iran Sanctions

Thursday, March 25th, 2010

“The U.S. has backed away from pursuing a number of tough measures against Iran in order to win support from Russia and China for a new United Nations Security Council resolution on sanctions,” The Wall Street Journal reports. “Among provisions removed from the original draft resolution the U.S. sent to key allies last month were sanctions aimed at choking off Tehran’s access to international banking services and capital markets”

Smeal’s Fariborz Ghadar testified before the U.S. House Foreign Affairs Committee’s Subcommittee on the Middle East and South Asia in February and cautioned against such sanctions.

An excerpt from his testimony:

The success of sanctions is predicated on the assumption that we will weaken the regime by these sanctions and that the regime desires Western imports and investments. These assumptions are incorrect. Sanctions play in the hand of the regime, deprive the Iranian public of economic growth, and reduce the role of the private sector (particularly small and medium companies) at the expense of the Revolutionary Guard and the paramilitary establishment. Sanctions strengthen the regime’s hand against the public and the private sector and play into its fear of international interaction with the Iranian public. Its efforts to seal the nation post election by restricting the flow of information via the Internet, crackdown on cell phones, text messaging and twittering make it clear that the regime is terrified of economic, informational, and social interaction with the West.

A more effective approach would be for the international community to punish revolutionary guard entities via limiting transfers while promoting information flows and economic activities with the private sector. This is a much more nuanced strategy that targets the paramilitary but protects the public.

… Strategic policy implementation should be measured by results. Three decades of sanctions have not been effective, have not changed the regime’s behavior, and have resulted in erosion in the very positive Iranian public’s attitude toward the U.S. government. The people of Iran have a positive attitude toward the American people. It is now time to consider an alternative strategy of intelligent engagement with the Iranian people.

Tags: Ghadar, International Relations, Politics
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Pay-for-Delay Pharma Deals Not Banned

Wednesday, March 24th, 2010

The Financial Times reports that “a proposal backed by President Barack Obama that would have banned multibillion-dollar deals between big pharmaceutical companies and their generic rivals was stripped out” of the health care legislation days before it was passed by the House. “The agreements have come under scrutiny from antitrust officials in the United States and Europe because they say the arrangements essentially allow branded drugmakers to pay off potential generic competitors, thereby keeping them out of the market,” according to FT.

Below, Smeal’s Daniel Cahoy, a patent lawyer and associate professor of business law, explains the special circumstances of these deals and why it was a good idea to remove this seemingly logical provision from the legislation:

Among the many provisions added to the health care reform bill was one that seemed eminently sensible and extremely popular: preventing branded pharmaceutical companies from paying generic companies to delay entry into the market.  Yet this provision was excised before the House of Representatives’ historic vote on Sunday.  What possible objection could anyone outside of the pharmaceutical industry have to precluding this behavior, known colloquially as “pay-for-delay”?  In fact, the situation is a bit more nuanced than many news reports suggest.  Even a skeptic of these arrangements might conclude that a total ban is a bad option.

The so-called “pay-for-delay” deals arise in the context of a very narrow and complex set of cases known as ANDA (Abbreviated New Drug Application) litigations. Essentially, generic companies file such cases to obtain the right to market their drugs early by establishing that a branded pharmaceutical company’s blocking patent (or patents) is invalid or not infringed. Commonly, the branded company vigorously opposes these assertions, as early generic entry can cause a significant reduction in expected profits. Unless there is a settlement, a court must sort it out. But this is where the confusion often begins, as ANDA settlements are different than those in most patent cases. Most importantly, the generic company has usually sold no product and would suffer no damages if it lost the case—it would simply be prevented from entering the market before the patent expires. To encourage settlement, the branded company may be compelled to offer the generic company something more than the option of simply walking away. So, reverse payments or some other kind of inverse incentive may be exchanged.

(more…)

Tags: Cahoy, Health Care, Pharmaceuticals, Politics
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Globalization of Business in India

Wednesday, March 17th, 2010

Another group of Smeal’s first-year MBA students recently returned from their global immersion week in New Delhi, India. In addition to deepening their understanding of global business, the immersion trip affords students the opportunity to meet with business leaders to learn how they position themselves in both local and international economies. Below, Smeal’s Dennis Sheehan, who accompanied the students on their trip, highlights a particular company and the breadth of Smeal’s network around the world.

When Selva Vaidiyanathan tells you that his workday typically begins at 1 p.m., you first think the pace of business in India must be awfully relaxed. That is, until he tells you it typically ends at 2 a.m. Selva is a 1997 graduate of the Penn State Smeal MBA program. He spent about ten years with Chrysler, then Daimler-Chrysler before returning to India to accept a job with Genpact. Selva spoke with Smeal’s second-year MBA students who were on their global immersion in Delhi, India.

Genpact is one of the largest business process outsourcing (BPO) firms in India (http://www.genpact.com/home.aspx). Their annual revenues are currently $1.1 billion, growing at a rate of 20%+ per year. They do all sorts of back-office process work such as finance and accounting, procurement and supply chain, collections, customer service, human resources, risk management, and IT infrastructure; they are one of the leaders in applying Lean Six Sigma methodology to process reengineering.

If you want an example of the globalization of business, you probably couldn’t find a better one than Genpact. It’s a firm that was started in Gurgaon, India as a spinoff from GE Capital; it is currently headquartered in Hyderabad. It is listed on the New York Stock Exchange and has several large VC investors involved with the company; all its financial statements are denominated in dollars. Selva is in charge of an 800 person team with people in India, China, Mexico, Poland, and Romania.

The firm recently bought the back-office operations of a leading U.S. firm located in the Midwest, and Selva is in charge of integrating those operations into Genpact. Genpact is going to keep all the people who currently work there, but now those people are going to be working for a global BPO firm. It means learning new things for everyone, but those new skills will open up possibilities for doing BPO work for other firms. It’s an amazing example of the power of globalization to reshape the local economy in a place very far from the center of outsourcing.

Selva spent several hours with us one afternoon, talking about Genpact and his role there. We then had the pleasure of sharing several hours more with him on a much more informal basis over drinks and dinner, where he answered all sorts of questions from the students about his career path. And he even suggested that he might need a few interns this summer in the United States. Halfway around the world, the Penn State network is helping current students!

Tags: Business Process Outsourcing, Globalization, India, Sheehan
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A Glimpse of China

Wednesday, March 10th, 2010

Smeal’s first-year MBA students recently completed their global immersion week, in which they spend a week abroad to get a glimpse of the international economy and the particular challenges and opportunities associated with doing business in another culture and under different laws and regulations. Terrence Guay, clinical associate professor of international business, accompanied one group of MBAs as they visited Shanghai, China. He shares a bit of the experience below:

The economic transformation in China is occuring on a massive scale and in light speed.  During the first week of March, I took 27 first-year MBA students to Shanghai to see these changes firsthand. 

We visited one French and eight U.S. companies, almost all of them names that every American would recognize.  Their reasons for being in China vary.  Some, like GM and Johnson & Johnson, are producing for the local market.  Others, like Caterpillar and Alcoa, are utilizing low-cost labor and exporting most of their products out of China.  Some companies have more flexibility in managing their operations, while others like Bank of America and Deloitte face restrictions in competing due to greater regulations in the service industry. 

Most students were surprised that, in a country of 1.3 billion people, almost all companies spoke of difficulties in finding highly skilled workers, especially at the middle-manager levels.  Yet every company was enthusiastic about the opportunities that exist in China.  Goodyear views the country as a blank slate where companies can re-position themselves, while Disney sees a promising future in selling merchandise to the two parents and four grandparents who dote on each child. 

Walking and riding through the streets of Shanghai, one would hardly notice that over half a billion Chinese citizens cannot afford any of the products that these companies sell.  The skyscrapers, lights, and bustle look more like New York or Chicago.  But the few hundred million middle and upper income Chinese consumers are rapidly transforming this country, and taking the global economy along with them.

Tags: China, Globalization, Guay, Outsourcing
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Consider Retail Successes With Cautious Optimism

Tuesday, March 2nd, 2010

Recently, there have been many articles published in The Wall Street Journal reporting on the fourth-quarter earnings of such companies as Lowe’s and Nordstrom, but Smeal’s Fred Hurvitz says that factors other than improved income statements must be taken into consideration before making conclusions about the current state of the economy.

From Hurvitz:

The performance of the retail industry is often viewed as an important indicator as to the future state of the economy. Quite naturally there has been cause for optimism as a result of a general improvement of earnings reported by many of the nations largest retailers such as Macy’s, Sears and Lowe’s. Although there is reason to believe that the economy is getting healthier, we still have to exercise some caution when merely focusing on these improved income statements.

Profitability can improve on the basis of different factors. First, consumer spending could increase substantially resulting in greater demand and increased sales volumes. This of course would be a positive sign that we are emerging from the recession that was brought on in part by a lack of consumer spending. To this point, although many stores are reporting modest increases in sales, this does not seem to be the main reason that we have been seeing these improved earnings. The improved earnings seem to be more the result of better management of inventory and expense practices.

Prior to last year’s economic collapse, many retailers were still optimistic in their forecasting of sales potential. As a result, their inventories were at very high levels and their operating expenses (especially labor) were less than optimal. When the recession hit, they were caught in overstocked conditions. The ensuing rush to dump inventories resulted in an unparalleled wave of discount and bargain pricing that cut drastically into maintained markups. With these lower margins and the higher level of operating expenses, bottom lines were severely impacted.

What we have witnessed this past season is a much better managed industry. Although many retailers have enjoyed modest sales increases, most reported increases are in the range of less than one to two percent. The real improvement has come in the form of more cautious inventory purchasing. Retailers are trying to turn their inventories more often and are taking the approach that it is better to lose an occasional sale than to be overstocked. In addition, many retailers took the opportunity to downsize their labor force. This move has resulted in decreased markup requirements. As a result, many retail operations have improved their bottom line without experiencing substantial increases in sales volumes.

Many experts believe that consumer confidence and spending are slowly improving. However, it is still too early believe that the economy is in a full recovery mode. Although there is cause for some optimism, retail sales projections appear to suggest that substantial sales increases will most likely not occur until sometime in 2011. As a result of improved management practices, many of the largest retailers will be in position to fully take advantage of the improving economy.

Tags: Economy, Hurvitz, Marketing, Retail
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