The Wall Street Journal Education Program
Weekly Review & Quiz
Covering front-page articles from Sep 9-15, 2006
Professor Guide with Summaries Fall 2006
Developed by: Scott R. Homan Ph.D., Purdue University
Questions 1 – 12 from The First Section, Section A
Divided H-P Board To Discuss
Leak Scandal, Dunn's Future
By JOANN S. LUBLIN and PETER WALDMAN
September 9, 2006; Page A1
http://online.wsj.com/article/SB115773006173257658.html
A divided Hewlett-Packard Co. board is scheduled to confer by phone Sunday to discuss
the future of Chairman Patricia Dunn and other fallout from an investigation of press
leaks which authorities say may have violated California law.
In an interview with The Wall Street Journal on Friday, Ms. Dunn said she knew little
about the tactics used by outside firms hired by H-P, and said she was "appalled" to learn
in the past two months that investigators disguised their identities to obtain private
telephone records of reporters and H-P directors. She said she had previously thought the
directors' phone records were obtained properly.
Ms. Dunn also said she has no plans to resign. However, she said she would step down as
both chairman and an H-P board member if fellow directors request it. "I serve entirely at
the pleasure of the board," Ms. Dunn said. "If they determine it no longer is in the interest
of shareholders" to remain chairman or a director, "I will do so."
Ms. Dunn's version of events left some questions unanswered and clashed with the
recollections of other directors, underscoring the growing divisions on a board that has
been fractured repeatedly in the past five years. The board heads into the meeting with a
broad split separating Ms. Dunn and her supporters from outgoing director George
Keyworth, identified as a leaker in the company probe, and his backers, who appear to
comprise a minority, people familiar with the matter said.
A person familiar with Ms. Dunn's account said she told certain other directors that the
leak investigation would include examining phone records after she learned that in
summer 2005. But a spokesman for former director Thomas Perkins, who resigned over
the conduct of the probe, said that statement was "absolutely not true."
California Attorney General Bill Lockyer is investigating whether H-P, or firms that it
hired, broke California law by pretending to be board members and reporters in obtaining
phone records. On Friday, Mr. Lockyer reiterated that he believes crimes were committed
in the probe but the ongoing investigation hasn't yet determined who committed the
crimes. He said he hoped the investigation could be completed within a couple of months
but that will depend on where the evidence leads them.
Ms. Dunn initiated the board's leak probe last year after media reports that led to the
ouster of former Chief Executive Carly Fiorina.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 1 of 34
The probe intensified in January, after Mr. Keyworth gave a background interview to
CNET News.com reporter Dawn Kawamoto, who published an article about some of HP's business strategies. In May, when the probe was completed, Mr. Keyworth was
identified as the source of that leak. The board asked him to resign as a director, but he
refused. In a regulatory filing this week, H-P said it had decided not to renominate Mr.
Keyworth for another term as director. Mr. Perkins resigned at the board's May meeting
because of the probe.
In a filing with the Securities and Exchange Commission, H-P said it had hired an outside
firm to conduct the leak investigation and that that firm, still unidentified, hired a second
firm that actually conducted "pretexting" to obtain phone records of directors and nine
reporters, including two employed by The Wall Street Journal.
The controversy is the talk of Silicon Valley -- where some observers have urged Ms.
Dunn to resign -- but it has sparked little concern on Wall Street4. H-P shares were little
changed this week. In 4 p.m. trading on the New York Stock Exchange yesterday, H-P
shares rose 75 cents to $36.17.
H-P's board has undergone unusual upheaval in recent years. The 2002 acquisition of
Compaq Computer Corp. led to the departures of Walter Hewlett and other directors with
ties to the company's founding families who opposed the deal. Changes accelerated again
after the board ousted Ms. Fiorina in February 2005. The board has fluctuated between
nine and 11 directors over the past 18 months, with multiple comings and goings.
Mr. Perkins, a veteran Silicon Valley venture capitalist who had served on H-P's board
from 2002 to 2004, played a key role in synthesizing the board's concerns about Ms.
Fiorina and rejoined the board in early 2005. Although the H-P board portrayed itself as
united in dismissing Ms. Fiorina, not all directors backed the move, and the leaks and
dispute over the company's direction had caused deep divisions, according to several
directors.
The selection of Mark Hurd as H-P's new CEO in March 2005 did little to heal the
divisions. Mark Corallo, a spokesman for Mr. Perkins, said he and Mr. Keyworth made
no secret within the board that they wanted Mr. Hurd to be named chairman as well as
CEO. Instead, Ms. Dunn kept the chairman title she had inherited when Ms. Fiorina
resigned.
Since taking over, Mr. Hurd has recruited more active executives and international talent
onto the board. John Hammergren, CEO of drug distributor McKesson Corp., joined in
November. Former Nokia executive vice president Sari Baldauf joined the board earlier
this year.
Though Ms. Dunn had clashed with Messrs. Keyworth and Perkins, she has some strong
supporters on the board, including Mr. Hurd, people familiar with current and past board
battles said. Another supporter, they said, is Robert Ryan, a former chief financial officer
of Medtronic Inc., who heads the H-P board's audit committee and presented information
about the leak investigation to the full board.
Ms. Dunn said several board members she spoke with Thursday urged her to "hang in
there" and not step down. But "the full board needs a chance to deliberate," she said.
People who have been supportive of Mr. Perkins and Mr. Keyworth include Richard
Hackborn, a longtime director and 33-year H-P veteran who retired from the company in
1993, said people familiar with the matter. Another director, Lucy Salhany, has been an
ally of Mr. Perkins, these people said.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 2 of 34
1. Patricia Dunn is the Chairman of _______.
a. Dell
b. IBM
c. Hewlett-Packard Correct
d. Medtronic
2. In a filing with the Securities and Exchange Commission, H-P said it had hired an
outside firm to conduct a leak investigation and that that firm, still unidentified, hired a
second firm that actually conducted __________ to obtain phone records of directors and
nine reporters, including two employed by The Wall Street Journal.
a. pretexting Correct
b. field studies
c. field visits
d. field research
Gas Bill For German Firms,
New Emission Caps Roil Landscape
By JEFFREY BALL
September 11, 2006; Page A1
http://online.wsj.com/article/SB115793765073859061.html
NIEDERAUSSEM, Germany -- Last year, to help combat global warming, Europe
started charging industry for the right to spew hot air. For the first time on such a scale,
governments slapped limits on the carbon-dioxide emissions of power plants, steelworks
and other factories. Companies exceeding the caps have to buy CO2 "allowances" that
trade on a European market.
Because CO2 emissions now carry a cost, Germany's largest utility, RWE AG, is
spending to improve the efficiency of its aging coal-fired power plants, including its
biggest power station here in the country's industrial heartland.
Carbon dioxide also is padding the profits of RWE and other utilities, because they have
been able to raise electricity rates to more than cover the new costs. Manufacturers that
use a lot of juice are fuming. "The utilities get a huge amount of windfall profits, and the
energy users get windfall costs," complains Markus Weber, a manager responsible for
CO2-allowance trading at steelmaker ThyssenKrupp AG.
Germany's experience with Europe's new emissions constraints holds important lessons
for countries that want to curb emissions of CO2, a product of fossil-fuel combustion that
contributes to global warming. In Germany, the caps are starting to have their intended
environmental effect: They are prodding industry to burn fossil fuels more efficiently.
At the same time, the new rules have upset the business status quo. Industries battled hard
to bend the rules in their favor, creating new winners and losers. The winners include
utilities that can charge higher rates and profit from trading allowances -- permits that
give companies the right to emit carbon dioxide -- at opportune moments. Losers include
energy-intensive manufacturers.
Although the U.S., the world's biggest emitter of CO2, has rejected the Kyoto Protocol,
many U.S. business leaders say it is only a matter of time before the country imposes
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 3 of 34
some sort of carbon constraint. Earlier this year, Congress discussed how such a
nationwide cap might be structured. Last month, California passed a law that will impose
the U.S.'s first cap on global-warming emissions. Now the state has to figure out how to
put that mandate into practice.
Europe's caps have their roots in Kyoto, which requires ratifying industrialized countries
to cut annual global-warming emissions a collective 5% by 2012. To prepare, the
European Union decided to run a road test ending in 2007, levying caps on utilities and
energy-intensive industries such as steel, cement and paper, which account for roughly
half the EU's total emissions. Each European country was allowed to pick its own
emissions-reduction target, which then had to pass muster with the EU.
Biggest Chunk
Germany, which accounts for the biggest chunk of emissions covered by the European
Union mandate, has pledged a Kyoto-related emissions cut of 21%. Its pledge under the
EU experiment is far smaller: The 1,849 facilities covered by the caps have to cut morerecent emissions by 0.4%. Scientists generally agree that neither Kyoto nor the EU
experiment, both of which are considered first steps only, is enough to meaningfully curb
global warming.
In Germany, companies scrambled to shape the rules to their benefit. Coal-dependent
utilities protested government proposals that would have encouraged gas-fired power
stations. (Burning coal to produce electricity emits about double the amount of CO2 as is
produced from burning gas.) The utilities largely won the battle, helped by support from
Germany's then-economics minister, who hailed from a coal-rich region.
After pressure from manufacturers, Germany also scaled back emissions cuts required of
companies who emit most of their CO2 in the course of making things, rather than from
burning fuel. One byproduct of the steelmaking process, for example, is an industrial gas
that is about half CO2. In their lobbying, some industries threatened to relocate to
countries without emission constraints. When it was over, Germany's CO2 plan contained
58 combinations of emissions rules from which companies could pick and choose.
Each allowance entitles its holder to emit one ton of CO2. The price of the allowance is
set on several exchanges around Europe; one is in the German city of Leipzig. The actual
buying and selling is done by hundreds of traders sitting at computer screens. The
market's most active players are utilities, many of which have hired specialized traders.
Bankers and independent brokers also trade, both speculatively and on behalf of
corporate clients.
Throughout 2005 and early 2006, the price of European CO2 allowances rose amid
speculation that industry was having a tough time complying with the caps, suggesting
companies would need to buy more. In April, European countries began disclosing that
their capped industries had emitted less CO2 than permitted under their 2005 allowances.
The price of CO2 plummeted. In mid-May, the EU confirmed that the EU as a whole
ended 2005 with allowances to spare. The biggest surplus was in Germany.
One cause of the surplus was the rules allowing big emitters to snag relatively permissive
CO2 allocations, the German government says. Another factor was real energy-efficiency
improvements.
"Emissions trading is working," says Franzjosef Schafhausen, an environment ministry
official who oversees the country's CO2-trading program. Companies "are thinking about
possibilities to reduce their CO2 emissions."
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 4 of 34
One such company is the municipal utility in Würzburg, a city of about 100,000 people
about an hour's drive southeast of Frankfurt. The utility's main power plant was built in
1954. In 2002, it faced a choice: Modernize the plant to reduce production costs or shut
down its generators and buy power from the grid.
Though the details of Germany's CO2 cap had yet to be worked out, "we could assume it
would be an advantage" to improve the plant's efficiency, and that "it would be a
disadvantage if we did nothing," recalls Armin Lewetz, head of the utility's powergeneration company.
In 2003, the utility began switching its coal-fired boilers to gas-fired models. The project
cost about €45 million ($57 million), nearly half of which will be defrayed by a German
government subsidy.
The plant received 319,000 annual CO2 allowances for 2005, based on its prior life as a
coal burner. Because of the switch, it emitted just 267,000 tons of CO2. It sold the extra
52,000 allowances, plus several thousand allowances for 2006, on the European market
for a profit of about €1.5 million.
Würzburg's gas-fired equipment produces more electricity than the coal-fired plant,
which means it can sell more electricity to the grid. It also is selling power at higher rates.
Utilities across the country have raised prices to reflect additional costs they have
incurred -- for example, from buying extra CO2 allowances. They also can turn a profit
from the initial allowances they received from the government, thanks to an accounting
move: Even though the allowances are free, the utilities incorporate the value into the
price of electricity.
"It doesn't matter if you get it free or not," says Ralf Schäfer, vice president for legal and
compliance issues at the trading unit of RWE, the nation's biggest utility. "It becomes
part of your production cost."
That has manufacturers such as ThyssenKrupp seething. ThyssenKrupp's economic heart
is the steel king complex in Duisburg, a company town at the confluence of the Ruhr and
the Rhine rivers in western Germany. It sprawls across more than three square miles,
comprising four blast furnaces and two steel mills.
3. European governments slapped limits on the carbon-dioxide emissions of power
plants, steelworks and other factories. Companies exceeding the caps have to buy CO2
_________that trade on a European market.
a. “permissions”
b. “regulations”
c. “elevations”
d. "allowances" Correct
4. Last month, _____ passed a law that will impose the U.S.'s first cap on global-warming
emissions. Now the state has to figure out how to put that mandate into practice.
a. Texas
b. Indiana
c. California Correct
d. Ohio
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 5 of 34
To Protect Its Box-Office Turf,
Ticketmaster Plays Rivals' Tune
By ETHAN SMITH and SARA SILVER
September 12, 2006; Page A1
http://online.wsj.com/article/SB115802470458860177.html
Reselling sports and concert tickets online has become a multibillion-dollar business for
eBay Inc., StubHub Inc. and other middlemen. Now the concert and sports industry -- and
Ticketmaster, which sells the majority of seats -- are fighting to take back some of that
money.
A division of Barry Diller's IAC/InterActiveCorp, Ticketmaster is overhauling the way it
sells tickets, embracing new methods that it long shunned. It is now running auctions to
sell seats for roughly 30% of this year's major music tours -- including Pink Floyd's
Roger Waters, Barbra Streisand, Madonna, B.B. King and Melissa Etheridge.
Ticketmaster also is letting customers resell some seats at its Web site. Since that lets
fans sell tickets far above face value, Ticketmaster has joined the fight against state
antiscalping laws, reversing its earlier position.
Concert promoters, performers and sports teams stand to win if the new methods at
Ticketmaster reduce scalper sales -- and return some of the proceeds to their own coffers.
Ticketmaster, which for 15 years has held a near-monopoly over the market for ticketing
major live events, is battling competition from online rivals that can easily resell tickets
at whatever price the market will bear. The result is a marketplace in the throes of
upheaval, confronting a pricing system that everyone agrees is dysfunctional.
Tickets for live events are frequently either overpriced -- leading to potentially disastrous
sales shortfalls -- or under priced, opening the door for scalpers. "We're in an industry
that prices its product worse than anybody else," says Ticketmaster Chairman Terry
Barnes. People in the concert industry estimate that only 45% of tickets made available to
the public end up being sold.
Last year, the number of concert tickets sold in the U.S. fell, although prices and overall
ticket revenue continued to rise. The average price of a ticket to the 100 top-grossing
shows hit a record $57 in 2005, according to Pollstar, a trade magazine, up nearly 9%
from 2004's average of $52.39. In 2005, the number of tickets sold fell to 67.4 million,
down nearly 7% from 72.2 million in 2004.
Prices for Barbra Streisand's coming tour, for example, are setting records, with top-tier
seats carrying face values of $750 through Ticketmaster. Sales have been slow, with
excellent seats going unsold in Atlanta, Columbus, Ohio, and other cities. That, in turn,
has undercut Ticketmaster and Ms. Streisand's efforts to sell some of those seats at
auction for even higher prices.
At the same time, sales of seats by resellers has thrived, thanks to the Internet. By some
estimates, the U.S. secondary market reached $5 billion in 2005 -- nearly equal to the
face value of all the tickets sold by Ticketmaster that year.
"The Internet has opened up the world of reselling tickets to anybody," says Arthur
Fogel, chairman of concert-promotion giant Live Nation Inc.'s music division. That
rankles Ticketmaster, concert promoters and musicians, who generally haven't benefited
financially from this extra revenue. "That secondary-market money, we think belongs in
the industry," says Ticketmaster's Mr. Barnes.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 6 of 34
Ticketmaster began exploring auctions and other sales methods in 2003 as a way to
address the disequilibrium. "On one hand, there is a small percentage of tickets, say 5%
to 10%, that are priced well below their market value, and end up being resold on the
secondary market for huge profits," says President and Chief Operating Officer Sean
Moriarty. "And on the other hand, over 50% of tickets go unsold."
Ticketmaster now makes auctions available as an option to concert promoters, venues,
performers and sports teams. For any given show, clients decide how many seats to put
up for auction -- and set the opening bid prices. The bidding process is similar to that of
Web auctioneer eBay. A fan enters the maximum he or she is willing to pay, along with a
credit-card number, and can follow competing bids online.
When country stars Tim McGraw and Faith Hill played a concert last month at Phoenix's
U.S. Airways Center arena, ticket prices ranged from $49 to $125. Marcus Ridgway, a
36-year-old real-estate developer from Mesa, Ariz., paid $700 on a Ticketmaster auction
for a pair of seats close enough to touch the country stars as they strutted on a catwalk.
Performers also argue that they -- not brokers -- should participate in any windfall from
resold tickets. Mr. McGraw spent the summer on the road with his wife and fellow star,
Ms. Hill. The duo largely financed the tour, which required a staff of 122 traveling with
22 trucks and 13 buses. After watching scalpers resell $125 seats online for $1,000 or
more, manager Scott Siman declares: "We would like to tap into that profit instead of
somebody else."
Ticketmaster's early efforts suggest even limited auctions can help offset scalping
activity. Jim Guerinot, a manager, says his client Nine Inch Nails auctioned fewer than
10% of the tickets on a tour last summer but saw a significant decrease in online
reselling. "We watched eBay and [scalping activity] was way down," he says.
Ticketmaster also is pushing its own resale program. Launched in 2002,
"TicketExchange" has proven most popular for sporting events, letting season-ticket
holders unload seats they won't use.
In 2005, Ticketmaster customers resold 329,000 tickets this way, up from 83,000 the year
before. Ticketmaster and the promoter, venue or team share an undisclosed percentage of
the sale price, while the seller keeps the rest. Ticketmaster allows reselling on
TicketExchange only when its clients agree.
Ticketmaster's revenue jumped to $950 million in 2005, up almost 24% from 2004, partly
as a result of strong sales in Canada and higher sales from recent acquisitions in Sweden,
Finland and Australia. The bulk of Ticketmaster's revenue comes from fees it adds on top
of the face value of tickets, accounting for 30% or more of the final cost. It is the cash
cow for parent company IAC. For the quarter ending June 30, the company's ticketing
division had $295 million in sales and produced $69 million in operating income, the
bulk of IAC's total operating income of $81 million.
Fighting Back
Ticketmaster's online rivals are fighting back, boasting that they offer a wider range of
tickets in the resale market. A leading combatant is StubHub, founded in 2000 amid the
tech crash by two students at Stanford University's Graduate School of Business who
began devising a business plan as part of a school competition. The company expects
ticket sales to hit $400 million this year -- double that of 2005 -- and to take in fees of
25% of sales, or about $100 million.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 7 of 34
5. People in the concert industry estimate that only ____ of tickets made available to the
public end up being sold.
a. 25%
b. 35%
c. 45% Correct
d. 55%
6. Ticketmaster has changed its selling practices and now ____.
a. includes backstage passes with its top tier tickets
b. makes auctions available as an option to concert promoters, venues, performers and
sports teams
c. is letting customers resell some seats at its Web site
d. both b and c Correct
Falling Oil Prices May Spell Relief for Consumers
By GREG IP and CHRISTOPHER CONKEY
September 13, 2006
http://online.wsj.com/article/SB115810435050661294.html
The recent drop in oil prices could provide a welcome and surprising boost to consumer
pocketbooks this fall, cushioning the economy from a falloff in home prices and
construction while venting an important source of inflation pressure.
The easing of energy prices is an unexpected -- and little-noted -- positive amid economic
anxiety over falling housing activity, previous energy-price increases and the possibility
of recession.
Crude oil was at $77 a barrel as recently as early August. Yesterday, the price of the
October crude-oil future contract settled at $63.76, a near six month low, down $1.85
from Monday, on the New York Mercantile Exchange. That helped spur stock prices to a
four-month high. At the same time, the average retail price of gasoline has fallen to $2.67
from $3.08 a gallon, according to the U.S. Energy Information Administration.
"Some 99% of the questions I get these days are about the size of the drag from housing,
and I think that far too few people are thinking seriously about the boost from lower oil,"
said Robert Mellman, senior economist at J.P. Morgan Chase. He predicted the retail
gasoline price should soon hit $2.30 a gallon, based on declines that already have
occurred in the wholesale price.
Mr. Mellman said lower gasoline prices should boost the annual growth rate of consumer
spending a full percentage point and could lift fourth-quarter economic growth from a
forecast 3%, at an annual rate, to as high as 3.7%. For now, though, his firm is leaving its
growth forecast unchanged.
Since 2004, oil prices are up sharply amid supply disruptions, tensions in the Middle East
and rising demand, especially in China and India. That increase has in turn squeezed
wages, in particular for less-affluent families. Although consumers have absorbed the
impact in part by saving less, their spending also has been crimped, which economists
and analysts have seen as a factor in slowing sales at retailers from Wal-Mart Stores Inc.
to mid- and up-market chains such as Williams-Sonoma Inc.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 8 of 34
Fuel prices have gone in reverse of late because many supply fears have proved -- so far - to be unfounded, including a wider conflict in the Middle East, possibly involving Iran;
violence in Nigeria and Iraq; and the hurricane season in the Gulf of Mexico. This also is
a seasonally weak period for oil demand.
If declining oil prices lead to a pickup in consumer demand, that also could boost
business confidence. "How gas prices affect the average Wal-Mart and Target customer
is of keen interest to us," said Patrick Casey, assistant vice president for forecasting and
planning at TTX Co., a Chicago provider of rail cars and freight-management services to
the railway industry.
Lower oil prices also could boost economic prospects overseas, although by less than in
the U.S., where consumer prices are far more sensitive to changes in energy prices. Relief
on the fuel front may trigger upward revisions to Europe's economic growth projections
for next year. "The rundown in oil prices has come so quickly, I think it has a lot of
people reaching for their calculators right now," says David Brown, an economist with
Bear Stearns in London.
In China, leaders have been contemplating relaxing costly regulations that have insulated
their consumers from the rise in world oil prices. The recent drop could remove some of
that urgency.
Some economists are less enthusiastic. Nancy Lazar, economist at ISI Group, said oil
prices take a while to fully affect the economy. "We've yet to see a lot of the damage
from the increase we've had in the price of oil in the last couple years," she said. "[The
recent drop] is good news, but it's more good news for the fourth quarter of 2007 than it
is for the near term."
Michael Englund, principal director of Action Economics in Boulder, Colo., said, "Price
swings have a much bigger impact on consumer-confidence survey readings and business
sentiment than they do on actual consumer behavior."
Of course, with spare capacity still tight, prices could easily shoot up again on a supply
disruption. "If oil is back over $70 per barrel in three weeks, all of this [positive benefit]
is out the window," said Stuart Hoffman, chief economist of PNC Financial Services
Group Inc. Indeed, trading on futures markets indicate oil prices may rise back above $70
by a year from now.
7. Crude oil was at a high of $____ a barrel as recently as early August.
a. 55
b. 66
c. 77 Correct
d. 88
8. Consumers have absorbed the impact of the high cost of oil mostly by _____.
a. parking their car permanently
b. taking public transit
c. carpooling
d. saving less Correct
Rising Tide Boat Builders Help Transform
Turkey Into a Regional Star
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 9 of 34
By PHILIP SHISHKIN
September 14, 2006; Page A1
http://online.wsj.com/article/SB115820129632862728.html
TUZLA, Turkey -- On a recent day this summer, an $80 million clipper called the
Maltese Falcon left the Turkish shipyard of its birth and zoomed up the Bosporus,
showing up rickety tourist boats and grimy cargo ships.
Three enormous carbon-fiber masts towered over the 88-meter yacht, which belongs to
Silicon Valley financier Thomas Perkins (and which played a cameo role in the
boardroom drama roiling Hewlett-Packard Co.) From a touch-pad console on the bridge,
the captain can rotate the masts and unfurl the sails embedded inside, a technological
first.
Made entirely in Turkey, the Maltese Falcon is the most visible sign of a boat-building
boom that has turned this once-sleepy town on the Marmara Sea into a bustling industrial
hub in just over a decade. Not so long ago, the idea of using Turkey to build a boat as
sophisticated as the Maltese Falcon would have sounded like "building a Ferrari in
Afghanistan," jokes Baki Gökbayrak, the Turkish naval architect who supervised the
project.
Things have changed so quickly that Ted Hood, a renowned yachtsman who won the
1974 America's Cup, calls Turkey "a secret boat-building area of the world" and has
invested in a shipyard in Tuzla. Bernie Ecclestone, the Formula-1 tycoon, has had two
yachts built here, while several marquee Western boat-makers have struck partnerships
with Turkish shipyards.
The emergence of a yacht-building center underscores a broader economic trend in
Turkey: the development of specialized manufacturing sectors that are creating growth
and employment at home and giving the country a growing niche in the global
marketplace. Some companies are beginning to focus on sophisticated engineering skills
instead of relying solely on a cheap work force to win business from more expensive
labor markets of the West. Manufacturing and service sectors have surpassed agriculture
as the biggest contributors to gross domestic product, a broad measure of an economy's
size.
Turkey's economic resurgence is helping underpin stability in this strategically located
country bordering the stagnating economies of Iraq, Iran and Syria. A mostly Muslim
country of 70 million people, Turkey is enjoying the longest period of economic
expansion in its history. Bolstered by banking and fiscal overhauls implemented after a
2001 financial meltdown, the country's GDP has been rising at an average 7.5% annual
pace for the past four years.
That record may be tested this year. Inflationary pressures have forced the government to
raise interest rates, which will slow lending. An investor pullback from emerging markets
sent the Turkish currency, the lira, plunging roughly 25% this spring and summer, though
it has subsequently rebounded somewhat. And uncertainty about Turkey's prospects for
entering the European Union, as well as growing violence by Kurdish ethnic separatists,
could further limit growth. Tuesday, a homemade bomb exploded in a predominantly
Kurdish city in the southeast, killing 10 people.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 10 of 34
Still, many economists expect Turkey's increasingly competitive manufacturing base to
keep the momentum going. Manufacturing clusters akin to Tuzla's yacht-building enclave
have sprung up across the country, sometimes in unexpected places.
Turkish construction companies, which trace their origins to massive public-works
projects in the 1960s and '70s, are building shopping malls and apartment complexes in
Eastern Europe and Central Asia. Turkish gold merchants and artisans, centered in
Istanbul, now are second only to Italy in global gold-jewelry exports, and that gap is
closing, according to the World Gold Council.
A vibrant group of furniture and denim makers has emerged deep in the Anatolian
countryside, in Turkey's geographic center. They are sometimes referred to as "Anatolian
tigers" because their rapid growth and export reach resembles the growth of the "Asian
Tiger" economies of Taiwan, Thailand, Singapore and Malaysia in the 1980s and 1990s.
In 2005, the Turkish automotive sector, which includes a Ford Motor Co. joint venture,
logged a record year with 900,000 vehicles assembled. Nearly half were exported.
All of these clusters have spawned subcontractors and suppliers around them, drawing on
Turkey's long history of small and midsize business and creating more employment.
"This has been a very important stage where you have big industries supporting a smaller
network feeding into them," says Standard Bank economist Mina Toksoz.
The forces that have shaped the Turkish yacht-building industry help explain the
resurgence of Turkey's economy. Tuzla already has turned Turkey into a competitor on
the high-end boat market, although most luxury yachts still are built in Italy, the
Netherlands and Germany. Around its marina, shipyards are stacked so tight next to each
other that a half-finished hull of one boat almost pushes out onto a highway into town.
Mr. Gökbayrak, the naval architect who worked on the Maltese Falcon, was among the
early entrants. In the late 1980s, Mr. Gökbayrak, fresh from a long career building
warships in the Turkish navy, decided to go into business for himself. At the time, Perini
Navi, a boutique Italian yacht maker, was looking for a low-cost location to build hulls,
the simplest part of yacht construction. Mr. Gökbayrak, who had studied at the Naval
Postgraduate School in Monterey, Calif., on a Turkish military scholarship, teamed up
with Perini and started running the Italian firm's shipyard in Tuzla.
Since there was no experienced manual labor around, Mr. Gökbayrak hired 30 carpenters.
He figured that with the right training, their wood-cutting experience could be adapted to
aluminum, the main hull component. For much of the 1990s, Perini's Turkish shipyard
cranked out mostly "naked hulls" that would be shipped to Italy for high-end work. In the
late 1990s, as the Turkish work force matured, Perini started transferring more work to
Tuzla from Italy. First it was the fitting of pipes, cables and insulation. Then came the
installation of partitions and living quarters for the crew.
By that time, Tuzla's yacht-building scene was slowly expanding, buoyed by a
combination of solid engineering skills and labor costs that are lower than in Western
Europe. In 1993, a new Tuzla company called Proteksan Turquoise Yachts Inc. built a
50-meter motorboat, its first project, and sold it to an American client. Years later,
Proteksan built two yachts for Mr. Ecclestone, the Formula-1 entrepreneur.
Many of the naval architects here attended Istanbul Technical University, the same elite
school that had trained much of the engineering talent behind the country's other
successful industries, including construction and cars. Founded in 1773, in the heyday of
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 11 of 34
the Ottoman Empire, the university first focused on training chart masters and
shipbuilders for the imperial fleet, adding other specialties later.
9. Most luxury yachts are built in ____________.
a. Iraq, Iran and Syria
b. Italy, the Netherlands and Germany Correct
c. Afghanistan, Russia and China
d. the United States, Britain and Sweden
10. Ted Hood, a renowned yachtsman who won the 1974 America's Cup, calls ______ "a
secret boat-building area of the world".
a. Turkey Correct
b. Italy
c. Texas
d. Columbia
Ford Aims to Cut Union Work Force
Through Buyouts
By JEFFREY MCCRACKEN
September 15, 2006
http://online.wsj.com/article/SB115825406763263239.html
Ford Motor Co. plans to offer buyouts to all 75,000 of its North American factory
workers in hopes of cutting its payroll costs by nearly a third, as the nation's secondbiggest automaker tries to accelerate its restructuring to head off a deepening financial
crisis.
The buyouts, to be announced today, come amid indications that Ford will post wider
losses and burn through more cash this year than previously expected. They also came as
Anne Stevens, the No. 2 executive behind Ford's North American turnaround effort and
the industry's highest-ranking woman, joined a recent exodus of top executives from the
company.
Ford's buyout plan follows a similar program offered this year by General Motors Corp.,
through which it shed 34,000 North American workers. Coupled with the GM buyouts,
the Ford buyouts mean the once-powerful United Auto Workers union could end up
losing as many as 50,000 members this year alone -- nearly equivalent to the number of
UAW workers now employed by DaimlerChrysler Corp.
Two senior officials say Ford has concluded its stated goal of profitability in North
America by 2008 is unrealistic, though it isn't clear whether Ford will say so today. One
official said Ford will "come in well under" the more than $20 billion it had previously
estimated it would have in cash on hand at the end of 2006. Through the first half of the
year, losses at Ford's North American operations have totaled $1.3 billion, including $826
million in the second quarter.
With new Chief Executive Alan Mulally just over a week into his job, Ford also is
expected to outline plans to cut its salaried work force and related costs by 30% and to
accelerate plant closings. The company previously had said it didn't plan to offer
companywide buyouts.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 12 of 34
Meanwhile, Ford is expected to retain all its U.S. brands in the overhaul and to hang on to
consumer-finance unit Ford Credit. Some Wall Street analysts had argued that junk-rated
Ford should consider selling a piece of Ford Credit and phase out its struggling Mercury
brand. Ford spokeswoman Becky Sanch declined to comment on the auto maker's plans.
Details of the announcement were still being finalized late yesterday.
Ford stock had risen in recent days on anticipation of a more aggressive restructuring
plan, though shares shed 10 cents, or 1.1%, yesterday to $9.09 by 4 p.m. in New York
Stock Exchange composite trading. If the plan lacks definitive statements on issues such
as the possible sale of luxury-car maker Jaguar, that could disappoint some investors, said
John Murphy, auto analyst at Merrill Lynch. "I just think they are reluctant to pull the
levers they need to," he said.
Ford's earlier overhaul, the "Way Forward" plan released in January, had proposed
eliminating 30,000 hourly jobs, at the time about 35% of the company's U.S. hourly
workers, and 4,000 salaried jobs by 2012. Those cuts, and more, likely will come three or
four years faster under the revised plan. Ford had about 82,000 hourly workers in the
U.S. at the start of the year.
Ford's buyout offers are similar to GM's in that a worker can get as much as $140,000 to
leave the company and leave behind his or her retiree health-care benefits. The mostgenerous of Ford's eight different buyout packages is limited to workers with at least 30
years of service or those that are at least 55 years old and have at least 10 years of
service.
"Ford is realizing it's time to get real. They've got to take their lumps like GM did last
year," said David Cole, president of the Center for Automotive Research, an autoanalysis firm in Ann Arbor, Mich.
Mr. Cole said the ability of Ford to negotiate new local contracts with about 10 stamping
and power-train plants in the past few months, so-called Competitive Operating
Agreements, may have limited its need to close many more plants. Such agreements can
save the automaker 25% to 30% on labor costs, according to a UAW official, by allowing
Ford to outsource more work or eliminate job classifications that required higher staffing
levels.
For the UAW, agreeing to companywide buyouts at Ford is the latest concession to the
competitive crisis that has engulfed Detroit's two biggest unionized automakers. The
UAW also agreed to cuts in retiree health benefits at GM and Ford, although it has
refused to agree to matching cuts at DaimlerChrysler's Chrysler Group. With Chrysler
now forecasting wide losses and struggling to reverse slumping sales, the union's resolve
will be tested.
By accepting huge job cuts within the past year at GM and Ford and their respective
former parts units, the UAW is gambling it can preserve its health-care and retirement
benefits in national contract talks with Detroit's Big Three next year. The companies are
likely to continue to press the weakened union, arguing Detroit's UAW-represented
operations can't compete with nonunion factories in the U.S. run by the companies'
foreign rivals.
Word of the UAW buyout deal was faxed to UAW locals yesterday afternoon. "Once
again, our members are stepping up to make hard choices under difficult circumstances,"
the union's president, Ron Gettelfinger, wrote in the fax. "Now, it's Ford Motor
Company's responsibility to lead this company in a positive direction -- which means
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 13 of 34
using the skills, experience and dedication to quality that UAW members demonstrate
every day in order to deliver quality vehicles to customers."
Ford already had some limited, targeted buyouts operating under the "Way Forward."
The latest move essentially expands those offers across the company. Offers range from
$35,000 for workers with 30 or more years experience, who can leave and keep their full
retiree benefits, to a flat $100,000 payment to younger workers who leave the auto maker
and give up retiree health care and Ford pensions.
For workers who want to go to college or vocational school for four years, Ford will
provide half their usual pay, about $27,000 on average, while they receive full medical
coverage and their tuition is paid for. Workers choosing this plan could keep any
accumulated pension but must leave behind any retiree medical benefits.
About 6,500 hourly workers have left Ford this year under current plans. Workers at
Ford's ACH plants, comprised of the former Visteon Corp., will be able to flow back into
Ford plants, much like workers at parts maker Delphi Corp. were able to return to GM
plants.
GM was able to get about 34,000 workers to take early-out programs, with about 31,000
taking early-retirement plans. GM executives say the larger-than-expected exodus has put
GM on track to cut annual costs by $9 billion.
Ford may not be as successful because it doesn't have as many older workers close to
retirement. Ford's hourly workers on average have 7.5 fewer years on the job than GM's - with an average of about 18 years at Ford, according to a report published yesterday by
Merrill Lynch.
Meanwhile, Ford's outside directors are increasingly concerned by the exodus of
management talent at the automaker and by signs that Ford's automotive operations are
weakening not just in the U.S., but in other parts of the world, too, said individuals
familiar with the situation.
Ford's management woes were highlighted by the abrupt departure of Ms. Stevens, a
chief architect of the "Way Forward." Ford made a counteroffer to keep her, said a Ford
senior official, but she decided to leave anyway. Ford said Ms. Stevens was unavailable
for comment.
Ford said David Szczupak, group vice president for Americas manufacturing, also is
retiring. Others who have left in the past 18 months include the head of product
development, head of hybrid programs and chief financial officer of Ford Credit.
It wasn't clear whether Ford would announce more plant closures as part of its accelerated
restructuring. Almost "any facility is vulnerable," said Catherine Madden, an auto
industry analyst at Global Insight Inc. She said her analysis was based on conversations
with Ford suppliers.
The automaker’s Michigan Truck Plant -- one of the most profitable in the world in the
late 1990s -- could be at risk. The Wayne, Mich., plant makes Ford Expeditions and
Lincoln Navigators, once-popular sport-utility vehicles that have fallen out of favor amid
high gasoline prices. "You've got people in the truck plant that are scared," said Brian
Quantz, vice president of UAW Local 900, which represents Michigan Truck Plant.
"They're afraid they're going to shut their plant down."
The Expedition and Navigator share similar architecture with Ford's F-series trucks,
meaning they could be built at the automaker’s newer Dearborn Truck Plant. "I see them
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 14 of 34
as a candidate" for closure, Ms. Madden said of the Michigan Truck Plant, "because
essentially what they're building there could be built at the Dearborn facility."
Ms. Madden said Ford's Wayne Assembly plant, which makes the Focus small car, also
could be vulnerable, because the car's sales have tumbled fast and the auto maker has
discussed building a new low-cost facility that could build a Focus-size vehicle plus
another small car. Both Michigan Truck and Wayne share the same UAW local and were
considered for closure with the first Way Forward plan.
11. ________ plans to offer buyouts to all 75,000 of its North American factory workers
in hopes of cutting its payroll costs by nearly a third.
a. Ford Correct
b. GM
c. Subaru
d. Saab
12. Coupled with the GM buyouts, the most recent buyouts mean the once-powerful
United Auto Workers union could end up losing as many as ______ members this year
alone.
a. 5,000
b. 10,000
c. 50,000 Correct
d. 100,000
Questions 13 – 17 from Marketplace
Two More CEO Ousters Underscore the Need
For Better Strategizing
By CAROL HYMOWITZ
September 11, 2006; Page B1
http://online.wsj.com/article/SB115793795734759067.html
Managers at Ford Motor can expect their new CEO, Boeing veteran Alan Mulally, to ask
a lot of questions before issuing many orders. As head of Boeing's commercial airplanes
division, he made tough and swift decisions, including laying off workers and
abandoning weak products, but never before discussing the moves with his top managers.
The group met weekly and worked together to plan and execute a turnaround. "We're
constantly testing our plan to see if we're on track," says Randy Baseler, the unit's vice
president of marketing.
Mr. Mulally's move to Ford last week, along with Tom Freston's ouster as chief executive
of Viacom, should be a warning to other CEOs that they have to strategize differently, by
enlisting managers below them in quicker, more continuous decision making.
At Ford, Bill Ford Jr. had the self-awareness to recognize he had run out of time -- and
needed outside help.
Many CEOs who don't want to step aside still rely on an antiquated strategic-planning
process that often doesn't help them make better decisions faster. Once a year, they
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 15 of 34
require the head of every business unit to compile a strategic report that includes three-tofive year financial forecasts.
A fraction of this data is used to decide budgets, but most ends up in forgotten files. And
when big decisions loom, as they invariably do throughout the course of any year, many
top executives don't consult with managers from different departments, whose thoughts
and cooperation might improve their own thinking and hasten action.
Companies still wedded to traditional planning each year make just 2½ decisions that are
"major," that is, with the potential to boost profits by at least 10%, according to a survey
of 156 large companies by Marakon Associates. By contrast, companies that spotlight a
few priorities and regularly hold strategy discussions -- instead of reviewing scores of
business unit plans all at once -- make more than six big decisions each year, the study
found.
"Being strategic today is like being a white-water rafter. You have to react immediately
to opportunities or moves by a competitor -- or risk being overtaken," says Walter Shill,
managing director of the strategy practice at Accenture, the big consulting operation.
At Harrah's Entertainment, about 20 top executives meet at least once a month, often by
videoconference, to discuss and decide new sites for casinos as well as potential
partnerships with hotel chains, retailers and restaurants. "The planning cycle has
"shortened considerably, from yearly to monthly and even bimonthly," says Chief
Financial Officer Jonathan Halkyard.
One current priority: expanding overseas. Last year, Harrah's acquired Cesar's
Entertainment and had to decide whether to repair or abandon two of its biggest casinos
that were flooded in Hurricane Katrina. (They rebuilt one and are selling the land the
other once occupied.) In addition, executives made plans to open casinos in Spain and the
Bahamas and to explore expansion into Singapore and Britain.
At their monthly strategy sessions, Harrah's executives also acknowledge what isn't
working. When a restaurant Harrah's had partnered with in Atlantic City wasn't attracting
enough customers, "we pulled the plug quickly," says Mr. Halkyard.
Other companies are supplementing traditional forecasting with more focused planning.
Managers at software maker Autodesk still submit annual strategic plans. But their main
planning focus is on Autodesk's move into three-dimensional modeling software, a new
product that is now driving growth.
Autodesk CEO Carl Bass also urges employees to consider various choices when
compiling strategic reports, and to weigh the moves competitors may be making.
"Sometimes we role-play being our competitors to help us better analyze what we're
doing," he says.
Ford's new CEO Mr. Mulally is leaving Boeing on the fifth anniversary of Sept. 11, when
the division he ran, like the nation, was in a dark period. Boeing was mired in indecision
about whether and how to replace its aging models and hurting from the deep slump in
the airline industry. Mr. Mulally instilled discipline and hope with a new planning
process.
In strategy sessions every Thursday, he told his top 30 managers to look beyond the
downturn and decide on a new generation of planes. Every other week, the meeting
expanded to include another 60 managers down the ranks. "They gave us a wider
perspective and could tell us if what we were planning actually worked and made sense,"
says Mr. Baseler.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 16 of 34
He believes the frequent meetings propelled managers to quickly design and market the
787 "Dreamliner," a fuel-efficient, easily maintained aircraft that has become the fastestselling new plane in aviation history.
Mr. Mulally is now expected to overhaul planning at Ford. Before he gets managers to
talk frankly and share ideas, he'll have to break down rivalries among managers of
different brands, many of which have been underperforming.
Boeing managers will continue their Thursday meetings, airing problems and debating
business issues. Last month they discussed the aborted terrorist plot at London's
Heathrow airport. "We don't think that will slow air travel over the long haul," says Mr.
Baseler.
13. Alan Mulally the new CEO at Ford Motor is a veteran of ____.
a. Boeing Correct
b. Dell
c. Texas Instruments
d. General Motors
Bloggers Get Under the Tent
By RACHEL DODES
September 12, 2006; Page B1
http://online.wsj.com/article/SB115801727410860002.html
Pamela Pekerman, who blogs about handbags at www.bagtrends.com1, had to sneak into
the Bryant Park tents during New York fashion week in February. Unable to secure hot
invitations, she had to settle for watching models strut down the catwalk on a large video
monitor outside the shows, or, worse, on the Internet. If she was lucky, she got a
standing-room-only ticket.
This fall is another story. Ms. Pekerman is one of about 40 bloggers, up from just a
handful a year ago, who scored official press passes from IMG, the company that runs
fashion week. "It's an evolving category," says Fern Mallis, vice president of IMG
Fashion.
For Ms. Pekerman, the recognition led to invitations to more than 20 designers' shows,
including one of her favorites, Badgley Mischka. "I was like, 'Wow that's phenomenal,"'
the 22-year-old blogger recalls. "It's a sign that they respect your work."
Once snubbed by the insular fashion world for their sometimes snarky reviews and tiny
audiences, fashion bloggers are now attracting the attention of the fashion establishment.
As blogs claim bigger followings, and advertisers shift more spending to them, designers
see these independent Web publishers as a new marketing opportunity.
Many small designers, in particular, now realize they can get valuable exposure on blogs
that they might not get in mainstream media. This year, with 191 shows in New York, up
25% from five years ago, there aren't enough old-media critics to cover them all.
"I would say we've become more selective," says Ed Nardoza, editor-in-chief of Women's
Wear Daily, the industry trade newspaper.
But determining who's who in the blogosphere is complicated. Technorati, the most
commonly used blog-tracking site, relies on bloggers themselves to categorize -- or tag -their blogs. The company says that method is more democratic than having a third-party
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 17 of 34
decide how to classify them. But because fashion is so widely discussed, a search for
fashion blogs will turn up many sites that have little to do with the subject, including the
personal diaries of teenagers.
Many public-relations firms that draw up guest lists for designers are doing their own
research. Alison Brod, a New York publicist who represents designer Jill Stuart, now has
an employee focusing exclusively on blogs, tracking their impact on sales, among other
things.
And today, a year-old company called Glam Media plans to launch a new fashion blogranking system called GlamCentral2 that will use criteria such as "most viewed," "most
linked to" and "most commented on." Chief Executive Samir Arora says the new
rankings will be useful to advertisers and fashion publicists, as well as Glam itself, which
is looking to buy blogs.
"This is going to be the YouTube of the fashion world," says Mr. Arora. Scheduled for
release next quarter is a search feature that will enable users to look through fashion
blogs to find a particular string of text.
Public relations firm LaForce + Stevens, which organized shows for clients like Nanette
Lepore and Baby Phat, drew up ad hoc guidelines for this week's invitees. Rule No. 1:
Bloggers who post photos of themselves don't make the cut. "Self-promotion is a bad
sign," says principal James LaForce.
Under the rules, Lesley Scott of FashionTribes.com3 got a fourth-row seat at some shows,
but shopology.com4 and a site called Coutorture5 were denied access, although neither
site features blogger photos. "It's not that they are bad blogs, it's just a question of
[audience] size," says Chris Constable, who makes the lists.
Some fashion companies are concerned about what bloggers are likely to say about their
shows. One blogger who has gained entrée into the tents this year is Mario Lavandeira,
founder of the gleefully catty celebrity-watching site PerezHilton.com6. Mr. Lavandeira's
blog recently posted a photo of Chanel designer Karl Lagerfeld in an all-white ensemble,
with the caption "Unkle Karl and the case of the Male menopause." A spokeswoman for
Chanel had no comment.
According to BlogAds, an agency which sells ads on PerezHilton.com, the site is viewed,
on average, 40 million times per month -- a figure that's hard to ignore. By comparison,
an established site such as Style.com7 (owned by CondéNet, a joint venture of Condé
Nast and Fairchild Publications), gets viewed 87 million times per month.
An exclusive site-wide advertisement on PerezHilton.com now costs $25,000, up from
$1,000 just a year ago. "People read me because I am not a cookie-cutter safe blog," says
Mr. Lavandeira, who says he hasn't faced resistance from designers and has received
about 50 invitations this year. "I don't mind pushing buttons and walking the fine
controversial line."
For designers, getting mentioned on a popular blog also can provide an ego boost. After a
show, which lasts around 20 minutes and can cost more than $100,000, many go through
"a type of post-partum depression," especially if fashion kingmakers like Vogue editor
Anna Wintour don't show up, says Kelly Cutrone, founder of People's Revolution, which
organized more than a dozen fashion shows this season. "Then they Google themselves,"
she says, and the more mentions they find of their show, the happier they get.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 18 of 34
14. The fashion industry’s opinion of “bloggers” has changed so that ____.
a. designers see these independent Web publishers as a new marketing opportunity.
b. many small designers, in particular, now realize they can get valuable exposure on
blogs that they might not get in mainstream media.
c. they are snubbed by the insular fashion world for their sometimes snarky reviews and
tiny audiences
d. Both a and b Correct
CW Will Try A New Ad Idea:'Content Wraps'
By BRIAN STEINBERG
September 13, 2006; Page B1
http://online.wsj.com/article/SB115811168010161509.html
When fans of "America's Next Top Model" tune into its season premier on the CW
network next week, they'll find more has changed than just the TV network airing the hit
reality show. In place of the familiar 30-second ads, some of the commercial breaks will
feature a mini-magazine show, called CWH, about the latest in fashion and pop culture.
CWH represents a new kind of TV advertisement, one that endeavors to entertain while
subtly promoting a product.
Each CWH will be two minutes long, and will air three times an evening, with its content
tailored to the programs being shown that night. CWH stands for "C What's Hip" -- or
what's "Hot" or what's "Happening," depending on which of the three segments are
airing.
During "America's Next Top Model," 90-second portions of CWH will feature fashion
gurus discussing hairstyle trends. In one, a "Seventeen" magazine beauty editor tells
viewers that ponytails with rockabilly details are hot, while milkmaid braids are out.
Shorter companion pieces will show a celebrity hair stylist creating fashionable hairstyles
using Herbal Essences styling products.
The sponsor of these segments is, no surprise, Procter & Gamble Co.'s Herbal Essences,
one of the first advertisers to sign on for the experimental new ads, which are dubbed
"content wraps." The network expects to run between 10 and 12 of the wraps this season,
and hopes a positive reaction will allow it to do more next year. Pfizer Inc.'s consumer
health-care unit has also been signed for a stint with the wraps.
Longer ads, of course, have been tested before. Ford Motor Co., for example,
"bookended" the 2003-04 season premiere of "24" with minutes-long commercials that
imitated the dramatic themes of the popular spy program. Likewise, P&G's Febreze airfreshener product has featured 90-second vignettes involving a family of dogs, "The
Poocharellis."
Industry research showed that audience retention for some of these longer ads increased
by as much as 10%. Still, the format hasn't caught on, in part because of the difficulty of
executing the longer spots.
CW, a joint venture of Time Warner Inc. and CBS Corp., is launching in a tough ad
environment for TV networks; ad dollars are shifting to the Internet as viewers use their
digital video recorders to skip through commercials.
CW hopes that more entertaining commercials will draw more viewers, and thus more ad
dollars. The network's move is well timed; Nielsen Media Research is about to begin
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 19 of 34
rating commercials in much the same way it rates TV shows, putting more pressure on
networks to deliver commercials that are both widely watched and well-remembered.
"One thing we heard from advertisers and viewers is they both wanted us to do things
that were different, that broke the mold, that would not be considered normal," says
Dawn Ostroff, CW's president of entertainment.
CW is effectively a merger of the shuttered networks UPN, which previously aired
"America's Next Top Model," and WB. Advertisers are interested in CW because it aims
for viewers between the ages of 18 and 34 -- a coveted consumer demographic -- and
because it will run some programs about which viewers are passionate, including
"Gilmore Girls" and "Veronica Mars."
15. In place of the familiar 30-second ads, some new commercial breaks on the new CW
network will feature a mini-magazine show, called, _____ about the latest in fashion and
pop culture.
a. CWI
b. CWH Correct
c. CWB
d. CWS
Conglomerates' Conundrum
By J. LYNN LUNSFORD and BRIAN STEINBERG
September 14, 2006; Page B1
http://online.wsj.com/article/SB115819523621362573.html
After more than a decade running one of the most profitable industrial conglomerates on
the New York Stock Exchange, George David is taking on one of his biggest challenges
yet: Make United Technologies Corp. into a name that lots of people recognize -- and
want to invest in.
He and other top executives often find themselves explaining what their $47 billion
conservative New England company actually does. "When I say we own Otis elevator, or
Carrier air conditioning, or Pratt & Whitney jet engines, or Sikorsky helicopters, the
lights come on," Mr. David said.
So he's trying to accomplish what many successful conglomerates such as General
Electric Co., Archer-Daniels-Midland Co. and BASF AG have tried with varying degrees
of success. He wants to create a "brand" for a parent company, and, in the process, help
UTC's share price better reflect its strong performance. UTC is betting that the
overarching slogan "United Technologies. You can see everything from here" will
educate the public, and especially investors and financial analysts, about a far-reaching
operation.
UTC has attempted to make such inroads in the past, with only mixed success. Now the
company is kicking off a $20 million-a-year ad campaign put together by the New York
office of Omnicom Group Inc.'s DDB Worldwide. In a break with the usual practice of
turning to a traditional business-to-business advertising agency, UTC hopes that DDB's
experience selling consumer products -- the agency works for PepsiCo Inc.'s Diet Pepsi,
for example, as well as Anheuser-Busch Cos.' flagship Budweiser -- will help it strike a
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 20 of 34
chord with people who will never buy an elevator or a jet engine, but might just be
persuaded to buy the stock of a company that makes lots of each.
"The challenge for any of these conglomerates is how to tell their story as being
something other than the parent of these great products. What else do you bring to the
party?" said Allen Adamson, managing director of WPP Group PLC's Landor Associates,
which advises companies on branding.
It's a technique other big companies have pursued in the past. For example, BASF, the
German chemical giant, ran a campaign whose slogan tried to raise awareness of how its
products affect people's lives: "We don't make a lot of the products you buy. We make a
lot of the products you buy better." Spokesman Mark Stephenson said the company was
"extremely pleased" with that effort and is getting ready to begin another round of ads
soon.
Companies not only use such campaigns to garner recognition among consumers more
accustomed to dealing with individual brands, but sometimes to show investors that a
wounded corporation is recovering or to prove a political point.
Tyco International Ltd. in 2004 launched a global ad effort designed to help it distance
itself from a mammoth corporate scandal and right itself after making a string of
acquisitions. The company, which sells everything from surgical staplers to alarm
systems to equipment to fight forest fires, advertised itself with the line, "You may not
know everything we make. But everything we make is vital."
Even companies with well-known names sometimes highlight the fact that there's more to
them than meets the eye. For example, when lawmakers were growing increasingly
concerned about childhood obesity, Coca-Cola Co., in 2003 unveiled a corporate effort
aimed in part at Capitol Hill that for the first time included all of its beverage brands,
including Minute Maid juices, in a single ad. More recently, Coke has been running ads
with the slogan, "Make every drop count." As part of that campaign, a promotion found
on a Coke Web site reads, "You've always known Coca-Cola, the soft drink. Now it's
time you knew us as Coca-Cola, the company."
UTC's push for a stronger identity is driven in part by the success of similar campaigns
waged by GE. Unlike GE -- with its hair dryers and refrigerators and light bulbs -- UTC
sells few of its products directly to consumers.
In an interview, Mr. David said research conducted after the company began a campaign
in 2003 with the tag line "This is Momentum," showed it is possible to move the needle
with investors. "We saw that the more they knew about us, the more they loved us," Mr.
David said. A survey of institutional investors conducted a year into the campaign
showed a 36% improvement in the perception of the company based on a variety of
measures. UTC hopes to build on that with the new ad push.
About 80% of UTC stock is owned by institutional investors. In the last decade, the
company's total shareholder value has increased by about 1,200%, or about three times
that of any company in its peer group, including GE. Despite this, when UTC's earnings
are compared with its stock price, the company's performance is only about average for
its group with a price-earnings multiple of about 19. Mr. David said the company is
betting that if more investors become familiar with UTC and its "year-in, year-out
reliable business model," it will translate into a higher multiple.
Advertising that convinces the public to think favorably of a corporation can have an
impact on stock prices, according to CoreBrand LLC, a branding consulting firm that
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 21 of 34
studies this issue. "Every experience that someone has with that company, with that
brand, whether it's customer service, whether it's seeing an advertisement, whether it's
dealing with products...can create additional value," says Brad Puckey, director, brand
intelligence at the Stamford, Conn., firm.
The new UTC campaign is aimed at catching its target audience at various places during
their daily commute or regular reading. Investors will see the ads in national publications,
and on television stations and on Web sites that specialize in financial news. They will
see them on some of Amtrak's high-speed Acela trains and in commuter rail stations and
subway stops in the Northeast, including New York, Boston and Washington. They will
see them on giant ads wrapping construction scaffolding on two buildings in Manhattan
and on computer displays in the elevators of many high-rises. And they'll see them on
thousands of bottles of water -- bearing a message about how much water the company's
industrial methods have saved -- at gatherings in New York in the coming months.
The ads use storybook-like illustrated cross-sections of items such as a helicopter, an
elevator, a jet engine and a building to drive home larger messages about the company.
All of the ads have trivia sprinkled around the main illustration.
16. Top executives of United Technologies Corp (UTC) often find themselves explaining
what their $47 billion company actually does. Recognition is an important concern for
them because_______.
a. they want consumers to buy UTC products
b. they want investors Correct
c. they want more press coverage
d. they want consumers to buy UTC elevators
What's the Newest Elmo's Gimmick?
If We Told You, We'd Have to Kill You
By CHRISTINA BINKLEY
September 15, 2006; Page B1
http://online.wsj.com/article/SB115828565889363932.html
Around a New York City conference table last fall, an elite group of Fisher-Price toy
designers faced an imposing task: Dream up a new gimmick to relaunch the falsettovoiced Tickle Me Elmo that made such a splash a decade ago.
The designers think they came up with a killer idea, but the marketing executives think
they've got an even better one -- shroud T.M.X. Elmo, as the 10th anniversary edition of
the gyrating, giggling toy is called, in black-ops secrecy in hopes of creating the
impression that it's a sensation before it's even out of the box.
Fewer than 50 people have seen Elmo -- compared with the 1,000 or more who would
normally see a toy before it's rolled out, says Fisher-Price, a unit of Mattel Inc. Those
who have were sometimes sequestered in conference rooms with the shades pulled, then
handcuffed to strict confidentiality agreements. Even the company's sales force has yet to
see the fuzzy, red monster they are expected to peddle.
17. Fisher-Price’s new gimmick to relaunch Tickle Me Elmo is to ____.
a. turn Elmo navy blue
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 22 of 34
b. dress him as a cowboy
c. change his voice
d. shroud T.M.X. Elmo, in black-ops secrecy Correct
Questions 18 – 23 from Money & Investing
At Milberg Weiss, A Move to Stanch
Loss of Top Talent
By NATHAN KOPPEL
September 9, 2006; Page B1
http://online.wsj.com/article/SB115775558779158097.html
One of the most famously aggressive law firms in the U.S. is fighting a new battle: keep
its talent from walking out the door.
The firm, Milberg Weiss Bershad & Schulman LLP, pioneered the business of filing
giant securities class-action lawsuits -- bringing together hundreds or thousands of
investors into one big case against a corporation. It is a lucrative field: The firm's lawyers
have engineered $100 million-plus settlements against Prudential Insurance Co., Lucent
Technologies Inc. and CVS Corp., among others.
But in May, the firm was indicted on fraud charges by a federal grand jury in Los
Angeles. Since then, 20 of Milberg Weiss's partners have left or are leaving the firm -close to half the total.
Overall, the firm has shrunk to about 70 lawyers, down from about 110, though it still
ranks as one of the largest firms in its field. The firm has promised special bonuses and
fatter paychecks for people to stay.
Among the big departures: Patricia Hynes, who until 2004 was part of the firm's name.
Also gone is Edith Kallas, a former member of Milberg's executive committee and
former head of its health-care litigation team.
The exodus is fallout from a 102-page indictment alleging that from 1981 to 2005, the
firm and two of its top partners, Steven Schulman and David Bershad, paid plaintiffs
millions of dollars in exchange for filing more than 150 lawsuits. Federal law prohibits
lead plaintiffs from being paid more than other plaintiffs in securities class-action
lawsuits (with some exceptions for incidental expenses). The government charged the
firm, as well as Messrs. Bershad and Schulman, with multiple fraud counts.
The defendants have all maintained their innocence. Messrs. Bershad and Schulman are
on a leave of absence.
So far this year, Milberg has filed less than half as many class-action securities-violation
lawsuits -- its bread and butter -- than it did last year. (In cases like these, shareholders
typically sue a company claiming it misstated its finances.) Last year the firm filed at
least 75 such cases, and it is routinely one of the most active filers of cases like these.
The firm appears to be in a "holding pattern," says Fred Isquith, a veteran securities classaction lawyer with Wolf Haldenstein Adler Freeman & Herz LLP who has been cocounsel with Milberg Weiss on cases. He notes that an indicted firm would be hardpressed to attract new talent. "From a recruiting standpoint, they are in an impossible
situation."
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 23 of 34
In a statement, the firm says that it "remains one of the largest and best equipped classaction firms in the United States." The firm is "doing everything possible to ensure that
we are able to continue our work without interruption during this difficult time," said
Melvyn Weiss, the top partner at the firm, in the statement. Mr. Weiss didn't make
himself available for an interview.
In response to detailed questions for this article, a spokeswoman said some of the
information about the firm was "inaccurate" but declined to identify inaccuracies.
Mr. Weiss has scrambled to retain partners in recent weeks by offering them a greater
share of the firm's equity or higher salaries. Some partners have been offered as much as
twice their previous salaries, according to a current Milberg partner and a former partner
who left after the indictment. Also, partners and associates who remain at the firm until
Sept. 15 will receive a retention bonus of about 10% of their annual salary, former
Milberg attorneys say.
Some former Milberg attorneys say they expect at least a few of the more-junior lawyers
to depart from the firm after receiving their bonus. But most partners will likely stick
around at least for a while, they say, because the firm still has a lot of large cases coming
in, and partners who remain could see sizeable payouts from that.
For instance, earlier this year, the firm and co-counsel reached a $1.1 billion settlement
with Nortel Networks Corp. Milberg alleged that the telecommunications company filed
misleading financial reports that artificially inflated the price of its securities.
Milberg typically handles cases on a "contingency fee" basis, meaning the firm gets paid
only if its clients recover damages. Class-action firms can earn as much as one-third or
more of any settlement or trial award, but their fees are often less than that.
Critics of this process complain that shareholders often reap comparatively little on an
individual basis. Plaintiffs' lawyers say their work helps keep companies honest, and
protects investors.
The firm also is pursuing securities-fraud suits against Xerox Corp. and Tyco
International Ltd., among others, and it stands to earn a share of the legal fees in the
Enron Corp. securities class action, which is being headed by the firm Lerach Coughlin
Stoia Geller Rudman & Robbins LLP.
This summer Mr. Weiss met with firm partners and discussed Milberg's projected
earnings. He estimated that the firm could take home as much as "nine digits" in certain
cases, says one partner who attended the meeting.
According to that partner, the intended message of that meeting: "It is worth your while
to stay."
18. A key concern of one of the most famously aggressive law firms in the U.S. is _____.
a. keeping its talent Correct
b. losing its office building
c. being sued
d. funding retirements
Out of Energy
By JUSTIN LAHART
September 11, 2006; Page C1
http://online.wsj.com/article/SB115793294195858965.html
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 24 of 34
For the first time in a long while, it doesn't seem like the world is conspiring to push
energy prices higher.
Problems with BP's Alaska pipeline haven't been nearly as disruptive as originally feared;
for all the saber-rattling, it looks like Iran has no intention of curtailing its oil exports;
and so far the 2006 hurricane season hasn't been what it was cracked up to be. That has
led to steep declines in crude oil and regular gasoline prices over the past month.
Maybe it's all just a matter of luck. But luck's a funny thing -- it was going the other way
when prices were rising. One week it would be unrest in Nigeria, the next it would be
refinery trouble. Just as those issues clouded the real reason energy prices were climbing
-- constrained supply struggling to meet rising demand -- maybe today's issues are
clouding a fundamental shift, where a slowing global economy is cooling demand.
With the housing market in a funk, economists have been trimming their estimates for
U.S. growth. Shares of transportation firms -- big energy users -- have fallen sharply in
anticipation of a slowdown. Auto sales have been softer, particularly for gas-guzzling
sport-utility vehicles and pickup trucks.
A slowdown in the U.S. economy could lead to softer global demand for energy. It's
doubtful that the world has fully weaned itself off U.S. consumption -- if it's weaned
itself off it at all. What's more, in places like China, industry takes up a much bigger
share of energy use than it does in the U.S. And since industry in places like China is
pretty much engaged in churning out consumer goods for the U.S. -- well, you get the
picture.
It may be that it's merely seasonal factors that are pushing energy prices lower. The peak
summer driving period is over, and in most of the U.S. it won't be cold enough to turn on
the furnace for months. But it may be that there will be plenty of heating oil and natural
gas on hand once winter comes around, and warm temperatures to boot.
Forecasters believe that El Niño, a phenomenon in which warmer than usual sea surface
temperatures in the Pacific affect weather around the world, is coming soon. El Niño
typically makes for a lighter hurricane season, meaning that there probably will be few
supply disruptions this fall. It also usually makes for mild winters in the Northern U.S.,
which would cut into home heating needs.
Sounds like the energy sector's luck has run out.
19. Forecasters believe that ______, a phenomenon in which warmer than usual sea
surface temperatures in the Pacific affect weather around the world, is coming soon.
a. El Pacifico
b. El Warmo
c. El Phenomeno
d. El Niño Correct
Trade Picture Brightens
By JUSTIN LAHART
September 12, 2006; Page C1
http://online.wsj.com/article/SB115802195956560116.html
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 25 of 34
Today's trade report will probably show a whopper of a deficit for July, something that
always gives investors a fright about holding U.S. dollar assets. But dig a little deeper,
and it looks like a shift in the nation's trade is happening.
Economists polled by Dow Jones Newswires are looking for a July trade deficit of $65.5
billion, up from June's $64.8 billion and prospectively the third largest monthly deficit
ever.
Oil prices were ticking to new highs in July. That meant upward pressure on the value of
imports and the deficit. The U.S. shortfall in oil accounts for 30% of the total trade
deficit. According to the Labor Department, prices for imported petroleum products were
4.7% higher in July than they were in June.
But oil prices have dropped sharply since July, which could bring the import figure back
down. Meanwhile, away from oil, imports were already looking subdued in July. Belle
Morales, vice president of sales and marketing for Inglewood, Calif., logistics company
Dynalink Systems, says her firm saw a 10% decrease in inbound cargo volume for July
and August from a year earlier.
July is usually the beginning of the peak shipping season, when holiday orders start
streaming through ports to retailers. It may be the peak season was merely delayed.
Rising European demand has some Asian suppliers racing to keep up, making it harder to
fill U.S. orders. It might also be that supply-chain improvements made U.S. retailers
comfortable placing holiday orders later in the year, Ms. Morales says.
But maybe retailers are pushing back orders because they're afraid consumers aren't
going to spend much this holiday season -- a real worry with the values of homes
softening.
Even as imports slow, continued growth in Asia should keep U.S. exports strong, says
Investment Technology Group economist Robert Barbera. Those exports will help boost
economic growth, a plus at a time when other engines of growth seem to be slowing.
Taken together, it spells a better trade picture in the months ahead, a silver lining for
investors who worry about financing the mammoth trade shortfall. The dark cloud is that
weary U.S. consumers might be behind much of it.
20._____ is usually the beginning of the peak shipping season, when holiday orders start
streaming through ports to retailers.
a. June
b. May
c. July Correct
d. August
Pump Priming Wal-Mart
By JUSTIN LAHART
September 13, 2006; Page C1
http://online.wsj.com/article/SB115809866763361111.html
Now might be the time to own retailers catering to the have-nots, rather than those
serving the have-mores.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 26 of 34
With gasoline prices in retreat, low-income consumers will have a little more to spend. At
the same time, with housing prices also sagging, higher-income households could be
sucking wind.
In its weekly report on gasoline prices yesterday, the U.S. Energy Information
Administration reported that a gallon of regular now averages $2.62 nationally, down
14% from the peak level in early August of $3.04. And with wholesale gasoline prices
down more than a third from their August highs, it looks like prices at the pump will be
slipping even more in the weeks to come.
Because there is little cushion between their paychecks and their daily spending needs,
high gasoline prices tend to hurt lower-income Americans -- and the retailers that cater to
them -- much more than the well-to-do.
International Council of Shopping Centers economist Mike Niemira estimates that, all
else being equal, each 10% rise in gasoline prices reduces Wal-Mart Stores' sales by
0.9% versus a 0.4% decline for overall chain-store sales. The gas squeeze was so intense
earlier this year that Wal-Mart noted more and more of its sales were clustering around
the first and 15th of each month, when its customers' paychecks came in.
Now, with gas prices dropping, relief could be on the way for the have-nots, and that
doesn't appear to be lost on investors. Over the past month, Wal-Mart's share price is up
about 8%.
Wal-Mart also should be better shielded from the housing slowdown than retailers aimed
at higher-income shoppers. The housing boom took the sting out of the rise in gasoline
prices in recent years, points out Lehman Brothers economist Ethan Harris. But since
lower-income consumers are less likely to own a home, the increase in housing wealth
didn't help them as much as it did higher-income households.
The combination of relief at the pump and trouble in the housing market means the tug
between hoi polloi and hoity toity is shifting. So far this year, Wal-Mart is outperforming
retailers like Coach, Tiffany and Williams-Sonoma. A few more months like this, and its
lead will grow.
21. The price at the gas pump tends to effect what group of consumers the most
a. the “haves”
b. the “have-nots”
c. the Wal-Mart shoppers
d. Both b and c Correct
As Energy Prices Sink, Many Firms Are Buoyed
By GREGORY ZUCKERMAN and IAN MCDONALD
September 14, 2006; Page C1
http://online.wsj.com/article/SB115819659758462602.html
Now that energy and other commodities are down, the fortunes of a number of companies
are looking up.
Oil prices remain near five-month lows, despite a small rise yesterday. Other
commodities, from copper and zinc to gold and aluminum, also have been falling.
Because they serve as critical inputs for the production of a range of products, the fall of
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 27 of 34
these commodities will help many companies -- and likely will give a shot in the arm of
consumers suffering at the pump.
The drop in commodity prices has spurred investors to search for stocks that might
benefit. Airlines are obvious candidates. Major airlines around the globe continue to see
strong passenger demand, so profits could climb if they are able to raise prices while their
own costs drop, as fuel prices fall.
A study of trading patterns during the past three years by Bianco Research LLC in
Chicago points to airlines as the sector most inversely correlated to oil prices. Some
investors, such as Appaloosa Management LP, a $4 billion Chatham, N.J., hedge fund,
bought airlines such as American Airlines in recent days, according to people familiar
with the situation.
Shares of AMR Corp., the parent of American Airlines, rose 2.1% yesterday to $22.67.
One caveat: Some airlines have used derivatives to lock in the price they pay for fuel.
This shelters them temporarily from high energy costs but also can keep them from
enjoying lower costs when crude prices fall. More broadly, another caveat is that the
price declines might prove temporary. Energy prices, say, could surge if the winter is
colder than expected or talks with Iran over its nuclear program fail.
Retailers also are likely to benefit if a drop in energy helps consumers deal with the
impact of a housing downturn. Target Corp. has been among the most sensitive to oil
prices in recent years.
Some traders say the recent surge in shares of Wal-Mart Stores Inc., Home Depot Inc.
and Costco Wholesale Corp. is a result of shorts -- those who have borrowed and sold
these stocks, betting on lower prices as housing weakens -- who now are scrambling to
buy back shares.
Companies that make consumer goods could be helped if consumers, with extra money in
their pockets that was previously covering higher gasoline prices, treat themselves, says
Bob Morris, director of equity investments at money manager Lord Abbett & Co.
Retailers also are helped by cheaper gasoline because it costs less to drive to their
locations. Casual dining restaurants like Applebee's International Inc. that have fallen
hard in recent weeks could benefit, according to Patrick Dorsey, head of stock analysis at
Chicago researcher Morningstar Inc.
Some investors are piling into Goodyear Tire & Rubber Co., arguing that it will benefit
as lower energy prices reduce the costs of producing tires. Sixty-five percent of the
company's raw materials are derived from oil, including carbon black and butadiene, a
synthetic rubber, according to a Goodyear representative. Raw materials, in turn, are 35%
of Goodyear's cost of goods sold.
Others point to Procter & Gamble Co. as a winner because lower commodity prices make
its goods' plastic and metal packaging cheaper, while giving a lift to consumer buying of
its products.
Chemical companies like DuPont Co. and paper companies like International Paper Co.
both buy significant amounts of oil to make and transport their products. While some
chemical companies have little pricing power lately, limiting their gains, these sectors
have their fans. "If oil and natural-gas prices are lower, you might start seeing much
better numbers from these companies in the third and fourth quarters," says David
Giroux, co-manager of the $8.1 billion T. Rowe Price Capital Appreciation Fund.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 28 of 34
22. The prices of commodities, from copper and zinc to gold and aluminum, have ____.
a. been tripling
b. been doubling
c. been falling Correct
d. been rising
Reality Check
By JUSTIN LAHART
September 15, 2006; Page C1
http://online.wsj.com/article/SB115828027173863800.html
Investors are hoping the technology sector's recent troubles are behind it. But judging
from the dust gathering on some tech-company shelves, there might be more pain to
come.
When it issued results in August, semiconductor-equipment maker Applied Materials
gave a cautious forecast for its business and said it was hearing from chip makers that
inventory was picking up in the personal-computer market. Last week, National
Semiconductor reported a slowdown in orders and said it would bring down inventory
levels. And this week, electronics retailer Best Buy reported results that generally pleased
Wall Street, except for one detail: Inventories increased more than sales.
A quarterly survey of chief financial officers released this week by Duke University and
CFO Magazine suggests a wide swath of tech companies are seeing rising inventory
levels. On average, tech CFOs expect their inventory levels to be 2.6% higher in the next
year than they were in the past year. Only construction companies, which have been
getting hit hard by the slowdown in housing, expect a bigger increase in inventories,
points out Duke professor John Graham. It's a sign that tech companies "are expecting
corporate spending to slow and consumer demand to stay low," he says.
If they are facing a slowdown, the quick tech companies will throttle back production
until they've worked down their inventory. Today's report on August industrial
production and capacity utilization may provide a signal on whether that's starting to
happen. Tech output has been going gangbusters -- it's up more than 22% from a year
ago, even more than oil and gas drilling.
One bright spot for the sector is that since a nadir in mid 2002, tech companies have been
running at fuller capacity, which helps profits. In July, they were using about 78% of
capacity -- the most in five years, though far below levels reached during the height of
the 1990s boom.
The sector also seems to be enjoying more hard-headed realism than it displayed in the
1990s. Sanford Bernstein strategist Vadim Zlotnikov notes that tech companies were
especially cautious when they reported second-quarter results. Strange as it sounds, they
may be better prepared for a slowing economy right now than others.
23. The bad news reported by electronics retailer Best Buy was _____.
a. Inventories increased more than sales Correct
b. sales would have been greater if inventories were available
c. HD TV is not selling
d. Music CD sales are down 75 percent
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 29 of 34
Questions 24 – 26 from Personal Journal, Section D
Majoring in IBM
By ANNE MARIE CHAKER
September 12, 2006; Page D1
http://online.wsj.com/article/SB115801753577160010.html
RALEIGH, N.C. -- When graduate students at North Carolina State University took their
seats on the first day of a class called Services Management, the kickoff lecture wasn't
delivered by a professor. Instead, it was given by a manager from International Business
Machines Corp.
The company, in fact, helped develop the curriculum and awarded grants to the school
with the expectation that the course would be taught -- all with the aim of producing
graduates better prepared to work for IBM. The guest speaker, a regional manager, began
his lecture by saying, "My name is Craig Nygard, and I am a services professional," later
adding, "You have started thinking about tackling big problems and turning them into
revenue opportunities."
A fast-moving, competitive economy -- and the perception that students are unprepared
for its demands -- is creating a new phenomenon at colleges and universities: courses
supported by, and tailored for, potential employers. In addition to IBM, other major
corporations seeking to increase their presence and influence on campus include Credit
Suisse Group and German auto maker BMW AG.
None have approached IBM's breadth of involvement in helping to create and promote a
new discipline. In the past two years, IBM has been drilling its priorities into graduate
and professional schools to help ease its transformation from a manufacturer of hardware
and software to a provider of what it calls "solutions" and "services," including
consulting and support services. The Armonk, N.Y., company has even developed a new
academic field: "Service Sciences, Management and Engineering," or SSME.
The discipline focuses on the relationship between clients and service providers by
combining studies in such disparate fields as computer science, engineering, management
sciences and business strategies -- areas that IBM contends are too segregated in higher
education, to the detriment of students, companies and, ultimately, the economy.
The curriculum offers an academic way of understanding interactions between client and
provider, according to IBM, using a mix of scientific and business concepts to focus on
areas that might not be core in either a Masters of Business Administration or computerscience program. Some of these concepts -- customer satisfaction, using mathematical
models and market research, understanding a supply chain -- may already exist in
graduate programs, but they are rarely packaged as a program of study in their own right.
The federal government is also keen on strengthening the relationship between
universities and potential employers. That is one of the issues before the Commission on
the Future of Higher Education, appointed by Education Secretary Margaret Spellings
and comprising academics and corporate executives from companies such as Microsoft
Corp., Boeing Co. and IBM. Its goal is to shake up what critics charge is complacency
and unaccountability in higher education, leading to graduates who are poorly equipped
for the realities of corporate work today.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 30 of 34
The trend goes beyond the traditional ties between private industry and academia.
Companies have long funded chairs for faculty -- or even academic centers -- in areas of
particular interest. They underwrite research into business issues that eventually turn into
case studies for classes. And executive-education programs housed in business schools
cater to corporate employees with courses taught by university faculty. For companies,
these links have promoted a better-prepared work force. Faculty, meanwhile, have
incorporated real-world applications into the classroom.
Now, though, critics worry about the implications of companies tailoring classes for their
benefit, as IBM is doing. "This is a breach of academic integrity," says Jennifer
Washburn, a fellow at the New America Foundation and author of "University Inc.," a
2005 book critical of corporate influence on education. She says such influence has
mushroomed as universities face cutbacks in federal and state support, and as companies
increasingly seek out the best talent. The upshot: "More and more universities are
allowing companies to have a greater say...even when it compromises their own
academic independence."
IBM, for its part, says the curriculum can help prepare students whether or not they go to
work for the company. "This is much broader than IBM's focus.... It's becoming part of
prominent types of jobs in most economies," says Gina Poole, IBM's vice president of
university relations. Still, she says the company has a bottom-line advantage in helping to
establish this curriculum. When students who have taken the courses look for jobs, they
will be "more likely to consider and perhaps recommend IBM," says Ms. Poole.
The University of California, Berkeley -- which has also been working with IBM to
develop coursework -- has created a "certificate" in Services Science, Management and
Engineering, which started this fall. The company has also awarded research grants to
five faculty members, IBM says. The effort began, says A. Richard Newton, dean of
Berkeley's College of Engineering, when an IBM executive who sits on an advisory
board suggested the school devote more resources to teaching service sciences.
"If IBM spends money on you, people start to get a little more motivated," says Robert
Glushko, an adjunct professor at Berkeley's School of Information. This fall he is coteaching a new course he helped create, titled The Information and Services Economy.
This summer he met with IBM executives at the company's Silicon Valley research
center to seek their advice on his syllabus. Among other readings, Mr. Glushko's students
now are required to study selections from the IBM Systems Journal and an article by
IBM's chief executive, Samuel Palmisano, published in Foreign Affairs magazine.
At IBM, revenue from its services business rose to $47.4 billion in 2005 from $12.7
billion 10 years earlier. Today, the company says, more than 50% of its revenue comes
from areas it considers to be "services."
And, it argues, that is where the rest of the economy is headed as well. According to the
Bureau of Labor Statistics, 83% of all employees in 2005 were in service-providing jobs.
It is estimated that sector of employment will encompass 90% of all new jobs by 2012.
IBM is a big employer of North Carolina State graduates, says Ira Weiss, dean of the
College of Management. And that, he says, is a top reason the university was eager to
work with IBM to develop a curriculum in service sciences. The "services management
concentration," which took about a year to build through intense collaboration between
NC State faculty and IBM staff, officially began this fall.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 31 of 34
The concentration is open to graduate students in both the M.B.A. and Masters of
Sciences in Computer Networking programs, and will draw from research and teaching in
both computer and business-related fields. The company has so far given five faculty
awards of $30,000 each -- and the time of IBM employees -- to help create five courses.
In developing the curriculum, the university says it was careful to make the content broad
enough so it could be applicable to students going to work at companies other than IBM,
says Professor Mitzi Montoya-Weiss. The school is in the process of setting up an
advisory board of corporate representatives from different industries to continue advising
the program, to ensure that different perspectives are represented.
IBM says it invests $100 million a year in its university initiatives. Funding for its SSME
efforts, which are part of that, have increased 30% in the past three years. Faculty
receives grants starting at $10,000 to be used either for curriculum and course
development that aim toward service skills, or specific research aimed at solving servicerelated problems. In some cases, the company contributes more than $100,000 for moreinvolved research projects, which can include hardware, software and staff support.
24. IBM has developed a new academic field: "Service Sciences, Management and
Engineering," or SSME which focuses on:
a. an academic way of understanding interactions between client and provider
b. concepts such as mathematical models and market research, understanding a supply
chain
c. a mix of scientific and business concepts to focus on areas that might not be core in
either a Masters of Business Administration or computer-science program
d. All of the above Correct
The Reality of Fantasy Investing
By ELEANOR LAISE
September 13, 2006; Page D1
http://online.wsj.com/article/SB115811401547961575.html
When Angelo Consiglio decided to start trading options about a year ago, the 50-year-old
St. Charles, Ill., physician knew he needed some practice. Since his previous investing
experience primarily involved trading stocks through a broker, he opened a "virtual
trading" account at online brokerage optionsXpress Holdings Inc. that allowed him to
make simulated options trades without putting any real money at risk.
After about four months, Dr. Consiglio had racked up more gains than losses and was
ahead overall, so he decided he was ready to trade options with $5,000 of real money.
But in May, when the stock market took a dive, his account tumbled 40%. Since the
market was climbing steadily when he was trading with virtual money, Dr. Consiglio
says, he wasn't prepared for such a steep slide. "There's a lot more emotion involved"
with real money, he says, and he had trouble letting go of some of his positions.
As online brokerages and other financial-services firms roll out new virtual-trading tools
that promise to teach the ins and outs of complex investing strategies, some individual
investors are finding the transition from fantasy trades to real-life investing isn't always a
smooth one.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 32 of 34
Indeed, investors' results in virtual accounts may be far different than their experience in
the real market, since virtual programs often give investors unlimited sums of makebelieve cash to trade with, encourage users to test their strategies with historical data that
may not reflect current conditions and can't factor in the emotions that come in to play
with real money.
In June, Fidelity Investments launched a new version of Wealth-Lab Pro, a tool that lets
investors test stock-trading strategies. E*Trade Financial Corp. last year began offering
an account that lets investors practice trading futures contracts. Interactive Brokers LLC,
an online brokerage, launched its first virtual-trading account earlier this year. Brokerage
thinkorswim Group Inc. launched a new Web-based virtual-trading program this year,
while optionsXpress a few months ago added futures and advanced trades to its virtualtrading program.
Companies offering these tools say they're seeing a surge of investor interest.
OptionsXpress says the number of investors using its practice account has jumped 50%
so far this year, while online foreign-exchange brokerage FX Solutions says the number
of its practice accounts has jumped fivefold this year. Another currency brokerage,
Forex.com, a unit of GAIN Capital Group, says 10,000 users are signing up for its
practice account each week, up from about 5,000 a week last year.
Many of the new tools let investors practice risky and complex trading strategies with
options, futures and foreign currencies. A futures contract is an agreement to buy or sell a
financial instrument or other asset at a set price on a future date, while an option gives an
investor the right to buy or sell a security at a set price before a certain date. Such
investments can be extremely volatile, and investors can lose more than their original
investment in certain types of trades. In foreign-exchange investments, investors can bet
on how a foreign currency will move in relation to another currency. This strategy also
poses substantial risks, as currency moves can be sharp and unpredictable.
Since many individual investors feel they don't have the expertise to dive into such
strategies, brokerage firms are trying to boost their confidence with try-before-you-buy
programs. Additionally, in recent months, options and futures exchanges have been
rolling out more "mini" futures and options contracts that are tailored to appeal to small
investors.
Most of the virtual programs cost nothing and often require no commitment from
investors. Brokerages say the programs educate investors. Many companies also say the
programs help bring in loyal customers. If an investor learns to trade options on the
optionsXpress trading platform, for example, he's unlikely to move to another brokerage
when he's ready to trade -- and pay commissions -- with real money.
While virtual-trading programs don't involve real money, these tools can pose their own
risks, industry experts say. Many people use the programs as a springboard to making
real trades. And while companies that offer virtual trading say these programs accurately
simulate market conditions, investors can still encounter potentially costly surprises when
they leave the land of make-believe.
25. Investors' results in virtual accounts may be far different than their experience in the
real market because
a. virtual programs often give investors very limited sums of make-believe cash to trade
with
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 33 of 34
b. they can factor in the emotions that come in to play with real money.
c. they encourage users to test their strategies with historical data that may not reflect
current conditions Correct
d. All of the above
New Car-Safety Focus: Crash Prevention
Regulators to propose That All Vehicles Include
Stability Control; Weighing Warning Systems
By Laura Meckler
September 14, 2006 Page D1
http://online.wsj.com/article/SB115820622167762866.html
Car-safety rules have long focused on features that protect you in a crash, such as seat
belts and air bags. Now, the government's auto-safety regulators are starting to focus on
measures designed to prevent accidents in the first place.
The first major step in the effort comes today when the National Highway Traffic Safety
Administration proposes regulations to require automakers to install electronic stability
control in cars, sport-utility vehicles, minivans and pickups. The systems use brakes and
engine power to automatically keep a car from veering out of control -- and are especially
useful in preventing vehicles traveling at high speeds or on slippery roads from flipping
over.
26. The National Highway Traffic Safety Administration is proposing regulations to
require automakers to install ______ in cars, sport-utility vehicles, minivans and pickups.
a. Bluetooth cell phones
b. extra cup holders in the drivers area
c. electronic stability control Correct
d. fast food serving tray holders
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 34 of 34