Saturday, February 28, 2009

Transforming Crisis Into Opportunities (2)

A continuation of an earlier thread (Assess, Position and Implement).


The key to transforming crisis (or chaos) into opportunity is to have the advantage of time and resources. Focus on detailed assessment, specific planning and solid preparation. The key is to maximize one's opportunities by establishing a Compass strategy (a Tangible Vision) that delineates your strategic overview. The strategic overview should be an organized set of priorities, approaches and circumstance that you can operate from.

When negotiating with an opposing party, assess the competitive position of each side. Then, determine who has the advantage of time and resources. Do not rush into the situation. Properly build a detailed plan based on assessed data. The greater your advantage of time and resources is, the greater your leverage becomes. Always assess the targeted party with a prepared strategic plan.

From the framework of 36 Stratagems

Loot a burning house ( 趁火打劫; Chèn huǒ dǎ jié)

When an organization is affected by an incremental streak of internal conflicts, then it will be unable to deal with an outside threat. This is the time to seize the opportunity to reap the rewards. Maintain the gathering of internal information about the strategic position of the opposing party. If he/she is currently in its weakest state ever, pursue it without any emotion. Maximize the opportunity to the fullest.

Watch the fires burning across the river ( 隔岸觀火; Gé àn guān huǒ)

Maintain the gathering of internal information on the position of the competitor. When the competitor is at its weakest, seize the opportunity without any emotions.

Delay the entering of the competition arena until all the other players are exhausted from their own internal conflict. Then go in at full strength and pick up the pieces.

Implement this "Opportunistic Stratagem" in situations where vulnerabilities can be exploited. As one capitalizes on all opportunities, the advantage continuously grow.

Collaboration360 Consultants (C360). Copyright:2009 © All rights reserved
Copying, posting and reproduction in any form (without prior consent) is an infringement of copyright.

#

Moneyed Chinese come house hunting
Andrew S. Ross Tuesday, February 24, 2009

Cash-rich Chinese coming to do some house hunting

Call it a bailout from the East. Approximately 40 Chinese real estate investors are winging their way from Beijing today looking to snap up foreclosed and otherwise "distressed" properties in the Bay Area and California. The trip, put together by Beijing real estate portal SouFun Holdings Ltd. and Fortune Group Realty Co. in Pittsburgh, is one of several such Chinese house hunting groups to visit the U.S. periodically. But the timing of this one appears to be particularly fortuitous, on both sides of the Pacific. "It's good for Chinese investors who see lots of opportunities," said Fortune Group vice-president Andrew Hang Chen. "It's also good for the American economy, at least on a small scale."

Homes, apartment buildings and other commercial property in the region are on the shopping list. First stop on the 10-day trip is Los Angeles, followed by the Bay Area, then to Las Vegas. Apparently, the group won't have to worry about mortgages and such. "They have cash, believe me," said Chen.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/02/24/BUUE1631TP.DTL&type=realestate

Wednesday, February 25, 2009

The Dao of Strategic Assessment (4)


Modern football is a competitive area where information on each competitor is available. Having the skill to assess the reality from the deception is the key.

Below this note is an article that displays a different way of assessing a strategic transition game that is limited by time.


[ "I get paid to get into a rhythm with the guy calling the defense" on the other side. When a coach achieves the right "rhythm," he can sense what his opponent is thinking—and for Reid, grasping the "rhythm" of the classic game was fairly easy. "I can see what the offense is doing," he said. "You can almost call it offensively and defensively." ]

#

October 2008

How the greatest game in football history looks 50 years later, through the eyes of a modern NFL head coach

by Mark Bowden

Distant Replay

Illustration by Sean McCabe

Watching game film with Andy Reid, head coach of the Philadelphia Eagles, can make you woozy. He lounges behind the wide desk in his office, feet up, using a wireless control to freeze the image of a play on a screen at the opposite end of the room, and then starts rolling it forward and backward, forward and back, first the whole play and then only portions of it, forward and back, forward and back, until he has pieced all the moving parts together.

Also see:

Interviews: Football's Founding Fathers

(September 19, 2008)
Mark Bowden discusses the legendary Giants-Colts game of 1958 and reflects on how the sport and its players have changed in the past half century.

Reid is a very big man, a former collegiate offensive lineman, and when I met him last spring, he was in full off-season mode: tan, relaxed, and draped in a colorful Hawaiian silk shirt large enough to display the entire Amazon rain forest. Reid was coming off another winning year—the Eagles had made it to the second round of the postseason playoffs just months earlier—and he was already well into his preparations for the next season. Pro football is a year-round occupation these days, so he was doing me a favor by agreeing to help me with research for my book, The Best Game Ever, an account of the celebrated 1958 NFL championship game between the Baltimore Colts and the New York Giants.

I've written about football in the past, but I am by no means an expert, so I had gone looking for a pro coach to help me break down film of the famous game. I live just outside Philadelphia and once covered the Eagles for the local newspaper, so I phoned Derek Boyko, the team's affable public-relations director. Boyko warned me that the club's assistant coaches were probably too busy, but he nevertheless agreed to ask around. He called back to say that all of the coaches, curious about the way the game was played before most of them were born, had expressed an interest. "But they need permission from Andy," he said. "I'll ask him when he comes back from leave in a few weeks."

Boyko called me weeks later to say, "Andy wants to do it."

It seemed odd at first for a pro coach to have never seen film of this historic game—a little like finding a doctor of English literature who had never read Macbeth. But success in pro football, as in any intensely competitive, constantly evolving arena, depends primarily on current intelligence: What did my opponent last do against me? What did he do last week? A pro coach is not inclined to search for what he needs in old black-and-white film. History is … well, history.

But no craftsman or professional can be completely uninterested in seeing how he measures up against past standards of excellence. How good was the game then? How capable were the players? How clever were the coaches and schemes?

The game in question defined excellence for an era. It pitted the best defense in the NFL, the Giants, against the best offense, the Colts, playing for all the marbles. It featured 17 future NFL Hall of Fame players, coaches, and owners. On the field were great athletes like Johnny Unitas, Raymond Berry, Lenny Moore, Gino Marchetti, Frank Gifford, Andy Robustelli, Emlen Tunnell, Rosey Grier, and Sam Huff. Coaching on the sidelines were Vince Lombardi and Tom Landry for the Giants, and for the Colts, Weeb Ewbank, the only pro coach who ever took teams from two different leagues (the NFL and the AFL) to national championships.

Reid was born in the year this game was played, and one reason he had never seen it is that the TV broadcast has been lost. But for serious study, I had wrested something even better from the archives of NFL Films: the grainy, monochrome "coaches' film" of the game, soundless footage shot from the sidelines high over midfield, with all the time-outs, huddles, and game breaks edited out.

Instant analysis envelops pro football like a cloud, but with most plays there is no way to tell what really happened and why without a careful, slow-motion dissection of the film. Reid is one of this craft's most successful practitioners. Even among pro coaches, he is notable for toting thick binders filled with notes and plans, and for fielding highly complex systems on both sides of the ball. Earlier in his career, he was quarterbacks coach for the Green Bay Packers, grooming Brett Favre and helping that team to a Super Bowl championship in 1997. His tenure in Philadelphia has been the most successful of any coach's in the team's long history: starting in 2001, he led the Eagles to four consecutive National Football Conference championship games and a Super Bowl—although, much to the consternation of long-suffering Eagles fans, he has yet to bring the Lombardi Trophy home to Philadelphia.

We watched the game in his office in the Eagles' training complex, just a few blocks from Lincoln Financial Field, where they play. When I covered the team in the early 1990s, the Eagles' offices, locker room, and workout facilities were housed in a few cramped, dark, damp rooms in the basement of the now-demolished Veterans Stadium. Today the team, whose worth is estimated at more than $1 billion, is housed at a state-of-the-art facility that sprawls over an area as large as a college campus.

"Okay," he'd say, when he had examined a play from snap to tackle, "here's what happened." Then out would pour a detailed explication: what the offense was trying to do, how the defense was trying to stop it, the techniques (good and bad) of the various key players, the historical roots of the formations and the play's design, and ultimately why it worked or failed, and who was responsible, either way. The wealth of information Reid gleaned from a single play reminded me of the way Patrick O'Brian's 19th-century naval hero, Jack Aubrey, eyeballing an enemy ship during a sea chase, could read from the play of its sails and the disposition of its crew the experience, intentions, strengths, and weaknesses of his opponent.

Reid's insight told on the first offensive play of the game. Colts coach Weeb Ewbank had designed a trick play, so secret that in his pregame meeting with his team in the visiting locker room at Yankee Stadium, he had mouthed the play call to them, fearful that the room was bugged. Observing the opening formation, Reid noted with surprise that all but one of the Colts linemen were positioned to the left of center Buzz Nutter. "This is a completely unbalanced formation," he told me. "You can't even do that today." The rules would no longer permit it: "You have to have some guys on the line of scrimmage." In the backfield, fullback Alan "The Horse" Ameche, a Heisman Trophy winner at the University of Wisconsin, was lined up behind quarterback Johnny Unitas; right halfback Lenny Moore was three steps to Ameche's right; and left halfback L. G. Dupre was split far out to the left side of the backfield.

Unitas didn't give the Giants a chance to set up in a recognizable defensive formation, even if they had one for such a bizarre look. He bent over, and Nutter immediately snapped the ball. Moore took the handoff—and was tackled for a loss.

"So they came out with a trick play in mind, and it really wasn't all that good," Reid said, chuckling. The main reason the play failed, he pointed out, was a missed block by Dupre, a speedy back whose initials, which stood for Louis George, had earned him the nickname "Long Gone." While Moore took the handoff from Unitas and followed Ameche around the left side of the Colts line, Dupre's job was to race forward and hit Harland Svare, the Giants' right-side linebacker, taking him out of the play. But the film tells the tale: "He didn't get the crack [block] right here," said Reid, using a red laser to point at Svare dodging Dupre, "and he kind of screws the play up." Svare races into the backfield, forcing Moore to step in front of Ameche, his blocker; the two briefly collide, and then as Moore tries to recover and race to the outside, he is pulled down for the loss.

"And then, the fullback forgot the snap count," Reid said, rolling the play back to the beginning again. Sure enough, on the snap of the ball, Ameche remains in a set position until Moore actually takes the ball from Unitas. "He forgot that it was a quick count … That's that Wisconsin education right there."

I told Reid that I had listened to the NBC radio broadcast, and had been struck by how much more quickly the game moved then than it does today. Breaks between plays and possessions are longer and more frequent now, to allow for more commercials, and the use of video replay to reexamine contested calls by the referees causes still more delays. Modern coaches use these gaps in the action for analysis, for sideline conferences and hand signals, or, in the case of the quarterback, for giving instructions over a direct radio link to his helmet. In 1958, the game, once started, was primarily in the hands of the players. Unitas called his own plays. Defensive field captains like the Giants' Sam Huff were on-field tacticians. The game was faster and simpler.

[ Whenever professional football teams are running a no huddle offense, the play calling is simple. While most coaches focuses on creating technical mismatches through motion and shifts, experienced quarterbacks made the adjustments within the play calling process. ]

It also lacked many of the refined mechanical and tactical innovations that are commonplace in modern football. For instance, Reid was surprised to note that wide receivers assumed a three-point stance before the snap of the ball—today they stand upright, which allows them a broader view of the defensive backfield. The pass defenders, meanwhile, stood upright on the old film, with one foot forward, one back, and then just backpedaled to stay with the receivers. In the modern NFL, backfield defenders poise in a forward crouch with their weight evenly balanced on both legs, and retreat by taking short stutter-steps backward, ready to bolt in either direction and avoiding the crossover step, a potentially costly mistake that can offer a receiver the split-second advantage he needs to break away.

Basic positioning along the line of scrimmage has changed as well. A few plays in, Reid noted that the Giants defensive tackles, Dick Modzelewski and Rosey Grier, were "flexed back off the ball"—that is, set up more than a yard away from the Colts linemen. "That's probably for the run game," Reid said, explaining that by hanging back from the line of scrimmage, the defenders could get a better look at the direction of the play before attacking.

I asked, "Why wouldn't you do that today?"

"Well, you give those big guys a head start on you," Reid said. "At that time I would imagine that the linemen were fairly equal athletically, and now the offensive linemen are so big and the defensive linemen are relatively smaller." If you're a defender today, he went on, and you spot a 300-plus-pound blocker a two-step running start, he'll knock you "right on your ass."

Reid surmised correctly. I checked the average weight of the starting offensive and defensive linemen in the '58 game: the Colts' offensive front five weighed an average of 243 pounds, and the Giants' defensive front five weighed an average of 244 pounds. Today, offensive lines on average weigh nearly 25 pounds more than defensive fronts.

Not everything has changed as much. Reid recognized one Colts offensive formation as "the one we run the most—two receivers, two backs, and a tight end." And he even noticed some of his own plays in the mix. "Look, this is a rattler route," he said, watching Raymond Berry twist his way into the backfield, turning the Giants cornerback completely around and gaining a step. "This is the one we ran in the Super Bowl that got picked by stinkin' Rodney Harrison." (Harrison's interception in the closing minutes of Super Bowl XXXIX clinched the New England Patriots' 24–21 win over the Eagles.)

After the Colts' opening boondoggle, the Giants settled into a 4–3 defense, which remains the pro standard. What we were watching on film was the original 4–3, contrived by New York defensive coach Tom Landry, years before he helped create a dynasty as head coach of the Dallas Cowboys. It features four players on the line of scrimmage backed by three linebackers; four pass defenders back up this formation: two cornerbacks split wide on either side, and two deep defenders, or safeties. The 4–3 was designed to counter the growing sophistication of passing offenses. Before the 1950s, football had primarily been a ground game, but after the invention of the wide receiver in 1949, defenses struggled to cover pass catchers without becoming too vulnerable to the run.

But while the 4–3 has survived to the present day, the simplicity of the old game often amazed Reid to the point of disbelief. The offensive formations were so basic that many of them are no longer even used in the pro game. The Giants frequently lined up in the T-formation—the quarterback behind the center, and the three running backs lined up horizontally about three yards behind him—and both teams employed the antiquated "single wing," where one halfback and the fullback line up beside each other, behind the quarterback, while the other halfback splits wide, sometimes all the way out to the flanker position.

The game as it was played in 1958 "is still an entertaining sport to watch, but it's just not near as complicated," Reid said. "If I'm calling the plays" on offense, he went on, "I get paid to get into a rhythm with the guy calling the defense" on the other side. When a coach achieves the right "rhythm," he can sense what his opponent is thinking—and for Reid, grasping the "rhythm" of the classic game was fairly easy. "I can see what the offense is doing," he said. "You can almost call it offensively and defensively."

For instance, he was struck, early in the game, by how close behind the line of scrimmage the Giants safeties, Emlen Tunnell and Jimmy Patton, were setting up. Safeties ordinarily play five to 10 yards back. Tunnell and Patton were just three or four yards back. "First time I saw those safeties that tight," said Reid, "I'd take the tight end up the seam," referring to the hash marks that line the field to the right and left of the center.

As if hearing Reid's advice, that's what Unitas did two plays later. First, he felt out the defense: facing second down and long, the quarterback handed the ball to Dupre, who plunged into the left side of the Giants' defense, where he was hit by Tunnell.

"'Okay,' the Colts are saying, 'this guy, number 45 [Tunnell], is getting tight, and he was very aggressive on the last play, so we'll sell a hard fake,'" Reid speculated. The Colts would set up as if they were going with another running play, he predicted, with the tight end, Jim Mutscheller, "coming up and out like he is going to crack" Tunnell with a block, but instead going past him up the field. "Then they should try and get [a pass] over the top to Mutscheller."

On third down, Mutscheller moved just as Reid had suggested, faking a block on Tunnell and racing up the hash marks. Unitas faked the handoff and dropped back, looking downfield toward his tight end.

"But this guy [Tunnell] sniffs it out!" Reid said, impressed, watching as the safety turned and matched the tight end stride for stride. Unitas, harried suddenly by the Giants' blitzing right cornerback, instead hurried a throw to Moore—"his safety valve," said Reid—that was almost intercepted.

Because the ploy failed, most spectators, myself included, would not have recognized Baltimore's intent, or understood why it failed. Reid saw the reason. He froze the play and noted the fullback, Ameche, missing his block on the Giants cornerback, forcing the quarterback to hurry his throw. Players are forever screwing up the coach's perfect plans.

The Eagles coach saw another opportunity later in the game, when the Giants safeties opted to line up farther downfield in a "cover four" defense, with the four players in the backfield—Patton, Tunnell, Carl Karilivacz, and Lindon Crow—divvying up the defensive secondary into four lanes, each covering one.

"The thing you'd tell Johnny [Unitas] right here," Reid said, "is to take your best mismatch. You put T.O. [former Eagle, now Cowboys receiver, Terrell Owens, a noted deep threat] here and just picture him running a post over the top of that guy [Crow]." Sure enough, several plays later, the Colts exploited the formation, zeroing in on the most obvious mismatch by sending the speedy Moore racing down the right side of the field one-on-one with Crow. Unitas heaved the ball for a 60-yard gain.

Reid was impressed with Moore's speed and hands; less so with his blocking. On a later play, when Moore lined up in the backfield, Reid laughed and rolled the film back. "Watch this," he said. The ball is snapped and Unitas is eventually brought down by the Giants' defense, while Moore simply stays put in the same stance he was in before the snap of the ball. In slow motion, his statue-like pose is comical.

On a later play where Unitas was sacked, Reid again laughed and pointed to Moore missing an assignment. "Lenny didn't help, picking his nose right there, man. That's pissing me off." Then, on another play, "Lenny needs his ass whipped a little bit right here."

(In the Hall of Famer's defense, his back was injured early in the game when Huff picked him up and slammed him into the ground. Moore nearly came out after that, but Ewbank urged him to continue playing, if only as a decoy, because the Giants' defense was keying on him.)

Time after time, watching the vaunted Giants defense in action, Reid remarked how much he wished he could play against it. Landry's squad lined up in the same formation, with the same personnel, on almost every down.

"Very seldom do you see the same formation in a game anymore," he said. "That's just the way it is today. But this was just a part-time job for these guys. They didn't have the time to be in the building [for classroom study] all day."

/// New England Patriots Coach emphasized this same approach in terms of playing defense. During any game, his defensive team rarely ever shows the same defensive formation twice. ...

Again, Reid was right. Most pro players in the 1950s held down full-time jobs off the field. Huff was a salesman for the textile company J. P. Stevens. Unitas and many of his teammates worked at Bethlehem Steel. Art Donovan, the Colts' hilarious defensive tackle known as Fatso, was a liquor salesman. Most of the men earned less than $10,000 a year playing football. The highest-paid stars made between $15,000 and $20,000—enough to support a middle-class lifestyle in 1958, but nothing like today's hefty paychecks. Players who took off from their full-time jobs to play were often expected to make up the time by working long hours in the off-season. This made them better prepared for life after football than many of their modern counterparts are, but it also meant that they were less prepared for Sunday's action.

Still, even if players had been able to devote time to perfecting more-complex schemes, Reid noted, there simply wouldn't have been enough time to implement them, because of the quicker, pretelevision speed of the game. In today's NFL, coaches will often alter both the personnel and the formation of their teams between downs.

The biggest difference between the two eras—literally—is the size and speed of modern athletes. The average player on the 1958 Colts starting team weighed 222 pounds. The average weight of a 2007 Indianapolis Colts starter was 243 pounds. And there is ample reason to believe that today's pros are not just bigger, but faster. For one thing, the league draws on a talent pool far broader and deeper than in the past. It was widely believed (and the evidence on the field suggested) that in the 1950s the league limited the number of African American players, with an unwritten agreement restricting each team to seven. Today, merit is the only criterion, and in some parts of the country, prospects for the pro game are selected and groomed when they are still in grade school. Training methods, dietary habits, coaching, and the quality of competition at all levels have vastly improved. In most cases, the modern pro football player has been preparing to play the game for most of his young life.

Even the kickers have evolved. Few modern teams lack field-goal kickers who can readily boot the ball through the uprights from 40 yards out, while the old toe-kickers, like Steve Myhra for the Colts and even Pat Summerall for the Giants, were shaky beyond 20. The consistency of modern kickers has transformed offensive strategy. In the overtime period of the classic game, for instance, the Colts elected to run five plays from inside the Giants' 20-yard line, because Ewbank did not trust Myhra enough to wager the game on his leg.

I asked Reid whether any of the legends on the field in 1958 might be able to keep up in today's game.

"I was looking to try to see players that I thought could play today," he said. "I think Moore probably could, and Raymond Berry would probably find a way to play. Gifford. Andy Nelson, he looked pretty good on that one run. I don't know what kind of all-out speed he had, but it looked like he moved around pretty good. And Unitas. Unitas could play."

Reid noticed a similarity between the old Colts superstar and the future Hall of Fame quarterback he had coached in Green Bay.

"There are only two quarterbacks that finish their throw," he said. "You always teach chin-to-shoulder follow-through. Your head follows through to your chin when you throw … The ball is going to go where your head goes, and if you are consistent with your head placement … normally good things will happen. There are only two quarterbacks who do it. Unitas and Brett Favre. Watch: every time, they follow through. It's chin to shoulder. You won't find any other quarterbacks that do it, but both those guys do it naturally."

We were watching Unitas at his finest. With less than two minutes on the clock, down by three points and 86 yards from the goal line, he orchestrated a brilliant seven-play passing drive. Three completions in the middle of this march, all of them to Berry, set up a game-tying field goal. (Sam Huff says that he is still haunted, a half century later, by the Yankee Stadium loudspeaker barking "Unitas to Berry, Unitas to Berry.") With just seven seconds on the clock, Ewbank had no choice but to send in Myhra, who booted the game-tying 19-yard field goal to set up the first overtime in pro history. It remains the only overtime ever in an NFL championship game.

At this point, Reid had become a rapt spectator.

"This is just simple football right now, man," he said.

The Giants won the toss and got the ball first in overtime, but they failed to make a first down. They punted, and Unitas did it again, this time without pressure from the clock, mixing runs and passes to move his team 80 yards in 13 plays. Berry caught two more passes for 21 and 12 yards, and then Unitas, spotting Huff cheating to his right in an effort to stop Berry, sent Ameche up the center on a perfectly executed trap play. The Colts' right tackle, George Preas, raced across the defensive backfield to flatten the middle linebacker and clear a path for the fullback, who sprinted 22 yards up the middle of the field to the Giants' 20-yard line.

It ended five plays later, when Ameche plunged over the goal line for the winning touchdown—with Moore, still playing hurt, throwing a perfect block to clear the way. Reid said, simply, "Awesome."

The URL for this page is
http://www.theatlantic.com/doc/200810/nfl-eagles

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Tuesday, February 24, 2009

Competitive Positioning: Succeeding in Chaotic Times

P&G markets consumer products ( i.e., Bounty paper towels, Dawn dish liquid, Tide laundry detergent, etc.) that possess more value than their cheaper rivals,

No matter how much one cuts back, the smart consumers will always buy "quality" necessities. ... Investing in the stocks of high-valued consumer companies is not the "coolest" investment. However, it is quite steady regardless of the seasons.

Because of their historical branding and quality products, the P&G value will "rarely ever go down.

Cardinal Rule: Quality is value

#

Thursday, February 19, 2009 (AP)
P&G Chief Executive: We'll win on value
By DAN SEWELL, AP Business Writer

(02-19) 13:33 PST CINCINNATI (AP) --
Procter & Gamble Co.'s chief executive said Thursday the consumer products maker's emphasis on value will carry it through the recession.

P&G executives told analysts that they don't expect any major price rollbacks in the near future. However, they are telling consumers, in some 100 current promotions, that their products offer more for the dollar than competitors'.

"Right now, it's a consumer value play," said A.G. Lafley, P&G's chairman and CEO. "A big part of consumer value is trusted brands and products that deliver better value. ... P&G is winning the consumer value equation every day."

Products such as Tide laundry detergent, Dawn dish liquid and Bounty paper towels get more done than cheaper rivals, he said. Lafley also said P&G is increasing productivity and becoming more efficient, seeking out cost savings everywhere from energy to packaging.

"We are leaving no stone unturned," Lafley told analysts at the Consumer Analyst Group of New York conference in Boca Raton, Fla. "P&G is becoming more productive and we're making how we work much simpler."

Consumer goods and food makers are battling household belt-tightening and private-label competition. P&G recently lowered its earnings outlook for the year and forecast lower total sales for this quarter and possibly for its full year.

Companies are dropping some products. P&G last year sold its Folgers coffee business and Noxzema skin care brand and is moving away from pharmaceuticals.

"The garden's going to get weeded," Lafley said. "We're weeding our own garden, but our garden's pretty strong ... I think we're going to come through this in pretty good shape."

P&G stock rose 18 cents to end at $51.13. It had fallen to a 52-week low of $49.28 earlier this week and has traded as high as $73.57 in the past year.
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Copyright 2009 AP
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http://www.sfgate.com/cgi-bin/article.cgi?file=/n/a/2009/02/19/financial/f065858S09.DTL
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Monday, February 23, 2009

The Dao of Strategic Assessment (3): Same Information, Different Assessment, Different Outcome


(An article that was sitting in our archives)
Some businesses secure the same slice of strategic intelligence as everyone else. Whether they have the skill to assess the intelligence, that is a different story.

Occasionally, someone secured that special piece of intelligence that no one has seen and assesses that information properly and timely. Then, they position themselves with proper planning and preparation. Through timely implementation and persistence, that business gets the right break and moves ahead of the competition.

Good Assessment => Good Planning => Great Implementation => Great Success

The challenge is to transform the assessed data into a Tangible Vision.


# October 12, 2008
Amid the Gloom, an E-Commerce War

By BRAD STONE

WHEN the e-commerce giant eBay emerged from the last recession seven years ago with an aura of invincibility, its chief executive, Meg Whitman, boasted that eBay is to some extent recession-proof.


As the online auctioneer’s revenues and stock price kept climbing, one of its primary rivals, Amazon.com, just limped along. How times have changed. Ms. Whitman, now co-chair of Senator John McCain’s presidential campaign, retired from eBay earlier this year as the company struggled with stagnation. Amazon, meanwhile, has emerged as one of the most vibrant and reliable retailers in the country. And in an unmistakable sign that Internet companies are indeed exposed to the gathering economic storm stemming from the credit crisis, Ms. Whitman’s successor, John J. Donahoe, laid off 10 percent of eBay’s 16,000 employees last Monday. Mr. Donahoe noted that eBay was already feeling the effects of the downturn.

This looks like it is going to be a more typical economic cycle that impacts consumer spending, he said. We are not immune.
That the economic crisis is washing up on Silicon Valley’s shores shouldn’t, perhaps, come as a surprise. Most tech companies are defenseless against waning advertising, business spending and consumer interest in big-ticket items like computers.

Over the last three months, investors have punished tech companies like Google, Microsoft and Apple, extracting a fifth to a half of their market value.
E-commerce, though, was once thought to be a refuge from economic storms. People who stay away from the mall might actually be more tempted to shop online and hunt for deals, or so the thinking went. But analysts are now revisiting that assumption.

Many consumers, citing an uncertain economy, say they will clutch their wallets tightly this holiday season regardless of where they shop: 48 percent surveyed recently by eBillme, an online payment service, said they planned to delay purchases.
Traditional, brick-and-mortar stores had wrenching, double-digit declines in September sales and are bracing for a bleak holiday season. No one is certain to what degree online retailers will feel that same pain, because digital vendors have never endured a deep, protracted economic slump before. We still feel pretty good about this year, but I worry about next year and beyond, said Brian J. Pitz, an analyst at Banc of America Securities. Are people going to spend when they can’t get home equity lines of credit, a student loan or a car loan? For eBay and Amazon, the twin giants of e-commerce, the financial meltdown has arrived at a particularly crucial time.

After years of claiming that their businesses were complementary, not competitive, the companies are now on a collision course.
Amazon has accelerated its courtship of small online vendors, allowing them to sell on its site becoming more like eBay.

And eBay, desperate to revive itself, has decided to emphasize traditional, fixed-price sales of both new and old merchandise becoming more like Amazon.
AT stake is more than e-commerce bragging rights.

On the Internet, size matters. Larger companies can collect more information about consumers, negotiate better deals with partners and use that leverage to expand their dominance (for example, Google versus Yahoo in search).


This is a pivotal holiday season for eBay, said Jeffrey Lindsay, a senior analyst at Bernstein Research who has covered the Internet for a decade. What people fear is that Amazon is basically building a bigger sales base than eBay and will use that knowledge to sell people more and more of the things they want to buy online. Indeed, the balance of power in e-commerce seems to be shifting faster than anyone expected.

Just three years ago, eBay had 30 percent more traffic than Amazon. Today, its total of 84.5 million active users is barely ahead of the 81 million active customer accounts that Amazon reported in June.
Amazon has exceeded eBay in other measures as well.

EBay’s market capitalization was three times Amazon’s in 2005, back when Wall Street loved the fact that it carried no inventory and generated huge profits
. This year, eBay’s stock has lost over half its value and, in July, Amazon’s valuation surpassed eBay’s for the first time.
In a series of interviews, Mr. Donahoe acknowledged that eBay, based in San Jose, Calif., didn’t adapt fast enough to shifting e-commerce winds. He now embraces a turnaround mind-set and is refocusing its Web marketplace toward shoppers who don’t want to waste time in online auctions.

There are times when I wish we can close this store and just open a new store, but we can’t, he said. We need to make bolder, more aggressive changes to the eBay ecosystem even if they are unpopular. Up in Seattle, meanwhile, Amazon’s chief executive, Jeffrey P. Bezos, says that after years of failed experimentation, third-party vendors the foundation on which eBay was built now account for about 29 percent of sales on Amazon. The company has endured and outlasted critics who long complained about its high fixed costs.

Last year, it impressed investors with accelerating growth, and its stock price revisited the highs of the dot-com boom, before waning euphoria and market pessimism erased more than half of those gains this year.

Mr. Bezos credits Amazon’s tolerance for risky, expensive bets like the Kindle electronic reading device.
Our willingness to be misunderstood, our long-term orientation and our willingness to repeatedly fail are the three parts of our culture that make doing this kind of thing possible, he said. EBay’s recent problems have made Mr. Bezos and his team look like shrewd and patient stewards of the Amazon franchise. And Amazon’s second wind is making eBay look as if it has missed one of the greatest opportunities in the Internet’s short history.

EBay could have closed the door to Amazon back when Amazon was mostly just a platform to sell books and music, said Scott Devitt, an analyst at Stifel, Nicolaus & Company, the investment bank. But what eBay did in those days was to take a very hands-off approach and let the marketplace control itself. And that ended up being the downfall of the business relative to others that have succeeded.

OVER the summer of 2004, at the annual executive retreat that eBay insiders call Telluride, a product strategy team argued that eBay needed to break into the promising world of digital media. Pointing to the popularity of services like Napster and the new iTunes music store from Apple, the group predicted that media like books, music and movies would inevitably be distributed digitally, over the Web. EBay, they argued, needed to ride that wave. That insight which did catch on at Amazon and is now responsible for high-profile efforts like the Kindle and Amazon’s MP3 store and video-on-demand service went nowhere at eBay. Nobody really shut it down. The process shut it down, says a former eBay executive who was on the product strategy team but requested anonymity to avoid alienating former colleagues. The company was obsessed with making quarterly numbers. Whether passing on digital media was a mistake at eBay is still an open question. But the anecdote illustrates larger problems.

More than a dozen current and former eBay executives, from all levels of management, say eBay routinely failed to reorient its core business.
They say eBay avoided fiddling with its auction model because it was wary of disrupting a long-profitable equilibrium between buyers and sellers.

EBay has known for years that some Web buyers were looking for a different experience. Surveys suggested that auction participants were alienated by untrustworthy sellers and hidden shipping fees, and increasingly preferred the certainty of instantly buying items at a fixed price. Although eBay executives recognized and routinely acknowledged the problem, they never took bold, direct steps to address it.

In 2005, the company acquired Shopping.com, a comparative shopping site that catalogs products for sale elsewhere on the Web. But for years eBay did not promote the company’s listings, primarily because its vocal community of sellers the ones paying fees to eBay protested whenever eBay sent buyers to other retailers.
Josh Koppelman, who founded the e-commerce site Half.com and sold it to eBay in 2001, says that there was an understandable cultural reluctance inside eBay to alienate sellers. We got paid a fee to provide a service to a community, he said. Hurting members of that community was difficult.

Instead of imposing critical fixes to its slowing model, eBay searched for high-growth businesses elsewhere, acquiring Skype, the online calling service; StubHub, the ticketing site; and a series of classified-advertising Web sites. The company did create a whole new site, called eBay Express, where it tried to satisfy buyer interest in a simpler shopping experience. EBay Express automatically amassed all the fixed-price, non-auction listings on eBay properties and presented them in an organized way with only one payment system, PayPal also owned by eBay. But in the two-year life of eBay Express, eBay never directed any meaningful traffic to it, fearing that it would interfere with the more profitable and popular auction-oriented site.

The company shuttered eBay Express this year and has said it will move some of its innovative features to eBay.com.
Contributing to intransigence, according to several former executives, were deep divisions and constant hand-wringing among its managers over the most fundamental question: What is eBay? One camp believed that eBay was a discount palace and that it had to continually offer deals to buyers in whatever shopping format they wanted. But another group, resistant to change even as late as last year when eBay was clearly losing ground, believed that the brand was tied up in the excitement of auctions. Emphasizing traditional shopping destroyed what made eBay special, they argued.

Today online shopping is mainstream, but it’s also becoming boring, Bill Cobb, then the president of eBay North America, wrote in a June 2007 blog entry that typified this thinking. We’re investing in the quintessential eBay experience of buying and selling person to person in an auction format.


Ms. Whitman seemed to moderate this constant debate while never actually settling it. At times, she also seemed unwilling to leave auctions behind. In an interview last week, while on a break from traveling with the Republican vice-presidential candidate Sarah Palin, Ms. Whitman said it was hard for her to reflect on these kinds of divisions within the company, or on missed opportunities. There was no shortage of realistic looks in the mirror, where we asked ourselves if we were doing the best job that we could do, she said. She also addressed another notion raised by former eBayers, who say executives were dismissive of Amazon but focused obsessively on Google, the search leader whose tentative moves into e-commerce were viewed inside eBay as acts of aggression. Google is a disruptive competitor. It’s not a marketplace and it’s not a retailer but has a different way of marrying buyers and sellers, she said. I don’t think you can overstate any competitive threats. But paranoia about Google, these former executives say, fueled strategic missteps like the Skype acquisition, which Google had also pursued.

Ms. Whitman and other eBay managers spent considerable energy trying to integrate Skype, and last year eBay wrote down $1.4 billion of the $3.1 billion acquisition.
As eBay obsessed about Google, the online retailer from Seattle was encroaching on its turf. CONVERSATIONS with Jeff Bezos of Amazon inevitably provoke two kinds of outbursts. One is that famous, barking laugh that punctuates even seemingly mundane sentences. The other is his paean to the wisdom of long-term thinking. We are willing to plant seeds that take five to seven years to grow into reasonable things, he said in an interview. You can’t do big, clean-sheet invention unless you are willing to invest for long periods of time. Mr. Bezos has delivered these kinds of odes to patience and risk tolerance for nearly a decade. The company’s appetite for enduring short-term pain for long-term gain is clearest when comparing it with its rival, eBay. While eBay was buying into classified advertising, online payments and Internet telephony, Amazon spent hundreds of millions of dollars building its brand as a trusted retailer hiring customer service representatives and returning money to customers when transactions went awry. As eBay took a pass on digital media, Amazon dove in and frustrated investors for years with margins that were diminished by a bulky R.& D. budget but produced promising businesses like the MP3 store. Compensation at the two companies also reflects core differences. Amazon evaluates its executives annually and gives performance-based stock grants. Until this year, when Mr. Donahoe became chief executive, eBay gave cash and stock bonuses based on quarterly performance, rewarding managers for meeting Wall Street’s short-term expectations. Similarly, Amazon’s push to recruit the small sellers who orbited eBay was marked, at first, by patience and often-embarrassing experimentation.

In 1999, five years after Mr. Bezos first plunged his stake into the ground as an online bookseller, Amazon invaded eBay’s territory, introducing Amazon Auctions and a way for retailers to set up stores on the site, called zShops. The efforts tanked. The problem then was that nobody came, Mr. Bezos said. Actually, sellers came, but the customers didn’t care and didn’t shop there. Amazon tried to promote this siloed merchandise on its site by linking to it on its more popular product pages. These so-called smart links were hotly controversial inside Amazon and became the subject of a rivalry between its retail and technology groups. Fearful that sending visitors to other pages would cut into their sales, retailing executives at Amazon took to removing them from the page at every opportunity, according to one senior Amazon executive who was there at the time. SEVERAL years ago, the company introduced Amazon Marketplace, laying the groundwork for its current path by listing new and used items from third-party sellers alongside its own merchandise. If Amazon didn’t stock a particular item, or if independent sellers could offer better prices, they would become the featured retailer on the page. Amazon settled internal tensions by giving its retail managers credit for any products sold on their pages, even by third-party sellers.

But Mr. Bezos says the arrangement still produces anxiety.
Put yourself in place of our retail buyers, he said. You just purchased 10,000 units of a particular digital camera and you are told, if any third party anywhere in the world can offer a better price, we are going to give them the buy box and you are going to get stuck with the inventory. That causes some angst. Over the last five years, Amazon has lowered hurdles for independent vendors to sell on its site and recruited new groups of merchants as it has expanded into other countries and product categories automotive parts in 2006 and office supplies this year, for example. Amazon executives say they don’t specifically pursue top eBay sellers, but some merchants suggest otherwise. David Duong, founder of Shoe Metro, a Web retailer based in San Diego, says Amazon representatives called him shortly after Amazon.com introduced a shoe category in 2005 and asked him to begin selling on the site. I guess they found us on eBay, he said. We were actually going to talk to them, but they beat us to the punch.

Lately, small merchants and their trade organizations say, the outreach has become even more direct. The Professional EBay Sellers Alliance said that Amazon recently offered to waive some fees for the 800 members of the group, an organization of eBay power sellers, to woo them to its platform.
Because Amazon also sells many of the same products as its merchants, executives at eBay predict that competitive tensions will emerge as the Amazon Marketplace grows. Maybe so. It’s happened before. Amazon once ran the Web operations of large traditional retailers like Borders, Circuit City and Toys R Us. One by one, those retailers concluded that outsourcing such a crucial feature of 21st-century retailing to a competitor was a bad idea. But some of its newer deals with sellers indicate that Amazon is finding ways around those tensions, at least with small merchants. Andrew and Deb Mowery of Fort Collins, Colo., who started selling home, garden and pet supplies on eBay in 1999, now make 60 percent of their sales on Amazon and about 20 percent on eBay. In addition to listing items for sale on the Amazon Marketplace, they are also a wholesale supplier to Amazon, providing it with products like heated pet beds.

Mr. Mowery is essentially competing with himself, but the arrangement works. If they run out, I’ve got their back, he said. If I run out, they’ve got my back. Amazon wants to forge these kinds of close ties with other small sellers. A program called Fulfillment by Amazon, introduced in 2006, allows retailers to store their inventory in Amazon’s warehouses. When someone buys an item from that seller, Amazon ships it out of its warehouse in an Amazon box. Integrating small merchants into its operations also allows Amazon to learn more about whom it can trust to sell on its site. Compared with eBay, the company says it exerts a far greater measure of control over its marketplace, calling certain vendors featured sellers and vetting others in product categories that are sensitive to fraud. At the end of the day, we believe it’s good for all of our sellers to make sure we are protecting the consumer experience first, Mr. Bezos said. Our first and foremost goal is to earn trust with consumers. If there are no consumers buying, nothing else matters. DESPITE Amazon’s success in courting independent sellers, its selection is still just a fraction of what eBay offers, and in some cases its prices are higher.

For example, there are hundreds of new, used and refurbished Trek racing bikes on eBay; as of last week, Amazon had three for sale. Acquisitive parents can buy a $90 Deux Par Deux baby sweater dress on eBay for under $30.

But only a few of this French designer’s items are listed on Amazon, and for close to full price.
And that Lehman Brothers 150th-anniversary collectible tote bag, which every irony-obsessed stock market fan wants under the Christmas tree?

It is available for purchase only on eBay, in auctions.
This is where Mr. Donahoe talks about a vision to fix eBay, and to create a Web discount store that offers a wide variety of new and old merchandise in auction and fixed-price formats. To get there, he must administer the sweeping, painful fixes that eBay has previously shunned. It was increasingly clear to me in 2007 that what felt like bold changes, and to the community felt like bold changes, were not bold enough, he said. His attempted fixes have started internally. In addition to making executive bonuses annual instead of quarterly, to keep employees from leaving and reward longer-term thinking, he moved the company’s focus to buyers instead of sellers. He canceled the annual eBay Live conference next year with merchants this year, it turned into an unwieldy complaint session and began making eBay executives read weekly surveys that ask shoppers whether they would recommend eBay to a friend. THE eBay facade is also undergoing its most significant renovation in its 14-year history as Mr. Donahoe tries to adjust eBay fees to tempt sellers to list more of their products at fixed prices. EBay has also added a new 30-day listing at a fixed price that is more economical to many sellers than auctions. It has also disabled the feedback mechanism that allowed sellers to rank buyers and introduced a new best match search engine that promotes trusted sellers and good deals.

In another controversial change, eBay has struck special deals with large merchants like Buy.com, which pays no listing fees and offers more than half a million products on eBay.com.
The point of the arrangement is to ensure that eBay stays fully stocked in basics like batteries and printer cartridges. Other eBay sellers are enraged, though, arguing that the deal violates the sacred eBay tenet of the level playing field. These sellers have vented their frustrations online about eBay’s changes. It’s hard to gauge whether the vitriol represents the majority view, but some less vocal, larger sellers on eBay say they have actually benefited. EBay has told all bad sellers to shape up, said Jordan Insley, an electronics merchant who lives near Seattle. I’ve seen a lot of sellers that used to sell a lot of product fall off the charts. Although he worries that buyer traffic on eBay is slowing, Mr. Insley says he will sell $13 million in gadgets this year on eBay alone. I think eBay is moving in the right direction. We are sticking around. Still, Mr. Donahoe can’t count on that sentiment to carry the day. Few of his changes are expected to deliver any immediate results, other than alienating certain sellers.

Yet for eBay, the changes may be a matter of survival. The company need only look across Silicon Valley at Yahoo to see what can happen to wounded Internet companies with depressed stock prices. In the meantime, he faces tough choices.

He is weighing a possible sale of Skype by next year, and analysts think he will almost certainly make that move, since the company now acknowledges that Skype has little synergy with eBay’s other businesses.
That would free eBay to focus on its core marketplace, on getting through the torrential economic downpour, and on combating a challenger that is making greater incursions every day.

[ Our suggestion to eBAY is to keep Skype. We believe that there are still ways to link Skype to the eBAY's e-commerce wagon. Hint: Try connecting the "voice to text" function to the Skype's engine. ]

I respect Jeff Bezos a lot as a leader and Amazon and what they’ve done, Mr. Donahoe said. But it is still early days in this industry. E-commerce is 7 percent of retail. I don’t think anyone thinks it’s going to end there. We think there is plenty of room for both Amazon and eBay to be successful.


Copyright 2008 The New York Times Company

http://www.nytimes.com/2008/10/12/business/12giants.html

Friday, February 20, 2009

The Realities of Strategic Project Management



We understand the essentials of strategy through experience and execution. With our process, you will be able to do the following:
  • Minimizing costs;
  • Mitigating risks;
  • Accelerating delivery;
  • Maximizing opportunities;
  • Ensuring quality.


Beside devising marketing strategies for startups, we also specializes in strategic project management.


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The following set of concepts is from Bob Lewis, one of my favorite IT project writers.

The KJR Manifesto's 13 concepts whose principal virtue is that they work:
  1. There are no best practices, only practices that fit best.
  2. To optimize the whole you must sub-optimize the parts.
  3. Bad metrics are worse than no metrics.
  4. Relationships precede process.
  5. Relationships outlive transactions.
  6. Don't confuse documentation with reality.
  7. Before you can be strategic you have to be competent.
  8. Big solutions that work start as small solutions that work.
  9. Customers are external. Internal customers aren't.
  10. Don't run IT as a business, run it in a business like way.
  11. There are no IT projects.
  12. Digest with intestines, think with brain.
  13. Every employee is irreplaceable.

http://issurvivor.com/shop/article_KJR/Keep-the-Joint-Running%3A-A-Manifesto-for-21st-Century-Information-Technology.html


All of his project management books and materials
are great. We recommended it.



Thursday, February 19, 2009

Transforming Chaos Into Opportunities


When negotiating with a trading partner, assess the competitive position of each side. Then, determine who has the advantage of time and resources. Do not rush into the situation. It is recommended to properly build a detailed plan that is based on assessed data. The greater your advantage of time and resources is, the greater your leverage becomes.

Revised content from the wiki page on the 36 Stratagems.


The View of China

Watch the fires burning across the river

(traditional Chinese: 隔岸觀火; simplified Chinese: 隔岸观火; pinyin: Gé àn guān huǒ)

Delay the entering of the field of battle until all the other players have become exhausted fighting amongst themselves. Then go in at full strength and pick up the pieces.

Usage

This "Opportunistic Stratagem" thrive on situations where vulnerabilities can be exploited. The objective is to capitalize on all opportunities so as to gain the advantage.


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"Looting a house on fire" (趁火打劫 or "Chen Huo Da Jie")
When an organization is beset by internal conflicts, they are not able to deal with an outside threat. This is the time for a superior organization to make a deal that gives them leverage.

Usage
Gather internal information about the opposition. If the opposition is in its weakest state ever, conquer the opposition without mercy.


The View of Russia

Russia possesses no strategic options to gain any leverage in its dealing with China. Their initial objective is to fix their economy first.


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[ Turning Crisis into Opportunities ]



China and Russia struck a deal that will give Russian energy firms Transneft and Rosneft loans to increase East Siberian oil field development and production and to connect the Eastern Siberia-Pacific Ocean pipeline to China. In return, China will receive about 300,000 barrels per day of oil for the next 20 years. Russia might have made the deal out of economic desperation as its state-owned energy firms feel the pain of evaporating credit, economic woes and low oil prices.

China and Russia struck a deal that will give Russian energy firms Transneft and Rosneft loans to increase East Siberian oil field development and production and to connect the Eastern Siberia-Pacific Ocean pipeline to China. In return, China will receive about 300,000 barrels per day of oil for the next 20 years. Russia might have made the deal out of economic desperation as its state-owned energy firms feel the pain of evaporating credit, economic woes and low oil prices.

Analysis

China and Russia reached an agreement under which China will give key Russian energy firms Rosneft and Transneft loans for $15 billion and $10 billion, respectively, Transneft spokesman Igor Dyomin said Feb. 17. Russian state-owned oil pipeline company Transneft will use its loan to connect the long-delayed Eastern Siberia-Pacific Ocean (ESPO) pipeline to China, and Rosneft will use its loan to expand East Siberian oil field development and production. In exchange for the loans, the Chinese will receive about 300,000 barrels per day (bpd) of oil for the next 20 years.

The loans are part of the much longer negotiations circling the idea of the ESPO pipeline. It makes perfect sense for Russia to link its vast Eastern Siberian oil resources (about 10 percent of Russia’s total oil reserves, or 10 billion barrels) to energy-consuming Asian markets like South Korea, Japan and especially China. Moreover, a pipeline that could carry Russian oil to the country’s Pacific coast could supply markets even further abroad, such as the United States. The problem is that building a pipeline across thousands of miles of mountainous Siberian terrain requires enormous capital investments that are not easy to come up with, particularly during a global recession. During Soviet times, the Russians used central government investment to undertake gigantic energy infrastructure projects (such as the pipelines from the Yamal Peninsula to Europe) that served strategic interests. After the Soviet collapse, and especially during Vladimir Putin’s presidency, Russia has been demure about such capital projects, performing only what was absolutely necessary to maintain exports to existing markets and passing up major renovations or expansions. This tight-fistedness enabled Russia to build up massive foreign exchange reserves with its trade surpluses, but it meant that many potential plans remained on the drawing board.


Map: Russian ESPO oil pipeline

A new opportunity emerged when the Chinese and the Russians began negotiating the deal that has just been settled. The Chinese would loan the money, and a 44-mile spur off the ESPO pipeline would be jointly built and operated, linking Skovorodino in Russia’s Amur region to Daqing in China’s Heilongjiang province. When Transneft offered to build the spur, negotiations began. Despite hard-bargaining tactics and inherent distrust between the two geopolitical rivals, the proposal always seemed promising, since it marked such a close alignment of interests. Without Chinese capital, the Russians were unlikely to realize their strategic goal of transporting resources to new markets in the East at a time when their main market — Europe — is turning away. Without Russian oil, the Chinese would not be able to diversify their oil supply and enhance their energy security.

But the proposal ignited a conflict between the two major Russian players, Transneft and Rosneft, over the fact that a pipeline leading directly to China limits Russia to one customer, whereas building the pipeline to the Pacific coast would allow supplies to be shipped to any number of buyers. Rosneft wanted to secure China as a customer first, and then go on to bigger and better things; Transneft wanted to run a line straight for the coasts (to prevent China from taking advantage of a direct line by re-exporting Russian oil or by unilaterally demanding price reductions), or to refine the oil at home and continue shipping products by rail to the Pacific.

Rosneft is one of Moscow’s energy champions, and also has the support of one of two major political factions in the Kremlin, led by Deputy Prime Minister Igor Sechin. Ever since Rosneft assimilated the broken pieces of former Russian energy company Yukos (with help from a $6 billion loan from China in 2004), it has depended on developing its Siberian potential in order to rise above its many competitors. ESPO is therefore crucial to Rosneft’s survival and success. Therefore, Rosneft wanted to secure the deal with China first so as to have a stepping stone to a broader Far East strategy.

Negotiations on the Chinese deal were delayed. The Chinese were reluctant to sign an agreement while they had doubts about whether the Russian oil producer and pipeline builder could get along — specifically, China was waiting to see whether Rosneft would have the Kremlin’s support. Beijing also knew it had control of the purse strings; and given its inherent distrust of the Russians, it wanted to be sure that the agreement was fully to its liking — for instance, by insisting, against Putin’s demands, that the loan be made in U.S. dollars and not Russian rubles. China also wanted to make sure it did not need the cash to address any immediate problems at home due to the financial crisis.

Ultimately, the Kremlin intervened in the spat between Rosneft and Transneft, approving of Rosneft’s strategy and enabling the deal to move forward — by endorsing a slew of tax reforms and incentives for oil development and export in key East Siberian sites such as Sakha, Irkutsk, Krasnoyarsk, and eventually Taymyr, Sakhalin, Lena-Tunguska and Lake Baikal. The Chinese then came forward with the $25 billion, with a 6 percent yearly interest rate (moved down from 7 percent), which means that Russia gets the cash up front while China receives about 2.2 billion barrels of oil.

The deal reveals several things about the way regional geopolitics are unfolding as the world economy contracts. Russia and its state firms are in need of a lifesaver now that the combination of low oil prices, the absence of outside credit, and domestic financial troubles has rapidly depleted their reserves. The Chinese loan will provide an infusion of cash at just the right time to stave off financial pressures, allowing the Russians to undertake otherwise unfeasible projects that will pay off when Chinese energy demand revives. Moscow will see its Far East strategy advance another rung up the ladder, while Sechin’s clan, having scored a major victory in winning Kremlin approval for the Chinese deal, will gain an economic and political advantage over rivals.

China, meanwhile, will receive a steady stream of oil for the next 20 years. Rosneft’s facilities are ready to produce about 313,000 bpd (slightly more than the agreed-upon amount to repay the loan) at Vankor, the key Siberian site for the ESPO project. This amount of oil to be paid to China is roughly the same as the amount imported from Russia in 2007 (mostly by rail), and about half as much as the 600,000 bpd rail capacity in the region. This is significant, especially for a country so dependent on manufacturing and sensitive to energy shocks. China needs a reliable energy supply and does not want to be overly dependent on energy from one source. Moreover, most of its oil is shipped via ocean from the Middle East, and this leaves China at the mercy of U.S. naval power. However remote the possibility of an interdiction, it is enough to make a landlocked oil supply route attractive to Beijing.

But for Russia the deal is not a win-win. Moscow is getting pounded by the recession, and the decision to go forward on a pipeline that goes directly to China, forgoing the possibilities offered by a more versatile sea port destination, is a major concession. Obviously, now the Russian firms have to go through with the infrastructure developments, which will be technically demanding and fraught with unforeseen expenses and delays (sending Siberian oil eastward is said to cost twice as much per barrel as sending it westward). And the Chinese got a steal: Although not all of the contract’s subtleties are likely out in the open right now, reimbursement for the loan means that the Chinese have purchased Rosneft crude for only about $11.40 a barrel once interest is figured in — about one-third of what Russia’s crude fetches on the open market right now. The Russians have essentially locked the fate of their Far East strategy to the whims of Chinese energy policy, and this is a compromise that could reveal how financially desperate Russia is.

China and Russia reached an agreement under which China will give key Russian energy firms Rosneft and Transneft loans for $15 billion and $10 billion, respectively, Transneft spokesman Igor Dyomin said Feb. 17. Russian state-owned oil pipeline company Transneft will use its loan to connect the long-delayed Eastern Siberia-Pacific Ocean (ESPO) pipeline to China, and Rosneft will use its loan to expand East Siberian oil field development and production. In exchange for the loans, the Chinese will receive about 300,000 barrels per day (bpd) of oil for the next 20 years.

The loans are part of the much longer negotiations circling the idea of the ESPO pipeline. It makes perfect sense for Russia to link its vast Eastern Siberian oil resources (about 10 percent of Russia’s total oil reserves, or 10 billion barrels) to energy-consuming Asian markets like South Korea, Japan and especially China. Moreover, a pipeline that could carry Russian oil to the country’s Pacific coast could supply markets even further abroad, such as the United States. The problem is that building a pipeline across thousands of miles of mountainous Siberian terrain requires enormous capital investments that are not easy to come up with, particularly during a global recession. During Soviet times, the Russians used central government investment to undertake gigantic energy infrastructure projects (such as the pipelines from the Yamal Peninsula to Europe) that served strategic interests. After the Soviet collapse, and especially during Vladimir Putin’s presidency, Russia has been demure about such capital projects, performing only what was absolutely necessary to maintain exports to existing markets and passing up major renovations or expansions. This tight-fistedness enabled Russia to build up massive foreign exchange reserves with its trade surpluses, but it meant that many potential plans remained on the drawing board.


A new opportunity emerged when the Chinese and the Russians began negotiating the deal that has just been settled. The Chinese would loan the money, and a 44-mile spur off the ESPO pipeline would be jointly built and operated, linking Skovorodino in Russia’s Amur region to Daqing in China’s Heilongjiang province. When Transneft offered to build the spur, negotiations began. Despite hard-bargaining tactics and inherent distrust between the two geopolitical rivals, the proposal always seemed promising, since it marked such a close alignment of interests. Without Chinese capital, the Russians were unlikely to realize their strategic goal of transporting resources to new markets in the East at a time when their main market — Europe — is turning away. Without Russian oil, the Chinese would not be able to diversify their oil supply and enhance their energy security.

But the proposal ignited a conflict between the two major Russian players, Transneft and Rosneft, over the fact that a pipeline leading directly to China limits Russia to one customer, whereas building the pipeline to the Pacific coast would allow supplies to be shipped to any number of buyers. Rosneft wanted to secure China as a customer first, and then go on to bigger and better things; Transneft wanted to run a line straight for the coasts (to prevent China from taking advantage of a direct line by re-exporting Russian oil or by unilaterally demanding price reductions), or to refine the oil at home and continue shipping products by rail to the Pacific.

Rosneft is one of Moscow’s energy champions, and also has the support of one of two major political factions in the Kremlin, led by Deputy Prime Minister Igor Sechin. Ever since Rosneft assimilated the broken pieces of former Russian energy company Yukos (with help from a $6 billion loan from China in 2004), it has depended on developing its Siberian potential in order to rise above its many competitors. ESPO is therefore crucial to Rosneft’s survival and success. Therefore, Rosneft wanted to secure the deal with China first so as to have a stepping stone to a broader Far East strategy.

Negotiations on the Chinese deal were delayed. The Chinese were reluctant to sign an agreement while they had doubts about whether the Russian oil producer and pipeline builder could get along — specifically, China was waiting to see whether Rosneft would have the Kremlin’s support. Beijing also knew it had control of the purse strings; and given its inherent distrust of the Russians, it wanted to be sure that the agreement was fully to its liking — for instance, by insisting, against Putin’s demands, that the loan be made in U.S. dollars and not Russian rubles. China also wanted to make sure it did not need the cash to address any immediate problems at home due to the financial crisis.

Ultimately, the Kremlin intervened in the spat between Rosneft and Transneft, approving of Rosneft’s strategy and enabling the deal to move forward — by endorsing a slew of tax reforms and incentives for oil development and export in key East Siberian sites such as Sakha, Irkutsk, Krasnoyarsk, and eventually Taymyr, Sakhalin, Lena-Tunguska and Lake Baikal. The Chinese then came forward with the $25 billion, with a 6 percent yearly interest rate (moved down from 7 percent), which means that Russia gets the cash up front while China receives about 2.2 billion barrels of oil.

The deal reveals several things about the way regional geopolitics are unfolding as the world economy contracts. Russia and its state firms are in need of a lifesaver now that the combination of low oil prices, the absence of outside credit, and domestic financial troubles has rapidly depleted their reserves. The Chinese loan will provide an infusion of cash at just the right time to stave off financial pressures, allowing the Russians to undertake otherwise unfeasible projects that will pay off when Chinese energy demand revives. Moscow will see its Far East strategy advance another rung up the ladder, while Sechin’s clan, having scored a major victory in winning Kremlin approval for the Chinese deal, will gain an economic and political advantage over rivals.

China, meanwhile, will receive a steady stream of oil for the next 20 years. Rosneft’s facilities are ready to produce about 313,000 bpd (slightly more than the agreed-upon amount to repay the loan) at Vankor, the key Siberian site for the ESPO project. This amount of oil to be paid to China is roughly the same as the amount imported from Russia in 2007 (mostly by rail), and about half as much as the 600,000 bpd rail capacity in the region. This is significant, especially for a country so dependent on manufacturing and sensitive to energy shocks. China needs a reliable energy supply and does not want to be overly dependent on energy from one source. Moreover, most of its oil is shipped via ocean from the Middle East, and this leaves China at the mercy of U.S. naval power. However remote the possibility of an interdiction, it is enough to make a landlocked oil supply route attractive to Beijing.

But for Russia the deal is not a win-win. Moscow is getting pounded by the recession, and the decision to go forward on a pipeline that goes directly to China, forgoing the possibilities offered by a more versatile sea port destination, is a major concession. Obviously, now the Russian firms have to go through with the infrastructure developments, which will be technically demanding and fraught with unforeseen expenses and delays (sending Siberian oil eastward is said to cost twice as much per barrel as sending it westward). And the Chinese got a steal: Although not all of the contract’s subtleties are likely out in the open right now, reimbursement for the loan means that the Chinese have purchased Rosneft crude for only about $11.40 a barrel once interest is figured in — about one-third of what Russia’s crude fetches on the open market right now. The Russians have essentially locked the fate of their Far East strategy to the whims of Chinese energy policy, and this is a compromise that could reveal how financially desperate Russia is.

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