Will Stronger Borders Weaken Innovation?

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Innovators within Borders

We’ve been publishing the Global Innovation 1000, an annual report on corporate R&D spending conducted by Strategy&, PwC’s strategy consulting business, since 2005. Every year, the innovation landscape has grown more and more open, with talent, information, and technical skill flowing across national borders. Until now. In this year’s report, “Will Stronger Borders Weaken Innovation?” (page 54), the tension between national interests (which can be characterized by suspicion of outsiders and protective of their home enterprises) and innovation (which has always been a boundary-crossing phenomenon) takes center stage. As authors Barry Jaruzelski, Volker Staack, and Robert Chwalik put it, “Companies are likely to lose efficiency, create redundancies, and take on higher costs,” especially if they divide their research and development footprints into more autonomous regional hubs. To be sure, global innovation flows have also had unintended consequences, particularly for companies that have invested in emerging markets only to

Illustration by Lars Leetaru have their technological knowledge co-opted, stolen, or used against them. The editor’s letter

strengthening of national barriers will make innovation tougher. But it may also create breathing room for some companies to become stronger and ready to compete when the barriers fall again, as they inevitably will. When that happens, we’ll all need better models of open innovation to help us rebuild those global collaborative connections. One of the best innovators to em- ulate is profiled by contributing editor Lawrence M. Fisher on page 80: physicist Larry Smarr, the founder and visionary leader of California Institute for Telecom- munications and Information Technology (Calit2). Although Smarr is perhaps best known for his prescient work in personalized medicine, he is a pioneering, 2 thoughtful, collaborative synthesizer of many fields, including supercomputing, highly advanced data analytics, microorganic biology, and organizational design. Elsewhere, you’ll find one of the most engaging groups of Best Business Books essays we’ve ever published (page 98). Culling the most valuable business writing of 2017 are James Surowiecki on innovation, Sally Helgesen on leadership, Duff McDonald on management, Bethany McLean on narratives, Ken Favaro on strategy, Catharine P. Taylor on marketing, and, for the first time in our pages, Economist news editor Ryan Avent on economics. Other articles cover the best ways to promote high-potential people who are held back by perceived biases (page 36), better cost management to improve mergers and acquisitions (page 8), the value of a strategically oriented tax function in your company (page 44), and the new collaborative trend in healthcare (page 29).Rotman professor Laura Doering’s research explains why entrepreneurs should pay more attention to their lowest-status constituents (page 21). Finally, on page 158, is our Thought Leader interview with economic gadfly Jeremy Rifkin. Rifkin’s view of a future of abundant energy and digitally driven quality of life has inspired many business and government leaders, notably in Germany and China. The openness of innovation will be a critical factor shaping how this future unfolds.

Art Kleiner Editor-in-Chief kleiner_art@

strategy-business.com strategy + business89 issue leading ideas 15

8 Getting Fit for Mergers and Acquisitions Deniz Caglar and Michael Connolly The disciplines that enable restructuring of established companies are also essential levers for helping deals succeed.

15 Lifelong High Performance, the Japanese–American Way Bobbie van der List A few companies in Tokyo are using U.S. management methods to resolve the trade-off between long employee tenures and global competitiveness.

21 Emerging Entrepreneurs 80 Laura W. Geller Rotman School assistant professor Laura Doering explores the intersection of economic development and human nature.

29 How Teamwork Will Transform Healthcare Brian Williams, Vaughn Kauffman, and Karen Young Payors, providers, medtech companies, and pharmaceutical firms need to get better at working with one another.

116 essays

ORGANIZATIONS & PEOPLE 36 How to Keep Perceived Bias from Holding Back High-Potential Employees Sylvia Ann Hewlett, Ripa Rashid, and Laura Sherbin When talented people from diverse backgrounds fail to rise in a company, use one of these three powerful solutions.

STRATEGY & LEADERSHIP 44 The Marriage of Tax and Strategy Andy Ruggles, Mark Schofield, and Michael Shehab Make a commitment to the function that knows your company best.

features

THE GLOBAL INNOVATION 1000 TECHNOLOGY 54 Will Stronger Borders 80 The Synthesizer Weaken Innovation? Lawrence M. Fisher Barry Jaruzelski, Volker Staack, Larry Smarr has become a vital and Robert Chwalik conductor of innovation by insisting The flow of talent, investment, and ideas that scientists and researchers at the that has boosted companies’ global R&D incubators he runs collaborate across efforts may soon be impeded by the rise the lines that separate disciplines. of economic nationalism.

60 Profiling the Global Innovation 1000 66 The 10 Most Innovative Companies ECONOMICS 98 Best Business 132 Not-So-Great Expectations Books 2017 Ryan Avent

INNOVATION MARKETING 100 The Platform Competition 141 Steady Progress James Surowiecki Catharine P. Taylor

STRATEGY MANAGEMENT 108 Animal Spirits 149 Mind Over Matter Ken Favaro Duff McDonald

NARRATIVES 116 Crimes, Not Misdemeanors 156 Top Shelf Bethany McLean

LEADERSHIP 123 Captains Courageous and Agile Sally Helgesen

THE THOUGHT LEADER INTERVIEW 158 Jeremy Rifkin Art Kleiner and Juliette Powell The influential economic theorist looks ahead to a world of virtually free energy, zero marginal cost production, and widespread abundance, and to a desperate race against climate change.

END PAGE: RECENT RESEARCH 176 Want More Ethical Employees? Give ’Em a Nudge Matt Palmquist A subtle suggestion from management can positively influence employee behavior, but a heavy-handed approach is likely to backfire.

Cover illustration by Paul Wearing

Issue 89, Winter 2017 www.strategy-business.com

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© 2017 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors leading ideas Leading Ideas 8 Illustration by David Suter leading ideas Getting Fit for Mergers and Acquisitions The disciplines that enable restructuring of established companies are also essential levers for helping deals succeed. by Deniz Caglar and Michael Connolly

he company had a history of growing through acquisition. But using 9 rollups to become a leading player in a fast-growing niche of services and technology had saddled the company with a complex organiza- T tional structure and significant inefficiencies. Now, as it prepared for its biggest acquisition ever — that of a global company that would increase its size by a third — the company decided to take a comprehensive look at its costs, operating model, and organization. Over the course of a year, the company analyzed all of its major selling, general, and administrative functions and processes and set about reinventing them. The result: By the time the acquisition was complete, the company was much better organized and had an operating model that would allow it to efficiently absorb the new acquisition — and help the whole enterprise run better. In preparing for this transformative acquisition, the company used an approach we call Fit for Growth.* This powerful discipline, which is described in detail in the book Fit for Growth: Strategic Cost Cutting, Restructuring, and Re- newal (by Vinay Couto, John Plansky, and Deniz Caglar; Wiley, 2017), rests on three pillars. First, companies that are fit for growth focus on a few differentiating capabilities that lie at the heart of their competitive advantage. Second, they align their cost structures with those capabilities. Recognizing that not all costs are bad, fit-for-growth companies manage their costs tightly and thoughtfully, freeing up funds to further invest in the “good” costs that strengthen a company’s differentiating edge. Third, they organize for growth. Based on their differentiating capabilities, fit-for-growth companies design an operating model that enables and sustains cost reductions and then create the right conditions for managers to drive growth. leading ideas

Typically, the Fit for Growth ap proach is used to realign existing resources at established companies with long operating histories. But it can also prove to be a powerful lever when companies are reorganizing and changing shape because of a significant merger, acquisition, divestiture, or spin-off. To understand why the Fit for Growth approach is so valuable in combina- tions or separations, remember that success in deal making — a high-stakes, expensive undertaking — is never assured. Our research shows that successful deals tend to fit with or enhance acquirers’ core capabilities systems. Deals that don’t have such a capabilities fit usually fail to create shareholder value. At the same 10 time, it is clear that companies are putting more at stake when they undertake transactions. There has been a resurgence in the number of trans formational deals, as companies set out to expand their market reach, broaden their product portfolios, and add significantly to their tech nical resources and management talent. In a 2017 PwC survey, 54 per cent of respondents said that their company’s biggest deal in the last three years had been “trans form ational,” up sharply from 29 percent in 2010. Amid the pressure to eliminate redundancies and find synergies, deal- making teams can easily lose sight of what’s important and of what needs to be preserved. That’s why Fit for Growth has special relevance in deals. It provides a set of guidelines that ensure the deal is being sought for the right reasons, that the right synergies are being pursued in the right ways, and that the new businesses are being stood up the right way — across all phases of M&A or separation.

Adding Value at Every Step The Fit for Growth approach can help with every phase of a deal, from due diligence to postmerger integration planning to actual integration. Due diligence. After a global food manufacturer decided to buy some smaller brands — a departure from its history of focusing on high-volume brands and large-scale operations — it had to decide whether to manufacture the new food products at its own plants or maintain the plants of the acquired company. A company steeped in the advantages of scale will revert to what it knows, which in this case would have meant bringing the acquired products into one of its ex-

isting plants with excess capacity. But as executives discussed what made the 89 issue strategy+business leading ideas acquired company unique (i.e., its differentiating capabilities), the conversation kept returning to packaging. It turned out the acquired company’s distinctive packaging could not be easily replicated by the acquirer in its own plants, at least not right away. As a result, the acquirer decided not to consolidate production at its facilities. In this case, the Fit for Growth lens applied to due diligence prevented an operating model change that could easily have confused customers and destroyed the deal’s value. A Fit for Growth mind-set can also be pivotal in helping a company transfer newly acquired capabili- 11 A Fit for Growth mind-set ties to other parts of its enterprise — can be pivotal in helping sometimes with striking results. a company transfer newly Although diligence is typically used to acquired capabilities to other describe the financial and market anal- parts of its enterprise. ysis that precedes an offer, we employ a broader definition. In our parlance, diligence describes an attitude of curiosity and an openness to outside ideas that the best acquirers always maintain when an acquisition is in some sense transfor- mational. That sort of diligence can and should go beyond the point where the deal has been signed; indeed, it should continue after the acquired company has been fully integrated. Integration planning. Before it com pleted its acquisition of the company that would increase its revenues by a third, the services and tech nology company referenced above had a problem to fix: its method of turn ing orders into cash. The company’s model was primarily geared toward making the sale, and only second- arily toward collecting the cash that was supposed to flow from the sale. As a result, the accounts receivable department was not allowed to approach customers about late payments; that was the sales force’s responsibility. Yet the sales force, whose compensation was tied to making sales, had no incentive to chase down slow-paying or nonpaying customers. What’s more, the sales team often con- sented to nonstandard contract terms — a practice that complicated billing. The cost-restructuring component of the Fit for Growth framework has two broad categories that proved helpful as the company, seek ing to re-create its cash coll ection system, prepared to absorb the new entity. The first was its operating leading ideas

model, which has to do with where companies perform specific activities. The second was its level of operational excellence, which has to do with how companies carry out those activities. These two filters helped the company rethink its process for collecting cash, resulting in changes to decision rights, performance metrics, and ultimately the contracting guidelines themselves. In hindsight, it may seem that the need to address these issues before bringing an additional business into the fold should have been obvious. But if the company had taken a different approach to M&A, leaders might have focused on preserving the existing model instead of rethinking 12 how the core work should be done. Separation planning. Divestitures of units or assets offer companies a rare chance to move away from operating models that have long since ceased to make sense, and to build a new comp any (or new companies) with only the needed assets and tailored organizational models. In many instances, Fit for Growth thinking has made a crucial contribution to a separation effort. A financial-services company had two categories of products, one that was subject to intense If the company had taken a regulation and one that wasn’t. A Fit different approach to M&A, its for Growth program was put in place to leaders might have focused on remove the inefficiencies so that what preserving the existing model had been a single large company with instead of rethinking how the too much cost could become two com- core work should be done. panies, each with just the right amount of resources to deal with the relative level of regulation. A Fit for Growth cost reduction lever called “zero basing” — which assumes that every cost can be eliminated until someone demonstrates otherwise — was instrumental in streamlining the support functions of both new companies. It worked because the cost-cutting decisions were tied to a detailed capabilities assessment. Portfolio reviews. Another area of M&A in which the Fit for Growth approach can be useful is in helping companies see the business and product lines they should or should not be in. Asking a company where its core strengths are,

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that were essential to the company’s success. This is true on a micro level, for example when deciding which product or service attributes make a difference, which parts of the staff are needed, and which customer service policies work. But it’s also true on a macro level. After we embarked on this line of inquiry with another global food company, it rapidly became clear that its private-label business, which was consuming a large quantity of resources without producing a commensurate profit, required different capabilities from the core business. That prompted the company to sell the private-label business and invest the proceeds in a few innovative brands that executives felt would work better in the company’s 14 own system of capabilities. Constructing postmerger models. The term discovery is often used narrowly in M&A, to refer to the preliminary analysis a prospective buyer does to figure out if it really makes sense to buy an asset. In a Fit for Growth context, however, the idea of discovery carries a larger operational meaning. It suggests that companies should look for the right model for what they are trying to put together — or take apart. This is very different from the default approach, in which the acquirer assumes its model is best and everything is expected, after the close, to con- form with that model. The Fit for Growth method ology itself forces companies to consider models that may suit the post-deal environment better. Companies that make acquisitions and merger decisions through a capabilities lens and adopt a Fit for Growth approach through the process will have a high er chance of success. + Reprint No. 17401

Deniz Caglar Michael Connolly [email protected] [email protected] is a leading practitioner in formerly led the global strategic cost transformation platforms practice for PwC. for Strategy&, PwC’s strategy consulting business. Based * Fit for Growth is a registered in Chicago, he is a principal service mark of PwC Strategy& with PwC US. He is the LLC in the United States. coauthor, with Vinay Couto and John Plansky, of Fit for Growth: Strategic Cost Cutting, Restructuring, and Renewal (Wiley, 2017). issue 89 issue strategy+business leading ideas Lifelong High Performance, the Japanese–American Way A few companies in Tokyo are using U.S. management methods to resolve the trade-off between long employee tenures and global competitiveness.

by Bobbie van der List

15 ould the next big management fashion be a hybrid of Japanese and U.S. styles? Could it provide the competitiveness of the most successful U.S. companies while still benefiting from the commitment and C loyalty that Japanese companies earn from lifelong “salarymen”? A few companies in Tokyo are ex perimenting with a prototype approach that, if successful, could be used by companies everywhere to com bine high perform ance and creativity with a nurturing, community-oriented business environment. Japanese companies are remark- ably innovative. They invented the light-emitting diode, portable music player, bullet train, video tape record- er, compact disc, flash memory, motion-sensing video game controller, the humanlike robot, and the Toyota production system, the original source of lean management. Yet the prevailing Japanese business culture is one of stability, consensus, and lifetime employment security. As freewheeling business cultures have risen up in places such as Silicon Valley and parts of China, some Japanese enterprise

Illustration by Patrick Hruby leaders are beginning to worry that leading ideas

they are too staid, bureaucratic, and complacent, perhaps even coddling their employees. They fear being overtaken by more aggressive newcomers. “From early in life,” says Shin Sakane, CEO of the Tokyo startup Seven Dreamers Laboratories, “we are taught that ‘the nail that is sticking out will be hit down.’ Consequently, it is very difficult to find people willing to lead.” Seven Dreamers places special value on creative leadership because it has staked its future on continual innovation. The company was originally part of Super Resin, a fiber- reinforced plastics (FRP) manufacturer then in its 54th year. “Super Resin is a traditional business-to-business manufacturer, making parts for 16 electronics companies and car manu facturers,” explains Sakane. “While Seven Dreamers is also technology oriented, it is mainly aimed at consumers. We develop products, but we outsource manufacturing.” In the mid-1990s, Super Resin began developing carbon-composite FRP materials and looked for products that could use them profitably. (See “The Next Big Technology Could Be Nanomaterials,” by Jeffrey Rothfeder, s+b, July 26, 2017.) Seven Dreamers was originally its vehicle for designing and making those products; it was spun off into a separate company in 2011. The two companies’ offerings include windmill blades, satellite technolo gies, remote-controlled aircraft, and com ponents for Japan’s Hayabusa spacecraft, the only unpiloted spacecraft to land on an asteroid and return to Earth with a mineral sample. In late 2016, Seven Dreamers raised more than US$60 million in venture capital to launch the “laundroid,” a machine that will use artificial intelligence to recognize fabrics and fold laundry. Sakane, who holds a Ph.D. in chemistry and biochemistry from the Univer- sity of Delaware, is a member of the family that founded Super Resin’s parent company, I.S.T. He joined Super Resin in 2008 as president, and was Seven Dreamers’ founding CEO — and a skeptic about the value of Japanese-style group management. “If I have a problem and I ask a team member which solution is best, he or she will wait for orders on how to go about [solving] it,” Sakane says. “So I decided to shake things up.” For example, he began promoting employees on the basis of individual performance, rather than seniority. This made employees more

likely to take initiative, but it also raised the level of uncertainty; Japanese work- 89 issue strategy+business leading ideas ers could no longer be sure of how their career path would progress. “I believe that the person who has the best qualities, or whose qualities match a certain position, deserves to get the job or make the promotion,” Sakane says. “We now have managers in their 20s and 30s, which is very uncommon for Japanese firms.” At the same time, Sakane recognized that employees do their best creative work when they are part of a supportive workplace, relative ly free from the fear of failure or dismissal, with decisions made through consensus. So he set out to develop a hybrid approach that would be competitive while ensuring that Seven Dreamers’ employees felt com fortable and secure. The guarantee of lifetime em- 17 ployment, pervasive in Japanese companies, is grounded in the broader culture. People often identify as part of a group that may form in university, go to work at a single company all together, progress up the ranks at a similar pace, and develop bonds that last through retirement. Japanese employees tend to feel proud of working for one company their entire life. Even younger Japanese often say in

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surveys that they prefer the stability of lifetime employment to the opportunities of joining a startup where they could advance more quickly but would take more risks with their career. The perceived role of management in that type of system is to drive performance not through competitiveness and pressure, but through a sense of belonging, almost as a shepherd drives a flock. “The most important thing for a Japa- nese company is to provide stability and job security for employees,” says Parissa Haghirian, professor of international management at Tokyo’s Sophia University and the author of Understanding Japanese Management Practices. “Crucial to the 18 Japanese leader is ensuring the company, or his or her department, remains a stable and trustworthy unit. For them it is very important the group sticks together, and is protected by its leader. If The perceived role of a leader can’t protect, he isn’t consid- management is to drive ered worthy of your trust. That is why performance not through Japanese companies place great em- competitiveness and phasis on continuity.” pressure, but through a sense Because Seven Dreamers did not of belonging, almost as a incorporate traditional Japanese man- shepherd drives a flock. agement practices, it had to develop a company culture that made its more traditional, security-oriented employees feel comfortable. For example, the superior status of age is embedded in the Jap anese language. Younger people are expected to address older people with honorific words. This deeply ingrained eti- quette is considered crucial to any successful business in Japan, but it contradicted the career paths at Seven Dreamers, where managers were sometimes assigned to lead teams of people older than themselves. Sakane developed a kind of verbal template for managers that become a visible sign of his commitment to traditional employees: Even if they lost status within the company, they could still be assured that their younger bosses would speak to them with the social and cultural terms of respect. “Slowly but steadily, we resolved the issue,” he says, “and found a neutral language to speak.” For Sakane, it was a crucial les- son: The application of foreign ideas about managing a com pany needs to go

hand in hand with an appreciation of fundamental Japanese values. 89 issue strategy+business leading ideas

Another domain where Seven Dreamers bridged differences was in the ringi decision-making process, which dictates that all people who are potentially affected by an action need to be involved in the decision. “Let’s say I want to implement a new procedure,” says Haghirian. “I create a document on paper, and it needs the hanko — a personalized stamp, like a Western signature — of each person who is related to the project. If they don’t agree to sign, we must recon- sider the de cision, changing it in some detail, until every single member agrees on the fi nal outcome. This is a cir cular pro cess, in which all voices are heard. Even- tually, they come to a con clusion which is acceptable to the majority.” 19 In the West, this is known as consensus decision making, and it is often criticized for its slow, bureaucratic nature — and for the group think, risk aver- sion, and slow responses associated with it. But in Japan, as Haghirian notes, it has the effect of fostering a strong com mitment that leads to better results. “Once a decision is made,” she says, “and the group knows what kind of direction they want to go [in], they act quickly and they be come very successful. It doesn’t only nurture a good relationship between workers; it also provides much- needed involvement of employees with the long-term goals they are working toward.” Here again, Seven Dreamers de veloped its own form of the ringi system — an online version, Sakane explains. There are no paper documents to slow down the process, and the company uses the method only for big budget decisions. Some executives, including some who have come to Japan from the U.S., see a more brusque U.S. management style as a necessary corrective to the Japanese culture. For example, Buster Brown, a Even if they lost status within Texas-born executive who was presi- the company, older people dent of Manpower Japan between 2014 could still be assured that and 2016, used U.S. cultural tropes as their younger bosses would a way to promote efficiency and auton- speak to them with the social omous leadership. “In the West, and cultural terms of respect. eccentri city and outspokenness can give you good leverage; they can help you pro gress in your career,” he says. “Therefore, you will find many people who are willing to lead in the United States. This explains why Japanese companies in a state of crisis will often look for Western leaders.” leading ideas

Japanese companies will probably continue to incorporate Western managerial ideas. This will help them hire more talented engineers, including those from outside Japan. It will give them a more merito cratic system, in which managers still feel protected overall, but have a chance to move up the ladder on the basis of performance. But what about Western companies? Could they benefit from a more com- munal, collegial, Japanese-influenced culture? The last time the two nations extensively intermingled their management approaches was in the 1980s and early 1990s, when experts such as W. Edwards Deming, Joseph Juran, and Richard 20 Pascale seemed to have found a remedy for the U.S. malaise of short-term thinking. Many Western companies changed their ways accordingly, which meant that the United States’ “prevailing system of management,” as Deming called it, became significantly more participative, quality oriented, and ready to treat all employees as assets to be cultivated. Without Japanese management, one could argue, many of the practices common in well- managed companies today would never have taken hold. This time, the momentum is moving in the other direction. Japanese companies, under fire, are beginning to change some of their long-standing ways. “In times of peace, Japanese continuity is preferred,” Haghirian says. “The group takes precedence over the individual. But in times of crisis, you may need a strong leader to make effective decisions.” If Japanese companies resolve this paradox — if they become more innovative and decisive, while providing a tangible commitment to their loyal employees — they may provide a model that will spread around the world. + Reprint No. 17402

Bobbie van der List [email protected] is a correspondent for Dutch newspapers and magazines. Based in Tokyo, he specializes in business- and management- related topics. issue 89 issue strategy+business leading ideas Emerging Entrepreneurs Rotman School assistant professor Laura Doering explores the intersection of economic development and human nature.

by Laura W. Geller

marketplace developed in rural India for low-income artisans to sell their wares sits largely vacant, used only by a select group of higher- 21 income exporters. The reason: When planning the facility, govern- A ment officials consulted only with people of similar high status. Else- where, a Pan amanian entrepreneur with a bold vision of introducing organic techniques to coffee farmers shutters his business after just a few months. Al- though local farmers were inter ested, they were unable to assume the financial risk inherent in making the change. These are among the find ings that economic sociologist Laura Doering has unearthed in her research on fostering economic development and entrepreneurship in emerging economies. Development policies may come together at a high level, but their success is dependent on the complex daily interactions among people. And these interactions — like all other human interactions — are vulnerable to bias and driven by basic needs rather than by economic theory. Doering, an assistant professor of strategic management at the Uni- versity of Toronto’s Rotman School of Management, has an academic re- sume that spans the globe — and several disciplines. At Dartmouth, she majored in psychology and brain science. She holds a master’s degree in

Photograph by Jan Doering international social development from Laura Doering leading ideas

the University of New South Wales in Australia, and a Ph.D. in sociology and business administration from the University of Chicago. She has spent a significant portion of her career doing field work in Latin America. With this background, Doering is able to combine the quantitative and the qualitative. The former gives her a bird’s-eye view of behaviors and outcomes, and the latter ensures that she understands what people’s lives and relation ships are actually like. As she explained in a recent interview with strategy+business, such understanding is critical to creating the kinds of policies and opportun ities that will support sustained economic growth. 22

S+B: How can bias impact economic development? DOERING: One area where I’ve seen the negative effects of bias is in public–private collaborations. Collaborations between state officials and industry leaders have done a tremendous amount of good in the world and have facilitated eco nom ic growth. It’s also the case, however, that these partnerships can lead to failed economic initiatives. I’m working on a project with Aruna Ranganathan at Stanford in which we take an in-depth look at a public–private collaboration in India that started out with all the right ingredients for success, and still failed. In the initiative we’re study ing, Indian government officials set out to create an industrial crafts park to be used primarily by low-income artisans. But the only people who ended up using the park were higher-income traders and exporters. In other words, it worked out well for the people who already had higher status in the community, and made the rich richer in that sense. Part of the reason it failed has to do with the relationships be tween government agents and members of the private sector. Government agents consulted extensively with members of the private sector who were similar to them in social status: They were well educated, had higher incomes, and had a similar religious background. What this meant was that gov ernment actors overlooked the members of the private sector who were crucial to the pro ject, but who were different from them: low-income artisans who didn’t have a lot of education and had different religious backgrounds. The government ended up designing a park that was completely ill-fitting for the indiv iduals who were supposed to be the park’s

primary users. The low-income artisans wanted a park that enhan ced the hand- 89 issue strategy+business leading ideas crafted work they were already doing, but instead the government design ed a high-tech, fully automated park that would have fundamen tally changed the bespoke nature of the artisans’ handicraft. Since status biases are highly prevalent, there are critical lessons to be learned from this example. Around the world, governments are designing policies and projects to promote economic growth “If the state doesn’t actively among private-sector groups that have collaborate with lower-status less education and income. But if the members of the private state doesn’t actively collaborate with 23 sector when designing such lower-status members of the private initiatives, the projects are sector when designing such initiatives, quite likely to fail.” the projects are quite likely to fail. Moreover, without consulting actively with the poor, the state runs the risk of cementing the very social inequalities that such economic initiatives are designed to alleviate. I think part of the challenge we all face is confronting the expectations and behaviors that guide us toward people who are familiar and comfortable, and subtly move us away from those who are different.

S+B: In what other development contexts have you seen bias affect the outcome? DOERING: I’ve worked on another study, with Sarah Thébaud at UC Santa Bar- bara, examining gender bias in microfinance. We looked at how the gender of a microfinance loan officer affects loan repayment, and found that clients were much more likely to miss payments when they were paired with female officers — although the female officers were much more experienced on average. These effects were consistent even when we accounted for other factors that might affect loan repayment, such as income and loan size. We also found that clients afforded officers different levels of authority depending on the gender they associated with the job. In this context, the job of a commercial microfinance loan officer was relatively new and was not strongly associated with men or women. Given the gender ambiguity of the position, we followed previous research and reasoned that the first officer a client interacted with would shape the client’s impression that the job was a “man’s job” or a “woman’s job.” leading ideas

Interestingly, we found that male managers experienced major diff erences in compliance with respect to loan repayment from clients depending on whether clients perceived their job as a “man’s job” or a “woman’s job.” Clients were highly compliant with male officers when they had previously worked with another male officer, but were significantly less compliant when they had previously worked with a fe male officer and saw the job as a “woman’s job.”

S+B: Did it matter if the clients themselves were male or female? DOERING: We thought that it would, but it didn’t. Male and female clients were 24 equally likely to miss payments with female loan officers, and they were equally likely to miss payments with male officers in “female-typed” roles. I think the context is particularly interesting, because when clients miss loan payments, they harm their own credit score. Engaging in this biased behavior is costly to clients in the long run, since it makes it more difficult for them to secure future credit. So you have a situation where gender bias negatively affects certain officers’ authority and also negatively affects certain clients. Even in the academic literature, we tend to think about economic development as this macro-level, top-down process that’s driven by policy. Part of what I’m trying to do is look at how development really unfolds in ways that are different from what we would expect based on policy — ways that result from micro- level interactions between human beings. That’s what development is: interactions between human beings. And when we think about it in that way, it gives us a new lens for thinking about economic growth.

S+B: What are some of the key challenges facing entrepreneurs in emerging markets? DOERING: When I was in graduate school, I went to Panama on a Fulbright scholarship to interview low-income, small-scale entrepreneurs. I remember in- terviewing one woman in her 50s who ran a clothing repair stand. At the end of the interview she asked me a question that spurred much of my subsequent academic research: “All of us, the micro-entrepreneurs, why is it that we work so hard but we never grow?”

One of the fascinating things about entrepreneurship in emerging markets is 89 issue strategy+business leading ideas

25 perspective noun \pər∙`spek∙tiv\

“ at eye-opening moment when I saw things di erently—the challenges became more de ned, the solutions more clear.”

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how prevalent small- scale business ownership is, but how little it contributes to economic growth at the regional or national level. The challenge is that many low-income entrepreneurs face circumstances that make it difficult to grow, even when they have all the right ingredients. For example, in my research in Panama, I found that many poor entrepreneurs had novel, creative business ideas that they initially implemented. They face conditions of necessity, and these conditions make them extremely creative — encouraging them to find solutions that other people wouldn’t see. Such novel businesses have higher growth potential than businesses that simply offer more of what already exists in the market. 26 But the same necessity that spurs creativity also makes it difficult for these business owners to profit from the fruits of their creativity. The problem is that they need to generate profits quickly. Poor entrepreneurs don’t have the luxury of wait- ing; they don’t have the income buffers that would allow time for consumers to become familiar with new products and services. Altering their ventures to a me-too model — selling something that already exists in the market, but that has a much lower potential for growth — enables them to earn at least a little bit of money right away. You can go to the fruit and vegetable market, set up a crate, and sell a box of fruit that first day. But if you are the first person in the market to sell fruit smoothies, you have to be able to wait for people to develop a taste for fruit smoothies.

S+B: Is there a way to mitigate those circumstances? DOERING: We have to create conditions that buy these entrepreneurs some time and flexibility. I think this is an area where the private sector could potentially play a role. If we could provide entrepreneurs with a small stipend while they re- fine their ideas and test them in the market, and support them in developing those ideas — similar to what would occur in a business incubator — I think that we would see a lot more growth among small-scale businesses in emerging markets. The entrepreneurs would benefit from the time and support and development that an incubator like this would offer. The incubators could also allow socially minded investors to tap into some of the amazing sources of ideas and creativity that right now just aren’t seeing the light of day. There may be opportunities to earn returns on some of these business ideas if they are appropriately

refined and developed. 89 issue strategy+business BREAKING CONVENTION,

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For example, I once interviewed a man who briefly ran a business training other farmers in organic farming techniques. He had taken courses in organic agriculture and wanted to teach other farmers how to cultivate coffee in a way that was more environmentally sustainable. He was from a region in Panama where people used a lot of pesticides when growing coffee. Organic farming hadn’t yet caught on, although there was a lot of demand for organic beans. He started a company that lasted for maybe a couple of months, and then he shut it down. Local farmers were interested in organic methods, but they couldn’t afford the training and were worried about changing their growing practices. I think 28 this is a good example of a business that, with a bit more support — both financial support that would’ve given him some time to convince other farmers that organic practices were a worthy investment, and also coaching to develop his overall business model — had strong potential to take off. The momentum of impact investing suggests that it might be a space that could drive [emerging market] incubators. Part of the reason impact investing is so exciting, even though it is just in its infancy, is that it creates funding opportunities for new types of businesses. Impact investing allows investors to earn financial returns and put their money toward causes they believe to be socially important, and it creates new opportunities for seeding and growing social enterprises. It’s this neat pairing of social and financial opportunities, and one that young people in particular are interested in. + Reprint No. 17403

Laura W. Geller geller_laura@ strategy-business.com is senior editor of strategy+business.

: Meet the next generation of business thought leaders at strategy-business.com/youngprofs. issue 89 issue strategy+business leading ideas How Teamwork Will Transform Healthcare Payors, providers, medtech companies, and pharmaceutical firms need to get better at working with one another.

by Brian Williams, Vaughn Kauffman, and Karen Young

ven though the U.S. healthcare industry is in the midst of wrenching 29 changes, it is still possible to predict with some confidence what the future will look like. To deliver better and more affordable results, care E will become far more coordinated and comprehensive. It will focus less on individual clinical procedures and more on preventing procedures. When they are necessary, it will focus more on patient wellness before, during, and after those procedures. It may sound simple. But achieving integrated, comprehensive care is re- markably complicated. Making the transition means that all participants — healthcare providers, payors, pharmaceutical companies, device makers, and new market entrants — will need to collaborate in new ways. They will have to move away from the entrenched fee-for-service model under which savings on healthcare costs can reduce revenue and profits for many participants. Until recently, market participants had not always had good reasons to work together as part of a continuum that includes everything from preventive care and wellness to acute care and end-of-life care. But in an environment in which consumers and payors are no longer willing to pay for waste or unnecessary care, we are starting to see new modes of collaboration. Centura Health, a 17-hospital network serving Colorado and western Kansas, installed biomet- ric sensors from Medtronic’s Cardio-

Illustration Hoong Yau by Tang com in the homes of 7,500 patients leading ideas

suffering from diabetes, chronic obstructive pulmonary disease, and congestive heart failure, and integrated a 24-hour call center to augment the traditional care- delivery model. By sharing health data and collaborating in care delivery, the pilot saved about US$1,700 per patient, an almost 200 percent return on investment. When Dignity Health, a hospital system with 400 care centers in California, Ne- vada, and Arizona, partnered with Philips to provide in-home monitoring of 750 patients suffering from congestive heart failure, the initiative reduced hospital visits while maintaining the quality of care, saving more than $9,000 per patient. The ability to coordinate care in this manner will be of paramount impor- 30 tance in what we call the New Health Economy. To deliver better outcomes at lower costs, companies will need to share financial and clin ical risks, manage data collaboratively, and build new capabilities. More fundamentally, they will need to understand that by working together, they can achieve much greater gains than they possibly could by trying to go it alone.

New Collaborations It’s always a challenge for companies with divergent interests to coordinate services. But it’s particularly hard to do so in healthcare — the maintenance of human beings — as compared with, say, the maintenance of machinery or vehicles. Keeping a patient healthy requires addressing multiple systems. The biology of a single person is extremely complex, with a genetic blueprint (the genome), a set of instructions for how certain proteins should turn on and off (the proteome), and communities of microbes existing on and in the body (the microbiome). External factors such as diet, exercise, sleep, stress, and pollutants also affect health. And each individual exists within a second system — the population of humans who engage with the health system. To try to predict the types of ill- nesses and conditions a person will suffer, and the kind of care she will need, an organization would need to consider a broad, complex data set that is meaningful at both the individual and population level. Emerging technology is giving providers and payors more of this data to analyze, which likely will lead to gains in effectiveness. For example, when a patient takes a weekend hike, his fitness tracker can automatically update his elec-

tronic health record with detailed data such as distance traveled, heart rate, and 89 issue strategy+business leading ideas blood pressure. When he takes his daily statin pill (or Must Reads for all fails to do so), or needs to refill his prescription, his Business Leaders entire care team may get an update. The result will be a much richer profile, with more — and more specific — contextual information, which could ultimately lead to better healthcare outcomes at lower costs. To achieve this, organizations must collaborate, even though today they sit in long-standing industry silos. Some companies are beginning to forge part- 31 nerships with other players in the healthcare value chain. The French drugmaker Sanofi, for example, is It’s Not Complicated working with Apple. San ofi makes diabetes medica- The Art and Science of Complexity in Business tions and a line of products, such as blood glucose by Rick Nason In his highly engaging style, Rick Nason meters, that help patients monitor their insulin levels. introduces the principles of “complexity thinking” which empower managers to Sanofi’s iPhone app allows diabetic patients to be re- understand, correlate, and explain motely monitored by their physicians and insurers. a diverse range of business phenomena. Sanofi also has a partnership with Google to apply analytics capabilities to help patients and clinicians better understand and manage the disease. Health insurers also are realizing the need to work with others. Companies are combining technologies and treatments to ensure adherence to and compliance with care plans for rare diseases and manage overall health. Eisai’s drug and app combination for the management and treatment of Gaucher’s dis- Working in a Multicultural World A Guide to Developing Intercultural ease, a genetic disorder that affects the liver and Competence by Luciara Nardon spleen, was developed by the Japanese pharmaceuti- In this book, Luciara Nardon offers a comprehensive framework for understanding cal company in collaboration with patients and their intercultural interactions and developing skills physicians. Together, they won payor coverage for a for successful intercultural situations. co-prescription of the app and therapy. And organizations are learning to reap benefits by working with networks of collaborators. The YMCA of the USA won a coveted Health Care In- utorontopress.com leading ideas

novation Award from the Centers for Medicare and Medicaid Services for the success of its diabetes prevention program delivered by trained YMCA staff and eight partner organizations. The $11 million award grant will expand the program to 17 communities in eight states.

Managing Risks and Data Succeeding in the New Health Economy isn’t just a matter of starting and managing complex partnerships. In order to deliver care that is preventive, personalized, and predictive, and incorporates nonmedical information, the industry will 32 need to determine how to share risk across several dimensions. Currently, financial risk in the U.S. healthcare system sits with the payors, though it is shifting to providers in some cases and to consumers. But in many ways, the system sets up a zero-sum game between participants that should be working toward the same goal. Because in many instances, every dollar for the radiologist is one less dollar for the insurer, and vice versa, incentives to collaborate on reducing costs aren’t always in place. For collaborative, coordinated care to truly work, all players should be responsible for some element of a patient’s financial risk, and they should be able to generate some gain from potential savings. This is tricky because the economics of prevention and wellness are dramatically different from those of traditional healthcare. When a patient requires surgery after a heart attack, the hospital makes money, and so do the surgeon, the anesthesiologist, and the makers of all devices and products used during his surgery and subsequent care. But if the same patient had bought some fitness equipment such as a heart-rate monitor, joined a health club, visited a nutritionist for coaching, and thus avoided a heart attack, the doctors and manufacturers would capture a much smaller amount of revenue and the hospital would get nothing. Reimbursement models and business models need to change so that all parties, from the surgeon to the health club and the patient, benefit financially from a predictive and low-cost preventive approach. Another consideration is clinical risk. Even when multiple organizations are

working together to provide care, only one segment can be responsible for situa- 89 issue tions when something goes wrong. Currently, clinical risk is pegged to specific interventions and procedures. For example, if a patient has a stent placed and strategy+business leading ideas complications arise that require readmission to the hospital, the need for extra care could be due to the surgeon who implanted the device, problems with the stent itself, or some kind of postsurgical issue. In today’s segmented environment, each entity assumes the clinical risk for its specific interaction with the patient, and then hands it off like a baton in a relay race. That means the different participants aren’t working together to consider the patient’s overall health — and possibly aren’t preventing that patient from needing a stent in the first place. Data is also a consideration. Mult iple companies are rolling out electronic health records (EHRs) — and jockeying over market share — yet these systems 33 are not interoperable. Even for basic structured data, such as a blood pressure reading, different systems record this data in different ways, so it isn’t easily trans- ferrable from one to another. This single hurdle makes it very hard for different healthcare org anizations to collaborate. An equally significant data challenge is that virtually all EHR systems remain largely focused on collecting and organizing clinical data for billing. They track relevant activities in a physician’s office and hospital, but ignore data about things that happen in the patient’s kitchen, gym, or living room. As patients generate more of this unstructured data, EHRs will need to evolve from today’s medical history, intended for billing, into tomorrow’s predictive profile, intended to nurture and maintain health.

New Capabilities To thrive in this evolving environment, all players will need to de velop several new capabilities, including the following. • Identifying and working with partners. In the past, companies typically formed partnerships and alliances based on clinical factors, such as commercializ- ing a promising new therapy. While the clinical element is still important, companies will need to think more broadly about who they should partner with, and how to structure those arrangements. Ideally, these partnerships will combine clinical data (information recorded at the hospital or physician’s office) with consumer data (information recorded everywhere else, such as workout logs, food journals, or sleep monitors). Moreover, they should be designed to identify the right interventions — such as behavioral prompts and clinical treatments — at the right time. leading ideas

• Capitalizing on new technology. Technological innovation happens much faster than clinical innovation. As data becomes more standardized and integrated, new entrants — many outside the traditional healthcare sector — can translate that data into specific guidance for consumers and clinicians. For example, WellDoc has demonstrated that behavioral modifications inspired by an app are more effective than traditional therapy for diabetes management. The company’s app was developed and approved in less than half the time associated with creating a new insulin therapy. Regulators such as the Food and Drug Administration are acknowledging that these innovation cycles are different and are adopting 34 guidelines and policies that support technical innovation while continuing to ensure safety and efficacy. Healthcare players need to be part of this process. • Assessing markets. It will be important to determine which national markets are most attractive for this kind of holistic approach to care. Factors at play include the regulatory environment, reimbursement models, consumer attributes (such as mobile phone penetration), and healthcare infrastructure (for example, the number and type of retail care facilities). Because the right approach will vary from market to market, companies will need to launch pilot tests and identify the right approach to scale up successful ideas to other countries. No single company — regardless of how brilliant its ideas — will be able to shape the future of healthcare. Instead, payors, providers, pharmaceutical companies, and device makers, along with new market entrants such as technology firms, will all need to collaborate directly with one another. Getting each segment to set aside its own economic self-interest and work together for a great gain will not be easy. But it’s the only way the industry will capitalize on its potential to deliver innovative, personalized care, keep people healthier while reducing costs, and ultimately create more value for everyone. + Reprint No. 17404

Brian Williams Vaughn Kauffman Karen Young [email protected] [email protected] [email protected] advises companies in the health- is the health services and new is the leader of the U.S. care industry on business model entrants advisory leader at PwC. pharmaceutical and life sciences innovation, corporate strategy, and Based in Cleveland, he is a practice at PwC. Based in New growth. Based in Indianapolis, he principal with PwC US. Jersey, she is a partner with

is a director with PwC US. PwC US. 89 issue strategy+business New & Noteworthy Business Books from

Selected as a “Top Shelf” “When I first came to title by Strategy+Business, Silicon Valley, I was struck Best Business Books 2017 by how much people teach

“Sherman takes a machete to and learn from one another. standard thinking in strategy, In this book, Tren continues offering up a common sense that spirit by sharing his own but deeply insightful—and learning from others—and sometimes surprising—recipe explains how investment for what it takes to win in judgments and decisions are business.” made in the world of tech —Sydney Finkelstein, start-ups.” author of Superbosses: How —Marc Andreessen, Exceptional Leaders Master cofounder of Netscape and the Flow of Talent Andreessen Horowitz

“This is a timely work in that “Damodaran’s success in “Seldom have the effects “James Rubin and Barie it parallels interest in applying combining storytelling of digital change on legacy Carmichael have done a effective business principles with traditional financial businesses and innovators fantastic job of mapping and practices to the nonprofit analysis and valuation is alike been so succinctly the challenges for corpo- and government sector. It also unprecedented. The book explained. David L. Rogers rations to get it right in aligns business with the idea of has the potential to be a uses frameworks and case today’s reset relationship doing well and doing good.” cornerstone of both tradi- histories to illustrate how with stakeholders.” —Toni Ungaretti, tional valuation and busi- and why the times they —Ken Sternad, Johns Hopkins School of ness ‘pitching’ as it shows are a changin’. And more former vice president of Education how individuals from each importantly, exactly how Worldwide Public Relations world can benefit from to adapt.” and Media Affairs, UPS co-opting tools from the —Bob Garfield, cohost of other.” NPR’s On the Media —Paul Johnson, Nicusa Investment Advisors

CUP.COLUMBIA.EDU · CUPBLOG.ORG essay ORGANIZATIONS & PEOPLE

organizations & people

How to Keep Perceived Bias from Holding Back High-Potential Employees When talented people from diverse backgrounds fail to rise in a company, use one of these three powerful solutions.

by Sylvia Ann Hewlett, Ripa Rashid, and Laura Sherbin Illustration by Lars Leetaru essay

’m just disgusted,” said Angela (not her real name), a vice president at a ma- organizations & people jor financial-services firm. “The company can keep doing things the wrong way. It’s not my problem.” I That is the last thing that leaders of most businesses want to hear. And Angela herself, an African-American woman who originally had been fast-tracked as a high- potential employee, was not happy that she felt this way. But her remark was grounded in a sober realization: She was receiving consistent signals that even though she believed in her own potential to rise higher in the enterprise, her superiors didn’t. 37 The year before, Angela had identified a significant flaw in the way her -com pany was analyzing a risk-related metric. She brought it to her boss’s attention only to be ignored. So she convened a small group of more experienced executives at the firm, who all happened to be older white men, to review her analysis. This group reached the same conclusions she had. The result would enable the firm to dial down risk exposure that it hadn’t known it had. Angela expected that her superiors would congratulate her for her analysis, her persistence in raising awareness of it, and her ability to bring together a group inside the company to confirm it. She hoped that her superiors might let her present her findings to senior management. Instead, they merely thanked her for thinking to put together the group. They asked a white man on Angela’s team who was junior to her to write up their findings. His report repeated, word for word, Angela’s insight of the month before, but didn’t mention her. Her superiors lavishly praised him for his good work and invited him to present his report to senior management. His career was now launched. Angela’s remained stuck in place. “I’m used to being mistaken for a secretary,” Angela says. “Or if a su perior had taken credit for my work, that’s maybe normal too. But this was too much. I’m now just going through the motions here until I get the right offer someplace else. They’re not exactly groom ing me to rise any further here. As far as I can see, they never do that for black people.” Many people feel that their potential is misjudged at some point in their careers. Like Angela, they may see someone else get opportunities and support that they believe they deserve. But how widespread is this experience of career diminishment? Does it happen more often to members of particular groups? essay

organizations & people And does this perceived bias then under mine the performance of the organ ization as a whole? At the Center for Talent Innovation (CTI), our research often focuses on questions like these. Thus, in early 2017, we conducted a survey of 3,570 full-time, college-educated employees in white-collar jobs in the United States. The results suggest that Angela isn’t alone in feeling misjudged. We found that 9.2 percent of white-collar workers at large companies (defined as having more than 1,000 employees) perceived that they were underrated in assessments of their potential by their bosses. The proportion of people perceiving this type of bias varied widely, 38 sometimes rising above 20 percent, and other times falling to zero, depending on the company and the individual. The problem is indeed more acute among members of specific groups. Employees with disabilities, people of color, and those born outside the U.S. seemed to be affected most often. And the resulting loss of their commitment and enthusiasm can lead to major costs for the enterprise. Misjudgments of employee potential that are grounded in deeply held attitudes and biases may seem to be an intractable problem in many organizations. But in CTI’s ongoing studies of employee perceptions of bias, we have identified three factors that can be implemented in just about any company, and that appear to make an enormous difference in supporting talent of all backgrounds. These factors are having more inclusive team leaders, fostering a culture in which people feel free to speak and feel confident of being heard; diversity in the leadership (that is, more people from different backgrounds in top positions); and the sponsorship of diverse people by senior executives. With these factors in mind, leaders can do a great deal to change employees’ perception that there’s a bias against them.

The Perception of Bias To measure the kind of misjudgment that Angela perceived, we asked survey respondents to assess their own potential along the following lines: ability, ambition, commitment, connections, emotional intelligence, and executive presence. Because of the letters these attributes start with, we call it the “ACE” model. We issue 89 issue also asked respondents what feedback they’ve received — or how they believe their current superiors judge them — on the same ACE model. Then we com-

pared the two. strategy+business essay

When respondents (using the Perception of Negative Bias organizations & people

ACE model) rated their own po- Individuals with team leaders who practice at tential highly but perceived that their least three inclusive behaviors (in the left group) have consistently lower levels of perceived bias superiors rated them poorly, we in- than individuals with leaders who don't. Every cluded them in the group who be- individual is included in at least two groups: lieved themselves unfairly judged. gender (men or women) and one or more others. Individuals in groups toward the bottom For example, if you say that you’re of the list were more likely to say that they had dedicated to your work but that your experienced ability, ambition, commitment, connections, emotional intelligence, and supervisors don’t see it, then you be- executive presence (ACE) bias. 39 lieve that your commitment is incorrectly judged. Percentage of employees who perceive negative bias from superiors Potential, unlike performance, is 0% 15% an inherently subjective measure. Employees Employees How can you prove beyond a doubt WITH... WITHOUT... to your superiors that they should S S I I p I I p n n o n n o cl he n cl he n u s u s consider and groom you for the lead- si re o si re o v n r v n r e t s e t s L D of L D of e iv Talen e iv Talen ership role that you think you deserve? Large ad e ad e e rs e rs Companies r it r it Your superiors must be willing to see Overall s y t s y t in you the capacity and potential you White see in yourself. When there is a gap in Women judgment be tween you and your su- Flex* perior, this comes across as bias, and you are more likely to withdraw your LGBT effort and commitment in ways that Men impose costs on your employer. Black

By comparing responses from Latino various individuals with different Asian backgrounds, we can gain signif- Disabled icant insight into this judgment gap. Foreign In this case, we narrowed our data to born the 1,918 respondents who worked at * Employees working flexible schedules large companies and put the results Source: Center for Talent Innovation into a heat map (see “Perception of essay

organizations & people Negative Bias”). The map shows what percentage of members of different groups perceived being underrated in the six ACE assessment categories. Some respondents perceived bias in two or more of the ACE cate gories, a phenomenon that we call “ACE bias.” ACE bias correlates with several potentially costly impacts on employee morale, retention, and per formance. Compared with peers who don’t perceive bias, employees at large companies who report ACE bias are more than four times as likely (33 percent versus 8 percent) to regularly feel alienated at work, 3.1 times as likely (31 percent versus 10 percent) to intend to leave their company within a year, and 2.6 times as likely (34 percent versus 13 40 percent) to have withheld ideas or solutions over the previous six months. “I’m a natural relationship build er,” an African-American account ma n ager at an advertising firm told us. “If I could be myself a little more, I could contribute more to the company. But to fit in, there’s a lot of myself that I have to keep under wraps. I’m preoccupied with how I’m presenting myself, all day, every day. It’s exhausting.” A Latino portfolio manager at an industrial conglomerate told us, “If I hear of an opening in a firm with the right culture, I’ll try for it, even if the compensation is less than what I’m getting now.” He continued, “What I want is a place that will recognize my work and give me a fair chance to move up.”

Building an Inclusive Culture How can leaders increase the odds that their organization will be perceived as giving all employees a fair assessment, without distortion from bias? To find answers, we looked at our three possible solutions, and their effects on the percentage of employees who perceive ACE bias. In other words, we tested three behaviors or structures that might “cool down” the heat map. The first solution was to develop an organization where inclusive leaders are prevalent. In prior research at CTI, we defined inclusive leaders as those who create a “speak-up culture,” in which members of their teams feel welcome and included, free to share their ideas and opinions, and confident that their ideas are heard and recognized. Leaders, we found, can foster a speak-up culture through issue 89 issue the following behaviors: • Ensure that everyone gets heard. Find ways to draw out people dialing in

from remote places or people who are less fluent than others in the language be- strategy+business essay

ing spoken by the group. You can assign each member a speaking role ahead of organizations & people time, or actively discourage participants from interrupting hesitant speakers or talking over those with quieter voices. • Make it safe to propose novel Continually ask for ideas. Continually ask for unconven- unconventional tional contributions. Offer your own contributions. Offer outside-the-box ideas to show that radi- your own outside-the- cal notions carry no penalty, and respond to novel ideas with overt enthusiasm. box ideas to show that 41 radical notions carry • Give actionable feedback. Make no penalty. your comments immediate and concrete. For example, establish a regular five-minute debrief with your direct reports after meetings where they were visible: “one thing you did well; one thing you need to work on.” • Take advice and implement feedback. Ask for input on your own decisions and behaviors, and then heed it. For example, you might visibly show that you are con vinced when a team member presents you with a conclusive reason for changing your mind. • Empower decision making among team members. Give people ownership of pieces of the strategy and lend them the support they need to succeed. • Share credit for team success. Stand back and let team members present success stories directly to senior management. The rates of employees at large companies who perceived ACE bias plunged when they had inclusive leaders. Employees at large companies were 87 percent less likely to perceive ACE bias when they had an inclusive leader. They were also 39 percent more likely than those without an inclusive leader to say that they were engaged at work. The second solution is having a wider range of diver sity among top leaders. The survey asked respondents about gender, race, sexual orientation, and five other lines of difference in company leadership. Employees at large companies with high levels of diversity in their leader ship (with at least three lines of difference represented) were 64 percent less likely to perceive ACE bias than those with essay

organizations & people low levels. Notably, every employee category — including that of white people — was less likely to perceive ACE bias when leader ship was diverse. The third solution, sponsorship of diverse talent, had the most dramatic impact on perceived ACE bias: Individuals at large compan ies with a reported sponsor (a senior-level advocate willing to use his or her power and influence to help advance the career of a protégé) were 90 percent less likely than those without to perceive ACE bias. Moreover, with sponsors, the risk of foreign-born talent, Individuals at large LGBT employees, and African-Ameri- 42 compan ies with a cans at large corporations perceiving senior-level sponsor ACE bias dropped to nearly zero. were 90 percent less “To move up, it’s so important for likely than those without senior management to know who you to perceive bias. are and know what you’re doing long before the promotion decision is made,” an Afro-Latina client relationship vice president at an entertainment conglomerate told us. “That’s an area where a sponsor can make a big difference, but in my company you almost never see women or people of color having a sponsor.” Data backs up this anecdote: Prior CTI research found that white employees are 63 percent more likely than people of color to have a sponsor. An Asian-American pharmaceutical executive reported a similar experience: “A while back, I had a manager who was out to get me. She’d never let me take on any kind of responsibilities. Then I got a sponsor, who got to know me and took a leap of faith on me. She arranged for me to get a new position, even though I didn’t check every box that an HR computer might have generated for an ideal candidate. That relaunched my career. I’ve had two promotions since then.”

Taking the Next Steps Our data suggests some solutions to the bias that appears to persist in corporate issue 89 issue America. Your organization can also perform its own diagnostics. Mapping where bias is perceived inside your ranks will make it easier to target, prioritize, and as-

sess interventions. You can then assess an intervention’s efficacy by repeating the strategy+business essay

diagnostic later to see how your employees’ perception of bias has changed. This organizations & people new diagnostic will indicate where additional efforts are needed. The heat map research shown in the chart on page 39 identifies and quanti- fies bias where it strikes individuals and organizations most: in the experiences of employees. Heat mapping takes a different tack from the unconscious bias train- ings that are currently popular but that lack evidence of effectiveness and may even make bias worse through the implication that managers are to blame. It may be easier to enlist managers as allies if you focus on the perception of bias and on the cost it brings to the organization. 43 Bias and inequity can’t be elim inated. But by training and encouraging managers in specific inclusive behaviors, working to increase diversity in leadership, and offering sponsorship opportunities to a wider range of people, your company can take measurable steps toward disrupting the experience of bias and reducing its costs. You can then reap the gains of a more motivated workforce and signal to incoming talent that no matter who they are, they won’t be held back because of the groups to which they belong. + Reprint No. 17405

Sylvia Ann Hewlett Ripa Rashid Laura Sherbin sahewlett@ [email protected] [email protected] talentinnovation.org is executive vice president at is the chief financial officer and is an economist and the founding the Center for Talent Innovation, head of research at the Center president and CEO of the specializing in global talent for Talent Innovation. She is an Center for Talent Innovation, a strategies. She is the coauthor, economist specializing in work– global research and advocacy with Sylvia Ann Hewlett, of Winning life issues and gender and the organization focused on talent the War for Talent in Emerging coauthor, with Sylvia Ann Hewlett, and inclusiveness, based in Markets: Why Women Are the of Athena 2.0: Accelerating Female New York. Her books include Solution (Harvard Business Talent in Science, Engineering & Executive Presence: The Missing Press, 2011). Technology (CTI, 2014). Link between Merit and Success (HarperBusiness, 2014). essay STRATEGY & LEADERSHIP

strategy & leadership

The Marriage of Tax and Strategy Make a commitment to the function that knows your company best.

by Andy Ruggles, Mark Schofield, and Michael Shehab Illustration by Lars Leetaru essay

ax discussions have the rare power to put senior executives to sleep strategy & leadership while keeping them up at night worrying. Business leaders have traditionally compartmentalized tax man- T agement as a compliance function, a complex specialty ceded to the experts. Although some C-suite executives have begun to realize that the tax function plays an important role in their overall strategy, it tends to operate relatively independently. When taxes do force their way onto the agenda of the CEO or the board, it is often in the context of bad news. Consider the uproar in the U.S. in recent years over corporate inversions, in which a U.S. company avoids 45 paying taxes in the United States by buying a foreign company and moving its own headquarters overseas. And with the promise of some kind of tax reform under the Trump administration, the only certainty is that corporate taxes will continue to be headline fodder. On the other side of the Atlantic, the European Commission’s rulings against perceived cases of “state aid” in the form of favored tax treatment of certain companies can be costly to companies that are required to pay back their tax savings, as well as damaging to their reputations. But to consign tax management entirely to a compliance role is to miss an important opportunity. In fact, executives should move quickly in the opposite direction: They should pull the tax function out of its silo and integrate it into the company’s daily operations. This broader function gathers data on every part of the business, including employees, assets, and intellectual property, in all territories. It’s one part of the organization where, at least once a year, you can be certain to find a comprehensive accounting of the entirety of the business. This overarching perspective, of course, isn’t just nice to have; it’s increasingly necessary if companies are to communicate effectively with regulators and tax authorities. For example, multinational organizations are facing unprecedented challenges in the global tax environment as governments require greater tax transparency in the countries where they operate. Moves toward digitization of the tax system in a number of countries — Russia, Mexico, and Brazil are among those at the forefront — are also giving government tax authorities unprecedented amounts of transactional data about companies, often in real time. Because the tax function is pulling all this information together for regulators, it behooves the organization to use it more effectively in its own right. Thus, it is becoming essay

strategy & leadership a best practice to view the tax function as a strategic partner, one that helps set business priorities and gives the company a competitive edge. Otherwise, the tax authorities might have more insight into your company’s data than you do. Indeed, even today, part of the reason this wealth of data is inaccessible and untapped at many organizations is that organizations have historically underinvest- ed in the tax function. However, by digitizing, integrating, engaging, and elevating tax management, companies can begin to create the tax function of the future. We have identified four goals that will improve tax operations, make a company more competitive, and lessen the risk of noncompliance. 46 Goal one: Use tax data as an integral part of the business. Achieving this goal begins with a change in perspective. The tax function is one of the largest consumers of data in an organization; virtually every transaction has a potential tax impact. A practice of examining the tax data that accompanies each transaction can help improve tax accounting, indirect tax, transfer pricing, general tax compliance, and tax dispute resolution. Moreover, proper organization of that data can give you greater insight into other parts of the business (for ex- Unless you view your ample, your company’s performance in different components of the supply company’s tax function as chain or in gender pay equality). a strategic partner, the Yet in a 2016 survey of man u- tax authorities might have fact-uring companies by PwC and the more insight into your Manufacturers Alliance for Productiv- data than you do. ity and Innovation (MAPI), only 15 percent of respondents said they frequently use the kind of business intelligence tools that would allow them to analyze tax data, and 57 percent reported no use at all. We would argue that there needs to be a shift in priorities throughout the organization: less time spent gathering and validating tax data, and more time spent analyzing and understanding the data. issue 89 issue Tax technology has lagged behind the development of wider enterprise resource planning (ERP) and financial software, although a rapid catch-up is un-

der way. Until the last few years, at many companies, tax data was captured and strategy+business essay

reported in disparate spreadsheets and loaded into compliance tax software tools strategy & leadership by hand. In some cases it has taken a while for senior managers to see a need to disrupt the stand-alone tax function with a technology overhaul, and members of the tax department might have resisted this technological integration themselves be cause of concerns about losing their unique role within the company. Yet when the integration takes place, it has the effect of reinforcing, not commoditizing, their value. Indeed, because it is a vital window into the company’s operations, the tax function needs access to the technological infrastructure of the rest of the company. This is especially true when the function is outsourced, because it 47 continues to play a strategic role. The finance function, as the main source of tax data, also needs to exchange information more effectively with the tax function. A failure to integrate tax data with other financial information can expose a company to financial statement errors, unnecessary controversy proceedings, and delays. Tax authorities are becoming less lenient with tax errors — intended or not — and quicker to impose penalties. For example, a European company that recently couldn’t reconcile its VAT returns with its Intrastat return (the cross-border movement of goods data) was hit with a ¤7 million (US$7.4 million) fine. Another company based in the U.K. that misstated its losses spent a year fighting a £10 million ($12.4 million) penalty, and the tax authority raised its risk rating. The publicity provoked by these sorts of errors and penalties also poses significant reputational risk to institutions. With this kind of scrutiny as the norm, the tax function will need to take a leading role in making its data available and understandable throughout the organization. Goal two: Integrate tax data with operations. When the tax function is digitized, advanced IT systems make it easier to integrate tax data with the organization’s systems and processes, all of which will improve operations. This is extremely helpful because most data used by the tax function for tax accounting, compliance, planning, and audit de fense purposes does not originate within the tax function, but rather in corporate finance, ERP, consolidation, and other operational systems. In the PwC/MAPI survey, 53 percent of the respondents reported undertaking this kind of transformation in their finance or tax function, essay

strategy & leadership or in both, and an additional 15 percent said they were exploring the benefits of such an initiative. It can be difficult to set up a system that gathers a broad base of company information in one place. The data can span multiple geograph ies, business units, financial systems, and debit/credit balances, and it is needed at a transactional level for every legal entity, including every country where the company does business. Once the needs of the tax function are integrated, however, data analysis can occur throughout the year in real time, which helps the organization adjust quickly and make better decisions. For instance, a company could identify and 48 automatically correct an upstream data entry problem (e.g., incorrectly calculating the tax on an invoice or at the point of sale), avoid unexpected over- and underpayment of taxes, and reduce the cost of filings. Integrated tax information could additionally offer data about pricing per market, cost of products, cost of support services, and so on. Such a system could also provide analysis on, for example, whether a product in a certain jurisdiction is subject to 5 percent or 10 percent customs duty or is VAT exempt, then feed those considerations into pricing decisions. The first step toward better enterprise-wide integration is a merging with other finance functions. The typical finance function, including tax, is responsible for core accounting and reporting activities such as period-end close and ex ternal tax and regulatory filings (for example, audited fi nancial statements, statutory accounts, and tax returns). In addition, finance undertakes other core operational accounting and compliance activities (such as payables, receivables, and sales tax compliance). Strong collaboration be tween tax and finance executives can help leaders identify potential problems and opportunities, including better ways to meet compliance requirements, gain efficiencies, and improve risk management. Tax is a complex function, and it cannot deliver on its obligations without the support of the rest of the organization. Tax needs information and data from other functions for both decision making and compliance. It is thus necessary to issue 89 issue integrate those functions and collaborate across the business, linking the front and back office, to support the overall delivery of tax as a business issue within the

organization. Once the needs and the integration requirements are understood, strategy+business essay

the organization can decide what will be managed in-house and what will be co- strategy & leadership sourced or outsourced. Goal three: Engage the tax function with external stakeholders. By digitizing and integrating the tax function, a company can begin to better engage outside stakeholders. In some countries, a more transparent data exchange and dialogue between the company and its regulators could bestow a number of significant benefits. It could create a stronger and less adversarial relationship with authorities; provide greater confidence with respect to tax positions; and achieve a lower risk rating (depending on the country), 49 which could result in reduced audit or A more transparent data investigation risk and lower penalty exchange and dialogue and interest costs. In the long run, this between the company could enable the company to build and its regulators could trust with a wider group of societal bestow a number of stakeholders than it had before. significant benefits. Government officials are also increasingly interested in engagement and transparency. The Organisation for Economic Co-operation and Development (OECD), respond ing to concerns that the global economy loses as much as $240 billion annually in tax revenues owing to base erosion and profit shifting (BEPS) around the world, adopted a BEPS Action Plan in 2013. The plan calls for companies with an international presence to provide information on their global allocation of profit, the taxes they’ve paid in each country, and certain indicators of economic activity within the countries where they do business, such as where employees are located. This country-by-country reporting (CbCR) initiative, now in the implementation stage, will demand that companies develop a means of collecting, verifying, and reporting the compliance data. In addition, they’ll need a set of standardized and repeatable processes for analysis of the information so that they can identify any anomalies before and after they meet compliance needs. CbCR is not the first transparency initiative, and it won’t be the last. But what makes this set of requirements stand out is the breadth of their reach and the impact on tax payers, tax authorities, governments, and even the general pub- essay

strategy & leadership lic. By mandating that multination als self-disclose standardized metrics, CbCR has raised the bar for transparency. Moreover, governments are engaging in unprecedented information sharing in order to assess risk and identify targets for audit. Tax audits and controversies are expected to rise dramatically as many governments seek more revenue by, for example, examining companies to ensure that the way they report the jurisdictions where they earn their profits accurately reflects their business model. As technology and data quality improve, organizations will find it easier to manage the process of allocating profits. Members of the C-suite must recognize that even if they are technically 50 operating within the law, the public perception of their tax policies could erode trust and hurt their brand. Unilever, a multinational company that has been notably transparent about taxes, states on its website: “Re-building public trust in the corporate tax system is vital — when broader taxpayer trust in the system is damaged people become less willing to comply and all taxpayers suffer as a result. Addressing public concerns that some multinationals are not paying their fair share of tax requires not only technical international tax reforms but also better efforts to improve public understanding and awareness.” Consistent with calls for greater trans parency, the statement also says that providing user-friendly in for mation about a company’s tax position to a broad range of stakeholders plays an important role in gaining public trust. In 2015, mining company Anglo American began publishing an annual report on its tax and economic contributions that included a detailed analysis of the taxes it paid and how those vary throughout the economic cycle of a mine. Companies will find it easier to make such promises if the tax function is prepared to help deliver on them. Goal four: Elevate the tax function to the role of strategic contributor. Once the tax function is better integrated with the rest of the enterprise, a company can begin to use tax information to inform strategic decision making. By engaging in trend analysis, forecasting, modeling, and benchmarking with its peers, the tax function can become a value-added business partner, and an important contributor to proactive planning. The amount of money that a company pays, for issue 89 issue instance, in real estate taxes or excise taxes could one day be measured as part of the operational overhead, similar to the way that such operations as IT or human

resources are taken into account. strategy+business essay

This final goal may be the least realized and most aspirational of the four, strategy & leadership but many executives are beginning to grasp the potential in elevating the tax function to this strategic role. For example, at a simple level, improving data on the tax treatment of the costs of a building can enable a real estate company to better price lease costs for tenants. Similarly, by building tax analytics into supply chain modeling tools, a company can project the tax consequences of sales goals and anticipated transactions, adopting similar criteria on a market-by-market and product-by-product basis, all of which will be helpful in fore casting profitability. A strategically focused tax plan would make it possible to consider the costs 51 and benefits in such areas as credits and incentives, transfer pricing, and specific initiatives. A beverage company, for instance, would be able to review the dispar- ity of indirect tax rates among substitute products for different types of alcohol. With that insight, the company could choose to focus lobbying efforts on fighting for a level playing field or on opening up new markets for itself, using elastic- ity data to support the arguments with governments for comparable treatment in cases where that would lead to increased tax revenues.

Tackling the Transformation Most senior tax executives know that their tax function must evolve, but it’s challenging to chart a course that is not only effective but feasible in a world of budget and resource constraints. A critical first step is to assess the tax function’s current capabilities in governance, data, technology, process, and people. Is the tax function meeting today’s challenges as well as getting ready for those that lie ahead? Does it have the capacity to take on new responsibilities while efficiently performing tax compliance and financial statement obligations? Is it fully supporting the needs of the business, including responding quickly to planning requests that require analysis? Is it briefing the C-suite prior to shareholder meetings or press conferences? Does the cost structure of the tax function align with the variable and growing needs of the organization? A company’s tax function effectiveness typically falls into one of five stages: • Initial. The organization is main ly in ci dent driven. The company uses basic accounting soft ware, but it is not integrated, and no internal controls are in place. At this stage, there is a greater risk of unnecessary financial costs or other essay

strategy & leadership problems occurring, such as duplication of work, financial misstatements, and stresses on controls. • Informal. Roles and responsibilities are mostly unwritten. There is no formal training, communication, or standardization. Licensed soft ware is used with limited integration. • Standardized. Processesare stan dardized, documented, and communicated. Deviations from written procedures may remain unnoticed. Minimally acceptable internal controls are followed. Technology includes a mix of licensed software and a tax-sensitized ERP or tax data hubs. 52 • Managed. Processes are actively monitored and continuously improved, and deviations are detected in time to avert problems. Technology tools are aligned with the overall organization and integrated, providing some predictive analytics. • Optimized. Processes are efficient, based on leading practices, and continually monitored for improvement. The quality of deliverables is high. The organization can adapt quickly to changes in data or process es. Technology crosses functions with advanced automated work flow, embedded controls, and sophisticated analytics. At this stage, management has the critical in formation necessary for enhanced decision making. Considering the changing demands in the tax arena, companies will need to constantly reassess their needs and effectiveness, developing a tailored, all- encompassing transformation road map. These are not static plans, and each company’s road map will depend on its current state, pain points, desired future state, and scope of feasible change, including what activities should be performed where — in the finance division, in the shared services center, or within the tax department. It will also specify whether the activities should be outsourced or co-sourced. Typically, the plan will cover multiple years with various options, depending on how phases are ultimately completed. The ideal road map pinpoints the specific capabilities that the tax function is striving to meet as well as the benefits and cost savings that will result. In developing this road map for change, start with an overall view of the issue 89 issue future state, identifying the expected gains in efficiency. Because transformation of this sort occurs on a dynamic and continual basis, be sure to plot key events

but assume that others will happen spontaneously. Include explicit plans for strategy+business essay

early efforts to obtain buy-in from other stakeholders, along with the commit- strategy & leadership ment of resources needed to make the road map a reality. Make use of existing enterprise technology where possible, but don’t preclude using new IT solutions if they are a good fit for the overall organization. At every stage, demonstrate how the tax function will actively participate. Most important, address tal- Here is your chance to ent gaps. Explore staffing, co-sourc- show that the tax function ing, and managed service options as is a vital element of the alternatives to new hires. 53 broader finance function. Don’t create this road map in a vacuum. Here is your chance to show that the tax function is a vital element of the broader finance function. Work with other teams to leverage enterprise technology investments and design the tax function of the future. The key to success is to define your organization’s own unique tax strategy and make it part of the overall corporate vision. + Reprint No. 17406

Andy Ruggles Mark Schofield Michael Shehab [email protected] [email protected] [email protected] is a partner with PwC US. Based is a partner with PwC UK. Based is a principal with PwC US. He in San Francisco, he oversees in London, he plays a key role in is based in Detroit, where he is the national practice for PwC’s the global and U.K. tax reporting the leader of the tax technology tax reporting and strategy, and strategy business, which and compliance practice. He has and specializes in the use of includes all of PwC’s services in advised clients on large-scale technology in the tax reporting, the tax reporting, risk, tax transformation projects in analysis, and compliance strategy, technology, and multiple industries, including processes. corporate compliance arenas. automotive, consumer products, financial services, manufacturing, and retail.

feature

54 innovation

strategy+business issue 89 featuresfeature title innovation of the article 555555

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sounds for more restrictive trade or immigration poli trade or restrictive more for sounds that a num shown have Studies home. at employment has grown heated in recent years. call clarion The inhas recent heated grown often growth and will believe promote thatcies supporters vary this to embraced mind-set have countries of ber in domestic that favor policies ing degrees,adopting dustry and companies. The political rhetoric of economic nationalism

by Barry Staack,by and Chwalik Robert Jaruzelski, Volker The flow of talent, investment,

and ideas that has boosted may soon be impededby the risenationalism. economic of companies’ global R&D efforts R&D globalcompanies’

Weaken Innovation? Weaken Will Borders Stronger Illustration by Paul Wearing Paul by Illustration Barry Jaruzelski Volker Staack Robert Chwalik [email protected] [email protected] [email protected] is a thought leader with Strategy&, is a leading practitioner in is an advisor to executives in the PwC’s strategy consulting Strategy&’s innovation practice, automotive, industrials, and oil business, where he advises working with automotive, and gas industries for Strategy&, senior high-tech and industrials industrials, and technology helping them improve both executives on corporate and companies, to help them build top-line growth and bottom- innovation strategy. In 2005, he competitive innovation capabilities line performance in such key created the Global Innovation 1000 from strategy to execution. He is operational and strategic areas study, and in 2013 was named a principal with PwC US and is as global engineering and product one of the Top 25 Consultants based in Miami. innovation. He is a principal with by Consulting magazine. He is PwC US and is based in New York. a principal with PwC US and is based in Florham Park, N.J.

According to Global Trade Alert, the U.S., India, Russia, and Argentina imple- feature mented the most protectionist measures from November 2008 to June 2017. The Information Technology and Innovation Foundation reported in early

innovation 2017 on “mercantilist innovation policies” from the previous year, citing local data storage and technology transfer measures in China, Russia, Indonesia, and Vietnam, among others. China, though it relaxed some of its restrictions in 2016 after the data was collected, was ranked second out of 62 nations (behind the Philippines) in the OECD’s 2017 FDI regulatory restrictiveness index, which measures various foreign investment constraints. Then there are the headline-grabbing events that have both been fed by and contributed to the rise of economic nationalism: the U.K.’s decision in June 2016 to leave the Euro-

56 pean Union, the election of U.S. president Donald Trump last November on an “America First” platform, and the rise in uncertainty surrounding the future of various multi lateral trade agreements. Economic nationalism is motivated by a range of intentions, many of which continue to be debated. But it has an unanticipated consequence that has received less attention to date: As many politicians and policymakers in the world’s major economic powers look inward, the realm of innovation has been thrown into uncertainty. The global innovation model long embraced by leading multinationals, one based on the free flow of information, money, and talent across issue 89 borders, is at risk. The policies inspired by economic nationalism may prove self- defeating, in part by disrupting R&D activities for the new products and ser-

vices that will generate the jobs, growth, and wealth of the future. The danger strategy+business featuresfeature title innovation of the article 5757 - - - - Going forward, multinational companies are forward, companies uncertainGoing multinational the current whether Two years ago, in the 2015 Global Innovation 1000 study, our annual our analysis study, 1000 Innovation Global years in ago, the2015 Two managing these distributed elements, and are connecting them to a strong cen and a strong are to connecting them managing elements, these distributed their business and innovation strategies. Although the goals of corporate innova and set up R&D centers close to their target their to markets. close skilled grown R&Dand They set up have at centers R&D They networks. are carefully as unfold, they plan watching the situation that more and more companies look for talent outside their headquarters country headquarters their outside talent for look companies and more that more country headquarters their earned a pre R&D their outside of spending more or global their disrupt to with the will potential policies turn into political rhetoric cre in efficiency, this are lose companies likely to scenario, Unfortunately, hubs. theworld, we mapped the development of the global innovation model. found We 60 percent also that that study The companies deployed found model. innovation autonomous of a group become may network interdependent a nimble, is now of corporate R&D spending among the 1,000 largest publicly traded companies in traded companies largest publicly R&D the 1,000 among spending corporate of a global such the largest follow of R&D revealed thatstudy spenders percent 94 domestically focused competitors. more their over growth income in operating what At many companies, evolve. to need would model the global innovation of thisof declining reality new of public- the overall global trend by is exacerbated R&D growth.sector spending tral R&D organization while maintainingnetwork.Our the fluidity throughout margin operating on and assets, on return on and percent 20 percent 30 of mium proliferate, to continues nationalism change if likely not economic would tion and take costs. higher redundancies, on ate “Even before [the events of 2016], the world has seen a declining rate of feature growth in R&D expenditure at both government and business levels,” says Soumitra Dutta, dean of the SC Johnson College of Business at Cornell Uni-

innovation versity and coauthor of the annual Global Innovation Index (GII). “With the increased focus on nationalism and some protectionist tendencies, there’s a real fear that this downward trend might continue and that the gains from the globalization of R&D, which we all have benefited from, might not be as strong or might in fact become weaker going forward.” (The GII measures innovation performance in 127 economies, rather than the 1,000 top corporate spenders featured in our study.) In fact, although corporate R&D spending among the Global Innovation

58 1000 continued to increase steadily in 2017 (see “Profiling the Global Innova- tion 1000,” page 60), our study shows that many companies are already feeling the effects of economic nationalism. A majority said a continued trend toward economic nationalism would have a significant or moderate effect on their R&D operations. Further, if more nationalistic policies are adopted, many said they will make changes to their R&D operations within the next two years, and three-quarters said they will act in the next five years. “Restrictions on visas, restrictions on talent movement, how easy it is to share technology and knowledge — none of these were issues we were talking about be- issue 89 fore our 2016 strategy review, and now they’re on our radar screen,” says Robert Pagano, chief executive officer of Watts Water Technologies, a U.S.-based global

provider of products and solutions for the plumbing, heating, and water quality strategy+business featuresfeature title innovation of the article 5959 ------(continued on page 62) (continued forcing companies companies forcing

But economic nationalism is forcing companies headquartered around the around headquartered companies is nationalism forcing economic But

toward global corporate R&D both as became itself business accelerated, global increas corporate toward U.S. in the 1960s. Beginning in the late 20th century, however, the movement the movement Beginning however, 20th in the late century, in the 1960s. U.S. Switzerland, and Japanese auto companies began opening design centers in the began companies centers design opening auto and Japanese Switzerland, countries for decades. IBM founded its first overseas research center in 1956 in 1956 in researchoverseas first its center founded decades. IBM for countries Major companies have been conducting some R&D outside their headquarters their R&D outside some conducting been have companies Major Facing the Unknown Facing and in America, North percent. 48 at percent, 52 at category, 52 percent of respondents said that a general move toward economic national economic toward said that move a general respondents of percent 52 world” of “rest in our and the countries in Europe respondents by are followed will need to look at various scenarios based on the current and potential environ and potential various scenarios the current based at on will look to need uncertainty.” Uncertainty breeds spots. political hot potential to term the] long global Overall, networks. the sustainability integrated their question of to globe effects. severe to They moderate envisioning percent highest, be with 58 would industry. Watts Water Technologies conducts R&D in America, North conducts Europe, Technologies Water Watts industry. and Asia. As future their R&D plan for “they companies activities, Pagano, says [over carefuland to commit not now, flexible be to have key The is thatyou ment. came age. main The of ingly communications globalized driv and as Web-based and the opportu pools talent wider tap into the ability to were innovators for ers facilities. growing markets R&D to and locate nity production facilities closer to R&D on ef companies’ significanttheir or impact willism a moderate have think regions, the impact in those other to relative respondents, forts. Japanese Economic nationalism is nationalism Economic

R&D networks. the sustainability of their global global of their the sustainability to question Profiling the rate of 4.8 percent of the last dozen R&D and Revenue years. Global private-sector R&D R&D intensity reached a record high in 2017 among the Global Innovation 1000. Global Innovation spending is now 2.7 times as high as it was in 1999, the first year for which we Indexed to 2005 2.0 1000 assembled data. 1.8 The rise in R&D spending came Revenue 1.6 he companies in the Global despite a 2.5 percent decline in 1.4 Innovation 1000 increased revenue for the Global Innovation T 1.2 their R&D spending by 3.2 percent in 1000 companies. This slump can be R&D Spending 1.0 2017, pushing it to an all-time high attributed largely to a 14.5 percent 0.8 of US$702 billion. This marked a decrease in revenue in the chemicals R&D Spending 0.6 as a % of Revenue resumption of meaningful growth in and energy industry, which experi- innovation spending following flat re- enced a second year of depressed oil 0.4 sults in 2016, and a reversion toward prices. The combination of overall 2005 2010 2015 the mean compound annual growth R&D spending growth among the Source: Bloomberg data, Capital IQ data, Strategy& analysis feature The Top 20 R&D Spenders Amazon moved from the number three position in 2016 to become the largest R&D spender in 2017. On the top 20 list, it is one of nine high-tech

companies and one of 13 companies headquartered in the United States.

innovation Companies in RED have been among the top 20 R&D spenders every year since 2005.

RANK R&D Spending

2017 2016 Company 2017 Change % of Headquarters Industry US$ Billions from 2016 Revenue 1 3 Amazon $16.1 28.3% 11.8% North America Software and Internet

2 4 Alphabet $13.9 13.6% 15.5% North America Software and Internet

3 5 Intel $12.7 5.0% 21.5% North America Computing and Electronics

4 2 Samsung $12.7 –0.1% 7.6% South Korea Computing and Electronics

5 1 Volkswagen $12.1 –7.7% 5.3% Europe Auto

6 6 Microsoft $12.0 –0.5% 14.1% North America Software and Internet

7 7 Roche Holding $11.4 14.0% 21.9% Europe Healthcare

Merck North America 60 8 14 $10.1 51.0% 25.4% Healthcare 9 11 Apple $10.0 24.5% 4.7% North America Computing and Electronics

10 8 Novartis $9.6 0.6% 19.4% Europe Healthcare

11 10 Toyota $9.3 5.7% 3.8% Japan Auto

12 9 Johnson & Johnson $9.1 0.5% 12.7% North America Healthcare

13 13 General Motors $8.1 8.0% 4.9% North America Auto

14 12 Pfizer $7.9 2.4% 14.9% North America Healthcare

15 15 Ford $7.3 9.0% 4.8% North America Auto

16 16 Daimler $6.9 3.3% 4.2% Europe Auto

17 20 Oracle $6.8 17.8% 18.1% North America Software and Internet

18 17 Cisco $6.3 1.4% 12.8% North America Computing and Electronics

19 23 Honda $6.2 13.3% 4.9% Japan Auto

20 27 Facebook $5.9 22.9% 21.4% North America Software and Internet issue 89

TOP 20 TOTAL $194.5 9.4% 8.8%

Note: Sums may not equal totals shown due to rounding. Source: Bloomberg data, Capital IQ data, Strategy& analysis strategy+business Global Innovation 1000 The Geography of R&D and lower revenues North America has the largest number of companies in the sectors with the fastest rate of R&D spending growth: the software and Internet and healthcare sectors. resulted in a record-

high rate of R&D inten- TOTAL COMPANIES 220 173 167 116 96 sity (R&D spending as a percentage 6% 8% 6% 9% Rest of 19% 2% of revenues) of 4.5 percent (see “R&D World 10% 26% 17% 18% and Revenue”). China For the first time in the study’s 12% 2% 13-year history, a software and In- 28% 13% 15% ternet company — Amazon — led the Japan 22% 31% top 20 R&D spenders, with outlays of Europe 13% $16.1 billion, followed by Alphabet (see “The Top 20 R&D Spenders”). 41% 53% 26% 62% 24% In fact, all the software and Internet North companies in the top 20 either stayed America at their position or rose on the spend-

18% 18% feature ing list in 2017, and for the first time, numbers one through four of the top Computing Healthcare Industrials Software Auto and Electronics and Internet 20 spenders list were high-tech

innovation companies. Honda and Facebook Note: Percentages may not total 100 due to rounding. Source: Bloomberg data, Capital IQ data, Strategy& analysis joined the ranks of the top 20 spenders in 2017 in the 19th and 20th places, respectively, replacing two 1000. Thirteen of the top 20 spenders and Internet companies will take the pharmaceutical firms, AstraZeneca in 2017 were headquartered in the number three industry position in and Bristol-Myers Squibb. United States, reflecting U.S. domi- 2018, surpassing auto companies. The As a group, the companies of the nance in the high-tech and healthcare software and Internet and healthcare top 20 spent $194.5 billion on R&D industries, which tend toward high industries also added the largest in 2017; this figure represented 28 R&D intensity. number of companies to the Global In- percent of the total spending of all the The top four industries by R&D novation 1000 in 2017: 13 new arrivals companies in the Global Innovation spending — computing and electron- from the software and Internet sector, ics, healthcare, auto, and software and nine from the healthcare sector. 61 Top Spenders by Industry and Internet — together accounted On the other side, the industri- for more than 75 percent of all R&D als, computing and electronics, and Healthcare companies are on track to become the biggest R&D spenders by 2018. spending by the Global Innovation chemicals and energy sectors saw 1000 companies. But looking ahead, the largest number of companies ex- US$ Billions $200 Healthcare the top four are in line for a shakeup. iting the Global Innovation 1000. Com- Computing Healthcare companies increased panies in those three sectors, as well and Electronics $150 R&D outlays by 5.9 percent in 2017, as consumer companies, decreased Software and Internet and are on track to supplant comput- their R&D spending in 2017. Here we ing and electronics as the top R&D can contrast innovation spending on $100 Auto

Industrials industry spender in 2018 (see “Top the hardware side of the digital world

$50 Spenders by Industry”). Meanwhile, with that of spending on software. Al- growth in R&D spending for soft- though recording just a small dip this est. $0 ware and Internet companies, at 16.1 year, R&D spending by computing and

2005 2010 2015 2019 percent, was once again the fastest electronics companies has dropped — by far — of all industries. Given by 5.2 percent since 2013. Source: Bloomberg data, Capital IQ data, Strategy& analysis their current trajectory, software (continued on next page) (continued from previous page) North America by 3.8 percent in 2017, R&D Spending by Region Among regions, North America although that was less than half the 8 After years of double-digit growth, R&D spending by Chinese companies declined has the largest number of compa- percent rate of growth in 2016. At Eu- in 2017. nies in the healthcare, computing ropean companies, spending rose 2.9 US$ Billions Change and electronics, and software and percent, partially offsetting a 9 percent $350 2016–17 North America Internet industries in the Global In- decrease in 2016. $300 +3.8% novation 1000. Europe and China have Finally, in China, R&D spending $250 the largest numbers of industrials decelerated sharply. After growing Europe $200 companies, and Japan and Europe consistently at double-digit rates +2.9%

feature have the largest numbers of auto since we began studying the Global $150 Japan +5.9% companies (see “The Geography of Innovation 1000 in 2005, R&D spend- $100 Rest of World +1.5% R&D,” pre vious page). ing at Chinese companies declined $50 –3.3%

innovation China R&D spending at Japanese com- for the first time, by 3.3 percent. This $0

panies rose 5.9 percent in 2017 — the decrease reflects the 11.4 percent 2013 2014 2015 2016 2017 first increase for these companies in drop in R&D spending in China’s in- Note: Use of local currency would result in different five years. Companies in the “rest of dustrials sector — still the country’s year-over-year changes. Source: Bloomberg data, Capital IQ data, world” group upped R&D spending by highest-spending industry — which Strategy& analysis 1.5 percent in 2017 (see “R&D Spending has been affected by China’s general by Region”). Meanwhile, R&D spending economic slowdown and increasing rose at companies headquartered in financial constraints.

(continued from page 59)

62 Although nearly two-thirds of companies surveyed said they have not experienced pressure to change their approach to innovation in their headquarters country, 30 percent of respondents said that they’ve already felt pressure to change either where or how they conduct innovation work. In addition, 23 percent said they experienced such pressure in another country (outside their headquarters country). And nearly a third of companies surveyed reported that they have already felt the effects of economic nationalism on their R&D talent acquisition or retention because of visa or work restrictions — causing them to either lose employees, see less talent available, or hire more local talent. issue 89 An executive at one Europe-based multinational that conducts innovation over a large network in Europe, North America, and Asia explains that “our con-

cern is more about what politicians are saying, rather than [about] what they’ve strategy+business featuresfeature title innovation of the article 6363 ------Uncertainty about economic nationalism may already may nationalism affecting be economic compa Uncertainty about From 2014 through 2016, the percentage of survey respondents report survey of the percentage respondents through 2016, 2014 From lose if economic nationalism affects nationalism if and economic will which R&D, lose gain. In “The Net Mapping Vulnerability to the most have economies countries’ which asked survey our respondents We limiting their people’s ability to work abroad — or if the U.S. encouraged reshor encouraged if the U.S. — or abroad work ability to limiting people’s their done at this point. A long-term worry is that if countries…in the future started worry is that if countries…in A long-term this at point. done verya into come could we — followed and others R&D, or production ingof similarwor have of we terms accessand to in world talent, fixed inflexible and sharing knowledge transfer and knowledge affected.” be could how about ries significantly outperform their rivalskeyon significantlytheir financialoutperform metrics. shown that when these strategies are closely aligned, companies consistently and aligned, these consistently strategies that are companies closely when shown innovators, which we have studied in past have years, alignment com we which is of the degree innovators, Our analyses term. short be to have tend which strategies, and business their nies’ strategic planning. One of the key characteristics successful of the most planning. One strategic of nies’ term, long be to tend which strategies, panies between achieve innovation their highly aligned rose steadily, from 27.7 to 31.8 percent. But in 2017, the per in 2017, But percent. 31.8 to 27.7 from highly aligned steadily, rose and trade is policy the likely cul uncertaintybelieve global economic about this decline. rapid ing that their company’s innovation strategies and business strategies were were strategies strategies andbusiness innovation ingthat company’s their We year. in a single decline percent — a 19 percent 25.8 to centage dropped landscapes explain changes economic or in major the business other No prit. Risk Index,” we show respondents’ predictions about how countries will fare (we assigned each country a net risk index score based on the net calculation of respondents’ perceived economic risk and gain for each country) compared with countries’ structural risk. The latter is represented by the amount of corporate R&D conducted in each country by companies that are headquartered in other countries; we think of this as the amount of R&D in any country that is, in effect, “imported.” According to our survey respondents, the U.S. is the country feature

The Net Risk Index

Each country's index score corresponds to the net level of economic risk or gain that survey respondents believe the country will face if economic innovation nationalism affects its R&D efforts. The potential impact of this score is illustrated by considering how much R&D spending a country imports.

South 5 U.S. U.K. China Mexico India Japan Russia Singapore Korea Brazil Australia France Germany Canada Risk/Gain Index: –31.7 –20.8 –17.4 –5.0 –3.2 –2.3 –1.4 –1.3 –1.3 –0.5 1.6 1.8 2.0 2.7 Imported Corporate $52.5 $19.5 $44.2 $1.5 $28.1 $16.0 $5.9 $7.1 $5.7 $5.1 $3.9 $7.9 $15.9 $9.8 R&D (2015): billion

GAIN 0 RISK

KEY

Imported corporate 64 R&D as a % of in-country corporate –10 R&D spending (2015)

0–20% 21–40% BAR HEIGHT: Country’s net risk/gain 41–60% if economic nationalism 61–80% affects R&D efforts 81–100%

–20

BAR WIDTH: Total corporate R&D imported into country, issue 89 in US$ billions

–30

Source: Strategy& analysis, 2015 Global Innovation 1000 study strategy+business featuresfeature title innovation of the article 6565 - - - - - The U.S. is particularly vulnerable to disruptions in flows is in particularly flows U.S. disruptions The to vulnerable The United States. United The Among graduate students in the U.S., the proportion of international stu international of theproportion in the U.S., students Among graduate Immigrants in the U.S. make up only 16.9 percent of the overall workforce, the overall workforce, of percent Immigrants 16.9 make only in up the U.S. As noted earlier, the global innovation model is powered by the relative the relative by is powered model the global innovation earlier, As noted where R&D operations are, by far, most vulnerable to rising economic national rising economic to vulnerable most far, are, by R&D operations where the Migration Policy Institute. Institute. Policy the Migration related positions and 24 percent in other sciences and engineering, according to sciences in other percent and 24 positions related sectors. They account for 32 percent of workers in computer- and mathematics- in computer- workers of percent 32 for They account sectors. but they hold an outsized share of jobs in the high-tech, science, and engineering science, in the high-tech, an jobs shareof outsized they hold but and should be a concern for U.S. policy leadership.” leadership.” policy U.S. for a concern be and should green cards — will have adverse effects on global corporations’ hiring cards strategiesgreen effects — will global corporations’ adverse on have or working visas to qualified foreign talent — and ultimately accessibilityto visas — working qualifiedor and talent ultimately to foreign so far, the executive notes that “any overly restrictive policy to granting student granting to policy restrictive student overly that “any notes the executive far, so time.” Although the company’s talent acquisition efforts have not been affected been efforts not have acquisition talent Although the company’s time.” facturer. “There’s a cost associated with hiring talent; it’s not easy, and it takes and it easy, not a cost associated with hiring talent; it’s “There’s facturer. says the chief technology officer of a U.S.-based electronics components manu components electronics U.S.-based of a officer thesays chief technology of talent. “Hiring talent is the most important thing we do in our organization,” thing important organization,” in our is do the most we talent “Hiring talent. of based overseas. making the country’s innovation efforts far more dependent on companies companies on efforts dependent far makingmore innovation the country’s country corporate R&D spending (81 percent, versus 36 percent in the U.S.), in the U.S.), percent 36 versus percent, R&Dcountry (81 spending corporate free flow of information, money, and talent. The U.S. has largest dollarthe The talent. and money, of information, free flow re R&D “imported” 2015 our of according to spending, corporate volume total in- of larger percentage make imports a much up China’s but spending, ism. It is followed by the U.K., China, and India. Mexico, the U.K., by is followed It ism. of R&D importer China is second-largest flows. the global innovation on port for many corporate R&D positions) is far higher than the proportion of im is of far R&D thanhigher many positions) corporate the proportion for as percent countries, electrical are 79 other programs areU.S. engineering from dents in engineering and computer science programs (the prime recruiting pool recruiting pool prime programs (the science and in computer engineering dents in students graduate of percent Eighty-one migrants in the overall population. The 10 R&D in 2017 — a mere 4.7 percent of Innovating vs. Spending its revenues. Apple spends up to 60 Companies selected by survey respondents as the most innovative continue to outperform the Most Innovative percent less on R&D as a percentage top R&D spenders. of revenue than do other top comput- HIGHEST Companies ing and electronics companies. POSSIBLE SCORE: 100

Amazon moved from fifth NORMALIZED PERFORMANCE lphabet (formerly Google) place in 2016 to third in 2017. This OF INDUSTRY PEERS 69 A was selected as the world’s is perhaps not surprising given the 67 50 most innovative company by respon- company’s reach and ambitions, 48 52 39 dents to our 2017 Global Innovation which expanded to include retail 39 1000 survey (see “The 10 Most Inno- grocery with its June 2017 acquisition vative Companies”). of Whole Foods. Tesla, which made LOWEST The company had been steadily headlines with the launch of its mass- POSSIBLE SCORE: 0 10 INNOVATORS TOP 10 SPENDERS TOP Revenue EBITDA as % Market Cap closing the gap with Apple, which had market electric sedan and lithium– Growth of Revenue Growth 5-yr. CAGR 5-yr. Avg. 5-yr. CAGR held the number one spot since we ion battery program, maintained its Source: Bloomberg data, Capital IQ data, first asked respondents to identify number four position. It remains the Strategy& analysis feature the most innovative company, in 2010. only auto company on the list. For Alphabet’s top ranking comes just the first time, a Chinese company —

two years after Google announced its e-commerce giant Alibaba — was noteworthy that half of the 10 most

innovation holding company structure, separat- ranked among the most innovative, innovative companies were founded ing its more mature businesses from coming in at number 10. It is the sec- within just the last 25 years — Ama- new ventures in such fields as au- ond online retailer (after Amazon) to zon in 1994, Alphabet (as Google) in tonomous vehicles and life sciences. be selected by respondents. Making a 1998, Alibaba in 1999, Tesla in 2003, Apple, at number two, has its departure from the list this year was and Facebook in 2004. But General own distinction: It is by far the most 3M, which had been a member of the Electric, founded more than a century efficient innovator among major play- top 10 since 2010. ago by innovation wizard Thomas ers in the computing and electronics Eight of the 10 most innovative Edison, is holding strong at number and software and Internet sectors. companies this year are headquar- seven (up from number nine in 2016). The company spent US$10 billion on tered in the United States. It is also As in all previous years, the 10 most innovative companies outper- formed the 10 biggest R&D spenders 66 The 10 Most Innovative Companies on a variety of financial metrics (see Survey respondents continued to look to the high-tech sector for the most innovative companies, “Innovating vs. Spending”). (Six of the promoting Alphabet to the number one position in 2017 and naming Alibaba — the first Chinese 10 companies on the most innova- company to appear on the list — as number 10. tive list — Alphabet, Amazon, Apple, RANK 1 Alphabet Facebook, Microsoft, and Samsung

2 Apple — also appear on the top 20 R&D

3 3M Amazon spenders list.) The 10 most innova-

4 Tesla tive once again beat the top 10 R&D

5 Toyota Microsoft spenders by double digits on both

6 Samsung average five-year revenue growth and

7 P&G GE market cap growth, and also posted

8 Facebook slightly higher five-year EBITDA as a issue 89 9 IBM percentage of revenue. 10 Intel Alibaba 2010 2011 2012 2013 2014 2015 2016 2017

Source: Strategy& analysis strategy+business featuresfeature title innovation of the article 6767 ------“The U.S. doesn’t churn out enough engineers by far — either in quality far by or — either engineers enough out churn doesn’t “The U.S. At San Jose State University, for example — where the Charles W. Davidson Davidson the Charles W. — where example for University, State At San Jose The United States’ turn toward economic nationalism has nationalism already affected turn economic toward States’ United The in quantity, and has making been talin foreign the difference quantity, with up of imports 62 percent in mechanical engineering, according to the National Foundation for for in mechanical Foundation percent the National engineering, according to 62 American Policy. of those in computer science programs; 75 percent in industrial engineering; andprograms; percent science 75 in those computer of Reg the American by Collegiate of Association in March 2017 survey conducted com Valley Silicon R&D of for talent supplier is Engineering a major of College officials. school according to data on national applications and enrollments won’t be available until early 2018, a until early2018, available be won’t and enrollments applications national data on percent. 30 to in the range 10 of applications declines in international shows after in the U.S. graduation, opportunities job pursue the ability to and about applications to U.S. institutions from foreign students. Although comprehensive Although comprehensive students. foreign from institutions U.S. to applications schools Anecdotal specific graduate from evidence applications. in international was maintain still to although the school enroll its able year, school the 2017–18 visa difficulties, possible safety about families about in the U.S., are concerned ent, usually starting with people coming out of U.S. universities,” says the says elec universities,” usually U.S. of ent, starting coming out with people above. quoted executive components tronics istrarsorga and Officers, Admissions partnershipin education several other with significant had seen declines institutions of percent 39 that about nizations, found for percent 15 down were students graduate overseas from panies — applications and their overseas from students Potential students. international of levels ment “If we don’t have that influx of [immigrants], and a welcoming environment where people can contribute, we’re going to lose our economic edge.”

“We’re in the same wait-and-see mode as corporations,” says Sheryl Eh- feature rman, dean of the engineering school at San Jose State. “Any change in visa or work training requirements would be a huge concern for us, and likewise [for]

innovation our industry partners who hire our students.” Adds Ehrman, “I grew up in the Valley, and I know the contribution that immigrants have made at all levels to the booming economy here. If we don’t have that influx of people, and a welcoming environment where people can contribute, we’re going to lose our economic edge.” Economic nationalism may be an even bigger issue for smaller schools not located near major cities. At Texas Tech University, in Lubbock, applications from international students are down 20 percent for 2017, and admissions of interna-

68 tional students are down 7 percent. Brandon Weeks, associate dean of research and graduate programs, says, “There’s a lot of angst among students about what’s going to happen in the future, and I think mid-tier universities like Texas Tech are probably going to feel the pain first — and I think we’re starting to feel it.” Meanwhile, other countries have responded to such developments in the U.S. by courting international students for their own universities, publicizing their more welcoming and transparent immigration policies. Both Canada and Australia have revamped their policies for international students, offering stream- lined application processes, easier visa and work–study rules, and more certain issue 89 paths to citizenship for students who want to remain after graduation. China has made major investments to fund its higher education system in order to develop,

attract, and retain its own R&D talent base since the 1990s. strategy+business featuresfeature title innovation of the article 6969 - - - - The second most vulnerable country, according to our according to country, vulnerable most second The

The third most frequently cited country risk is China. at cited This is un third frequently The most Weaker R&D programs in the U.K. could also have a ripple effect across R&D also could a ripple programs have in the U.K. Weaker China. The United Kingdom. United The survey, is the United Kingdom. With the Brexit negotiations under way, it’s still it’s way, under negotiations Kingdom. With theBrexit is the United survey, will in withdrawal the the pending European Union from much clear how not reported a drop of 17 percent in E.U. undergraduate applications for 2017. 2017. for applications undergraduate in E.U. percent 17 of a drop reported the Euro is unclear, in the U.K. Brexit of result Although the end the region. after having risen steadily in previous years. In late 2016, Cambridge University University Cambridge afteryears.2016, having steadily risen In late in previous officials have warned that applications from E.U. students will be down in 2017, will down 2017, in students be E.U. from officials warned applications have that after Asia and America. North recruiting engineers from other E.U. countries. In addition, British university university British In addition, countries. E.U. other from recruiting engineers to third, regions placehad fallen firstR&D in from Europe among spending shortage of skilled workers could hit a crisis point if companies face if companies barriers to point a crisis hit could skilledshortage of workers revealed betweenflows that 2007 2015, analysis and global innovation of 2015 the world’s largest existing organizations, engineering warned that the country’s the world’s thepast Our decade. over hasalready deteriorated in globalinnovation position to the Brexit vote, Britain’s Institution of Engineering and Technology, one of of one and Engineering Technology, of Institution Britain’s vote, the Brexit to and Eu and deteriorate, skill might power the U.K. of economic “the isolated, overall that worth Europe’s noting It’s with Asiacompared and the Americas.” hibit the recruiting ability of British companies and universities. In the run-up In the run-up and universities. companies British the recruiting ability of hibit more becomes that if the U.K. concern expressed above pean quoted executive — will weaker necessarily become — not the European Union as a whole rope derstandable: Total corporate R&D spending in China grew 120 percent from from R&D percent in China spending grew corporate 120 derstandable:Total

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70 innovation and potential gain by potential ourand respondents. gain It’s possible countries that may decide to ever, number four it ranked bothpotential in noting worth India was is risk that destination global leading for the R&D. HowIndia became offshored software entirely driven almost was by companies growth fromthat other countries as 115 spending India grew in R&D percent from to 2007 2015, billion; to $28 ment it from other vulnerable.in multinationals based Total countries, making relations United the with States. India’s spending dominated is R&D by invest by U.S.example, could be affected policy actions, given country’s the close trade U.S., the degree than smaller spending U.K., Mexico, in for R&D China. and at other from risk several economic countries also are nationalism, to though a Unitedthe States United the and Kingdom. or Europe,Canada, eventhose or in flowsfrom in Australia, companies based operations, foring R&D innovationincreased could of be abeneficiary China policiestrade other in regions, including U.S., the were to become less welcom low sites, as well development as manufacturing key and immigration If costs. location, R&D an includingtions and as its market proximity to ahigh-growth 43 percent with pared attrac many who has thought it still at risk). China was would benefitfromthe impact economicof (com nationalism globalR&D on abroad. from come vulnerable to disruptions investment particularly of R&D country the may that we created Global the Innovation 1000 2005. in Together, trends these make by companies China-based declined by 3.3 percent since decrease first —the double-digit trend rates that for reversed years, 2017. many in spending R&D domesticalthough been had corporateat growing spending China in R&D single sourcecountries, being United the largest the with States. addition, In 2015 in ing billion) performed was by companies ($44 headquartered other in to2007 2015 (to US$55 billion), but percent more80 spend than of R&D that However, 25 percent of our respondents believeChina’s that economy Other countries that are at risk or may gain. may or risk at are that countries Other

Oursur vey respondents believe ------

strategy+business issue 89 featuresfeature title innovation of the article 7171 - - - - - iterated its pro-globalization policy stance. Such openness is impor openness stance. policy Such pro-globalization its iterated Oursurvey that indicates R&D additionally be in several would countries constrain availability Arthur talent countries. in headquarters their ex Orduña, best interests of their company if pressures from economic nationalism were to to were nationalism economic from if pressures company their of best interests The executives we interviewed underscored the fact act that in the they underscored would interviewed we executives The Preparing to Respond to Preparing pointedly re pointedly positions and an estimated economic impact of US$180 million per year. Sec year. million per US$180 of impact and an estimated economic positions double down on their software their on down R&D in au India, setting largerdouble and up more R&D with 750 border, the U.S. across just Vancouver, indowntown in 2016 alternative for multinationals. Microsoft, for example, opened an R&D opened example, center for Microsoft, multinationals. for alternative likely to benefit modestly if economic nationalism and protectionism At rise. the protectionism nationalism and modestly if economic benefit likely to this is aiming of list is Canada, attracttop noted, to inter as which, previously immigration programs. And Canada is already an attractive American North tonomous innovation hubs in the country. visa tightens system and as university its the U.S. to talent innovation national which has is Germany, ourrespondents, to according benefit, likely to most ond jobs from London to Frankfurt. to London from jobs U.K.-based hubs; several major banks hubs; several already major transfer have announced plans to U.K.-based economy. Both countries are being eyed by companies that may need to relocate relocate to that need companies are may eyed Both being by countries economy. Macron ran on a platform stressing the importance of innovation for the French the French for stressing innovation the importance of ran a platform on Macron GDP. Germany is followed by France, where newly elected president Emmanuel president elected newly where France, by Germany is followed GDP. tant to the German economy; exports make up close to 47 percent of Germany’s Germany’s of percent exports 47 to make the German close tant to up economy;

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72 innovation Automation doesn’taddresstheproblem talent of notbeingabletorelocate(orhire)top nomic nationalism would lead them to of their use increase such tools. freely throughout network. the Ofour respondents, 59 percent eco that said even more collaboration on digital tools, people and would be less able to move propriate, highest-value locations. R&D The evolving model depend would also problem of not being able to relocate (or your hire) top talent most the in ap more autonomous innovation model. Automation doesn’t, however, the address result of redundanciesthe inefficiencies and comethat with having to set a up tion a solution is to a different problem. lower It build a can that up costs as responsetion alikely economic as if hold. nationalism takes automa Ofcourse, locations (33 regional in markets percent). (reportedcountry by 37 percent of respondents), would and open R&D future their headquarters in rather than regional markets talent local in specialized hire ment where talent companies mobility would challenged, is be most to likely an modelsenvironthat mayin evolveR&D is aresult. finding The key as potential the and cited actions they most frequently help envision us how global to keep of their companies’ operations changes a range R&D make vibrant, will appropriate we the wouldchallenges, take steps to meet our business objectives.” led engineering and perspective.to talent policy If changes acquisitionsoftware “Wesays: have talent on not acquisition R&D effect yet seen direct any from a provideral of mobility solutions whose include brands Avis, Budget, Zipcar, and ecutive president vice chiefinnovation and officer of Budget Avis Group,glob a Other respondents (18 percent) cited increasing automa and reducing staff respondents survey Our economic if said nationalism continues to they rise, in thehighest-valueR&Dlocations.

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strategy+business issue 89 featuresfeature title innovation of the article 7373 - - - - - ncertainty. ning u ercent said they would be more likely to limit likely to more be said they would ercent as 16 p as 16 When we dig deeper and examine responses on the basis of companies’ per and companies’ When examine dig the basis we deeper of on responses Perhaps reflecting policy changes, ourre uncertaintythe potential Perhaps about The high performers, then, are more likely to anticipate changes. And they anticipate likely to are more then, highThe performers, erty across borders, where erty borders, across sharing.such political uncertainty The is plan creating are also more likely to take action. Forty-one percent said they would open fu open said they would percent take likelyare to Forty-one also action. more same as key their that competitors.) of asked if their organization’s revenue growth was than, the faster or revenue than, slower asked if organization’s their belief. (Company performance level was self-reported by respondents, who were were who respondents, by was performance level self-reported (Company belief. take likely to most an that harmful be could were action companies their to with 23 percent of respondents from high-performing companies who held this held who companies high-performing from respondents of percent with 23 low-performing Interestingly, companies. low-performing of with34 percent among our survey respondents were the most doubtful that economic national that doubtful economic the most were survey our among respondents This nationalism. compares any be changes would economic asthere of a result specialized hire more technicalwould in local talent markets, regional compared policies: 20 percent said they would be more willing share intellectualmore be to said they prop would percent policies:20 companies the middling example, and lower-performing For needs and abilities. believe that they did not reported in respectively, these two groups, respondents that they reported high of performers percent And companies. performing 39 spondents reported mixed opinions about the effects intellectual about on property mixed opinions reported spondents in individual differences emerge strategy, and innovation their level formance of and 34 percent changes 35 — necessitate in R&D their would ism operations low- of percent 25 turewith in markets, regional only R&D compared centers

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74 innovation desirable applications. desirable seekto and technologies push these services and out of into search in market the Drivers ogy on market trends as fast followerson fast trends market as to meet customers’ needs. articulated Readers Marketon needs. superiorunarticulated to fill end-user aiming understanding, develop based products services and to generatedirectly new and insights Seekers strategies: innovation damental have found, follows one fun of three company,to Nearly market. every we to create them their products take and use companies strategies innovation (along other with factors) distinct the Innovation 1000 tracked study has byning Performance Level”). percent performers of high “Plan (see production centers, compared 11 with away or from current manufacturing locations R&D move would they said operations: 15 R&D overall percent For 10 past the Global the years, focus on engaging customers on focus engaging monitor competitors customers and closely to create value by capitalizing use their internal technological use capabilities to develop new products Need Need - - Source: Strategy&analysis whereas low performers are more likely to turnto automation. and staff themwithlocal talent ifeconomic nationalismtakes hold, High-performing companies are most likely to openmore R&Dcenters Planning byPerformance Level “I donot there believe willbeany changesasaresult of economic nationalism” innovation efforts ifthereinnovation efforts toward isamove greater economic nationalism? company your What changeswould likely consider makingto itsR&D/ autonomous regional Move R&Dlocations production centers away from current technical talent in regional markets Open future R&D withautomation Hire specialized Move to amore division model local markets Reduce staff and replace centers in Performers 23% High % % 0 1% 0 2% 0 3% 40% 35% 30% 25% 20% 15% 10% 5% 0% Low Performers Middling Performers High Performers Performers 35% Middling Performers 34% Low Technol -

strategy+business issue 89 featuresfeature title innovation of the article 7575 - Market Readers 28% Need Seekers 28% sm proliferates. Although proliferates. sm Technology Drivers Drivers Technology Need Seekers Need Seekers Market Readers Readers Market 0% 5% 10% 15% 20% 25% 30% 35% 40% ali Drivers 35% Technology centers in centers and replace Reduce staff Reduce local markets local Hire specialized Hire with automation Open future R&D Open future regional markets regional technical talent in talent technical What changes would your company likely consider making to its R&D/ making to consider likely changes wouldWhat your company innovation efforts if there is a move toward greater economic nationalism? economic greater is a move toward effortsinnovation if there Source: Strategy& analysis Source: Planning by Innovation Strategy Planning by Innovation need driver, as a technology innovation approaches Whether a company the rise of economic to its response will affect reader or market seeker, nationalism. “I do not believe there will be any changes as a result of economic nationalism” economic of changes as a result will be any believe there “I do not - - - - - Both need seekers and market readers are slightly more likely to hire special likely to are and more market slightly seekers readers Bothneed For need seekers and technology respectively, say that they perceive mod that say they perceive respectively, nationalism, 56 percent and 54 percent, and percent, 54 percent 56 nationalism, natural and technolo seekers that need economic toward affected a move by as that of market readers. It’s therefore therefore as It’s market that readers. of R&D their be would much asked how readers percent). do (47 nies. Their R&D Their nies. as spending a percent twice is about as high revenue age of risksgy opera their to see more drivers (when nationalism economic from tions significant thanto impact) marketerate and strategy compa other than is for it central to the overall business model model central the overall business to drivers, innovation spending is more is more spending innovation drivers, “Planning by Innovation Strategy”). Innovation “Planning by ly to turn to automation if economic nationalism affects nationalism (see if economic operations their turn to automation ly to to be the companies with the largest engineering centers, and are the most like and are with- the most the the be companies largestto centers, engineering markets than technology drivers if economic nation markets than if economic drivers technology think likely to are drivers most changestechnology no will they tend needed, be ized future in in local regional R&D talent open markets to regional centers or

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76 innovation could be forcedthe to reflect to change new normal. thethat We believe result term, confident remains and that the in long“common prevail will term.” sense tions or talent acquisition from protectionism rising short the in term to medium N.Y., Plains, White in based told concerns he few that sees about opera us R&D company diversifiedhigh-technology a globally and manufacturing engineering Savi, executive president vice Corporation, chiefoperating and officer ITT of innovation model not developed Luca vanish. will decades over several last the Great the during tracted Depression, global prevailing the that it certain seems onevied with another world the to erect as barriers higher trade economy con Short of aprolonged of on 1930s, the scale war the trade global when countries The LawofUnintended Consequences Methodology Methodology innovation spending. In prior years, years, prior In spending. innovation of picture complete and accurate amore gain to order in process collection data the to adjustments and governmentsources. from allsources,includingcorporate percent oftheworld’sR&Dspending, companies collectivelyaccountfor40 financials. TheGlobalInnovation1000 were includedintheparentcompany’s were excludediftheirfinancialresults gle corporateparentduringtheperiod more than50percentownedbyasin- bers public.Subsidiariesthatwere had tomaketheirR&Dspendingnum- 30, 2017.Tobeincluded,companies during thelastfiscalyear,asofJune the worldthatspentmostonR&D the 1,000publiccompaniesaround egy consultingbusiness,identified 1000, this year Strategy&, PwC’s strat- A In 2013, Strategy& made some some made Strategy& 2013, In editions of the Global Innovation editions oftheGlobalInnovation s But economic if hold, nationalism does take innovation global the model it has in each of the past 12 ithasineachofthepast12 the relevant period; for data on share share on data for period; relevant the over rate exchange the of average an to according dollars U.S. into converted were currencies foreign in figures expenditure R&D and sales All capitalization. market and tures, expendi R&D historical profit, net profit, operating profit, gross sales, 2017, 2012 through for including rics met financial key the IQ Capital and Bloomberg from obtained we panies, 2012 studies. through 2005 the for figures published previously with align always not will onward 2014 from studies the in referenced data historical aresult, as data; years’ previous all to methodology this applied now We have costs. ized capital non-amortized any exclude to continuing while investment, R&D total the calculating in companies relevant for expenditures R&D ized capital of amortization year’s fiscal recent most the included we 2013, in Starting excluded. were expenditures R&D amortized and capitalized both For each of the top 1,000 com 1,000 top the of each For - - - - - five geographic regions. geographic five all and sectors; industry the of nine all spending; R&D 1000 Innovation Global total year’s this of percent 14.4 or spending, R&D in billion US$100 than more represented participating companies The world. the around ers lead innovation 562 of survey online an conducted Strategy& industries, multiple across companies at ducted con be will and is R&D global which industry. own its in values average the against indexed were company each of metrics mance perfor financial and levels spending R&D the industries, across parisons com To meaningful enable locations. headquarters reported their by mined deter as designations, regional five of one into and designations, industry IQ’s Capital to according “other”) (or sectors industry nine of one period. the of day last the prices, we used the exchange rate on on rate exchange the used we prices, Finally, to understand the ways in in ways the understand to Finally, into coded were companies All ------

strategy+business issue 89 featuresfeature title innovation of the article 7777

Meanwhile, the wait-and-see stance is that are many companies adopting the wait-and-see Meanwhile, We’ve seen a similar type of autonomous model before. Two of the largest of Two before. model a similar seen type autonomous of We’ve thermal technologies and is a U.S. subsidiary of the U.K.-based firm Spirax- firm subsidiary the U.K.-based and of is a U.S. thermal technologies Mike Sutter, president and CEO of Chromalox, which specializes which Chromalox, in and of advanced CEO president Mike Sutter, economic nationalism and protectionism will As actions. policy translate into and nationalism protectionism economic appropriate, as it remains difficult to judge the degree to which the rhetoric of rhetoric remains as which to degree difficult the judge it the to appropriate, themselves facing similarthemselves challenges. and politically driven opportunities as automotive, clean technologies, semiconductors, and software find — might semiconductors, clean technologies, as automotive, technology. Other industries and projects that are national priorities — such — such that are priorities national and projects industries Other technology. entailed complex program management challenges management program and significant oftransfers complex entailed foreign governments, suppliers, and customers. But these arrangements also But and customers. suppliers, governments, foreign the aircraft; reduced up-front investment and risk; and closer relationships with and relationships risk; and closer investment the aircraft; up-front reduced sharing R&D and production costs. The benefits included wider markets for wider included costs.sharing benefits The R&D and production networks of partner countries and companies, in globally dispersed models for for in partner and globally companies, dispersednetworks models of countries and Boeing’s 787 Dreamliner — were developed in long-term agreements with agreements in long-term developed Dreamliner — were 787 and Boeing’s aerospace programs in history — Lockheed Martin’s F-35 Joint Strike Fighter Strike Fighter Joint programs inF-35 historyLockheed — aerospace Martin’s hired in each location. top talent cannot move easily throughout the network but instead needs to be instead needs to but the network easily throughout cannot move talent top with this model, for example, as a result of redundancies that are created when when that arecreated redundancies as of example, result a for withthis model, Companies will need to look for ways to manage to ways for costs the higher they willCompanies will look to need incur be more autonomous in terms of both their decision rights and their capabilities. rights and capabilities. their decision both their of in terms autonomous more be would be the evolution of today’s integrated and interdependent network into into network and interdependent integrated today’s of the be evolution would fully self-sufficient, nodes R&Dfunctioning nodes. will These with more one

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78 innovation the technology,the science and engineering, communities inherently are universal. increase,” says Avis Budget Group’s Orduña. “My personal experience that is not continue. will tionalism “My hope economic that is nationalism doesn’t trend the that hopeful toward uniformly greaterviewed remain economic na their potential and issues these downside.through rightthe bringing peopleare to tablethe alongside leaders, to their R&D think innovatorseffective component. acritical is Companies sure need they to make pose a strategic —of risk to which risk the nationalism can to their ability be economic Taking that costs. rising astep must back,recognize companies also communicationsand need tomanage efficiency to and tools maintain will they consider must collaborationThey also to whether digital havethe they access shortsighted. should they Instead, prepare centers these to be more self-sufficient. Moving production and them away from their manufacturing centers would be centers: ate. resource and need their R&D They to consider staff how will they how and gies amore autonomous network redundant and would R&D oper mustthey consider potential the realignment of business innovation and strate it out may turn thing, to be nothing.” there’sbecause just of lack such clarity. adarned It out may turn to be some cerned about we and don’t past, the in to plan spend awhole lot of on time it, we’re generallytermingprotectionism. It not is something we have been con Sarco, noted: “As we do our 2018 we’re budgeting, aplaceholder adding for what centers contingency plansandpreparetheirR&D Business leadersneedtodevelop Even executives the their bets, we hedging companies inter though are But business leaders need to develop contingency now. plans For example, to bemoreself-sufficient. ------

strategy+business issue 89 featuresfeature title innovation of the article 7979 - -

Reprint No. 17407

, Oct. 27, 2015: 2015: , Oct. 27, Feb. 2, 2017: How changesFeb. 2, 2017: in , Apr. 23, 2016: How Brexit could make Telegraph , May 9, 2017: How Canadian 2017: , May 9, companies and universities from 2005 to 2015, asfrom well 2005 as to 2015, videos, infographics, and other articles:

allows you to evaluate your company’s R&D strategy and the capabilities requires: it strategyand.pwc.com/

strategy-business.com/innovation

Innovation Strategy Profiler previous Global Innovation 1000 studies

As policies based on economic nationalism continue to be debated, the po debated, be to continue nationalism economic based Ason policies are capitalizing the on U.S. administration’s “America First” policy shift. Kate Palmer, “Brexit will widen engineering 1.8m skills crisis, industry heavyweights warn,” an existing skills gap in the U.K. industry worse. Strategy&’s global/home/what_we_do/services/innovation/thought-leadership/innovation-strategy-profiler More thought leadership this on topic: Links to all U.S. immigration policy could impair Silicon Valley’s role as a magnet for global innovation talent. Soumitra Dutta, Bruno Lanvin, and Sacha Wunsch-Vincent, eds., The Global Innovation Index (Cornell 2017 University, INSEAD, WIPO, 2017): Annual study, for which Strategy& is a Knowledge Partner, of the innovation performance countries of 127 and economies. Barry Jaruzelski, Kevin Schwartz, and Staack, Volker “The Global Innovation 1000: s+b Innovation’s Order,” New World study, we foundIn that our 2015 leading innovators had embraced a globalized R&D model — and were reaping financial benefits. Steven Trump Dividend Lohr, “A for Canada? Maybe in Its A.I. Industry,” New York Times Michael Coren, J. “The US is about to exclude the next generation of immigrant entrepreneurs,” Quartz, Resources There’s competitiveness, of course, but collaboration and openness are corner and openness collaboration course, but of competitiveness, There’s these.” each of of stones strategyand.pwc.com/innovation1000 creates jobs — and — these are goals jobs creates us that all. connect + should be approached with caution. Innovation fuels growth, it improves lives, it it lives, fuels improves growth, it Innovation with caution. approached be should grow ever more costly and cumbersome. That’s an unintended consequence that consequence anunintended That’s costly and cumbersome. more ever grow of the discussion. The result of such policies could be innovation programs that innovation be could policies such of result The the discussion. of tential impact on companies’ R&D cannot left be strategy companies’ out on impact tential and operations

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80 technology THE SYNTHESIZER BY LAWRENCE BY M. LAWRENCE FISHER the lines that separate disciplines. incubators he runs collaborate across that scientists and researchers at the conductor of innovation by insisting Larry Smarr has become a vital

strategy+business issue 89 feature technology 81 Lawrence M. Fisher [email protected] is a contributing editor of strategy+business. He covered business and technology for the New York Times from 1985 to 2000, and his work has also appeared in Fortune, Forbes, and Business 2.0. He lives near Seattle.

N ONE LABORATORY, researchers are developing pro grams and computer feature visualizations that can map the complex urban boundaries in India. Near- by, the cofounder of the University of Illinois at Chicago’s Electronic Vi-

technology sualization Laboratory is working on high-speed networks and machine learning computing. On the first floor, 78-year-old Don Norman, author of The Design of Everyday Things, presides over a design lab. In one stu- I dio, an archaeologist is creating ultra-high-resolution 3D virtual reproductions of world cultural heritage sites that are under threat of destruction. Scientists huddle with first responders to combine readings from hundreds of meteorologi- cal stations to predict the movement of wildfires. In a corner office, two graduate students hack out code that enables more effective visualization of people’s inter-

82 nal organs to help pre-surgery planning. This beehive of activity isn’t taking place on Google’s vast campus in North- ern California, or in a futuristic corporate installation in Bangalore, or in a co- working space in Brooklyn. Rather, it’s all happening at the California Institute for Telecommunications and Information Technology, which is housed at two University of California campuses in the southern part of the state. And instead of being the brainchild of a 20-something Stanford computer science dropout, Calit2, as it is commonly known, is the creation of 68-year-old Midwestern physicist Larry Smarr. Smarr may not be a household name. For four decades, he has been among the world’s most important synthesizers of innovation — as a researcher on his own and as a collaborator in the discovery and commercializa-

tion of new technologies as varied as Web browsers and personalized medicine. Photographs by Vern Evans featuresfeature title technology of the article 8383 ------, though he did Forbes or Fortune magazine. His 1975 astrophysics doctoral astrophysics magazine. His 1975 , E

Larry of Smarr graced has the front never What sounded like a lonely farm kid’s fantasy is a pretty apt description of of farm fantasykid’s description is likeWhat a pretty a lonely apt sounded Growing up in Missouri in the 1950s, Larry his in back on lie Smarr in Missouri would in up the 1950s, Growing World Wide Web, was developed on his watch at the National Center for Super for Center the National at his watch on was developed Web, Wide World fields of study collaborate across across disciplinaryboundaries. At Calit2,study collaborate of fields artistsde and the na to supercomputers of the power bring to laboratories weapons nuclear that firstpopularized the browser Mosaic, the today. of the global Internet to Smarr’s career. Smarr is indeed director of a research hub where leaders in diverse leaders where a research of hub director Smarr is indeed career. Smarr’s the microbiome. of and the mysteries assuch climate change, sustainable energy, with the collaborated he In the 1980s, relativity. theory general of Einstein’s to Arpanet, Defense, an of early the Department funded data-sharing by network cated: He wanted to build an institute where the brightest people from allfrom disci people the brightest where an build institute to cated:wanted He and as be successful could plines creative as possible. tackle issues to big andphysicists mingle with biologists, mathematicians, signers R&D of the cover appear on once rigor bringing numerical seminal holes, black researchdissertation included on the of thetransition for pushed He andresearchers corporations. academic tion’s the Univer at in 1985 (NCSA), Smarr which founded Applications computing Urbana-Champaign. Illinois at of sity what he wanted to do when he grew up, Smarr’s response was highly response sophisti Smarr’s grew up, he when do to wanted he what Tesla coil, which knocked out the neighbors’ radio reception. Whenasked adults radio reception. theneighbors’ knocked which out coil, Tesla himself astronomy from a college textbook, and used old car and used old parts textbook, a college a from build to himself astronomy the clover fields, observing cloud dynamics. observingHe fields, captured fireflies in cloud jars, taught the clover Smarr in the StarCAV Opening pages: Smarr Machine UCSD’s at Perceptionlaboratory with a humanoid robot that is learning a baby’s facial expressions and movements at Calit2at a specially built virtual reality environment

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84 technology create a system that can explain the observed the data,” explain hecreate can says. that asystem from extremely the limited amount of information you getfrom observation, to relativity. and dynamics, “As astrophysicist, an you have to put together amodel, tromagnetism, gravity, nuclear physics, atomic physics, particle hydrodynamics, scientific disparate as uponfields specialized whichics, elec draws such highly to of putknowledge that back together asynthesis.” all in different fields. We’ve of century reductionism, a had but at some point you need real-worldthe problems it’s we face, that many in sport, specialists with ateam entirely on based single-warrior combat,” says. “But Smarr you if want to attack collaboration.ciplinary “If you look at university, any is structure reward the grew all their own vegetables, kept all chickens. grandfa grew honeybees, His raised and consequences of one’s actions. involved flows, and stocks feedback observing theloops,andunintended often great preparation for modeling complex it a career because systems, dynamic Nebraska — was in ranch operation acattle case, his —in agricultural on an The late Jay Forrester, inventor up growing that often said of dynamics, system tron across microscope country. the images cryo-elec communications secure sharing and networks truly building such as director, our As bodies. share involvedthat he also is ahost in of other projects, genome microbiome and for myriad the microorganisms understanding catalogs possible on current the Internet. He collaborates on aprogram to create reference collaboratorstem” allow is up will to data to that share 1,000 than faster times Pacificthe “data-centricsys freewayPlatform, Research high-capacity a secure Farm to Tables Smarr traces his interdisciplinary approach his traces Smarr background toastrophys in his - Smarr’s ownedColumbia, ina commercial floral family nursery Mo. They Smarr’s ambition now university tothe is so remake it on based is interdis founded which Smarr he principal the 2000, is in investigatorAt Calit2, on - - - - -

strategy+business issue 89 featuresfeature title technology of the article 8585 - - - He entered the Ph.D. program in astrophysics at Stanford University in University Stanford at in program astrophysics the Ph.D. entered He By his high school junior year at the University of Missouri Laboratory of year the University at his junior highBy school “I had this crazy, eclectic education because of stuff sitting around,” Smarr because stuff of around,” education sitting had eclectic this“I crazy, As radios with his build grandfather a child, Smarr and telescopes helped “I attribute both my affinity my both to attribute to “I Larrycreative always facthe’s and the that last two they practice, de years for taking in college classes. “Just graduate-level Smarr says. degree,” a master’s me they give had to they so decided still a senior, ing the undergraduate math and physics curriculum as a sophomore, he spent his spent he curriculum math as and physics a sophomore, ing the undergraduate while exam, ever the highest and score I got take I could Ph.D. cided the written School, he was calculus he attending After itself. courses the university School, at complet say, ‘You just look around, see what needs to be created, and you create it.’” create and you created, be needs to see what around, look just ‘You say, how to do it. Today, when people say, ‘Larry, how do you know the future?’ know you do how ‘Larry, I say, people when Today, it. do to how apart and fix them. You learn, when something needs doing, you just figure outjust figure you needsdoing, something learn,when You apart and fix them. says. “We would never take things somewhere to get fixed; you would take get fixed;takewould to never things you them would somewhere “We says. the basement. the basement. to calculate the angle of a roof. He printed copies on an old press he found in found he press an on old copies printed He calculateto the a roof. angle of belief that you can really do anything you want — you just have to work hard.” can work that to belief you really have anything just do — you want you His catalog. fa theEdmund Scientific purchased withlenses as from surplus how for directions ancestors, Washington’s the names George kings of Israel, of this sense of needing to prove ourselves and contribute. He grew up with grew the up He and contribute. ourselves this prove needing to of sense a list of measurements, for tables with packed conversion information, of book second-in-command at the National Science Foundation (NSF). “We all have “We (NSF). Foundation Science the National at second-in-command and swimming that are a big still platforms Smarr created in use 60 years later. Human Growth and Development at the University of Michigan of and a former the University at Human Growth and Development piers with wooden family ponds enlistedther the entire in building elaborate his coming from the Midwest,” says Anne Petersen, a professor at the Center for for the Center at professor a Anne says Petersen, thehis Midwest,” coming from children could walkchildren could there. the university to ther had an eighth-grade education and rode to school on a horse with riflea and horse a on school to and rode had an ther education eighth-grade his so and settled in Columbia was inventor he also But self-taught a a sidearm.

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86 technology supercomputers could solve Einstein’s equations for what would happen when The Collision Illustration: of Twocal Black Holes,” demonstrated Smarr that Observatory announced that a signal from gravitational asignal waves been that announced had Observatory discov 2016,radiation. February In Interferometer when Laser the Gravitational-Wave black holestwo collided head-on: computer my Ph.D. was program to that do and that, thesis,” recalls. Smarr theory, to asupercomputer use to solve Einstein’s equations. “I setout to create a eminent an Dewitt, scholar on and unification the of general relativity quantum fromlight, could by Ph.D. escape inside his challenged it. was Smarr adviser, Bryce of space-time not where nothing, were that even so gravitationalpowerful effects new concept of black holes. The term been had coined 1968 in to describe aregion one becoming He quickly stance. was of world’sthe top researchers then the in eclipseunder of an moon.” the to our soat bodies happened using we protect us, were all all science. this And this group amid fingertip,endless fingertip to people of and screaming yelling it.’ is ‘This said, and my guys “I organized We literally formed chain, ahuman to computer the march center burn it and barricades. the down. manned Smarr agroup professor instigated history to BruceFranklin night, Stalinist/Maoist time my awayfrom first dorms, was riots this home,” —and says. OneSmarr night, helicopters every pursuitcampus into bright with cops lights, full the in 1970, War Vietnam just protests as on were the gas erupting. tear “There was In his 1975 his In aNumeri of with Structure GeneralRelativity “The thesis, protestors’ the shared Smarr sentiment, antiwar but not their anti-science

They wouldThey merge produce and gravitational Smarr with an array array an with Smarr minute detail minute in sets data large extremely to view Calit2 at groups research by used is which HIPerSpace, as known monitors, resolution ultra-high- of 70

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strategy+business issue 89 featuresfeature title technology of the article 8787 - - - Although he had no interest in nuclear weapons, Smarr obtained a top-secret Smarr a top-secret obtained weapons, in nuclear interest Although had no he “Larry was just burning with passion about what he was doing with nu was“Larry he doing what about was burning with just passion Smarr “was absolutely the leader in taking in leader the absolutely “was Smarr and equations gobbledygook Einstein’s could you so computer a on them putting on.” going was what understand Computer Liberation Computer researcher at the Max Planck Institute in Munich. The Planck had the firstCray Planck The in theMunich. Max at researcher Institute Planck from sleep deprivation and dehydration. In 1980, he became a summer scientific became scientific he summer a In 1980, and dehydration. deprivation sleep from scientists finished their work, Smarr often pulled all-nighters and once once collapsed Smarr pulled often and all-nighters work, finished their scientists use the Cray. Because he could get Cray time only when the nuclear weapons weapons the nuclear when time only Because get Cray could he use the Cray. work on the design of nuclear weapons: Lawrence Livermore and Los Alamos. weapons: Lawrence Livermore nuclear the of design on work could he so — just security clearance Lawrence Livermore at and an internship only at the two national laboratories in the United States that conducted classified that States conducted in the United the two at laboratories national only most powerful data processors on Earth. But Cray computers could be found found be could Earth. powerful computers on most Cray data processors But the supercomputers designed by the pioneering Seymour Cray were the fastest, were Seymour Cray the pioneering by designed the supercomputers half a day to run Smarr’s math problems. In those days, and well into the 1990s, the 1990s, days,In those and well into math problems. halfrun to day a Smarr’s Back in the 1970s, the fastest computers available at top universities could take could universities top at available the fastest computers Back in the 1970s, in the discovery. ered emanating from the collision and merger of two massive black holes more more two holes black of massive and merger emanating the collision ered from was relativity numerical a critical factor Smarr’s away, than light-years a billion father of numerical relativity.” could understand what was going on.… I think it’s accurate to say Larry say accurate to is I think the it’s was on.… what understand could going merical relativity,” recalls Michael Norman, director of the San Diego Super the San recallsof Diego director Norman, Michael merical relativity,” in tak the leader was absolutely colleague. and a longtime “He Center computer you so a computer on them and putting equations gobbledygook ing Einstein’s

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88 technology fice fice Scientificof Computing in chartered 1984, and four supercomputer centers Project NSF the alumnus, Manhattan respondedand Of the by establishing Despite strong opposition led by Peter aHungarian-born mathematician Lax, of each in their disciplines, course acrash language. so the he couldhimself speak ality. Before approaching seniorthe professors whose support critical, he was gave sity of tailor-made Illinois, but was task the for autodidactic his polymath person could enhance research in their fields. fields. their in research enhance could to about each writedemic aparagraph disciplines, how asking supercomputers would support them. Next, he approached professors across breadth the of aca only —if else National the for Sciencebe used nearly Foundation anything toused design nuclear weapons or model collision the of black holes, could also Xerox as copies. wrote Smarr supercomputers,samizdat, that which could be computer Universities,” American Famine in distributed and it apiece like of Larry created the intellectual center created to intellectual recruit the allowed him me that others and Larry applicationssoftware protocols and were that distributed of free charge. added later.)was Under Smarr’s leadership, NCSA the developed of range avast University Diego. at Carnegie San at ofMellon California in (A fifth, Pittsburgh, — rope American-made computer to an use open an environment,” in says. Smarr Europe.in hit “I by was irony the outrage the and of to having go to Western Eu

at Cornell University, Universitythe of Illinois, Princeton University, the and At the time, Smarr was an untenured an was Smarr At time, the junior member faculty at the Univer “The NSF“The out handed money to buy asuper-computer operate and it, but response,In tapped Smarr out on typewriter, Super his “The amanifesto ------

strategy+business issue 89 featuresfeature title technology of the article 8989 - After freeing supercomputers from the national labs, Smarr labs, the national turned his from at After freeing supercomputers But Smarr was happy to invite top corporations to the NCSA, to and he corporations top invite Smarr to wasBut happy Seemingly overnight in the late 1980s, the NCSA became one of the most the most of became theNCSA one 1980s, in the late Seemingly overnight place where the unexpected could happen.” “There was no intent to create a Web browser, but there was an intent to create a create to was there an intent but browser, a Web create to was intent “There no working on software development ultimately produced Mosaic. Said Norman: Mosaic. produced ultimately software on working development and innovation came out,” Norman adds. For example, a group of researchers of group a example, adds. For Norman came out,” and innovation to cover the waterfront of applications,” says Norman. Researchers were given given Researchers were Norman. says applications,” of the waterfront cover to ourjuststuff did “We specific direction. without freedom of amount a great charged them US$1 million a year to use its Cray. Owning became a Cray charged a US$1 them million a year Cray. use its to world thinks they invented it? Well, forget it.” forget thinks Well, it? world they invented NSF decided to take to all decided thisNSF corporate The and make available. technology it all its resources into war,” he says. “I don’t think people understand how the how understand think people don’t “I says. he war,” all into resources its came at a moment where we as physicists had come out of an of America that put out had come as we physicists where came a moment at edu then; Smarr says he didn’t see a dot-com Web address until 1990. “This address until 1990. Web see a dot-com then; didn’t edu Smarr he says frequently hit sites on the nascent Internet. The traffic The dot- wasand Internet. the nascent on alldot-mil sites hit frequently Arpanet for NSF Net, which became which Net, the Internet. Arpanet NSF for among them, urged the NSF to use the TCP/IP communications protocol of the of protocol use communications theTCP/IP to urged theNSF them, among network to link the NSF’s supercomputers. Leading scientists, Smarr prominent LeadingSmarr prominent scientists, supercomputers. link to the NSF’s network convene a September 1986 meeting in which he proposed building a fiber-optic building a fiber-optic proposed meeting in he which 1986 a September convene Al Gore later took heat for claiming a crucial role, but as a senator he did in fact he as claiming a senator but for heat a crucial role, took Al later Gore and a handful of academic researchers since its creation in 1972. Vice President Vice President in 1972. and a handful creation its since researchers academic of tention to the Arpanet, which had been used exclusively by scientists at those labs those at scientists by the Arpanet, to used had which been exclusively tention

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90 technology incredible vision that Larry was largely responsible largely incredible was for.” vision Larry that computationalestablish toan firmly was disciplines. science was This all across mentation, abstraction, supercomputer the modeling. and “What program did Washington eScience Institute. First, he observation, says, there was then experi acomputer Lazowska, ward scientist founding and director of University the of George Lucas discoveredGeorge power Lucas the animation. of digital one SGIwith became and servers of SGI’s customers filmmaker largest until 1995, time. In models real in dimensional visual replaced Smarr NCSA’s Cray stepped(SGI), could desktop manipulate that three- up machines powerful with Here out aMac or PC was of its depth, but Silicon atiny startup, Graphics Inc. veloping provided that models created. of sets immensedata the visual software Davis devised a competition devised Davis among the University campuses. of California offer wasn’t quite what he mind. in had from University the came Diego, at San of California receptive. he was But the rectorship longed and to collaboration. and get back to research when So acall duties of tired NCSA the di associatedwith Smarr administrative time, the In Company. Even Apple bought aCray. Ford the and of Lilly mark for distinction Eli diverse Motor as companies as Second Act “Every once anew awhile, mode in comes of along,” discovery says Ed In 1999,In at height the of Internet the bubble, governor California Gray number the ofAs applications mushroomed, NCSA the took lead the de in - - - -

strategy+business issue 89 featuresfeature title technology of the article 9191 ------“The heart of the matter is that no one was compelled to work with us, and work to was compelled “The heart is one that the matter no of Smarr brought with him certain lessons from the University of Illinois, not not Illinois, of with him certainSmarr the University brought from lessons Robert Conn, dean of UCSD’s Jacobs School of Engineering at the time, Engineering at of School Jacobs dean UCSD’s of Conn, Robert Real estate occupied by nanotechnology could quickly be turned over to com to quickly turned be could over nanotechnology Real by estate occupied would compete for lab space, which was intentionally kept fluid and ad hoc. ad fluid and kept was which lab space, intentionally for compete would Ramesh says the of Rao, director with anyone,” work to compelled not were we tract UCSD stars to live at Calit2, just to bring their best work there. Everyone Everyone there. Calit2, starstract at best their work live UCSD bring to to just his time look spend unexpected. something to Smarr to wanted or munications, teams. interdisciplinary and weaving together opportunities ing for led to unnecessary internecine conflict. In his new position, he didn’t want to at to want he didn’t unnecessary to conflict.new In led position, his internecine he felt that the Beckman’s practice of luring faculty luring of practice stars departments their from that the Beckman’s felt he institute, Smarr was heavily involved in picking its projects and talent. However, However, and talent. projects in picking its Smarr was involved institute, heavily computer interaction. Although he never held an administrative position at the at an administrative held position Although never he interaction. computer structures and processes, biological intelligence, imaging and human–structures intelligence, science, and processes, biological and Founded Technology. the in Beckmanpursues 1989, research in nanoscale only from the NCSA, but also the Beckman the NCSA, Advanced from Science but from for only Institute million to spend. spend. million to drama), Smarr agreed. Calit2 In became 2000, of he head and was $250 given the department of theatre and dance, of specializingthe department in Renaissance culture and (Both Qualcomm and the Jacobs family have played crucial roles in San crucial Di (Both family roles Qualcommplayed and the Jacobs have (as wife, in Janet a distinguished professor Smarr’s to a position offered UCSD The state would give $100 million to three centers, each of which had to pro had to which each of three millionto centers, $100 give would state The million in initial funding. $15 up Qualcomm put to Qualcomm, convinced asked After run Smarr to institute. the new the funds, raised Conn of and most vide a 2:1 match to the state grant with non-state fundraising. San UC Di grant with the state non-state a 2:1 to vide match Irvine Calit2, with UC form to in partnership, a 70/30 ego joined (UCSD) had cofounded who professors UCSD two of former and Irwin one Jacobs, center.) technology as a major emergence ego’s

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92 technology raise the grant money, you can do almost anything at Calit2. Stars in their field in Stars money, grant the raise at Calit2. anything do you almost can element human the minating reef management. coral in of forest dynamics cover spatial the and loss, illu activity and mining tracking Sponsoredtial. projects India, in include areas of boundaries the urban detecting DigitalGlobe Foundation spa to grow laboratory aliving related to everything stitute) UCSD’s and School of Global Policy the with partnered Strategy and enabled exploration. Calit2’s UCSD In Division Qualcomm the as (known Yu-Min Albert with field It the in expert began by Lin,of an Calit2. technology- it’svaluable; good magic.” like it IBM.makes andmore “Larry’s touch, multipliesanything, which magnifies UCSD who alumnus lead is researcher of Cognitive the Computing group at plines, aplace in where project the to wants be,” says Dharmendraa Modha, ment. “It’s asort of projects glue really allows academic disci that span that offered brain, they for it application and man to testing early Calit2 develop come.” made it has ahotbed that And for innovation collaboration. and UCSD’ssla, a“safe chancellor, space where people calls won’t prejudge out the tablished their credentials were and looking for something different.” new and ground, people and self-selected, people who es had who been successful, had UCSD division since its of inception. Calit2 “A out lot some of it staking was their field take pay cuts to work there. can you do almost anything money, at Calit2. Stars in grant the raise can you If Smarr dangles the lure the of dangles freedomSmarr to you If recruit leaders can to Calit2. The Big Pixel of Initiative collaborations kinds the neatly illustrates fostered When IBMWhen scientists of developed processor on a newbased type hu the The result is that in its in The evolved result 17 that is has into Calit2 what years, Pradeep Kho ------

strategy+business issue 89 featuresfeature title technology of the article 9393 ------Smarr doesn’t dictate, even benevolently; however, he expects people to to expects he people however, benevolently; even dictate, Smarr doesn’t “It’s magnificent,” says Vint Cerf, one of the fathers of the Internet co-and of Internet the of fathers the one says Cerf, Vint magnificent,” “It’s laborate and he supports them. This them. guy like policy supports wields a laser.” and he laborate laborating, you leave.’ He creates these incentives that make people want to col to want that make these incentives creates people He leave.’ laborating, you produce and to share. Some projects sound fanciful, but many have direct fanciful, many rel have sound but projects share. Some and to produce stayed at a private university like Duke, I could never have done this.” done have like university Duke, never I could a private at stayed to build it out and, God willing, reach commercialization,” Radic I’d “If says. and, God willing, out it reach commercialization,” build to the in labs Calit2, re-config created “When were he there TCP/IP. of inventor it works, the engineering to put it together, and the test bedding and systems together, it put to the engineering works, it this own col space; stop if you don’t You in an way. interdisciplinary somebody a table full of custom electronics to a single chip. “We have the physics to prove prove to the physics have “We chip. single a full to electronics a table custom of Qualcomm Insti facility Calit2’s at use the to nanofabrication an hour $100 very rapidly. replaced be are with collaborating that you me to demonstrate to access, have want you you take pay cuts to work there. “He stole me from Duke University, where I was ob where Duke University, from me stole “He there. takework to cuts pay engineer electrical of and computer Radic, a professor Stojan says paid,” scenely With funding the De lab. DARPA, from photonics Calit2’s ing of and head next-generation a Radic is developing Agency, Advanced Researchfense Projects from reducing iscurrently his which group platform, wireless computation-free startups tiny from Qualcomm, pay companies, to and 140 evance industry, to and com cords power of Calit2, architecture The of the layout to tute. down pullcanitsweight A doesn’t lab fluid. that is intentionally cables, munications rule:a made if He ‘Dear faculty, high extremely quality. of clean rooms urable

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94 technology samples sent and submitted and for them off to analysis multiple He scans. CT he on switched He data gathering himself. doctors collected stool began and But Smarr’s symptoms worsened. he didn’t because And believe diagnosis, the pouchestract. thedigestivea common in infection or in small inflammation by physician diverticulitis, caused which his was said distress, oped intestinal ease, an autoimmune an ease, conditionthe colon. severe of inflammation causes that body — 1966 movie cave. It reality even brought morean to immersive mind the virtual the in view display,on Cinerama-sized, the gazillion-pixel wall donned and for aheadset Itoured much-magnified Ivisited his When colon Calit2, tract. own intestinal most technology, sophisticated visualization created Smarr 3D models of his freezer, his in poop cemented plastic bags in notoriety. his planet. A2013 showed BBC cheerfully areporter which special, Smarr in the — famous became working and out, shed quickly and fully more30 pounds. than view. gotocean wife aPrius, His he and aTesla. drives health eating He started He the beard. bought came ego. a sweeping a home and Off a cellar wine with heMidwestern that went Smarr friends teased native when he moved Di to San The QuantifiedSelf With a battery of abattery supercomputersWith along world’s the with disposal, at his retrospect,In says, too maybe weight the off Smarr easily. came He devel But it wasn’tthe sci-fi; and showedtools had tests thatCrohn’s Smarr dis

minus Raquel Welch. Raquel minus Fantastic VoyageFantastic

or infamous — or infamous , in which scientists are shrunk to enter which scientists, in shrunk are ahuman

as the most the being the quantified as on human - - - -

strategy+business issue 89 featuresfeature title technology of the article 9595 ------“Now there are all these people writing papers, where before it was just me, was me, just it before are where all writing there papers, these“Now people to a limsucceeded and get hisSmarr to tried inflammation control, under his at in advance look abdominal had an surgeons unprecedented Smarr’s After some initial ridicule from the established gastrointestinal community, After gastrointestinal initial the established from ridicule community, some into a laboratory animal, experimenting with diet and other treatments, collect animal, treatments, a laboratory with diet and other experimenting into and viruses in that the was gut, live full irregularities. of Smarr turned himself understandingrevolu this not is a scientific I was people tired so of the science. His C-reactive protein (CRP), a blood test marker for inflammation in the body, inflammation (CRP), test marker for in body, the a blood protein His C-reactive bacteria the sum of was off-the-charts high, his and the makeup microbiome, of I knew drive I could “But Smarr. says samples,” guy collecting stool this lonely other scientists began using Smarr’s data, often in comparison with the Ameri data, in comparison often began scientists using Smarr’s other the population at large. was worth it.” CT a significantin restriction scanhis co showed and a subsequent a high level, collaboration. in an technological exercise into operation surgical makesthat (The tools company robotic the monitors. high-definition ing data, his results. and publishing that collects fecal from project specimens crowdsourced a huge can Project, Gut it humiliation, a few years public of that endure if that I had to I decided tion his CRP test showed reading again a blood at in the fall But 2016, degree. of ited turned his and he own surgery December, for scheduled Smarrreluctantly lon. Calit2. at they aug created During models testines, the surgery, using the 3D cameras his from the feed gut with these inside images,mented viewing both on

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96 technology UCSD kinds. —he example for to of wants setan organizations all he not is And content at for Calit2. change it than to for drive cultural Calit2 nology, telecommunications and inevitable, is no and place better positioned is much to do. He believes convergence the of information technology, nanotech no Still, age. one pressing to is retire, him or to groom there’s a successor; too Bob Seger.blaring may of but live Smarr future, the a in certain a man he also is ogy. Ican’t Inever excited believe how thought be this again.” is; I’d exciting this theare in they biolas algorithms fluentand just are as kids machine in learning collaboration sort the of built. cross-disciplinary “These was for which Calit2 ly out hack the new is world,” newthe code. “This says, delighted. Smarr It’s just to of adifferent see have quick kind graphic, justthey asks written. Smarr When lows, who modeling microbiome are his on data alaptop, aprogram they using day, On afinefall two postdoctoral is fel his huddledsunny with Smarr in office early, tois detect deter and disease illness. treating to foster rather health than for “predictive, preventive, participatory and medicine.” personalized, The idea friend, gene sequencing pioneer “P4 Leroy Hood, calls medicine,” short which is he time, In confident is enablethat zeal. will his data what big typical with “Medicinehealth. doesn’t interactive an body treat the system,” as says Smarr togo in cut, you amistake.” less the likely to are make managementrisk point of view, more the you before know about you details the routine,” this another setof make surgeries, to we if see can says. “From Smarr a able He 3D in experienced at no Calit2.) complications recovered and rapidly. five-hour operation to remove portion thediseased of Smarr’scolonview be will operation the in used leaped to monitorat the chance Smarr’s procedure. The A Collaboration Engine As we crossed UCSD’sAs Smarr’s in campus vast blue Tesla stereo the X, was impatient is Smarr for level next the intersection the in tech and of high to is plan work“The company the between surgeons the then and and do - - - - -

strategy+business issue 89 featuresfeature title technology of the article 9797 - - +

Reprint No. 17408 (Scientific American 1993):Library, An early account , Fall 2005: Jay Forrester’s computer models show the nonlinear roots of calamity , Dec. 2000: 10, A profile of Smarr’s career and ambitions at the moment that New York Times , July/Aug. 2012: An article about Smarr’s interest in healthcare by the famed author of . “There are a lot of lessons here for any corporation, any government agency, agency, any government any corporation, for here lessons of are “There a lot Resources Mark Bowden, “The Measured Atlantic Man,” The Down Black Hawk and reveal the leverage that can help us avoid it. William Kaufmann J. and Larry Science of L. Transformation Smarr, the and Supercomputing Lawrence M. Fisher, “The Prophet of Unintended Consequences,” s+b positioned for it than Calit2. than it for positioned is inevitable, and no place is better better is place no and inevitable, is nanotechnology, and telecommunications and nanotechnology, Smarr believes the convergence of IT, IT, of convergence the believes Smarr predict the future, but if you’re going to create it, you have to be collaborative.” be to have you it, create to going if you’re the future, but predict of the immense data that can be collected and analyzed. Says Smarr: “You can’t datatheimmense that of can and analyzed. can’t collected be Smarr: Says “You synthesize world views, scientific philosophies, and competencies to to make sense competencies and philosophies, views, scientific synthesizeworld zation. There has a superstructure be that to There to willzation. lift hold and temporarily up is to progress key The to a multidisciplinaryteamgether thatattacks a problem.” best return, after the investment you make in capital and people, in that make organi you in capital and people, best after return, the investment any large-scale organization,” Smarr says. “The question is how can get the is how you Smarr “The says. question any large-scale organization,” of the potential, power, and impact of supercomputers. John Markoff, “The Soul of the Ultimate Machine,” Calit2 was first authorized. “Why Professor Larry Smarr Freezes His Own Faeces,” BBC Horizon, Aug. A news 12, 2013. report Smarr’s on efforts to quantify and monitor his functions.bodily More thought leadership this on topic: strategy-business.com/technology best books 2017 books best Best Business

technology introduction Books 2017

98 Read it and reap. issue 85 strategy+business n this increasingly digital age, there’s still nothing CONTENTS like feeling the weight of a book in your hand. And even when a book comes to our phones, tablets, 100 INNOVATION and other screens in weightless digital form, it’s still The Platform possible to feel its intellectual heft. At strategy+business, Competition James Surowiecki Iwe value the longest of the long forms of content because of books’ ability to take us deep — deep inside narratives and stories, deep inside carefully constructed paradigms 108 STRATEGY and schemas, deep inside brilliantly constructed arguments Animal Spirits backed by meticulously compiled evidence. Ken Favaro Quick, hot takes may be all the rage in media today. But there is much to be said for 116 cooler consideration. Which is why putting together s+b’s Best Business Books package NARRATIVES — our 17th — is such a pleasure. Because we respect and value the labor of authors, Crimes, Not 2017 books best each year we task gifted writers to pick out the three best books in a range of genres. Misdemeanors Platforms have become so pervasive in Silicon Valley that the term is becoming Bethany McLean hackneyed. But in looking into the best volumes on innovation, James Surowiecki, the longtime business columnist at the New Yorker, zeroes in on the way data savants are using platforms to build new businesses — and a new future. The best of these savants 123 LEADERSHIP

argues, in a finding that is either amazing or dystopian, depending on your mind-set, Captains introduction that algorithms will increasingly make decisions for us. Although Ken Favaro, one of Courageous the most prolific and insightful contributors to s+b, finds strategy inspiration in books and Agile that deal with softer skills such as collaboration and mindfulness, he concludes that Sally Helgesen this year’s most compelling volume traffics in the nuts and bolts of building sustainable, profitable growth. There are few better practitioners of business narratives than Bethany McLean, a contributing editor at Vanity Fair and a coauthor of The Smartest 132 Guys in the Room. Two of this year’s best business narratives, she concludes, deal in ECONOMICS Not-So-Great the perennially (and unfortunately) familiar subject of white-collar crime; the bizarre Expectations tale of a mysterious album and a notorious provocateur takes the honors as the best Ryan Avent 99 in class. In our roundup of leadership tracts, s+b contributing editor Sally Helgesen finds inspiration in the better angels of our nature. And although comparisons between sports and business are often imperfect, she concludes that we have much to 141 learn from the ways brilliant captains marshal the skills and emotions of their teams. MARKETING Economics is often known as the dismal science. Ryan Avent, a columnist at the Econ- Steady Progress Catharine P. Taylor omist, reminds us why. This year’s best economics books help explain the muted expectations most people have about their economic prospects — and why inequality is a historical inevitability. This year’s best marketing books, veteran journalist Catha- rine P. Taylor argues, describe the sometimes Orwellian ways in which the vast retail 149 MANAGEMENT and sales complex is harnessing data to construct compelling offerings. Finally, Duff Mind Over Matter McDonald, author of a recent sweeping history of Harvard Business School, has been Duff McDonald known to cast a jaundiced eye on the professional practice of management. This year, he finds fresh cause for optimism in a more mindful and holistic management style from outsiders, including neuroscientists and military leaders. 156 Top Shelf —DANIEL GROSS INNOVATION The Platform Competition by James Surowiecki best books books best 2017

innovation

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Clayton M. Christensen, Kevin Kelly, The Inevitable: Andrew McAfee and Erik Taddy Hall, Karen Dillon, and Understanding the 12 Brynjolfsson, Machine, David S. Duncan, Competing Technological Forces That Will Platform, Crowd: Harnessing against Luck: The Story of Shape Our Future (Viking, 2016) Our Digital Future (Norton, 2017) Innovation and Customer Choice A TOP SHELF PICK (HarperBusiness, 2016) Illustrations by Karolin Schnoor nnovation is an obsession. Companies spend hundreds of billions of dollars every year on R&D. Yet studies find little correlation between how much a company spends on R&D and its financial performance. Most products fail to make it past two years. And even in this time of rapid technological change, the difference between success and failure in in- Inovation seems, if anything, more random than ever. So it’s not surprising that the year’s best business books on technology and innovation promise to discern the order beneath the chaos, and to make building a new product or service something more than taking a shot in the dark. In Competing against Luck: The Story of Innovation and Customer Choice, Harvard Business School pro fessor Clayton M. Christensen and his coauthors (Taddy Hall, Karen Dillon, and David S. Duncan) start with the assumption books best 2017 that at most companies, innovation is “a hit-or-miss process,” and they want to change it. Christensen’s 1995 book, The Innovator’s Dilemma, in which he coined the term disruptive innovation, was a theory of why dominant companies fail to

innovate. In his new work, Christensen lays out a theory of what real innovation innovation requires, one that he terms Jobs Theory. Jobs Theory rests on a deceptively simple concept: Customers aren’t really interested in products and services in and of themselves. Instead, they buy them to solve a problem — or, in Christensen’s parlance, to do a job. Success- ful innovation, then, demands identifying exactly what that job is, and offering something that will help. Competing against Luck discusses five different routes 101 to identifying the jobs that customers need help with — including looking at the jobs you yourself want to do, and looking at what customers are trying desperately to avoid doing. But the real key is a focus on context and circumstance. Jobs Theory is a well-developed articulation of legendary marketing guru Theodore Levitt’s famous line (which he attributed to an advertiser named Leo McGivena), “Customers don’t want to buy a quarter-inch drill bit. They Competing against Luck want a quarter-inch hole.” But Chris- discusses five different tensen says companies should ask, routes to identifying the jobs that customers need “What do customers want a hole in help with — including the wall for?” To answer this question, looking at what they companies must uncover a rich and are trying desperately best books books best 2017 fully developed definition of what cus- to avoid doing. tomers seek that goes beyond the classic market research into customer needs, engaging with the social and emotional dimensions of why customers purchase products and services. One of the most

innovation compelling sections of Competing against Luck is a careful dissection of the complex thought process a buyer went through while taking six months to decide to replace his mattress. One interesting aspect of Christensen’s theory is that many consumer problems have a range of plausible solutions. Jobs Theory also inverts a conventional model of innovation: Instead of building a product and then figuring out how to

102 sell it to consumers, you start with the consumers. That helps avoid the problem of an overemphasis on features for features’ sake, and the tendency of tech products, in particular, to succumb to feature creep as companies add more and more features to their products simply because they can. Christensen makes a case that you can turn his theory into a systematic, rigorous process for driving innovation. But the leap from identifying a job to helping consumers do that job is obviously a huge one, and even identifying jobs seems harder than Christensen makes it out to be. Still, Jobs Theory offers an essential insight, which is that successful products are, in some sense, services. Corporations are already coming to terms with this reality, in part because of issue 89 digitization. That’s why PwC has projected that R&D spending on products

will have fallen 19 percent by 2020. Christensen’s book provides an intellectual strategy+business framework for understanding that shift, and in the process helps explain why it will, if anything, accelerate.

Technological Futurism On the surface, it’s hard to imagine a book less like Competing against Luck than futurist Kevin Kelly’s The Inevitable: Understanding the 12 Technological Forces That Will Shape Our Future. Where Christensen’s book is resolutely concrete and is replete with such homely examples of innovation as mattresses and milkshakes, Kelly’s book is — like most of his previous works — oracular in tone, riddled with high-flying sentences such as “People of the Book favor solutions by laws, while People of the Screen favor technology as a solution to all problems.” Kelly’s job title is senior maverick at Wired, and what he’s written here is a quintessential books best 2017 work of technological futurism, laying out 12 broad trends that will play a crucial role in shaping the future. Yet for all of the airy pronouncements, The Inevitable remains usefully tethered, at least most of the time, to reality; its real focus is

the way humans use and will use technology in an always-on, always-connected innovation world where devices are increasingly intelligent and increasingly networked. Kel- ly’s trends are all in the form of verbs — flowing, filtering, sharing, and so on. Although a bit of a shtick, the framework embodies Kelly’s view of where society is going: Processes are ultimately more important than products, even as products themselves are becoming processes.

The rise of artificial intelligence, the cognification of our surroundings 103 (such that the physical world will respond and adapt to our needs and desires), the replacement of ownership by access (or the “Spotification” of the world), the tendency for individuals to self-track and to be tracked: These things are, in Kelly’s mind, inevitable. As the flood of information and data continues to rise, methods of filtering and organizing that flood will be more essential and more valuable. Consumption, particularly of information and entertainment, will become more active and dialogic. Our experience of the world will, in large part, be mediated through screens. Because Kelly views these developments as inevitable, he says comparative- ly little about companies or entrepreneurs, and how they are supposed to bring this glorious future about. In that sense, his futurism has something in common with Marxist theory: Innovators almost seem to be mere vehicles, driven by the deeper forces of history. What’s valuable about The Inevitable, from a business perspective, is less what it says about how to innovate, and more what it says about where to innovate. There’s something exhilarating about Kelly’s optimism — no dystopian view of AI or the ro bot apocalypse for him. At the same time, he often treats any new technology as necessarily worth using, even when it doesn’t appear to represent much of an improvement over what we use today. He talks about how we’ll screen bowls to see if they’re clean from the dishwasher — is that a meaningful improvement from just looking at the bowl to see if it’s clean? Kelly’s specific predictions often seem to reflect the kind of future someone best books books best 2017 like Kevin Kelly would like to live in. And in that, they may tell us less about the future than about Kelly himself. His macro view of the future, though, offers a convincing, and rigorous, picture of how technologies that we can see today will have a profound effect on our tomorrow. And that makes The Inevitable an

innovation essential text in thinking about how to take advantage of — and simply prepare for — the transformation of everyday life.

Platform News If Competing against Luck is a classic work of business theory and The Inevitable is an inspiring ride into the future, Andrew McAfee and Erik Brynjolfsson’s Ma-

104 chine, Platform, Crowd: Harnessing Our Digital Future, the best business book of the year on technology and innovation, is an insightful and powerful blend of the two. McAfee and Brynjolfsson, both of MIT’s Sloan School of Management, became gurus of the digital era with their seminal book, The Second Machine Age (Norton, 2014), in which they argued that we were on the cusp of nothing less than a new industrial revolution. And although they were relatively optimis- tic about the long-term implications of that revolution, they also argued that in the short term, the impact would be wrenching, as new technologies decimated old job categories and threw millions out of work. Clearly, in specific industries, digitization, the rise of AI, and the growing issue 89 ability to tap the crowd are creating a host of new opportunities — and posing

a new set of challenges. Machine, Platform, Crowd is McAfee and Brynjolfsson’s strategy+business guidebook to this new world, focusing concretely on how organizations can best leverage the new tools the digital age offers. And its real subject is innovation in the broadest sense: not just innovations that bring new products and services to market, but also innovations in the way we make decisions and solve problems, in the way we collaborate, and in the way we organize work. The book focuses on three shifts: from humans to machines, from products to platforms, and from the core to the crowd. Some of the book will be familiar to anyone who’s paid a little attention to the digital economy: It’s hardly a reve- lation, after all, that platforms have become central to the tech economy. But the authors’ discussion of the economics of platforms and how platform companies price their services is nonetheless fascinating. And they raise an especially interesting question: If so-called sharing platforms end up massively increasing the books best 2017 degree to which existing assets, such as cars, are shared (thereby reducing the number of cars that need to be individually owned), what happens to the companies that make the cars, and that have built entire businesses around the idea

of individuals owning them? innovation Even stronger is the book’s analysis of how machine learning is changing the way companies not only analyze data but also make decisions. As the sheer amount of data that machines can now analyze has grown (thanks to the Inter- net), so too has the value of machine learning. It’s not just that patterns become more robust (and more significant) the bigger the sample you’re looking at. It’s also that the more data you give machines, the better they become at learning. If 105 you want computers to be able to recognize pictures of a cat (something that was beyond them not very long ago), showing them millions of tagged cat pictures is a great way to do it. McAfee and Brynjolfsson argue that machine learning can be used to, in effect, make decisions. They emphasize that algorithms are a good way of avoid- ing the biases that we know plague human decision makers. And a host of studies, dating back decades, show that algorithms can outperform human experts in a wide range of fields. Rather than continue with a decision-making model that ultimately boils down, in their words, to the highest paid person’s opinion (or HiPPO), companies should outsource a big chunk of the work of analysis, evaluation, and prediction to the machines. And although Machine, Platform, Crowd may overstate just how powerful machine learning has become and un- derstate the organizational hurdles to going all in on algorithms, the book does an excellent job of showing how technological innovation is changing the way decisions are made. Technology has made it far easier for companies to appeal to what McA- fee and Brynjolfsson call the crowd. Although more suggestive than definitive, this section of their book makes a convincing case that companies that open themselves up to working with people outside the company (including customers and suppliers) can radically improve performance and drive innovation. In Will the corporation as we such companies as Quantopian, which know it become obsolete? best books books best 2017 As transaction costs fall is trying to build an investment tool by , after all, the reasons to tapping the collective wisdom of trad- put everything under one ers; GE, which has used customers to corporate roof become help generate new products; and Top- less important.

innovation coder, which provides companies access to coders around the world, the crowd is increasingly influential. People have been talking about the potential virtues of tapping the wisdom and work of the crowd for almost two decades. But its moment seems to have arrived. Machine, Platform, Crowd is, then, an invaluable look at the impact of new technologies. But beneath all the concrete problems it raises, an intriguing ques-

106 tion lies at the heart of the book: Given the rise of algorithmic decision making, the ability to outsource tasks to the crowd, and such technologies as blockchain, will the corporation as we know it become obsolete? As transaction costs fall, after all, the reasons to put everything under one corporate roof become less important, and it should become easier for groups of people to come together (virtually) to solve a problem without bosses or formal hierarchies. And yet, as McAfee and Brynjolfsson argue, big companies don’t seem to be on their way out. Instead, by some measures, they’re more powerful than ever — especially in the tech world. And the companies that have been most successful at trying to drive new technologies also tend to look a lot like traditional companies. issue 89 So what gives? Some of these apparent contradictions have to do with the

predictability and efficiency of having everyone connected to the same organi- strategy+business zation — which also makes it easier to obtain long-term commitments to new projects. But what’s also essential, Machine, Platform, Crowd argues, is that management matters and management creates value — from the CEO down to the much-maligned middle manager. That’s because if you want to get things done, leadership still matters. Organization still matters. And helping people work together smoothly and efficiently still matters. This doesn’t mean that companies will go back to the traditional top-down, command-and-control model. On the contrary, McAfee and Brynjolfsson find, the best managers tend to be egalitarian — they listen to and take seriously ideas from people throughout the organization. And they also tend to be cog- nizant of their own decision-making limitations, open to using machines and crowds in helping inform their choices, and transparent in the way they share books best 2017 information. But their core job — managing people — is still much the same. Even as the world around it changes, the company, it turns out, is an innovation that endures. +

Reprint No. 17409 innovation

James Surowiecki [email protected] wrote the “Financial Page” column in the New Yorker. He is the author of The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes 107 Business, Economies, Societies, and Nations (Doubleday, 2004). STRATEGY Animal Spirits by Ken Favaro

Leonard Sherman, If You’re Olivia Fox Cabane and Heidi K. Gardner, Smart in a Dogfight, Become a Cat: Judah Pollack, The Net Collaboration: How Strategies for Long-Term and the Butterfly: The Professionals and Their Growth (Columbia Business Art and Practice of Firms Succeed by Breaking School Publishing, 2017) Breakthrough Thinking Down Silos (Harvard Business A TOP SHELF PICK (Portfolio/Penguin, 2017) Review Press, 2017) best books books best 2017

strategy

108 issue 89 strategy+business n the business world, conventional wisdom holds that market leaders eventually succumb to the law of large numbers, the law of competition, and the law of competitive advantage. But in the most compelling business book on strategy this year, If You’re in a Dogfight, Become a Cat: Strategies for Long-Term Growth, Leonard Sherman assembles a convinc- ingI brief that the slowdowns companies face as they become successful and attract imitators are not inevitable. A faculty member at Columbia Business School and a career consultant, Sherman builds a persuasive case that it’s possible to achieve and sustain the great desideratum of business: long-term profitable growth. And he does so by telling many fascinating stories of companies that found — and haven’t yet lost — the holy grail, among them JetBlue, Southwest Airlines, IKEA, and, inevitably, Apple. books best 2017 Sherman argues that companies have to reimagine what they are and thus what they are capable of — hence the dog/cat imagery. He writes that “most companies [pursue] predictable…strategies within well-established business

boundaries,” which over time “leads to a blurring of meaningful differentiation strategy between companies competing on the same terms for the same customers.” In- stead of by running faster, you “break away from the pack by redefining one or more of the boundaries that historically constrained industry behaviors” and by consistently renewing your product and service portfolios. Like a skilled arborist, Sherman prunes back the ungainly, overgrown tree that strategy has become since it entered the corporate mainstream in the middle 109 of the last century. He saws off a number of dead branches, including the many prescriptions that emerged from the countless searches for excellence, greatness, and the secrets of success. What’s left behind is an expertly trimmed tree of knowledge that brilliantly summarizes and integrates what’s been learned about strategy over the last 60 years. The many success stories in this book tell us that the key to sustained, profitable growth is an innovative idea that solves an important problem with a novel solution. For example, the Ford Motor Company went from being just another carmaker in 1910 to being the market leader in 1920, with a 60 percent market share. As Sherman points out, Ford’s strategy of “demo cratizing the automobile” with one model (the Model T) and one color (black) made on a moving assembly line and sold through third-party dealerships was a very big idea at a time best books books best 2017 when the market for the horseless carriage was limited to the wealthy. In fact, having a big idea explains every success Sherman identifies, including Cirque du Soleil (staging a circus without animals), Costco (selling bulk packaged goods, but to members only), Netflix (renting movies by monthly

strategy subscription), Southwest Airlines (competing with bus, auto, and train travel), Swatch (positioning watches as timely, affordable fashion accessories), CrossFit (creating gyms for elite athletes), and IBM (serving as your corporate/IT partner). Each of these companies created strategies that enabled it to turn its big ideas into long-term profitable growth. And their growth will eventually stall if those ideas are widely copied or made obsolete, and are not replaced with new

110 ones. This is why Ford is once again just another car company: Every automak- er in the world has copied its once-innovative business model, and Ford has yet to create another idea that is big enough (sorry, but an electronic liftgate on the back of an SUV doesn’t qualify!) to fuel profitable, breakaway growth. Sherman offers an interesting list of reasons that “continuous disruptive renewal” remains the exception, rather than the rule. Essentially, he writes, companies are like dogs, especially older ones: They are easily distracted, are prone to foibles, and find new tricks difficult to learn. They focus on customers and competitors, they have resource constraints, and they suffer from misplaced pride and overconfidence. But the real issue at most companies is the tendency for leaders issue 89 to overdelegate the job of innovation and strategic renewal. This is why compa-

nies are so prone to what Sherman calls feature replication and performance aug- strategy+business mentation. These approaches are often the best that middle managers can come up with when leaders abdicate innovation. The crucial difference at companies such as Apple (at least under Steve Jobs) and Amazon is the active, everyday involvement of their CEO in leading and pushing for breakthrough strategic innovation, not just renewing the company’s The crucial difference current products and services, or how it at companies such as makes, sells, and delivers them. Apple and Amazon I do have some problems with parts is the active, everyday involvement of their CEO of Sherman’s argument. In a chapter en- in strategic innovation. titled “There’s No Such Thing as a Bad Industry,” he argues that being average dooms you to poor profitability. But of course, there are plenty of them. The books best 2017 author himself gives us two great examples: wine and airlines. In addition, the chapter “Why Are We in Business?” is a misleading lecture based on several un- truths and an obviously biased selection of facts — the reader can skip it entire-

ly without losing any of the book’s fine benefits. And the chapter “Where Do strategy Great Ideas Come From?” suggests that they come from modern frameworks and methodologies, though none of these explain where the ideas behind the strategy successes in his book actually came from. On the whole, however, Dogfight is full of insights, and Sherman argues convincingly that it’s possible to find meaningful differentiation in any industry.

He shrewdly notes that too many boards lack sufficient understanding of their 111 company’s strategy and that too many leaders conflate budgeting with planning. But the book’s most important contribution is the marriage of strategy and innovation. Sherman rightly makes the case that if you want to avoid dogfights and become a cat, the latter is central to renewing the former.

Butterfly Effect How do you make your company better at innovation? You might start by reading The Net and the Butterfly: The Art and Practice of Breakthrough Thinking. The subtitle notwithstanding, the book is really about the science and practice of how we can use our inherent creativity to generate new ideas. The authors — Olivia Fox Cabane and Judah Pollack, who worked at Stanford University’s StartX program — use our latest understanding of brain biology to describe how breakthrough thinking actually happens, and how to make it happen when you need it. “Breakthroughs, like butterflies, may fly an unpredictable path, but it is possible to capture them if we build the right net,” they write. As Dogfight does, The Net and the Butterfly provides many fascinating examples of iconic innovations, such as the original “eureka” moment experienced by Archimedes, the inspiration that led to round-shot ammunition, the lock- stitch sewing machine, the Wright bro thers’ wing-warping breakthrough, the opening riff for the Rolling Stones’ “Satisfaction,” Vel cro, pacemakers, Teflon, and, yes, Ford’s moving assembly line. How these inventions came about had little to do with design thinking, disruptive innovation, blue oceans, or any of best books books best 2017 the other methodologies offered up by consulting firms, innovation gurus, and business school faculty. It had everything to do with the structure and behavior of our brains, say the authors. In place of the now-disproved analytical left brain/creative right brain theo-

strategy ry, the authors give us EN/DN. Our executive network (EN) is goal oriented and action oriented. We use it when we are focused on tasks, and on using our expertise to solve problems we’ve seen before. The default network (DN) is our Creativity is enhanced meandering mode of thinking, during by alternating between which we are most able and likely to cognitively challenging work and activities 112 make new connections between the with low cognitive load, seemingly unconnected (the authors’ such as riding a bike. examples include termite towers inspiring self-cooling buildings and bakeries’ conveyor belts inspiring Ford’s moving assembly line). The EN provides the analytical focus to define the problem, and the DN provides the “associative, nonlinear” thinking that is essential to sparking a creative solution to the problem. Oscillating between the EN and the DN is what enables us to generate breakthrough ideas. This explains the research that tells us creativity is enhanced by alternating between cognitively challenging work and activities with issue 89 low cognitive load, such as riding a bike. It explains why when I ask executives

where they get their best ideas, I never hear “at my desk” or “in a brainstorming strategy+business session.” The number one answer is “in the shower.” In fact, the authors tell us, the best activity for creativity is walking. This seems to be the single common habit of great innovators in all, ahem, walks of life, including Charles Dickens, Beethoven, Tchaikovsky, Immanuel Kant, Werner Heisenberg, and Steve Jobs. Citing neuroscience, the authors build a compelling argument that anyone can become more creative. And they provide powerful prescriptions and an enormous toolbox to help readers do just that. For example, your DN is most active when you are falling asleep and waking up. These times are called, respectively, the hypnagogic and hypnopompic states of semi-consciousness, and you can practice inducing yourself into them. Other tips in the book include how to get the most from brainstorming and how to feed your DN with an ever-richer body of facts, stories, knowledge, and experiences. Visual thinking and practic- books best 2017 ing the “re laxation response” to calm the parasympathetic nervous system are just a subset of the many techniques sprinkled throughout and then helpfully consolidated into an appendix.

Most of the book’s second half is devoted to what Fox Cabane and Pollack strategy believe are the three great killers of creativity: the fear of failure, the experience of failure, and the pain of uncertainty. Most companies, the authors argue, would see a measurable increase in innovation just by increasing their employees’ ability to cope with and manage the real anxiety and actual pain they feel in con- nection with the prospect and experience of both failure and uncertainty. The authors dispense with the usual clichés about embracing failure and uncertainty, 113 and instead proffer more practical advice — such as reframing, detaching, naming, personifying your inner critic, practicing responsibility transfer, and “load- ing your certainty bucket.” Despite its dead-serious content and at times scientific language, the book is an easy read with a good sense of humor. And is it well organized for those who don’t have time to read every word, with key takeaways at the end of each chapter and two appendixes at the end of the book, one on exercises and another on science.

Working Together Collaboration is a too frequently overlooked practice of successful companies. Without it, strategy, innovation, and execution have little hope. That becomes abundantly clear when reading Smart Collaboration: How Professionals and Their Firms Succeed by Breaking Down Silos, by Heidi K. Gardner. A fellow at Harvard Law School, previously a faculty member at Harvard Business School, and before that a consultant at McKinsey & Company, Gard- ner has conducted deep research into law practices, consultancies, accountancies, and engineering firms. But her conclusions apply to any company in which specialized expertise is paramount and complex challenges cross internal boundaries — which is to say, every company. It turns out that smart — defined as efficient and effective — collaboration pays off, and that can be proved. For the market-facing parts of your business, Gardner argues, the payoff comes in the form of more insight into your custom- best books books best 2017 ers’ needs and priorities, more differentiated products and services, fewer chanc- es of selling or fulfillment mishaps, and greater numbers of loyal alumni who will send business your way. Smart Collaboration really comes alive in the final chapter, which covers the top 11 reasons customers like it when you are a smart

strategy collaborator. My favorite: If customers see that you can collaborate well inter- nally, they’ll assume that you’ll be a great collaborator with them. Another good one: Customers hate cross-selling; great collaborators bring bigger, better solu- Customers hate tions, not a bigger menu. cross-selling; great collaborators bring From a talent perspective, Gardner bigger, better solutions, 114 powerfully dem onstrates through her not a bigger menu. extensive research — 10 years of data on eight firms — that smarter collaboration creates more committed, motivated, knowledgeable, confident, trusting, and innovative staff. It also leads to fewer whole-group defections, lower individual attrition, and fewer burnouts. The result is greater staff productivity and lower costs of attracting, on-boarding, integrating, developing, and retaining staff. Smart collaboration has some daunting barriers. These include insufficient levels of trust and confidence, inadequate knowledge of the company’s capabilities and offerings, and the high costs of coordinating across geographies, genera- issue 89 tions, cultures, functions, and sectors. Gardner shows us not only how to build a

business case for investing in smart collaboration, but also how to get it. Her sug- strategy+business gestions include setting up knowledge contests, establishing customer councils, implementing customer laddering (assigning different members of your firm to different staff in your customer’s organization), holding virtual tours for distant colleagues, having internal brokers to clear the internal market for demand and supply of expertise, and holding visible celebrations of collaboration successes. Several chapters are devoted to how to help particular types of staff — the “solo experts,” the “seasoned collaborators,” the “rainmakers” — use collaboration to grow professionally and build a bigger book of business, responsibilities, or followers. But Gardner’s wisdom is most evident when talking about compensation. In a spot-on section, she writes that companies should measure inputs, not just outputs, to reinforce the behavior they want; avoid individualistic and time-based metrics; prioritize intrinsic motivators (such as recognition and de- books best 2017 velopment) over extrinsic motivators (money); have a single profit pool; and use frameworks and guidance, not formulas, to determine pay. Above all, ensure that your compensation system doesn’t harm your company’s ability to simulta-

neously collaborate and hold itself accountable. strategy This is a timely book because the demand for specialization and the complexity of making companies more than just the sum of their parts will only grow. In a world of dog-eat-dog competition where markets move in the unpredictable pattern of butterflies, it helps to remember Benjamin Franklin’s famous maxim: “We must, indeed, all hang together, or most assuredly we shall all hang separately.”+ 115 Reprint No. 17410

Ken Favaro [email protected] is a contributing editor of strategy+business and the lead principal of act2, which provides independent counsel to executive leaders, teams, and boards. NARRATIVES Crimes, Not Misdemeanors by Bethany McLean

Eugene Soltes, Why They Do It: Cyrus Bozorgmehr, Once Jonathan Taplin, Move Fast and Inside the Mind of the White- Upon a Time in Shaolin: The Break Things (Little, Brown, 2017) Collar Criminal (Public Affairs, Untold Story of Wu-Tang Clan’s 2016) Million-Dollar Secret Album, the Devaluation of Music, and America’s New Public Enemy No. 1 (Macmillan, 2017) A TOP SHELF PICK best books books best 2017

narratives

116 issue 89 strategy+business hite-collar crime. We may think it’s always been with us. But it was a novel concept in 1939, when soci ologist Edwin Sutherland coined the phrase, according to a new book by Harvard Business School (HBS) professor Eugene Soltes, Why They Do It: Inside the Mind of the White-Collar Crim- Winal. Sutherland was the first to argue that stealing wasn’t restricted to deviant, lower-class individuals on the streets “but rather was present within many of the leading corporations of America,” writes Soltes. Others believe the crime is what is sanctioned by law and hence goes un- punished. “I say corruption, but it’s all legal, because that’s how institutional corruption works — the guys taking the money make the laws,” writes Cyrus Bo- zorgmehr in Once Upon a Time in Shaolin: The Untold Story of Wu-Tang Clan’s books best 2017 Million-Dollar Secret Album, the Devaluation of Music, and America’s New Public Enemy No. 1. Two of this year’s three narrative-focused best business books raise import-

ant and uncomfortable questions about the way in which we define and attempt narratives to curtail and punish corporate practices that aren’t good for society (or how we fail to make those attempts). The third, Jonathan Taplin’s Move Fast and Break Things, considers the way in which some of the largest digital companies seek to capture our attention. Not many case studies on white-collar crime are taught at HBS, where Soltes teaches accounting and management. But struck by the “bewildering number of 117 theories about why white-collar criminals ‘did it,’” he began talking to them directly, ultimately corresponding with and visiting more than four dozen of the most senior executives who oversaw some of the most significant corporate fail- ures in history. Soltes questions common theories, like one most recently espoused by former federal prosecutor Preet Bharara, who said the white-collar criminals he prosecuted were “‘highly skilled at cost-benefit analysis’ and they ‘weigh the risk of getting caught against the potential reward, and they decide it’s worth the risk.’” Rather, there seemed to be no method to the madness of the executives the author interviewed. Sam Waksal, the former ImClone CEO who went to jail for insider trading (and who also tipped Martha Stewart), tells Soltes, “They wrote about me as if there was some giant byzantine idea that I was trying to best books books best 2017 perpetrate…[but] I don’t know what I was thinking.… I wasn’t, sadly.’” Ponzi schemer extraordinaire Bernie Madoff tells Soltes, “I really have not been able to figure out how I let myself do this. Is there a flaw in me?” In Soltes’s argument, the whys have more to do with the facelessness of mod-

narratives ern big business — you never have to meet the people you’re stealing from — and our minds’ reflexive power to convince ourselves that we’re not doing anything wrong. Many fall prey to what Plato called the “noble lie,” the idea that whatev- er bad actions you undertake are fine if they further some grand and good goal, such as keeping shareholders satisfied. “I never meant to hurt anybody,” one former CEO told Soltes. “My motivation was for the company to do well.”

118 Soltes, who is clearly sympathetic toward some of those he portrays, explores difficult questions about what constitutes a crime. What’s the difference be tween a CEO participating in illicit insider trading and a hedge fund manager trading on better information than others have? What about the difference “ I never meant to hurt between earnings management as prac- anybody,” one former CEO told Eugene Soltes. ticed by much-lauded former GE CEO “ My motivation was for Jack Welch and criminal manipulation the company to do well.” of earnings? Between misleading dis- closures of the sort that regularly are employed to sell used cars and those that send CEOs to jail for securities fraud? Or between innovative rewriting of regulations à la Uber and criminal rule breaking? And how should an executive nav- igate those distinctions, such as they are, in a world of information overload and split-second decision making? I found the book totally compelling and insightful — until I got to Enron. Soltes, who describes Enron’s collapse as the result of a culture that saw “every problem as something that could be solved with greater financial ingenuity,” tells the story through the lens of Andrew Fastow, the company’s former CFO. Fa- stow, we learn, used aggressive yet legal accounting techniques to create a more pleasing, but ultimately misleading, picture of financial reality. “Although each step appears guiltless on its own, when all of the steps are put together the outcome may appear far more mischievous,” Soltes writes. Which, no. Certainly, too-clever financial engineering was a big part of the Enron story, books best 2017 but Fastow was actually charged with much more egregious criminal acts, such as making secret side agreements that explicitly violated accounting laws, as well as with looting some of the financial structures he set up; Soltes ignores both of

these facts. Did the HBS professor himself fall victim to the disease of rational- narratives ization that affects the CEOs he describes? Because Soltes wanted to tell a story — and an important one, at that — about blurry lines, he ignored the inconve- nient facts that didn’t fit his picture. Still, it’s indisputably true that Fastow’s she- nanigans, both legal and illegal, helped destroy Enron, costing billions of dollars and thousands of jobs.

119 A Mysterious Album A white-collar criminal features prominently in Cyrus Bozorgmehr’s Once Upon a Time in Shaolin, my pick for the year’s best business book on narratives. This is the rollicking narrative of the rap group Wu-Tang Clan’s notorious efforts to create an album that, rather than being mass marketed, would be valued like a work of art — sold to only one buyer, who would be the only one who could ever play it. “There was no template for selling a single copy of an album, no identifiable set of collectors or buyers, no clear medium for the sale, no legal structure whatsoever,” writes Bozorgmehr (who was an advisor to the project and works for a mysterious Mr. S. who funded it, and who himself remains something of a cipher). But the book also invokes much deeper themes. It’s about the group’s efforts to rectify the fact that file-sharing and streaming business models have rendered it nearly impossible for most musicians to make money from their work. “Trag- ically, in a weird evolutionary flaw, the less effort people have to make for something, the less they value it,” Bozorgmehr writes. The author also has his own answers to some of the questions Soltes raises. About corporations, he writes that “their very facelessness abrogates the need for morality.” Executives who are good people “allow themselves to collude in shocking practices because they have bought into the insidious architecture of amorality. It’s numbers, it’s statistics, it’s my job, it’s not my personal morality.” And oh, those noble lies. “A business is responsible to its shareholders rather than best books books best 2017 the public good in the same way that a lawyer is responsible to his client’s interests rather than the truth,” writes Bozorgmehr. “And that inevitably leads to a winner-take-all mentality without the nuisance of conscience.” The twist in this story — and it’s a doozy — is that Wu-Tang’s album,

narratives which was designed to raise moral and philosophical questions about how we value music, ended up being sold to one of the most notorious and amoral figures of our time: Martin Shkreli. The so-called Pharma Bro, who gleefully hiked the price of a lifesaving drug, was found guilty last summer of securities fraud for an unrelated scheme. The members of Wu-Tang had no clue about Shkreli’s activities when the then-unknown young entrepreneur bought their album in the

120 summer of 2015. So when Shkreli burst into the headlines that fall, it was a crisis. “This wasn’t just calamitous,” writes Bozorgmehr. “This was Calamity walking into a bar, sweet-talking Catastrophe, getting really drunk together, smoking some crack, punching Fiasco in the face, then going on a shooting spree while eating orphans and setting fire to kittens.” Bozorgmehr ultimately decides that because what Wu-Tang wanted to do was foster a debate, it’s actually good that the album ended up in Shkreli’s hands. “Maybe this was the ultimate artistic statement,” Bozorgmehr writes. “If we don’t support musicians as a society and all contribute to [music’s] sustainability, then it will end up in the hands of the most ruthless capitalists out there.” issue 89 Bozorgmehr’s somewhat sympathetic view of Shkreli is surprising. It is at

best ironic that what Shkreli did by price-gouging the seriously ill was morally strategy+business reprehensible but legally fine, whereas he was convicted criminally for running a Ponzi-like scheme in which everyone got paid back. And maybe Shkreli himself was posing a question about how our system works. “Much of what Martin was actually doing was entrenched in the worldview of thousands of cutthroat companies,” Bozorgmehr writes.

Fast and Furious The challenge of sustaining viable business models for content is at the center of Jonathan Taplin’s Move Fast and Break Things. “The streets of American cities are haunted by the ghosts of bookstores and record stores, which have been destroyed by the greatest thugs in the history of the culture industry,” the cultural critic Leon Wieseltier noted in 2015. books best 2017 In Taplin’s view, the technological revolution that has swept our world has betrayed all the original idealistic expectations about aiding art and making the world a better place — and has done even worse. Founding fathers Thomas Jef-

ferson and James Madison feared the power of monopolies enough to insist that narratives “freedom from monopoly” should be in the Bill of Rights. But the all-important digital universe we now live in is ruled by a series of extremely powerful companies that have a massive influence on the distribution of content, including Face- book, Apple, and Amazon. The attitudes of Silicon Valley elites who have built these companies, Ta- plin contends, often follow the famous Mark Zuckerberg advice with which he 121 begins his book: “Move fast and break things. Unless you are breaking stuff, you aren’t moving fast enough.” In the case of the Internet giants, “breaking things,” including rules and regulations, lands their CEOs on magazine covers and ultrarich lists, not in jail. For instance, Taplin details how YouTube’s founders flouted copyright law, with one even emailing another about how to get content: “Steal it!” Taplin argues that Silicon Valley’s belief in the nobility of its goals enables its companies to pursue them without a sense that they are doing anything wrong. Critical to the success of Silicon Valley giants, he writes, “is the ability to maintain the illusion that they are working for the greater good even while pursuing policies that serve only their own needs.” On the contrary, Taplin says, real damage is being done. The fact that a few very large companies garner the overwhelming majority of Internet advertising has made it challenging for content creators, producers, and publishers to make a living. And the relentless rise of these companies may harm humanity. Taplin quotes author and educator Neil Postman, who brilliantly contrasted the dystopian visions presented by George Orwell’s 1984 and Aldous Huxley’s Brave New World. “Orwell feared those who would deprive us of information. Huxley feared those who would give us so much that we would be reduced to passivity and egoism,” Postman wrote. “Orwell feared that the truth would be concealed from us. Huxley feared that the truth would be drowned in a sea of irrelevance.” Taplin does engage in some obvious oversimplification, such as when he best books books best 2017 asserts that the “libertarians who control the major Internet firms do not really believe in democracy,” and pins much of the blame on — who else? — the Koch brothers. But certainly, he’s right that the old model that enabled content creators to make a living has been smashed to bits.

narratives In the end, the three books leave us wondering. Why do good people do bad things? Why do some of those people get rewarded, while some go to jail? How can we value content in a digital world where content seemingly has no value? Bozorgmehr writes, “The best questions have no right answer, no linear sequence of logic or moral clarity, but dance forever in shifting shades of gray.” + Reprint No. 17411

122 Bethany McLean [email protected] is a contributing editor at Vanity Fair. Her most recent book is Shaky Ground: The Strange Saga of the U.S. Mortgage Giants (Columbia Global Reports, 2015). issue 89 strategy+business LEADERSHIP Captains Courageous and Agile by Sally Helgesen best books books best 2017

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Sam Walker, The Captain Class: Chris Fussell with C.W. Susan David, Emotional Agility: The Hidden Force That Creates Goodyear, One Mission: How Get Unstuck, Embrace Change, the World’s Greatest Teams Leaders Build a Team of Teams and Thrive in Work and Life (Random House, 2017) (Portfolio/Penguin, 2017) (Avery/Penguin, 2016) A TOP SHELF PICK number of themes have persistently cropped up in leadership literature over the last two decades. The difficulty of spurring hearts-and-minds engagement in a high-pressure environment. The need to distinguish leadership from celebrity. The challenge of building cohesive teams while rewarding exceptional perfor- Amance. And the integration of neuroscientific research into our understanding of group behavior. This year’s three best business books on leadership bring fresh, persuasive, and arresting perspectives to these conundrums. And they derive their power from the fact that they are rooted not in theory but in hard-earned experience and rigorously assembled data. Most notably, they make clear that best books books best 2017 even in this age of algorithms, artificial intelligence, and bots, it is still human values such as flexibility, humility, and the courage to speak truth to power that define excellence.

leadership Captain Theory The best of the crop is Sam Walker’s The Captain Class: The Hidden Force That Creates the World’s Greatest Teams. This wonderfully written and wildly enter- taining study of the most winning sports teams in history has more to say about leadership, engagement, and the chemistry that sparks and sustains extraordinary achievement than a decade’s worth of leadership books.

124 Walker, deputy editor for enterprise at the Wall Street Journal and founder of its daily sports feature, set out to discover the secret sauce of freakishly successful major sports teams by devising a complex series of weighted metrics with which he could identify the best of the best — teams that sustained unques- tionable dominance over time. In his attempt to figure out what the 16 teams he identified as the Tier One group had in common, Walker closely analyzed the 1956–69 Boston Celtics, who won 11 championships in 14 years, including eight in a row. Now, the Celtics did not have a superstar player à la Michael Jordan, who was regarded as the best in the league in his heyday. The team’s stats for points issue 89 scored or average margin of victory weren’t overwhelming. It had different

coaches during its remarkable streak. But Walker noticed that the playing career strategy+business of center Bill Russell overlapped precisely with the Celtics’ period of dominance. Russell also served as captain of the team starting in 1963. And when he retired in 1969, the Celtics promptly collapsed. When Walker reexamined his data, he discovered that every one of the 16 Tier One teams he had identified had a single player whose tenure coincided with the team’s streak, and that that player had usually served as captain. Hence the captain theory was born. Walker posits that team captains play a major and indeed determinative role in the phenomenon of outsized success. But why? As a business journalist, Walker knows that correlation does not equal causation. So he set out to answer two questions. First, given the highly variable nature of the position, what do spectacularly successful team captains actually do for their teams? And second, what qualities and characteristics do the highly books best 2017 diverse Tier One captains, in sports as diverse as international men’s ice hockey and international women’s volleyball, have in common? He found that the team captains provided strong and passionate internal

leadership. They held sway over the locker room by speaking to their teammates leadership as peers, counseled them on and off the field, challenged them, protected them, kept their secrets, resolved their disputes, enforced standards, and inspired fear when required. As one teammate said of Buck Shelford, the Maori captain of the 1986–90 New Zealand All Blacks Great captains, Sam Walker of the International Rugby Union, “He concluded are what , was a guy you could walk over broken 125 baseball managers call“ the glass for, because he just had that man- glue guys,” those players who devote themselves to ner about him.” unifying the team. Great captains, Walker concluded, are what baseball managers call “the glue guys,” those players who devote themselves to unifying the team. It’s perhaps not surprising, then, that the greatest captains are rarely the most talented or dazzling players, the high performers so lionized in corporate literature today. Humility as well as toughness is required. Didier Deschamps, a French soccer midfielder, captained France’s national team to a World Cup championship in 1998 and the European Championship in 2000, and captained his club team when it won an important championship. He described himself happily as a water carrier, a porteur d’eau, whose job was to get the ball to other players. (Des- champs is now the coach of France’s national team.) Walker spends the bulk of the book exploring the seven traits shared by his deeply quirky elite captains. These include extreme doggedness, a tendency to play aggressively to the edge of the rules, a willingness to take on thankless jobs, a low-key and democratic communication style, an ability to motivate others with passionate nonverbal displays, the courage to stand apart (and stand up to management when necessary), and the ironclad emotional control that enables them to keep their heads clear of distractions. These practices are described using vivid, often thrilling examples of how the captains approached competition, inspired and communicated with their best books books best 2017 teammates, challenged coaches and referees, and coaxed the best from other players. Mireya Luis, who captained the Cuban women’s team to three consec- utive World Cups, psychologically outwitted the favored Brazilians through her use of what Walker calls intelligent fouls. And Valeri Vasiliev, legendary defen-

leadership seman of the Soviet Union’s Red Army men’s ice hockey team, led his team on a sustained winning streak following its devastating loss in the 1980 Lake Plac- id Olympics after reaming out the coach on the return flight for singling out specific players for blame. Walker unearths a quote from a clinical psychology paper published in a textbook on which Tim Duncan, who won five NBA championships with the

126 1997–2016 San Antonio Spurs, collaborated as an undergraduate. Titled “Blow- hards, Snobs, and Narcissists: Interpersonal Reactions to Excessive Egotism,” the issue 89 strategy+business paper makes the case that self-centered people who project arrogance through speech and body language can weaken a group or team’s cohesion. Duncan went on to exemplify the opposite characteristics in his nearly two decades with the Spurs, devoting himself to setting up plays for teammates. Sportswriters dubbed the Spurs’ longtime captain the “most boring superstar in the history of sports.” The record books tell us otherwise.

Mission Critical Business isn’t a military conflict any more than it is an athletic conflict. But, as is the case with sports, the armed forces have a lot to teach companies about leadership. That’s evident from reading Chris Fussell’s One Mission: How Lead- ers Build a Team of Teams. It’s an elegantly written and vivid account of what books best 2017 happens when superbly trained and highly resourced teams that operate as part of a bureaucratic structure confront a decentralized and fluid network of under- prepared and barely resourced competitors that are nonetheless fiercely aligned

around a persuasive common narrative. And it offers a rich template for effec- leadership tive action. In the process, One Mission demonstrates precisely why 20th-century managerial innovations such as management by objectives and vertically cascading strategic alignment are doomed in an environment characterized by complexity, unpredictability, and speed. On deployment in Iraq in 2003, Fussell found a profound source of engagement and purpose in the camaraderie and distinctive traditions of the elite 127 SEAL group to which he belonged. Yet his operations unit served as part of a joint task force, and even on that first deployment he noticed that the constituent units that made up the force often operated at cross-purposes despite their common and oft-stated mission, “to defeat al Qaeda in Iraq.” The Ranger units, CIA analyst teams, State Department liaisons, NSA signals intelligence partners, and SEAL platoons all had proud and insular tribal cultures that constrained relationships between teams. This made it difficult for members to share information and trust colleagues from other “clans.” This deficiency was particularly acute — and often lethal — given that the SEALs’ opponent, al Qaeda, had perfected a fluid operational structure and in- culcated extraordinary cohesion among its dispersed units. The enemy’s rank and file, Fussell noted, could “move with speed and individual initiative, collaborating with one another and aligning their otherwise isolated actions free from formalized approval chains.” Thus the joint task force, although far more im pressive on paper than the enemy, was weakened by the individual cultures that made its constituents great. “We had excellence, talent, and capability; they had a uniting calling.… We were a strictly ordered machine…they were an organic movement.” In other words, it was a typical asymmetric 21st-century encounter between a powerful but bureaucratic behemoth and an underfunded but passionate startup. Deployed in Afghanistan the following year, Fussell saw the physical man- ifestation of the cul tural silos in the state-of-the-art operations compound at best books books best 2017 Khowst. There, high walls, cipher locks, and rigid sec urity procedures inhibited cross-functional relationships, symbolizing the “operational divide that was me- tastasizing across the Task Force’s ordered body.” Enter General Stanley McChrystal, whom Fussell would later serve as aide-

leadership de-camp before leaving military service in 2008, and with whom he (and others) collaborated on the 2015 book Team of Teams: New Rules of En gage ment for a Complex World (Portfolio/Penguin). McChrystal recognized that the tactic- al screw ups that kept occurring in an unpredict able war against an unpredictable enemy were the in evitable result of closely protected team cultures that Silos cannot be

128 inhib it ed synchronization. dismantled by fiat or by As many private- and public-sector the creation of nice org charts with a weblike leaders have learn ed, silos cannot be dis- shape. Dotted lines mean mantled by fiat or by the creation of nothing when trust and nice org charts with a weblike shape. relationships are absent. Dotted lines mean nothing when trust and relationships are absent. What’s needed are processes, practices, and team- wide traditions that get colleagues speaking honestly with one another. Prior to McChrystal’s intervention, leaders of the task force had used “Con- gressional hearing”–style events to debrief subordinates of constituent groups issue 89 — a tactic that encouraged only vertical alignment. McChrystal replaced this

format with a digitally enabled daily forum in which members of operations and strategy+business intelligence teams at all levels and in all locations exchanged newly discovered, often imperfectly formed ground-level information with one another and with senior leaders in real time. By assembling a complex but up-to-date picture of a continually evolving situation via constituents with vastly different charges, perceptions, and domains of expertise, the military could encourage better decision making and collaboration across disciplines. Fussell’s precise and detailed description of these forums is a high point in his narrative, as are his pointed observations about the futility of mission statements that originate at the top. He argues that the innovations that the joint task force put in place can have wide application in a range of organizations that struggle with bureaucracy, silos, and cross-unit mistrust. For example, he cites research showing that although 84 percent of managers express confidence books best 2017 in their direct line superiors and subordinates, only 9 percent feel confidence in peers from other functions and units. In his post-military career, as part of McChrystal’s consulting group, Fus-

sell spreads the gospel of inclusive action forums and horizontal alignment to leadership business clients. One Mission presents engaging case studies of how task force innovations have helped five nonmilitary enterprises address diverse conundrums. Standouts included Intuit’s struggle to achieve scale while maintaining the speed of a startup through rigorous focus on an aligning narrative, and the Okla homa Office of Management and Enterprise Services’ use of a virtual forum to build relationships among siloed units and defeat a bureaucratic culture that had come 129 to “feel like a dictatorship.” Fussell’s specific and bracing descriptions of how the practices can be applied gets to the heart of how significant culture change actually occurs. The joint task force managed to shift a massive and highly central ized organization whose stated goal was defeating al Qaeda into an organization committed to building the kind of culture required for defeating a complex and continually evolving adversary.

Emotionally Agile Since it was published in 1995, Daniel Goleman’s Emotional Intelligence has had a big impact on organizations. Recruiters typically consider “EQ” (an applicant’s emotional intelligence quotient) when considering candidates for hiring and promotion. HR departments test for EQ when composing teams. Coaches work with countless executives to help them improve their EQ. Now comes Susan David, a psychologist on the faculty of Harvard Medi- cal School, with Emotional Agility: Get Unstuck, Embrace Change, and Thrive in Work and Life, an insightful book whose promise-the-moon subtitle does it a dis- service. As a concept and a practice, emotional agility (EA) seems poised to enter the lexicon of organizations. If EQ reflects your level of skill in managing others, EA reflects your level of skill in managing yourself. Given the recent emphasis on self-awareness as an essential leadership trait — and the stunning institutional damage that can be done by leaders who lack this quality — the author’s tim- ing seems particularly astute. best books books best 2017 David defines emotional agility as the ability to change or maintain one’s behaviors in a way that aligns with what one values and intends. Our capacity to be agile is undermined when we resort to familiar but rigid responses to situations, stimuli, and the speech or actions of others. Doing so may feel comfortable, but

leadership it impairs our ability to choose our responses. Instead, we operate on autopilot. Given the speed and demands of today’s environment, autopilot presents a powerful temptation. Yet this approach leaves no opening for the space between stimulus and response that Austrian neurologist and psych iatrist Viktor Frankl, one of David’s heroes, identifies as the only true source of personal growth, freedom, meaning, and fulfillment.

130 Although the framework of Emotional Agility can feel a bit arbitrary, Da- vid’s insights are often riveting and refreshingly counterintuitive. Her examples are clear and anything but run-of-the-mill. For instance, her take on the role negative emotions and bad moods play in building emotional agility offers an invigorating antidote to a culture in which happiness has become not only an unquestioned goal but the presumed best metric of mental health. Yet while recognizing the advantages that positive emotions provide, David notes that our experience of sadness, anger, fear, and guilt can instill perseverance, spur attention, improve memory, encourage compassion, clarify thought, and make us less prone to confirmation bias. issue 89 By contrast, lionizing positivity creates rigid responses by blinding us to data

that contradicts the cheerful story we insist on telling ourselves. In our quest to strategy+business be upbeat, she writes, we dismiss cautionary signals, jump to unwarranted conclusions, make hasty or risky decisions, and harbor unrealistic expectations that may culminate in bitter disappointment. Perhaps most arrestingly, David demonstrates why trying to smother distress with positive affirmations, a widely recommended practice, is ineffective given the chemistry of the human brain. She invites us to instead pay attention to our negative emotions and consider what function they might serve, using the shorthand question “What the func?” In our quest to Leaders can also benefit from how be upbeat, we dismiss David connects the dots between emo- cautionary signals and harbor unrealistic tional agility and ethical behavior. She expectations. argues persuasively that identifying and books best 2017 taking responsibility for our emotions is essential if we are to act with integrity and honor. Solid values are the only possible counterweight to the phenomenon of negative social contagion, described for

all time in Elias Canetti’s classic Crowds and Power (Gollancz, 1962), but given leadership new urgency and form in the social media era. + Reprint No. 17412

Sally Helgesen [email protected] is a contributing editor of strategy+business and an author, speaker, and leadership 131 development consultant whose most recent book is The Female Vision: Women’s Real Power at Work (with Julie Johnson; Berrett-Koehler, 2010). ECONOMICS Not-So-Great Expectations by Ryan Avent best books books best 2017

economics

132 Marc Levinson, An Extraordinary Rick Wartzman, The End of Walter Scheidel, The Great Time: The End of the Postwar Loyalty: The Rise and Fall of Leveler: Violence and the Boom and the Return of Good Jobs in America History of Inequality from the the Ordinary Economy (Basic (PublicAffairs, 2017) Stone Age to the Twenty-First Books, 2016) Century (Princeton University Press, 2017) A TOP SHELF PICK issue 89 strategy+business nvariably, the stories return to World War II. Ten years after the first stir- rings of the global financial crisis of 2007–09, economic historians are trying desperately to understand what has gone wrong. With remarkable frequency, writers and thinkers orient themselves and their stories around World War II, which seems entirely appropriate: What’s happen- Iing in the global economy and in politics cer tainly may feel like an unraveling of the postwar institutions and order. But precisely why that unraveling is occurring and what it implies for the future is a matter of debate. This year’s three best business books on economics focus on this issue. They vary in their pessimism. Marc Levinson, author of An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy, is not very hopeful. But neither does he suggest that something has broken. Levinson is a historian and journal- books best 2017 ist, formerly of the Economist (and an occasional contributor to s+b), who is best known for The Box, a surprisingly engrossing history of container shipping. An Extraordinary Time, like The Box, is an efficiently presented chronology of the

global economy since the end of World War II. Levinson opens at the hinge of economics this chronology, which he locates in October 1973 — at the start of the oil crisis precipitated by the Yom Kippur War. In Levinson’s telling, this single moment split the postwar era into the decades of freakishly rapid and broad-based growth and the subsequent period of uneven and unequal progress. An Extraordinary Time reminds us just how tenuous were conditions after the surrender of Nazi Germany and Imperial Japan. With much of the world in 133 rubble, both victors and defeated nations lacked the hard currency to import basic essentials, to say nothing of the material needed to rebuild. Economists worried, or assumed, that demobilization would plunge industrialized economies back into a depression. Even rich economies remained a long way from what we would consider modernity. In 1948, Levinson reminds us, only one French household in 30 had a refrigerator. But then came three decades of extraordinary growth — Les Trente Glo- rieuses in French, Wirtschaftswunder in German, and the Japanese postwar “economic miracle” — that utterly transformed the lives of many Europeans and East Asians. Families who worried about finding their next meal in the 1930s, and who fled for their lives during the war, suddenly found themselves with telephones, televisions, automobiles, and well-stocked fridges to boot. Prosperity brought confidence in government and a feeling of security, even in the shadow of the Cold War. As Levinson traces the era’s macroeconomic history, it is clear that in the 1970s, this era came to an end — slowly and then all at once. Weaving together data and narrative, he shows how productivity growth foundered and the irritant of inflation appeared and would not leave. The social strains that began to sim- mer in the 1960s boiled over, politics turned more dysfunctional, and the economic themes that would dominate the next few decades (rising inequality, wage stagnation, and financial instability) began to emerge. Faith in the competence and honesty of government was shaken. During the boom years, rapid growth best books books best 2017 had flattered nearly every intervention, making even the most ham-handed central bankers and trade officials seem like policy geniuses. But in the 1970s, what had worked before suddenly didn’t. Stimulus programs raised inflation but did nothing to reduce unemployment. Industrial policy no longer seemed a reliable

economics route to higher productivity. Yet as Levinson notes, this sudden helplessness did not cause an outbreak of humility. In fact, another set of wonks seized their chance to slash tax rates and regulation, privatize state-owned businesses, and squeeze union power. Perhaps economies would have performed worse in the absence of such measures. But the change of tack did not prevent inequality in the distribution of economic

134 gains even as growth in incomes and productivity remained well short of the postwar glory days. issue 89 strategy+business That should come as no surprise, argues Levinson. In his macro view, the golden age was an aberration. In the decades prior to it, technological innovations such as electricity and automation piled up unused by the private sector thanks to the Great Depression and war. The conflict also repressed corporate investment and consumption. Then after the war, a burst of investment in productive capacity, infrastructure, and education juiced employment and incomes, and generous government benefits pow- In Levinson’s macro ered consumer demand. As governments view, the golden age was worked to piece the global trading and an aberration. Rarely in history has so much financial system back together, integra- economic potential been tion further propelled growth. Rarely in unleashed at a stroke. history has so much economic potential books best 2017 been unleashed at a stroke. But since the 1970s, the circle has unwound. People grew less secure as their incomes oddly failed to soar, and as social safety nets began to fray. There was

nothing nefarious behind all this, in Levinson’s view. It simply represents regres- economics sion to the mean. And there’s no easy fix, apart from an adjustment to our expectations. Although Levinson correctly points out the fundamental difference in growth potential between the early postwar period and more recent decades, he is too willing to accept that things could not have gone better for most people since the early 1970s — and that actions taken by politicians and business leaders were ineffectual. 135

The Decline of Paternalism Rick Wartzman provides a less fatalistic account of the same story in The End of Loyalty: The Rise and Fall of Good Jobs in America. Wartzman’s book is a metic- ulous and essential history of the worker’s place in the postwar corporate United States. He, too, starts his narr ative arc during World War II, as titans of industry met to work out how to employ all those who would need jobs at the war’s end. Having come through the pain of the Depression and the sacrifice of the conflict, residents were desperate for security. If the economy could not deliver — if its corporate giants could not provide — there would be no telling what sort of political backlash the capitalists would face in the home of capitalism. In the words of Harrison Jones, then chairman of Coca-Cola, “Any nation with a great unemployment wave becomes a seedbed for -isms.” Wartzman is also a journalist, and a director at the Drucker Institute. His comprehensive tale follows four of the great companies of the 20th century — General Electric, General Motors, Kodak, and Coca-Cola — all of whose executives were members of the conspiracy to maintain full employment. In the decades before the war, they had not been uniformly progressive or paternalistic. At Kodak, generous pay and benefits were meant to foster loyalty, but also to deter efforts to unionize. General Motors, having hired Pinkerton detectives to spy on and thwart efforts to organize its plants, ultimately acquiesced to union pressure in the 1930s, but only after the Wagner Act made organizing far easier. best books books best 2017 After the war, as unions gained more strength and critical mass, GM and the United Auto Workers struck the so-called Treaty of Detroit in 1950, which established a model for the achievement of labor peace. The five-year contract protected GM (and later, other carmakers) from the risk of strikes, while workers

economics received good pay, annual cost-of-living adjustments (which became a common feature of labor contracts), and a pension. It also established a set of benchmarks that other industrialized companies would follow. As the decade wore on, the benefits that were exten ded to workers grew. Some employees received annual “wage dividends” as a form of profit sharing. Pensions and health benefits expanded, as did efforts to shield employees from

136 turns in the business cycle. Firms invested heavily in workforce training, occasionally setting up internal institutes indistinguishable from university programs. Companies pumped out a steady stream of consumer goods to soak up fattening paychecks and fill the homes employees were buying in growing numbers. It worked for everybody in the U.S. — workers, management, shareholders — in part because so much of the world’s productive capacity had been destroyed in the 1940s and was slow to rebuild. Wartzman concludes, as does Levinson, that the good times could not continue. But the story he tells is more specific to companies and industries. As the world’s other rich economies recovered, the competitive environment for firms issue 89 intensified. GM, for example, faced competition not just from Ford and Chrys-

ler, but from Toyota and Honda. Improving technology allowed manufacturers strategy+business to automate factory floors and streamline corporate offices. The macroeconomic environment also grew more difficult. Cost-of-living adjustments and union wage bargains were increasingly seen as the source of inflationary pressure, and therefore something to be resisted. Companies relocated their operations from the Midwest and Northeast to Southern states, where labor costs were lower and organized labor nonexistent. For Wartzman, the new generation of post-1970s policymakers that Levin- son focuses on had a parallel in the executive suite. CEOs began to prioritize profits and share prices over commitments to employees, and hacked away at fat payrolls. “Any organization that thinks it can guarantee job security is going down a dead end,” said Jack Welch, the iconic General Electric CEO who earned the sobriquet Neutron Jack. “Only satisfied customers can give people job books best 2017 security.” Complacent companies were at risk of experiencing an assault by corporate raiders. Ronald Reagan’s decision to break the air traffic controllers’ strike in 1981 represented a stark warn ing to organized labor: Submit or face destruc-

tion. Even left-leaning politicians embraced the notion that the computing age economics demanded flexibility and the relentless Even left-leaning accumulation of skills. politicians embraced the As the Treaty of Detroit was meta- notion that the computing phorically ripped up in the decades af- age demanded flexibility and the relentless ter the 1970s, the sense of corpora tions’ accumulation of skills. loyalty to workers was utterly destroyed. 137 Yet Wartzman presents this broad and important shift as the inevitable result of structural economic change: of technological advances, globalization, and the increased pace of change across markets. Where Levinson casts the difficulties of workers as the result of regression to the mean, Wartzman suggests they are the product of adaptation in the face of progress. And it is indeed difficult to imagine that GM and Kodak, whose size and history could not prevent a spiral into bankruptcy, could have maintained their historical commitments and loyalty to workers and still prospered. Nonetheless, Wartzman, along with Levinson, doesn’t fully examine or explain how the in- tentional economic reforms of the 1970s and 1980s altered the political climate in which these companies operated. Mean Means In the year’s best and most striking economics book, Walter Scheidel views today’s economic woes through a significantly wider — and darker — lens. The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century is a more sweeping, bleaker version of Thomas Piketty’s Capital in the Twenty-First Century. A professor of history at Stanford University, Scheidel packs the book full of data and historical analysis, including differences in the comparative splendor of ancient tombs and variances in human height, to present a stylized but compelling picture of inequality across the whole of human history. Inevitably, he argues, societies that manage to create an economic surplus become economically and politically unequal. Within those societies, over best books books best 2017 time, elites get better and better at rig- ging the system to divert resources to- Inevitably, Scheidel ward themselves. Only catastrophe lim- argues, societies that manage to create an its the march toward greater inequality

economic surplus economics — great plagues, state failure, revolu- become economically tion, and mass-mobilization warfare. and politically unequal. In Scheidel’s view, this has been the way of things since the domestication of crops more than 10,000 years ago. Farming societies generated agricultural surpluses, and found themselves with land, equipment, and stores of food that needed defending. Such societies sorted

138 themselves into hierarchies dominated by the strong, who were best able to de- fend the surplus — or to expropriate an outsized share of it. Control of resources made elites stronger still, and allowed them to bend the rules of society in their own favor. Political and economic inequality carried on growing in this way until disaster struck. In the West, for example, inequality reached a peak under the Romans, when a large and integrated Mediterranean market generated enormous wealth that flowed in wildly disproportionate degree to elites. State collapse destroyed that market and led to a dramatic fall in inequality that persisted for centuries. But over time, medieval European elites built issue 89 new states, restored commerce, and established tighter control, driving a re-

newed up ward trend in inequality. That, then, was interrupted by the arrival strategy+business of the plague in the 13th and 14th centuries. Mass death resulted in a scar- city of labor, which returned power to the surviving peasantry. But when the population began to recover, inequality began to rise — straight through the ages of colonialism and industrialization and right up to the eye-popping levels of 1914, when both revolution and mass-mobilization warfare were unleashed. World War II was a historically potent leveler of economic status. In the thick of war, governments seized corporate elites’ power to run the economy and drained corporate fortunes to fund the war machine. Much of what was left was shattered by inflation and physical loss. In defeated and victorious nations alike, the social trauma of war and the political demand for new rules and institutions that would make its recurrence less likely led to sweeping changes in the state’s role in the economy, such as the creation of the welfare state, which enshrined in books best 2017 law the regular redistribution of resources from rich to poor. And then, many of us imagined, history ended, more or less. The welfare state and international institutions such as the European Union and GATT

made the world safe for global capitalism, which eradicated the threat from economics comm unism, brought magical technologies into the world, and finally spurred development in the world’s vast emerging markets. But, as Scheidel notes, even as comm unism was teetering and triumphalism was spreading, the old worrying trends emerged: slow productivity growth, stagnant incomes, and rising inequality. Why?

Perhaps, as Levinson writes, it was simply a matter of regression to the mean. 139 Or perhaps, as Wartzman reckons, it reflected the ways in which the world was becoming a more complicated place with new markets and technologies and re- alities to manage, demanding new expectations and ways of doing things. But Scheidel’s work suggests a different interpretation. Perhaps what we have seen is the reestablishment of an even older pattern. Maybe the tax cuts and the de- regulation, the union busting and the trade deals, the waning interest in public investments and the listless response to regional economic hardship, the compla- cency toward the financialization of the global economy and concentration of economic power in the hands of a few firms — maybe all of that was, at least in part, the doing of elites who wanted a larger pie, yes, but also a larger share of it. And perhaps they are not done with their work. Of course, Scheidel’s bleak theory need not be prophecy. He, like Thom- as Malthus, may have identified a fundamental truth about the world just as it ceased to apply. But saving liberal society and the market economy will require quite a lot of political effort. These books, with their compelling diagnoses, tell us that we are recognizing the seriousness of the problem. They also make clear that we are a long way from agreeing about how to treat it. + Reprint No. 17413

Ryan Avent [email protected] is economics columnist at the Economist. He is the author of The Wealth of Humans: best books books best 2017 Work, Power, and Status in the 21st Century (St. Martin’s Press, 2016).

economics

140 issue 89 strategy+business MARKETING Steady Progress by Catharine P. Taylor best books books best 2017

marketing

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Eddie Yoon, Superconsumers: Joseph Turow, The Aisles Have Thomas A. Stewart and Patricia A Simple, Speedy, and Eyes: How Retailers Track Your O’Connell, Woo, Wow, and Win: Sustainable Path to Superior Shopping, Strip Your Privacy, Service Design, Strategy, and Growth (Harvard Business and Define Your Power (Yale the Art of Customer Delight Review Press, 2016) University Press, 2017) (HarperCollins, 2016) A TOP SHELF PICK martphones are proliferating! People — especially millennials — are cutting the cable cord in favor of buying their media à la carte! The rise of programmatic ad buying is allowing marketers to target at the mi cro level across devices! With all the chaos in marketing, technology, and media, 2017’s Scrop of marketing books, many of which covered such topics, seemed thoroughly expected. I’d venture that as shape-shifting as marketing has had to become — who, really, watches much network TV anymore? Or clicks on banner ads? — it has also, strangely, reached a point of stasis. The megatrends affecting the field have become as accepted in the business as cable TV became by the late 1980s. It’s not that there’s nothing left to learn. Rather, what we’re seeing now, best books books best 2017 reflected in this year’s best business books on marketing, is the triumph of in- crementalism. Instead of reinventing the wheel, marketers need to expand their competencies, even against the steady drumbeat of technological change. The year’s best offering was Superconsumers: A Simple, Speedy, and Sustain-

marketing able Path to Superior Growth, by Eddie Yoon. A confession: I originally reviewed this book for the Spring 2017 issue of s+b. But its inclusion here can’t be chalked up to that bane of modern marketers, a short attention span. What I discovered was that after I had carefully vetted more than a dozen additional books for this review, Superconsumers continued to stay with me for its brevity, its anthropolog- ical approach, and its power. The book contains compelling examples of what

142 makes the people of the title — the small minority of customers who buy more of, and have a concurrent passion for, a particular product — so vital for building businesses. It was also hands down the most enjoyable read. Yoon, a consultant at Cambridge Group, introduces readers to people like Laura, a superconsumer of Nacho Cheese (a real product given a generic name). In a meeting with the brand team, she demonstrates an attribute of the product that its marketers might not have noticed. While dipping a piece of broccoli into melted Nacho Cheese, “she pointed out how the cheese was viscous enough to form a perfect crown on the broccoli’s head without falling off the side, yet mel- ty enough to fill every crack and crevice.” issue 89 Then there’s Sally, who has a passion for office prod ucts. In many writers’

hands, Sally would be a ripe subject for ridicule. But Yoon deftly explains why strategy+business such prosaic products as three-ring binders and staplers inspire legitimate passion in some people: These products are “hired” to do a job beyond their baseline function. Sally, who works at a car rental agency, “hires” office products to bring a sense of calm to a tumultuous workplace. That three-ring binder is a portal to control. It’s “like a trophy for a job well done and her way of bringing order to the chaos.” For many marketers, Superconsumers will prove illuminating because it emphasizes that you don’t have to be a maker of cutting-edge basketball shoes or fast cars to inspire passion. The key, says Yoon, is to uncover the larger reason that superconsumers are hiring your product, and use those insights to expand your market. “Super consumers are not Sally, who works at a the be-all and end-all,” explains Yoon. books best 2017 car rental agency, “hires” “But they are the proper place to start a office products to bring consumer-centric strategy.” a sense of calm to a Yoon also points out that the les-

tumultuous workplace.

That three-ring binder is sons marketers glean from supercon- marketing a portal to control. sumers can rope in even larger audiences and thus have a broader business impact. In an anecdote about the champagne category, Yoon explains that women superconsumers in particular “hire” the bubbly wine in the summer, as an alternative to beer. Because that context is different than it is during celebrations

— when a number of people might share a bottle — the industry began produc- 143 ing single-serving champagne bottles. While delighting superconsumers, this new way of packaging champagne raised the “fun” ratio because consumers could try a variety and no longer had to worry about wasting champagne. This has helped make champagne more attractive to potential superconsumers, expanding its appeal.

TMI? Attend virtually any marketing conference, and you’ll sense great excitement in the room when discussion turns to the potential of data to help marketers understand consumers at an unprecedented level. What’s rarely acknowledged, however, is that there’s also something Orwellian about a world in which marketers and retailers can track user locations, transactions, and passions in real time. Is the mobile age helping consumers and products discover one another? Or is it creating an environment of constant surveillance? Because it wrestles intelligently with these issues, I chose The Aisles Have Eyes: How Retailers Track Your Shopping, Strip Your Privacy, and Define Your Power as another of this year’s best business books on marketing. It’s a skeptical — even occasionally paranoid — view of how big data is changing the face of retailing and, at some level, reordering the way people relate to one another. As such, it pushes marketers to step out of their industry bubble and consider an alternative viewpoint from an academic. “The transformation of re tailing is, at the core, a rethinking of the ways merchant–customer relationships should best books books best 2017 take place in the twenty-first century,” writes Joseph Turow, the Robert Lewis Shayon Professor of Communication and associate dean for graduate studies at the Annenberg School for Communication at the University of Pennsylvania. “Monitoring and discrimination are certainly critical to this rethinking, but they

marketing are only part of an accelerating project to redefine relationships with shoppers.” By marrying loyalty programs to tracking devices and the smart manipulation of images and messages, he argues, retailers are pushing shoppers to “accept systematic biases about them.” That’s loaded language. The end game, per Turow, is that retailing will return to being discriminatory, as digital technology gives retailers the ability to dynami-

144 cally change pricing based on individual customer data. An affluent and loyal customer may get a lower price on high-end skincare products than someone who is less loyal. A new customer who holds potential for cross-selling — perhaps she’s a grandparent who could be persuaded to buy more accessories for her granddaugh- ter’s American Girl dolls — may get a better price than someone perceived as not having additional value, and so forth. To a degree, if this happens, it will be going back to the past. In the 19th century, when retailer–customer relationships were more intensely personal, “selling techniques centered around prejudice and discrimination, with peddlers and small merchants determining which shoppers were ‘winners’ and which were ‘losers’ in the course of negotiating sales based on such issue 89 measures as the purchaser’s race, gender, ethnicity, and income,” Turow writes.

Its dire warnings aside, the book packs a punch because it provides an ex- strategy+business haustively researched look at the history of retailing. Most of us don’t really know how UPC codes got their start (they solved the problem of telling grocery stores when it was time to restock by transmitting sales data instantly to headquarters), or have forgotten that in the pre-industrial economy, most pricing was really the result of haggling. Most of us don’t really Turow certainly paints a detailed know how UPC codes and accurate picture of how the future got their start, or have he envisions — and fears — is techno- forgotten that in the pre-industrial economy, logically possible. It is not hard to see most pricing was really how stores could deploy the big data the result of haggling. they hoover up to target shoppers with customized coupons and enticements. books best 2017 Turow notes that this already happens in the airline in dustry, where frequent fliers receive more perks than occasional customers and pricing is dynamic. It could be that the passenger seated next to you paid twice as much, or half, or

nothing at all, for his or her ticket. marketing But the book misses by giving short shrift to consumers’ power and agency. As norms surrounding privacy and sharing have changed, there’s much to suggest that when it comes to privacy, consumers aren’t putting their money where their mouth is. Even though they express concern about how their data is used, they continue to shop at e-tailers such as Amazon, which use individual purchase behavior to spur additional transactions. And a 2014 Pew Research Center 145 study found that only half of respondents thought their physical location over time was “very sensitive” and a mere 8 percent thought their basic shopping habits were “very sensitive.” What’s more, if we’ve learned anything in the last decade of social media proliferation, it’s that consumers will speak up — loudly, and on multiple platforms — when they feel a company is mistreating them. Although Turow asserts that consumers won’t know when the marketplace is discriminating against them, it doesn’t take much crowdsourcing to uncover truly abhorrent behavior by retailers. It’s true that companies know where to find consumers and how to push their levers; however, as anybody who works on social media for airlines will tell you, consumers know where to find companies, too. That said, The Aisles Have Eyes should be regarded as a wakeup call. Turow’s best books books best 2017 dark vision may never come to pass. But it’s worth thinking about how the powerful forces and tools already in place could make a discriminatory marketplace an unpleasant reality.

marketing Winning Design Woo, Wow, and Win: Service Design, Strategy, and the Art of Customer Delight provides a bracing counterbalance to The Aisles Have Eyes. Its authors, Thomas A. Stewart, director of the National Center for the Middle Market at Ohio State University (and a byline familiar to readers of s+b), and Patricia O’Connell, president of Aerten Consulting, put the voice of the customer front and center.

146 Rather than viewing a customer as a mark to be manipulated or a source of data, Stewart and O’Connell regard each customer as “an active, and quite possibly idiosyncratic, participant in the creation of value.” The concept of “service design” essentially describes the components and strategies companies put in place to attract and keep customers. “The experience of customers propels forward your work to improve the experience of customers — customer feedback becomes customer feed-forward — and you are measuring both the input and the output,” they write. Indeed, Woo, Wow, and Win is what might be called a post-marketing book. It views the act of winning over customers not as a series of tag lines and media issue 89 buys leading to purchases, but as a set of customer experiences, which, when

handled appropriately, can drive business forward. strategy+business A brand such as Dunkin’ Donuts, as the book emphasizes, is all about service design. It knows its customers are on the go and builds everything around that truth, by operating drive-through stores, picking quick-serve menu items, serving some food in cupholder-sized containers, and developing an on-message tag line (“America Runs on Dunkin’”). By providing caffeine, sugar, carbs, and protein, the brand literally fuels its cus- Woo, Wow, and Win views tomers’ journeys. the act of winning over Good service design can help com- customers not as a sale, panies define who their optimal cus- but as a set of customer experiences, which can tomers are — and who their sub optimal drive business forward. customers are. Your company can “ar- range the links of your value chain to books best 2017 capture and encourage the customers you want, while siphoning away customers whom you cannot serve profitably or well,” the authors write. Indeed, as that quote makes clear, one strength of the book is its willingness

to eschew marketing orthodoxy. In fact, the first of its five service design prin- marketing ciples is “The Customer Is Always Right — Provided the Customer Is Right for You.” In short, there’s no business sense in bending over backward for a customer who’s not a fit for what you’re selling. These guardrails are important. It would be too easy to view service design as trying to please all customers all the time. In fact, there’s a full chapter devoted to what the book calls service design archetypes, from “classic” brands such 147 as Verizon Wireless to “trendsetter” brands such as Warby Parker. Service design changes according to brand type. Those who shop at Costco, listed under the archetype “the bargain,” should not expect the store to stock five different brands of mayonnaise in eight-ounce bottles, or even to give them plastic bags to carry it home in. Costco’s service design needs to hew to what it is: a place to buy large quantities of a limited variety of goods cheaply and conveniently. The authors also throw cold water on the belief that marketers need to “surprise and delight” customers. Delight them, sure. But if servicing a customer requires behind-the-scenes heroics, then the service design is out of alignment. One last thing. Even though it’s easy to think service design applies more to services than products, Woo, Wow, and Win does an exceptional job of explain- ing why many products have become product–service hybrids. One reason people buy computers from Apple or boots from L.L. Bean is that they know those companies will be there for them if something goes wrong. This year’s best business books on marketing may not appear to have much in common. Superconsumers and Woo, Wow, and Win have entirely different views of the consumer in comparison with The Aisles Have Eyes. But one common theme courses through these enjoyable books. The challenge isn’t to understand how technology changes the relationship between people who sell things and people who buy things. We all seem to get that. Rather, the task is to figure out the contours, shape, and rules of the future marketplace. + Reprint No. 17414 best books books best 2017 Catharine P. Taylor [email protected] has covered digital media since 1994, writing for publications including Adweek and Advertising Age. She also wrote the weekly

marketing Social Media Insider column for MediaPost for seven years, and is a program director for the Con- ference Board, managing some of its marketing-focused events.

148 issue 89 strategy+business MANAGEMENT Mind Over Matter by Duff McDonald

Steven Kotler and Jamie Wheal, Friederike Fabritius and Tasha Eurich, Insight: Why Stealing Fire: How Silicon Valley, Hans W. Hagemann, We’re Not as Self-Aware as the Navy SEALs, and Maverick The Leading Brain: Powerful We Think, and How Seeing Scientists Are Revolutionizing Science-Based Strategies for Ourselves Clearly Helps Us the Way We Live and Work Achieving Peak Performance Succeed at Work and in Life (HarperCollins, 2017) (TarcherPerigee, 2017) (Crown Business, 2017) A TOP SHELF PICK best books books best 2017

management

149 ach year, scores of management books claim significant new scientific findings in the pursuit of an unchanging goal: how to perform better, both individually and in groups. But most of those so-called findings are neither scientific nor new. The majority of management writers simply offer up freshly tossed word salads in hopes of E coining that year’s business buzzword. However, a refreshing wave of insight has flooded into the management space in recent years thanks to neuroscience, the rapidly evolving study of how our brains work and how we might use that knowledge to make better decisions, break bad habits, and generally live our best lives. The clear standout in the category in 2017 is Stealing Fire: How Silicon Val- best books books best 2017 ley, the Navy SEALs, and Maverick Scientists Are Revolutionizing the Way We Live and Work. Authors Steven Kotler (The Rise of Superman; New Harvest, 2014) and Jamie Wheal have gifted us with a thrilling tour through worldwide efforts to better harness flow, which is defined as an optimal state of consciousness

management where we feel our best and perform our best. Most books that focus on using neuroscience in order to work better con- centrate on improving our understanding and control of our own brains. But Stealing Fire shows us how to find peak performance through release rather We get in the peak than effort: We get in the peak perfor- performance zone not mance zone not by finding ourselves but by finding ourselves 150 but by allowing our by allowing our sense of self to vanish. sense of self to vanish. The goal is to enter “an elongated pres- The goal is to enter ent,” which researchers also describe as “ an elongated present.” “the deep now.” This concept has been pop ularized in various forms: presence, mindfulness, Eckhart Tolle’s “power of now.” Although they go by different names, the majority of altered states, or flow, share four signature characteristics: selflessness, timelessness, effortlessness, and richness (STER), write the authors. (Their Flow Genome Project is an “interdisciplinary, global organization committed to mapping the genome of flow by issue 89 2020 and open sourcing it to everyone.”)

It’s clear that the search for and sense of the interconnectedness of all things strategy+business isn’t just for yoga class; it’s also one of the best ways to make those mental connections that elude the majority of us during the daily grind. Although the au- books best 2017 thors make the case that we collectively spend US$4 trillion on the “altered states economy” every year trying to achieve STER, we are very much at the dawn of our understanding of it. Indeed, the Navy SEALs, who are legendary for their

ability to shut off the self and merge with the team, go so far as to admit that management they don’t know how to train people to do so. The most they can do is weed out those who reveal that they cannot enter the correct state. “If we really understood this phenomenon,” says SEAL commander Rich Davis, “we could train for it, not screen for it.” But they don’t. Stealing Fire includes a brilliant discussion of the intersection of self-exploration via non-ordinary states and societal control, with clearly written and highly 151 persuasive chapters on why so many people are afraid of the kinds of things that flow researchers talk about. And we learn that at the highest levels of corporate America, flow is taken very seriously. One of the reasons Eric Schmidt found himself at the head of the pack of candidates to become the CEO of Google was that he was the only one of hundreds of candidates to have attended Burning Man — a festival associated with the search for flow. That impressed cofounders Larry Page and Sergey Brin as much as anything else on all the hundreds of re- sumes they reviewed, according to the authors. There’s an extremely wide range of opinions about the benefits — or harms — of drinking Red Bull (full disclosure: This reviewer is a fan, and has written a profile of founder Dietrich Mateschitz). But Kotler and Wheal remind us of a few factors that differentiate the energy drink giant from 99.99 percent of its corporate brethren. In 2013, for example, the company cosponsored the Red Bull Hacking Creativity project with the MIT Media Lab, the largest meta-analysis of creativity research ever conducted. One of the conclusions was that the reason we find it so difficult to teach creativity is that we confuse it for a skill; in reality, it’s more like a state of mind. The same might be said for Red Bull — it’s less an energy drink company than a champion of a carpe diem, YOLO way of living. You know, the approach most likely to lead you to flow. The ideas that Kotler and Wheal are homing in on and illuminating through their Flow Genome Project are some of the most important ideas in the history of exploring not just the self, but life itself. We might call it different names, but best books books best 2017 that place where action and awareness merge is the place we should all be aiming for. This is the rare management book that really makes you think. And the questions it raises are not easy ones. If we really can let go of our ego and change the “wallpaper” of our minds, ask the authors, what good are the thoughts we

management have been telling ourselves? If we are not our thoughts, who are we?

The DNA of Performance The Leading Brain: Powerful Science-Based Strategies for Achieving Peak Perfor- mance is a more trad itional entry in the neuroscience-and-work realm. Authors Friederike Fabritius (a neuropsychologist) and Hans W. Hagemann (a leadership

152 consultant) have produced a smartly written examination of our current understanding of the neurochemicals they refer to as the “DNA of peak performance”: dopamine, noradrenaline, and acetylcholine. Dopamine helps update information in your memory and affects your ability to focus on a given task. A so-called novelty transmitter, it has the strongest effects when the stimulus that generates it is new. Learning is easiest, as we all know, when it is fun. Noradrenaline, whose primary purpose is survival, regu- lates your attention and alertness. Recent findings show, not surprisingly, that we achieve optimal noradrenaline levels when we are slightly overchallenged. And acetylcholine ties it all together. Comparing the “DNA” to photogra- issue 89 phy, the authors suggest that noradrenaline prompts you to point your camera

in the right direction, dopamine lets you zoom in until the composition is just strategy+business right, and acetylcholine sharpens the focus. If you get only two of those ingredients right, you’ve got one of the millions of snapshots living in the phones in our pockets. Get all three right, and you’ve got a work of art, or optimal performance. The authors also remind us of the important point that we are not all wired the same way, and one person’s optimal state of emotional arousal could be another’s recipe for a nervous breakdown. The key, say the authors, is to know yourself (via serious self-study) well enough to figure out how to best regulate your emotions and focus your attention on the kinds of tasks you are well suited to. The way to do that is to train your brain by teaching its weaker but more sophisticated conscious regions how to reliably outsmart its stronger but more unconscious parts. Who among us has not been poorly served by a runaway fight-or-flight re- books best 2017 sponse in an unexpectedly uncomfortable moment with our boss? And how can we do better grappling with it in the future? By eating well, sleeping well, re- membering to breathe, and exercising regularly. Although that isn’t exactly news,

neither is the fact that failure on one or more of those four fronts is how most of management us usually enter the realm of self-defeating behaviors. Correct for those, and then start using some of the authors’ tricks such Train your brain by as “cognitive reappraisal” to expand the teaching its weaker space between stimulus and response and but more sophisticated do a better job of operating within it. conscious regions how to reliably outsmart That’s the elongated present again, 153 its stronger but more the deep now. Maybe one day, we can hold unconscious parts. meetings there as well. And why wouldn’t we want to? According to a decade-long McKinsey study, productivity increases fivefold when top executives are in flow. Although such a precise statistic kind of misses the point — MBAs and their measuring sticks can help us analyze ourselves to death, but MBAs are not the first people you should call if you want to harness altered states — the fact that it’s being studied at all is a good thing. Of course, it will be difficult to truly find ourselves in flow unless we give up on mass delusions such as multitasking’s effectiveness and start to make con- certed efforts to reduce, not increase, the digital distractions. Searching for Insight Tasha Eurich’s Insight: Why We’re Not as Self-Aware as We Think, and How See- ing Ourselves Clearly Helps Us Succeed at Work and in Life is an earnest if simpli- fied survey of the burgeoning subject of self-awareness. Eurich, an organizational psych ologist, researcher, and entrepreneur, is less inclined to hard science than the authors of Stealing Fire and The Leading Brain, but Insight does indeed offer insight into the difficul ties of exercising mind over matter. Such as: Self-awareness can be difficult to come by, even for those who write about it pro fessionally. Eurich recounts the time she gave a “closing keynote” at a conference and didn’t feel so good about it but it turned out that the audience loved her. Eurich posits a softer understanding of the impact of mindfulness. She in- best books books best 2017 forms us that em ployees who lack self-awareness reduce “decision quality” by an average of 36 percent, and increase conflicts by 30 percent. (These are tough metrics to quantify.) But Eurich’s tendency to use her own experience as proof of the quality of her own ideas shows the dangers of circular self-examin ation.

management Although she was first skeptical of the benefits of meditation, she tells us, a one- week retreat at the Shambala Mountain Center allowed her to “finally get it.” But The best you can do is then she ceased the practice within days prepare yourself — and because, as she puts it, “non-meditative your brain — to be ready when you really need techniques just work better for me.” it, and hopefully your 154 The benefits of mindfulness and neurotransmitters will meditation are well documented by do their thing when you now, but the fact is that, as Eurich her- need them to. self demonstrates, a true increase in self-knowledge is one of those things that you can’t force or buy at the gift shop during a spiritual retreat. Don’t get me wrong. I’m sure Shambala is a beau- tiful place, and I’m all in on the benefits of mindfulness and meditation. But you don’t have to trek to remote Colorado to enjoy them. If you haven’t tried Headspace or the Oprah Winfrey/Deepak Chopra meditation apps, get them. They’re both great. issue 89 Like anything worthwhile, meditation, mindfulness, and insight all take

commitment and practice. And the best you can do is prepare yourself — and strategy+business your brain — to be ready when you really need it, and hopefully your neurotransmitters will do their thing when you need them to. To that end, it cannot hurt to remind yourself of the things you really want from your brain, and Eurich is certainly correct in her suggestion that increased self-awareness should rank high among them. But her contribution to the canon reads less like scholarship than like a spiel from someone who’s read the first two books and is telling you how her own life is a reflection of all the learnedness within. This is an annual best business books survey of works about management science, with the goal of helping you prioritize your reading. And being mindful of your time, I’d like to propose a small twist. Read Insight if the concepts of neuroscience and its relationship to management are relatively new to you. Read Stealing Fire and The Leading Brain to take a deeper dive into the topic. books best 2017 If you’re intrigued and seeking even more knowledge, you should also pick up Your Brain at Work, s+b contributor David Rock’s groundbreaking 2009 contribution to the canon. +

Reprint No. 17415 management

Duff McDonald [email protected] is a columnist at the New York Observer and author of The Gold- en Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite (HarperCollins, 2017). 155 Top

Shelf INNOVATION STRATEGY NARRATIVES

best books books best 2017 s+b’s Select Andrew McAfee and Erik Leonard Sherman, If You’re Cyrus Bozorgmehr, Once Upon a Brynjolfsson, Machine, Platform, in a Dogfight, Become a Cat: Time in Shaolin: The Untold Story Crowd: Harnessing Our Digital Strategies for Long-Term Growth of Wu-Tang Clan’s Million-Dollar Best Future (Norton, 2017) (Columbia Business School Secret Album, the Devaluation of Publishing, 2017) Music, and America’s New Public Business Enemy No. 1 (Macmillan, 2017)

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LEADERSHIP ECONOMICS MARKETING MANAGEMENT 156

Sam Walker, The Captain Class: Walter Scheidel, The Great Eddie Yoon, Superconsumers: Steven Kotler and Jamie Wheal, The Hidden Force That Creates Leveler: Violence and the History A Simple, Speedy, and Stealing Fire: How Silicon Valley, the World’s Greatest Teams of Inequality from the Stone Sustainable Path to Superior the Navy SEALs, and Maverick (Random House, 2017) Age to the Twenty-First Century Growth (Harvard Business Scientists Are Revolutionizing (Princeton University Press, 2017) Review Press, 2016) the Way We Live and Work (HarperCollins, 2017) issue 89 strategy+business Burn Your Rule CHIPOTLE TAKES Book and Unlock the ANOTHER HIT Power of Principles TO REPUTATION, STOCK PRICE Clear and simple shared The recent closure Liberate Your of a burrito shop for objectives nurture Team with Clearer possible norovirus shows how vulnerable employee energy, ideas, Processes a company’s image is How the right type of in the digital age. and commitment. structure frees your MICHELLE ERIC J. employees from rework GERDES MCNULTY and hassles.

ELIZABETH DOTY Recent HOW TO MAKE INNOVATION posts on STRATEGY WORK ALIGNING TECHNOLOGICAL s+b Blogs INVESTMENTS WITH BUSINESS GOALS AND Visit strategy-business.com/sb-blogs for your index to the best thinking in business UNDERSTANDING HOW THEY AFFECT REAL USERS SHOULD Looking for a Better IT Project HELPS ENSURE A GREATER COMPANIES Manager? Try the RETURN ON INVESTMENT. Hybrid Model MIMIC APPLE’S As business and TOM OPEN FLOOR technology strategies PUTHIYAMADAM become more integrated, PLAN? companies need an IT manager who can watch It’s not an open- the bottom line and and-shut case communicate, as well as do the hard coding. IMPROVING COMPANY CULTURE when it comes IS NOT ABOUT PROVIDING MATT to optimal PALMQUIST FREE SNACKS office design. Why organizational culture is not the same thing as employee engagement. DANIEL GROSS ALICE ZHOU THOUGHT LEADER The Thought Leader Interview: Jeremy Rifkin

The influential economic theorist looks ahead to a world of virtually free energy, zero marginal cost production, and widespread abundance, and to a desperate race against climate change.

BY ART KLEINER AND JULIETTE POWELL thought leader Photograph by Hector Emanuel 158 thought leader 159 ------). And his yet overned by a highby overned (Penguin, 2009); (Penguin, The The Empathic Civiliza Empathic The omy g omy The Zero Cost The Marginal strategy+business her of of her lis ousness in a World in Crisis in a World in ousness ly be replaced by a more distributed and stream distributed a more by replaced be ly sci n ngers of climate change of extinction. ngers and species itab bal Co bal ing da bot-driven manufacturing. But only a few people are thinking a few people manufacturing. only But bot-driven ost people in the business world are aware of the convergence of com of theconvergence are aware of world in the business people ost the shift fossil in energy from technology, and communications puter self-driving vehicles toward and the movement fuels renewables, to and ro

Rifkin his thesis in outlined three books: successive According to Rifkin,According to system will possible made be economic this hybrid new This systemic approach to the industrial future is the domain of economic the industrial to future economic isThis the of domain systemic approach

(Palgrave Macmillan, 2011); and Macmillan, (Palgrave 2011); and World the omy, Third Industrial Revolution: How Lateral Power Is Transforming Energy, Econ the Revolution: Industrial Transforming Third Lateral Is Power How happen during the next 40 years or so, he says, unless they are cut short by the unless says, by he they during short theare next 40 years so, cut happen or manageabundance shared and — the use goodsof and services. Theseshifts will tion: Race The to Glo goodsand services will learn to to willhave and economies near zero, to dwindle increas exponentially world he envisions, the costs of producing and delivering an and array increasing delivering of the producing costs of envisions, he world facilitated by innovations such as the Internet of Things of In the and blockchain. as such the Internet innovations by facilitated through the provision of solar, wind, and other renewable energy on demand, energy on renewable wind, and other solar, of through the provision lined network-based capitalism, alongside a sharing econ alongside capitalism, network-based lined globaltech commons. mediate returns,mediate will inev technological issues and a lecturer in the executive education program at the Uni at program education issues and in a lecturer the executive technological China), with along of Republic the People’s of and the leadership Commission, PwC, (including many companies the pub theorist Jeremy Rifkin. Jeremy and Rifkin, theorist economic on commentator is a longtime 72, the European of the president Germany, of leadership the top (including state of matic reduction in ecological footprint. reduction matic heads to is a consultant He Finance. Wharton of School Pennsylvania’s of versity and education — to generate rapid, widespread growth a draby accompanied widespread rapid, generate — to and education with changes in advancedmanufacturing, systems, agriculture, water healthcare, intensively about how all — how changes thesealong technological about willtogether fit intensively of thermodynamics. Investor-based capitalism, which focuses resources for im focuses which capitalism, for resources thermodynamics. of Investor-based capitalism and fuel the are fossil industries hitting the laws limits from that stem logic is controversial in many business circles. He argues, that example, both He for circles. in many business is controversial logic M Art Kleiner Juliette Powell kleiner_art@ [email protected] strategy-business.com is a business and technology is editor-in-chief of journalist. She is the author strategy+business. of 33 Million People in the Room: How to Create, Influence, and Run a Successful Business with Social Networking (FT Press, 2009).

Society: The Internet of Things, the Coll abora tive Commons, and the Eclipse of Cap- italism (Palgrave Macmillan, 2014). His ideas were featured in a 2017 documen- tary film,The Third Industrial Revolution (Vice Media). Two massive initiatives for which he is an advisor — the E.U.’s “Smart Europe” and China’s “Internet Plus” — are, in a sense, manifestations of his world view. Even those who do not agree with Rifkin’s theory that capitalism is in the midst of a fundamen tal transformation must respect the exponential power of the forces he is tracking. Intelligent technology, in particular, is expanding at an ever- increasing rate, lowering costs, replacing human labor, tracking human activity, and making many new things possible — which could be the “dark net” of authoritarian surveillance or a broadening of wealth and quality of life. Rifkin sat down with strategy+business in late Aug ust at the Bethesda, Md.–based headquarters of his primary organization, TIR Consulting Group, to explain his arguments in greater detail. thought leader

S+B: The “zero marginal cost society” concept suggests we’re heading into a time of abundance that will radically change the way people live. How did you come to this idea? RIFKIN: In the early 2000s, I was teaching in the advanced management program (AMP) at Wharton Ex ecutive Education. It had been clear, even before the issue 89 dot-com bubble collapsed in 2000, that the digital rev olution was forcing down fixed and marginal costs in information and communications technology in an

exponential way, as described by Moore’s Law. strategy+business 160 thought leader 161 - - - - lly zero, lly zero, tua BM felt, starting felt, BM ure I tinued to plummet, where where plummet, to tinued In our AMPIn our classes, I introduced mainframecomputer. But as competi com of increased, and the price tion con puters from? That come profits their would shift, to them led in part, managing to services. information and that thethe digital idea revolution,

st of streaming is vir of st the music

al co al costs are taking the costs scale, of to and these had al a product At the time, yes. But we saw that this might soon apply to other parts other to of that saw this apply we soon might At the But time, yes. But this applied only to digital media. digital to But this applied only Margin utives, said out loud that they had a problem. Their cash Their was cow the big that they had problem. a loud said out utives, forcing down costs.” the digital revolution was revolution digital the “It had been clear, even even clear, been had “It 2000, in collapsed that exec bubble dot-com the before the economy as well. One major signal, for us, wassignal, for the press major One as well. the economy top with the company’s a retreat at [Then CEO] Lou Gerstner, in the mid-1990s. S+B: RIFKIN: whether you stream a thousand or a million copies. Newspapers, television, re television, Newspapers, stream a million copies. you a thousand or whether to record a song, the margin a song, record to cord labels, and the film industry discovered that they could no longer rely on rely labels, and the filmlonger cord no industry that they could discovered advertising. especially models, if business they involved old their ready gone to near zero in media and software. Once you’ve paid the fixed costs near in media and zero to software. you’ve gone Once ready business model. business of capitalism. But it would also a radical would force shift it the capitalist But capitalism. in the nature of of dropping of marginal costs down to near zero, represented the ultimate successthe ultimate marginalof represented near zero, dropping costs to down S+B: By capitalism, you mean market-based economies, governed by the laws of supply and demand, without government controls. RIFKIN: By capitalism, I mean a par ticular type of market economy where the investors, owners, managers, workers, and consumers are all separate people. Capitalism of this sort is only 200 years old. Let’s step back for a moment and consider how the great economic transformations in history occur. There have been a number of them in world history, and they all have a common denominator. At a single historic moment, the same three defining technologies emerge and “There have been a converge to create a new gen eral- number of great economic purpose technology infrastructure. transformations in world They fundamentally change the way society manages, powers, and moves history, and they all have a economic activity. The three technolo- thought leader common denominator.” gies are new communication systems that manage economic activity more effectively; new sources of energy that power the activity more efficiently; and new modes of mobility that move the economic activity more rapidly. This changes society’s spatial temporal orientation, its business models, its forms of governance, and even people’s cognition and consciousness. For example, consider the first Industrial Revolution, which took place in issue 89 the 19th century. Before then, there were very few large businesses. Most mer-

chants owned the tools they used — the means of making, delivering, and trad- strategy+business 162 thought leader 163 ------ers ons, ons, pap ati ic activity and the geographic expansion of markets. activity of expansion ic and the geographic nom We saw that the productivity potential of the second industrial revolu the second of potential that saw the productivity We

And by the early 2000s, you were saying that way of life was obsolete. of life saying that way were 2000s, you And by the early

These technological changes were so broad and complex that they required and complex changes broad so These technological were A second industrial revolution followed in the early 20th century. This in the early in 20th century. followed industrial revolution A second a new form of management. Railroads management. of form a new becamebusi modern thecapitalist first RIFKIN: S+B: 1900, in than less transformed. had been 40 years, the world 1900, use, around 1860, modern capitalism rolled out quickly around the world. By By the world. quickly around out capitalism rolled modern 1860, use, around and shareholders separated from the business. Once all three technologies were in all were Once the business. three from separated technologies and shareholders ness corporations, with thousands of employees, vertically oper integrated with employees, thousands of corporations, ness a new form of energy, made it possible to manage production at a much larger a much at manage to production possible it made energy, of form a new eco of moving making possible national and even global markets. andmaking even national coal-based The steam engine, possible rails, on loco giving wasThat system a national engine of rise put to then scale. further transportation, the speeding managing,motive-based up and powering, tems. The invention of the telegraph annihilated time, the telegraph and of space compressed invention The tems. ity. The steam-powered printing press, which made possible cheap news cheap possible made which press, printing steam-powered The ity. more This enabled books, transformed communications. and mass-produced sys school public compulsory be could textbooks, there with literacy; widespread ing goods. Then came new technologies for communications, energy, andmobil energy, communications, for ing came goods. Then technologies new tion technology infrastructure technology tion had run a dramatic Meanwhile, course. its reduc in fixed tion marginaland commu costsand had occurred already in computers second industrial revolution’s juvenile infrastructure juvenile in in the place Unit was put industrial revolution’s second half the 20ththe second of century the industrial across world. of the internal combustion engine for road, rail, water, and airThe transport. rail, water, road, for engine combustion the internal of finally and it II, matured in War and World Depression the Great the coming of volved the invention of the telephone and, later, radio and television; the wide radio and television; and, later, the telephone of the invention volved fuels; fossil grids; use electricity of of spread and the laying the introduction out with growth Its was interrupted and 1929. between and 1905 elsewhere ed States nications, and would probably occur elsewhere as well. And as this happen ed, it would change the economy so that neoclassical economic theory would no longer suffice to describe it. The world was entering a third industrial revolution — a digital revolution. [Note: Although the numbers differ, what Rifkin calls the third industrial revolution and the broad technological shift known as “Industry 4.0” are roughly the same movement.] In a digitally connect ed society, the marginal costs of an increasing number of goods and services would fall to near zero. This would force a fundamental change in prevailing business models: from markets to networks, from ownership to access, from work ers to “prosumers” [individuals who pro duce as well as consume goods and services distributed on the Web], from sellers and buyers to providers and users, and from con sum erism to sustainability — and the second industrial revolution’s economies of scale would no longer apply. The communications part of it had already happened: In ex pensive computers and the Internet existed, and the smartphone had just been invented. It took a while to see that the same phen omen on could occur in the world of atoms, and dramatically reduce the cost of energy, mobility, and other goods and services.

The Next Infrastructure thought leader S+B: So when you say “third industrial revolution,” what change are you referring to? RIFKIN: A new technological infrastructure is gradually coming together, brought on by digitization. The process began with the maturation of the communications Internet over the past 25 years. Now this is converging with a second Inter- net, this one for renewable energy. It’s a new digital power grid, stretching across continents, which allows millions of people to produce their own wind and solar issue 89 electricity and send their excess power generation back into the system. Both of

these Internets will converge, during the next decade, with an emerging digitized strategy+business 164 thought leader 165 ------n pea yment of a smart of digitalyment plo nt of the European Committee of the Regions, in an the Regions, of theEuropean Committee of nt ide It’s already happening in some places. Germany places. hasbuild quietly already been in some happening It’s Where will this shift happen first? Where On a parallel track, I have worked with three presidents of the Euro of with three a parallelOn presidents worked track, I have Since then, Germany has been working on all Germany has on working then, been threeSince fronts: the digitization Commission in charge of the E.U. Energy Union and andSmart Mark Europe, Energy Union in charge the E.U. Commission of ku Markkula, the pres In February 2017, I joined Maroš Šefcˇovicˇ, the vice president of the European of the vice president Maroš Šefcˇovicˇ, I joined In February 2017, Jean-Claude Juncker — in the conception and de — in the conception Juncker Jean-Claude the European Union. states of all across member 28 third industrial revolution Commission — Romano Prodi, José Manuel Barroso, and the current president, president, and the current Barroso, Manuel José Prodi, — Romano Commission RIFKIN: emerging sharingemerging economy. S+B: tion, energy, and mobility partially and mobility in the capitalist energy, market and partiallytion, in the water, and air systems. These three systems share communica to water, will allow people mobility Internet composed of increasingly autonomous electric andfuel-cell electric - ve autonomous increasingly of composed Internet mobility smart marginal rail, energy on road, near-zero by cost renewable operated hicles industrial revolution paradigm. Almost immediately, she and her colleagues and her re she paradigm. Almost immediately, industrial revolution economy. She and a third transforming I discussed of She Germany into the potential economy. Stein Frank-Walter president officials including there, government with senior energy than the energy industry inin the of renewable rest combined. became chancellor in 2005, she asked me to advise her on growing the German on advise her asked to me she became chancellor in 2005, closely working been I have and mobility. energy, renewable communications, of through re produced German is of now electricity one-third in place, they put jobs are more there and now this jobs way, net thousands of of hundreds created ing out the necessarying out infrastructure years. When Angela thepast 10 for Merkel in the third leaders industrial revolution. world become to solved the plan Under minister Sigmar Gabriel. and vice andchancellor economy meier marginal near-zero at costs. Installing energy, solar and wind technolo newable least duringthisat Germany has transition. intensive, labor giesis tremendously nouncing the launch of the Smart Europe in it iative. A ¤631 billion [US$744 billion] kitty for investment — the Juncker Fund — will now be partially available for its deployment. The other center of activity is Chi na. When President Xi and Premier Li came into office, Premier Li published his official biography, which mentioned that he had read [my book] The Third Industrial Revolution and had instructed the central government to pay close attention to the narrative and proposals outlined in the book. President Xi and Premier Li realized that their country had been locked out of the first Industrial Revolution and much of the second, and they didn’t want to lose out on the third. Shortly after the first of several formal visits I had with Chinese leaders, the chairman of the national electric power grid announced an [US]$82 billion commitment to digitize the state electric power grid in the current Five-Year Plan. Millions of Chinese people can produce their own solar and wind power, and use it locally or sell it back to the grid. With the thought leader Belt and Road project, they’re moving the same technologies to other countries. China calls this digital transformation the Internet Plus revolution, which is similar to the Smart Europe initiative. Of course, China is still one of the world’s largest users of fossil fuels, but that is rapidly changing. Parts of the U.S. are also moving in this direction, without much government involvement: California, Oregon, Washington state, New York, New Eng- land, and the San Antonio–Austin area in southeastern Texas. There are wind issue 89 farms in the prairie states and many large companies and small entrepreneurial

startups, all hoping to lead the transition. strategy+business 166 thought leader 167 - - - - - aseaggregate efficiency cre The carsThe and trucks that are left duction and consumption and related and related and consumption duction agricultural likely practices. We’ll in the vehicles of eliminate 80 percent as we in the next two generations world shift car to and truck sharing pro [via] vider–user networks. will in effect, become, rolling, mobile distributed data centers outfitted with

ity in car-sharing the marginal Meanwhile, networks. costs of bil Already, millions of people use car-sharing networks asprimary their people millions of Already, ductivity, while dramatically ecological footprint. ductivity, reducing mous, self-driving electric vehicles operating with near-zero marginalwith near-zero operating costvehicles self-driving electric mous, o What about mobility and communications? The payback for renewable energy is much more rapid than people think. than rapid people more energy is much renewable for payback The mode of transportation. Millennials don’t want to own automobiles. They want automobiles. own to want Millennials transportation. of mode don’t any. The sun and wind haven’t sent us a bill. sent sun The and wind haven’t any. nology is just now reaching a tipping point. As for the marginal costs, there aren’t As the marginal for point. reaching aren’t costs, tipping a there now is just nology August 2017, it’s 55 cents. By 2020, it will be 35 cents. The viability of the tech viability The of cents. will it 35 be 2020, By cents. 55 it’s August 2017, In 1979, the fixed cost of producing one watt of solar electricity was $79. of wassolarof electricity As watt one $79. producing the fixedof cost In 1979, The fixed costs — materials and installation — have gone down exponentially. fixedThe down exponentially. costs — materials installationgone and — have and pro 400,000 of its motor trucks This with willsensors. motor 400,000its in of be 35be cents.” cents. Bycents. will 2020, it “In 1979, the fixed cost fixed the 1979, “In 55 it’s As 2017, August of solar electricity was $79. solar electricity was $79. renewable energy will plummet. Drones will also operate with near-zero mar will with near-zero also energy will Drones operate plummet. renewable watt one of producing of access mo to auton RIFKIN: S+B: cause global warming after of the third emissions, buildings major and beef pro ginal costs. Today, there are about a billion cars, billion a buses, and trucks, are about there and they are ginalcosts. Today, than and Daimlermore logistics. has already outfitted availability, quietly house sensors that pick up and share information on traffic, weather conditions, ware traffic, on and shareconditions, weather up information that pick sensors The Key to Productivity Growth

S+B: Doesn’t this contradict what people like Robert Gordon and Erik Brynjolfsson have been saying about productivity growth — that it is not likely to pick up again? RIFKIN: They haven’t taken aggregate efficiency into account. Aggregate efficiency is the ratio of potential work to the actual useful work that gets embedded into a product or service. The higher the aggregate efficiency of a good or service, the less waste is produced in every single conversion in its journey across the value chain. A few economic researchers, like physicist Reiner Kümmel at the University of Würzburg and economist Robert Ayres at INSEAD, have reconsidered productivity in re cent years. Traditional economics says you increase productivity by investing more capital in better machines and by providing better-performing workers, all of which reduces the fixed and marginal cost of production. But these factors account for only about 14 percent of productivity. Much of the rest of productivity is accounted for by the improvement in aggregate efficiency in the managing, powering, and moving of economic activity. Aggregate efficiency works the same way in economic production as it does thought leader in nature. When a lion chases down an antelope and kills it, only about 10 to 20 percent of the entire energy in the antelope gets embedded into the lion; the rest is heat lost in the transition. So the lion’s aggregate efficiency is only 10 to 20 percent. If it could consume more of its prey’s energy, or use less of its own in the hunt, the lion would gain productivity as a predator. Economists are now learning that aggregate efficiency is a critical determin- er in productivity growth. In the past, economists have missed this because they issue 89 have not been trained in thermodynamics; chemists, engineers, biologists, and

architects get it. strategy+business 168 thought leader 169 ------ing the ecological foot duc tats, assembly lines, appliances, lines, appliances, tats, assembly mos ncy in the U.S. production of goods and services. of Mass production ncy in the U.S. cie fi fi ficiency and productivity while re while productivity and ficiency ic ef ic When the second industrial revolution began around 1905, there was about was there about began 1905, around industrialWhen revolution the second Now, with the digital third industrial revolution more fully under way, ag fully way, more under with the digital third industrial revolution Now, The impact will be immense. For instance, an improvement of just 1 percent 1 percent just of instance, will impact The an For immense. be improvement the economy, with the ability to mine it and use predictive analytics and use predictive it mine with the ability to improve to the economy, one will have a transparent picture of all the economic activity all flowing willof through transparent a picture theeconomic one have thermodynam technology is embedded in homes, offices, factories, offices, infrastructure, and factories, in homes, is embedded technology every those devices can be interconnected through the Internet. When intelligent Whenintelligent through devicesthose the Internet. can interconnected be embed them in devices: them trillions of embed ther allWith the IPv6 and gathering more, data. protocol, equipment, warehouse through chains. value their the world at 20 percent aggregate efficiency. wasThat ceiling, aggregatethe productiv efficiency. and percent 20 at the world in managing,productivity goods their and and services moving powering, percent aggregate efficiency; Germany had reached 18.5 percent; and Japan ledJapan and percent; 18.5 aggregate efficiency; reached Germany percent had infrastructure significantly can increase aggregatetheir longer efficiency no and tions, fossil fuel–based fossil tions, trans energy systems, combustion–driven and internal 13 around was to up the U.S. century, the beginning the21st By of portation. industrial revolution theity second growth stagnated. into Businesses that plug production methods dramatically improved this level, and productivity rose as rose a methods dramatically and productivity this level, production improved 20th-centuryof the efficiency limits to telecommunica were there But result. 3 percent aggregate ef 3 percent in aviation engine fuel efficiency, which GE posits as a baseline for its newits sys baselineas a for posits GE which fuel engine efficiency, in aviation print of economic activity. economic of print chain be value would intelligent The years. 15 over $30 billion save would tems, identification chips is, for the first time, dropping low enough toenough to us low allow firstfor the dropping is, time, chips identification that we talked about. Another is the Internet of Things. The cost of sensors and Things. sensors of cost The of is theAnother Internet that talked we about. factors are the vastly reduced costs of communication, energy, and transport energy, are communication, costs the vastlyfactors of reduced gregate efficiency is about to rise again — perhaps exponentially this time. Two Two this exponentially time. perhaps — to rise again efficiencygregate is about continually learning how to create, use, upgrade, recycle, and reuse physical goods at an ever lower cost. We’ll have an economy of partial abundance, full of many nearly free products and services provided at near-zero marginal cost.

S+B: What would living in that economy of abundance be like? RIFKIN: We’re witnessing the birth of a new economic system: a hybrid of the existing capitalist structure and the sharing economy. Most of the goods and services that [make up our] quality of life will be much less expensive. It will be easier to broaden prosperity, without having to fight over scarce resources, in part because it will be much eas ier to make “We’re witnessing the the most of the resources we have. birth of a new economic Cooperatives, free services, and system: a hybrid of app-based resource-sharing enterprises will crowd out some — but not all — the existing capitalist of the incumbent corporations that de- structure and the pend on fixed-cost business models. sharing economy.” We already saw this with digital communications. Whole industries were disrupted: music, television, newspapers, publishing, magazines, educational me- thought leader dia. But new businesses emerged, and not just the major platforms like Facebook, Google, and Amazon. Millions of individuals are producing and selling or sharing virtual goods, like music, videos, and writing, at near-zero marginal production cost, using blogs and social media to find audiences. Millions of students are taking massive open online college courses and getting college credits. The most notable is Jimmy Wales’s experiment with Wikipedia: It’s the sixth-largest website in the world, operated with $50 million in donations a year. For the first time issue 89 in history, the knowledge of the world is being democratized: People from all

walks of life have constructed it in a peer-reviewed platform, with accuracy at strategy+business 170 thought leader 171 ------Investor capitalism won’t disappear; it will live side by side with the sharing side by disappear; will side it live capitalism won’t Investor The four largest German power companies — EnBW, RWE, E.ON, and RWE, E.ON, largest — EnBW, four companies The German power interest loans from the banks and put up solar and wind generation installations. the banks solar and loans from wind generation up interest and put small business groups or urban neighborhood associations — have received low- received have — associations urbanor neighborhood smallgroups business economy. In the emerging era, the cooperative form of business isreinvigo being business of form era, the cooperative In the emerging economy. small by and cooperatives: companies democrati is rest generated The country. run farmers, others by representing — some cooperatives These electricity new they own only about 5 percent of all of energy in the installed 5 percent renewable capacity of about they only own the country. across energy that generate the smallrenewable players of gators sources or amplifying or sources text their information. with additional like in industries agricul in them, work and a half A billion people 20th century. collabo as that such to make easier blockchain, tools, it arethat IT-based there together, years. market But and electricity for the power — dominated Vattenfall and aggre in Germany companies are- becoming distributors power four the big least equal to that of top-down encyclopedias. When anyone puts something up up something puts When encyclopedias. anyone least equal top-down that of to checking within hours, Wikipedia, all their crawling it on are over people there the because a digitally lateral scalingrated by of inter advantages possible made marginal already with suc near-zero were cost. There global economy connected dating the early them to many back of cessful the world, around cooperatives life new banking, now They have housing, and energy. ture, production, food and the digitally because the scaling by rate, of inter advantages possible made connected global economy. least At of members. to two callygo the managed in the profits which enterprises None of these companies defaulted on their loans. Instead, they sold their extra energy back to the power grid. Cooperatives scale more efficiently than the large incumbent power companies. There are similar electric power cooperatives in the United States.

Abundance and Its Discontents

S+B: What effect will this have on today’s energy and transportation industries? RIFKIN: The legacy fossil fuel industries, and the countries that depend on them, will suffer. According to a recent study by Citibank, the energy industry and power and transmission companies today are sitting on potentially $100 trillion in strand ed assets. These include exploration rights, leases, and infrastructure for the extraction of fossil fuel that will be underpriced by renewables. Countries like Saudi Arabia and the Emirates, with oil-based economies, see the disruption coming. So do some of the major oil companies. Other players in the energy industries are simply in denial. But for those that are willing to adapt, there will be some time. We’re not leaving the second industrial revolution entirely tomorrow morning. This is a 30- to 40-year transition stretching over two generations. thought leader “In the end, the economy may no longer In the end, the economy may no be controlled by a small longer be controlled by a small group of centralized, global, vertically integrated group of centralized, companies. The first and second indus- global, vertically trial revolution infrastructures were integrated companies.” centralized, proprietary, and vertically scaled because the communication, en- issue 89 ergy, and transport technologies worked best that way. By contrast, the coming

infrastructure of 5G communication, renewable energy, and automated mobility strategy+business 172 thought leader 173 - - - - e efficiency gat rced, andrced, laterally scaled. sou One model for this change is in Hauts-de-France — the rust belt of France, France, this of — the rust for change belt model is in Hauts-de-France One second than and 250 more universities seven together brought region The We’ll see a similar kind of change in education. The public school system school see a similar public The change kindWe’ll of in education. all they’re the classroom, millennials Outside an have alternative. Today, trained to be efficient automatons operating machines. If the students share operating in machines. If students the automatons trained efficient be to minutes a bell rings and they move to the next spot on the line. They’re being They’re the line. on the next spot a bell to rings andminutes they move students are supposed to memorize the knowledge and recite it back. Every 50 50 back. Every it and recite the knowledge memorize to are supposed students work teamconsulting revitalize began to with economy, the region working its designed for that time is a microcosm of a factory. The teacher instructs, teacher The and the a factory. of that time is a microcosm for designed that recognizes school kind interconnectivity. of this collaborative global our are industries based. Beginning and auto coal, in steel, 2010, its where andsources, starting enterprises. entrepreneurial and then was only slightly upgraded for the second industrial revolution. A school A school industrial revolution. the second for and was upgraded slightly then only a new toward move to need and sharing We knowledge. their games together, are mining transformingsolar retrofitting with power towns, them wind and old was a great leap forward in the 19th century, but it was introduced to prepare a prepare to was introduced it but century, was forward leap a great in the 19th of officefactoryemployment, and the first industrialrevolution for generation online playing crowdsourcing, They’re smartphones. their learning on together They committees and projects. participating of in scores several thousand people tralized, coming in will and taking others to vulnerable be place. their called cheating. it’s each other, and help formation, with and civil society, community, the business the government, ing alongside monopolize, control, or centralize the or infrastructure it, aggre control, loses monopolize, cen too if they become platforms, giant Internet today’s Even and productivity. works best if it’s distributed, open, transparent, crowd- open, distributed, best if it’s works to attempt With benefits. any everyone the more the network, users on more The eliminate departments, but all teach in an eliminate interdisciplinary but now the departments departments, ary schools in a consortium to think in terms of digital education. They didn’t ary think They to didn’t in a consortium digital of in schools terms education. fashion, with multiple perspectives. The students work in teams, and they have to teach one another, with the faculty operating as guides. They also ratcheted up service learning, so that students at all levels work outside in the communities, and have to teach and learn collaboratively with the community businesses and neighborhoods. There is a robust level of social entrepreneurialism involving students, teachers, and their neighborhoods in ways that generate more positive community value.

S+B: You’ve portrayed the upside, but what about the downsides? RIFKIN: Although the digital third industrial revolution could bring about a more democratic and ecological era, it is by no means guaranteed. I’m not a utopian in regard to technology. Indeed, I’ve been critical of some technologies over the years. There are going to be many political struggles along the way. For example: How do we ensure data privacy when everyone’s connected? How do we prevent cybercrime and cyber terrorism? And how do we prevent Internet companies, the big ones, from monopolizing the platform for commercial purposes and exploit- ing the information they gather? Increasingly, members of the millennial generation are aware that their personal information is commodified and sold to third parties, which incorporate it into algorithms and use it for marketing and other purposes. Authoritarian governments can use that same information to control thought leader what people do politically. These are qualitatively big issues. In Europe now, policymakers are recognizing that these issues of the dark net are as formidable as the possibilities are bright, and they will have to spend at least 50 per cent of their regulatory capac ities managing them. It’s naive to think that com panies like Google, Facebook, Amazon, and Twitter can main tain their current practices with out regulation. issue 89 The battles over this have already started. And the biggest shadow in the room is climate change. Most scientists had

thought that we had another 100 years before facing a significant crisis, but we strategy+business 174 thought leader 175 - - - - Reprint No. 17416 nd future generations and future generations nd ent a ent ction event of life on Earth life on of the course of event over ction tin ipate the feedback loops brought on by global warming by on emissions brought loops the feedback ipate tic Fortunately, the third industrial revolution is based on post-carbon technol is post-carbon based on the third industrial revolution Fortunately, The most recent indicators of change scared of of have the living daylights indicators out recent most The But there may not be enough time to avoid the abyss. The transition would would transition The the abyss. avoid time to enough be not may there But for life itself on Earth. life on itself for the next half century. Even in a world of abundance, climate change of is the dark in a world Even the next half century. pres for opportunities that foreclose could shadow time, taking the sixth us into ex winter storms, dramatic spring flooding, prolonged summer droughts summer droughts wild and dramatic flooding,prolonged storms, spring winter in the clouds and more extreme and unpredictable water events — blockbuster — blockbuster events water and extreme unpredictable and more in the clouds curve a runaway cycles exponential and to are in in real collapsing theup water global warming emissions, the atmosphere is absorbing 7 percent more precipita more 7 percent is absorbing global warming the atmosphere emissions, precipitation and concentrated the oceans, the ground from more leading to tion hurricanes. five Our ecosystemsand fires, catch category and four, cannot three, me. For every one degree rise in the temperature of the planet brought on by by on brought the planet of rise degree in the temperature every one For me. didn’t fully an didn’t the Earth climate change— the more of the process accelerates. warms, the more than less have years 30 effectively civilization. exit a carbon-based to probably We to transition into a more just and ecologically sustainable just civilization. + a more into transition to world over the course of the next 30 years by using the third industrial revolution the years next 30 using the course the of third by industrial over revolution world highly motivated and passionately committed, do something similarsomething the across do committed, and passionately highly motivated installed across much of the United States in less than 40 years. We could, if We in less than 40 years. installed States much of the United across I said, we know it’s possible. The second industrial revolution infrastructure was industrial revolution second The possible. it’s know said,I we have to take place quickly. We would need to make to need the shift would 40 years. in to 30 As We take to quickly. have place cyberterrorism, or natural or cyberterrorism, disasters climate change. from the more resilient the infrastructure resilient cybercrime, is to it the is, more and the vulnerable less ogy. Moreover, it’s inclined toward a highly diverse and distributed infrastruc a highly and distributed toward diverse inclined it’s Moreover, ogy. the networks and systems are, and distributed redundant, diverse, more The ture. Illustration by Elwood Smith Elwood by Illustration - -

BY MATTBY PALMQUIST Want More

once the domain of Smokey Bear and McGruff Smokey Dog, the of domain the Crime once

Give ’Em a Nudge ’Em Give A subtle suggestion from management management from suggestion A subtle

udges, guide their to companies of are an used being by number increasing policy public for Initially conceived a certain behave to way. employees campaigns smoking, quitting in — think about projects government Ethical Employees? a heavy-handed approach is likely to backfire. to likely is approach a heavy-handed

can positively influence employee behavior, but but behavior, employee influence positively can To find the answer, the author of a new study of a analyzed programsnudgingatauthor the find the answer, To Firms also have a vested interest in preventing unethical in preventing and illegal interest also a vested Firms behavior. have Given nudges’ low cost and success in public policy, companies are companies starting policy, cost and success in low public nudges’ Given

large firms. And he found that simply importing public policy–style nudges into policy–style nudges into public importing large simply firms. that found he And corporate realm as it does in the public sphere?” realm in does the as public corporate it creasing organ donation, and not littering — nudges are interventions, sugges are interventions, — nudges littering and not creasing organ donation, changing the better about for reminders or tions, as “Will effectively the raising in boss, the work by the question nudging given But suggestions from government agencies are different from polite reminders reminders polite from are different agencies government suggestions from But nudges to increase employees’ safety and financial increase employees’ literacy. to nudges healthier employees who lower the company’s healthcare costs. firms Other use the company’s lower who employees healthier the vegetables in its cafeterias to steer workers toward good food choices, a bid for for a bid choices, food good toward cafeterias in workers its steer the vegetables to to use them to alter workplace conduct. Google displays photos and facts about photos displays Google conduct. workplace alter use to them to

end page 176 end page 177 - - - + American Business Business American individual choice with rational self-interest with self-interest rational align individual choice

people from acting in self-interest (e.g., fudging expenses). travel (e.g., acting from in self-interest people “Nudging Corporate Compliance,” by Todd Haugh, Haugh, Todd by Compliance,” Corporate “Nudging Successful nudging involves a delicate balance of preserving employee au balance a delicate preserving of Successful employee involves nudging Indeed, a heavy-handed approach may undermine a company’s compliance compliance a company’s undermine may approach a heavy-handed Indeed, “If behavioral ethics behavioral significantly “If does unethicalreduce nudging behavior prevent trategy-business.com/recent_research s More Recent Research at: rational, response. more aggressive; promise unclear benefits; and rely on an emotional, rather rather than aggressive;on unclearemotional, an benefits;rely more promise and personal choice. Further, the study found, nudges that don’t work tend to be to tend work that don’t nudges found, thestudy Further, choice. personal behavior, but it will also spawn a perception of being scrutinized being little will of and given it also a perception but spawn behavior, software will be used to track their work may nudge them toward more ethical more software toward them nudge will may track used be to work their strict or as overstepping. For example, informing employees that monitoring that monitoring informing employees example, For asstrict or overstepping. sense of autonomy. Workers may want to get back at a regime they a regime see as at get back to too want may Workers autonomy. of sense to employees’ eroding by writes, efforts the author and increase unethical behavior, (e.g., smoking is bad for you). But behavioral nudges from companies often aim often companies from nudges behavioral But you). for is bad smoking (e.g., the workplace not only was ineffective, but could backfire. That’s because many backfire.could was only ineffective,That’s but not the workplace seek to nudges policy public file paperwork only if they don’t want to take part, participation rates soar. Point to take want soar. part, rates participation only if don’t they paperwork file in the fight against tool wrongdo in decades unique — a corporate compliance participate, to opt-out, in which workers are automatically enrolled and have to to and have enrolled are automatically in workers which opt-out, to participate, advances important in corporate the most of one be may within it companies, provision is changed from opt-in, which requires employees to fill out forms to forms fill to out employees requires which is changed opt-in, from provision power of nudging when it comes to 401(k) plans. When the default enrollment plans. enrollment When thedefault 401(k) to comes it when nudging of power welfare. own their improves nudge tonomy and articulating benefits. For example, studies have demonstrated the demonstrated studies have and articulatingexample, For benefits. tonomy how the seeto also employees retirement allows of for saving the benefits ing out writes. author the public,” companies, and the employees, ing benefiting Source: vol. 54, no. 4, Winter 2017 2017 Winter 4, no. 54, Law Journal, vol. Meet the next generation of business thought leaders

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