Harvard Business Review June 2008

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PARADOX AT TOYOTA…page 96 CLARITY AT IDEO…page 84

www.hbr.org June 2008

60 The Secrets to Successful Strategy Execution Gary L. Neilson, Karla L. Martin, and Elizabeth Powers

72 The Next Revolution in Productivity Ric Merriﬁ eld, Jack Calhoun, and Dennis Stevens

84 Design Thinking Tim Brown

96 The Contradictions That Drive Toyota’s Success Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu

106 The Multiunit Enterprise David A. Garvin and Lynne C. Levesque

22 FORETHOUGHT

41 HBR CASE STUDY Why Are We Losing All Our Good People? Edward E. Lawler III HOW TO 53 FIRST PERSON Business Basics at the Base of the Pyramid DELIVER Vikram Akula 123 MANAGING YOURSELF ON A GREAT How the Best of the Best Get Better and Better PLAN Graham Jones …page 60

129 BIG PICTURE Patent Sharks Joachim Henkel and Markus Reitzig

138 EXECUTIVE SUMMARIES

144 PANEL DISCUSSION If there’s a 2-do for coupes, we

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Features

60 The Secrets to Successful Strategy Execution Gary L. Neilson, Karla L. Martin, and Elizabeth Powers 96 Restructuring and establishing proper incentives may improve your company’s ability to execute strategy, but not unless you ﬁ rst clarify decision rights and unleash the ﬂ ow of competitive information up the line and across the organization.

72 The Next Revolution in Productivity Ric Merrifi eld, Jack Calhoun, and Dennis Stevens 72 The frontier of effi ciency is no longer “the process” but its component activities. Redesigning those activities so that they can be easily put together and disassembled could transform your entire business into a highly fl exible and focused plug- and-play operation.

84 Design Thinking 106 Tim Brown When designers are involved from the very beginning of the innovation process, startling new ideas can result – as a U.S. health care provider, a Japanese bicycle components manufacturer, and a system of Indian eye hospitals learned.

96 The Contradictions That Drive Toyota’s Success Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu The Toyota Production System may be one of the world’s most-vaunted management approaches, but it isn’t the only reason for the company’s success. A new study reveals that Toyota’s culture of contradictions generates innovative ideas and allows the company to pull ahead of competitors – some- 84 times incrementally, sometimes radically.

106 The Multiunit Enterprise David A. Garvin and Lynne C. Levesque Although the multiunit corporation abounds in many industries, management thinkers have all but ignored this organiza-

tional form – until now. 60

continued on page 8 Cover Art: Jacob Thomas Jacob Art: Cover

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Departments

12 COMPANY INDEX 94 STRATEGIC HUMOR

14 FROM THE EDITOR 123 MANAGING YOURSELF Tools for Change How the Best of the Best Get Better It takes dirty hands and messy conversa- and Better tions to execute strategy. Graham Jones What separates elite performers from the 22 FORETHOUGHT rest of the pack? According to a noted Companies can stop the female brain drain sports psychologist turned executive coach, 22 in science…Get a panel of experts to advise it’s a special form of mental grit. your fi rm on social issues…Government subsidies are the key to Chinese fi rms’ low 129 BIG PICTURE costs…Online business scams are on the Patent Sharks rise…How companies can pursue their Joachim Henkel and Markus Reitzig “deep future”…A guide to China’s new tax Attacks by patent sharks – fi rms with incentives…Tying CEO pay to performance hidden intellectual property that surface, 41 with integrity…Thorough preparation is the threatening to sue, when their rights are prerequisite to success…The roadblock inadvertently infringed – are on the rise. To between women and the C-suite. escape intact, you’ll have to turn your R&D processes inside out. 41 HBR CASE STUDY Why Are We Losing All Our Good People? 134 LETTERS TO THE EDITOR Edward E. Lawler III Several talented employees have recently 138 EXECUTIVE SUMMARIES left the architecture and engineering fi rm Sambian Partners – and the CEO has no 144 PANEL DISCUSSION idea why. How can she fi nd out what’s Strategy Paradox wrong and prevent more employees from Don Moyer jumping ship? With commentary by Anna Investing in the big opportunity invari- Pringle, F. Leigh Branham, Jim Cornelius, 53 ably brings along a chance for the big and Jean Martin. catastrophe.

53 FIRST PERSON Business Basics at the Base of the Pyramid Vikram Akula The founder and CEO of SKS Microfi nance 123 does business with some of the world’s poorest people in a way that lifts them up and makes money for the fi rm. His formula: Stick to for-profi t principles while truly placing customers’ interests fi rst.

129

8 Harvard Business Review | June 2008 | hbr.org y 1, 2008.

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On our website this month > From the Front Lines This new blog from HBR’s senior editorial team provides discerning commentary on today’s management issues and invites you to contribute your own insights. Go to editors.hbr.org.

> An Inside Look Thomas Stewart, the editor of HBR, shares his thoughts on articles in this > Why Are We Losing All Our Good People? issue and dis- What should you do when you can’t keep your top talent? cusses how the Tell us at LosingGoodPeople.hbr.org. ideas in them can shape your business. To listen to this podcast, go to editorspreview.hbr.org.

> Stopping the Exodus of Women in Science Go to BrainDrain.hbr.org to download a free preview of the new research report, “The Athena Factor: Revers- ing the Brain Drain in Science, Engineering, and Technology,” by Sylvia Ann Hewlett and colleagues.

ALWAYS AT HBR.ORG

SUBSCRIBER ACCESS PREMIUM SUBSCRIPTION HBR IN OTHER LANGUAGES HBR ANSWERS If you are a subscriber, you A premium subscription to Visit “HBR in Other The editors of HBR have have 12 months’ worth of Harvard Business Review Languages” on the home posted questions that man- digital back issues at your gives readers access to a page for information about agers ask about their biggest disposal. Click on any searchable archive of more the 11 licensed translated challenges, along with select article with a next to it, than 2,700 articles. To sign editions of Harvard Busi- articles that address each and you will be prompted up, click on “Subscribe ness Review. one. Readers can suggest to enter your subscriber Today” in the upper-right questions or topics by click- ID information. corner of the home page. ing on “E-mail Us” on the HBR Answers page.

RANGE ROVER DESIGNED FOR THE EXTRAORDINARY COMPANY INDEX | June 2008

Organizations in this issue are indexed to the ﬁ rst page of each article in which they are mentioned. Subsidiaries are listed under their own names.

Alcoa ...... 22 Nokia ...... 22, 129 Columbia University ...... 22 Amazon ...... 72 NTP ...... 129 Corporate Executive Board’s Corporate Aravind Eye Care System ...... 84 Pfi zer ...... 22 Leadership Council ...... 41 Asure Software ...... 129 Rambus ...... 129 Ernst & Young ...... 22 Bank of America ...... 84 Research in Motion...... 129 General Electric ...... 22 Blackstone Group ...... 22 Robert Bosch ...... 129 Grant Thornton ...... 22 Borders ...... 106 Safeway...... 22 Grant Thornton International ...... 22 Boston Scientifi c ...... 129 Shimano ...... 84 Harvard Business School...... 106 Bristol-Myers Squibb ...... 41 Siemens ...... 129 Harvard Law School...... 22 Burger King ...... 22 SKS Microfi nance ...... 53 Harvard University’s John F. Kennedy School Caterpillar ...... 60 Staples ...... 106 of Government ...... 22 Cisco ...... 22 Target ...... 106 Hitotsubashi University’s Graduate School of Costco ...... 106 Toyota ...... 96 International Corporate Strategy ...... 96 FedEx ...... 72 Toyota Motor Sales, U.S.A...... 96 IDEO ...... 84 Forgent Networks ...... 129 TXU ...... 22 Keeping the People ...... 41 General Motors ...... 96 University of Cambridge ...... 22 Lane4 ...... 123 Harvard Pilgrim Health Care ...... 72 U.S. District Court for the Eastern District of Texas ...... 129 London Business School ...... 129 Home Depot...... 106 U.S. Supreme Court ...... 129 Microsoft ...... 41, 72 Honda ...... 96 Victoria’s Secret ...... 106 Milano the New School for Management IDEO ...... 84 Wal-Mart ...... 106 and Urban Policy ...... 22 Intel ...... 129 World Trade Organization ...... 22 Munich University of Technology ...... 129 Intergraph ...... 129 Yale University ...... 22 New York University ...... 22 Internal Revenue Service ...... 22 Nokia ...... 22 IPCom ...... 129 SKS Microfi nance ...... 53 Synaptus ...... 72 J.C. Penney ...... 106 AUTHOR AFFILIATIONS Johnson & Johnson ...... 22 University of California San Francisco’s Women’s Kaiser Permanente ...... 84 Accelare ...... 72 Mood and Hormone Clinic ...... 22 McDonald’s ...... 22 Blackstone Group ...... 22 University of New Haven ...... 22 Microsoft ...... 22, 41, 72 Booz & Company ...... 60 University of Southern California’s Marshall School Motorola ...... 72 Bristol-Myers Squibb ...... 41 of Business ...... 41 New United Motor Manufacturing ...... 96 Burger King ...... 22 University of Wales ...... 123 Nissan ...... 96 Center for Work-Life Policy ...... 22

“Ferguson, our new consultant, will help us navigate around the ethics thing.” Harley Schwadron Harley

12 Harvard Business Review | June 2008 | hbr.org

FROM THE EDITOR

Tools for Change

HEN IN trouble…reorga- www.simulator-orgeffectiveness.com, nize.” Using those words, where you can diagnose your organi- spoken with a Solomonic zation’s effectiveness at strategy exe- “W confidence, a long-ago cution, design a change program – and boss of mine opened a meeting. For then grade the decisions you make to the next two hours, he prepared the carry it out. ground for an extensive plan to impose The 2004 HBR List of breakthrough a degree of centralization on three busi- ideas included “The MFA Is the New ness units, obtaining some economies MBA,” in which Daniel Pink argued for of scale while leaving each with certain the importance of an aesthetic sense critical dimensions of independence. in business. Time has proven Pink’s pre- When the deed was done, though, ev- science. Apple’s resurgence owes everything had changed but nothing was erything to the elegance that suffuses different. Several layoffs, a few months, every aspect of its business. Our friends and many resentments later, the com- at BusinessWeek have taken up design pany righted itself and continued on the almost as if it were a moral crusade. path that led to its being sold. Procter & Gamble’s CEO, A.G. Lafl ey, It wasn’t until last fall, when senior editor Ellen Peebles hired 150 designers and has made sure their voices are heard and I met Gary Neilson of Booz & Company, that I fully un- by having the head designer report directly to him. derstood what had gone wrong. My old boss’s sin was to rely Behind this activity is a revolutionary approach to business on reorganization as the primary vehicle by which to carry called “design thinking.” That’s also the title of this issue’s forward a strategic decision. All his savings were dissipated brilliant article by the CEO of IDEO, Tim Brown, a leading because the new organization seemed almost inherently un- proponent of the movement. Where new products are con- able to make smart decisions about inventory, which left us cerned, design thinking begins not at the drawing board but short of items that were selling and oversupplied with things with an anthropological devotion to what customers do and that were not. As management scholar Robert Burns noted, want to do. Service design isn’t so much about making a “the best-laid schemes o’ mice an’ men gang aft agley.” hotel lobby look fab as it is about crafting every interaction In a multiyear study, Neilson and his colleagues Karla Mar- between a company and its customers in a way that gives tin and Elizabeth Powers have learned the most effective them the experience the company intends. Even strategy, ways to keep such plans on track. This month’s lead article, one might say, is the residue of design. “The Secrets to Successful Strategy Execution,” presents IDEO has designed well-known products such as TiVo’s their fi ndings, and, as you’ve gathered, reorganization doesn’t video recorder and the updated Zyliss salad spinner. But lead their hit parade. The trio studied 17 kinds of behavior – Brown has become an adviser to many other chief execu- centralizing versus decentralizing, changing incentives, and tives (Lafl ey among them), because they recognize that the so on – and clustered them into four areas, depending on process of design thinking offers a powerful new way to whether they primarily affect structure, decision rights, in- make choices – especially those involving customers. formation fl ow, or motivation. The two in the middle matter most. Notably, those are the least subject to corner-offi ce diktats. They involve dirty hands and messy conversations. The picture is complex, however. For one thing, factors interact; for another, interventions that galvanize one corporate culture might paralyze another. You can see how this works at Thomas A. Stewart Robert Meganck

14 Harvard Business Review | June 2008 | hbr.org

EDITOR AND MANAGING DIRECTOR Thomas A. Stewart

DEPUTY EDITOR AND ASSISTANT MANAGING DIRECTOR Karen Dillon

EDITORIAL DIRECTOR The more you Sarah Cliffe ART DIRECTOR Karen Player

EDITOR, SPECIAL ISSUES know about Julia Kirby SENIOR EDITORS SENIOR PRODUCTION David Champion MANAGER (Paris) Dana Lissy executive leadership, Diane Coutu Bronwyn Fryer EDITORIAL PRODUCTION Paul Hemp MANAGER Lew McCreary Christine Wilder Gardiner Morse M. Ellen Peebles SENIOR ASSOCIATE Steven Prokesch ART DIRECTOR the more Anand P. Raman Chandra Tallman ASSOCIATE EDITORS SENIOR DESIGNER Roberta A. Fusaro Jill Manca Andrew O’Connell DESIGNER executive leadership CONSULTING EDITOR Lindsay A. Sweeney Bernard Avishai ASSISTANT EDITORIAL MANUSCRIPT PRODUCTION EDITORS MANAGER knows about you. Christina Bortz Josette Akresh- Lisa Burrell Gonzales Steven DeMaio COMMUNICATIONS Susan Donovan DIRECTOR Andrea Ovans Cathy Olofson Martha Lee Spaulding COMMUNICATIONS ARESTY INSTITUTE OF BUSINESS ASSOCIATE ® DEVELOPMENT EDITOR Siobhan C. Ford EXECUTIVE EDUCATION We’re all business. John T. Landry CONTRIBUTING STAFF EDITORIAL RESEARCH Lilith Z.C. Fondulas MANAGER Amy L. Halliday Build your case for moving up quickly with skills and strategies that will Kassandra Duane Annie Noonan have the C-suite taking notice. At Wharton, we surround you with some of EDITORIAL Eileen Roche COORDINATOR Kristin Murphy the brightest minds in business today and focus specifically on accelerating Rasika Welankiwar Romano Debbie White your impact as a leader. Download our FREE article series “Wharton on STAFF ASSISTANT Christine C. Jack Senior Management” at executiveeducation.wharton.upenn.edu. For more information, e-mail [email protected]. Call 800.255.3932 (U.S. or A NOTE TO READERS The views expressed in articles are the Canada) or +1.215.898.1776 (worldwide), and reference HBR. authors’ and not necessarily those of Harvard Business Review, Harvard Business School, or Harvard University. Authors may have consulting or other business relationships ADVANCED MANAGEMENT PROGRAM with the companies they discuss. > September 21–October 24, 2008 > May 31–July 3, 2009 SUBMISSIONS We encourage prospective authors to follow STRATEGIC THINKING AND MANAGEMENT FOR COMPETITIVE ADVANTAGE HBR’s “Guidelines for Authors” before > September 15–19, 2008 > December 8–12, 2008 submitting manuscripts. To obtain a copy, please go to our website at www.hbr.org; write to The Editor, Harvard Business Review, HIGH-POTENTIAL LEADERS: ACCELERATING YOUR IMPACT NEW! 60 Harvard Way, Boston, MA 02163; or send > September 21–26, 2008 e-mail to [email protected]. Unsolicited manuscripts will be returned only THE LEADERSHIP JOURNEY: CREATING AND DEVELOPING if accompanied by a self-addressed stamped envelope. YOUR LEADERSHIP EDITORIAL OFFICES > October 19–24, 2008 > May 17–22, 2009 60 Harvard Way, Boston, MA 02163 617-783-7410; fax: 617-783-7493 www.hbr.org

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A survey of ideas, trends, people, and practices on the business horizon

GRIST Stopping the Exodus of Women in Science by Sylvia Ann Hewlett, Carolyn Buck Luce, and Lisa J. Servon

Business leaders in the U.S. wring their Female scientists, engineers, and Harvard Business Review special report, hands over the country’s shortage of technologists exist in large numbers accessible at BrainDrain.hbr.org.) First, scientists, engineers, and technologists, (contrary to popular belief) but are we confi rmed the scale of the problem, often citing it as the biggest constraint abandoning their chosen professions in which echoes but far exceeds the overall on growth. As they’ve sought to improve droves. With the support of a vanguard tendency among women to “opt out” of the situation, much of their focus has of concerned fi rms, the Center for full-time work at a higher rate than men been on lobbying for a relaxation of H1-B Work-Life Policy recently examined this do. Our research fi ndings show that visa norms so that foreign nationals can brain drain. (The complete fi ndings of on the lower rungs of corporate career fi ll the gap. Employers seem not to real- our study “The Athena Factor: Reversing ladders, fully 41% of highly qualifi ed ize that the talent they need is already the Brain Drain in Science, Engineer- scientists, engineers, and technologists here – if only they can retain it. ing, and Technology” are contained in a are women. But the dropout rates are James Yang James

22 Harvard Business Review | June 2008 | hbr.org hbr.org huge: Over time 52% of these talented the “mystery” around career advance- Cisco decided to Preview the related report, women quit their jobs. Most strikingly, ment. Isolated and lacking sponsors, develop a “game “The Athena Factor: this female exodus is not a steady trickle. they cannot discern the pathway that changer.” Designed Reversing the Brain Drain in Science, Engineering, Rather, there seems to be a key moment will allow them to make steady progress to ensure that and Technology,” at in women’s lives – in their mid to late upward. The result is that women tend within 18 months, BrainDrain.hbr.org. thirties – when most head for the door. to fi nd themselves shunted into roles women will come (See the exhibit “Intervening at the ‘Fight as executors or helpers – without ever to represent 25% of the senior manage- or Flight’ Moment.”) understanding why – while men occupy ment team, this program will create a Stop for a moment and let these statis- the more illustrious creator and pro- critical mass of senior women in one tics sink in. Can you imagine the dustup ducer roles. fell swoop. in the boardroom if 50% of a company’s Johnson & Johnson and Microsoft most promising products were aban- Intervening at the have focused on the “fi ght or fl ight” doned midstream? And yet companies “Fight or Flight” Moment moment. In a new program called Cross- routinely invest large sums of money in Cutting female attrition yields ing the Finish Line, J&J is providing developing female talent, only to see half huge gains. leadership development to young, high- of that talent walk out. The scale of the potential multicultural women and loss is enormous. And of course the pain 220,000 highly qualified strengthening their connections with women would return to of lost potential is particularly acute for 65% the labor market. senior managers who can act as their the individuals themselves. 60% sponsors down the road. In a similar vein, So why do women leave science, 55% Microsoft has created a group of inter- engineering, and technology careers? 50% locking “mentoring rings” with an eye The answer comes in fi ve parts. First and 45% to giving female talent better access to foremost, the hostility of the workplace 40% and mentoring from senior managers – culture drives them out. If machismo is on especially at career stages when support 35% the run in most U.S. corporate settings, is most needed. 30% then this is its Alamo – a last holdout of 25–34 yrs 35–44 yrs 45–60 yrs Alcoa has targeted the issue of attract- redoubled intensity. Second is the dispirit- ing more women into operating manage- Current % of qualified female scientists, ing sense of isolation that comes when engineers, and technologists working ment roles. Through its Women in Line a woman is the only female on her team in their fields Roles initiative, the company is offering or at her rank – a problem exacerbated Projected % if attrition were reduced high-potential women who might be inter- for others when she in turn leaves. Third, through interventions ested in production or technical roles the there is a strong disconnect between chance to try them out through temporary women’s preferred work rhythms and None of this is good news, but assignments and help staying on track the risky “diving catch” and “fi refi ghting” the fact that we have surfaced these through carefully crafted career develop- behavior that is recognized and rewarded problems certainly is. Because we can ment plans. Finally, Pfi zer has a creative in these male-dominated fi elds. map the point of highest attrition, for approach to mentoring female scientists. Two more factors round out the set. example, fi rms can be more targeted Working with Yale University, Pfi zer’s “Extreme jobs,” with their long work- in their interventions. And because we Women’s Leadership Network launched weeks and punishing travel schedules, know the worst pressures women face, a student mentoring program, which are particularly prevalent in science, organizations can begin to relieve them. both stems losses among highly qualifi ed engineering, and technology companies. Indeed, the companies that are part of female graduate students and increases (See “Extreme Jobs: The Dangerous our research consortium have already their awareness of the private sector. Allure of the 70-Hour Workweek,” HBR launched 14 initiatives to do so. It will be a long time before initiatives December 2006.) Because women in Cisco stands out, perhaps, for the like these, dispersed and targeted as two-income families still bear the brunt boldness of its new Executive Talent they are, add up to systemwide change. of household management, few are Insertion Program. Having determined But this is the only form in which that able to sustain those pressures. Finally, isolation to be one of the most serious change will come: real work by leading many women we surveyed bemoaned problems facing female executives, companies to selfi shly address their own

hbr.org | June 2008 | Harvard Business Review 23 talent requirements. Based on today’s One of the CSR issues I’m deeply know our policies are based upon sound data, our research fi nds that if we could, involved with at Burger King is animal science and make sense. The panel also as a nation, cut female attrition in sci- welfare. Obviously, a corporation like weighs costs against benefi ts and takes ence, engineering, and technology by ours could do many things on that front. into account our supply-chain issues – 25%, we would add 220,000 highly quali- So we need help choosing the right initia- the Burger King system is so large that fi ed workers to the labor market. In a tives. But where can we get it? Should we could virtually cause the country global economy where such talent drives we tap activists as advisers, as McDon- to run out of a particular product if we the competitiveness of nations, that’s ald’s did with environmentalists on the decided to fi ll our pipeline with it. a goal worth rallying around. issue of packaging? Should we seat The advisory panel members are vol- Sylvia Ann Hewlett is an economist and activists at the decision-making table, unteers, and most are academic experts; the founding president of the Center for as the new owners of TXU have done? the well-known author and researcher Work-Life Policy in New York. She also Burger King has chosen a different Temple Grandin of Colorado State Univer- heads up the Gender and Policy Program at path. It’s a deliberative, low-key approach, sity is a member. Sometimes we have Columbia University. Carolyn Buck Luce but it has given us confi dence that we’re disagreements, but after we put all the leads the global pharmaceutical practice going about our animal-welfare initiatives facts and science on the table, in every for Ernst & Young in New York. Lisa J. in the right way. And lately it has given us case we have been able to come up with Servon is an associate professor at Milano unexpected benefi ts. recommendations that have moved the the New School for Management and We set out on this path a decade or so company forward and addressed the Urban Policy in New York. ago, when animal-rights activists began relevant concerns. to generate concerns among consum- On the panel’s advice, last year we Reprint F0806A ers. (Admittedly, we had a rather bad announced a new goal for the amount relationship with some activist groups of egg product from cage-free chick- at the time.) We chose to establish an ens that we use throughout our entire STAKEHOLDERS advisory panel to generate, fi lter, and restaurant system. We now aim to have Getting Sound Advice analyze ideas for how the company could the equivalent of 5% of the egg volume promote animal welfare. (We aren’t the of our company-owned restaurants be on Social Initiatives only food company with such a panel – cage-free. (The company owns 10% of by Steven Grover Safeway, for instance, also relies on an our restaurants – the rest are franchised.) Companies today face a common animal-welfare advisory committee, and We also set a goal of obtaining 10% of challenge: how to develop workable McDonald’s has a panel, too.) the pork in the entire system from sows programs that will help them move Our advisory panel helps us sort raised without gestation crates. The panel forward strategically on corporate social through the sometimes confl icting hoped these moves would encourage responsibility initiatives that matter to suggestions we receive and provides the spread of humane practices within customers and employees. a stringent academic review so that we the poultry and pork industries. We were surprised by the large number of positive calls and letters we received from consumers in response to our efforts and the favorable press coverage. We’ve under- taken other animal-welfare initiatives that were considerably more expensive and comprehensive, but they’ve never generated this level of positive public response. The public approval has given us a certain external validation for a process that previously we had kept under the radar. My experience suggests several success factors for setting up and using an outside panel on CSR initiatives:

Q Recruit top experts and leaders in their ﬁ eld who are willing to take the time to work through their differences and create solutions.

Q Identify a staff adviser from the company who is an expert in the ﬁ eld and can be the company and industry

24 Harvard Business Review | June 2008 | hbr.org resource. This person will schedule meetings, set agendas, and give the panel frequent updates about how its advice is being implemented.

Q Don’t parade the panel around just to get publicity. The goal is to make informed, science-based changes that have an impact, not to create media sound bites. Furthermore, publicity seeking may alienate the panelists and waste their valuable time. It’s important to take the advisory panel seriously and to work hard to show its members that their ideas make a difference. That way they’ll become true partners in helping the company address consumers’ concerns and advance social initiatives. Steven Grover ([email protected]) is vice president for food safety, quality assur- ance, and regulatory compliance at Burger King, based in Miami. manage to sell steel for about 19% that the energy supplied to China’s other Reprint F0806B less than steel from U.S. and European manufacturing industries is subsidized companies? Labor accounts for less than as well. The steel industry may benefi t 10% of the costs of producing Chinese disproportionately from energy subsidies SUPPLY CHAIN steel, and Chinese steel doesn’t appear because of its voracious appetite for coal, Subsidies and the to rely on scale economies, supply-chain but the energy subsidies obviously help proximities, or technological effi ciencies other industries too. China Price to lower its costs. Foreign companies doing business by Usha C.V. Haley and George T. Haley Let’s look in detail at the probable in or with China or competing against Many assume that China’s cost advan- source of this cost advantage. In research Chinese rivals need to recognize a few tage in manufacturing comes from cheap conducted with funding from the Alliance things about subsidies. First, they can labor. But in China’s burgeoning steel for American Manufacturing – work be abruptly affected by political forces. industry, our research suggests, massive that draws heavily on our decade-long For example, the November 2007 World government energy subsidies, not other previous study of Chinese industry – Trade Organization subsidy-reduction factors, keep prices down. These sub- we found that total energy subsidies agreement between the U.S. and China sidies have broad implications for how to Chinese steel (from 2000 to midyear cut export subsidies to foreign compa- companies compete and collaborate with 2007) reached $27 billion. (See the nies located in China but maintained sub- Chinese businesses. exhibit “Energy, Subsidies, and Steel.”) sidies to Chinese companies. This shows In 2005, Beijing designated steel as a About 95% of that amount was for coal. how subsidy-based cost advantages of pillar industry for the Chinese economy. (These numbers are conservative best foreign companies located in China can China was the world’s largest producer estimates, based on data from Chinese, suddenly evaporate. of steel, with 27% of global production, U.S., and international agencies, industry Second, companies that offshore to, or but until then it had imported 29 million associations, individual Chinese compa- source or import from, China may suffer tons of steel annually. That year, China nies, and other sources.) Our analysis of price shocks if they don’t discount fl uc- suddenly transformed itself from a net the relationship between the increase in tuating, subsidy-based cost advantages. steel importer to a net steel exporter. In energy subsidies and the growth of Chi- Our research showed that under scrutiny, 2006, the country became the world’s nese steel production and steel exports subsidies from Beijing often dry up, only largest steel exporter by volume, up showed a powerful statistical correlation; to be replaced to varying degrees by from the fi fth largest in 2005. Today it this is not a chance association. subsidies from provincial and local gov- remains the world’s largest consumer Our research revealed that energy sub- ernments, which use them to support and producer of steel, with 40% of sidies to the steel industry were paid to employment, build self-suffi ciency, global production. How did China make the energy sector and passed on through and promote import substitution locally. these astonishing gains so quickly and lower energy prices, which suggests Companies should establish relationships

hbr.org | June 2008 | Harvard Business Review 25 Energy, Subsidies, and Steel This is an example of a classic short After the Chinese government increased its energy subsidies to the steel industry, con, a one-shot transaction that involves the country’s steel production and steel exports rose signiﬁ cantly. a single breach of trust. More worrisome is the rise online of long cons, scams that involve repeated interaction with 4,000% Energy subsidies (US$) $15.7B the mark over the course of weeks or 3,500% Global exports months while bleeding him slowly or 3,000% priming him to hand over a large amount Production 2,500% $7.8B of cash. (Nigerian “419” scams fall into (midyear) this category.) The logic of outsourcing 2,000% $6.1B $5.8B and telecommuting makes long cons

Growth 1,500% $4.8B less risky and more cost effective. It’s relatively easy for criminals to set up 1,000% $1.6B well-designed, legitimate-looking web- 500% $.401B $.514B sites and use them to groom and exploit 0% $–.026B a number of victims simultaneously, far -500% from the law, and over the long term. 2000 2001 2002 2003 2004 2005 2006 2007e On the internet, a single con artist can

Subsidies were determined by the price-gap method, which indicates the difference between run a long con using dozens of “sock prices paid for energy and world reference prices. puppets” (fake online identities), as happens when eBay scammers refer with industry and government offi cials Usha C.V. Haley (uhaley@asia-pacifi c. you to their “customers” who vouch for in China so that they know the source of com) is a professor of international their bona fi des. Automation allows con subsidies and can gauge the risk of re- business and the director of the Global artists to reach thousands of potential duction and subsequent price increases. Business Center, and George T. Haley marks at once and then cherry-pick the Before foreign companies cut other (gthaley@asia-pacifi c.com) is a professor of most gullible, a high-volume/low-yield suppliers loose in favor of lower-priced industrial marketing and the director of the model impossible with face-to-face cons. Chinese sources, they should be mindful Center for International Industry Competi- That ease of operations means that that Chinese fi rms’ prices may fl uctuate tiveness, at the University of New Haven in long-con artists can be expected soon abruptly as subsidies shift. Foreign fi rms Connecticut. The full report is available at to turn their full attention to businesses, should therefore retain some original americanmanufacturing.org. where the real money is. They could supply relationships until Chinese suppli- open legitimate accounts with busi- ers prove reliable over the medium term. Reprint F0806C nesses, order small shipments and pay on time, and then, when trust is established, order a huge shipment and vanish. They could mimic legitimate businesses’ SECURITY websites to divert traffi c and collect in- Next-Generation Online Cons formation on customers – and money. Or they could open fake outsourcing shops by Clay Shirky and pass the work through to others, Con artists thrive by faking trustworthi- Consider this online con: Scammers while stealing trade secrets. Ominously, ness, and they’re fi nding the internet and set up a fake Internal Revenue Ser- the low cost of online cons also invites the companies that do business there vice electronic-fi ling site and offer to the participation of amateurs and could ripe for exploitation. Online confi dence submit taxpayers’ returns for them. That encourage con artists who have no games today are where spam was in sounds like a setup for identity theft, profi t motive – for example, activists or 1998 – they’re bad but bearable, and but this con is much more imaginative pranksters who simply want to damage businesses and governments are irration- than that. Once the scammers get hold a brand. ally optimistic that they can be stopped. of a return, they adjust the income Businesses are entering an arms race But a permanent solution to online and deductions so that the IRS owes a that for the moment favors the con art- cons won’t materialize, just as a way to refund, and then they have the refund ists; the balance of power won’t begin eradicate spam has never been found. directed to a bank account they control. to shift until businesses wake up to The only real way to end spam is to shut In 2007 there was so much attempted the threat. Three defensive strategies down e-mail communication, and the electronic-fi ling fraud that the IRS had can help: only real way to stop cons would be to to replace its previous e-fi le vetting First, establish hard-to-fake relation- disable the internet for commercial use. process. ships with customers. The best way to continued on page 30

26 Harvard Business Review | June 2008 | hbr.org Flat out wonderful.

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ob Iannucci, Nokia’s chief technology offi cer, is You say you search widely betting that the mobile-phone industry will soon for new technologies and make the same sharp turn that the mainframe, product ideas. How do you minicomputer, and PC industries took in past handle the cost of casting B years: Platforms will become standardized, a wide net? manufacturers will stop making incompatible hardware, One thing I learned from IBM, where I worked for 14 years, and the value of software and services will soar. His job, is the importance of investing in basic science in areas as he sees it, is to help Nokia position itself to lead in this that may have a profound impact on the company’s “deep next phase of mobile communications. future.” Our investment in nanoscience, for instance, is very much in the spirit of what IBM Research has done in Given that Nokia is fi rmly committed to the handset hard sciences. But there’s a difference: We’re doing our na- market, what response do you get when you propose noscience work in residence on university campuses with that Nokia look for growth by taking a radical new partners such as the University of Cambridge in the UK. direction? Signifi cant nanoscience work requires a world-class team Though the company is a bit humble about it, Nokia has and world-class facilities – Cambridge has both. We bring a 150-year history of reinventing itself. Depending on how expertise and challenging problems, and it makes for an you count, we are on our fi fth or sixth major reinvention. interesting collaboration. This is a strategy we have imple- When I was running Compaq’s research back in 1999, mented worldwide – we have moved from being a closed I went to Finland to visit Nokia, and I was astounded innovator to being an open innovator. In addition to our by how much it invested in technological innovation – own research centers, we have co-locations with a half and astounded at myself that I didn’t know much about dozen of the world’s top universities. Our researchers aug- the company. Nokia became my model of an organiza- ment the universities’ work, the academic researchers get tion that reimagines itself by adding growth businesses the potential for future commercialization of their ideas to mature ones. on a vast scale, and we accelerate one another’s efforts. Since coming to Nokia, I’ve found that during the strategy process, the leadership is pretty honest about the Assuming Nokia’s efforts are fruitful, how will people state of the industry and the need to reinvent, and there’s use mobile phones differently in the coming years? a very healthy discussion – and a low degree of politics or Nokia is moving into services and software for mobility. turf protection. On a scale of one to 10, Nokia is maybe a We’re trying to fuse the physical and digital worlds and one or two when it comes to corporate politics. The man- looking at how wristwatches, sensors in your car, and agement structure is very fl at, and strong interpersonal other types of input devices might interact with your relationships are what drive the company forward. mobile phone so that you can get a whole range of data, The leadership also grasps the gravity of what reinven- from information about your health, to the status of your tion means. Just recently, the company took a corporate automobile, to whether there’s traffi c a few miles ahead. structure that had been in place for a few years and basi- One particularly exciting technology is the use of the cally blew it up. A lot of the senior managers are now in phone as a sensor. Rather than use a text query to search very different roles. The company also takes a clear-eyed the internet, our researchers use an image captured by approach to evaluating research centers: On the basis of the phone’s camera to initiate what they call a “zero-click” our seven-year industry forecast, we’ve opened new R&D search. Point the phone at a shoe in a store window, and centers, but we’ve closed a handful of others, all in the in a second or two you can read about it on your screen. name of better aligning our actions with our ambitions. Or take a picture of a sign in one language and get a trans- This, of course, has been a painful process. But Nokia lation of it in another. All we’re trying to do is orchestrate seems to have refi ned the technique of bringing the rel- a revolution in the mobile phone industry. evant facts to bear on a discussion, making a decision, – Andrew O’Connell and then executing like crazy. Reprint F0806E

28 Harvard Business Review | June 2008 | hbr.org The Dance, by Alan Kenny

Ireland. One of Europe’s most successful economies. And also one of its happiest.

The Irish mind. Creative. Imaginative. And flexible. Agile, with a unique capacity to initiate, and innovate, without being directed. The Irish like thinking on their feet. Adapting and improving. Generating new knowledge and new ideas.

Naturally, this innate flexibility pervades the ecosystem. Nowhere else will you find such close and frequently informal links between enterprise, education and research facilities and a pro-business government. Connected by a dynamic information infrastructure.

These competitive advantages make Ireland, according to the 2008 Index for Economic Freedom*, one of the world’s most business friendly environments, especially for investment. And now, according to a Eurobarometer Report**, it’s also one of the happiest nations, enjoying very high levels of satisfaction with the quality of life.

The productive and happy Irish mind can be the pathway to profit and success for your business. To learn more, contact the Irish Government’s inward investment agency, IDA Ireland, 345 Park Avenue, New York on 212 750 4300, email [email protected] or log on to www.idaireland.com

* The Heritage Foundation & The Wall Street Journal, 2008 Index of Economic Freedom. ** Eurostat, Special Eurobarometer Report 273, Wave 66.3 European Social Realities, February 2007. prevent con artists from inserting them- many fi rms that have been paying deeply Do research. Some of the biggest selves between you and your custom- discounted rates. For those companies, tax breaks have been reserved for multi- ers is to make sure that customers can the law will have the effect of increasing nationals engaged in qualifi ed R&D easily tell the difference between dealing taxes by up to 25% over the next fi ve activities in China. with your business and dealing with a years. In addition, China will place multi- Repave, reuse, recycle. A foreign fake one. A good way to do that is to nationals under greater scrutiny as company with a qualifying infrastructure, exchange hard-to-counterfeit information it seeks to ensure that it’s getting its environmental, or recycling business in that only you and the customer know share of the wealth generated by the China may be eligible for a three-year of. You could provide a review of the country’s economic boom. tax exemption and a subsequent three- customer’s last purchase or a reference The new tax regulations also form a year rate reduction, according to offi cial to something that the customer has map, of sorts, showing how the Chinese guidelines. Even companies without been looking at on your site, or the cus- authorities plan to transform the country: such businesses may be able to benefi t tomer could share a photo only he could China wants to improve its transport from tax credits if their Chinese opera- have taken, to adorn every page he looks infrastructure. It is looking for more high- tions set up initiatives that protect the at on your site. Second, make frontline tech jobs for its engineers. It wants to environment, save water, or produce employees a critical part of security, green its industry. And it hopes to dispel safety equipment. giving them both tools and incentives its image as a manufacturer of cheap Sow, reap, go fi shing. Companies to raise red fl ags, because they, and not products and become a provider of high- engaged in agricultural, forestry, animal the members of the executive team, quality, high-margin goods. husbandry, and fi shery activities may are going to be the targets of business The country is providing tax incen- qualify for lower rates. cons. Finally, collaborate with other busi- tives to make all this happen. Of course, Go high-tech. Lower rates also may nesses. This will require sharing informa- the authorities may tweak the rules for be available for new high-technology tion and solutions, rather than trying to months to come – there’s no telling what fi rms in China that own intellectual prop- solve the problem quietly. exact shape the regulations will eventu- erty and employ knowledge workers. Clay Shirky ([email protected]) is the author ally take. It’s crucial for fi rms wishing to Companies should also take the fol- of Here Comes Everybody (Penguin Press, benefi t by assisting in the transition lowing steps to limit their tax exposure 2008), a book about social media. He to be sure they’re relying on the most and avoid the risk of triggering a Chi- teaches in New York University’s graduate up-to-date offi cial guidelines. nese audit: Interactive Telecommunications Program. That said, here are a few general Mind the ex-pat head count. things multinationals can do to take The presence of a multinational’s non- Reprint F0806D advantage of the tax breaks. Some may Chinese employees in the country for require a willingness to diversify or alter more than 180 days a year could prompt operations in China. the authorities to classify the MNC – not TAX INCENTIVES Tapping Hidden Opportunities in China’s New Tax Law by Jeff Olin and Gary James A new Chinese law has erased many of the previous tax benefi ts for foreign fi rms, but it also offers abundant opportunities for multinationals that are willing to help transform the country into a more sophisticated – and greener – producer of high-end goods. For many foreign fi rms, the law, which took effect this year, will inevitably increase the cost of doing business in China. It sets a single corporate income tax rate of 25% for all foreign and domestic companies – low by other countries’ standards (the U.S. rate is 35%, for example) but a shock to the system for the

30 Harvard Business Review | June 2008 | hbr.org just its local subsidiary – as a permanent Chinese establishment and assert that The Best Advice I Ever Got the parent company should be subject to Stephen A. Schwarzman higher taxes. Companies should there- Chairman and Chief Executive Offi cer, the Blackstone Group fore schedule more-effi cient trips, make grew up in a small town outside Philadelphia and went to the local high liberal use of video conferencing, limit school, where I ran track all four years. Our team practiced outdoors, and in employees’ in-China vacation time, and I the winter, in the bitter cold, the experience was pretty miserable. The school monitor non-Chinese employees’ time at was set on a hill, and as we ran around the parking lot the wind would come whip- the summer Olympics in Beijing. ping around the building and hit us. We had to watch our steps carefully so as not Document, document, document. Certain transfer payments from a Chi- to slip and fall on the ice. While we were doing our laps, the coach – a 50-year-old nese subsidiary to its foreign parent – named Jack Armstrong – would stand against one wall protected from the wind, interest, rent, service fees, some kinds bundled up in a huge coat and wool hat and gloves, clapping and smiling cheer- of royalties – will continue to be deduct- fully. Every time the pack shuffl ed past, he’d shout, “Remember – you’ve got to ible. But all such payments, along with make your deposits before you can make a withdrawal!” related employee activities and the trans- Now, this was a public school with no special facilities, and the team was made fer of company goods and intellectual up of average athletes with differing levels of intelligence and motivation. But we property into China, must be properly never lost one single meet. And because of that success, and maybe because of the documented – in Chinese. way in which the advice itself was delivered – I remember it when people yell at The new tax law provides an opportu- me – Coach Armstrong’s words resonated. I’ve thought of them a million times nity for multinationals to fold their global throughout my career in fi nance, and they’ve guided this fi rm, too. tax strategies into their global business Coach Armstrong came to mind in one of my fi rst weeks on Wall Street, 35 years strategies – or, if they have already done so, to reimagine that integration. A well- ago. I’d stayed up all night building a massive spreadsheet to be ready for a morn- thought-out integration of strategies will ing meeting. These were the days before Excel, and it was a huge feat for someone help fi rms make the most out of China’s as bad at statistical stuff as I was to do this all by hand; I was pretty proud of my- coming transformation. self. The partner on the deal, however, took one look at my work, spotted a tiny Jeff Olin ([email protected]), based in error, and went ballistic. As I sat there while he yelled at me, I realized I was get- Chicago, is a national managing partner in ting the MBA version of Coach Armstrong’s words. Making an effort and meet- the International Tax Services practice of ing the deadline simply weren’t enough. To put it in Coach Armstrong’s terms, Grant Thornton, the U.S. member fi rm it wasn’t suffi cient to make some deposits; I had to be certain that the deposits of Grant Thornton International. Gary would cover any withdrawal 100% before we made a decision or did a deal. If I James ([email protected]) is a hadn’t done all the up-front work and made completely sure that my analysis was partner in the International Tax Services correct, I shouldn’t have put anything forth. Inaccurate analysis produces faulty practice of the Hong Kong member fi rm insights and bad decisions – which lead to losing a tremendous amount of money. of Grant Thornton International. Today, whenever I’m under pressure to make a decision on a transaction but Reprint F0806F I don’t know what the right one is, I try desperately to postpone it. I’ll insist on more information – on doing extra laps around the intellectual parking lot – before committing. I take the same approach with people, too. For example, when CEO COMPENSATION we were looking for a manager to start up our long-short hedge fund, we inter- The Fatal Flaw in viewed for a year and a half. The timing was ripe for that asset class, and if you Pay for Performance weren’t doing something with it, you were losing out. It took a huge amount of time and effort for Blackstone, but we found a young money manager we were by Ben W. Heineman, Jr. comfortable with, and he’s become an enormous asset. Many corporate boards, responding to Every year I speak to our new associates and give them this advice, although in shareholder and public pressure, are my own words. This isn’t like school, I tell them, where you want to get your hand designing pay-for-performance plans to in the air and give an answer quickly. The only grade here is 100. Deadlines are hold CEOs accountable. But there is often a crucial fl aw in such schemes: They important, but at Blackstone you can always get help in meeting them. As a fi rm, don’t pay for performance with integrity. we can always fi gure out how to do another lap around the parking lot. Because The omission – evident from compen- what’s true when running track is true when doing deals: The person who’s the sation committee reports in top compa- most ready for game day will be the one who wins. nies’ proxy statements – is striking. – Interviewed by Daisy Wademan Dowling Corporations, after all, face unceasing Reprint F0806H continued on page 34

hbr.org | June 2008 | Harvard Business Review 31

pressures to make the numbers by Q Has integrity permeated every outside HR experts periodically conduct bending the rules, and an integrity miss aspect of the corporate culture? One 360-degree assessments of the CEO can have catastrophic consequences, vital tool for assessing that is an annual, and top executives that explore such including indictments, fi nes, dismissals, anonymous employee survey across all questions. and collapse of market capitalization. businesses and regions that asks, “Is Q Has the CEO met annual perfor- Furthermore, performance with integrity integrity compromised by business mance-with-integrity objectives set by creates the fundamental trust – inside pressures?” and “Are the leaders’ verbal the board? One example might be effec- and outside the company – on which commitments to integrity refl ected tively handling a major miss or crisis – an corporate power is based. in action?” The board can also have environmental accident, a bribery case, A board should explicitly base a de- or a fi nancial restatement – and remedy- fi ned portion of the CEO’s cash coming the problem systematically after a pensation and equity grants on his or The Practice of Performance candid analysis of its causes. Another her success in handling the foundational with Integrity objective might be hiring leaders in task of fusing high performance with emerging markets such as China, Russia, high integrity at all levels of the company. and India who are skilled in integrating Why don’t boards do that? They may be Here’s a sample list of questions (greatly performance and integrity. shortened because of space limits) that uncertain about the meaning of integrity Q How do business divisions rate com- will help boards assess a CEO’s perfor- and how to assess its integration into paratively? The board should look at how mance-with-integrity practices. They fi nancial performance. integrity practices differ among divisions can be answered using tools like process Step one, then, in designing pay for reviews and substantive audits and ex- and how the CEO deals with laggards. performance with integrity is using ternal outcomes (such as environmental It should also look at how the units rank the following defi nition: Integrity is a violations or customer complaints). against external peers. (This may require uniform corporate culture with three data from news or government reports elements – robust adherence to formal Leadership or a comparative audit by, say, a former Does the CEO... rules; adoption of ethical standards that regulatory offi cial.) are in the company’s long-term enlight- R communicate to the organization that The board’s standards for assess- ened self-interest; and employee com- integrity must never be compromised ing pay for performance with integrity to make the numbers? mitment to honesty, candor, fairness, should also defi ne a new set of “specs” trustworthiness, and reliability. Step two R discipline generals, not just troops, in the company’s CEO succession is for the board to assess whether the for integrity lapses? planning. In evaluating candidates, the CEO has infused high performance with R address diffi cult integrity issues board should ask: Do they possess the high integrity. The board can do that by regularly at staff meetings? knowledge, experience, and skills to answering the following questions, using drive a robust performance-with-integrity Business processes hard analytics as well as the board mem- culture deep into the company’s global Does the CEO... bers’ own judgment. operations? The same specs should be R build a strong integrity infrastructure – Q Has the CEO established company- used to evaluate the compensation of processes for preventing, detecting, wide performance-with-integrity prin- and responding to lapses in all busi- senior executives and set goals for lead- ciples for which the fi rm’s leaders are nesses and regions – and put A players ership development programs. That’s the responsible and accountable? Examples in charge of it? best way to ensure that, over the long of these include demonstrating commit- term, the company’s top ranks are fi lled R assess integrity needs realistically and ted and consistent integrity leadership; provide adequate funding for those with managers who live by the principles managing performance with integrity as activities? and practices of performance with a business process; using early-warning integrity – and thus help the company R respond promptly to early warnings systems to stay ahead of global trends; avoid debilitating risks and secure the on trends in legal, ethical, and country providing timely, risk-assessed training; risks? trust that is vital to doing business. and giving employees a voice. Ben W. Heineman, Jr. (ben_heineman@ Q Have the CEO and top managers Giving employees a voice harvard.edu), a former senior vice president implemented these principles through Does the CEO... and general counsel of General Electric, is robust practices? If leaders don’t invest R encourage reporting of fi nancial, legal, a senior fellow at Harvard Law School and time, effort, and resources in embed- and ethical concerns through a system Harvard’s Kennedy School of Government ding key integrity practices in business that prevents retaliation? in Cambridge, Massachusetts. He is the processes, “tone at the top” is just R ensure that concerns are investigated author of High Performance with High window dressing. (For examples, see the fairly and promptly, that trends are Integrity (Harvard Business Press, 2008). box “The Practice of Performance with tracked, and that remedial action is Integrity.”) taken if needed? Reprint F0806G

34 Harvard Business Review | June 2008 | hbr.org

GLASS CEILING required that taxes the brain, however, so another source of high-stress unpredict- much as the unpredictable need for care. ability into their lives. One Reason Women When any decision maker’s brain If the same call came a few years later, function is overburdened, the result is many women would seize the oppor- Don’t Make It to stress, and nothing taxes the brain more tunity. The very woman who could not the C-Suite than unpredictability. We know this from fi nd the capacity to green-light her own numerous scientifi c studies. Moreover, promotion in her forties can be, in her by Louann Brizendine, MD the typical woman in her forties deals fi fties, ready to take on the world. How As a neuropsychiatrist who studies the with at least two sources of heightened unfortunate if, by then, top management differences between male and female unpredictability not shared by her male has shifted its focus to the next cohort brains, I’m often asked whether such colleagues. The fi rst is preadolescent and her candidacy is off the table. differences play a role in professional and teenage children, who no longer re- The model of the brilliant career we’ve achievement – and particularly, in men’s quire basic care and nurturing. Effective all internalized was established over dominance of the highest ranks of many fi elds. Male and female brains are more alike than not, and business’s famous glass ceiling has nothing to do with raw intellect. Yet the distinct demands that are put on men’s and women’s brains at key career phases may help explain the gender inequality in top management. Many women are sidelined, ultimately, by a timing issue. There’s a certain age, long established by large organizations, at which professionals must decide to make their play for the big promotion – the one that will put them in line for the C-suite – and while it’s a good time for men, it’s not a good time for women. That go-for-it moment typically comes in one’s forties, when managers have gained the knowledge and perspective needed to take on real stewardship of a business. But at that phase of life, women with children already have a lot parenting is vital at their ages but can’t decades by men – which isn’t to imply on their plates. Not only are they usually be achieved on a schedule; mothers any prejudicial intent. It’s merely a pat- expected to handle the lion’s share of must be on the lookout for moments of tern that worked for them. Organizations, responsibility on the home front (even need and quick to respond when they however, have it within their power to when both members of a couple hold full- arise. Second, women in their forties are create new patterns that work for both time jobs), but their own brain chemistry also beginning to experience the normal sexes. If a business is serious about makes it hard for them to do otherwise. hormonal changes leading up to meno- bringing more women into top manage- For reasons important to the survival pause. For some, this has unpredictable ment, here’s an idea: Open that win- of the species, women in childbearing effects on sense of well-being. dow of promotability wider. When you years undergo changes that intensify People coping with heightened levels dangle the brass ring of advancement their focus on the viability of offspring. of unpredictability rarely go looking for and someone qualifi ed fails to grab for it, It’s a passing phenomenon, but ill-timed even more ways to mix it up. To expect don’t write that person off for good – for those with career ambitions. the typical woman to make her play for especially if the candidate is a woman. Women tend to pride themselves a newly demanding role at this particular on their multitasking capabilities – and life stage is unrealistic. Yet this expecta- Louann Brizendine, MD (louann.brizendine rightly so – but as their children grow tion is implicit in most organizations. Top @ucsf.edu), is the director of the Women’s past grade-school years the demands on management starts looking seriously at Mood and Hormone Clinic at the University women’s brains reach their maximum a cohort as it enters its forties. But the of California, San Francisco, and the author levels. This may seem counterintuitive, high-potential women may be opting of The Female Brain (Broadway Books, given that younger children are less out – temporarily, they hope – because 2006) and The Male Brain (Broadway Books, independent. It’s not the quantity of care the timing is wrong to introduce yet forthcoming in 2009). Reprint F0806J

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These tools are educational tools and not intended to serve as the primary or sole basis for your investment or tax-planning decisions. 2 As of 3/31/08, 86 out of 159 funds rated 4 or 5 stars by Morningstar. 3 Fund expenses, brokerage commissions, and SIMPLE IRA fees still apply. Depending on your situation, low-balance, short-term trading, and account closing fees may apply. 4 System availability and response time may be subject to market conditions. Fidelity Brokerage Services, Member NYSE, SIPC 484874.6 TheReviews_aux Making of text Second Life Wagner James Au Reviews (Collins, 2008) A good anthropologist keeps one foot Megacommunities fi rmly planted in the society he is studying and the other in his own. If he’s simply a How Leaders of Government, Business and Non-Profi ts detached observer or – just as bad – if he Can Tackle Today’s Global Challenges Together goes native, he won’t be able to straddle Mark Gerencser, Reginald Van Lee, Fernando Napolitano, and Christopher Kelly the two cultures in a way that leads to true (Palgrave Macmillan, 2008) understanding. Wagner James Au carefully strikes the right balance in his nuanced ac- In the aftermath of Hurricane Andrew in 1992, state offi cials and others in Florida realized they lacked an effective structure for responding to the count of the evolution of the online world extraordinary devastation wrought by Andrew’s 160-mile-an-hour winds. The Second Life. Au, who was fi rst a reporter interrelated problems were of such a scale, and involved the interests of so hired by Second Life developer Linden Lab many stakeholders from every part of society, that and is now an independent blogger, has al- only a vast, combined effort by organizations from ways combined an empathetic view of the every sector could have resolved them. Based on its place and its “residents” with a journalist’s analysis of the fl awed Hurricane Andrew response, dispassionate (if not always combatively Florida created the kind of framework for which the critical) voice. This book, which draws book Megacommunities is named – a “community of on the vast trove of fascinating tales and institutions and organizations” representing govern- trends he has chronicled over the years, ment, businesses, and nonprofi ts. continues in that vein, deftly addressing The authors – a quartet of Booz Allen Hamilton subjects ranging from virtual sex to the Sec- consultants – argue that a host of heavyweight global problems (involving, among others, the environ- ond Life marketing initiatives of real-world ment, energy policy, and threats to human health and companies. security) can be solved only by harnessing the power, – Paul Hemp creativity, and insight of the three sectors working in concert. These collaborations, they write, require structures “in which no leader The Trillion Dollar Meltdown: Easy Money, High Rollers, and or institution is necessarily in charge, and yet a healthy, prosperous, effectual the Great Credit Crash environment exists in which issues are addressed and complexity is reduced.” Charles R. Morris How to do that is the crux of this book. The authors draw on interviews with (PublicAffairs, 2008) CEOs, government offi cials past and present (Bill Clinton is among the most co- Why did the credit markets tighten so gent), and heads of nonprofi t agencies to give credence to their view that only drastically last year, in the absence of by putting aside the individual institutions’ unilateral agendas and identifying major shocks? Morris, a former banker, areas of “overlapping vital interest” can a megacommunity effectively coalesce sees the crunch as the culmination of a around a well-defi ned mission and produce worthy solutions. quarter century of deregulation and inno- Unfortunately, the idea is new enough that few examples of such collabora- vation that initially greatly benefi ted the tion exist; most are in their early stages. Moreover, because of the massive scale of the problems they address, megacommunities are inherently open-ended economy but eventually self-destructed in undertakings rather than time-bounded projects. Hardly a megacommunity an orgy of ideologically driven behavior. exists that has fully realized its mission. This dearth of practical experience oc- He sees unnecessarily cheap money from casionally leaves the reader awash in too much theory and too little street cred. the Federal Reserve as the main proximate Still, the authors manage to convey useful guidance, sometimes by depicting cause of the excessive risk taking. With the instructive failures. In one such case, an international conference on avian infl u- United States now in a slowdown, he adds, enza recommended the aggressive culling of infected birds. But since confer- this Fed policy, combined with the global ence organizers excluded groups they perceived as opposed to their interests (a shift away from the dollar, means the healthy megacommunity would strive to include such viewpoints), a global bird government has little leeway to stimulate conservation group was not present to share solid scientifi c evidence that cull- growth without provoking infl ation. The ing infected birds actually accelerates the virus’s spread. Oops. only good news is that Morris’s cyclical The book doesn’t soft-pedal the diffi culty of getting parties with strongly held view of the political economy suggests beliefs and agendas to subordinate them to pursue overlapping vital interests. But it is in the main an optimistic handbook for creating promising frameworks America will return to a sustained period for change that balance ideals with realities, the perfect with the good. of prosperity in the next decade. –Lew McCreary – John T. Landry

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BY EDWARD E. LAWLER III

COMMENTARY BY ANNA PRINGLE, F. LEIGH BRANHAM, JIM CORNELIUS, AND JEAN MARTIN

Why Are We Losing All Our Good People? Sambian Partners has prided itself on being a great place to work, but now talented employees are leaving. What’s going on?

MARY DONILLO, the head of hu- fer I couldn’t refuse. I mean, a direct- man resources at Sambian Partners, admit partnership to J&N? It really motioned Tom Forsythe, Sambian’s is an opportunity that doesn’t come assistant director of commercial along often.” design, to a comfortable chair in Mary couldn’t help blinking at the her offi ce. It was late on a Thurs- mention of J&N, Sambian’s much day afternoon, and the Chicago sky larger competitor. In the past year, looked like slate. The darkness out- it had seemed to step up its raids on side made the overhead fl uorescent Sambian’s talent pool, luring some lights in her offi ce seem even more very capable people over to “the dark glaring than usual. side,” as Sambian’s CEO, Helen Gas- “Hey, Tom,” she said, adding an ex- barian, liked to call it. “I’m glad for tra bit of warmth to her voice. “I was you,” Mary managed to say. “Although so sorry to hear that you’ve decided I wish it were anywhere else.” to leave. I know your mind is made “I know.” up – everyone’s already tried to talk Mary studied Tom’s face for a mo- you out of it. But I do hope you can ment, wondering how to press for help us understand why.” She paused and offered a rueful more. No unplanned departure was good news, but this one smile. “It’s a huge loss, but maybe we can learn something was really setting off alarm bells. Tom was at the top of his from it.” game; at 35, he’d been with Sambian nearly eight years. The Tom sat stiffl y in his chair, one side of his face partially company had been like a family to him, even after he got covered by a few strands of dark hair that had escaped his married and had children. He’d won a slew of design awards, ponytail. The lights brought out the bags under his eyes, and and he was on the CEO’s short list of high performers. Mary his fi ve o’clock shadow looked more like a seven. With a new- could see the attraction of a partnership position. But was born at home, he probably hadn’t been getting enough sleep, that the whole story? At Sambian, Tom enjoyed the same kind Mary thought. “Well, I think you know that I wasn’t out looking,” Tom said. HBR’s cases, which are fi ctional, present common managerial

Daniel Vasconcellos Daniel “Their headhunter came to me, and, what can I say? It’s an of- dilemmas and offer concrete solutions from experts.

hbr.org | June 2008 | Harvard Business Review 41 HBR Case Study Why Are We Losing All Our Good People?

hbr.org of authority he would have at J&N, if and it showed plainly on Francisco, New York, and Offer your advice not more. He chose his projects, set his her face. on this case at London. own priorities. Did he know how hard it “Working on the memo?” LosingGood Helen looked hard at would be to earn that kind of autonomy Mary asked gently. People.hbr.org. Mary. She wished she could at a new fi rm, partner or no? Helen nodded. “Not much put the blame for losing Tom “I’m sure it’s no news to you that you fun. I was just going to send it to you so on her – or on someone, anyone – but were coming up for promotion,” she ven- you could look it over. How’d the exit she couldn’t. “You know, ever since Dad tured. “If not this year, then maybe the interview go?” founded this company, we’ve tried to next. Would it have made a difference Mary confessed that Tom hadn’t re- make it a great place to work,” she said, if the raises had been bigger? For that vealed much. “He didn’t want to get spe- sighing. “And I think we treat people matter, would it make a difference now? cifi c about why the grass is greener there really well. Where are we going wrong?” I mean, there’s no shame in reconsid- or tell me about anything that made “I don’t know, honestly,” Mary replied ering – you really are highly respected him unhappy here.” carefully, hearing the bewilderment in here, you know.” When Helen’s father, Peter Gasbarian, Helen’s voice. “But I want to be careful Tom looked at his hands. “It’s nice to had founded Sambian, in 1975, it was about not reading too much into this. hear that, Mary,” he said. “But of course supposed to be the antithesis of a be- Obviously, we need to get to the bottom I’ve already accepted. And anyway, it’s hemoth like J&N. His idea was to build of it, but it might turn out that it’s not a time to move on. I have to challenge my- a top-notch architecture and engineer- trend, just a nasty coincidence. People self, keep it fresh.” ing fi rm by making appealing offers to leave jobs for all kinds of reasons.” “But you’ve always managed to keep it fresher than just about anyone. Are the projects themselves less challenging There was nothing Helen hated more these days?” She avoided the obvious question: Have you been unhappy? than losing staff to her fi rm’s much Tom tilted his head and looked directly into Mary’s gray eyes, as if read- larger competitor. ing her thoughts. “I’ve been very happy here,” he said. “The people are great. I’m not running away from anything. It’s young talent. Rather than spend years Helen pondered the point. “Well, just that a fantastic opportunity came as anonymous “leverage” to fat-cat part- that’s true enough: Pat Dougherty along at a good time.” ners, young people at Sambian could moved to Ireland ‘for family reasons.’ Mary kept probing, asking all the start making their mark immediately Irena Milkovic decided to go solo – I’m standard questions, but Tom demurred, on interesting projects. It was no coinci- still trying to fi gure that one out. And merely repeating what he’d already dence that he had stopped mulling this now Tom, to a partnership at a big tra- told her. By the time the interview had idea over and turned it into reality after ditional fi rm.” She shook her head. “But ended and she’d seen him to the door, his only child announced she was apply- the fact remains that it is a trend. I want she felt defl ated. ing to architecture school. to know what we need to do to keep After leaving her offi ce, Tom headed It was also no surprise when Helen the rest!” into the back stairwell, pulled out his took the reins following her father’s “I have a few theories, Helen,” Mary cell phone, and speed-dialed his wife. death, in 1997. By then an award-winning said, as soothingly as possible. “But to “Alyson? Hey. Yeah. You’ll be proud architect in her own right, she made it see whether there’s anything to them, of me – I kept my mouth shut. I mean, her mission to increase collaboration I’d like to move this year’s employee sur- you’re right about not burning bridges, among the fi rm’s cutting-edge designers, vey up on the schedule. I think we need but who cares at this point? This place engineers, and client account managers. to get some new data in front of us.” can be as screwed up as it wants. It’s not As a result, innovation had fl ourished Helen turned back to the computer. my problem anymore.” in general – and, in particular, the fi rm “Yes, do the survey,” she said. “Do it as had been in the vanguard of the “green soon as you possibly can.” An Unhappy Memo building” movement. By the time other, Early the next morning, Mary tapped larger firms were just starting their The Word on the Street on Helen Gasbarian’s door. She found green practice groups, Sambian had al- Designer Hal Pope and engineer Savan- Helen staring at her computer screen, ready designed dozens of LEED-certifi ed nah Dorsey were two fl oors down in frowning. There was nothing Helen buildings. Riding the growth wave, the Sambian’s large kitchen, heating up their hated more than losing staff to J&N, company had opened offi ces in San lunches in the microwaves. They were

42 Harvard Business Review | June 2008 | hbr.org hbr.org | June 2008 | Harvard Business Review 43 HBR Case Study Why Are We Losing All Our Good People?

both subdued, having read the memo be as simple as that. Two kids now. He’ll rumor about Adrienne, Mary felt the bearing the news of Tom’s departure. be worrying about college funds.” blood start to drain from her face. “Tom sort of checked out when we Savannah jumped back into the con- “It’ll be a real problem if we lose Adri- lost that Marko bid,” Savannah ventured. versation. “True, but you’d think he’d enne,” Bob said. “She’s in the thick of a “He really wanted to see that design get also be worried about quality of life. I huge project, and the client loves her.” built. It was gorgeous, with all that light guess Alyson must have decided not to He gave Mary a hard look as they passed and air. And anyone could see that the go back to work. They’ll have him on the Jessie’s desk. “What’s going on here, any- price was right.” road constantly.” way? It’s like our talent is being sucked Hal agreed. “The design couldn’t have out by vampires.” been better.” He lowered his voice a little. This Is Not a Drill Hearing them enter, Helen turned “If only Paul Bonney had been able to A month later, Helen was scanning a away from the window. “OK, Bob,” she point that out.” staff utilization report when the phone said. “What exactly is this rumor?” Paul Bonney was the head of archi- rang. The phone’s display showed that “People are picking up a vibe that tecture sales. Savannah stared at Hal. the call was coming from Bob Wor- she might follow Tom to J&N,” Bob be- “You thought so, too,” she said. “His pitch tham, the vice president of engineering. gan, pulling the door shut. “The two of sounded so, well, uninspired.” Through the open door, Helen saw her them were kind of on a wavelength. It wouldn’t surprise me if he wanted to fi nd a home for her there.” “We really value you around here, and Helen shot a look at Mary. “No non- compete?” Presumably, Tom had signed I want you to be happy. I don’t want the standard contract preventing him from taking talent or clients with him to you to even think about leaving.” the competition. “Oh, sure,” Mary replied. “Tough to enforce, though,” she added, immediately Adrienne Perle, another colleague assistant, Jessie, move to pick it up at her wishing she hadn’t. from engineering, couldn’t help over- own desk. “Oh, I’ll fi nd a way,” Helen spat. “Even hearing as she reached past them for “I’ve got it, Jess,” she said, lifting the if I can’t win, I can make life tough some utensils. “He’s uninspired,” Adri- receiver. “Hi, Bob. What’s up?” for him.” enne said. “And he’s not the only one. “I might need your help on something. Mary and Bob exchanged glances. It’s really a pity when you have someone I’m afraid we’re at risk of losing Adri- Helen turned to Bob, on the offensive doing incredibly creative work, and the enne. It’s just a rumor so far, but I want now. “So you’re telling me we shouldn’t support structure isn’t there to let it see to jump on the situation.” be surprised, but I’m also getting the the light of day. All the salespeople fo- Helen grimaced. “Adrienne? You’re sense that you haven’t done anything in cus on is cutting the deal. If you ask me, right – we don’t want to lose her. Why anticipation of this.” She couldn’t resist that’s why Tom is leaving. He’s a fi rst- don’t you come up now?” adding a swipe at Mary. “And why are class architect, but if he doesn’t have Hanging up, Helen called out to Jes- you waiting around for the satisfaction fi rst-class sales and marketing behind sie. “Can you see if Mary is free? If she survey results before taking any action?” him, he’s no one. He’s the tree falling in can make time right now, that would Mary opened her mouth as if to object, the forest. I’ve tried telling people up- be great.” but Helen waved her hand impatiently. stairs that we’re veering off base. But She stood up, walked over to the win- “OK, look,” she said. “I’ll talk to her. Let nobody’s listening.” dow, and pressed her forehead against me see what I can do.” She walked to the Hal shook his head. “I don’t know, the cool glass. On the plaza below, a few door and opened it. guys. Tom had plenty of wins. More late lunchers clustered around a ven- “Jess, call Adrienne Perle and ask if work than he could handle. I just think dor’s stainless-steel cart. She closed her she’s available. I want to see her as soon he looked above him and realized he eyes. Another loss for Bob, she thought. as possible.” was going nowhere fast. No one on the Was he part of the problem? She shook executive team is even close to retiring, her head, refusing to pursue that line Oh, Won’t You Stay? and the org chart is top-heavy as it is. of thought. The best way to decrease Ten minutes later, Adrienne appeared Where’s the career path?” attrition surely couldn’t be to fi re loyal in Helen’s doorway. Her heavy-framed Adrienne pulled a sour face, indicat- employees. designer glasses made it a little diffi cult ing agreement. “I wonder how much In the hallway outside Helen’s offi ce, to read the expression on her face, but he’ll make as a partner at J&N? It could Bob ran into Mary. As he relayed the her body language signaled anxiety. It

44 Harvard Business Review | June 2008 | hbr.org wasn’t every day she was summoned to Helen had known that the sudden- amples of departments whose results di- the CEO’s offi ce. ness of her executive decision would not verged from the averages. And, as always, A few moments of small talk pro- sit well with Mary, but the intensity of the open-ended questions had yielded longed the awkwardness, but Helen Mary’s reaction surprised her. She had, food for thought. Commenting anony- got to the point as quickly as possible. after all, succeeded in keeping Adrienne mously on their survey forms, a few em- “Adrienne, I’ve heard an alarming ru- on board. “Desperate times call for des- ployees had complained of too much mor – that you might be considering perate measures,” Helen offered in her deadwood in the project manager ranks. a job elsewhere. I certainly hope this own defense. One staffer referred to “certain prima isn’t true.” “But that’s just it,” Mary cried. “It will donnas” who cared more about winning Adrienne looked down at the coffee look like an act of desperation to anyone awards than staying on budget. The ad- table and then around the room as if to who heard the rumor. And worse than ministrative staff was, for the most part, see who might have spilled the beans. that, it isn’t fair. If that job is available, neutral. Some resented the evening and “Rumors spread fast around here,” she there are other people who should get a weekend hours they spent when, as said fi nally. crack at it. It’s not right that they should one phrased it, “someone higher up the “I want you to tell me the truth – in to- effectively be penalized because they chain procrastinated.” The perks were tal confi dence, no repercussions,” Helen were the loyal ones. What kind of signal good. The perks were bad. The perks said pleadingly. She paused for effect. “Is does that send?” were skewed to the younger employees. Tom Forsythe talking to you?” “I’ll tell you what signal I think it The younger employees didn’t feel val- Adrienne’s eyes widened slightly, and sends. It tells people that we aren’t so ued enough. her answer seemed, to Helen, a little too constrained by HR procedures that we Helen listened for 20 minutes, saying quick. “Tom has nothing to do with this,” can’t make exceptions for fast-rising little but shaking her head frequently. she said. “I mean, it’s true that I talk to talent. That’s a positive message. And Then, when Mary was in the middle him. We’ve known each other for a long as for Adrienne, don’t worry about her. of reading a comment about the snack time – since I got here, fi ve years ago. Everyone loves her. She’ll step up to and beverage choices in the kitchen, she He’s probably the closest thing I’ve had the plate.” interrupted. to a mentor. And I guess I do feel a little Mary shook her head. “It’s not a ques- “Oh, that one was mine,” she joked. lost now that he’s gone.” tion of popularity or attitude. She’s miss- Mary played along. “I thought so. And “Well, my job is to make sure that you ing some of the competencies…” don’t worry, I’m on the case.” But she don’t feel lost. We really value you around “Well, aren’t we all!” Helen interrupted. knew the boss had heard enough for the here, and I want you to be happy. I don’t “Sometimes I think we focus too much moment. Closing the report cover, she want you to even think about leaving.” on the things that aren’t quite perfect. If leaned back in her chair. “I know it’s hard She paused. “Is it possible that Bob could Adrienne were on the outside and sent to separate the signal from the noise play more of that mentoring role?” us her résumé, we’d say she was perfect here, but at least it gives me some more With an uncomfortable shrug, Adri- for this job. Tell me that’s not true.” ideas about what to probe for when I’m enne began formulating a careful re- talking to people one-on-one.” sponse. “Well, it’s not so much, um…” The Voice of the People “And that might be enough,” Helen Her voice trailed away. A few weeks after the tense encounters said, “if only they would give us straight Helen let her off the hook. “Well, let’s over Adrienne, Mary tapped again at answers.” fi gure out how we can fi ll that void.” It Helen’s door. was clear that Adrienne wasn’t being “Survey results time,” Mary called How can Sambian discover what’s totally forthcoming but impossible to out in a singsong voice, glad that she really driving people out the door? know how much she was withholding. and Helen were back on a happy foot- Four commentators offer expert advice Of course, she would know better than ing. She sat down across the desk from beginning on the next page. to say that Tom was recruiting her, even Helen and handed over a copy of a if he was. Recalling Bob’s note of desper- chart-saturated report. “I’ll give you Edward E. Lawler III (elawler@marshall. ation earlier, Helen made a decision. “In the big picture fi rst. Overall, people at usc.edu) is the Distinguished Professor fact, maybe you would let me play a little Sambian are quite satisfi ed with just of Business at the University of Southern of that role myself. I’m promoting you.” about every aspect of their employment California’s Marshall School of Busi- experience.” ness and the founder and director of the Which Is Worse? Helen groaned. university’s Center for Effective Organiza- “Helen, you can’t do that! Adrienne’s “I know, I know,” Mary continued, “but tions. His latest book is Talent: Making only a level-six employee – she’ll drown once you get into the details, there are People Your Competitive Advantage in that position.” some nuances.” She offered a few ex- (Jossey-Bass, 2008).

hbr.org | June 2008 | Harvard Business Review 45 HBR Case Commentary How Can Sambian Discover What’s Really Driving People Out the Door?

Mary is not doing her most important job, which is to be the custodian of talent at Sambian.

HELEN GASBARIAN has had a wake-up call. it, she writes about topics that employees To keep precious talent on board, she must have raised, often during her listening tours, grab the helm. This is especially urgent be- and then she asks for opinions, which people cause Mary Donillo is not giving Helen the can offer anonymously. Recently, the blog Anna Pringle (anna. help she needs. revealed that many employees had a strong [email protected]) is Indeed, if I were Helen, I’d be taking a hard, interest in international careers but were frus- the head of international cold look at Mary. In her exit interview with trated because it was so diffi cult to fi nd out people and organization Tom Forsythe, Mary asks poor questions, of- about opportunities. As a result, we’re now capability for Microsoft. fers only stock responses, and gives up too posting listings of international jobs. She is based in Dublin. soon. Mary is not doing her most important Sambian should also establish an open-door job, which is to be the custodian of talent policy so that employees know that they can at Sambian. She should have known Tom talk to someone above their supervisors if they was at risk. If she had established an early- have a complaint. Helen must personally guar- warning system, Tom might not have quit. If antee that it is safe to do this and that feedback his departure was not preventable, she should will be taken seriously. Making this policy work have been looking out for the people around requires robust and clear HR processes. him, such as Adrienne Perle. When Tom left, Additionally, Helen should assure employ- Mary should have thoroughly rerecruited Adri- ees that she knows what’s important to them enne. At the very least, Helen should tell Mary and that Sambian’s value proposition for em- to pull up her socks and start providing the ployees is clear and differentiated from the kind of information and advice needed to keep competition’s. At Microsoft, we try to tailor Sambian’s talent intact. our proposition to individuals’ needs. Parents Even if Mary were more effective, Helen like Tom, who have young children at home, should be out there listening to people. She don’t have the same needs as younger, sin- cannot delegate that task to anyone inside or gle employees. They may value fl exible hours outside the fi rm. In organizations like Sam- above, say, access to a fi tness club. Sambian bian, where creativity, innovation, and intellec- should also try to engage people intellectually, tual capital equal competitive advantage, the emotionally, and even through their physical most effective leaders devote at least 40% of environment, so that they can enjoy doing their time to people – coaching and mentoring their best work there. other leaders, rerecruiting the top talent. To Finally, it’s important for Sambian to make this end, Helen and Mary – or Mary’s replace- leaders accountable for attracting and retain- ment – should consider conducting “listening ing key talent. This starts at the top. Helen tours.” These would involve visiting every should make it clear that she personally holds department, gathering direct feedback from herself and her direct reports to a high stan- supervisors and staff, and taking the organi- dard in this regard and will, over time, remove zation’s pulse. Helen should hold small, open those who are not effective. Sambian’s per- discussions with key employees in the form formance management systems should be of breakfast or coffee meetings. These should revamped to focus managers on both busi- be at least a weekly feature on her calendar. ness results and people management goals. At Microsoft, one effective listening tool By doing these things, Sambian will be able

is the HR vice president’s weekly blog. In to keep employees from drifting. Wendy Wray

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SADLY, I’VE seen Helen’s panicked reaction grumbles about a misalignment between the too often when good people start to leave a designers and the salespeople. The discon- company. After the second or third resigna- nect between the fi rm’s long-standing focus tion, the CEO acts impulsively, just as Helen on innovative design and its concern with deal did with Adrienne Perle. She wants to stop cutting can lead to disillusionment for proud the bleeding so desperately that she’s trying professionals like Tom. to do so before she even knows why it’s hap- To get to the root of what is happening, pening. Mary, the cooler head, is absolutely Helen needs to provide a forum where em- right to try to put the brakes on Adrienne’s ployees can speak openly about their discon- on-the-spot promotion. Helen needs to take tent without fear of repercussions. For ex- a deep breath, pull back, and move directly ample, she might consider calling employees F. Leigh Branham (LB@ to expose the causes of the exodus, going far together into a GE-style “workout session,” keepingthepeople.com) is the beyond deciphering the clues in the fi rm’s su- where employees break into groups to discuss CEO of Keeping the People, a perfi cial, apparently self-conducted, survey. their concerns and appoint representatives to human resources consultancy In my analysis of 20,000 employee surveys make recommendations to the larger group. in Overland Park, Kansas. conducted by the Saratoga Institute, a human- One design fi rm I worked with suffered He is the author of The 7 capital-management fi rm in Silicon Valley, from a staffi ng fl ight similar to the one at Hidden Reasons Employees I discovered that in all sorts of companies Sambian. During a workout session, the Leave: How to Recognize and industries, there are several “triggering CEO – an engineer who was an introvert by the Subtle Signs and Act Be- events” that can impel employees to fl ee. nature – made himself vulnerable by taking fore It’s Too Late (Amacom, Sometimes, soon after being hired, an em- the stage and listening to every employee 2005). ployee realizes that there is a misalignment be- who had an idea. He took action based on tween her expectations and the actual work or what he had heard – including raising pay to

To discover what impels employees to ﬂ ee, Helen must go beyond deciphering clues in the ﬁ rm’s self-conducted survey.

the workplace, or she fi nds that the job doesn’t market levels and reassigning less effective fi t her. Other times, a boss offers insuffi cient sales staff. This kind of action went a long way coaching or feedback. Workers may feel that toward gaining the respect of his workforce. their career opportunities are limited or that Within fi ve months, the fi rm had won a key they are not valued, listened to, or well paid. contract and the bleeding had stopped. Employees may experience an imbalance Helen also needs to get some help for Mary, between work and life, or a loss of trust and who is not providing the honest information confi dence in senior leaders. Most employees Helen desperately needs to guide the fi rm. are reluctant to talk openly with management Hiring a third party to assist with surveys and about any of these so-called push factors. exit interviews would help, because employ- In Sambian’s case, several of these below- ees will tell a trusted outsider things they may the-radar issues are in play, as the conversa- not feel safe telling an insider like Mary. This tion among Hal Pope, Adrienne, and Savannah is clearly the case with Tom. In the absence Dorsey reveals. Tom feels devalued by Paul of an environment in which employees can Bonney, the head of architecture sales, and speak freely about what bugs them, even a so is lured away from Sambian by the promise once-great company like Sambian may be- of a partnership and a fresh challenge. Hal come little more than a revolving door.

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Helen needs to assure her most talented employees that she understands their concerns and desires.

HELEN MAY have inherited her architectural the future of the business rests with people talents – as well as the fi rm – from her father, in R&D. Having worked with R&D employees but she doesn’t seem to have his managerial in my previous positions, I understood their genes. As a CEO, Helen’s number one job is language, and that proved helpful at BMS Jim Cornelius (ceo@bms. to attract and retain great talent, but she’s just when I met with R&D staffers in the wake com) is the chairman and not doing that. of the fi rings to discuss science and technol- CEO of Bristol-Myers Squibb I can certainly understand the diffi culty of ogy issues. With our chief scientifi c offi cer, in New York City. the problem, having been in a talent-draining I still attend R&D meetings and discuss the situation myself. In 2006, Bristol-Myers Squibb, importance of the R&D function to the future where I was then an independent member of of the company. In addition, our scientists the board, spun into turmoil when the CEO know that I sit on the board’s science and and general counsel were summarily fi red fol- technology committee and that they have the lowing a botched patent fi ght. Having spent board’s full support. At Sambian, Helen can my previous life as a senior executive at both use the language of architecture to connect Guidant and Eli Lilly, I understood the business with her most talented employees and assure well enough and accepted the board’s request them that she understands their concerns and to step in as interim CEO of BMS. desires. Dealing with workforce turmoil was one of At the same time, I would encourage Helen, the toughest challenges I’d ever faced. Fol- with her leadership team, to hold a lot of face- lowing the fi rings, employees were in shock. to-face meetings with senior managers from Our stock price fell, and there were rumors all departments, including, as often as pos- that we were going to be acquired. Given the sible, the folks from San Francisco, New York, drop in employee morale and our proximity and London. Phone calls, e-mail, and telecon- to other large pharmaceutical fi rms in the ferences won’t cut it; she needs to read the New York area, competitors found it pretty senior managers’ body language and facial easy to lure people out the door. It looked as expressions. In these meetings, she and the if there might be a large exodus. Worst of all, team must defi ne what success means for nobody really knew me; I had to build trust Sambian and how they will achieve it. from ground zero. My job, not unlike Helen’s, Finally, Helen should start writing bimonthly was to reestablish stability – and fast. e-mails – “memos from the CEO” – in which If my experience can serve as a guide, I she actively solicits anonymous feedback, would suggest to Helen that she do several suggestions, ideas, and complaints from ev- things right away. First, she should simplify eryone in the company. At BMS, my memos the management structure so that she can generate hundreds of responses – a sure sign gain a direct understanding of the issues fac- of employee engagement. I read them all and ing each area of the fi rm. Second, she should respond to as many as possible. make sure that Sambian’s mission is crystal As a result of doing all these things at BMS, clear and that everyone in the fi rm under- we cut turnover to a level below the histori- stands it. Third, she should ensure that people cal average and have attracted some indus- are being compensated correctly. try stars, all within 15 months. If Helen does It’s also critical for Helen to spend much likewise, she may be able to turn Sambian more time with the key talent. At our fi rm, around.

50 Harvard Business Review | June 2008 | hbr.org SAMBIAN’S STORY is not unusual. People hold monthly employee-run “mission review begin leaving, and the blame game starts (“Is sessions,” in which workers discuss Sambi- it the manager? Is it HR?”). Senior managers an’s mission and its relevance to their work. react by increasing compensation, making Employees also stick around when they promotions, and introducing new projects and have everything they need – from tools and re- even new managers. But these are short-term sources to top-down managerial support – to fi xes. They might postpone a departure, but succeed in their jobs. Without a clear under- they are really no more than Band-Aids. standing that the fi rm is aligned behind them, Helen must understand that people don’t even the most talented workers can feel that just leave managers; they leave organizations. their work is futile. Sambian needs a cure for the organizational ills Finally, employees – especially young ones – that are making employees unhappy. In a four- are more likely to stay at a company whose Jean Martin (martinj@ year analysis of more than 100,000 employees culture and values they enjoy. Mary should executiveboard.com) is the around the world, the Corporate Leadership conduct regular “culture audits” to measure executive director of the Cor- Council found that although workers join com- employees’ connection to the company’s porate Leadership Council, a panies for rational motives (better compensa- work environment. These anonymous audits global membership of chief tion, benefi ts, and career opportunities), they consist of a brief set of questions aimed at human resources offi cers and stay and work hard for emotional ones. discovering cultural disconnects: “What are a division of the Corporate The most important contributor to em- the unwritten assumptions about the way Executive Board, headquar- ployees’ emotional commitment is a sense work gets done here?” “Do you believe hard tered in Washington, DC. of connection to the fi rm’s mission. Tom’s work will be rewarded?” “Do you feel that situation reveals the danger of Sambian’s fail- other employees are committed to your suc- ure to make this connection. When his pet cess and the organization’s success?” By project loses a bid, he’s disappointed because he feels a misalignment between the direction the fi rm is taking and his own aspirations. Sambian has failed to create a mission His boss probably failed to spot his growing unhappiness for two reasons: The fi rst is that and culture to which high performers Tom never said anything about it. Indeed, CLC data show that, on average, only 25% of de- feel connected and committed. parting employees express dissatisfaction before quitting. This means that by the time unhappy workers tell their managers what’s comparing the answers to such questions going on, it’s often too late to win them back. with employee demographic data, Sambian The second reason that Tom’s unhappiness may see trends. For instance, employees with went unnoticed may be that his performance fi ve or more years of tenure may feel discon- was so strong. In a CLC survey, however, nected from the fi rm’s culture. Such studies, nearly a third of high performers reported that followed by proper managerial attention, can what they want for their careers is not what reduce attrition rates by as much as 87%. their company wants for them. In the end, by making sure that Sambian To better pick up on the warning signs of an actively supports a mission and culture to emotional disconnect, Sambian needs fi rst to which employees feel committed, Helen can communicate a clearer mission and the con- see to it that her high performers – and her tribution individual employees will make to it. company – survive and thrive. Helen must also update the company’s mis- Reprint R0806A sion; words like “creative” and “green” may Reprint Case only R0806X no longer set the fi rm apart in the minds of Reprint Commentary only R0806Z talented employees like Tom. To get disen- To order, see page 143. chanted staffers back on board, Helen could

hbr.org | June 2008 | Harvard Business Review 51 Growt_ & P_oﬁt

The world’s most successful companies have this one ﬁgured out.

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BY VIKRAM AKULA

The author, center, in India.

Business Basics at the Base of the Pyramid Why should business among the very poor be different than it is anywhere else? Listen to customers, standardize processes, and don’t be afraid to make a proﬁ t.

IT’S NOT EVERY day that a fellow who runs a The fatwa, handed down by local clerics, said it was a sin to $250 million fi nancial services fi rm has a fatwa, borrow from us. We knew if we became complicit with a culture of extor- or Islamic religious ruling, issued against him. tion, our customers would be the ones to suffer. They barely But that’s what happened four years ago when had enough money to meet basic needs, never mind pay off my then $7.3 million company, SKS Microfi nance, bad guys. So we walked away from our $285,000 portfolio in nance started doing business in Nizamabad, India. Nizamabad. By not giving in to the thugs, however, we won some respect in that town and in other villages where we were Armed with broken bottles and machetes, a gang doing business. of local thugs intimidated, attacked, and stole Many companies say they protect the interests of their cus- cash from some of our loan offi cers. They tried to extort tomers. Very few actually sit in the dirt with them, using stones, money from us in exchange for permitting SKS to operate fl owers, sticks, and chalk powder to fi gure out if they’ll be able safely in the region. When we refused to pay, they spread to repay a $20 loan at $1 a month. With this approach, we’ve

photos courtesy of SKS Microﬁ SKS of courtesy photos rumors that we were trying to convert people to Christianity. created our own loyal “gang” of over 2 million customers.

hbr.org | June 2008 | Harvard Business Review 53 First Person Business Basics at the Base of the Pyramid

SKS is like any other healthy high- ARTICLE AT A GLANCE While the industry celebrates hav- growth business, except that our custom- ing reached about 140 million people, ers have almost no money. Consider the Q Vikram Akula’s $250 million roughly 3 billion (or 750 million house- fi rm applies for-profi t prin- plight of Saryamma: She and her hus- holds) still live on $2 a day or less. In ciples to the world of microfi - % band were landless laborers who earned nance – accessing commercial terms of households, that’s only a 19 about $1 a day. Persistent drought often capital, standardizing products market penetration – a sure sign of un- made work and food scarce. Saryamma’s and processes, and embracing derperformance in any other industry. husband entered into bonded labor, a new technology. Microfi nance fi rms haven’t succeeded form of indentured servitude that still Q The company unfailingly does in helping as many customers as they exists in India, just so the family would what’s best for customers, would like for several reasons: their lack even if that undermines the have enough money for grain. Her old- of access to commercial funds, the high fi rm’s short-term interests. est son was forced to seek work rather cost of handling millions of microtrans- Q The result: a rapidly growing than attend school. actions, and an inability to create scal- customer base, now over In 2002, Saryamma joined our pro- 2 million strong, and a solid able operating systems. I fi rst learned gram and recruited four other women brand to leverage with about these limitations in 1995, when, from her village who wanted loans. In partners. after graduating from Yale with a mas- line with our group-lending model, each ter’s degree in international relations, loan was linked to the others: If one I became a loan offi cer for the Deccan woman couldn’t pay her small weekly Rethinking Microfi nance Development Society (DDS), an NGO installment, the rest of the women A fatwa is hardly the only scary thing that extends microfi nance loans in In- chipped in; if she refused to pay, the oth- my company has encountered on its dia. One day, in the course of my normal ers pressured her into meeting her ob- path toward rapid growth. Much more rounds, an impoverished woman from ligation. Saryamma initially borrowed worrisome is the slow rate at which our Kusunoor, a remote village DDS wasn’t $200 to buy a buffalo so she could sell industry has been able to gain traction serving, asked me, “Can you offer loans the milk. She took one year to repay, in and deliver broadly on its promise. in my area?” I passed her inquiry on to weekly increments of $4.50. In subse- Microfi nance is often lauded as the the NGO’s directors. Their response was quent years, she took out other capital solution to poverty. Borrowers include both a refusal and an excuse: The grant loans, eventually adding three more buf- agricultural laborers, mom-and-pop cycle was ending, and DDS could not ex- falo, a cow, two acres of land, and a pair entrepreneurs, street vendors, home- pand beyond the 100 villages it was then of bulls to her portfolio. Her family’s net based artisans, and small-scale produc- serving. I shared that with the woman, income has increased to $10 a day, pro- ers, each living on less than $2 a day. and I will never forget her reply: “Am I pelling her fi rmly into India’s lower mid- They are quintessential base-of-the- not poor, too? Do I not deserve a chance dle class. Her husband is now free from pyramid customers – the potentially to get my family out of poverty?” I real- bonded labor, and Saryamma’s youngest lucrative market segment that Uni- ized then that to truly use microfi nance children are the fi rst in the family to at- versity of Michigan professor C.K. Pra- to help eradicate poverty, we would tend school. halad has so famously drawn attention need a new model, one that would allow Saryamma’s story illustrates that pro- to and that many companies have had microfi nance organizations to scale up viding loans to women is a sure way of trouble reaching. (See his and Allen quickly so that we’d never have to turn making microfi nance work. Studies have Hammond’s “Serving the World’s Poor, any poor person away. shown that women are more likely than Profitably,” HBR September 2002.) I launched SKS in 1998 to build that men to reinvest profi ts in the household The simple notion of microfi nance – next-generation microfi nance company. and to support others in their borrow- providing business loans of as little I remember early on walking down a ing group. That’s why we lend only to as $100 or $200 to the poor – was pio- dusty road in a remote drought-prone women. neered in 1976 by Muhammad Yunus, region of India, looking for potential How do we manage to help women who founded Grameen Bank, won the customers. I turned a corner and came like Saryamma on such a large scale? Nobel Peace Prize, and is a personal upon a group of women in bright- From the beginning, SKS’s deliberate hero of mine. No doubt, microfi nance colored saris sitting in front of thatched strategy has been to bypass the usual has benefi ted people like Saryamma mud huts. I approached and explained conventions of poverty-eradication pro- tremendously, but the model just hasn’t that I was starting a microfi nance programs. By reenvisioning microfi nance, managed to scale to large numbers. gram and could bring collateral-free we have achieved excellent customer Most microfi nance institutions world- loans right to their doorstep. “You can and business relationships through- wide are small nonprofi ts; about 80% start small businesses and get out of pov- out India. serve fewer than 10,000 customers. erty,” I said. The women met my pitch

54 Harvard Business Review | June 2008 | hbr.org with silence and probably some skepti- was able to attract multimillion-dollar on paper, in three separate locations: cism, but one had a sparkle in her eye. lines of credit from Citibank, ABN Amro, passbooks, collection sheets, and back- That woman was Saryamma. and others. offi ce ledgers. A loan offi cer who has 450 Standardize products, training, customers with two products each must The Scale Is the Thing and other processes in order to boost make 2,700 manual entries a week or SKS’s business strategy is based on three capacity. Taking a cue from giants like more than 140,000 a year. Imagine how entrepreneurial principles borrowed Starbucks and McDonald’s, SKS stan- many missed zeroes and transposed dig- from fast-scaling consumer businesses dardized its products and frontline pro- its there might be, particularly with a like Starbucks and McDonald’s. These cesses. Instead of getting, say, 23 rupees low-skilled workforce? principles can help guide any multina- from one villager and 27 from another, So we digitized the process. Because tional or NGO that wants to sell – profi t- all in coins, our loan offi cers collected we couldn’t fi nd software that suited us, ably – to the hundreds of millions of peo- standard repayments in round num- we enlisted vendors to help us build our ple at the base of the economic pyramid. bers of 25 or 30 rupees. Internally, we own – a suite of simple, user-friendly ap- Adopt a profi t-oriented approach adopted the factory-style training mod- plications that a computer-illiterate loan in order to access commercial capital. els that had helped the corporate gi- offi cer with a 12th grade education can When I started SKS 10 years ago, I had ants scale up so rapidly – and thereby easily learn. Since the loan repayments no money of my own and no inter- boosted our own workforce capabilities are standardized, the fi elds in the online ested investors, so I established it as a and growth. To this day, we walk our em- forms are prepopulated and only the ex- nonprofi t with lots of small donations ployees (all of whom come from poor ceptions must be entered. The system from friends and relatives. I had cer- villages themselves) through a series of is also internet-enabled, so loan offi cers tainly admired Grameen Bank’s group- highly simplifi ed and experiential learn- can send their summary data to the head lending model, but I wasn’t a big fan of ing modules. We enroll about 500 new offi ce within hours after their morning Yunus’s theory that microfi nance fi rms should be merely self-sustaining companies – what he calls “social businesses.” I felt that if the industry were going to provide the estimated $300 billion of credit needed by the poor, it would have to tap larger, commercial capital markets – and that meant structuring our businesses so that investors could expect signifi cant returns. To attract the kind of bigwigs that any Silicon Valley start-up might, I made the following pitch: “There’s an entrepreneurial spirit among the poor, who earn extraordinarily high returns from their small businesses. You invest in us, we invest in them – and fortunes will come to both of you.” As a fi rst step, right after SKS broke even, I converted it to for-profi t status and was able to get philanthropist Ravi Reddy to be a found- loan offi cers every month. They partici- fi eld meetings. (Given that electricity is ing investor. Then I secured money pate in theory classes on Saturdays and unreliable in many areas, we’ve installed from parties such as Unitus, a Seattle- practice what they’ve learned in the fi eld car batteries or gas-powered generators based NGO that helps promote micro- during the week. At most microfi nance as backups.) More recently, we’ve been fi nance; the Small Industries Develop- organizations, it takes four to six months experimenting with mobile text-messag- ment Bank of India; and technology of training for a loan offi cer to become ing payment applications and biomet- entrepreneur Vinod Khosla. Later, we productive; we have shortened that to ric authentication technologies. These landed Sequoia, a premier venture cap- two months and hope to cut it to one. improvements offer our borrowers the ital fi rm that was an early investor in Use technology to reduce costs convenience of settling their accounts Google. With our performance strong and limit errors. Most microfi nance or- online and our loan offi cers a measure and these power players on board, SKS ganizations record all their transactions of protection from cash-hungry thugs.

hbr.org | June 2008 | Harvard Business Review 55 First Person Business Basics at the Base of the Pyramid

Scaling Up Customer Loyalty kets and collecting information about talking informally and forging bonds Perhaps the most critical factor in our potential borrowers, for instance, we re- with potential borrowers. growth (and maybe one not so obvi- lied on some of the visual exercises from Using this local knowledge, we de- ous to most companies that want to do my days as a DDS fi eld agent. Instead of signed a set of products and a delivery business at the base of the pyramid) has asking villagers, who are often illiterate, mechanism specifi cally for our custom- been our extreme focus on the customer. to describe the seasonal pattern of their ers. For example, based on what we In everything we do, we ask, “Does this cash-fl ow needs, we had them diagram it learned from the visual exercises about work for the borrower?” – even if it with sticks, seeds, and coins. We encour- how money ebbed and fl owed from means operating against our own short- aged them to use colored chalk pow- households – when pay day was, when term interests. der and fl owers to map out the village bills came due, what fi nancial crises fam- It’s hard to identify what’s best for on the ground – indirectly telling us ilies faced – we set people’s tiny weekly the Indian customer without immers- where the poorest people lived, what repayments as low as $1 per week. In ing yourself in the rhythms of her vil- kind of fi nancial products they needed, the same vein, our health insurance and lage. We’ve succeeded by engaging poor which areas were lorded over by which whole-life insurance premiums are only communities in culturally appropriate loan sharks, and so on. I personally sat in $10 a year and 25 cents a week, respec- ways. When we were fi rst scouting mar- tea stalls and lunched in roadside diners, tively. We also offer interest-free emer-

56756756756756756756756756756756756756 RISE TO ANY CHALLENGE, such as making global connections.

With an approach that inspires you to put your ideas into action, the Kellogg Executive MBA Program can help you fulfill your aspirations. And with a global network of programs in Europe, Asia, the Middle East and the Americas, you can fulfill them almost anywhere. Visit www.kellogg.northwestern.edu/emba or call 847-491-3100 56756756756756756756756756756756756756to sign up for an upcoming information session. gency loans. All these products are costly costs, we are growing at nearly 200% an- UPCOMING to administer. For example, we are bor- nually, adding 50 branches and 160,000 EMBA rowing the funds we use for emergency new customers a month. The customer INFORMATION loans at commercial rates. We do it any- growth slope is getting steeper, so we way because the customer needs a safety are on track to reach 8 million clients SESSIONS: net when, say, her family’s hut catches by 2010. fi re or she can’t resume her manual work The next step is to leverage our brand after complications during childbirth. to expand an already broad distribution Tuesday, April 22 Our customer-fi rst philosophy also network. With our huge base of bor- Miami, FL extends to our processes and systems. rowers, we can say to makers of soap, The salaries of loan offi cers, for example, clothes, consumer electronics, and other aren’t tied to repayment rates or the packaged goods, “Source high-quality Friday, April 25 size of their loan portfolios – something products to us at the lowest cost avail- Evanston, IL probably unheard of in mainstream fi - able, and we can guarantee you a large nancial services. We don’t want our loan market share.” We’ve already done such offi cers, because of pressure to make deals with Indian insurers ICICI Lom- Friday, May 9 their numbers, to collect from a bor- bard and Bajaj Allianz, and telecom Evanston, IL rower who’s in a diffi cult situation or to providers Nokia and Airtel. For instance, try to lend her more than she needs. In- we supply borrowers with Nokia cell stead of having borrowers visit a branch phones and airtime at lower prices than Thursday, May 15 Miami, FL

Our loan offi cers journey on mopeds Tuesday, June 10 to borrowers’ villages and schedule Evanston, IL loan meetings as early as 7:00 AM. Thursday, June 26 Miami, FL offi ce, our loan offi cers journey on mo- the marketplace offers. We’ve also been peds to their villages and schedule loan approached by electronics manufactur- Thursday, June 26 meetings as early as 7:00 am so that the ers, retailers, and others that want to Minneapolis, MN women don’t miss part of the work- utilize our channel. day. We do this even though the costs The bottom line: Our borrowers get Wednesday, July 9 of travel are quite high. It’s not just the high-quality, low-cost goods. Our sup- gasoline; our offi cers brave monsoons, pliers also fi nd new market segments, Cleveland, OH summer heat, and sometimes harrowing and SKS and its investors see a small driving conditions on rough dirt roads. profi t margin. Of course, Sequoia is not Thursday, July 10 Our reward for these efforts? Deep particularly interested in tiny margins. customer loyalty that ultimately results But when you bundle 15 or 20 products Cincinnati, OH in a 99.5% repayment rate. to 8 million customers, with a small profi t earned on each, well, that’s Google Leveraging the SKS Brand territory. How can razor-thin margins and costly customer relationships lead to high re- Vikram Akula ([email protected]) Visit turns? The payoff comes with volume. is the founder and CEO of SKS Micro- www.kellogg.northwestern.edu/emba Over the past 10 years, SKS has provided fi nance, an India-based provider of or call 847-491-3100 $ 725 million in unsecured microloans small business loans and other fi nancial to sign up for one of these and insurance products to over 2 mil- services to poor women. upcoming information sessions. lion people in 30,000 Indian villages Reprint R0806B and slums. Because of the changes we’ve To order, see page 143. made related to capital, capacity, and SPECIAL ADVERTISING SECTION

Delivering High Performance Using Enterprise Systems to Create Distinctive Capabilities

here’s no longer any real argument about whether enterprise systems add value. What is sur- THE LINK BETWEEN ENTERPRISE SYSTEMS prising, however, according to Accenture research, AND DISTINCTIVE CAPABILITIES is the extent to which high-performance businesses Survey respondents rate to what extent their Tuse enterprise systems as the platform on which to create enterprise systems’ enabled capabilities contribute distinctive capabilities—those that are differentiated from to their distinctive capabilities (% of respondents). competitors’ capabilities. “The stereotype of enterprise systems as commoditized, (some totals exceed 100% due to rounding) packaged software is now obsolete,” says James Hayes, Integrated critical processes managing director, Oracle business for Accenture. “Our 28 38 23 74 research shows that the best performers know how to use Using IT as a strategic asset their enterprise systems to create the distinctive capabilities 18 32 27 18 5 that drive high performance.” Analytics for decision making Accenture conducted a four-part survey of experts and 15 44 30 10 2 senior executives in 34 countries and 19 major industries, Accurate planning updating a similar survey done previously. Fully 91 percent 13 36 36 11 4 of the 450 respondents said enterprise systems contributed Enabling flexibility to adapt to change either “to a very large extent” or “substantially” to distinctive 13 28 33 20 6 capabilities, which the survey defined as “integrated busi- Monitoring/measuring progress against aggressive or stretch goals ness processes and capabilities that together serve customers 11 28 33 18 9 in ways that are differentiated from competitors.” Investing resources in alignment with strategic objectives Three factors in particular determine whether a company 11 23 34 22 10 Understanding how the organization creates value will obtain this kind of business value from its enterprise sys- 825 4016 12 tems, says Jeanne Harris, executive research fellow for the Insight into customers Accenture Institute of High Performance Business. They are: 824 3422 13 • The extent to which operations are integrated. • The degree of business process optimization. 0 20 40 60 80 100 • The amount of data analysis used in decision making. To a very large extent Substantially Of the three, the updated survey revealed that companies Somewhat Slightly Not at all are paying much more attention to developing an analytical capability for better decision making. In the earlier survey, Source: Accenture only 28 percent of the respondents said their organizations had an above-average or outstanding analytical capability, distinctive capabilities include integrated critical processes compared with 57 percent in the second survey. and using IT as a strategic asset (see chart, “The Link High performers understand the correlation between Between Enterprise Systems and Distinctive Capabilities”). business results and the use of analytics, Harris explains. “They The Accenture research proves that, although controver- realize that the use of information from enterprise systems sial in the past, enterprise systems can add business value. is how an organization differentiates itself,” she says. In addition, the research shows that an organization’s dis- Companies that emphasize the use of business intelligence and tinctive capabilities are often enhanced by the significant analytics software are better able to out-perform their peers. business value derived from enterprise systems. Indeed, the In addition to analytics, other IT-enabled outcomes that Accenture research demonstrates that high performers are respondents rated highly as contributors to the creation of acting on that insight today. ■

FOR MORE INFORMATION The Research Report More on High Performance Business Using Enterprise Systems To read the research report on new To see insights from Accenture’s research and experience, To learn more about using enterprise systems growth from enterprise systems, go to: including its study of more than 500 high performers, go to: to gain competitive advantage, go to: http://accenture.com/newgrowthreport http://accenture.com/research http://accenture.com/enterprisesystems

60 Harvard Business Review | June 2008 | hbr.org The Secrets to Successful STRATEGY EXECUTION Research shows that enterprises fail at execution because they go straight to structural reorganization and neglect the most powerful drivers of effectiveness – decision rights and information ﬂ ow. by Gary L. Neilson, Karla L. Martin, and Elizabeth Powers

A BRILLIANT STRATEGY, blockbuster product, or breakthrough technology can put you on the competitive map, but only solid execution can keep you there. You have to be able to deliver on your intent. Unfortunately, the majority of companies aren’t very good at it, by their own admission. Over the past fi ve years, we have invited many thousands of employees (about 25% of whom came from executive ranks) to complete an online assessment of their organizations’ capabilities, a process that’s generated a database of 125,000 profi les representing more than 1,000 companies, government agencies, and not-for- profi ts in over 50 countries. Employees at three out of every fi ve Jacob Thomas Jacob A hbr.org | June 2008 | Harvard Business Review 61 The Secrets to Successful Strategy Execution

companies rated their organization weak at execution – that This time, management looked beyond lines and boxes to is, when asked if they agreed with the statement “Important the mechanics of how work got done. Instead of searching strategic and operational decisions are quickly translated into for ways to strip out costs, they focused on improving execu- action,” the majority answered no. tion – and in the process discovered the true reasons for the Execution is the result of thousands of decisions made ev- performance shortfall. Managers didn’t have a clear sense of ery day by employees acting according to the information their respective roles and responsibilities. They did not intui- they have and their own self-interest. In our work helping tively understand which decisions were theirs to make. More- more than 250 companies learn to execute more effectively, over, the link between performance and rewards was weak. we’ve identifi ed four fundamental building blocks executives This was a company long on micromanaging and second- can use to infl uence those guessing, and short on accountabil- actions – clarifying decision ity. Middle managers spent 40% of rights, designing information What Matters Most their time justifying and reporting flows, aligning motivators, to Strategy Execution upward or questioning the tactical and making changes to struc- decisions of their direct reports. ture. (For simplicity’s sake When a company fails to execute its strategy, the fi rst thing Armed with this understanding, managers often think to do is restructure. But our research we refer to them as decision the company designed a new man- shows that the fundamentals of good execution start with rights, information, motiva- agement model that established clarifying decision rights and making sure information fl ows who was accountable for what and tors, and structure.) where it needs to go. If you get those right, the correct struc- In efforts to improve per- ture and motivators often become obvious. made the connection between performance, most organiza- formance and reward. For instance, tions go right to structural the norm at this company, not un- Information 54 measures because moving usual in the industry, had been to lines around the org chart Decision Rights 50 promote people quickly, within 18 seems the most obvious solu- months to two years, before they Motivators 26 tion and the changes are vis- had a chance to see their initia- ible and concrete. Such steps Structure 25 tives through. As a result, manag- generally reap some short- ers at every level kept doing their Relative Strength (out of 100) term effi ciencies quickly, but old jobs even after they had been in so doing address only the promoted, peering over the shoul- symptoms of dysfunction, not its root causes. Several years ders of the direct reports who were now in charge of their later, companies usually end up in the same place they started. projects and, all too frequently, taking over. Today, people Structural change can and should be part of the path to im- stay in their positions longer so they can follow through on proved execution, but it’s best to think of it as the capstone, their own initiatives, and they’re still around when the fruits not the cornerstone, of any organizational transformation. In of their labors start to kick in. What’s more, results from those fact, our research shows that actions having to do with deci- initiatives continue to count in their performance reviews for sion rights and information are far more important – about some time after they’ve been promoted, forcing managers to twice as effective – as improvements made to the other two live with the expectations they’d set in their previous jobs. As building blocks. (See the exhibit “What Matters Most to Strat- a consequence, forecasting has become more accurate and egy Execution.”) reliable. These actions did yield a structure with fewer layers Take, for example, the case of a global consumer packaged- and greater spans of control, but that was a side effect, not the goods company that lurched down the reorganization path primary focus, of the changes. in the early 1990s. (We have altered identifying details in this and other cases that follow.) Disappointed with company The Elements of Strong Execution performance, senior management did what most compa- Our conclusions arise out of decades of practical application nies were doing at that time: They restructured. They elimi- and intensive research. Nearly fi ve years ago, we and our col- nated some layers of management and broadened spans of leagues set out to gather empirical data to identify the actions control. Management-staffi ng costs quickly fell by 18%. Eight that were most effective in enabling an organization to imple- years later, however, it was déjà vu. The layers had crept back ment strategy. What particular ways of restructuring, moti- in, and spans of control had once again narrowed. In ad- vating, improving information fl ows, and clarifying decision dressing only structure, management had attacked the vis- rights mattered the most? We started by drawing up a list of 17 ible symptoms of poor performance but not the underlying traits, each corresponding to one or more of the four building cause – how people made decisions and how they were held blocks we knew could enable effective execution – traits like accountable. the free fl ow of information across organizational boundaries

62 Harvard Business Review | June 2008 | hbr.org The 17 Fundamental Traits of or the degree to which senior leaders refrain from get- Organizational Effectiveness ting involved in operating decisions. With these factors in mind, we developed an online profi ler that allows From our survey research drawn from more than 26,000 people in individuals to assess the execution capabilities of their 31 companies, we have distilled the traits that make organizations organizations. Over the next four years or so, we col- effective at implementing strategy. Here they are, in order of importance. lected data from many thousands of profi les, which in turn allowed us to more precisely calibrate the impact STRENGTH INDEX of each trait on an organization’s ability to execute. That RANK ORGANIZATION TRAIT (OUT OF 100) allowed us to rank all 17 traits in order of their relative infl uence. (See the exhibit “The 17 Fundamental Traits Everyone has a good idea of the decisions and actions for 81 1 which he or she is responsible. of Organizational Effectiveness.) Ranking the traits makes clear how important deci- Important information about the competitive environment 2 68 sion rights and information are to effective strategy ex- gets to headquarters quickly. ecution. The fi rst eight traits map directly to decision 3 Once made, decisions are rarely second-guessed. 58 rights and information. Only three of the 17 traits relate to structure, and none of those ranks higher than 13th. Information fl ows freely across organizational boundaries. 58 We’ll walk through the top fi ve traits here. 4 1. Everyone has a good idea of the decisions and Field and line employees usually have the information actions for which he or she is responsible. In compa- % 5 they need to understand the bottom-line impact of their 55 nies strong on execution, 71 of individuals agree with day-to-day choices. this statement; that fi gure drops to 32% in organizations weak on execution. Line managers have access to the metrics they need to 48 Blurring of decision rights tends to occur as a com- 6 measure the key drivers of their business. pany matures. Young organizations are generally too 7 Managers up the line get involved in operating decisions. 32 busy getting things done to defi ne roles and responsibilities clearly at the outset. And why should they? In a small 8 Confl icting messages are rarely sent to the market. 32 company, it’s not so diffi cult to know what other people are up to. So for a time, things work out well enough. The individual performance-appraisal process differenti- 32 As the company grows, however, executives come and 9 ates among high, adequate, and low performers. go, bringing in with them and taking away different ex- The ability to deliver on performance commitments pectations, and over time the approval process gets ever 10 strongly infl uences career advancement and 32 more convoluted and murky. It becomes increasingly compensation. unclear where one person’s accountability begins and It is more accurate to describe the culture of this orga- another’s ends. 11 nization as “persuade and cajole” than “command and 29 One global consumer-durables company found this control.” out the hard way. It was so rife with people making competing and confl icting decisions that it was hard The primary role of corporate staff here is to support the 29 to fi nd anyone below the CEO who felt truly account- 12 business units rather than to audit them. able for profi tability. The company was organized into Promotions can be lateral moves (from one position to 29 16 product divisions aggregated into three geographic 13 another on the same level in the hierarchy). groups – North America, Europe, and International. Fast-track employees here can expect promotions more Each of the divisions was charged with reaching explicit 23 14 frequently than every three years. performance targets, but functional staff at corporate headquarters controlled spending targets – how R&D On average, middle managers here have fi ve or more 19 dollars were allocated, for instance. Decisions made by 15 direct reports. divisional and geographic leaders were routinely over- If the fi rm has a bad year, but a particular division has a ridden by functional leaders. Overhead costs began to 13 16 good year, the division head would still get a bonus. mount as the divisions added staff to help them create bulletproof cases to challenge corporate decisions. Besides pay, many other things motivate individuals to do 10 Decisions stalled while divisions negotiated with func- 17 a good job. tions, each layer weighing in with questions. Functional staffers in the divisions (fi nancial analysts, for example) BUILDING BLOCKS QDecision Rights QInformation QMotivators QStructure often deferred to their higher-ups in corporate rather

hbr.org | June 2008 | Harvard Business Review 63 The Secrets to Successful Strategy Execution

than their division vice president, since functional leaders were responsible for rewards and promotions. Only the CEO and his executive team had the discretion to resolve disputes. All of these symptoms fed on one another and collectively hampered execution – until a new CEO came in. The new chief executive chose to focus less on cost control and more on profi table growth by redefi ning the divisions to focus on consumers. As part of the new organizational model, the CEO designated accountability for profi ts unambiguously to the divisions and also gave them the authority to draw on functional activities to support their goals (as well as more control of the budget). Corporate functional roles and decision rights were recast to better support the divisions’ needs and also to build the cross-divisional links necessary for developing the global capabilities of the business as a whole. For the most part, the functional leaders understood the market realities – and that change entailed some adjustments to the operating model of the business. It helped that the CEO brought them into the organizational redesign process, so that the new model wasn’t something imposed on them as much as it was something they engaged in and built together. 2. Important information about the competitive environment gets to headquarters quickly. On average, 77% of individuals in strong-execution organizations agree with this statement, whereas only 45% of those in weak-execution organizations do. Headquarters can serve a powerful function in identifying badly misaligned that its very existence was threatened. Deci- patterns and promulgating best practices throughout business sion rights were hoarded at the top by functional general of- segments and geographic regions. But it can play this coordi- fi ces located at headquarters in Peoria, Illinois, while much of nating role only if it has accurate and up-to-date market intel- the information needed to make those decisions resided in the ligence. Otherwise, it will tend to impose its own agenda and fi eld with sales managers. “It just took a long time to get deci- policies rather than defer to operations that are much closer sions going up and down the functional silos, and they really to the customer. weren’t good business decisions; they were more functional Consider the case of heavy-equipment manufacturer Cat- decisions,” noted one fi eld executive. Current CEO Jim Owens, erpillar.1 Today it is a highly successful $45 billion global com- then a managing director in Indonesia, told us that such infor- pany, but a generation ago, Caterpillar’s organization was so mation that did make it to the top had been “whitewashed and varnished several times over along the way.” Cut off from information about the external market, senior About the Data executives focused on the organi- We tested organizational ef- completed) profi les, for a total sets in which the trait exhibited zation’s internal workings, overana- fectiveness by having people fi ll of 26,743 responses. Applying a signifi cant correlation with our lyzing issues and second-guessing out an online diagnostic, a tool regression analysis to each of the measure of success within a 90% decisions made at lower levels, cost- comprising 19 questions (17 that 31 data sets, we correlated the 17 confi dence interval. Finally, we ing the company opportunities in describe organizational traits and traits with our measure of orga- indexed the result to a 100-point fast-moving markets. two that describe outcomes). nizational effectiveness, which scale. The top trait – “Everyone Pricing, for example, was based To determine which of the we defi ned as an affi rmative has a good idea of the decisions on cost and determined not by 17 traits in our profi ler are most response to the outcome state- and actions for which he or she market realities but by the pricing strongly associated with excel- ment, “Important strategic and is responsible” – exhibited a general offi ce in Peoria. Sales repre- lence in execution, we looked at operational decisions are quickly signifi cant positive correlation sentatives across the world lost sale 31 companies in our database for translated into action.” Then with our success indicator in 25 after sale to Komatsu, whose com- which we had responses from at we ranked the traits in order, of the 31 data sets, for an index petitive pricing consistently beat least 150 individual (anonymously according to the number of data score of 81. Caterpillar’s. In 1982, the company

64 Harvard Business Review | June 2008 | hbr.org posted the fi rst annual loss in its almost-60-year history. In ing second-guessed, whereas only 45% of those from strong- 1983 and 1984, it lost $1 million a day, seven days a week. By execution organizations felt that way. the end of 1984, Caterpillar had lost a billion dollars. By 1988, Recently, we worked with a global charitable organization then-CEO George Schaefer stood atop an entrenched bureau- dedicated to alleviating poverty. It had a problem others might cracy that was, in his words, “telling me what I wanted to hear, envy: It was suffering from the strain brought on by a rapid not what I needed to know.” So, he convened a task force of growth in donations and a corresponding increase in the depth “renegade” middle managers and tasked them with charting and breadth of its program offerings. As you might expect, this Caterpillar’s future. nonprofi t was populated with people on a mission who took Ironically, the way to ensure that the right information intense personal ownership of projects. It did not reward the fl owed to headquarters was to make sure the right deci- delegation of even the most mundane administrative tasks. sions were made much further down the organization. By Country-level managers, for example, would personally over- delegating operational responsibility to the people closer to see copier repairs. Managers’ inability to delegate led to deci- the action, top executives were free to focus on more global sion paralysis and a lack of accountability as the organization strategic issues. Accordingly, the company reorganized into grew. Second-guessing was an art form. When there was doubt business units, making each accountable for its own P&L over who was empowered to make a decision, the default was statement. The functional general offi ces that had been all- often to have a series of meetings in which no decision was powerful ceased to exist, literally overnight. Their talent and reached. When decisions were fi nally made, they had gener- expertise, including engineering, pricing, and manufacturing, ally been vetted by so many parties that no one person could

Second-guessing was an art form: When decisions were ﬁ nally made, they had generally been vetted by so many parties that no one person could be held accountable.

were parceled out to the new business units, which could now be held accountable. An effort to expedite decision-making design their own products, develop their own manufacturing through restructuring – by collocating key leaders with subject- processes and schedules, and set their own prices. The move matter experts in newly established central and regional cen- dramatically decentralized decision rights, giving the units ters of excellence – became instead another logjam. Key man- control over market decisions. The business unit P&Ls were agers still weren’t sure of their right to take advantage of these now measured consistently across the enterprise, as return centers, so they didn’t. on assets became the universal measure of success. With this The nonprofi t’s management and directors went back to accurate, up-to-date, and directly comparable information, se- the drawing board. We worked with them to design a deci- nior decision makers at headquarters could make smart strate- sion-making map, a tool to help identify where different types gic choices and trade-offs rather than use outdated sales data of decisions should be taken, and with it they clarifi ed and to make ineffective, tactical marketing decisions. enhanced decision rights at all levels of management. All Within 18 months, the company was working in the new managers were then actively encouraged to delegate standard model. “This was a revolution that became a renaissance,” Ow- operational tasks. Once people had a clear idea of what deci- ens recalls, “a spectacular transformation of a kind of sluggish sions they should and should not be making, holding them ac- company into one that actually has entrepreneurial zeal. And countable for decisions felt fair. What’s more, now they could that transition was very quick because it was decisive and it focus their energies on the organization’s mission. Clarifying was complete; it was thorough; it was universal, worldwide, decision rights and responsibilities also improved the organi- all at one time.” zation’s ability to track individual achievement, which helped 3. Once made, decisions are rarely second-guessed. it chart new and appealing career-advancement paths. Whether someone is second-guessing depends on your van- 4. Information fl ows freely across organizational bound- tage point. A more senior and broader enterprise perspective aries. When information does not fl ow horizontally across dif- can add value to a decision, but managers up the line may not ferent parts of the company, units behave like silos, forfeiting be adding incremental value; instead, they may be stalling economies of scale and the transfer of best practices. Moreover, prog ress by redoing their subordinates’ jobs while, in effect, the organization as a whole loses the opportunity to develop shirking their own. In our research, 71% of respondents in a cadre of up-and-coming managers well versed in all aspects weak-execution companies thought that decisions were be- of the company’s operations. Our research indicates that only

hbr.org | June 2008 | Harvard Business Review 65 The Secrets to Successful Strategy Execution

21% of respondents from weak-execution companies thought bounded by the information available to employees. If manag- information fl owed freely across organizational boundaries ers don’t understand what it will cost to capture an incremental whereas 55% of those from strong-execution fi rms did. Since dollar in revenue, they will always pursue the incremental rev- scores for even the strong companies are pretty low, though, enue. They can hardly be faulted, even if their decision is – in this is an issue that most companies can work on. the light of full information – wrong. Our research shows that A cautionary tale comes from a business-to-business com- 61% of individuals in strong-execution organizations agree pany whose customer and product teams failed to collaborate that fi eld and line employees have the information they need in serving a key segment: large, cross-product customers. To to understand the bottom-line impact of their decisions. This manage relationships with important clients, the company fi gure plummets to 28% in weak-execution organizations. had established a customer-focused marketing group, which We saw this unhealthy dynamic play out at a large, diversi- developed customer outreach programs, innovative pric- fi ed fi nancial-services client, which had been built through a ing models, and tailored promotions and discounts. But this series of successful mergers of small regional banks. In combin- group issued no clear and consistent reports of its initiatives ing operations, managers had chosen to separate front-offi ce and progress to the product units and had diffi culty securing bankers who sold loans from back-offi ce support groups who time with the regular cross-unit management to discuss key did risk assessments, placing each in a different reporting re- performance issues. Each product unit communicated and lationship and, in many cases, in different locations. Unfor- planned in its own way, and it took tremendous energy for tunately, they failed to institute the necessary information the customer group to understand the units’ various priorities and motivation links to ensure smooth operations. As a result, and tailor communications to each one. So the units were not each pursued different, and often competing, goals. aware, and had little faith, that this new division was making For example, salespeople would routinely enter into highly constructive inroads into a key customer segment. Conversely customized one-off deals with clients that cost the company (and predictably), the customer team felt the units paid only more than they made in revenues. Sales did not have a clear perfunctory attention to its plans and couldn’t get their coop- understanding of the cost and complexity implications of eration on issues critical to multiproduct customers, such as these transactions. Without suffi cient information, sales staff potential trade-offs and volume discounts. believed that the back-end people were sabotaging their deals,

To help companies construct an improvement program with the greatest impact, we’ve developed an organizational-change simulator.

Historically, this lack of collaboration hadn’t been a prob- while the support groups considered the front-end people lem because the company had been the dominant player in to be cowboys. At year’s end, when the data were fi nally rec- a high-margin market. But as the market became more com- onciled, management would bemoan the sharp increase in petitive, customers began to view the fi rm as unreliable and, operational costs, which often erased the profi t from these generally, as a diffi cult supplier, and they became increasingly transactions. reluctant to enter into favorable relationships. Executives addressed this information misalignment by Once the issues became clear, though, the solution wasn’t adopting a “smart customization” approach to sales. They terribly complicated, involving little more than getting the standardized the end-to-end processes used in the majority groups to talk to one another. The customer division became of deals and allowed for customization only in select circum- responsible for issuing regular reports to the product units stances. For these customized deals, they established clear showing performance against targets, by product and geo- back-offi ce processes and analytical support tools to arm sales- graphic region, and for supplying a supporting root-cause people with accurate information on the cost implications of analysis. A standing performance-management meeting was the proposed transactions. At the same time, they rolled out placed on the schedule every quarter, creating a forum for common reporting standards and tools for both the front- and exchanging information face-to-face and discussing outstand- back-offi ce operations to ensure that each group had access ing issues. These moves bred the broader organizational trust to the same data and metrics when making decisions. Once required for collaboration. each side understood the business realities confronted by the 5. Field and line employees usually have the informa- other, they cooperated more effectively, acting in the whole tion they need to understand the bottom-line impact of company’s best interests – and there were no more year-end their day-to-day choices. Rational decisions are necessarily surprises.

66 Harvard Business Review | June 2008 | hbr.org Creating a Transformation Program Mapping Improvements The four building blocks that managers can use to improve to the Building Blocks: strategy execution – decision rights, information, structure, and motivators – are inextricably linked. Unclear decision Some Sample Tactics rights not only paralyze decision making but also impede information fl ow, divorce performance from rewards, and Companies can take a host of steps to improve their prompt work-arounds that subvert formal reporting lines. ability to execute strategy. The 15 here are only some of the possible examples. Every one strengthens Blocking information results in poor decisions, limited ca- one or more of the building blocks executives can reer development, and a reinforcement of structural silos. So use to improve their strategy-execution capability: what to do about it? clarifying decision rights, improving information, Since each organization is different and faces a unique set establishing the right motivators, and restructuring of internal and external variables, there is no universal answer the organization. to that question. The fi rst step is to identify the sources of the problem. In our work, we often begin by having a company’s Q Focus corporate staff on supporting employees take our profi ling survey and consolidating the business-unit decision making. results. The more people in the organization who take the Q Clarify and streamline decision making at each survey, the better. operating level. Once executives understand their company’s areas of Q Focus headquarters on important strategic weakness, they can take any number of actions. The exhibit, questions. “Mapping Improvement Tactics to the Building Blocks” shows QQ Create centers of excellence by consolidating simi- 15 possible steps that can have an impact on performance. lar functions into a single organizational unit. (The options listed represent only a sampling of the dozens QQQ Assign process owners to coordinate of choices managers might make.) All of these actions are activities that span organizational functions. geared toward strengthening one or more of the 17 traits. For Establish individual performance measures. example, if you were to take steps to “clarify and streamline QQ decision making” you could potentially strengthen two traits: Q Improve fi eld-to-headquarters information fl ow. “Everyone has a good idea of the decisions and actions for Q Defi ne and distribute daily operating metrics to the which he or she is responsible,” and “Once made, decisions are fi eld or line. rarely second-guessed.” QQ Create cross-functional teams. You certainly wouldn’t want to put 15 initiatives in a single Introduce differentiating performance awards. transformation program. Most organizations don’t have the Q managerial capacity or organizational appetite to take on Q Expand nonmonetary rewards to recognize more than fi ve or six at a time. And as we’ve stressed, you exceptional performers. should fi rst take steps to address decision rights and informa- QQ Increase position tenure. tion, and then design the necessary changes to motivators and QQ Institute lateral moves and rotations. structure to support the new design. Broaden spans of control. To help companies understand their shortcomings and con- Q struct the improvement program that will have the greatest Q Decrease layers of management. impact, we have developed an organizational-change simulator. This interactive tool accompanies the profi ler, allow- BUILDING BLOCKS QDecision Rights QInformation QMotivators QStructure ing you to try out different elements of a change program virtually, to see which ones will best target your company’s particular area of weakness. (For an overview of the simulation process, see the sidebar “Test Drive Your Organization’s Transformation.”) that included aggressive targets in customer growth, revenue To get a sense of the process from beginning to end – from increases, and cost reduction, which would require a new level taking the diagnostic profi ler, to formulating your strategy, of teamwork. While there were pockets of cross-unit collabo- to launching your organizational transformation – consider ration within the company, it was far more common for each the experience of a leading insurance company we’ll call unit to focus on its own goals, making it diffi cult to spare Goodward Insurance. Goodward was a successful company resources to support another unit’s goals. In many cases there with strong capital reserves and steady revenue and customer was little incentive to do so anyway: Unit A’s goals might re- growth. Still, its leadership wanted to further enhance ex- quire the involvement of Unit B to succeed, but Unit B’s goals ecution to deliver on an ambitious fi ve-year strategic agenda might not include supporting Unit A’s effort.

hbr.org | June 2008 | Harvard Business Review 67 The Secrets to Successful Strategy Execution

The company had initiated a number of enterprisewide Test-Drive Your projects over the years, which had been completed on time Organization’s Transformation and on budget, but these often had to be reworked because stakeholder needs hadn’t been suffi ciently taken into account. You know your organization organization. If you’re not sure, After launching a shared-services center, for example, the com- could perform better. You are you can take a fi ve-minute diag- pany had to revisit its operating model and processes when faced with dozens of levers you nostic survey. This online survey units began hiring shadow staff to focus on priority work that could conceivably pull if you had automatically generates an or- the center wouldn’t expedite. The center might decide what unlimited time and resources. ganizational profi le and baseline technology applications, for instance, to develop on its own But you don’t. You operate in the execution-effectiveness score. rather than set priorities according to what was most impor- real world. (Although 100 is a perfect score, tant to the organization. How, then, do you make nobody is perfect; even the most In a similar way, major product launches were hindered by the most-educated and cost- effective companies often score insuffi cient coordination among departments. The market- effi cient decisions about which in the 60s and 70s.) ing department would develop new coverage options without change initiatives to implement? Having established your asking the claims-processing group whether it had the ability We’ve developed a way to test baseline, you use the simulator to process the claims. Since it didn’t, processors had to cre- the effi cacy of specifi c actions to chart a possible course you’d ate expensive manual work-arounds when the new kinds of (such as clarifying decision like to take to improve your ex- claims started pouring in. Nor did marketing ask the actuarial rights, forming cross-functional ecution capabilities by selecting department how these products would affect the risk profi le teams, or expanding nonmon- fi ve out of a possible 28 actions. and reimbursement expenses of the company, and for some of etary rewards) without risking Ideally, these moves should di- the new products, costs did indeed increase. signifi cant amounts of time and rectly address the weakest links To identify the greatest barriers to building a stronger money. You can go to www. in your organizational profi le. To execution culture, Goodward Insurance gave the diagnostic simulator-orgeffectiveness.com help you make the right choices, survey to all of its 7,000-plus employees and compared the to assemble and try out various the simulator offers insights organization’s scores on the 17 traits with those from strong- fi ve-step organizational-change that shed further light on how a execution companies. Numerous previous surveys (employee- programs and assess which proposed action infl uences par- satisfaction, among others) had elicited qualitative comments would be the most effective and ticular organizational elements. identifying the barriers to execution excellence. But the di- effi cient in improving execution Once you have made your se- agnostic survey gave the company quantifi able data that it at your company. lections, the simulator executes could analyze by group and by management level to deter- You begin the simulation by the steps you’ve elected and mine which barriers were most hindering the people actually selecting one of seven organi- processes them through a web- charged with execution. As it turned out, middle management zational profi les that most re- based engine that evaluates was far more pessimistic than the top executives in their as- sembles the current state of your them using empirical relation- sessment of the organization’s execution ability. Their input became especially critical to the change agenda ultimately adopted. Through the survey, Goodward Insurance uncovered im- low [unless it comes] from everywhere. We are all on the hook pediments to execution in three of the most infl uential orga- for fi xing this.” nizational traits: Contributing to this lack of horizontal information fl ow

Q Information did not ﬂ ow freely across organizational was a dearth of lateral promotions. Because Goodward had boundaries. Sharing information was never one of Good- always promoted up rather than over and up, most middle ward’s hallmarks, but managers had always dismissed the and senior managers remained within a single group. They mounting anecdotal evidence of poor cross-divisional in- were not adequately apprised of the activities of the other formation ﬂ ow as “some other group’s problem.” The orga- groups, nor did they have a network of contacts across the nizational diagnostic data, however, exposed such plausible organization.

deniability as an inadequate excuse. In fact, when the CEO Q Important information about the competitive environ- reviewed the profi ler results with his direct reports, he held ment did not get to headquarters quickly. The diagnostic up the chart on cross-group information fl ows and declared, data and subsequent surveys and interviews with middle man- “We’ve been discussing this problem for several years, and yet agement revealed that the wrong information was moving up you always say that it’s so-and-so’s problem, not mine. Sixty- the org chart. Mundane day-to-day decisions were escalated seven percent of [our] respondents said that they do not think to the executive level – the top team had to approve midlevel information fl ows freely across divisions. This is not so-and- hiring decisions, for instance, and bonuses of $1,000 – limit- so’s problem – it’s our problem. You just don’t get results that ing Goodward’s agility in responding to competitors’ moves,

68 Harvard Business Review | June 2008 | hbr.org managers did not know whom to ask for clarifi cation. Natu- rally, confusion over decision rights led to second-guessing. Fifty-fi ve percent of respondents felt that decisions were regularly second-guessed at Goodward. To Goodward’s credit, its top executives immediately re- sponded to the results of the diagnostic by launching a change program targeted at all three problem areas. The program integrated early, often symbolic, changes with longer-term initiatives, in an effort to build momentum and galvanize participation and ownership. Recognizing that a passive-aggressive attitude toward people perceived to be in power solely as a result of their position in the hierarchy was hindering ships identifi ed from 31 com- nations of possible actions. Each information fl ow, they took immediate steps to signal their in- panies representing more than simulation includes only two tention to create a more informal and open culture. One sym- 26,000 data observations. It then rounds, but you can run the simu- bolic change: the seating at management meetings was rear- generates a bar chart indicating lation as many times as you like. ranged. The top executives used to sit in a separate section, the how much your organization’s The simulator has also been used physical space between them and the rest of the room fraught execution score has improved for team competition within with symbolism. Now they intermingled, making themselves and where it now stands in rela- organizations, and we’ve found more accessible and encouraging people to share information to the highest-performing that it engenders very engaging tion informally. Regular brown-bag lunches were established companies from our research and productive dialogue among with members of the C-suite, where people had a chance to and the scores of other people senior executives. discuss the overall culture-change initiative, decision rights, like you who have used the While the simulator cannot new mechanisms for communicating across the units, and simulator starting from the same capture all of the unique situa- so forth. Seating at these events was highly choreographed original profi le you did. If you tions an organization might face, to ensure that a mix of units was represented at each table. wish, you may then advance to it is a useful tool for assessing Icebreaker activities were designed to encourage individuals the next round and pick another and building a targeted and ef- to learn about other units’ work. fi ve actions. What you will see fective organization-transforma- Meanwhile, senior managers commenced the real work is illustrated above. tion program. It serves as a ve- of remedying issues relating to information fl ows and de- The beauty of the simulator hicle to stimulate thinking about cision rights. They assessed their own informal networks is its ability to consider – the impact of various changes, to understand how people making key decisions got their consequence-free – the impact saving untold amounts of time information, and they identifi ed critical gaps. The outcome on execution of endless combi- and resources in the process. was a new framework for making important decisions that clearly specifi es who owns each decision, who must provide input, who is ultimately accountable for the results, and how results are defi ned. Other longer-term initiatives customers’ needs, and changes in the broader marketplace. include:

Meanwhile, more important information was so heavily ﬁ l- Q Pushing certain decisions down into the organization to tered as it moved up the hierarchy that it was all but worth- better align decision rights with the best available informa- less for rendering key verdicts. Even if lower-level managers tion. Most hiring and bonus decisions, for instance, have knew that a certain project could never work for highly valid been delegated to immediate managers, so long as they reasons, they would not communicate that dim view to the are within preestablished boundaries relating to numbers top team. Nonstarters not only started, they kept going. For hired and salary levels. Being clear about who needs what instance, the company had a project under way to create new information is encouraging cross-group dialogue. incentives for its brokers. Even though this approach had been Q Identifying and eliminating duplicative committees. previously tried without success, no one spoke up in meetings Q Pushing metrics and scorecards down to the group level, or stopped the project because it was a priority for one of the so that rather than focus on solving the mystery of who top-team members. caused a problem, management can get right to the root

Q No one had a good idea of the decisions and actions cause of why the problem occurred. A well-designed score- for which he or she was responsible. The general lack of card captures not only outcomes (like sales volume or rev- information ﬂ ow extended to decision rights, as few managers enue) but also leading indicators of those outcomes (such understood where their authority ended and another’s began. as the number of customer calls or completed customer Accountability even for day-to-day decisions was unclear, and plans). As a result, the focus of management conversations

hbr.org | June 2008 | Harvard Business Review 69 The Secrets to Successful Strategy Execution

has shifted from trying to explain the past to charting the lated into action. As long as companies continue to attack future – anticipating and preventing problems. their execution problems primarily or solely with structural

Q Making the planning process more inclusive. Groups are or motivational initiatives, they will continue to fail. As we’ve explicitly mapping out the ways their initiatives depend seen, they may enjoy short-term results, but they will inevita- on and affect one another; shared group goals are assigned bly slip back into old habits because they won’t have addressed accordingly. the root causes of failure. Such failures can almost always be

Q Enhancing the middle management career path to empha- fi xed by ensuring that people truly understand what they are size the importance of lateral moves to career advancement. responsible for and who makes which decisions – and then Goodward Insurance has just embarked on this journey. The giving them the information they need to fulfi ll their responsi- insurer has distributed ownership of these initiatives among bilities. With these two building blocks in place, structural and various groups and management levels so that these efforts motivational elements will follow. don’t become silos in themselves. Already, solid improvement in the company’s execution is beginning to emerge. The early Gary L. Neilson ([email protected]) is a senior vice presi- evidence of success has come from employee-satisfaction sur- dent in the Chicago offi ce of Booz & Company, a management- veys: Middle management responses to the questions about consulting fi rm. He is a coauthor of “The Passive-Aggressive levels of cross-unit collaboration and clarity of decision mak- Organization” (HBR, October 2005). Karla L. Martin (martin_ ing have improved as much as 20 to 25 percentage points. And [email protected]) is a principal in the fi rm’s San Francisco offi ce. high performers are already reaching across boundaries to Elizabeth Powers ([email protected]) is a principal gain a broader understanding of the full business, even if it in the New York offi ce. doesn’t mean a better title right away. • • • 1. The details for this example have been taken from Gary L. Neilson and Execution is a notorious and perennial challenge. Even at Bruce A. Pasternack, Results: Keep What’s Good, Fix What’s Wrong, and the companies that are best at it – what we call “resilient Unlock Great Performance (Random House, 2005). organizations” – just two-thirds of employees agree that im- Reprint R0806C To order, see page 143. portant strategic and operational decisions are quickly trans- Thomas Cheney

70 Harvard Business Review | June 2008 | hbr.org STEADY WINDS | A CLEAR HORIZON | NO MORE MEETINGS The course was set a long time ago.

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REVOLUTION IN PRODUCTIVITY Trapped inside your company’s processes are activities that can now be swapped, bought, and sold. If you liberate them, you can create a radically more efﬁ cient plug-and-play business. by Ric Merriﬁ eld, Jack Calhoun, and Dennis Stevens

USINESSES HAVE BEEN reengineering their processes for nearly 20 years. For many companies, knitting together numerous fragmented tasks and data into cross-functional business processes has had a substantial impact in terms of cost savings, cycle-time reductions, and service improvements. However, many companies that embraced the reengineering revolution are now hitting a wall. Fortunately, the means to break through that wall are emerging. Thanks to the development of new technologies for using and sharing functions via the internet, the frontier is no longer the process but rather the business activities that make up

David Plunkert David every process – from pricing a product to issuing an invoice to

hbr.org | June 2008 | Harvard Business Review 73 The Next Revolution in Productivity

assessing the risk of individual customers to prioritizing the their underlying software or electronic user interface allows potential features of a new product in development. the activity to be turned into a de facto web service. This trans- It is becoming possible to design many business activi- formation makes it vastly easier to share discrete activities ties as Lego-like software components that can be easily put and entire processes internally, to buy or sell them externally, together and taken apart. What’s primarily responsible is to delegate their execution to suppliers or customers, and to service-oriented architecture, a relatively new way of design- update and maintain IT systems. ing and deploying the software that supports a business ac- That said, obstacles to using SOA in this way exist. One is the tivity. The beauty of SOA is that it allows activities – or pro- lack of a universal standard: Vendors and industries currently cesses built from such activities – to be accessed using the now- use different versions of SOA. This is not a major issue, though, ubiquitous internet in a standardized fashion. Whether the because systems using those various versions can converse capabilities that make up an activity are manual, fully auto- with one another about most activities. Moreover, all signs mated, or somewhere in between, the SOA-based design of suggest that SOA will become a standard overseen by a governing body of professionals. “The world is rapidly moving in that direction,” says Mark Baciak, a senior technology architect at Microsoft, who pioneered SOA work at the software giant and several of its large customers. companies that have A bigger obstacle is a familiar one: the gulf between corporate leaders and embraced service-oriented architecture their IT departments. Chief executives have applied it without fi rst rethinking have tended to see SOA as merely the next big thing being pushed by their the design of their businesses. CIOs and to assume that it, too, will end up costing a fortune without delivering commensurate benefi ts. Partly because of this fear and partly because CIOs have not understood or have had trouble articulating what SOA makes possible, most CEOs have authorized their IT departments to deploy it in a limited fashion – to improve and lower the cost of maintaining the software supporting existing processes. As a result, most companies that have embraced SOA have applied it without fi rst rethinking the design of their businesses. This omission means they have overlooked SOA’s greatest value: the opportunity to create much more focused, effi cient, and fl exible organizational structures. Companies with which we have worked that have applied SOA only after redesigning their operations have eliminated huge amounts of redundant software, reaped major cost savings from simplifying and automating manual processes, and realized big increases in productivity. Harvard Pilgrim Health Care, the insurer, was able to shift nonstrategic, or noncore, activities such as pharmacy-benefi ts management and disease diagnosis to companies that per-

74 Harvard Business Review | June 2008 | hbr.org form them better. Motorola’s mobile-phone business recently Imagine if a car manufacturer designed its identifi ed ways to standardize the previously proprietary pro- motors and all the supporting parts (alternator, cesses of its customer-service call centers, allowing them to radiator, fuel pump, battery, and so on) so that share software and cut their collective annual operating costs it was impossible to replace one piece without by millions of dollars. And in a test case that helped Baciak replacing the whole system. That’s the state of sell Microsoft on SOA, the software giant invested business processes at the vast majority of companies: They $1.25 million in an SOA project that cut the an- are monolithic operations supported by software that is not nual cost of maintaining one set of IT systems easy to replace piece by piece – especially if they use cross- by more than $3 million. functional “enterprise” software packages. Just replacing a Achieving such gains, however, requires a sea pricing calculator, for example, requires an absurd amount of change in operations-improvement techniques. time and money. In essence, it calls for the transformation of companies One reason that reengineering focused on creating better from collections of proprietary operations into a collection of proprietary processes is that 20 years ago, in the early days of standard plug-and-play activities. the process-redesign revolution, the internet was not what it is today: an omnipresent computer network that allows organiza- The Value of Service-Oriented Architecture tions of all sizes, whether in Minneapolis or Mumbai, to easily Over the past 25 years, rapid advances in IT and operations and inexpensively plug into the same software modules. The design and practices revolutionized the way organizations only way to share pricing, accounts receivable, marketing, sales, conducted business and yielded huge productivity gains. The and other capabilities that were automated or at least had elec- widespread adoption of quality-improvement methods such tronic user interfaces was to build or lease a private network; as total quality management and Six Sigma reduced waste and for most companies, that did not make economic sense. defects. Capitalizing on information technology, reeingineer- Also missing until this decade were methods of designing ing, and other process-redesign techniques helped organiza- computer systems that permit capabilities to be shared over tions eliminate some tasks and integrate others that had been the internet as web services. That’s the essence of SOA: It imprisoned in functional silos. The result was much more ef- provides guidelines that allow software developers to design fi cient, cross-functional processes for procuring supplies, tak- systems in stand-alone chunks of computer code, each specify- ing and fulfi lling orders, manufacturing products, providing ing the critical outcomes, performance metrics, and interfaces services, delivering offerings to customers, and so on. Collec- between a discrete activity and other services. Consider a web tively, these innovations have helped companies reduce costs service that one manufacturer installed to verify zip codes by hundreds of millions – sometimes even billions – of dol- for its direct-mail marketing campaigns. The specifi ed out- lars, cut order-delivery times by 50% or more, and signifi cantly come was “validate zip code” – in other words, make sure mail- boost quality. ings were not misdelivered. The two key metrics for this service For the most part, however, reengineering has involved re- were the accuracy rate of mailings (determined by the number casting processes and the information systems that support returned because of incorrect zip codes) and the frequency them in a proprietary, rather than a standardized, form – that with which the software found the right zip code for returned is, customized for individual organizations. Such designs make mailings. Specifi ed interfaces included those with the “update it diffi cult and expensive for businesses to share, consolidate, customer address” and “handle returned mail” services. and change processes. For example, you can’t rip out FedEx’s When software is designed this way and placed on an in- order-fulfi llment process and the computer systems behind tranet or the internet, anyone using SOA – any business unit in it (or any component of the process or the systems) and plug a fi rm and any customer or supplier – can plug in or remotely them into another company. That limitation has made it access the same software. Five divisions can use the same pric- tough for FedEx to integrate the many logistics companies ing calculator, eliminating the need for fi ve separate systems. it has acquired. Outsourcing noncore activities becomes extremely easy. These Proprietary design, together with technology constraints attributes make SOA-based software far superior to both the that existed until recently, have kept the constituent activities customized software supporting proprietary processes and so- of a process locked within it. Therefore, the activities could called “off-the-shelf” enterprise software packages. not be easily shared across processes or businesses. The re- Airline check-in is a good example of what this new world sult: Virtually all large companies suffer from an enormous looks like. A standard interface allows passengers to check in duplication of activities; they continue to create and perform for fl ights on their personal computers, at an hundreds of noncore tasks that would ideally be outsourced; electronic airport kiosk, or through a customer- and they are spending exorbitant amounts on IT projects in service representative using a console. It does order to support redundant and nonstrategic operations and not matter to the customer what’s happening to update core processes. behind the interface – who is supplying the

hbr.org | June 2008 | Harvard Business Review 75 The Next Revolution in Productivity

capabilities and how – as long as she has a satisfactory out- orders, secure supply, forecast demand, and plan replenish- come. If the airline can fi nd an organization that can pro- ment. From a mile-high view, the operations of a typical large duce the required outcome at a lower cost, it can simply buy company comprise fi ve to seven areas, 20 to 40 activities, 150 and plug in that service. And when a superior provider comes to 350 capabilities, and more than 1,000 subcapabilities. along, the airline can easily unplug the existing service and One of the biggest challenges in identifying duplications in plug in the new one. This is not science fi ction; at least one work and technology is that the same or similar activities are major airline is doing it already. However, the reality is that often called by different names, even within the same company. a complex function like fl ight check-in is not just one activity Defi ning a company’s operations in terms of the outcomes or or service but, rather, a bundle of several that can be indepen- purposes of its activities helps to solve that problem. It al- dently swapped or reused in other functions. lows managers, operations designers, and technologists to see Unfortunately, few companies are using SOA with crystal clarity the work – the operations and supporting to create more productive and focused organiza- technology – that their company’s units, their customers, and tions or to slash costs by purging duplicative op- their suppliers are duplicating. They can then identify which erations and technologies. They are not revisit- activities are strategic because they provide competitive ad- ing the fundamental design of their operations. vantage and should be kept in-house, which might be offered as services to other companies, which should be outsourced, Rethinking Operations and which of those retained need to be strengthened. Turning companies into plug-and-play businesses is easier Only with this kind of atomic view can executives set priori- than reengineering in some ways and more challenging in oth- ties for initiatives to improve operations and their supporting ers. It’s easier because it doesn’t have to be done in a big bang: technology. The method is pretty straightforward. We call it Individual SOA projects tend to be of much smaller scope and a business capabilities analysis. shorter duration, and have a faster payback, than reengineering projects. What’s more, turning a business into a collec- Conducting a Business Capabilities Analysis tion of loosely coupled activities does not require that mono- The fi rst step involves drawing a diagram of the activities, ca- lithic enterprise resource planning or customer-relationship pabilities, and subcapabilities in your business. Collaborating management systems be overhauled or ripped out. To the with the people who run a particular area of the business, you contrary, when SOA is placed on top of them, it unlocks their should describe its operations in terms of outcomes or funda- proprietary language, making them more accessible. mental purposes. This is easier said than done because people Moving into the plug-and-play world is more challenging are used to describing the work they do (“We send a customer than reengineering because it requires more-profound op- an invoice that requests on-time payment”) and how they do erational and technological changes: for divisions to share it (“We check the order against our invoice. Then we call the operations and software, for companies to outsource far more customer to ask who should receive the invoice and how we than they do, and for business units to shift operations to cus- should send it. On the due date, we check to see whether tomers and suppliers. Indeed, managers must adopt a whole we have been paid.”). They are not accustomed to talking new approach to operations design, which starts with a new about its fundamental purpose or outcome (“bill customer” unit of operational analysis – the level at which a company’s or “collect customer payment”). operations troubleshooters diagnose and solve operational The next task is to describe the crucial capabilities that sup- problems. port most of your business activities, including all the key In the late nineteenth century, the unit of analysis was the ones. For the area “generate demand,” the managers at one worker’s task, the effi ciency of which Frederick Taylor’s time fi nancial services fi rm listed three activities: manage partner and motion studies improved. Sixty or so years later, with the relationships, market products and services, and sell products arrival of the mainframe computer, the key unit became and services. We then asked them what capabilities supported the department. Then, in the late 1980s and early 1990s, when each. They came up with seven, for instance, cheap PCs and internal networks allowed companies to con- for sell products and services: manage orders, nect departments economically, it became the cross-functional manage sales, manage immediately fi lled process. In the age of the internet and SOA, the unit of analysis sales, confi gure product pricing, manage con- is not a company’s way of conducting its operations at all; tracts, qualify prospects, and conduct business it is the primary purpose or desired outcome of each intelligence. In all, it took about three weeks to activity, no matter how that activity is accom- defi ne the entire company’s capabilities and subcapabilities. plished. For example, every company has either After mapping out the activities in your operations and the an internal or outsourced payroll process with capabilities involved in carrying them out, it’s time to identify a fundamental purpose of paying employees. the activities most critical to your company’s success and to Other common activities are capture customer assess the health of all activities. If the executive team has

76 Harvard Business Review | June 2008 | hbr.org a general understanding of what drives revenue and profi t- guidelines, sharing it with other divisions or shifting it to ability in the organization, the fi rst task typically takes only customers or suppliers will be diffi cult. two to four weeks. Even if executives agree on the drivers, An important aspect of predictability is that some activities however, they might fi nd it valuable to bounce their percep- have inherently more unpredictable outcomes than others. On- tions off other people in the organization (functional heads, line companies like Amazon have highly predictable customer- customer-facing managers, and workers) as well as customers, ordering activities: When a customer orders online and pro- partners, and suppliers. vides the required information (including name, address, Because this exercise differs radically from operations- product selection, and credit card number), Amazon knows improvement methods that are now widely employed, we with certainty that the customer has committed to this spe- suggest starting small – with one or two groups of capabili- cifi c order. In contrast, a management consultancy has trouble ties in a specifi c part of the business – in order to acclimate predicting precisely how many customers will say yes to its functional heads who must play a central role in the effort. proposals and whether a particular customer wants exactly This will challenge their mind-sets, get them thinking about what the proposal offers. The managers leading your company’s effort now can use the results of this analysis to produce a heat map: a diagram that lays out all the fi rm’s activities and identifi es those that are critical and those whose capabilities can’t just rip out a need to be improved. Of course, the capabili- company’s order-fulfi llment process ties to focus on fi rst are the poor performers whose value to the business is high. (See the and plug it in at another fi rm. exhibit “Identifying Your Top Priorities.”) After piloting a capabilities analysis in one small part of its operations, a multibillion- dollar U.S. distribution company decided to create a heat map of its entire business. In what SOA-based systems should or should not be built, and particular, it wanted to know which capabilities were critical help them understand the magnitude of the organizational for fulfi lling a mandate from its biggest supplier to dramati- changes that lie ahead. Typically, such initial efforts, which re- cally improve satisfaction among the retailers and consumers quire only a couple of full-time people, can identify substantial who bought the supplier’s products. The analysis parsed the opportunities for improvement in six to 10 weeks. fi rm’s vast operations into about 20 activities and 140 capabili- There are three basic criteria for determining which activities. After asking managers in those areas about the value, per- ties are most important to your business, which have under- formance, and predictability of each, they identifi ed three ac- lying capabilities that need to be improved, and which are tivities with a total of 14 capabilities as the leading candidates candidates to become web services: for improvement – the ones with the greatest value, the most

Q Business value. Does the activity (or the capabilities that predictable outcomes, and the worst performance. Because 14 deliver it) differentiate your company from competitors, were too many to tackle at once, they decided to ask retailers greatly infl uence whether customers buy from you and what they thought the priorities should be. Three capabilities remain loyal, or drive a key performance measure such as emerged: fi x sloppy order fulfi llment so that the right ship- cost of manufacturing, product quality, or time to market ments go to the right retailers at the right time; give retailers with new products? suffi cient marketing collateral to persuade consumers to buy

Q Current performance. Is the performance of an activity’s the distributor’s accessories; and track product sales more rig- underlying capabilities excellent, inconsistent, or poor in orously to help retailers weed out poor performers faster. terms of your company’s needs and relative to competitors? At this point, the distributor analyzed the people, processes, How much investment is necessary to raise performance and IT of the three activities in depth. The solution for im- to the required level? Would the higher performance justify proving order fulﬁ llment involved training retailers to use the the investment? existing technology; automation was the answer for tracking

Q Predictability. Are the outcomes that an activity deliv- product sales. Not all the solutions identiﬁ ed were new. For ers (in terms of cost, time, quality, and so on) inherently example, some managers had long pushed the company to predictable or not? The answer to that question is impor- install product-information software to support the manage- tant because if the outcomes are highly unpredictable, the ment and distribution of marketing collateral, but not until activity (or at least its user interface) will be difﬁ cult to the capabilities analysis had been conducted did the business automate. If it cannot be automated according to SOA case for making the investment seem compelling.

hbr.org | June 2008 | Harvard Business Review 77 The Next Revolution in Productivity

Only after tackling these three priorities did We typically fi nd that as many as 20% of activities are pri- the distributor return to the remaining 11. Al- mary and that 25% to 50% of all activities can be shared or though its overall improvement program is still shifted to external parties. The CIO of one manufacturer ini- a work in progress, customer satisfaction has tially thought that only two divisions had redun- already increased substantially. dant marketing data systems and subscription One lesson of this story is that the heat map is services but ultimately discovered that 12 di- strictly a tool for identifying priorities. By providing an over- visions did. Consolidating them into an SOA- view of all the activities in a business, it can help managers based system that all 12 could share cut the throughout the organization agree on priorities for an im- annual technology and data-subscription budget provement program – but managers must think long and hard by $40 million, allowed the company to redeploy 63 of the about how many the company can realistically take on at 70 staff members who initially supported the 12 systems, and one time. Otherwise, the program may go nowhere fast. A made the new system accessible to divisions that previously second lesson is that automation, including the implemen- could not afford a system. tation of SOA, is a means to an end and not an end in itself. A business capabilities analysis conducted in 2000 helped Charles Baker, Harvard Pilgrim’s then-new CEO, realize that he could transfer 40% of the insurer’s operations to other companies that could perform them better. The heat map showed, for example, that one of the or buying fi rm’s most important capabilities was identifying subscribers who were in the early SOA software should be the stages or at high risk of developing chronic illnesses like diabetes and heart disease. last – not the fi rst – step in Spotting these people early would enable creating a new operating model. Harvard Pilgrim to enroll them in preventive care or disease-management programs before their conditions became serious. That, however, required sophisticated data- mining and data-analysis technology that Notably, the distributor decided what to automate – and could comb through claims and other information. Recogniz- where to apply SOA – only after it had chosen the capabilities ing that it lacked the technology and the analytical expertise, whose improvement was most critical to achieving its busi- the insurer moved those activities to an outside specialist. ness objective. In the end, Harvard Pilgrim decided to focus its attention and resources on improving distinctive capabilities that pro- Creating a New Operating Model vide a competitive advantage: customer service, creating new With the heat map of activities in hand, managers will have products, pricing health insurance (actuarial services), con- much or most of the information they need to design a new tracting doctors to participate in its network, selling to large operating model. They might want to probe a bit more – for groups, and marketing directly to individual policyholders. example, to ascertain whether apparently similar activities in It had outside experts take over pharmacy-benefi ts manage- two areas are really the same, to check whether a standard ment, several disease-management programs, behavioral process already exists, or to understand just how intertwined health management, and claims processing. With the benefi t (or independent) activities are. Satisfi ed that they have an ac- of the capabilities-analysis results, the company could spell curate picture of all activities, managers can then place them out precisely what it expected its dozens of contractors to in one or more of the following categories: deliver in terms of quality, cost, volume, and cycle time – and

Q primary: activities that the company should keep in-house then could closely track their success in achieving that. Three and that should be the top priority of programs to improve separate ﬁ nance organizations and their systems were consoli- operations and technology dated into one.

Q shared: activities that can be shared with other divisions Thanks in part to the business capabilities analysis, Har-

Q shifted: activities that can be transferred to customers, sup- vard Pilgrim’s streamlining of its operations has paid off. The pliers, or operational specialists insurer, which was on the verge of bankruptcy in 2000, is now

Q automated: activities whose capabilities – or at least whose solidly in the black, has a host of loyal customers, and has re- user interfaces – can be automated so that they can be peatedly received top awards or rankings for the quality of its turned into web services services and customer satisfaction.

78 Harvard Business Review | June 2008 | hbr.org Identifying Your Top Priorities

This greatly simplifi ed heat map of a company’s “fulfi ll demand” area includes fi ve activities – manage customer support, plan fulfi llment, procure raw materials, produce products, Current-Performance Spectrum and ship products – and their associated capabilities. For each area, activity, and capability, the strip on top identifi es the value to the business (high, intermediate, or low), and the color requires attention of the box indicates the current performance. Any element that is of high value to the business and whose performance requires attention is a top priority for an improvement program. (An analysis of which activities could become web services has not been mapped.) performs well

HIGH BUSINESS VALUE

Fulﬁ ll Demand

HIGH VALUE LOW VALUE HIGH VALUE HIGH VALUE LOW VALUE

Manage Customer Procure Raw Plan Fulﬁ llment Produce Products Ship Products Support Materials

INTERMEDIATE VALUE LOW VALUE HIGH VALUE INTERMEDIATE VALUE LOW VALUE track supported manage manage sourcing fabricate products fulﬁ ll orders customers merchandise plan and suppliers

HIGH VALUE INTERMEDIATE VALUE HIGH VALUE LOW VALUE LOW VALUE align demand with administer provide support purchase materials assemble products sales forecasting transportation

HIGH VALUE INTERMEDIATE VALUE INTERMEDIATE VALUE INTERMEDIATE VALUE LOW VALUE track service administer receive indirect test products manage inventory performance supply plan capital goods

INTERMEDIATE VALUE HIGH VALUE LOW VALUE manage perform quality manage inventory plan check warehouse

LOW VALUE For this company, the “procure raw materials” activity is a top schedule priority; it falls within the critical area of “fulﬁ ll demand” and manufacturing contains two top-priority capabilities.

As we hope is abundantly clear by now, creating a new any large software application, the investment will be worth operating model does not begin with building or buying SOA it. SOA-based software can usually be updated in less than software. In fact, that is the last step – one you should take half the time needed for other software. After all, you can just only after you have identifi ed your company’s primary activi- plug in the new module without overhauling the software of ties and determined which have capabilities or interfaces that related activities. can be computerized. While no two companies are alike, we know of some that cut their annual IT budgets by 20% by sav- Barriers to Creating Plug-and-Play Businesses ing the automation decision for last. Gartner, the IT research and consulting fi rm, reports that However, once you’ve identifi ed primary activities whose more than half of the mission-critical systems companies outcomes are inherently predictable, you should move aggres- built in 2007 were based on SOA principles, and it predicts sively to apply SOA. Though it can be as expensive to install as that the fi gure will exceed 80% by 2010. Shifting to the world

hbr.org | June 2008 | Harvard Business Review 79 The Next Revolution in Productivity

of SOA will be anything but easy, however. Adopting this new letting go of activities – they either overestimate their impor- model requires a new mind-set for those who have been at the tance or fear that sharing or outsourcing them will jeopardize nexus of process improvement and technology. We compare it the unit’s performance. Consequently, the CEO must be deeply to the change that architects and engineers in the mid-1800s involved in deciding which work to do in-house, which du- had to make after the arrival of the two biggest plications to eliminate, and which work to shift to outsiders. construction technology breakthroughs of The CEO can and should be spared the process and technical that century: high-strength steel and electric details, but at the end of the day, he or she is the chief busi- elevators. They took 30 years to realize that ness architect. these great advances meant they could build New ways of constructing software com- skyscrapers. bined with a computer network that can In a similar way, breakthroughs in net- distribute the modules instantaneously any- working technology and software-building techniques are where in the world give executives unprec- unleashing a revolution in how operations are designed. edented tools for building ultra-effi cient and However, most managers are still using the operating model fl exible operations. The business leaders who are of the twentieth century: They continue to defi ne their ac- willing to pioneer plug-and-play businesses will fuel the next tivities and processes in a customized, proprietary fashion, great leap in corporate productivity. and they continue to build software in ways that mean entire systems must be thrown out when a part has to be Ric Merrifi eld ([email protected]) leads Microsoft’s replaced. business-architecture endeavors in Redmond, Washington. The leaders of companies are another obstacle to change. Jack Calhoun ([email protected]) is the CEO of Many view the debates about SOA as arcane technical discus- Accelare, a consulting fi rm in Randolph, Massachusetts. sions that need not concern them. They’re anything but that. Dennis Stevens ([email protected]) is the CEO Decisions about what business capabilities to eliminate or of Synaptus, an operations-improvement consulting fi rm in shift to customers, suppliers, and outsourcing fi rms should not Norcross, Georgia. be left to the operating divisions. Our experience has shown Reprint R0806D To order, see page 143. that many division heads and their direct reports have trouble

“R & D says try making them hotter and see if sales pick up.” Teresa Burns Parkhurst

80 Harvard Business Review | June 2008 | hbr.org Just what every home needs. Your very own 170,000 trillion watt power station.

Solar technology from GE could help produce enough energy to power thousands of homes with very low emissions. With a bit of help from that big red power station 93 million miles away, naturally. It’s one more example of our blueprint for a better world.

Design Art Credit

84 Harvard Business Review | June 2008 | hbr.org Thinking like a designer can transform the way you develop products, services, processes – and even strategy. Thinking by Tim Brown

HOMAS EDISON created the electric light- T bulb and then wrapped an entire industry around it. The lightbulb is most often thought of as his signature invention, but Edison understood that the bulb was little more than a parlor trick without a system of electric power generation and transmission to make it truly useful. So he created that, too. Thus Edison’s genius lay in his ability to conceive of a fully developed marketplace, not simply a discrete device. He was able to envision how people would want to use what he made, and he engineered toward that insight. He wasn’t always prescient (he Photos courtesy of IDEO of courtesy Photos

hbr.org | June 2008 | Harvard Business Review 85 Design Thinking

originally believed the phonograph would be used mainly gies aesthetically attractive and therefore more desirable to as a business machine for recording and replaying dictation), consumers or by enhancing brand perception through smart, but he invariably gave great consideration to users’ needs and evocative advertising and communication strategies. Dur- preferences. ing the latter half of the twentieth century design became Edison’s approach was an early example of what is now an increasingly valuable competitive asset in, for example, called “design thinking” – a methodology that imbues the the consumer electronics, automotive, and consumer pack- full spectrum of innovation activities with a human-centered aged goods industries. But in most others it remained a late- design ethos. By this I mean that innovation is powered by a stage add-on. thorough understanding, through direct observation, of what Now, however, rather than asking designers to make an people want and need in their lives and what they like or dis- already developed idea more attractive to consumers, compa- like about the way particular products are made, packaged, nies are asking them to create ideas that better meet consum- marketed, sold, and supported. ers’ needs and desires. The former role is tactical, and results Many people believe that Edison’s greatest invention was in limited value creation; the latter is strategic, and leads to the modern R&D laboratory and methods of experimental dramatic new forms of value. investigation. Edison wasn’t a narrowly specialized scientist Moreover, as economies in the developed world shift from but a broad generalist with a shrewd industrial manufacturing to knowl- business sense. In his Menlo Park, New edge work and service delivery, inno- Jersey, laboratory he surrounded himself vation’s terrain is expanding. Its ob- with gifted tinkerers, improvisers, and jectives are no longer just physical experimenters. Indeed, he broke the products; they are new sorts of pro- The surgeons mold of the “lone genius inventor” by described a cesses, services, IT-powered interac- creating a team-based approach to in- new device for tions, entertainments, and ways of novation. Although Edison biographers sinus surgery. One designer communicating and collaborating – write of the camaraderie enjoyed by this grabbed a marker, a fi lm exactly the kinds of human-centered merry band, the process also featured canister, and a clothespin and activities in which design thinking endless rounds of trial and error – the taped them together. “Do you can make a decisive difference. (See “99% perspiration” in Edison’s famous mean like this?” he asked. the sidebar “A Design Thinker’s Per- defi nition of genius. His approach was sonality Profi le.”) intended not to validate preconceived hypotheses but to help Consider the large health care provider Kaiser Permanente, experimenters learn something new from each iterative stab. which sought to improve the overall quality of both patients’ Innovation is hard work; Edison made it a profession that and medical practitioners’ experiences. Businesses in the ser- blended art, craft, science, business savvy, and an astute under- vice sector can often make signifi cant innovations on the front standing of customers and markets. lines of service creation and delivery. By teaching design think- Design thinking is a lineal descendant of that tradition. Put ing techniques to nurses, doctors, and administrators, Kaiser simply, it is a discipline that uses the designer’s sensibility and hoped to inspire its practitioners to contribute new ideas. methods to match people’s needs with what is technologically Over the course of several months Kaiser teams participated feasible and what a viable business strategy can convert into cus- in workshops with the help of my fi rm, IDEO, and a group of tomer value and market opportunity. Like Edison’s painstaking Kaiser coaches. These workshops led to a portfolio of innova- innovation process, it often entails a great deal of perspiration. tions, many of which are being rolled out across the company. I believe that design thinking has much to offer a business One of them – a project to reengineer nursing-staff shift world in which most management ideas and best practices are changes at four Kaiser hospitals – perfectly illustrates both the freely available to be copied and exploited. Leaders now look broader nature of innovation “products” and the value of a holis- to innovation as a principal source of differentiation and com- tic design approach. The core project team included a strategist petitive advantage; they would do well to incorporate design (formerly a nurse), an organizational-development specialist, thinking into all phases of the process. a technology expert, a process designer, a union representative, and designers from IDEO. This group worked with innovation Getting Beneath the Surface teams of frontline practitioners in each of the four hospitals. Historically, design has been treated as a downstream step in During the earliest phase of the project, the core team col- the development process – the point where designers, who laborated with nurses to identify a number of problems in the have played no earlier role in the substantive work of in- way shift changes occurred. Chief among these was the fact novation, come along and put a beautiful wrapper around that nurses routinely spent the fi rst 45 minutes of each shift at the idea. To be sure, this approach has stimulated market the nurses’ station debriefi ng the departing shift about the sta- growth in many areas by making new products and technolo- tus of patients. Their methods of information exchange were

86 Harvard Business Review | June 2008 | hbr.org A Design Thinker’s different in every hospital, ranging from recorded dictation to Personality Profi le face-to-face conversations. And they compiled the information they needed to serve patients in a variety of ways – scrawling Contrary to popular opinion, you don’t need quick notes on the back of any available scrap of paper, for weird shoes or a black turtleneck to be a design example, or even on their scrubs. Despite a signifi cant invest- thinker. Nor are design thinkers necessarily cre- ment of time, the nurses often failed to learn some of the ated only by design schools, even though most things that mattered most to patients, such as how they had professionals have had some kind of design train- fared during the previous shift, which family members were ing. My experience is that many people outside with them, and whether or not certain tests or therapies had professional design have a natural aptitude for been administered. For many patients, the team learned, each design thinking, which the right development shift change felt like a hole in their care. Using the insights and experiences can unlock. Here, as a starting gleaned from observing these important times of transition, point, are some of the characteristics to look for the innovation teams explored potential solutions through in design thinkers: brainstorming and rapid prototyping. (Prototypes of a service innovation will of course not be physical, but they must be Empathy. They can imagine the world from mul- tangible. Because pictures help us understand what is learned tiple perspectives – those of colleagues, clients, through prototyping, we often videotape the performance of end users, and customers (current and prospec- prototyped services, as we did at Kaiser.) tive). By taking a “people fi rst” approach, design Prototyping doesn’t have to be complex and expensive. In thinkers can imagine solutions that are inherently another health care project, IDEO helped a group of surgeons desirable and meet explicit or latent needs. Great develop a new device for sinus surgery. As the surgeons de- design thinkers observe the world in minute scribed the ideal physical characteristics of the instrument, detail. They notice things that others do not and one of the designers grabbed a whiteboard marker, a fi lm use their insights to inspire innovation. canister, and a clothespin and taped them together. “Do you Integrative thinking. They not only rely mean like this?” he asked. With his rudimentary prototype in on analytical processes (those that produce hand, the surgeons were able to be much more precise about either/or choices) but also exhibit the ability to what the ultimate design should accomplish. see all of the salient – and sometimes contra- Prototypes should command only as much time, effort, and dictory – aspects of a confounding problem investment as are needed to generate useful feedback and and create novel solutions that go beyond and evolve an idea. The more “fi nished” a prototype seems, the less dramatically improve on existing alternatives. likely its creators will be to pay attention to and profi t from (See Roger Martin’s The Opposable Mind: How feedback. The goal of prototyping isn’t to fi nish. It is to learn Successful Leaders Win Through Integrative about the strengths and weaknesses of the idea and to identify Thinking.) new directions that further prototypes might take. Optimism. They assume that no matter how The design that emerged for shift changes had nurses pass- challenging the constraints of a given problem, ing on information in front of the patient rather than at the at least one potential solution is better than the nurses’ station. In only a week the team built a working pro- existing alternatives. totype that included new procedures and some simple software with which nurses could call up previous shift-change Experimentalism. Signifi cant innovations don’t notes and add new ones. They could input patient informa- come from incremental tweaks. Design thinkers tion throughout a shift rather than scrambling at the end to pose questions and explore constraints in cre- pass it on. The software collated the data in a simple format ative ways that proceed in entirely new directions. customized for each nurse at the start of a shift. The result Collaboration. The increasing complexity of was both higher-quality knowledge transfer and reduced prep products, services, and experiences has replaced time, permitting much earlier and better-informed contact the myth of the lone creative genius with the with patients. reality of the enthusiastic interdisciplinary col- As Kaiser measured the impact of this change over time, it laborator. The best design thinkers don’t simply learned that the mean interval between a nurse’s arrival and work alongside other disciplines; many of them fi rst interaction with a patient had been more than halved, have signifi cant experience in more than one. At adding a huge amount of nursing time across the four hospi- IDEO we employ people who are engineers and tals. Perhaps just as important was the effect on the quality marketers, anthropologists and industrial design- of the nurses’ work experience. One nurse commented, “I’m ers, architects and psychologists. an hour ahead, and I’ve only been here 45 minutes.” Another

hbr.org | June 2008 | Harvard Business Review 87 Design Thinking n tio said, “[This is the] fi rst time I’ve ever made it out of here at ta the end of my shift.” en Thus did a group of nurses signifi cantly improve their pa- m tients’ experience while also improving their own job satis- e faction and productivity. By applying a human-centered l Move on to the design methodology, they were able to create a rela- p next project – repeat tively small process innovation that produced an Im outsize impact. The new shift changes are being Make the case to rolled out across the Kaiser system, and the ca- the business – pacity to reliably record critical patient infor- spread the word mation is being integrated into an electronic medical records initiative at the company. What might happen at Kaiser if every 3 nurse, doctor, and administrator in every hospital felt empowered to tackle problems Help marketing the way this group did? To fi nd out, Kaiser design a communi- has created the Garfi eld Innovation Center, cation strategy which is run by Kaiser’s original core team and acts as a consultancy to the entire or- Execute the Vision ganization. The center’s mission is to pur- Engineer the experience sue innovation that enhances the patient Prototype some more, experience and, more broadly, to envision test with users, test Kaiser’s “hospital of the future.” It is intro- internally ducing tools for design thinking across the Kaiser system.

How Design Thinking Happens Communicate The myth of creative genius is resilient: internally – don’t work We believe that great ideas pop fully in the dark! formed out of brilliant minds, in feats of imagination well beyond the abilities of Tell more stories (they Prototype, test, mere mortals. But what the Kaiser nursing keep ideas alive) prototype, test… team accomplished was neither a sudden breakthrough nor the lightning strike of genius; it was the result of hard work aug- Apply integrative Put customers in thinking mented by a creative human-centered discov- the midst of every- ery process and followed by iterative cycles of thing; describe their prototyping, testing, and refi nement. journeys The design process is best described meta- Build creative frameworks phorically as a system of spaces rather than a pre- (order out of chaos) defi ned series of orderly steps. The spaces demar- cate different sorts of related activities that together form the continuum of innovation. Design thinking Make many sketches, can feel chaotic to those experiencing it for the fi rst concoct scenarios time. But over the life of a project participants come to see – as they did at Kaiser – that the process makes sense and achieves results, even though its architecture differs from the linear, milestone-based processes typical of other kinds of business activities. Brainstorm Design projects must ultimately pass through three spaces Id (see the exhibit at right). We label these “inspiration,” for the ea circumstances (be they a problem, an opportunity, or both) tion that motivate the search for solutions; “ideation,” for the pro-

88 Harvard Business Review | June 2008 | hbr.org 2 Ins pir cess of generating, developing, and testing ideas that may at lead to solutions; and “implementation,” for the charting of a 1 io path to market. Projects will loop back through these spaces – n particularly the fi rst two – more than once as ideas are refi ned and new directions taken. Expect Success Sometimes the trigger for a project is leadership’s recogni- Build implementation tion of a serious change in business fortunes. In 2004 Shimano, resources into your plan a Japanese manufacturer of bicycle components, faced fl at- tening growth in its traditional high-end road-racing and mountain-bike segments in the United States. The com- What’s the business prob- pany had always relied on technology innovations lem? Where’s the oppor- to drive its growth and naturally tried to predict tunity? What has changed where the next one might come from. This time (or soon may change)? Shimano thought a high-end casual bike that ap- pealed to boomers would be an interesting area Look at the world: to explore. IDEO was invited to collaborate on Observe what people do, how they think, what they the project. need and want During the inspiration phase, an interdisciplinary team of IDEO and Shimano people – designers, behavioral scientists, marketers, and engineers – worked to What are the business con- Involve many disciplines straints (time, lack of resources, identify appropriate constraints for the from the start (e.g., engi- impoverished customer base, project. The team began with a hunch neering & marketing) shrinking market)? that it should focus more broadly than on the high-end market, which might prove to be neither the only nor even the best source of new growth. So it set out to learn why 90% of American Pay close attention to adults don’t ride bikes. Looking for new “extreme” users such as ways to think about the problem, the children or the elderly team members spent time with all kinds of consumers. They discovered that nearly Have a project room everyone they met rode a bike as a child where you can share and had happy memories of doing so. They insights, tell stories also discovered that many Americans are intimidated by cycling today – by the retail experience (including the young, Lycra-clad athletes who serve as sales staff in most independent How can new bike stores); by the complexity and cost of the bikes, Are valuable ideas, as- technology help? accessories, and specialized clothing; by the danger sets, and expertise hiding of cycling on roads not designed for bicycles; and by inside the business? the demands of maintaining a technically sophisticated bike that is ridden infrequently. This human-centered exploration – which took its insights from people outside Shimano’s core customer base – led to Organize information and the realization that a whole new category of bicycling might synthesize possibilities be able to reconnect American consumers to their experi- (tell more stories!) ences as children while also dealing with the root causes of their feelings of intimidation – thus revealing a large untapped market. The design team, responsible for every aspect of what was envisioned as a holistic experience, came up with the concept of “Coasting.” Coasting would aim to entice lapsed bikers into

hbr.org | June 2008 | Harvard Business Review 89 Design Thinking

A SKETCH (left, seat plus helmet an activity that was simple, straight- storage) and a PROTOTYPE (middle) would have expected the design team forward, and fun. Coasting bikes, built show elements of Coasting bicycles. to be responsible for – the look of the more for pleasure than for sport, would Shimano’s Coasting WEBSITE (right) bikes – was intentionally deferred to points users to safe bike paths. have no controls on the handlebars, no later in the development process, when cables snaking along the frame. As on the team created a reference design to the earliest bikes many of us rode, the brakes would be applied inspire the bike companies’ own design teams. After a success- by backpedaling. With the help of an onboard computer, a ful launch in 2007, seven more bicycle manufacturers signed minimalist three gears would shift automatically as the bicy- up to produce Coasting bikes in 2008. cle gained speed or slowed. The bikes would feature comfort- ably padded seats, be easy to operate, and require relatively Taking a Systems View little maintenance. Many of the world’s most successful brands create break- Three major manufacturers – Trek, Raleigh, and Giant – de- through ideas that are inspired by a deep understanding of veloped new bikes incorporating innovative components from consumers’ lives and use the principles of design to innovate Shimano. But the design team didn’t stop with the bike itself. and build value. Sometimes innovation has to account for In-store retailing strategies were created for independent bike vast differences in cultural and socioeconomic conditions. In dealers, in part to alleviate the discomfort that biking novices such cases design thinking can suggest creative alternatives felt in stores designed to serve enthusiasts. The team devel- to the assumptions made in developed societies. oped a brand that identiﬁ ed Coasting as a way to enjoy life. India’s Aravind Eye Care System is probably the world’s (“Chill. Explore. Dawdle. Lollygag. First one there’s a rotten largest provider of eye care. From April 2006 to March 2007 egg.”) And it designed a public relations campaign – in collabo- Aravind served more than 2.3 million patients and performed ration with local governments and cycling organizations – that more than 270,000 surgeries. Founded in 1976 by Dr. G. Venka- identiﬁ ed safe places to ride. taswamy, Aravind has as its mission nothing less than the erad- Although many others became involved in the project ication of needless blindness among India’s population, includ- when it reached the implementation phase, the application ing the rural poor, through the effective delivery of superior of design thinking in the earliest stages of innovation is what ophthalmic care. (One of the company’s slogans is “Quality is led to this complete solution. Indeed, the single thing one for everyone.”) From 11 beds in Dr. Venkataswamy’s home, Ara-

How to Make Design Thinking Part of the Innovation Drill

Begin at the beginning. Take a human-centered Try early and often. Seek outside help. Involve design thinkers at the approach. Along with busi- Create an expectation of rapid Expand the innovation very start of the innovation pro- ness and technology consider- experimentation and prototyp- eco system by looking for cess, before any direction has ations, innovation should factor ing. Encourage teams to create opportunities to co-create been set. Design thinking will in human behavior, needs, and a prototype in the fi rst week with customers and consum- help you explore more ideas preferences. Human-centered of a project. Measure progress ers. Exploit Web 2.0 networks more quickly than you could design thinking – especially with a metric such as aver- to enlarge the effective scale otherwise. when it includes research age time to fi rst prototype or of your innovation team. based on direct observation – number of consumers exposed will capture unexpected in- to prototypes during the life of sights and produce innovation a program. that more precisely refl ects what consumers want.

90 Harvard Business Review | June 2008 | hbr.org ARAVIND’S outreach to rural vind has grown to encompass fi ve hos- patients frequently brings basic treatment to one of its urban facilities pitals (three others are under Aravind DIAGNOSTIC TOOLS (left and and then home again. Over the years it management), a plant that manufac- center) and an advanced satellite- has bolstered its diagnostic capabilities linked TELEMEDICINE TRUCK tures ophthalmic products, a research in the fi eld with telemedicine trucks, (right) to remote areas of India. foundation, and a training center. which enable doctors back at Aravind’s Aravind’s execution of its mission and hospitals to participate in care decisions. model is in some respects reminiscent of Edison’s holistic con- In recent years Aravind’s analysis of its screening data has led cept of electric power delivery. The challenge the company to specialized eye camps for certain demographic groups, such faces is logistic: how best to deliver eye care to populations far as school-age children and industrial and government workers; removed from the urban centers where Aravind’s hospitals are the company also holds camps specifi cally to screen for eye located. Aravind calls itself an “eye care system” for a reason: diseases associated with diabetes. All these services are free for Its business goes beyond ophthalmic care per se to transmit the roughly 60% of patients who cannot afford to pay. expert practice to populations that have historically lacked ac- In developing its system of care, Aravind has consistently cess. The company saw its network of hospitals as a beginning exhibited many characteristics of design thinking. It has used rather than an end. as a creative springboard two constraints: the poverty and Much of its innovative energy has focused on bringing both remoteness of its clientele and its own lack of access to expen- preventive care and diagnostic screening to the countryside. sive solutions. For example, a pair of intraocular lenses made Since 1990 Aravind has held “eye camps” in India’s rural ar- in the West costs $200, which severely limited the number of eas, in an effort to register patients, administer eye exams, patients Aravind could help. Rather than try to persuade sup- teach eye care, and identify people who may require surgery pliers to change the way they did things, Aravind built its own or advanced diagnostic services or who have conditions that solution: a manufacturing plant in the basement of one of its warrant monitoring. hospitals. It eventually discovered that it could use relatively In 2006 and early 2007 Aravind eye camps screened more inexpensive technology to produce lenses for $4 a pair. than 500,000 patients, of whom nearly 113,000 required surgery. Throughout its history – defi ned by the constraints of poverty, Access to transportation is a common problem in rural areas, so ignorance, and an enormous unmet need – Aravind has built the company provides buses that take patients needing further a systemic solution to a complex social and medical problem.

Blend big and small Budget to the pace of Find talent any way you can. Design for the cycle. projects. Manage a portfolio innovation. Design thinking Look to hire from interdisci- In many businesses people of innovation that stretches happens quickly, yet the route plinary programs like the new move every 12 to 18 months. from shorter-term incremental to market can be unpredictable. Institute of Design at Stanford But design projects may take ideas to longer-term revolu- Don’t constrain the pace at and progressive business longer than that to get from tionary ones. Expect busi- which you can innovate by rely- schools like Rotman, in Toronto. day one through implementa- ness units to drive and fund ing on cumbersome budgeting People with more-conventional tion. Plan assignments so incremental innovation, but be cycles. Be prepared to rethink design backgrounds can push that design thinkers go from willing to initiate revolutionary your funding approach as proj- solutions far beyond your inspiration to ideation to imple- innovation from the top. ects proceed and teams learn expectations. You may even be mentation. Experiencing the full more about opportunities. able to train nondesigners with cycle builds better judgment the right attributes to excel in and creates great long-term design-thinking roles. beneﬁ ts for the organization.

hbr.org | June 2008 | Harvard Business Review 91 Design Thinking

Getting Back to the Surface monthly statements showing customers they’ve saved money I argued earlier that design thinking can lead to innovation without even trying. that goes beyond aesthetics, but that doesn’t mean that form In less than a year the program attracted 2.5 million custom- and aesthetics are unimportant. Magazines like to publish ers. It is credited with 700,000 new checking accounts and a photographs of the newest, coolest products for a reason: They million new savings accounts. Enrollment now totals more than are sexy and appeal to our emotions. Great design satisfi es 5 million people who together have saved more than $500 mil- both our needs and our desires. Often the emotional connec- lion. Keep the Change demonstrates that design thinking can tion to a product or an image is what engages us in the fi rst identify an aspect of human behavior and then convert it into place. Time and again we see successful products that were both a customer benefi t and a business value. not necessarily the fi rst to market but were the fi rst to appeal Thomas Edison represents what many of us think of as a to us emotionally and functionally. In other words, they do golden age of American innovation – a time when new ideas the job and we love them. The iPod was not the fi rst MP3 transformed every aspect of our lives. The need for transfor- player, but it was the fi rst to be delightful. Target’s products mation is, if anything, greater now than ever before. No mat- appeal emotionally through design and functionally through ter where we look, we see problems that can be solved only price – simultaneously. through innovation: unaffordable or unavailable health care, This idea will grow ever more important in the future. As billions of people trying to live on just a few dollars a day, Daniel Pink writes in his book A Whole New Mind, “Abundance energy usage that outpaces the planet’s ability to support it, has satisfi ed, and even over-satisfi ed, the material needs of education systems that fail many students, companies whose millions – boosting the signifi cance of beauty and emotion traditional markets are disrupted by new technologies or de- and accelerating individuals’ search for meaning.” As more of mographic shifts. These problems all have people at their heart. our basic needs are met, we increasingly expect sophisticated They require a human-centered, creative, iterative, and practi- experiences that are emotionally satisfying and meaningful. cal approach to fi nding the best ideas and ultimate solutions. These experiences will not be simple products. They will be Design thinking is just such an approach to innovation. complex combinations of products, services, spaces, and information. They will be the ways we get educated, the ways we Tim Brown ([email protected]) is the CEO and president of are entertained, the ways we stay healthy, the ways we share IDEO, an innovation and design fi rm with headquarters in Palo and communicate. Design thinking is a tool for imagining Alto, California. His designs have won numerous awards and these experiences as well as giving them a desirable form. been exhibited at the Museum of Modern Art in New York, the One example of experiential innovation comes from a fi nan- Axis Gallery in Tokyo, and the Design Museum in London. cial services company. In late 2005 Bank of America launched Reprint R0806E To order, see page 143. a new savings account service called “Keep the Change.” IDEO, working with a team from the bank, helped identify a consumer behavior that many people will recognize: After paying cash for something, we put the coins we received in change into a jar at home. Once the jar is full, we take the coins to the bank and deposit them in a savings account. For many people, it’s an easy way of saving. Bank of America’s innovation was to build this behavior into a debit card account. Customers who use their debit cards to make purchases can now choose to have the total rounded up to the nearest dollar and the difference deposited in their savings accounts. The success of this innovation lay in its appeal to an instinctive desire we have to put money aside in a painless and invisible way. Keep the Change creates an experience that feels natural because it models behavior that many of us already exhibit. To be sure, Bank of America sweetens the deal by matching 100% of the change saved in the fi rst three months and 5% of annual totals (up to $250) thereafter. This encourages customers to try it out. But the real pay- “It’s good to fi nally meet you after all those years of trying to avoid you.” off is emotional: the gratifi cation that comes with P.C. Vey

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There is no such thing as the right “way for a manager to operate or behave. There are only ways that are appropriate for specifi c tasks of specifi c enterprises under specifi c conditions.

Theodore Levitt “The Managerial ” Merry-Go-Round” Harvard Business Review July–August 1974

“ First of all, let me allay your fears of being overqualiﬁ ed.” ron, Patrick Hardin, Vey and P.C.

“I don’t read my reviews.” Charles Barsotti, John Caldwell, Todd Cond

94 Harvard Business Review | June 2008 | hbr.org “ A younger guy could have ducked faster. You’re ﬁ red!”

“Can you keep these in your ofﬁ ce til the employee evaluations are over?”

“We’ve invested heavily – if not always wisely – in talent.”

hbr.org | June 2008 | Harvard Business Review 95 Stable and paranoid, systematic and experimental, formal and frank: The success of Toyota, a pathbreaking six-year study reveals, is due as much to its ability to embrace contradictions like these as to its manufacturing prowess.

ContradictionsThe That Drive Toyota’s Success by Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu

NO EXECUTIVE NEEDS convincing that Toyota NMotor Corporation has become one of the world’s greatest companies because of the Toyota Production System (TPS). The un- orthodox manufacturing system enables the Japanese giant to make the planet’s best automobiles at the lowest cost and to develop new products quickly. Not only have Toyota’s rivals such as Chrysler, Daimler, Ford, Honda, and General Motors developed TPS-like sys-

tems, organizations such as hospitals and Koren Shadmi

96 Harvard Business Review | June 2008 | hbr.org

The Contradictions That Drive Toyota’s Success

postal services also have adopted its underlying rules, tools, fi nd solutions by transcending differences rather than resort- and conventions to become more effi cient. An industry of ing to compromises. This culture of tensions generates innova- lean-manufacturing experts have extolled the virtues of TPS tive ideas that Toyota implements to pull ahead of competi- so often and with so much conviction that managers believe tors, both incrementally and radically. its role in Toyota’s success to be one of the few enduring truths In the following pages, we will describe some key contradic- in an otherwise murky world. tions that Toyota fosters. We will also show how the company Like many beliefs about Toyota, however, this doesn’t serve unleashes six forces, three of which drive it to experiment and executives well. It’s a half-truth, and half-truths are dangerous. expand while three help it to preserve its values and identity. We studied Toyota for six years, during which time we visited Finally, we will briefl y describe how other companies can learn facilities in 11 countries, attended numerous company meet- to thrive on contradictions. ings and events, and analyzed internal documents. We also conducted 220 interviews with former and existing Toyota em- A Culture of Contradictions ployees, ranging from shop-fl oor workers to Toyota’s president, Most outsiders fi nd Toyota unfathomable because it doesn’t Katsuaki Watanabe. Our research shows that TPS is necessary bear any of the telltale signs of a successful enterprise. In fact, but is by no means suffi cient to account for Toyota’s success. it resembles a failing or stagnant giant in several ways. Toyota Quite simply, TPS is a “hard” innovation that allows the pays relatively low dividends and hoards cash, which smacks company to keep improving the way it manufactures vehi- of ineffi ciency. From 1995 to 2006, Toyota’s dividends aver- cles; in addition, Toyota has mastered a “soft” innovation that aged only 20% of earnings. For instance, its 2006 payout of 21.3% relates to corporate culture. The company succeeds, we be- was on par with that of smaller rivals, such as Nissan’s 22.9% lieve, because it creates contradictions and paradoxes in many and Hyundai-Kia’s 17.4%, but far behind (the then) Daimler- aspects of organizational life. Employees have to operate in Chrysler’s 47.5%. At the same time, it had accumulated $20 bil- a culture where they constantly grapple with challenges and lion of cash, leading some analysts to call it Toyota Bank.

Toyota views employees not just as pairs of hands but as knowledge workers who accumulate chie – the wisdom of experience – on the company’s front lines.

problems and must come up with fresh ideas. That’s why Most of Toyota’s senior executives are Japanese men, Toyota constantly gets better. The hard and the soft inno- whereas top management in successful Western corporations vations work in tandem. Like two wheels on a shaft that is more diverse. The company’s roots are in a rural suburb bear equal weight, together they move the company forward. of Nagoya called Mikawa, and they run deep, accounting for Toyota’s culture of contradictions plays as important a role its managers’ humility and strong work ethic. Toyota doesn’t in its success as TPS does, but rivals and experts have so far plan to relocate its headquarters to Tokyo as rivals like Honda overlooked it. have done. By any standard, the company pays executives very Toyota believes that effi ciency alone cannot guarantee suc- little. In 2005, Toyota’s top executives earned only one-tenth cess. Make no mistake: No company practices Taylorism better as much as Ford’s. Their compensation was lower than that than Toyota does. What’s different is that the company views of their counterparts at the 10 largest automobile companies, employees not just as pairs of hands but as knowledge work- save Honda. Toyota managers also rise through the hierarchy ers who accumulate chie – the wisdom of experience – on the slowly: In 2006, the company’s executive vice presidents were company’s front lines. Toyota therefore invests heavily in peo- on average 61 years old – close to the retirement age at many ple and organizational capabilities, and it garners ideas from non-Japanese companies. everyone and everywhere: the shop fl oor, the offi ce, the fi eld. Another oddity at Toyota is the infl uence the founding At the same time, studies of human cognition show that Toyoda family wields even though it controls just 2% of the when people grapple with opposing insights, they understand company’s stock. The Toyodas appear to have a say in most the different aspects of an issue and come up with effective key decisions, but it isn’t clear why they exert power. The solutions. So Toyota deliberately fosters contradictory view- company’s presidents came mostly from the family’s ranks for points within the organization and challenges employees to decades, and although three nonfamily executives have been

98 Harvard Business Review | June 2008 | hbr.org president over the past 13 years, there’s speculation that the action plans, and expected results on a single sheet of pa- next president will once again be a Toyoda. per. At the same time, Toyota fosters a complex web of social Toyota doesn’t merely have some odd characteristics – it networks because it wants “everybody to know everything.” is steeped in contradictions and paradoxes. During the fi rst The company develops horizontal links between employees phase of our research, we uncovered six major contradictory across functional and geographic boundaries, grouping them tendencies, one of which infl uences company strategy and the by specializations and year of entry; creates vertical relation- others Toyota’s organizational culture. ships across hierarchies through teaching relationships and Toyota moves slowly, yet it takes big leaps. For example, mentoring; and fosters informal ties by inviting employees the company started production in the United States gradu- to join clubs based on birthplaces, sports interests, hobbies, ally. It began in 1984 by forming a joint venture with GM and so on. called New United Motor Manufacturing, in Fremont, Cali- Toyota has a strict hierarchy, but it gives employees fornia, and opened its fi rst plant in Kentucky four years later. freedom to push back. Voicing contrarian opinions, expos- However, the launch of the Prius in Japan in 1997 was a huge ing problems, not blindly following bosses’ orders – these are leap. To yota came up with a hybrid engine that combined the all permissible employee behaviors. Watanabe, who recounts power of an internal combustion engine with the environmen- how he fought with his bosses as he rose through the ranks, tal friendliness of an electric motor much earlier than rivals. often says, “Pick a friendly fi ght.” We were surprised to hear Toyota grows steadily, yet it is a paranoid company. In criticism about the company and senior management in our the early 1950s, the company faced near bankruptcy, but over interviews, but employees didn’t seem worried. They felt they the past 40 years, the company has recorded steady sales and were doing the right thing by offering executives constructive market-share growth. Despite this enviable stability, senior criticism. executives constantly hammer home messages such as “Never Once we realized that contradictions are central to Toyota’s be satisfi ed” and “There’s got to be a better way.” A favorite say- success, we tried to identify the underlying forces that cause ing of former chairperson Hiroshi Okuda is “Reform business them. However, digging into Toyota is like peeling an onion: when business is good,” and Watanabe is fond of pointing out You uncover layer after layer, but you never seem to reach the that “No change is bad.” center. After we had written a half-dozen case studies, a pattern Toyota’s operations are effi cient, but it uses employees’ time in seemingly wasteful ways. You would be amazed to see how many people attend a meeting at Toyota even though most of them don’t participate in the discussions. The company assigns many more employees to offi ces in the fi eld than rivals do, and its senior executives spend an inordinate amount of time visiting dealers. Toyota also uses a large number of multilingual coordinators – a post that Carlos Ghosn abolished at Nissan soon after he became CEO in 2001 – to help break down barriers between its headquarters and international operations. Toyota is frugal, but it splurges on key areas. Only Wal- Mart can match Toyota’s reputation for penny pinching. In Japan, the company turns off the lights in its offi ces at lunch- time. Staff members often work together in one large room, with no partitions between desks, due to the high cost of offi ce space in Japan. At the same time, Toyota spends huge sums of money on manufacturing facilities, dealer networks, and human resource development. For instance, since 1990, it has invested $22 billion in production centers and support facilities in the United States and Europe, and for the past six years, it has spent $170 million annually competing in the Formula One circuit. Toyota insists internal communications be simple, yet it builds complex social networks. It’s an unwritten Toyota rule that employees must keep language simple when communicating with each other. When making presentations, they summarize background information, objectives, analysis,

hbr.org | June 2008 | Harvard Business Review 99 The Contradictions That Drive Toyota’s Success

fi nally emerged. We identifi ed six forces that cause contra- that outlines the company’s beliefs, says it best: “We are al- dictions inside the company. Three forces of expansion lead ways optimizing to enhance the happiness of every customer Toyota to instigate change and improvement. Not surprisingly, as well as to build a better future for people, society, and the they make the organization more diverse, complicate decision planet we share. This is our duty. This is Toyota.” making, and threaten its control and communications systems. Many of Toyota’s goals are purposely vague, allowing em- To prevent the winds of change from blowing down the or- ployees to channel their energies in different directions and ganization, Toyota also harnesses three forces of integration. forcing specialists from different functions to collaborate They stabilize the company, help employees make sense of the across the rigid silos in which they usually work. For example, environment in which they operate, and perpetuate Toyota’s Watanabe has said that his goal is to build a car that makes the values and culture. air cleaner, prevents accidents, makes people healthier and happier when they drive it, and gets you from coast to coast Forces of Expansion on one tank of gas (see “Lessons from Toyota’s Long Drive,” “This is how we do things here” is a common refrain in every HBR July–August 2007). Zenji Yasuda, a former Toyota senior organization. Established practices become standardized and managing director, points out the wisdom of painting with create effi ciencies. Over time, however, those methods can broad strokes. “If he prevent the adoption of new ideas. Toyota prevents rigidity makes [the goal] more from creeping in by forcing employees to think about how concrete, employees Forces of Expansion to reach new customers, new segments, and new geographic won’t be able to exer- lead the company to instigate areas and how to tackle the challenges of competitors, new cise their full poten- change and improvement ideas, and new practices. tial. The vague nature Q Impossible goals Impossible goals. By setting near-unattainable goals, Toyo- of this goal confers 3QLocal customization ta’s senior executives push the company to break free from es- freedom to research- tablished routines. This practice goes back to Toyota’s genesis. ers to open new ave- QExperimentation In 1937, the founder, Kiichiro Toyoda, wanted to produce auto- nues of exploration; mobiles in Japan without using foreign technology. It seemed procurement to look like an impossible goal; even mighty zaibatsu such as Mitsubi- for new and unknown shi and Mitsui had decided against entering the automobile suppliers who possess needed technology; and sales to con- industry at that stage because of the investments they would sider the next steps needed to sell such products.” have to make. Toyoda dared to – and the rest is history. Local customization. Toyota doesn’t modify its automo- Toyota often sets tough goals to raise employees’ conscious- biles to local needs; it customizes both products and opera- ness and self-worth. Consider the company’s global strategy: tions to the level of consumer sophistication in each country. Meet every customer need and provide a full line in every This strategy pushes Toyota out of Japan, where it is dominant, market. It’s impossible for any company to do that. Besides, and into overseas markets, where it has often been the under- the strategy runs contrary to management thinking, which es- dog. Following the strategy increases operational complex- pouses the merits of making trade-offs. Strategy guru Michael E. ity, but it maximizes employees’ creativity since they have to Porter, for instance, says that the essence of strategy is choos- develop new technologies, new ways of marketing, and new ing what not to do. However, Toyota tries to cater to every supply chains. Nissan and Honda follow the same strategy, but segment because of its belief that a car contributes to making less rigorously: In 2006, Toyota offered 94 models in Japan – people happy. It’s reminiscent of Henry Ford’s desire to make almost three times as many as Nissan’s 35 and Honda’s 30 mod- automobiles affordable to American families of moderate els. Pursuing local customization also exposes Toyota to the means so that they might enjoy “the blessings of happy hours sophistication of local tastes. For instance, when it introduced spent in God’s great open spaces.” Toyota has set itself the goal the subcompact Yaris in 1999, Toyota had to offer advanced of delivering “a full line in every market” to make employees technology, greater safety, roomier interiors, and better fuel feel they serve a useful purpose. Toyota Value, the document effi ciency to live up to European customers’ expectations.

By encouraging open communication as a core value, Toyota has made its culture remarkably tolerant of failure.

100 Harvard Business Review | June 2008 | hbr.org Local customization forces Toyota to push the envelope no choice but to tap a hybrid technology that one of the in numerous ways. For instance, the company faced complex company’s laboratories was developing. Sure enough, the fi rst challenges in 1998 when it developed the Innovative Interna- engine wouldn’t start. When a subsequent model did, the tional Multipurpose Vehicle (IMV) platform. Toyota engineers proto type moved only a few hundred yards down the test had to design the platform to meet the needs of consumers track before coming to a dead halt. In later models, the battery in more than 140 countries in Asia, Europe, Africa, Oceania, pack shut down whenever it became too hot or cold. Despite Central and South America, and the Middle East. The IMV these setbacks, Toyota didn’t stop working on the project and platform is used for three vehicle types – trucks, minivans, and unveiled a hybrid concept car at the 1995 Tokyo Motor Show. sport utility vehicles – so Toyota can minimize design and pro- Its executives knew that alternative power train technolo- duction costs. Notably, the IMV-based vehicles were the fi rst gies were emerging, but the fact that the Prius would be an that Toyota produced overseas without fi rst making them in interim solution didn’t deter them. They believed the project Japan, which led to the decentralized development of produc- was worth the investment because Toyota would learn a lot tion know-how, manufacturing technology, and production in the process. planning technologies. Since 2004, Toyota has produced IMV- Toyota organizes experiments using strict routines, as is based models in Thai- widely known. It has refi ned Plan-Do-Check-Act (PDCA), the land, Indonesia, Ar- continuous-improvement process used throughout the busi- gentina, and South ness world, into the Toyota Business Practices (TBP) process. Forces of Integration stabilize the company’s expansion Africa while India, The eight-step TBP lays out a path for employees to challenge and transformation the Philippines, and the status quo: clarify the problem; break down the problem; Malaysia manufac- set a target; analyze the root cause; develop countermeasures; QValues from the founders ture them for their see countermeasures through; monitor both results and pro- 3QUp-and-in people management own markets. cesses; and standardize successful processes. Similarly, the A3 The IMV also ren- report, named for a sheet of paper 11 inches by 17 inches, is QOpen communication dered the Made-in- a succinct communication tool. As we mentioned earlier, it Japan concept irrel- forces employees to capture the most essential information evant to the Toyota needed to solve a problem on a single sheet that they can dis- brand. Many executives thought it was risky to relinquish the seminate widely. label since it had become synonymous with quality. However, What sets Toyota’s culture apart is the way it encourages executive vice president Akio Toyoda, then in charge of sales employees to be forthcoming about the mistakes they make and production in Asia, launched a personal crusade to per- or the problems they face. By encouraging open communica- suade employees that the company should replace Made in tion as a core value for decades, Toyota has made its culture Japan with Made by Toyota. remarkably tolerant of failure. Experimentation. Toyota’s eagerness to experiment helps it clear the hurdles that stand in the way of achieving near- Forces of Integration impossible goals. People test hypotheses and learn from the As Toyota expands, it has to deal with a greater variety of consequent successes and failures. By encouraging employees perspectives from the growing number of employees and cus- to experiment, Toyota moves out of its comfort zone and into tomers in many markets. In addition, the quality of internal uncharted territory. communications deteriorates, and it becomes diffi cult to co- Toyota has found that a practical way to achieve the im- ordinate operations across markets and product groups. How possible is to think deeply but take small steps – and never does the company cope with the hazards of constant change give up. It fi rst breaks down a big goal into manageable chal- and growth? We found three forces of integration that allow lenges. Then it experiments to come up with new initiatives Toyota to stick to its mission. They perpetuate its culture and and processes for handling the more diffi cult components of stabilize the company’s expansion and transformation. each challenge. This pragmatic approach to innovation yields Values from the founders. Over the decades, several numerous learning opportunities. Consider, for instance, To- people have developed Toyota’s values: Sakichi Toyoda, who yota’s path for developing the Prius. In 1993, the company de- created the parent Toyoda Automatic Loom Works; Kiichiro cided to develop a car that would be environmentally friendly Toyoda, Sakichi’s son and founder of the Toyota Motor Corpo- and easy to use. The development team, called G21, fi rst came ration; Taiichi Ohno, the TPS’s creator; Eiji Toyoda, Kiichiro’s up with a car that delivered a 50% improvement in fuel effi - fi rst cousin and a former Toyota president; Shotaro Kamiya, ciency. Toyota’s senior executives rejected the prototype and who developed the company’s sales network; and Shoichiro demanded a 100% improvement. That was unachievable us- Toyoda, Kiichiro’s son and another former president. The val- ing even the most advanced gasoline and diesel engines or ues include the mind-set of continuous improvement (kaizen); even fuel cell technology–based engines. The G21 team had respect for people and their capabilities; teamwork; humility;

hbr.org | June 2008 | Harvard Business Review 101 The Contradictions That Drive Toyota’s Success

putting the customer first; and the credit rating from AAA to AA1, citing importance of seeing things fi rsthand Characteristics of the guarantee of lifetime employment. (genchi genbutsu). Toyota Executives Even though the downgrade increased Toyota inculcates these values in em- Toyota’s interest payments by $220 mil- ployees by demonstrating their every- lion a year, company executives told the day relevance through on-the-job train- QWillingness to listen and learn rating agency that it would not aban- from others ing and through stories that managers don its commitment. tell succeeding generations of employ- QEnthusiasm for constantly Toyota prefers on-the-job training to ees. Although it is a complex organiza- making improvements off-the-job programs. During their ini- tion, we believe four simple beliefs have tial training, employees are given the QComfort with working in teams kept the company from losing its way. freedom to make judgment calls. They Tomorrow will be better than today. QAbility to take action quickly have to adhere to a broad set of guide- Toyota has succeeded in the long term to solve a problem lines rather than follow a strict set of because of its naive optimism. Its em- rules. The company adds more context QInterest in coaching other ployees see obstacles as challenges that employees to employees’ perspectives by asking energize them to do better. They really them to think as if they were two lev- QModesty believe that Toyota will make tomor- els higher in the organization. Toyota row a better day than today was. An at- trains employees in problem-solving titude of never being satisfi ed with the methods during their fi rst 10 years with status quo explains why employees conduct experiments all the company. Another feature of its people management poli- the time. cies is the role exemplary employees play as mentors. They Everybody should win. The company has stressed team- shoulder the responsibility of developing a cadre of manag- work as a guiding principle since its early days. When a prob- ers who learn through experimentation, and pass on Toyota’s lem arises, each member of the team is accountable and has values by sharing personal experiences – a modern-day ap- the authority and responsibility to fi nd a solution. The practice prenticeship system. started on the factory fl oor and has spread throughout the When Toyota evaluates managers, it usually emphasizes corporation. process performance and learning over results. The company Genchi genbutsu. At a recent conference, Toyota’s chairper- looks at how managers achieved their goals; how they handled son Fujio Cho translated genchi genbutsu as “Have you seen it issues; how they fostered organizational skills; and how they yourself?” The implication is that if you have not seen some- developed, motivated, and empowered people. The company thing fi rsthand, your knowledge about it is suspect. Toyota’s uses fi ve kinds of criteria, all of which are fuzzy and subjective. senior executives hold themselves to the same standard, em- For instance, one category it employs is personal magnetism phasizing the importance of the tacit knowledge rooted in (jinbo), which captures how much trust and respect the man- each employee’s actions and experiences. By visiting a factory ager has earned from others. Jinbo is a vague criterion that is and a dealership when he was in St. Petersburg, Cho com- open to interpretation and impossible to quantify; you can manded respect not just by talking about genchi genbutsu but evaluate people on it only if you have worked closely with by practicing it. them. Another quintessentially Toyota measure of manager Customers fi rst, dealers second – and manufacturer last. performance is persistence or resilience. The company sees Toyota believes its success depends on maintaining the trust this as part of its DNA, describing it as nebari tsuyosa, which of dealers and customers, and it goes to extraordinary lengths translates, literally, as adhesive strength. to forge lasting relationships with them. Even on the factory Toyota’s evaluation criteria are particularly relevant in au- fl oor, supervisors drive home to workers that it isn’t the com- tomobile manufacturing, where various types of expertise are pany but customers that pay their salaries. essential to success. It’s not the kind of company where a few Up-and-in people management. Many companies either shine. Watanabe says that “every single person is the main ac- promote employees or ask them to leave – up-or-out, as the tor on the stage.” When Toyota promotes employees, it doesn’t practice is called. Toyota rarely weeds out underperformers, fo- praise them. Instead, senior executives deliver a message along cusing instead on upgrading their capabilities. In fact, Toyota these lines: “Congratulations on your promotion. Many others is still committed to long-term employment – as all Japanese were within a hair’s breadth of being selected. Keep that in companies once were. During the 1997 Asian fi nancial crisis, for mind as you do your job.” This is to instill humility in employ- instance, Toyota’s Thailand operation weathered four straight ees by reminding them that their success is due in part to the years of losses with no job cuts. The order had come down efforts of equally accomplished colleagues. from then president Hiroshi Okuda: “Cut all costs, but don’t Open communication. Toyota operates 50 manufacturing touch any people.” In August 1998, Moody’s lowered Toyota’s facilities outside Japan, sells vehicles in more than 170 coun-

102 Harvard Business Review | June 2008 | hbr.org tries, and employs close to 300,000 people. Despite its size and she thinks is right. Every employee enjoys the prerogative to reach, Toyota still functions like a small-town company. Its top ignore the boss’s orders or not take them too seriously. Con- executives operate on the assumption that “everybody knows fronting your boss is acceptable; bringing bad news to the boss everybody else’s business.” is encouraged; and ignoring the boss is often excused. In many Information ﬂ ows freely up and down the hierarchy and of our interviews, employees told us how local operations had across functional and seniority levels, extending outside the succeeded by refusing to obey orders or ignoring what head- organization to suppliers, customers, and dealers. Typical of quarters had advised. For instance, the head of Toyota Motor traditional Eastern business practice, personal relationships Sales, U.S.A., Yukitoshi Funo, told us candidly: “Before I was are of primary importance, and Toyota’s networks are human sent to the U.S. in 1997 [as senior vice president], I made the rather than virtual. Employees must cultivate the skill of lis- rounds of several top executives in Japan. They told me to in- tening intently to opinions in an open environment. The result crease the number of sales outlets. These were executive vice is a web of relationships that former executive vice president presidents and managing directors. I went to the market to Yoshimi Inaba calls the “nerve system.” Like the human body’s see the situation. Increasing the number of dealerships would central nervous system, Toyota transmits information swiftly have caused more intense competition and threatened proper across the entire organization. management of dealerships. I decided to ignore everything Even in a Toyota plant, executives deliver and receive infor- those top executives told me.” mation by going to the front lines in person. For instance, the Have frequent face-to-face interactions. Although there head of the Takaoka and Tsutsumi plants, Takahiro Fujioka, is are no reprisals if local operations don’t act on headquarters’ on the factory ﬂ oor every day and joins workers for drinks in advice or if subordinates disobey orders from supervisors,

Confronting your boss is acceptable; bringing bad news to the boss is encouraged; and ignoring the boss is often excused.

the evening (nomikai) sometimes as often as four times a week. refusing to listen to others is a serious offense. Toyota’s system Similarly, senior sales people share information with dealers functions only when information from the source is available and learn about customer tastes by visiting them. Toyota uses to everybody in the organization. The emphasis is therefore this system to avoid the pitfalls of poor communication typical on interactions at the scene (genba). For instance, Tony Fujita, of big organizations. We identifi ed fi ve elements that under- former vice president of Toyota Motor Sales, U.S.A., believes pin Toyota’s unique communications system. that Toyota distinguishes itself from American carmakers by Disseminate know-how laterally. The slogan “Let’s yokoten” listening to dealers. “Other carmakers have meetings with is often heard in the corridors of Toyota. Yokoten, which is short dealers, but I think Toyota is unique in the frequency and the for yokoni tenkaisuru, literally means unfold or open out side- seriousness of what we discuss [with them].” ways. At Toyota, communication is viral and knowledge is dif- Make tacit knowledge explicit. Another element in Toyo- fused in all directions. The company has found that one of the ta’s nerve system is the practice of converting experiential or best ways to ensure good communications is to have everyone tacit knowledge into an explicit form to be shared throughout work together in a large room with no partitions (obeya). The the organization. When Fujio Cho was president, Toyota put concept originated in Japan because of the perennial shortage into writing the founders’ wisdom that had until then been of offi ce space, which we mentioned earlier, but the company passed down orally. Senior executives evaluated sayings and now uses it all over the world. Project teams also post informa- anecdotes and identifi ed two core values as the pillars of The tion on the walls of a dedicated situation room for everyone to Toyota Way 2001: continuous improvement (kaizen) and re- see – a practice known as mieruka (visualization). spect for people. Give people the freedom to voice contrary opinions. To- Create support mechanisms. In 2002, the company set yota’s communication system works because the organization up the Toyota Institute and the Global Knowledge Center is open to criticism. Employees feel safe, even empowered, to at Toyota City in Japan and Torrance, California, respectively. voice contrary opinions and contradict superiors. Each indi- Together with the University of Toyota, established four years vidual in Toyota is expected to act according to what he or earlier at Torrance by Toyota Motor Sales, U.S.A., these formal

hbr.org | June 2008 | Harvard Business Review 103 The Contradictions That Drive Toyota’s Success

mechanisms support Toyota’s communication networks by less companies teach employees how to deal with problems disseminating best practices and company values. In addition, rigorously and systematically, they won’t be able to harness employees are encouraged to join a wide variety of informal the power of contradictions. Third, companies must encour- groups, as we mentioned earlier. Every employee belongs age employees to voice contrary opinions. Top managements to several committees (iinkai), self-organizing study groups must be open to criticism and hearing opposing viewpoints if (jishuken), and other social groups, of which there are close to they want new ideas. 20 in the company. This helps create a multilayered communi- • • • cation network at Toyota. Should companies try to do as Toyota does? We believe they should. Toyota’s culture of contradictions places humans, not Emulating Toyota machines, at the center of the company. As such, the company People often ask us, “Tell me one thing I should learn from will be imperfect, and there will always be room for improve- Toyota.” That misses the point. Emulating Toyota isn’t about ment. In that sense, Toyota’s model mirrors human creativity. copying any one practice; it’s about creating a culture. That Can you say the same about your company? takes time. It requires resources. And it isn’t easy. First, companies have no choice but to embrace contradictions as a Hirotaka Takeuchi ([email protected]) is a professor; way of life. Most enterprises stop growing because they stick Emi Osono ([email protected]) is an associate professor; to processes and practices their past successes have gener- and Norihiko Shimizu ([email protected]) is a visiting ated. However, old methods also lead to institutional rigidi- professor at Hitotsubashi University’s Graduate School of Inter- ties. Companies can overcome them by trying to reach new national Corporate Strategy in Tokyo. This article is adapted markets or by tackling fresh challenges. Second, companies from their book Extreme Toyota: Radical Contradictions That must develop routines to resolve contradictions. Toyota uses Drive Success at the World’s Best Manufacturer, forthcoming numerous tools such as the Plan-Do-Check-Act model, the from John Wiley & Sons. eight-step Toyota Business Practices process, the A3 reporting Reprint R0806F To order, see page 143. system, and the widely known ask-why-ﬁ ve-times routine. Un-

“Of course we want all of our clients to feel valued.

I’m just not sure that giving out stickers is appropriate.” Teresa Burns Parkhurst

104 Harvard Business Review | June 2008 | hbr.org

The Multiunit Enterprise by David A. Garvin and Lynne C. Levesque

Retail chains, banks, hotels, restaurants – these are all multiunit enterprises. The ﬁ rst comprehensive study of this ubiquitous structure ﬁ nds that how they design their organizations and assign roles and responsibilities has a big impact on their effectiveness. Nick Lowndes Nick

106 Harvard Business Review | June 2008 | hbr.org

The Multiunit Enterprise

AT FIRST BLUSH, giant corporations such as Citigroup, CVS, Hertz, Home Depot, Kroger, Marriott International, United Parcel Service, Wal-Mart, and Yum Brands seem to have nothing in common, apart from appearing on the Fortune 500 list in 2007. They operate in different industries and face distinct business challenges. Yet structurally they are very much alike. Each is, wholly or partly, That’s the gap in management thinking we set out to fi ll. what we call a multiunit enterprise – a geographically dispersed How typical is this organizational structure? What special organization built from standard units such as branches, ser- challenges does it pose? Can multidivisional companies learn vice centers, hotels, restaurants, and stores, which are aggre- anything from multiunit enterprises? To fi nd some answers, gated into larger geographic groupings such as districts, re- we adopted a two-pronged research approach. First, after con- gions, and divisions. Every tier has its own set of managers. ducting a literature review, we studied Staples – the world’s Those higher up have larger profi t-and-loss statements, based largest offi ce supply company, headquartered in Framingham, on the number of operating units reporting to them. All these Massachusetts – in microscopic detail. We observed and in- levels of management constitute the fi eld organization, and terviewed managers at several levels of the company over a they are responsible for meeting fi nancial and operating tar- two-year period. Staples provided us with unfettered access, gets set by corporate headquarters. Meanwhile, various de- and because its operational and fi nancial performance has partments at headquarters frame policies, develop programs, been exemplary in recent years, we cite it frequently in this and make key strategic, budgeting, pricing, and marketing article. Second, to ensure that our arguments were valid, we decisions that shape the fi eld organization’s interviewed managers and collected data at priorities, behavior, and actions. harvardbusiness.org 12 other multiunit enterprises, including Bor-

Multiunit enterprises have become the For details on the authors’ research, ders, CVS, Sovereign Bank, Starbucks, and norm in several industries, such as apparel, see the Harvard Business School case Victoria’s Secret (owned by Limited Brands). banking services, consumer electronics, food studies titled “Management Levels In the following pages, we discuss the unique at Staples” (A, B, C, D, E, and F) at and drug stores, general merchandise, hospi- harvardbusiness.org. issues that multiunit corporations face, de- tality, hardware, mail and package delivery, scribe how managers tackle them, and draw and toys and sporting goods. Many of them some lessons from our research that will are large corporations, with national or international foot- help managers at all kinds of organizations execute strategy. prints. By our count, they include 10 of the 25 largest employ- Our key fi ndings: Multiunit enterprises employ four levels of ers in the world and six of the 25 best employers in the United fi eld managers with carefully defi ned responsibilities and use States, as listed by Fortune magazine. According to Chain Store fi ve organizational-design principles to implement strategy Guide, in 2007 the top 10 U.S. multiunit retailers (in terms of effectively. annual sales volume) generated more than $717 billion in sales and employed 3.45 million people. Of the Fortune 100 compa- The Challenges of Multiunit Enterprises nies, 20% are to some degree multiunit enterprises. Fewer of It isn’t easy to make a multiunit enterprise hum like a well- them exist in developing countries, although that will change oiled machine. In addition to issues such as specialization, as those economies become more services-intensive. coordination mechanisms, decision rights, and organizational Despite its prevalence, the multiunit enterprise has received boundaries, which all companies confront, such a structure little attention from academics and consultants over the years. faces four distinct problems. Instead, they have associated the operation and management First, multiunit enterprises fi nd it hard to maintain consis- of large corporations with the multidivisional organizational tency, because they are agglomerations of hundreds, some- structure. That form, pioneered by DuPont and General Mo- times thousands, of branches, service centers, hotels, restau- tors in the 1920s, divides companies into independent divisions rants, or stores. To create one company out of so many units, specializing in different products, services, technologies, or managers must pay a great deal of attention to implementa- markets. Most books on organization describe the multidivi- tion. They must focus continually on aligning priorities, plans, sional enterprise in detail but say nothing about the multiunit and practices across a highly dispersed fi eld organization. enterprise – or else dismiss it as old hat, because its managerial Since these companies promise customers the same brand hierarchy, specialized jobs, and centralized power structure experience everywhere, employees must adopt common oper- seem to resemble the traditional bureaucracy that sociologist ating practices, serve customers in similar ways, and present a Max Weber described in the early 1900s (see, for instance, his uniform image. While fl awless execution is the goal, it’s diffi - book The Theory of Social and Economic Organization). cult to achieve. That’s partly because it isn’t easy to design the

108 Harvard Business Review | June 2008 | hbr.org communication, control, and deployment processes necessary typical middle managers. On the one hand, they manage a to deliver consistently high levels of service. P&L and coordinate diverse tasks, which are general manage- Second, multiunit organizations must ensure some degree ment responsibilities. On the other, they lack the autonomy of customization even as they pursue standardization. They and decision-making authority of unit leaders in multidivi- must respond to the distinctive features of local and regional sional organizations. Many don’t control marketing dollars, markets to achieve the best results. For instance, in some cities, pricing fl exibility, and other levers that determine the unit’s Wal-Mart, Costco, and Target compete on a relatively equal success. Defi ning fi eld managers’ responsibilities and decid- footing; in others, one dominates the market. If any of them ing how they will exercise infl uence isn’t easy. In addition, a adopts a uniform pricing policy for both types of locations, multi unit enterprise resembles a Russian nesting doll, in that it is likely to lose market share in some areas while forgoing the P&Ls of one level are incorporated in those of the level profi ts in others. Multiunit corporations must customize their immediately above. Sometimes this makes it tough to differ- marketing and merchandising programs because consumer entiate jobs from level to level, which may generate confusion demographics and tastes vary from place to place. Employees’ and affect performance. availability, skill sets, and wage levels differ by region, as well, so companies have to adopt different labor practices. These The Four Levels of Field Managers enterprises constantly wrestle with issues such as how much These challenges result from breakdowns in coordination, tailoring corporate headquarters should allow; how to balance communication, and control, especially since these are large the advantages of local responsiveness with those of global organizations with diffuse responsibilities and unclear levels uniformity; and whether to leave differentiation to the discre- of accountability. If problems remain unresolved for long pe- tion of the store, the district, or a larger region. riods, they can have a major operational and fi nancial impact. Third, the sharp division of responsibilities between cor- To prevent that, multiunit enterprises try to defi ne the roles porate headquarters and the fi eld organization causes many of fi eld managers and distribute responsibilities in a novel problems. For the most part, executives at headquarters way. All fi eld managers work on the same problems, taking make strategy decisions that relate to, say, product position- on some roles, sharing others, and dispersing responsibilities ing and advertising, as well as fi nancial decisions such as the across levels. In this respect, the multiunit enterprise is the size of annual budgets and performance targets. Decisions opposite of the classic bureaucracy. Rather than featuring spe- about implementation – how to roll out initiatives, how to cialized jobs, it creates a set of general management jobs with reinforce desired employee behaviors, how to deliver revenue overlapping responsibilities. Together, the managers form a increases – are the province of fi eld managers. The physical multilayered net to catch all of the problems that can affect and psychological gulfs that separate the two groups present strategy implementation. a number of challenges. For instance, can headquarters de- Interestingly, the companies we studied employ similar velop new products, programs, and policies that fi t with fi eld structures in spite of wide variations in the size of their base units’ capabilities? How should the company communicate units. Designations differ, but these organizations have all cre- information about fresh initiatives to a large workforce with- ated the same four levels from bottom to top: store managers, out having distortions or misinterpretations creep in? How district managers, regional vice presidents, and division presi- can the organization spot problems in faraway locations after dents or senior vice presidents. At the top of every fi eld organi- launching initiatives? zation is a senior executive, usually a member of the corporate Finally, multiunit enterprises often struggle to get the best management team, with signifi cant strategic responsibilities. out of fi eld managers, who are surprisingly hard to classify. We don’t discuss that job in this article because it is similar to Field managers are neither traditional general managers nor those of other senior executives. Since the manner in which

A multiunit enterprise resembles a Russian nesting doll, in that the P&Ls of one level are incorporated in those of the level immediately above. Sometimes this makes it tough to differentiate jobs from level to level.

hbr.org | June 2008 | Harvard Business Review 109 The Multiunit Enterprise

multiunit organizations tailor jobs is central to their success, ney found from customer surveys, little things such as clean we’d like to start by describing the work of fi eld managers. dressing rooms are critical determinants of sales. According Store managers. Store managers, branch managers, or to several store managers at Staples, another key to success, restaurant managers (depending on the industry) are respon- especially in the case of a new initiative, is motivating employ- sible for both day-to-day operations and the execution of new ees. “My job is to get my managers and associates excited,” one initiatives. In every company we studied, they work within store manager explained. “People are never going to believe in tight constraints set by corporate headquarters, which con- a program unless you make them believe in it.” trols everything from store layout and product selection to Store managers can run into a number of problems (see pricing policies and inventory levels. Although store managers the sidebar “Traps to Avoid”). First, they may fail to delegate are evaluated on the achievement of fi nancial targets, along properly. Most are skilled at performing routine tasks such as with numerous operational, customer-service, and employee- checking inventory and ringing up sales, having done them satisfaction goals, they have very little say in setting those early in their careers, and are tempted to step in when they targets. At the same time, they do control the selection, assign- notice employees botching them up. But executing routine ment, training, and motivation of frontline employees and the tasks often refl ects a store manager’s unwillingness to delegate. timing, oversight, and follow-through of key activities. In some Taking over doesn’t build organizational capabilities; coach- companies, they also have a small amount of leeway in modi- ing and working side by side with associates does. Second, fying merchandise displays, ordering goods locally (usually some store managers make the mistake of treating all store no more than 15% of the store’s inventory), and pricing mark- associates alike. Smart managers maximize productivity by downs. Overall, store managers have little control over what designing schedules and roles around employees’ personal they must do but considerable discretion over how to assign, needs (“Bill has child care only until 3 pm, so I always schedule sequence, and accomplish tasks. Their focus is short-term and his shift to end at 2:30”), strengths (“Mary is a good salesper- more tactical than strategic. In the words of one store manager, son, so I never take her off the fl oor to unload freight”), and every day is “a day of small things to be accomplished.” weaknesses (“The two students who work here on weekends At Staples, for example, a store manager arrives at 6 am, are chatterboxes, so I put them on separate shifts”). Third, turns off the alarm, counts the money in the safe, prepares store managers run into trouble if they don’t draw up plans to the cash registers, checks on the store’s cleanliness, and handle unexpected disruptions such as absences and delayed develops the day’s agenda for employees. After reviewing deliveries. voice mail, which is frequently from district managers and District managers. District managers focus on ensuring usually about the store’s performance, he or she checks the consistent execution, improving performance, and develop- company intranet for messages, paying special attention to ing bench strength in all their stores. They manage by driving the Management Action Planning (MAP) system. Run by around, spending three to four days a week in different stores. Staples’ U.S. store operations, MAP informs store manag- The time between visits to a store ranges from two weeks ers about new corporate initiatives, deadlines for changes to two months, depending on the company. District manag- to displays, and new promotional programs, and identifi es ers are responsible for opening new stores and implementing the associated store-level tasks. Home Depot similarly em- new initiatives and have a little more say than store managers ploys a Merchandise Action Planner, which communicates do in budget making, real estate decisions, and local adver- all the details about the month’s merchandising presenta- tising. In a few organizations, the job also entails managing tions. These systems provide elaborate “to do” lists. For sev- specialized stores within stores, such as pharmacies in retail eral hours thereafter, store managers direct work fl ows and stores, and helping headquarters design merchandising and ensure that employees attend properly to customers – a role service initiatives. that Staples calls “manager on duty” and Victoria’s Secret When district managers call, they ask store managers for calls “client sales lead.” During the rest of the day, manag- performance updates and propose remedial plans when neces- ers walk around, interacting with customers and coaching sary. They help tackle operational problems either by interven- associates on tasks such as selling, managing inventory, and ing locally or by working with staff at headquarters. Because restocking. They also tackle the problems that crop up, such of their organizational knowledge, contacts at headquarters, as delayed deliveries, product shortages, unhappy customers, and experience, district managers often serve, in the words and broken fi xtures. This forces them to refocus their atten- of several store managers, as “connectors”: They provide links tion constantly. As one store manager told us, “Many things to people who can fi x a problem immediately, or they bring can happen, and sometimes they happen all at once.” the issue to the attention of senior executives. District manag- The impact store managers have on a company’s P&L state- ers communicate news from headquarters about upcoming ment comes from paying attention to customer service, im- promotions, possible delivery problems, and system break- proving the store environment, keeping employees engaged, downs. They also audit stores to ensure compliance with the and assigning employees according to their skills. As J.C. Pen- company’s policies and procedures.

110 Harvard Business Review | June 2008 | hbr.org Like their peers in other compa- The district manager’s main challenge nies, Staples’ district managers devote Traps to Avoid is to balance monitoring with coaching. most of their in-store time to walk- Many overemphasize the auditing func- ing around and interacting with store Managers in multiunit fi rms face tion, zeroing in on minor infractions by managers, assistant managers, associ- a number of potential pitfalls. stores, and don’t spend enough effort ates, and customers. They usually be- on developing people. Some are content gin by “checking the building’s pulse,” Store managers to tell store managers what changes to starting at the front of the store and Taking over tasks rather than make without explaining why. Providing delegating them taking a quick walk through the aisles. a rationale may take longer, but district They then conduct a detailed assess- Failing to respond to individual managers make a more lasting impact employees’ needs, strengths, and ment along with the store manager when they probe for understanding and weaknesses or an assistant manager. They exam- engage their charges in conversation. In- Being unprepared for contingencies ine each aisle, see whether associates experienced district managers tend to ad- are waiting on customers and per- vocate a single management style, usually forming other tasks properly, check District managers their own, and refuse to entertain differ- for signage about out-of-stock items, Failing to build store-level management ences in approach. Our studies show that and make sure the store has changed teams effective district managers realize store prices where necessary. They may also Overemphasizing compliance by managers can have different styles, build determine whether a problem they focusing only on audits on each person’s strengths, and help over- noticed in another store – for example, Relying too heavily on direction and come individuals’ weaknesses. a shortage of binders during back- control and not enough on coaching Regional vice presidents. These to-school season – is an isolated in- Imposing a single management style managers focus on markets, key competi- stance or a trend. At Staples these tors, growth opportunities, and systemic store walks depend on each district Regional vice presidents problems. They are critical intermediar- manager’s style; at Victoria’s Secret, Over- or underemphasizing regional ies between the fi eld organization and by contrast, managers follow a prede- differences headquarters, linking stores with com- termined checklist. Failing to recognize patterns and pany goals. Usually the regional human District managers wield consider- systemic breakdowns resources, sales and marketing, fi nance, able authority because they control Focusing on local issues rather than and loss-prevention departments and district labor pools, which they treat reinforcing corporate priorities occasionally the real estate function re- as a fl exible resource. (At Staples a port to them on a dotted-line basis while pool consists, on average, of 14 store Divisional heads maintaining direct lines of reporting managers, 28 assistant managers, and with headquarters departments. Most re- Failing to fi lter information 400 associates.) Without disrupting gional vice presidents spend three days a Overidentifying with the fi eld store teams overmuch, they move week in the fi eld and the rest with head- employees around to improve perfor- Spending too much time at headquarters quarters departments or task forces, typi- mance or respond to sudden needs. Not distinguishing their jobs from those cally working on new projects, marketing For instance, a district manager will of regional vice presidents programs, and site selection. At Staples, assign to a manager whose store is these managers communicate regional good operationally but doesn’t excel priorities upward and corporate direc- at customer service an assistant manager who can help with tives downward. In the process, they perform four roles: offer- service even as he or she learns more about operational is- ing feedback to headquarters on proposed initiatives, turning sues. Because district managers, more than store managers, broad programs into detailed action plans, ensuring alignment are responsible for developing assistant managers and deter- between the region and headquarters, and troubleshooting. mining their assignments, they are particularly sensitive to At Staples a region consists of 80 to 100 stores located in the stores’ top teams. As coaches, they teach with questions a major city such as New York or in a larger area such as the rather than directives, asking, “How do you think that episode Carolinas; it’s usually a distinct market. The regional vice presi- was handled? What should have happened? What might you dents are the guardians of the markets’ idiosyncratic needs, do now to ensure that things happen differently next time?” which gives them a voice at the table when the company They also identify best practices. At Borders, for example, one makes decisions. Interestingly, there’s a growing trend in the manager takes photographs of the most attractive window companies we studied of assigning regional vice presidents displays in the district’s stores and shares them with all her more responsibility and reducing the authority of headquar- store managers. ters departments. Wal-Mart, for example, recently relocated 27

hbr.org | June 2008 | Harvard Business Review 111 The Multiunit Enterprise

A Portrait of the Multiunit Enterprise

There is surprisingly little information The Four Levels of the Field Organization about the characteristics of multiunit enterprises. Even the most basic ques- Retailers Restaurants Banks tions – How are they structured? What are their similarities and differences Store Managers across industries? – have gone unan- Total number of 2,334 3,900 569 swered. To learn more, we collected store managers (range: 665–5,500) (range: 1,800–6,000) (range: 350–708) data in 2005 and 2006 on 13 multiunit Number of employees reporting to each 79 29 15 organizations: eight retailers, two res- store manager (range: 6–275) (range: 19–38) (range:10–25) taurant chains, and three commercial Annual sales $12.0M $1.3M $69M banks. The criteria for inclusion in our per store (range: $0.9M–$38M) (range: $1.0M–$1.5M) (range: $40M–$110M) survey were sales or deposits of over $1 billion and 500 or more sites (in the District Managers case of banks, 300 or more branches). Total number of 163 415 42 district managers (range: 47–323) (range: 230–600) (range: 26–64)

Number of stores 14 9 15 supervised (range: 9–27) (range: 8–10) (range: 10–25) Number of employees reporting to each 822 248 204 district manager (range: 121–2,750) (range: 195–300) (range: 111–250) In all three industries, we found, Annual sales $127M $11.0M $914M enterprises determined respon- per district (range: $16M–$339M) (range: $10M–$12M) (range: $642M–$1,100M) sibilities by using similar geographic and market groupings, which became progressively Regional Vice Presidents larger at higher organizational Total number of 20 61 15 levels. For example, at the retail- regional VPs (range: 6–36) (range: 31–90) (range: 4–35) ers, district managers were each Number of stores 117 62 146 in each region (range: 75–243) (range: 58–67) (range: 10–250) responsible for 14 stores, on average; regional vice presidents Number of employees reporting to each were responsible for 117 stores; regional vice 7,219 1,763 1,507 and divisional heads were president (range: 923–22,500) (range: 1,300–2,226) (range: 250–2,500) responsible for 657 stores. The Annual sales $1.1B $78M $7.1B numbers were smaller for the per region (range: $0.1B–$3.8B) (range: $67M–$89M) (range: $1.1B–$10.3B) restaurant chains: nine, 62, and 458, respectively, suggesting Divisional Heads that in this industry sites require (presidents and senior VPs) more routine oversight. Total number of 4 11 6 divisional heads (range: 1–8) (range: 3–19) (range: 1–10) Number of stores 657 458 331 per division (range: 333–1,620) (range: 316–600) (range: 35–708) Number of employees reporting to each 40,307 14,579 3,485 divisional head (range: 4,000–142,500) (range: 6,158–23,000) (range: 875–7,080) Annual sales $6.4B $618M $18.3B per division (range: $0.7B–$24.1B) (range: $316M–$920M) (range: $3.9B–$41.1B)

Note: Numbers given are averages, with ranges below them. By store managers, we also mean managers of restaurants and bank branches. Banks’ ﬁ nancial ﬁ gures are deposits, not annual sales.

112 Harvard Business Review | June 2008 | hbr.org Spans of Control by Level

Retailers Restaurants Banks

Number of levels (from store managers up to 4 54 divisional heads) (range: 4–5) (range: 4–5) (range: 4–5)

Number of managers reporting to each level

Store manager to 14 9 15 district manager (range: 9–27)(range: 8–10)(range: 10–25)

District manager to 8 7 9 regional VP (range: 6–11) (range: 7) (range: 1–16)

Regional VP to senior VP 5 8 3 or division president (range: 4–7) (range: 5–10) (range: 1– 4)

An important multiunit design choice is the span of control – that is, the number of ﬁ eld managers reporting up to each level. Spans of control narrowed higher up the pyramid at both the retailers and the banks, for instance. At the retailers, district managers oversaw an average of 14 store managers; regional vice presidents oversaw an average of eight district managers; and divisional heads oversaw an average of ﬁ ve regional vice presidents. Figures for the banks were comparable: 15, nine, and three, respectively.

However, there were wide differences across organizations in each industry, especially at the district level, which had the largest variation in spans of control. Our data suggest that the discrepancies are due to differences in unit size – a good proxy for complexity – because the number of stores supervised by district managers was considerably lower when their stores were larger or had more employees.

hbr.org | June 2008 | Harvard Business Review 113 The Multiunit Enterprise

lems. The aim of these visits is to ensure that the company is sending a consistent message to fi eld managers, to increase their understanding of corporate goals, and to fi nd solutions to pressing issues. Once a company announces the outlines of a new program, the regional heads are responsible for converting it into action plans. At Staples each regional vice president can tailor his or her plan to the region, so efforts often vary across the country. To monitor execution, regional heads review reports about district and store performance in their regions and talk with district managers, both individually and as a group, about issues such as lower-than-expected sales and logistical problems. In the case of upcoming initiatives, their goal is to anticipate problems that will affect execution. They do that by serving, in their words, as “aggregators” or “accumula- tors,” synthesizing information from diverse sources. One regional vice president summa- rized this role by noting: “My managers may have a problem, but they don’t know how big or widespread it is. I identify trends. Then it’s my job to work the information back to headquarters so we can fi nd a long-term solution.” For many regional heads, it’s tough to balance national needs with regional ones. Some will resist even well-designed corporate plans, arguing that their regions require a different approach. Others will passively accept any initiative even if it meshes poorly with local conditions. Effective regional vice presidents avoid being mindless advocates for regions or headquarters. They also dis- regional heads from its headquarters, in Bentonville, Arkansas, tinguish between problems that stores or districts can handle to the areas they supervise, giving them greater responsibility themselves and those that require intervention from head- for handling community issues and for choosing products to quarters. Although they are sensitive to their regions’ distinc- carry in their stores. tive features, the best ones, we observed, devote more time to Regional vice presidents’ store visits are typically short and consistency among stores and districts in the region, reinforc- follow a standard pattern. These managers conduct policy ing the same themes on every store visit. and culture audits and identify region-specifi c needs and op- Division presidents and senior vice presidents. Like their portunities. They are less interested in monitoring compliance regional counterparts, division presidents and senior vice than in collecting feedback on new programs, reinforcing de- presidents focus on new initiatives, growth opportunities, and sired behaviors, and identifying systemic problems. To that systemic problem solving. Their distinguishing features are end, they usually engage store managers and associates in ex- the ability to direct the organization’s attention to major prob- tensive discussions about the company’s latest initiatives, ask- lems and the greater responsibility they bear for representing ing open-ended questions such as “What is our new customer- the fi eld organization in corporate decisions. At Staples, we no- service model? What behaviors does it require? What is your ticed, while regional vice presidents have only a voice in policy role in supporting it?” Regional vice presidents coach district decisions, senior vice presidents have a vote. They are the eyes managers by scheduling joint visits to company stores or com- and ears of corporate departments in the fi eld. For this reason, petitor sites to talk about performance and personnel prob- one senior vice president told us, “we have a seat at the table

114 Harvard Business Review | June 2008 | hbr.org when key decisions come up and close to veto power over new meetings, conference calls, and store visits. Their store visits initiatives. If we say no, it’s unlikely to happen.” are briefer than those of lower-level fi eld managers. One senior At Staples senior vice presidents create the business plans vice president likened them to state visits, noting, “They’re for their divisions subject to the constraints of the corporate very ceremonial; the sum total of my visit is an alignment plan. Most choose to emphasize priorities and metrics that check.” Divisional heads engage employees in conversation, they believe are important to their divisions. Thus, one may try test their understanding of programs, and then elevate the to improve customer service, and another may try to standard- discussion to examining the reasons behind a new direction ize processes. One senior vice president succinctly summed or initiative. The focus is usually on a single issue, so they up this approach: “You can inspire any way you want. You just ask the same questions and follow up on the same issue at can’t change the plan.” To support their approaches, divisional each store. heads can use the discretionary resources at their disposal. For At this level, the challenge is giving equal consideration to example, they can allocate thousands of labor hours every year the concerns of headquarters and of the fi eld organization. Be- for uses that help them meet their objectives. cause divisional heads have usually risen through the ranks, it When companies launch new programs, division presidents is easy for them to fall into the trap of regarding headquarters and senior vice presidents must share the corporate vision as the enemy – a distant, poorly informed group of executives with the fi eld. These managers work through the regional they must resist whenever possible. The most effective divi- vice presidents and district managers, bringing them together sional leaders recognize the need to cooperate and develop for meetings or visiting stores with them. Like regional vice close relationships with their counterparts at headquarters. presidents, divisional heads ensure alignment among people, Yet they don’t spend too much time there. They make regular policies, and programs. However, they are far more selective fi eld visits to remain up-to-date on implementation challenges. in the information they share, acting as a fi lter so that only A number of divisional heads we interviewed had diffi culty critical messages fl ow down to the front lines. One senior vice distinguishing between their roles and those of regional vice president explained: “We keep the anxi- presidents. That can be a concern, since ety at the top of the house from fi lter- the divisional head’s role, our research ing to the fi eld. That way, the troops can suggests, is to build bridges between maintain their operational focus.” Overlapping Responsibilities headquarters and the fi eld – not to in- Divisional heads collect informa- tervene in regional matters or to run tion through a combination of reports, Multiunit enterprises try to execute well the business. by having managers at different tiers of the fi eld organization focus on the same issues. This creates a multilayered net that prevents problems from slipping through.

Store District Regional Divisional Managers Managers Vice Presidents Heads

strategy/policy reﬁnement

strategy/policy implementation

strategy/policy compliance and alignment

competitive/market intelligence and positioning

task execution

task/tactics compliance

local problem solving

systemic problem solving

ﬁxing of performance problems

coaching and development of managers and employees

hbr.org | June 2008 | Harvard Business Review 115 The Multiunit Enterprise

Designing Organizations for Implementation been deliberately left unclear. As a result, the organization is The art of organizational design involves assigning roles and able to spot and tackle problems effectively. Take, for example, responsibilities in ways that prevent breakdowns in policy the task of managing inventory in stores. In a classic bureau- formulation, communication, and delivery. In multiunit enter- cracy, this routine activity is usually the province of specialized, prises, ﬁ eld jobs entail responsibility both for general manage- lower-level employees. In multiunit enterprises, by contrast, all ment and for execution. Each job involves integrating activi- four levels of ﬁ eld management track inventory, albeit from ties around a unifying concept or theme. Store managers must different vantage points. With their constant oversight, any ensure coordination and integration of activities at a single inconsistency is likely to be uncovered quickly. When multiple site; they are responsible for multiple-task management. Dis- layers of management ask more or less the same questions, trict managers must ensure coordination, development, and look for similar behavior patterns, and communicate directly integration of talent across the district labor pool; they are with frontline employees, processes are less likely to break thus accountable for multistore management. Regional vice down – or if they do, to stay broken for very long.

Nurturing talent is a central responsibility of ﬁ eld managers; it occupies 30% to 50% of their time – far more than is typical in other kinds of organizations.

presidents must ensure coordination and integration of prod- Use integrators at all levels. In a functional organization, uct offerings and competitive positioning across their market there is only one integrator – the business unit leader – and areas; they face the challenge of multi-initiative management. most midlevel employees perform narrow, specialized roles. Division presidents and senior vice presidents must ensure Multiunit enterprises, by contrast, have integrators at all levels. coordination and integration of staff and line departments They expect managers throughout the organization to coor- between headquarters and their fi eld organizations; they must dinate diverse activities and optimize the whole rather than cope with multidepartment management. the parts. Having integrators at different levels helps balance The job of these managers, as individuals and as a group, is customization with standardization. For example, at the low- to tackle the breakdowns that interfere with employees’ ef- est levels of the fi eld organization, integration is a way of guar- forts to get things done. However, implementation challenges anteeing consistency. Store and district managers are largely aren’t limited to retailers, restaurants, and consumer banks; responsible for delivering on preset goals; they have fl exibility they arise whenever companies frame strategies centrally in choosing how and with whom they implement – not in and implement them locally. In such settings, managers face deciding what they deliver or offer. At the highest levels, inte- similar challenges: limited information about how to execute gration supports customization. Regional and divisional man- new initiatives; diffi culty in responding to unexpected events agers are able to tailor operations to local needs because they such as delayed deliveries, sick employees, market changes, know the market, have access to headquarters departments, and new competition; and an inability to stay focused on key and can infl uence superiors. priorities because of innumerable directives from corporate Set up information funnels and fi lters. Multiunit corpora- headquarters. That’s why, we believe, any organization can tions could grind to a halt because of an overabundance of profi t from the following principles of organizational design, information. Frontline managers may feel overwhelmed by pioneered by multiunit corporations. a constant stream of new initiatives from headquarters and Allow overlapping roles and responsibilities. Field respond with inaction in the hope that “this too shall pass.” management roles in multiunit corporations aren’t special- Similarly, headquarters departments may feel frustrated by ized. Each level focuses on similar challenges and has similar a rising chorus of complaints from the fi eld and ignore them. responsibilities. Who is charged with achieving high levels Add on the complexities of diverse markets and hundreds of customer service? Who will implement new initiatives? of sites – and it is easy to see why communication overload Which managers will the company evaluate on the basis of poses a serious threat. To avert breakdowns, regional and di- P&L statements? The answer, in every case, is some combina- visional managers serve as information funnels, narrowing tion of store, district, regional, and divisional managers. All data fl ows to manageable levels. They regulate the number these jobs overlap, and the dividing lines between them have of initiatives from headquarters and shorten store managers’

116 Harvard Business Review | June 2008 | hbr.org activity lists by setting a few clear priorities. They also fi lter companies must take care to develop these managers. Nurtur- the information fl owing up from stores to headquarters. For ing talent is a central responsibility of fi eld managers; it occu- instance, these managers aggregate data in order to distin- pies 30% to 50% of their time – far more than is typical in other guish between problems that require systemic solutions from kinds of organizations. Multiunit enterprises frequently reset headquarters and those they can help solve at a lower level. spans of control to keep within limits the number of manag- Appoint translators to convert strategies into action. ers reporting to each level, thereby guaranteeing that every All too often, the roadblock to implementation is a failure employee receives suffi cient attention. People development to convert broadly framed policies into fi ne-grained action is a frequent topic of conversation between managers and plans. Having strategy managers and headquarters depart- supervisors. In fact, it isn’t uncommon for an underperform- ments physically and psychologically far away from the front ing store or branch manager to be the focus of discussions at lines only exacerbates the problem. At multiunit corporations, the district, regional, and even divisional levels. This not only fi eld managers, especially division presidents and regional keeps upper-level managers informed about personnel issues vice presidents, are collectively responsible for overcoming on the front lines but also helps create consistent coaching this challenge. They are translators, charged with defi ning in across units. concrete terms how the fi eld organization should frame and • • • roll out initiatives. Headquarters departments consult them Quietly and unobtrusively, multiunit enterprises have mush- before launching new programs, in order to identify potential roomed in the corporate world. This organizational form has trouble spots. Those managers make sure that companies confl ourished – and will continue to spread – for the simple rea- sider implementation challenges while formulating strategy. son that it puts effective implementation at the top of its Importantly, divisional and regional leaders have considerable priorities. For that same reason, it provides a model for compa- leeway in launching initiatives. Divisions and regions often nies of every sort. After all, successful corporate performance differ in their action plans and the targets they choose to em- requires more than well-designed strategy. phasize because customizing them to local needs improves the odds of successful implementation. David A. Garvin ([email protected]) is the C. Roland Christen- Share responsibility for talent development. The suc- sen Professor of Business Administration at Harvard Business cess of multiunit corporations depends on the competence, School in Boston. Lynne C. Levesque ([email protected]) capabilities, and commitment of fi eld managers, who embody is a Boston-based consultant and researcher. the brand through their actions, oversee daily operations, and Reprint R0806G To order, see page 143. implement new initiatives. To maintain high performance,

Harley Schwadron “Your résumé looks familiar. Didn’t I just ﬁ re you?”

hbr.org | June 2008 | Harvard Business Review 117 special advertising section

Aligning Diversity, CSR and Multicultural Marketing

by Stephen Palacios There is an emerging market reality in the United States, driven by changing consumer population dynamics, heightened global competition and greater demand for corporate transparency and accountability. Companies that are able to realign their diversity initiatives, Corporate Social Responsibility (CSR) and multicultural marketing efforts can produce new levels of value in this changing marketplace. But before that can happen, we need to broaden and redefine diversity to encompass cultural competence, the ability to understand underlying value systems and behavioral influences that shape consumers’ attitudes and buying behavior.

The Drivers of the New Reality Barry, global head of diversity and inclusion, Consumer population dynamics: Corporate Merrill Lynch, says. “Merrill was the first finan- America is still reacting to 2000 U.S. Census cial-services company to do this.” For many data, in which the growth of minority popula- industries, multicultural markets represent the tions, particularly Hispanics, was significantly largest relatively untapped organic growth higher than expected. Today, nearly 30 percent opportunity on the horizon. of all Americans are either Hispanic or Black, Heightened global competition: Globalization is with close to $2 trillion in estimated spending requiring companies to be more adept at under- power and with projected growth rates of twice standing their consumers. In a January 2008 article the rest of the U.S. population. Companies are in the International Herald Tribune, GE’s CEO Jeff recognizing that to be relevant, they must build Immelt said, “I'm a salesman . . . I know that you cultural competence to serve these consumers don't get to sell things for long unless you are part more effectively. “In 2001, the Census identified of the culture into which you are selling.” In the opportunities for Merrill, so we started multicul- globalizing economy, building cultural compe- tural business development, with an emphasis on tence is a core asset for business success. “The rest getting business closed and booked,” Subha of the world is globalizing so quickly that the

incorporation of different races and genders is taken for president, notes: “We used to make a business case for granted,” notes Steve Miranda, chief human resources, CSR, then a business case for diversity and inclusion, and strategic planning and diversity officer, The Society for then for multicultural marketing. Increasingly, these are Human Resource Management. “Being able to understand seen as integrated components of a single strategy.” different cultural perspectives—how a Chinese business- U.S. companies are now at the tipping point of man sees the concept of ‘contract’, for example—is a skill realigning themselves to more tangibly bring together that is increasingly in demand.” their CSR, diversity and multicultural marketing efforts. Corporate transparency: A quick Google search can dam- This phenomenon is evident across various industries, age a company’s reputation by revealing a bad business including financial services, health care, media and con- practice in some remote corner of the world. Conversely, sumer packaged goods. “What has changed,” according CSR activities are increasingly being relied upon to build to Sylvia Reynolds, chief marketing officer, Wells Fargo, goodwill. Companies like Starbucks, for example, apply “is diversity is becoming operationalized as an integral CSR practices like “fair trade” and eco-friendly growing part of business process.” throughout their supplier network. In the multicultural marketing arena, companies that are making commu- Best Practices Integrating Diversity, CSR and nity-oriented CSR commitments and are seen as Multicultural Marketing supportive through hiring practices routinely score Integrating diversity, CSR, and multicultural marketing higher on consumer preference surveys. adds value in four ways: It creates a stronger company, a Corporate functions are evolving to address these better place to work, deploys resources more efficiently, changing dynamics. Many companies already have pre- and reduces waste. When Indra Nooyi became CEO of existing tools that present a significant opportunity to PepsiCo in 2006, she quickly established a mandate of address these changes and contribute to substantial busi- “Performance with Purpose.” The philosophy is to “build ness growth – namely, the realignment of diversity, CSR brands that people trust, because the foundation is and multicultural marketing. “From 2001 to 2004, we rooted in something deeper than just making money. We saw an evolution on all of these fronts,’” says Merrill’s are seeking meaning in our brands,” Cooper explains. He Subha Barry, which resulted in greater alignment: “All sees a “huge opportunity to draw a line connecting CSR, activities speak actively together, moving these functions diversity and inclusion and multicultural marketing.” closer together.” PepsiCo uses platforms of health and wellness to work with community groups while positioning its health-ori- The Origins of Misaligned Initiatives ented products, like NAKED Juice, Aquafina and Propel Current structures are often not fully aligning efforts and water positively with multicultural consumers. can speak past one another in the market execution. In the past five years, Time Warner Inc. has restruc- Why? Corporations initiated CSR, diversity and multi- tured their CSR efforts with their diversity and inclusion cultural marketing for different mandates that required efforts and aligned them with multicultural marketing. separated functions. Lisa Quiroz, senior vice president, corporate responsibil- Diversity was mandated by hiring; it is the domain of ity, started as a line manager, creating and running People human resources, where historically, it has been fraught en Español from 1998 through 2004. It was then that with political and social agendas that are not universally Quiroz took over CSR for Time Warner, and two years shared throughout a company. CSR is associated with later she was granted oversight of diversity and inclusion, corporate philanthropy. While it is shifting toward more previously under human resources. strategic applications, it often continues to live in the By realigning CSR with diversity, Quiroz is able to realm of building corporate “goodwill” in ways that are coordinate corporate assets more strategically to solve only tangentially related to business outcomes. Until some of the issues she encountered as a line manager. only recently, multicultural marketing, meanwhile, has “CSR is about aligning with business objectives, not traditionally been driven by mandates to address the about the old model of glad-handing,” says Quiroz. underserved. Frank Cooper, a PepsiCo marketing vice “Rather than underwriting activities such as free concerts

ALIGNING DIVERSITY / JUNE 2008 S2 special advertising section

in the park, like we used to, we are investing in develop- than a mortgage; it offers them financial education, a ing new artists such as the Time Warner Storytellers trusted lender, and some protection against predatory Project,” a program through Sundance Film Festival to lending. Alejandro Hernandez, vice president of national find multicultural writers that tell the stories of contem- alliances for Wells Fargo, observes that the new par- porary life in the United States. “Philanthropy has adigm of corporate/NGO interaction is becoming an changed from community do-gooder to strategic busi- engine to "drive social innovation." ness asset,” comments Quiroz. With Pfizer, NCLR created the Sana La In 2007, Time Warner further drove the Rana program in March 2003, which took CSR and diversity competencies into the six CSR to a new level. This program engaged Time Warner Divisions (HBO, Time churches, NGOs and other grassroots Warner Cable, Turner Broadcast, organizations in large Hispanic cities Time Inc., AOL and Warner Brothers) like Houston and Miami, where they by including an explicit multicultural offered free health screenings, high business component in the annual Diversity blood pressure tutorials and other Action Plan. Diversity was officially recast as a health education workshops. In the process, business imperative under a multicultural Pfizer gained invaluable information on con- marketing banner. At Wells Fargo Corporation, diversity has a signifi- sumer attitudes and practices, they built goodwill cantly more expansive definition – one that relates to all with local health clinics and physicians and were able to business functions. “Wells has been a leader in diversity all map out the key influencers in the Hispanic community. along,” says CMO Sylvia Reynolds. In the past five years, At Blue Cross/Blue Shield of Florida (BCBSFL), the however, even Wells has become more proficient at weav- diversity team serves as a business consultant to various ing diversity efforts into business strategy. “There was a lines of business on the multicultural marketing effort. time when we were developing a product or communica- They also sponsor employee networking groups for tion, it was developed for a white, English-speaking South Asian, Hispanic, African American and other consumer first, then it would be ‘translated’ for a Chinese, employees, where these groups provide insights on cul- Hispanic, etc. Today we develop products and communi- ture and race. In a recent meeting, for example, the cations simultaneously targeted against ethnic populations African American employee group met with BCBSFL’s as appropriate,” Reynolds states. advertising agency, “which changed the ad campaign Structurally, Wells Fargo created a Diverse Growth focus to education, a positive message, from violence pre- Segments (DGS) division. Focused on understanding vention, a negative message,” says Visael ‘Bobby’ and serving multicultural consumers, DGS encompasses Rodriguez, director, cultural competency and diversity. a multitude of programs, including its African-Ameri- can-owned Small Business Initiative. Tasked with What Will Happen Next? meeting lending goals of approximately $10 billion, this The proper alignment of diversity, CSR and multicul- initiative starts with a CSR sponsorship of the National tural marketing can produce new innovations and better Black MBA Association, to build Wells’ brand awareness results for consumers, shareholders and employees. and corporate goodwill, but also to serve as a talent Global companies and companies that focus on multi- recruiting platform. From that foundation, Wells Fargo cultural consumers are in the best position to benefit in fosters relationships with national business alliances the near term. As these functions continue to come focused on African American small business owners and together, diversity will one day be taken for granted as a Wells’ bankers learn firsthand about how to best serve requirement for doing business, multicultural marketing this market’s needs. will be embedded in everyday business processes and, Wells Fargo and other lenders have been collaborat- like casual Fridays, we will barely remember why this was ing with the National Council of La Raza (NCLR), the not the case all along. largest Hispanic advocacy nonprofit in the country, to create an innovative alternative distribution channel for Stephen Palacios is executive vice president of Cheskin mortgages. This program offers Hispanic families more Added Value, where he leads their Hispanic Practice.

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BY GRAHAM JONES

How the Best of the Best Get Better and Better Compete only with yourself, demand relentless feedback, and don’t forget to celebrate, says this sports psychologist and executive coach.

UNTIL 1954, MOST people believed late to people. But the real key to ex- that a human being was incapable cellence in both sports and business of running a mile in less than four is not the ability to swim fast or do minutes. But that very year, English quantitative analyses quickly in your miler Roger Bannister proved them head; rather, it is mental toughness. wrong. Elite performers in both arenas “Doctors and scientists said that thrive on pressure; they excel when breaking the four-minute mile was the heat is turned up. Their rise to impossible, that one would die in the top is the result of very careful the attempt,” Bannister is reported planning – of setting and hitting hun- to have said afterward. “Thus, when I dreds of small goals. Elite perform- got up from the track after collapsing ers use competition to hone their at the fi nish line, I fi gured I was dead.” skills, and they reinvent themselves Which goes to show that in sports, continually to stay ahead of the pack. as in business, the main obstacle to Finally, whenever they score big wins, achieving “the impossible” may be a self-limiting mind-set. top performers take time to celebrate their victories. Let’s look As a sports psychologist, I spent much of my career as a con- at how these behaviors translate to the executive suite. sultant to Olympic and world champions in rowing, swimming, squash, track and fi eld, sailing, trampolining, and judo. Then in Love the Pressure 1995, I teamed up with Olympic gold medal swimmer Adrian You can’t stay at the top if you aren’t comfortable in high-stress Moorhouse to start Lane4, a fi rm that has been bringing the situations. Indeed, the ability to remain cool under fi re is the lessons from elite athletic performance to Fortune 500 and one trait of elite performers that is most often thought of as FTSE 100 companies, with the help of other world-class athletes inborn. But in fact you can learn to love the pressure – for driv- such as Greg Searle, Alison Mowbray, and Tom Murray. Sport ing you to perform better than you ever thought you could. is not business, of course, but the parallels are striking. In both To do that, however, you have to fi rst make a choice to devote worlds, elite performers are not born but made. Obviously, star yourself passionately to self-improvement. Greg Searle, who athletes must have some innate, natural ability – coordination, won an Olympic gold medal in rowing, is often asked whether physical fl exibility, anatomical capacities – just as successful success was worth the price. He always gives the same reply:

Joe Morse senior executives need to be able to think strategically and re- “I never made any sacriﬁ ces; I made choices.”

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Managing pressure is a lot easier if ARTICLE AT A GLANCE Fixate on the Long Term you can focus just on your own excel- Much of star athletes’ ability to rebound Q Elite performers don’t get lence. Top sports performers don’t al- from defeat comes from an intense fo- distracted by the victories of low themselves to be distracted by the competitors – or even by a cus on long-term goals and aspirations. victories or failures of others. They death in the family. At the same time, both sports stars and concentrate on what they can control their coaches are keenly aware that the Q Superstars have an insatiable and forget the rest. They rarely let them- demand for honest, immediate road to long-term success is paved with selves be sidetracked by events outside feedback. But it must be con- small achievements. a competition. World-class golfer Dar- structive; stars don’t engage The trick here is to meticulously plan in self-fl agellation. ren Clarke, for example, helped lead the short-term goals so that performance European team to a Ryder Cup victory Q Champions train with the will peak at major, rather than minor, competition to push them- in 2006, six weeks after the death of his events. For athletes who participate in selves to new limits. They beloved wife. Elite performers are mas- continually reinvent them- Olympic sports, for example, the train- ters of compartmentalization. selves – especially after they ing and preparation are geared to a four- If you want to be a high fl ier in busi- become the benchmark. year cycle. However, these athletes may ness, you must be equally inner-focused Q Elite performers know how also be competing in world champion- and self-directed. Consider one execu- to party. But celebrating ranks ships every year. The inevitable tension tive I’ll call Jack. When he was a young ninth on their list of top 10 rea- arising from this complicated timetable man, wrestling was his passion, and he sons for wanting to win. requires very careful management. turned down an offer from Harvard to Adrian Moorhouse’s Olympic gold attend a less-prominent undergraduate medal success in 1988 is a case in point. school that had a better-ranked wres- ity to switch their involvement in their His long-term goal was to swim the 100- tling team. Later, after earning his MBA, endeavors on and off. A good way to do meter breaststroke in a time of 62 sec- Jack was recruited by a prestigious in- this is to have a secondary passion in life. onds, because he and his coach had cal- vestment-banking fi rm, where he even- Rower Alison Mowbray, for example, al- culated four years in advance that this tually rose up to the rank of executive ways set time aside to practice the piano, time should be good enough to win the director. Even then, he wasn’t driven by despite her grueling athletic-training gold. Of course, Adrian thought about any need to impress others. “Don’t think schedule. Not only did she win a silver winning in the interim, but all of his for a minute I’m doing this for the sta- medal in the Olympics in 2004, but she training and practice was geared toward tus,” he once told me. “I’m doing it for also became an accomplished pianist in hitting a time of 62 seconds or better myself. This is the stuff I think about in the process. in the Summer Olympics in Seoul. He the shower. I’d do it even if I didn’t earn For top executives, the adrenaline mapped out specifi c short-term goals a penny.” rush of the job can be so addictive that in every area that would affect his People who are as self-motivated as it’s diffi cult to break away. But unless performance – strength training, nutri- Jack or Darren Clarke rarely indulge in you are able to put the day behind you, tion, mental toughness, technique and more – to make sure he achieved that ultimate goal. Star players focus on what they can Successful executives often carefully plan out their path to a long-term goal control and forget the rest. They’re too. I once coached a woman I’ll call Deborah, an IT manager who worked masters of compartmentalization. for a low-budget airline. Her long-term goal was to become a senior executive in three years. To that end, we identifi ed self-fl agellation. That’s not to say that as elite athletes can, you’ll inevitably run several performance areas in which she elite performers aren’t hard on them- the risk of burning out. Many leading needed to excel – for example, increas- selves; they would not have gotten so businesspeople are passionate about ing her reputation and infl uence among far without being hard on themselves. their hobbies; Richard Branson is fa- executives in other departments of the But when things go awry, business and mous for his hot-air balloon adventures, company and managing complex ini- sports superstars dust themselves off for instance. However, even small diver- tiatives. We then identifi ed short-term and move on. sions such as bridge or the opera can be goals that underpinned achievements Another thing that helps star per- remarkably powerful in helping execu- in each performance area, such as join- formers love the pressure is their abil- tives tune out and reenergize. ing a companywide task force and lead-

124 Harvard Business Review | June 2008 | hbr.org ing an international project. Together we built a system that closely monitored whether Deborah was achieving the interim goals that would help her fulﬁ ll her long-term vision. It paid off. Two months short of her three-year target, Deborah was offered an opportunity to head up the $12 million in-ﬂ ight business sales unit.

Use the Competition It’s common in track-and-fi eld sports for two elite athletes from different countries to train together. I was at a pre-1996 Olympics training camp for the British team where 100-meter sprinter and then current Olympic champion Linford Christie had a “guest” train with him. His training partner just happened to be Namibian Frankie Fredericks, a silver medalist who had been one of the major threats to Christie’s Olympic crown. World champion rower Tom Murray told me just how competing with the best inspired him to higher achievement. Murray was part of a group of 40 rowers selected to train together with the hopes of gaining one of the 14 spots on executive I’ll call Karl. He declined an op- Reinvent Yourself the 1996 U.S. Olympic rowing team. Be- portunity to take a position as the second- It’s hard enough getting to the top, but cause the fi nal team was chosen only in-command at a competitor’s fi rm at staying there is even harder. You’ve two months before the Atlanta games, twice his current salary. Karl passed up won that Olympic medal or broken that this meant that the group of 40 trained what looked like a standout career op- world record or racked up more wins together for almost four years. portunity because his current company than anyone in your sport. So how do As Murray recalled, one of the last was deeply committed to coaching him you motivate yourself to embark on an- performance evaluations during the and a cohort of other senior executives other cycle of building the mental and fi nal week leading up to the naming on how to become better leaders. Karl physical endurance required to win the of the Olympic team involved a 2,000- had a reputation for burning people out, next time, especially now that you have meter test on the rowing machine. The and he realized that if he moved on, he become the benchmark? That is one of 40 athletes took it in four waves of 10; would continue that pattern of behav- the most diffi cult challenges facing elite Murray went in the third wave. During ior. He remained in the same job because performers, who have to keep reinvent- the fi rst two waves, 15 rowers set per- he knew that his coach and peers would ing themselves. sonal best times, and two recorded times help him grow and change his ways. Consider trampolinist Sue Shotton. I that were faster than anyone in the U.S. Smart companies consciously cre- was working with her when she achieved had ever gone. The benchmark was im- ate situations in which their elite per- the number one ranking among women mediately raised. Murray realized that formers push one another to levels they in 1983 – that is, she was considered to he needed to row faster than he’d antici- would never reach if they were working be the best female trampolinist in the pated. He ended up bettering his previ- with less-accomplished colleagues. Tal- world. Yet she had still not won a world ous personal best by three seconds and ent development programs that bring championship. subsequently made the 1996 team. together a company’s stars for intensive Shotton was determined to capture If you hope to make it to the very top, training often serve precisely such a that title, and she left nothing to chance. like Murray, you too will need to make purpose. If you want to become a world- She challenged herself constantly by sure you “train” with the people who will class executive, getting into such a pro- working with specialists such as physi- push you the hardest. I once coached an gram should be one of your fi rst goals. ologists, biomechanists, and elite sports

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B63/@BA173<13=4<35=B7/B7=< coaches who kept her up to date on cutting-edge thinking. She perfected new moves based on video analysis; she tried different ways of boosting her energy based on nutritional intake. Her efforts to fi nd ways of staying ahead of fi ercely ambitious competitors paid off when she won the world championship in 1984, becoming the fi rst British woman ever to hold the title. Shotton had an insatiable appetite for feedback – a quality I have seen in all the top business performers I have worked with. They have a particularly strong need for instant, in the moment AC;;3@7AAC3 feedback. One top sales and marketing =<<3EAAB/<2A director I worked with told me that he would never have stayed at his current position if the CEO hadn’t given him <=E relentless, sometimes brutally honest critiques. If you’re like the elite business performers I have coached, you too are hungry for advice on how to develop and progress. One word of caution, however: While it’s good to feel challenged, you need to make sure that any feed- E63B63@G=Ç@3<35=B7/B7<5O[cZbWPWZZW]\R]ZZOàOZS]Ò[SSbW\U back you get is constructive. If criticism eWbVg]c`P]aa\SU]bWObW]\aYWZZaO`SeVObYSS^g]c`PcaW\SaaÓ\R doesn’t seem helpful at fi rst, probe to g]c`QO`SS`´[]dW\UT]èO`RBVSac[[S` &WaacS]T6/@D/@2 see if you can get useful insights about 0CA7<3AA@3D73E=<>=72¸a coaching advice. 2][W\WQY8;WaW\]¶ Celebrate the Victories µ;OYW\UbVS;OX]ÀOZS¶Pg0S\a]\>AVO^W`]O\R@]\OZRA>]a\S` Elite performers know how to party – in- µAWf6OPWba]T;S`SZg3TTSQbWdSSàcOaW]\¶Pg@]PS`b01WOZRW\W with a professional golfer who, as he µ5SbbW\U>OabGSa(]W\bOdOWZOPZS_cO`bS`Zg ]\\SeaabO\Ra]ÒbeeeVP`]ÙT]QcaSa]\OaW\UZS Celebration is more than an emotional bVS[SSOQVWaacSBVSO`bWQZSae`WbbS\Pga][S]TbVS e]`ZR¸aZSORW\U[O\OUS[S\baQV]ZOàO\R^ÒQbWbW]\Sà release. Done effectively, it involves O`SQcZZSRT`][60@¸a`WQVO`QVWdSa6SZ^TcZO`bWQZS ac[[O`WSaZWaba]TYSgWRSOaQ][Ô\gSfO[^ZSaO\R acUUSabW]\aT]`Tc`bVS``SORW\UO`SW\QZcRSR a deep level of analysis and enhanced they also know that partying must be awareness. The very best performers deserved. Without victory, celebrations do not move on before they have scru- are meaningless. tinized and understood thoroughly the factors underpinning their success. I saw The Will to Win that discipline in the Welsh rugby team, As the spectacle of the Olympics unfolds, which I advised from 2000 to 2002. After it will be easy to be captivated by the each game, the team members made a fl awless performance of elite athletes special effort to highlight not only what who make their accomplishments seem they did poorly but what they did par- almost effortless. Such effortlessness ticularly well. They typically split into is an illusion, though. Even the most small groups to identify and discuss the youthful star has typically put in count- positive aspects of their performance, less years of preparation and has en- so that they could focus on reproducing dured repeated failures. But what drives them in the next game. The exercise was all these elite performers is a fi erce de- a powerful way to build expertise – and sire to compete – and win. Even so, most self-confi dence. Indeed, the most impor- of those participating in the Olympics tant function of affi rming victory is to this summer will walk away from the provide encouragement for attempts at games without grabbing a single medal. even tougher stretch goals. Those with real mettle will get back into In business, where companies are training again. That’s what truly sepa- pressed to meet quarterly earnings and rates elite performers from ordinary stockholders are impatient, managers high achievers. It takes supreme, almost

The elite know how to party. They also know that celebrations without victory are meaningless. YOUR IDEA. HER POTENTIAL. YOU GET THE PICTURE. must consider the timing and duration unimaginable grit and courage to get Welcome to The Mind Trust. of the celebration. Dwelling on success back into the ring and ﬁ ght to the bit- We believe transformative change for too long is a distraction and, worse, ter end. That’s what the Olympic ath- starts with great leaders. Our leads to complacency. Celebrate – but lete does. If you want to be an elite per- Education Entrepreneur Fellowship push on. Don’t get stuck in the rituals former in business, that’s what you need provides talented leaders with of success. At the end of the day, getting to do, too. an unprecedented opportunity to to the next level of performance is what develop and launch new education celebrating is really all about. Graham Jones (graham.jones@ Smart companies know how to lane4performance.com) is a cofounder initiatives. Make the leap today, and manage the tension between celebrat- of Lane4, an international performance tap into the power of The Mind Trust. ing and looking hungrily for their next development consultancy, and a former achievement. One UK mobile telecom professor of elite performance psychology APPLICATIONS FOR THE EDUCATION provider puts on an annual ball for its at the University of Wales. He is based in ENTREPRENEUR FELLOWSHIP ARE DUE people – spending over £1 million a year. Princeton, New Jersey, and is the coauthor, SEPTEMBER 5, 2008. The company hires out well-known ven- with Adrian Moorhouse, of Develop- ues and brings in pop bands to entertain ing Mental Toughness: Gold Medal all the employees. But one factor in the Strategies for Enhancing Your Business TO LEARN MORE, VISIT company’s success is that its managers Performance (How To Books, 2007). THEMINDTRUST.ORG know that partying comes number nine Reprint R0806H on the list of top 10 reasons for want- To order, see page 143. ing to win. Like all elite performers, When we develop a new fuel we don’t just apply chemistry and engineering, but also a special kind of creative thinking. Because, to create something different, you need to start somewhere different. In this case, starting with cleaner natural gas and turning it into liquid fuel. The result? GTL Fuel – a fuel that typically produces between 26% and 40% less sooty emissions in tested cars.

REAL ENERGY SOLUTIONS FOR THE REAL WORLD. SHELL.COM/US/REALENERGY Big Picture

BY JOACHIM HENKEL AND MARKUS REITZIG

Patent Sharks Legal strategies aren’t enough to deal with these predators of the IP world. You need to rethink your approach to R&D.

COMPANIES THAT FOCUS heavily on research and development generally have more value tied up in intangible assets – patents and other intellectual property – than they do in material assets. Different sectors take very different approaches to managing those resources. Pharmaceutical companies, for example, play hardball – they’ll do anything to protect a key patent. That’s not so surprising when you consider that a single patent can sometimes safeguard an entire product. Technology companies, however, have to cooperate with one another because a complex product can incorporate several thousand patents, many of which are held by other organizations. The patents, therefore, become a form of currency exchanged among them. Recently, though, technology companies have been attacked by patent sharks, ﬁ rms with hidden intellectual property that surface, threatening to sue, when their rights are inadvertently infringed. Most of the time, the assault comes out of the blue from an unknown source, and enterprises usually aren’t able to identify their opponent until it is too late for them to react. What’s more, their traditional line of defense, designed for taking on visible competitors, is completely unsuited for this type of guerrilla warfare. To avoid shark attacks, companies will have to go beyond c relying on legal remedies. They’ll also need to move away from amassing huge patent portfolios for cross-licensing

Mirko Ili´Mirko with competitors; develop smarter, simpler standards and

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design more-modular components; co- ARTICLE AT A GLANCE the mobile e-mail service of the same operate earlier with competitors; make name. NTP, a pure patent-holding com- Q Technology companies are sure that functional groups within and pany, fi rst fi led suit against RIM in 2000 being attacked by patent among fi rms share information about sharks – fi rms with hidden for violation of fi ve of its patents and shark attacks; and abandon the practice intellectual property that sur- petitioned the court for an injunction of fi ling for patents on ever smaller, less face, threatening to sue, when on the sale and support of BlackBerry signifi cant inventions. In other words, their rights are inadvertently devices. The case dragged on for years, infringed. they’re going to have to turn their R&D and RIM felt relatively secure that no processes inside out. Q Sharks are winning the game injunction would be issued. On Febru- with preliminary injunctions ary 24, 2006, however, statements by U.S. and high awards for damages. What’s a Patent Shark? District Court judge James Spencer indi- Q To protect themselves, corpo- To be clear, patent sharks are not inven- cated that he was inclined to grant the rations must slim down their tors who pursue their own line of re- patent portfolios; develop injunction and that his ruling was immi- search, visibly offer it for sale or licens- smarter, simpler techni- nent. Faced with the acute risk of an un- ing early on in the process, and then cal standards and design favorable decision, RIM settled only one defend their rights against deliberate more-modular components; week later for $612.5 million – paying a cooperate earlier with their infringements. Instead, they are entities fortune for rights that were dubious at competitors; make sure that that – opportunistically or intentionally – functional groups within and best, given that all fi ve NTP patents had profi t from payments by companies that among fi rms share informa- already been preliminarily invalidated inadvertently infringe on the sharks’ IP tion; and stop fi ling for patents by the U.S. Patent and Trademark Offi ce rights simply because they never even on minor innovations. and that two of them had then received knew those rights existed. Though the a fi nal rejection. The suit all but put patent sharks’ activity is perfectly legal, an end to RIM’s fabulous success story, manufacturers must understand that also realized enormous revenues: more and it shows that weak patents can be they are extremely dangerous and can than $100 million from a single (ac- just as dangerous as strong ones when cause a great deal of harm. They some- quired) patent. And the situation is get- injunctions put a shark’s target under times hold patents based on their own ting worse. Sharks are no longer a purely time pressure. With several competing inventions, but an increasing proportion U.S. phenomenon; they have surfaced mobile e-mail services ready to take license in, or acquire (sometimes from in international waters. As Klaus Hacker, RIM’s place, even a limited disruption bankrupt companies), patents that they the head of Deutsche Telekom’s patent of operations might have ruined the can then turn against manufacturers. department, explained, “Given that re- company. In fact, the uncertainty over This kind of business is not only growing cent legislation has made life harder for its future alone during the legal battle in importance, it’s also attracting more sharks in the United States, I expect to may have cost RIM many potential new venture capital than it has in the past, see increased patent shark activity in customers and tens of millions of dollars according to Buckmaster de Wolf, senior Europe.” in revenues. counsel of litigation and legal policy at Researchers tend to agree that much Damages. Sharks can also win exces- General Electric. Patent sharks operate of the feeding frenzy has been fueled, sive damages at the end of an infringe- in many technology fi elds, but they fo- up to now, by legal ineffi ciencies. Two ment trial. Essentially, this happens be- cus primarily on computing, telecommu- different strategies, taking advantage cause courts don’t distinguish between nications, and mobile communications. of two different legal loopholes, have two important types of patents. The Those industries, and in particular the caused manufacturers major headaches. fi rst are patents that have great intrinsic technical standards they develop, provide Preliminary injunctions. Sharks can value because the technology they pro- a perfect breeding ground for sharks. put enormous pressure on manufactur- tect is critical for a manufacturer’s inven- The challenge for manufacturers is ers by threatening to shut down their tion and because it is diffi cult to avoid enormous. Chip maker Intel, for exam- operations using a preliminary injunc- infringement by “inventing around” it. ple, has had to pay Intergraph at least tion. This tactic is especially effective When a known patent has high intrinsic $675 million for infringement of its Clip- in a fast-paced, complex industry like value, manufacturers most often negoti- per processor patents – even though In- mobile phone operations, where closing ate for licenses to use the protected tech- tergraph stopped manufacturing hard- the doors – no matter how briefl y – can nology, and those negotiations usually ware years before and has never used put even an established player out of result in a price that refl ects the patent’s some of the patents it holds in its prod- business. Consider what happened to true economic value. ucts. Another shark, Asure Software (for- Research in Motion (RIM), which builds The second type of patent, with small merly known as Forgent Networks), has the best-selling BlackBerry and runs intrinsic value, offers patent holders

130 Harvard Business Review | June 2008 | hbr.org little opportunity for revenue through But will this lead to the extinction threatening to enforce them against the licensing, since manufacturers can often of patent sharks in the United States? other companies, the fi rm is reported to invent around the technology. If that While many stakeholders seem to think have generated, over a period of several kind of patent remains hidden, however, so, our research suggests the opposite. years, licensing returns of $50 million to it can gain value as the basis for a law- Toward the end of 2006, the public me- $100 million annually from its surprised suit in which the holder prevails against dia had identifi ed 45 fi rms as patent targets. This approach requires no legal a manufacturer that has inadvertently sharks, with 135 known predatory pat- loopholes in order to work. As long as integrated the patented technology ents – which probably represent just the sharks can cause manufacturers to in- into a product. This is because, in deter- tip of the iceberg. Based on our analysis fringe on a patented technology that is mining damages, the courts (or certain jurisdictions, anyhow) generally apply standard industry royalty rates and do The profi ts from genuine licensing not account for potentially low-cost invent-arounds. pale next to those from the game Thus, no matter how a shark obtains its position, whether through pure luck of “hide, seek, and sue.” or through trapping the manufacturer, it wins – and for a simple reason: When patents are hidden, companies unknow- of those fi rms and patents, we are forced interconnected with other elements in ingly lack vital information when creat- to conclude that variations of the black- a complex product, playing “hide, seek, ing new products. As a result, they can’t mailing game will be sustainable even and sue” will still be more profi table avoid infringement by inventing around, after policy changes unless target fi rms than genuine licensing. And there are acquiring, or bartering for components. choose to fi ght back. several ways for sharks to obtain such In February of this year, for instance, the Patent sharks seem to have adopted patents – through acquisitions in bank- U.S. District Court for the Eastern District a new strategy that they are likely to be- ruptcy proceedings, licensing agree- of Texas (considered by IP experts to be gin following more frequently: trapping ments, or even their own R&D efforts. very plaintiff-friendly) ordered Boston manufacturers with patent-protected We estimate that about a quarter of all Scientifi c to pay more than $431 million technology that is diffi cult to substitute shark attacks fall into this category. This in damages to Dr. Bruce Saffran as royal- for under any circumstances – not only fi gure is likely to increase. ties for its sales of heart stents from 2004 under time pressure but also in the long to 2007. Had Boston Scientifi c known run – once it is integrated into a com- What Managers Can Do of Saffran’s patent while the stent was plex product or technology standard. Most large corporations take a very under development, it most likely would Rambus, a manufacturer of high-speed tough stance once a shark has made a have invented around his technology. memory solutions, appears to be using claim. As Winfried Büttner, head of in- this strategy. The company participated tellectual property at Siemens, told us, Legal Remedies in Sight, But… in a standard-setting process, initiated “We always fi ght it out – if needed, in Not surprisingly, high-technology pro- by the Joint Electron Devices Engineer- court – even for small amounts in dis- ducers and other interest groups have ing Council, for new types of dynamic pute. Settling would only invite more at- lobbied heavily for policy changes, and random access memory chips, which tacks.” Other large fi rms sometimes con- recent decisions by the U.S. Supreme are manufactured by the billions every sider settling when the amount seems Court have created a far less hospitable year. Coordination among competitors manageable. For some smaller fi rms, environment for sharks in the United via standards was particularly important however, settling is the only option if States. Two rulings are particularly rele- with regard to these chips because of they can’t afford a costly trial. Neverthe- vant: In 2006, the Court held in eBay Inc. their complex architecture and because less, companies of all sizes clearly need v. MercExchange that granting a perma- the costs of switching from one tech- to tackle the problem before it gets to nent injunction on a fi nding of patent in- nological solution to another would in- court. We believe that corporations fringement will no longer be automatic, crease drastically once the standard was won’t really fi nd a solution until they making it harder for patent holders, and set. Rambus, however, despite its partici- fundamentally change how they think sharks in particular, to obtain that relief. pation in the meetings, did not disclose about IP protection, how they relate Then, in 2007, the ruling in KSR Interna- that it was fi ling patents on technolo- to competitors, how they set standards, tional Co. v. Telefl ex Inc. made obtaining gies that were ultimately incorporated and how they structure their internal patents for trivial inventions more dif- in the standards. By taking out patents R&D processes, so we offer fi ve princi- fi cult and invalidating them easier. on the standard and subsequently ples to help guide them. Some of these

hbr.org | June 2008 | Harvard Business Review 131 Big Picture Patent Sharks

principles – including “smart” standard setting, R&D modularization, and cross- functional cooperation – are good ideas regardless of whether patent sharks are circling, but companies have been slow to adopt them. Perhaps the threat of attacks will ﬁ nally push companies into rethinking their R&D practices.

| 1 | High-technology fi rms should move away from building huge patent portfolios for the purpose of cross-licensing with competitors. For at least a decade, high-tech fi rms have believed that they can mitigate the risk of extortion by creating technological interdependence with one another. The thinking has been that their ecosystems will function effi ciently if all players use patents as bargaining chips. As a result, they have built up bulky portfolios of detailed patents that they cross-license to one another and collectively use as fi rst place, though, requires a forward- tal, but shark attacks may help swing entry barriers for new players. This ap- looking R&D strategy. Klaus Diepold, a the pendulum further toward early- proach has resulted in far too many member of the MPEG standardization stage cooperation. If individual fi rms patents overall – and the irony is that it body and the head of the Institute for can’t spot predators on their own, then doesn’t work against sharks, since sharks Data Processing at Munich University pooling resources and cooperating with have no interest in exchanging tech- of Technology, pinpoints this challenge: direct competitors early on may help nology. The only alternative to paying “One needs to make sure that the core them avoid developing products that sharks is to stop using their protected of essential inventions is…fully covered are prone to subsequent attacks. This technology. by ‘friendly’ patents or public-domain does require that manufacturing fi rms technologies. The noncore parts of the exchange knowledge about where they | 2 | Companies must simplify tech- standard should be highly modular.” are heading, an uncomfortable prospect nical standards and create more- for some. Nevertheless, it may be pref- modular designs. Currently, compa- | 3 | Companies must begin cooper- erable to the alternative: Some sharks nies create and adhere to technology ating with their competitors early in are fi nding ways to stipulate licensing standards in an effort to increase overall the R&D process. As noted, early-stage agreements – as many as 900 at a time – profi tability by reducing wasteful dupli- research tends to be highly secretive, with different targets, and then threaten cation and the transaction costs of in- whereas a patent-protected idea often the targets separately in a mass-mailing terfi rm cooperation. This approach also, becomes a trading asset. Intuitively, this effort. Because the targets don’t know however, makes companies particularly makes sense, since disclosing knowledge who else is being blackmailed, they can’t attractive for sharks: If a shark’s tech- about unprotected ideas can make a join forces. But all that could change nology is built into a standard, and a fi rm’s R&D department very vulnerable. if more fi rms started to disclose early- company can neither stop using it nor This approach has become outdated, stage information that they would not switch to a feasible alternative, that however. In the pharmaceutical industry, have shared in the old days. company is trapped. Thus, companies increases in required R&D spending on must design technology in an even more drug development make pooling R&D | 4 | Firms must foster interdepart- modular way so that they can simply resources from the start – despite all the mental and intercompany coop- swap out an infringing module when risks – far more effi cient than engaging eration. R&D departments that assign a problem occurs, and standards must in patent races. In industries such as patent lawyers to projects from the be- be simplifi ed so that there are fewer ir- telecommunications and semiconduc- ginning tend to produce higher-quality replaceable core components to worry tors, patent races still play a minor role technologies, which they are then bet- about. Creating these options in the because innovation is more incremen- ter able to protect. Most fi rms don’t fol-

132 Harvard Business Review | June 2008 | hbr.org NUDGE Improving Decisions About Health, Wealth, and Happiness low this practice, however, because it’s more and more diffi cult.” These prob- more expensive in the short run. Cross- lems are further exacerbated in the case Richard H. Thaler and functional coordination problems exist of standards. By fl ooding patent offi ces Cass R. Sunstein not only within fi rms but also among with their applications, R&D-intensive fi rms, particularly during standard defi rms have actually managed to lower velopment. Our research suggests that the bar for obtaining patents over time,

In the current environment, trivial patents can exist, may be hidden, and may even be enforced. Sharks love it. although early involvement of legal ex- making it easier to secure protection for perts would create complexity, it would simplistic inventions. The result is an en- also dramatically reduce the costs of pro- vironment in which trivial patents can “This book is terrific. It will tecting high-quality technologies down exist, may be hidden, and may even be change the way you think, not only the line. A recent lawsuit against Nokia enforced. Patent sharks love it. about the world around you and provides an example of how important • • • some of its bigger problems, but cross-functional cooperation among Companies that are R&D-intensive also about yourself.”—Michael Lewis fi rms may be. In 2007, Pullach, Germany– stand at a crucial crossroads. Senior peo- based IP licensing company IPCom ple at these companies know that their Visit the author’s website: www.nudges.org A Caravan Book: www.caravanbooks.org obtained patents from automotive gi- designs should be more modular, that ant Robert Bosch and then used those technology standards could be devel- patents to sue Nokia for ¤12 billion in oped more intelligently, and that they THE FUTURE OF THE January 2008. No doubt Bosch profi ted should bring legal experts – and occa- in the short run from this seemingly sionally competitors – into development INTERNET—AND simple patent sales deal. But, given the processes earlier. Above all, they know HOW TO STOP IT outcome, perhaps Bosch – and certainly that their patent portfolios, and those of Nokia – might have been better off in their competitors, are overstuffed with Jonathan Zittrain the long run if Bosch’s IP sales team had small, insignifi cant patents. One of our coordinated more closely with Nokia interviewees neatly described the di- and denied IPCom the means and the lemma: “With the ever increasing num- opportunity to attack. ber of patent applications, the pendulum has swung too far. One would have | 5 | Companies must stop fl ooding to cut down – but no one wants to go patent offi ces with insignifi cant in- fi rst.” We hope that companies fi nd the ventions. Companies evidently believe courage to change how they work with that more is better when it comes to their intellectual property – because it’s patents. Not only is the absolute num- quite clear that the sharks won’t leave ber of patent fi lings increasing, but so is them alone until they do. the number of patents per R&D dollar spent. Firms amass portfolios of patents Joachim Henkel is a professor of technol- that are so huge they obscure the view of ogy and innovation management at the core invention and make it diffi cult Munich University of Technology. Markus “A must-read for all who take the to navigate the technological landscape Reitzig ([email protected]) is an as- ubiquitous nature of the Internet in without stepping on a patent mine. As sistant professor of strategic management our everyday lives for granted.” Fritz Teufel, formerly the head of intel- at London Business School. —Dr. Klaus Schwab, Executive Chairman lectual property at IBM in Germany, put and Founder of the World Economic Forum Reprint R0806J it, “Due to the strong rise in patent appli- To order, see page 143. cation numbers, patent monitoring gets 1908–2008 University Press YALE yalebooks.com Letters to the Editor

When Growth Stalls combined to stall growth. Thus, we are In their article “When Growth Stalls” exhorted to renew and innovate while (March 2008), Matthew S. Olson, Derek managing to stick to the core business van Bever, and Seth Verry suggest fac- at the same time. tors that may be responsible for seri- Furthermore, there is a thread of com- ous revenue stalls. There appears to be moditization throughout the article. For some conﬂ ict among those elements, instance, the authors imply that prime however. products erode quickly, drifting down- In the section “When Innovation ward, and they recommend allocating Management Breaks Down,” the authors funds for innovation to create lower-cost highlight the importance of maintaining versions of existing products. There is growth through careful R&D spending, ample evidence, however, that erosion does not necessarily take place. Many companies, such as Mercedes-Benz, have been able to maintain their prime position in the market without com-

Ln\\^ll_ne\hfiZgb^l ehl^fhf^gmnf_hk_hnk moditizing their products with low-cost fZbgk^Zlhgl':eeZk^pbmabg fZgZ`^f^gmÍl\hgmkheb_ lihmm^]bgmbf^' versions – and with good reason. Turn- [rFZmma^pL'Helhg% =^k^doZg;^o^k%Zg]L^maO^kkr ing a prime product into a commodity relinquishes any competitive advantage gained though the careful, expensive, Pa^g development process and usually leads @khpma to a reduction in margins and a loss of market share. mZeelSENIOR MANAGEMENT AT LEVI STRAUSS & COMPANY L could be for- given for not seeing it coming. The year was 1996. The company had just achieved a personal best, with sales cresting $7 billion

Harting for the ﬁrst time in its history. This performance extended a run of growth in which overall revenue had more than doubled Finally, the conclusions drawn in within a decade. Since taking the company private in 1985, man-

Christopher agement had relaunched the ﬂagship 501 brand, introduced the

50 Harvard Business Review | March 2008 | hbr.org hbr.org | March 2008 | Harvard Business Review 51 this article do not apply to all business segments. The authors break down the root causes of revenue stalls through an pointing out that doing so could lead to analysis of 50 representative companies, innovation and more growth. Yet in the and they deem 13% of those causes to following section, the authors fault com- be beyond management’s control. Yet in panies for failing to fully exploit growth the health care industry, where govern- opportunities in their existing core busi- ment regulation is extensive, that num- nesses. They cite Kmart’s critical mistake ber misses the mark. We note that no of taking its eye off the gathering storm health care companies were cited in the that was Wal-Mart and argue that the article and wonder whether they were company’s resulting lack of focus on its included in the analysis. If they were core business, along with a search for not, we believe that such an omission growth through diversiﬁ cation, in fact would constitute a signiﬁ cant oversight,

We welcome letters from all readers wishing to comment on articles in this issue. Early responses have the best chance of being published. Please be concise and include your title, company afﬁ liation, location, and phone number. E-mail us at hbr_letters@harvardbusiness. org; send faxes to 617-783-7493; or write to The Editor, Harvard Business Review, 60 Harvard Way, Boston, MA 02163. HBR reserves the right to solicit and edit letters and to republish letters as reprints.

134 Harvard Business Review | June 2008 | hbr.org since approximately 15% of the U.S. GDP strategy. Moreover, in an entire range of twice recently by the Consumer Product comes from the health care sector. markets, transaction volumes and prof- Safety Commission (CPSC) for failing to Executive MBA Class of 2008 its are migrating away from the thick report safety hazards in a timely man- Baylor University middle of the bell curve and toward ner: $1.1 million in 2001 for problems Dallas both the low and high ends. Mercedes with its Power Wheels motorized toy car management played this development and $975,000 in 2007 for issues concern- Gary R. Carini as well as any we studied. ing its Little People toys. Associate Dean for Graduate Programs Finally, we’d like to reassure health Mattel’s CEO, Robert Eckert, has de- Professor of Management care executives that our research sam- fended his company’s practice of dis- Hankamer School of Business ple is representative across industries, closing safety problems on its own time- Baylor University including all segments of health care. table, not regulators’, by asserting that Waco, Texas That said, we hasten to note that stalls the timetable required by the law, and are phenomena of companies – not of the CPSC’s enforcement methods, are industries – and that individual organi- unreasonable. Olson, van Bever, and Verry respond: zations will follow a variety of growth E. Marla Felcher Gary R. Carini and Baylor University’s trajectories even in regulated lines of Adjunct Lecturer in Public Policy Executive MBA Class of 2008 voice an business. John F. Kennedy School of Government understandable concern about whether Harvard University elements of our root cause analysis Cambridge, Massachusetts are in confl ict with one another, given Socially Responsible Lobbying that we highlight the importance of innovation in 3M’s case and then seem- In his article “Socially Responsible Lob- Vogel responds: My description of Mat- ingly reverse ourselves by emphasizing bying” (The HBR List, February 2008), tel as a socially responsible company is Kmart’s need to focus on its core. We see David Vogel identifi es toy maker Mattel based on its willingness to establish an no confl ict here, however. Since compa- as being a socially responsible company. independent monitoring council with nies typically reap most of their growth I have conducted research on the chil- full access to the 13 factories Mattel from a dominant business model, each dren’s products industries for the past owns and operates in China – and to al- organization’s stall will have a charac- 10 years and have found little in Mattel’s low the council to make the results of its teristic signature, or pattern, refl ecting behavior, either in its manufacturing audits public. Few other Western fi rms that model. A company like 3M depends processes in China or in its sales opera- have accepted such extensive auditing primarily on innovation for increments tions in the United States, to warrant requirements and made their labor prac- of new revenue growth; a retailer such that distinction. tices so transparent. as Kmart is overwhelmingly dependent Last January, for instance, the Wall Certainly, compliance with labor on new-store openings, same-store sales Street Journal reported that a Chinese standards has been uneven. But I would gains, and effi cient logistics. manufacturer whose batteries Mattel challenge E. Marla Felcher to name any Carini and his coauthors next cite uses in its toys was exposing its work- Western fi rm that has made a more seri- Mercedes’s experience to question the ers to unsafe levels of cadmium, a toxic ous effort to treat its Chinese workers idea that commoditization is inevitable metal that can – and did, in this case – responsibly. and that a company occupying a pre- lead to kidney failure and environmen- mium position in a market should cre- tal contamination. Similarly, the Chicago ate low-end versions of its products. Let Tribune reported that Mattel issued a re- Sustainable and Unsustainable us point out, however, that Mercedes call in Illinois for blood-pressure cuffs Trends introduced its C-class automobile line in in its toy medical kits but refused to response to market share erosion from recall them nationally, despite a letter I was surprised by the seeming contra- below – and that BMW, Porsche, and from 50 U.S. lawmakers urging the com- diction between two trends identifi ed others have followed exactly the same pany to do so. Mattel also has been fi ned by Garrett Gruener in “Sustainable and

hbr.org | June 2008 | Harvard Business Review 135 LETTERS TO THE EDITOR

Unsustainable Trends” (The HBR List, As a 35-year-old technology-savvy As scandalous as this may be, imagine February 2008). I struggle to see how leader, I found the descriptions of Sec- the PR nightmare when activists target one can promote enhancements to ag- ond Life, BarCamp, brain scanning, and a legitimate company for closing an il- ricultural productivity via biotechnol- other technologies very strange. I can legal factory and putting thousands of ogy as a growing, sustainable trend yet only imagine what leaders a generation unskilled Chinese workers on the street. denounce the decline of ecological di- behind me, the so-called “digital natives,” Yes, there is opportunity in the land, but versity as an unsustainable trend that would make of all of this. it’s not all milk and honey. should be reversed. Surely the two are in Dizzy delight in new technologies is Kevin R. Woolf opposition. What else is the expansion not what I would expect from HBR, a Global MBA Candidate of the biotech revolution – by which normally insightful journal, and I think National Taiwan University I assume the author means primarily the you have done your readers a disservice. Taipei use of genetically modifi ed crops – ex- James Robertson cept the ongoing destruction of ecologi- Managing Director cal diversity? Step Two Designs China + India: The Power of Two Every time a fi eld containing tradi- Chippendale, Australia tional local crops is replanted with stan- The article “China + India: The Power dard, industrially produced, genetically of Two,” by Tarun Khanna (December modifi ed varieties there must be a re- China’s Untapped Second Cities 2007), is very timely. I was disappointed, sulting loss of ecological diversity. The however, that the author did not men- biotech revolution is further shifting our Editor’s note: The following letter to tion both nations’ growing environmen- food system from a state of diversity to the editor was originally posted online tal problems. China and India already a narrow and potentially dangerous re- as a comment on Harvard Business’s face water contamination and shortages, liance on monocultures across a range Conversation Starter blog at harvard and air quality is so low that it consti- of major food crops. Such a shift needs business.org. tutes a health epidemic. What’s more, to be carefully managed to avoid unin- those problems will only worsen as the tended consequences. In “China’s Untapped Second Cities” countries continue to increase their Judson Berkey (The HBR List, February 2008), George substantial contributions to the world’s Managing Director Pohle highlights the promise of second- greenhouse gases, which shrink the gla- UBS tier cities in China. But there are two ciers that feed their rivers, raise ocean Zurich good reasons why that segment of the levels along their coasts, and damage country’s market remains challenging crops. China and India must cooper- for multinationals: corporate espionage ate with each other and with the rest Understanding Opposition and counterfeiting. of the world to address environmental Reliable reports have surfaced of concerns. This is a signifi cant part of When I read the article “Understanding government intrusion and interfer- their relationship and should have been Opposition,” by Michael Sheehan (The ence by distributors, who get bribes and included. HBR List, February 2008), I must con- kickbacks for keeping counterfeiters James E. Jones, MD fess I actually checked to see whether in business and out of the inept legal Chairman this might be the April Fool’s edition of system. Fallout from the corruption Harrisburg-Hershey Chapter of Physicians Harvard Business Review. Sheehan’s ad- can be painful. Companies in Taiwan, for Social Responsibility vice seems to have come straight from for example, suffer ramped-up expenses New Cumberland, Pennsylvania the script of the movie Thank You for and damaged brand images because Smoking and, in my opinion, is unethical they are now forced to service counter- at the very least. feit goods to avoid losing high-volume Khanna responds: James E. Jones’s con- I then started into the rest of the customers. tention, that water and environmental HBR List, only to fi nd page after page What’s more, awareness campaigns issues deserve a cooperative solution, is of uncritical, starry-eyed descriptions are useless in the outer cities because incontrovertible. But how is this to be of technology and how it will appar- customers see only the price tag, not the achieved? Perhaps progress toward co- ently change the world. Many of the discolored packaging or misspelled En- operation would be likelier if the general ideas were oversold or poorly thought glish logo. And while legitimate compa- Sino-Indian milieu tilted more toward out, and few, if any, mapped back to real nies spend millions of dollars on R&D economic and business-based symbiosis business issues – surely the most impor- and M&A, counterfeiters steal more rather than saber rattling and relatively tant criterion for inclusion in HBR. than 40% of some products’ market share. intractable border disputes.

136 Harvard Business Review | June 2008 | hbr.org 4th Law of Healthonomics:

Investing to keep employees

working and healthy

beats paying for

them when they’re

out and sick.

More employers are rethinking their responses to escalating healthcare costs. Why? Th ey recognize chronic diseases are the root problem. Example: An employee managing his diabetes might cost $5,000 per year.1 An employee not managing his diabetes could cost up to $45,000.1 Th e win-win here is that by providing employees incentives to lead healthier lives and helping them manage their chronic diseases, you reduce your healthcare costs. And you’ll have healthier employees. Sure beats the alternative.

Learn about lowering costs now at www.CenterVBHM.com

Reference: 1. Health Partners. Beyond Beneﬁ ts. January 2006. http://www.healthpartners.com:747/media/beyondbeneﬁ ts/BB0106_ br.htm. Last accessed 8/3/07. | ORGANIZATION & CULTURE |

COVER STORY 60 | The Secrets to Successful Strategy Execution Gary L. Neilson, Karla L. Martin, and Elizabeth Powers When a company fi nds itself unable to execute Executive strategy, all too often the fi rst reaction is to redraw the organization chart or tinker with incentives. Summaries Far more effective would be to clarify decision rights and improve the fl ow of information both up the line of command and across the organization. JUNE 2008 Then, the right structures and motivators tend to fall into place. That conclusion is borne out by the authors’

PARADOX AT TOYOTA…page 96 CLARITY AT IDEO…page 84 decades of experience as Booz & Company consultants and by the survey data that they have been collecting for almost ﬁ ve years from more than www.hbr.org June 2008 125,000 employees of some 1,000 organizations in more than 50 countries. From this data they have

60 The Secrets to Successful Strategy Execution distilled – and ranked in order of importance – the Gary L. Neilson, Karla L. Martin, and Elizabeth Powers

72 The Next Revolution in Productivity Ric Merriﬁ eld, Jack Calhoun, and Dennis Stevens top 17 traits exhibited by the organizations that are

84 Design Thinking Tim Brown most effective at executing strategy.

96 The Contradictions That Drive Toyota’s Success The single most common attribute of such Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu

106 The Multiunit Enterprise David A. Garvin and Lynne C. Levesque companies is that their employees are clear about

22 FORETHOUGHT which decisions and actions they are responsible

41 HBR CASE STUDY Why Are We Losing All Our Good People? for. As a result, decisions are rarely second- Edward E. Lawler III HOW TO 53 FIRST PERSON Business Basics at the Base of the Pyramid guessed, and accurate competitive information DELIVER Vikram Akula 123 MANAGING YOURSELF quickly ﬁ nds its way up the hierarchy and across ON A GREAT How the Best of the Best Get Better and Better PLAN Graham Jones …page 60 organizational boundaries. Managers communicate

129 BIG PICTURE Patent Sharks Joachim Henkel and Markus Reitzig the key drivers of success, so frontline employees 138 EXECUTIVE SUMMARIES have the information they need to understand the 144 PANEL DISCUSSION impact of their day-to-day actions. Motivators – like performance appraisals that distinguish high, adequate, and low performers and rewards for fulfi lling particular commitments – are also important but are most effective when applied after decision rights and information fl ows have been addressed. That holds true for structural Structural change can moves as well. Surprisingly, the most effective and should be part of structural moves turn out to be promoting people laterally – and more slowly. the path to improved “ How can you make the most educated and execution, but it’s best to cost-effi cient decisions about which change initiatives to implement? The authors have developed think of it as the capstone, a powerful online diagnostic and simulation tool not the cornerstone, that can help you test the effectiveness of various approaches virtually, without risking signifi cant of any organizational amounts of time and money. transformation. Reprint R0806C; HBR Article Collection “Great –page 60 ” Strategy and Great Results, 2nd Edition” 10118 Art Credit

138 Harvard Business Review | June 2008 | hbr.org | IDEAS & TRENDS |

FORETHOUGHT Tapping Hidden Opportunities 22 | Stopping the Exodus in China’s New Tax Law of Women in Science Jeff Olin and Gary James Sylvia Ann Hewlett, Carolyn Buck Luce, and China’s new tax regulations provide at- Lisa J. Servon tractive incentives for foreign companies that are willing to help the government A new study reveals that U.S. companies improve local infrastructure, make Chi- face a troubling brain drain: Fifty-two nese businesses greener, and shift the percent of female scientists, engineers, country’s industry from manufacturing and technologists abandon their chosen cheap products to providing high-quality professions. If companies understand why women drop out, however, they can goods. Reprint F0806F create targeted interventions and head off a talent shortage. Reprint F0806A The Fatal Flaw in Pay for Performance Getting Sound Advice on Ben W. Heineman, Jr. Social Initiatives Boards should tie CEO pay to more Steven Grover than just company performance – they should link it to performance with integ- DELIVERING INFORMATION SERVICES Burger King has found a low-key but sur- rity. Otherwise, companies can’t build JULY 20–26, 2008 prisingly effective way to deal with con- the reputation that is vital for survival. sumer concerns about animal welfare: Establish an advisory panel of outside Reprint F0806G STRATEGIES FOR PROTECTING experts who can help analyze and fi lter AND MONETIZING INTELLECTUAL ideas for initiatives. Reprint F0806B The Best Advice I Ever Got PROPERTY Stephen A. Schwarzman JULY 27–30, 2008 Subsidies and the China Price The chairman and CEO of the Black- Usha C.V. Haley and George T. Haley stone Group refl ects on the advice of his PRIVATE EQUITY AND high school track coach, who continu- New research suggests that Chinese ally reminded him that the person who VENTURE CAPITAL companies’ price advantage comes not is most prepared is the one who wins. SEPTEMBER 7–11, 2008 from low-cost labor but from massive government subsidies. That fi nding has Reprint F0806H major implications for foreign fi rms that CORPORATE SOCIAL RESPONSIBILITY compete with, or source from, those One Reason Women Don’t Make It OCTOBER 15–18, 2008 companies. Reprint F0806C to the C-Suite Louann Brizendine, MD CONSUMER FINANCIAL SERVICES Next-Generation Online Cons There’s a certain age, long established NOVEMBER 2–7, 2008 Clay Shirky by large corporations, at which executives must make their play for the big Online business scams are rising be- ACHIEVING BREAKTHROUGH SERVICE promotion that will put them in line cause the internet offers a perfect me- NOVEMBER 9–14, 2008 for the C-suite. While the timing is dium for con artists, who know that the good for men, it’s not good for women. money’s in business. Companies can EFFECTIVE STRATEGIES FOR meet that threat with three defensive Reprint F0806J MEDIA COMPANIES strategies. Reprint F0806D Reviews DECEMBER 3–6, 2008 A Conversation with Bob Iannucci Featuring Megacommunities: How Leaders of Government, Business and Nokia’s chief technology offi cer is help- GOVERNING FOR NONPROFIT Non-Profi ts Can Tackle Today’s Global ing the company fi nd growth by going EXCELLENCE Challenges Together, by Mark Gerencser, in a radical new direction. Because Reginald Van Lee, Fernando Napolitano, DECEMBER 3–6, 2008 Nokia has been down the reinvention and Christopher Kelly. road before, Iannucci believes it has the mind-set, structure, and strategy in place to realize its “deep future.” Reprint F0806E For more information, visit www.exed.hbs.edu/pgm/uphbr | HUMAN RESOURCES | | ENTREPRENEURSHIP | | MANAGING TECHNOLOGY | | HBR CASE STUDY FIRST PERSON 72 The Next Revolution in Productivity 41 | Why Are We Losing All Our 53 | Business Basics at the Base of Good People? the Pyramid Ric Merrifi eld, Jack Calhoun, and Dennis Stevens Edward E. Lawler III Vikram Akula If your company embraced the reengi- Is it a sign or just a coincidence that A decade after founding SKS Micro- neering revolution and is now hitting a several talented employees have recently fi nance, CEO Akula explains how to wall, look beyond business processes left Sambian Partners? The architecture make money at the bottom tier of the to the new frontier of effi ciency: the and engineering fi rm’s latest defector re- economic pyramid while raising the living activities that make up those processes. fuses to tell the head of human resources, standards of the people who occupy Advances in IT – especially a relatively Mary Donillo, why he was unhappy. And it. His company, which provides many recent one called service-oriented the self-administered employee surveys small-business loans and other fi nancial architecture – are making it possible to don’t reveal much. When CEO Helen services to poor women in India, has design and deploy business activities as Gasbarian gets word of the next possible a customer base that has been nearly Lego-like software components, which fl ight risk, she promotes the employee tripling each year and now numbers more can help transform your business into a on the spot. How can Sambian stop the than 2 million. highly productive plug-and-play operation. talent drain? Four experts comment on Akula attributes his fi rm’s success in SOA enables discrete activities to be this fi ctional case study. part to heeding three principles: Adopt accessed via the internet and to be easily Anna Pringle, the head of international a profi t-oriented approach in order to updated, shared, bought, and sold – both people and organization capability for access commercial capital; boost capac- within your organization and externally. Microsoft, thinks that Helen should take ity by standardizing products, training, Most companies have thought of SOA a hard look at Mary, who is not safe- and other processes; and use the latest merely as an easier, less expensive way guarding the fi rm’s talent. Helen must technology to reduce costs and limit er- to maintain the software that supports also become an attentive listener. rors. Collectively, these for-profi t maxims existing operations. By failing to revisit F. Leigh Branham, the CEO of human refl ect a rethinking of the conventional their organizational designs before ap- resources consultancy Keeping the microfi nance model, which simply aims plying SOA, however, these businesses People, thinks that Sambian’s employees to break even. Instead, SKS scales up are missing an opportunity to replace need a forum in which they can speak to achieve growth; the margins are proprietary processes and activities with openly about their discontent. The candid razor thin, but the volume is stagger- standardized, fungible ones. discussions can expose the “triggering ing – 160,000 new customers every That’s the nuanced argument made events” that impel people to leave, such month. Numbers like that give the com- by Merrifi eld, of Microsoft; Calhoun, of as a disconnect between the fi rm’s long- pany great leverage with partners – in- Accelare; and Stevens, of Synaptus. To standing focus on innovative design and surers, telecom providers, consumer guide you through the intricacies of a more recent concern with profi tability. goods manufacturers, and so on – whose revisiting your operations, they outline an Jim Cornelius, the chairman and CEO products SKS’s clients need. approach called a business capabilities of Bristol-Myers Squibb, once faced a Customers are indeed central to analysis. Their method involves diagram- potential employee exodus as interim Akula’s enterprise. Every SKS loan offi cer ming your company’s work activities, CEO of the pharmaceutical company. is required to do what’s best for the cli- describing the capabilities that support He advises Helen to meet face-to-face ent, even if it undermines the fi rm’s short- them, valuing and assessing the perfor- with her most talented employees and term interests. That means everything mance of both, and creating a heat map assure them that she understands their from traveling far and wide to meet with that helps identify the priorities for an concerns and desires. prospective borrowers on their schedules improvement program. Jean Martin, the executive director of to scratching out repayment plans in the The authors share real-world examples the Corporate Executive Board’s leader- dirt with them. Such commitment scales of companies that have reaped rewards ship council, urges Helen to support a up customer loyalty, which ultimately from this self-analysis and subsequent mission and culture to which employees improves the fortunes of not only the SOA implementation. They also acknowl- will feel connected. She explains that al- clients themselves but also the company edge the barriers to applying SOA, includ- though people join companies for rational and its investors. ing the gulf between CEOs and their IT motives, they stay for emotional ones. By Reprint R0806B departments. The leaders who overcome the time unhappy workers tell their man- such obstacles, say the authors, will agers what’s going on, it’s often too late. pioneer the next great leap in corporate Reprint R0806A productivity. Reprint Case only R0806X Reprint R0806D Reprint Commentary only R0806Z Art Credit Art

140 Harvard Business Review | June 2008 | hbr.org THE UNTOLD STORY OF | INNOVATION & CREATIVITY | | ORGANIZATION & CULTURE | RISK AND 84 | Design Thinking 96 | The Contradictions That Drive Tim Brown Toyota’s Success OPPORTUNITY In the past, design has most often Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu occurred fairly far downstream in the development process and has focused Toyota has become one of the world’s on making new products aesthetically greatest companies only because it attractive or enhancing brand perception developed the Toyota Production System, through smart, evocative advertising. right? Wrong, say Takeuchi, Osono, and Today, as innovation’s terrain expands to Shimizu of Hitotsubashi University in To- encompass human-centered processes kyo. Another factor, overlooked until now, and services as well as products, compa- is just as important to the company’s suc- nies are asking designers to create ideas cess: Toyota’s culture of contradictions. rather than to simply dress them up. TPS is a “hard” innovation that allows Brown, the CEO and president of the the company to continuously improve innovation and design fi rm IDEO, is a the way it manufactures vehicles. Toyota leading proponent of design thinking – a has also mastered a “soft” innovation method of meeting people’s needs and that relates to human resource practices desires in a technologically feasible and and corporate culture. The company strategically viable way. In this article he succeeds, say the authors, because offers several intriguing examples of the it deliberately fosters contradictory discipline at work. One involves a collabo- viewpoints within the organization and ration between frontline employees from challenges employees to fi nd solutions health care provider Kaiser Permanente by transcending differences rather than and Brown’s fi rm to reengineer nurs- resorting to compromises. This culture ing-staff shift changes at four Kaiser generates innovative ideas that Toyota hospitals. Close observation of actual implements to pull ahead of competitors, shift changes, combined with brainstorm- both incrementally and radically. ing and rapid prototyping, produced new The authors’ research reveals six procedures and software that radically forces that cause contradictions inside streamlined information exchange be- Toyota. Three forces of expansion lead tween shifts. The result was more time the company to change and improve: for nursing, better-informed patient care, impossible goals, local customization, and a happier nursing staff. and experimentation. Not surprisingly, Another involves the Japanese bicycle these forces make the organization more components manufacturer Shimano, diverse, complicate decision making, and which worked with IDEO to learn why threaten Toyota’s control systems. To 90% of American adults don’t ride bikes. prevent the winds of change from blow- The interdisciplinary project team discov- ing down the organization, the company ered that intimidating retail experiences, also harnesses three forces of integra- “ THE DEFINITIVE the complexity and cost of sophisticated tion: the founders’ values, “up-and-in” HISTORY OF bikes, and the danger of cycling on heav- people management, and open commu- THE BIRTH OF nication. These forces stabilize the com- ily traffi cked roads had overshadowed VENTURE CAPITAL. people’s happy memories of childhood pany, help employees make sense of the Anyone who is interested in environment in which they operate, and biking. So the team created a brand con- innovation, entrepreneurship, perpetuate Toyota’s values and culture. cept – “Coasting” – to describe a whole or the roots of America’s Emulating Toyota isn’t about copying new category of biking and developed start-up economy must read new in-store retailing strategies, a public any one practice; it’s about creating a cul- this book.” relations campaign to identify safe places ture. And because the company’s culture to cycle, and a reference design to inspire of contradictions is centered on humans, JAMES BREYER Managing Partner, Accel Partners designers at the companies that went on who are imperfect, there will always be to manufacture Coasting bikes. room for improvement. Reprint R0806E Reprint R0806F

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WWW.HARVARDBUSINESS.ORG/PRESS | OPERATIONS | | HUMAN RESOURCES | | RESEARCH & DEVELOPMENT | | 106 The Multiunit Enterprise MANAGING YOURSELF BIG PICTURE David A. Garvin and Lynne C. Levesque 123 | How the Best of the Best Get 129 | Patent Sharks A multiunit enterprise is a geographi- Better and Better Joachim Henkel and Markus Reitzig cally dispersed organization built from Graham Jones R&D companies are increasingly falling standard units (stores, restaurants, or What is the real key to elite performance? prey to patent sharks: fi rms with hid- branches) that are aggregated into larger According to sports psychologist turned den intellectual property that surface, geographic groupings (districts, regions, executive coach Graham Jones, star threatening to sue, when their rights and divisions). Although this organiza- athletes and businesspeople share one are inadvertently infringed. The at- tional structure has become the norm in defi ning trait: mental toughness. People tacks usually come out of the blue, and several industries, it has received little who become champions aren’t necessar- companies’ traditional lines of defense, attention from academics and consul- ily more gifted than others; they’re just designed for fi ghting off visible competi- tants. Garvin and Levesque set out to fi ll masters at managing pressure, meticu- tors, are essentially useless in this type that gap in management thinking with lously tackling goals, and driving them- of guerrilla warfare. Munich University of their research. selves to stay ahead of the competition. Technology’s Henkel and London Busi- The authors closely studied the offi ce Jones, who has advised Olympic ness School’s Reitzig offer fi ve principles supply company Staples for two years medalists and Fortune 500 executives, to help companies avoid attack. and then collected data from 12 other sees many parallels between the arenas Move away from amassing huge multiunit enterprises. In this article, of business and sports, especially in patent portfolios for cross-licensing they discuss the unique problems that the behavior of people who rise to the with competitors. Creating technologi- such corporations face, describe how very top. These stars have learned to cal interdependence can work among managers tackle those challenges, and love pressure because it spurs them to competitors interested in exchanging offer lessons that will help all types of achieve. Inner-focused and self-directed, technology. Patent sharks, however, organizations execute strategy. they concentrate on their own excellence want only monetary gains. In a multiunit enterprise, four tiers and forget the rest. They don’t get dis- Simplify standards and create of management constitute the fi eld tracted by others’ victories or failures – or more-modular designs. Companies organization: store, district, regional, and even by a personal tragedy off the fi eld become vulnerable when a shark’s tech- divisional heads. All these managers are of competition. Like Darren Clarke, the nology is built into a standard and they responsible for meeting targets set by golfer who inspired his team to a Ryder can neither stop using the technology corporate headquarters and implement- Cup victory shortly after the death of his nor switch to a feasible alternative. The ing strategy. To do so, they adhere to beloved wife, elite performers are mas- solution is to simplify standards to mini- fi ve principles of organizational design. ters of compartmentalization. mize the number of irreplaceable core First, the fi eld organization’s different Superstars rebound from defeats components and to create more-modular tiers have overlapping responsibilities; more easily, Jones observes, because designs, so an infringing module can be together they create a multilayered net they don’t engage in self-fl agellation. swapped out for a legitimate one. to catch any problems that arise. Second, One of the keys to their success is a Cooperate with competitors early managers at all levels serve as integra- relentless focus on the long term and in the R&D process. Disclosing unpro- tors, coordinating diverse activities the careful planning of short-term goals tected ideas to competitors can seem and optimizing the efforts of the whole that will help them attain major mile- counterintuitive, but sharing informa- organization rather than its parts. Third, stones. Competition doesn’t daunt elite tion early on may help companies avoid higher-level managers fi lter data from performers; they just use it to challenge developing products that are susceptible headquarters to frontline managers, who themselves – and they never stop striv- to attacks. otherwise might feel overwhelmed by ing. Even after becoming benchmarks Foster interdepartmental and a constant stream of initiatives. Fourth, in their fi elds, stars keep their edge by intercompany cooperation. Assigning regional and divisional heads in particular reinventing themselves. patent lawyers to projects from the start act as translators, defi ning in concrete Star businesspeople and athletes also reduces the costs of protecting high- terms how the fi eld organization can roll recognize the importance of celebrating quality technologies down the line. out initiatives. Finally, all managers share their wins. It’s not just the emotional Stop fl ooding patent offi ces with responsibility for talent development. reward that’s important, however: The insignifi cant inventions. The deluge Reprint R0806G very best performers also analyze the has actually made it easier for sharks to factors underpinning their success. That secure protection for trivial innovations, helps them build their expertise and their thus increasing the chances that a com- confi dence. pany will unknowingly infringe on a patent. Reprint R0806H Reprint R0806J Art Credit Art

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THE ATHENA FACTOR REVERSING THE BRAIN DRAIN IN SCIENCE, ENGINEERING, AND TECHNOLOGY A HARVARD BUSINESS REVIEW RESEARCH REPORT by SYLVIA ANN HEWLETT et al.

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Identify the cultural and workplace Realign your culture and redesign barriers that force talented women career paths to better attract and DEVELOPED IN ASSOCIATION WITH THE to drop out of promising science and retain women employees. CENTER FOR engineering careers. Gain fi rsthand insight into game- WORK-LIFE POLICY HIDDEN BRAIN DRAIN Create targeted interventions that changing retention initiatives at TASK FORCE pre-empt the “fi ght or fl ight” moment Alcoa, Cisco, Johnson & Johnson, for women. Microsoft, Pfi zer, and other companies. PANEL DISCUSSION | by Don Moyer

TRATEGISTS POINT OUT that the highest returns come when a company focuses Strategy on a single strategy, commits fully to it, and aligns all resources accordingly. When you look back at companies that have been successful, they often appear S to have used this strategy. Paradox But investing in the big opportunity invariably brings along a chance for the big catastrophe. As Michael Raynor argues in The Strategy Paradox, because the real world in general and competitive markets in particular are ﬁ lled with great unknowns, the same focus and commitment that promise the highest returns also carry the greatest risk of failure. Raynor urges businesses to make sure they have “the ability to pursue alternative strategies…depending on how key uncertainties are resolved.” Raynor further suggests that CEOs should focus not on achieving results but on managing uncertainty. A century ago, Andrew Carnegie had this advice: “Concentrate your energies, your thoughts, and your capital. The wise man puts all his eggs in one basket and watches the basket.” But of course the risk, then and now, is that no matter how attentive and focused you are, the basket you’re watching is simply the wrong one.

Don Moyer can be reached at [email protected].

144 Harvard Business Review | June 2008 | hbr.org