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Islands of Certainty 1

Even more than usual, I see a lot of lytics, and digital fabrication will Pripp note that corporate boards uncertainty in the news these days. transform not just factories but the need technologically savvy direc- Nobody is sure what’s going to hap- entire global value chain. As Rein- tors (page 6). Luis Ballesteros and pen next with the U.S. presidential hard Geissbauer, Jesper Vedsø, and Michael Useem suggest that cor- election, the European Union, or Stefan Schrauf point out on page 86 porations can play a greater role in Asian economies. And yet, as the ar- in “A Strategist’s Guide to Industry helping communities and nations ticles in this issue remind us, there 4.0,” this change will vastly increase recover from crisis (page 16). Roger are some aspects of the future we the capabilities of large organiza- L. Martin, Sally R. Osberg, and Jen- can count on. The development may tions. (For example, exporters will nifer Riel propose a powerful model not always be positive. But there are ship code, not goods, across national for social entrepreneurship exempli- islands of certainty that stand as boundaries.) On page 96, Joseph fied by Nandan Nilekani’s visionary beacons to guide our way through Kaeser, the CEO of the industrial project: digital ID cards for every In- the murky swells of the unknown. giant Siemens, explains how this dian (page 24). And Jorge Camarate, In the cover story, “Global wave of innovation is transforming Peter Hoijtink, and Miles Puttergill Power Shift,” Dennis Chesley, Miles that influential enterprise. offer an approach for building a Everson, and John Garvey outline Another certainty is the value business presence in Africa (page 9). three inevitable aspects of the future of user experience, especially for This issue also contains our that few are prepared for: an increas- employees. Expert Elizabeth Rosen- annual report on the hiring and ingly multipolar global economy led zweig explains why (page 64), with tenure of global chief executives, by the U.S. and China, the contin- an added perspective from Dan “From the Outside In,” by DeAnne ued evolution of state-controlled Bricklin (co-inventor of the spread- Aguirre, Per-Ola Karlsson, and Gary corporations, and dramatic reac- sheet) on page 68. There is also the L. Neilson (page 52). There’s one big tions as companies face technologi- certainty of Moore’s Law, the dou- counterintuitive finding this year: a cal disruption (page 44). One such bling of computer power every two rise in the percentage of new CEOs disruption is cyber-attacks, which years. On page 76, Jeffrey E. Garten, hired from another company. Final- are certain to increase in both fre- the former dean of Yale’s school of ly, we note with sadness the passing quency and ferocity. But David Burg management, recounts the story of of Joel Kurtzman, the founding edi- and Tom Archer describe a related Intel CEO Andy Grove. Grove, who tor of s+b, in early April. certainty: the effectiveness of cloud passed away in March, contributed computing in preventing intrusion as much as anyone to this ongoing Art Kleiner (page 36). enabler of economic vitality. Editor-in-Chief We can be sure that the conver- Elsewhere in this issue, Chunka kleiner_art@

Illustration by Lars Leetaru by Illustration gence of robotics, sensors, data ana- Mui, Toby Redshaw, and Olof strategy-business.com leading ideas 76

6 Your Next Board Member Should Be a Geek Chunka Mui, Toby Redshaw, and Olof Pripp Why companies need directors with technological expertise.

9 A New Map for Business in Africa Jorge Camarate, Peter Hoijtink, and Miles Puttergill On the world’s most diverse continent, companies need a deep understanding of local context.

12 Social Network Effects Laura W. Geller Stanford’s Adina Sterling on the pros and cons of relying on relationships in the hiring process.

16 Corporate First Responders Luis Ballesteros and Michael Useem Even in wealthy countries, companies can play a vital role in disaster relief. 16 19 Small Customer Today, Revenue Giant Tomorrow Namit Kapoor and Lavanya Manohar A new segmentation strategy can help sales teams identify their growth hot spots.

22 s+b Trend Watch: What Keeps CEOs Up at Night?

essays

GLOBAL PERSPECTIVE 24 Social Entrepreneurship by the Billions Roger L. Martin, Sally R. Osberg, and Jennifer Riel An audacious effort to provide digital ID numbers throughout India illustrates the potential for large-scale change. 6 INNOVATION 30 Will You Be Mine? Joerg Krings, J. Neely, and Olaf Acker As they look to enhance digital capabilities through mergers and acquisitions, traditional companies have to heed a new set of dating rules.

TECHNOLOGY 36 Safety in the Cloud David Burg and Tom Archer The next generation of cybersecurity prevents attacks by monitoring online behavior — of intruders, customers, and everyone else. features

GLOBAL PERSPECTIVE THE THOUGHT LEADER INTERVIEW 44 Global Power Shift 96 Joseph Kaeser Dennis Chesley, Miles Everson, and John Garvey Daniel Gross Winners, losers, and strategies in the new world The CEO of Siemens describes economic order. how an industrial powerhouse founded in the 19th century is using software, sensors, and STRATEGY & LEADERSHIP savvy to build a digital manufacturer that can thrive in the 52 From the Outside In 21st century. DeAnne Aguirre, Per-Ola Karlsson, and Gary L. Neilson BOOKS IN BRIEF Faced with volatility, more companies are looking 104 Boardroom Brawlers beyond their own ranks to ﬁnd new leadership. Jill Priluck

55 CEO Turnover in 2015 106 The Race Goes to the Grift 57 2015: Not the Year of the Woman CEO Nancy A. Nichols

TECHNOLOGY 108 Rocking the Bus Mark Stahlman 64 Beyond the Ninth Circle of Help 110 Twilight of the Central Bankers Elizabeth Rosenzweig Zachary Karabell To raise employee morale and productivity, improve the design of your internal software. END PAGE: RECENT RESEARCH 112 Who’s the Boss? 67 How to Tell if Your Software Is Well Designed Matt Palmquist 68 Radical Intimacy and the Smartphone When companies are run by co-CEOs, sharing Dan Bricklin power equally doesn’t necessarily translate into better results.

INNOVATION

76 Moore’s Lawman Cover illustration by Otto Steininger Jeffrey E. Garten Intel’s Andy Grove pioneered high-stakes, high- speed, high-tech manufacturing — and made the computer age possible.

OPERATIONS & MANUFACTURING

86 A Strategist’s Guide to Industry 4.0 Reinhard Geissbauer, Jesper Vedsø, and Stefan Schrauf Global businesses are about to integrate their operations into a seamless digital whole, and thereby change the world.

Issue 83, Summer 2016 www.strategy-business.com

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EDITORIAL Editor-in-Chief Executive Editor Managing Editor Senior Editor Senior Editor Editor, Digital Art Kleiner Daniel Gross Elizabeth Johnson Laura W. Geller Jan Alexander Melanie Rodier kleiner_art@ gross_daniel@ johnson_elizabeth@ geller_laura@ alexander_jan@ rodier_melanie@ strategy-business.com strategy-business.com strategy-business.com strategy-business.com strategy-business.com strategy-business.com

Deputy Managing Editor Chief Copy Editor Information Graphics Assistant to the Editors Sally Errico Victoria Beliveau Linda Eckstein Natasha Andre errico_sally@ info@ info@ andre_natasha@ strategy-business.com strategy-business.com strategy-business.com strategy-business.com

Art Director Designers Contributing Editors John Klotnia Laura Eitzen Edward H. Baker Julia Heskel Cesare R. Mainardi Juliette Powell [email protected] [email protected] Susan Cramm William J. Holstein Eric J. McNulty Jeffrey Rothfeder Ken Favaro David K. Hurst Gary L. Neilson Michael Schrage Jennifer Thai Bruce Feirstein Jon Katzenbach Rob Norton Thomas A. Stewart jennifer@ Lawrence M. Fisher Theodore Kinni James O’Toole Christopher A.H. optodesign.com Ann Graham Tim Laseter James O’Toole Vollmer Sally Helgesen Paul Leinwand Matt Palmquist Chrisie Wendin

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Find out more and download brochures: www.sbs.oxford.edu Illustration by Benoit Tardif, colagene.com Tardif, Benoit by Illustration Even boards with world-class world-class with boards Even companies in States the United and analyzingEurope. By company fil- ings and information, public we thatfound all many too boards un- to expertise the lacked needed derstand how technology informs strategy and affects execution. In Europe, for example, 95 percent of the companies we assessed, excluding technology and telecommunications non-execu- no had still companies, technology deep with directors tive States, In the almost United fluency. half the of surveyed companies had no technology expertise on their boards. These finan- included major cial-services, insurance, industrial, companies. products consumer and those each industries is grap- of Yet ques- strategic complex with pling tions that hinge technology. on technology expertise can blind have

The boards many large of com- Yet that’s precisely where many precisely where that’s Yet panies are ill-equipped these for 1,000 than shifts. That was of the conclusion more of study 2015 our nonexecutive and executive directors of theat largest 112 publicly traded companies comes to are it when criti- as information becoming technology. Digitally is change driven cal an issue companies most to as finance. Companies are being called to reimagineon and reconstruct every aspect their of business; custom- anders, markets suppliers, expect example, for the less.no Consider, rapidly expanding use mobile of phonesin retail and banking. Or the changes foreseen in the transportation industry due to car-hail- ing algorithms and driverless vehi- MITcles. Already, one study has 26 as much thatfound digitally as compa- adept average, on are, nies than profitable more theirpercent competitors. And that advantage is only likely to increase. accounting, reporting, regulatory risk management. or compliance, and investors Most regulators would deem such a board unfit to carry fiduciary its out guidance and governance responsibilities.

magine that in- were a major you and in leading a vestor company, boardits directors of had no members with independent, world- Who expertise. ﬁnancial class afterwould look your interests? You coachcould the probably directors they askto but good questions, would lack the competence judge to the answers. The board would not engage to in management be able robust conversations about the complexities of capital structure, ﬁnancial and acquisitions, mergers by Chunka Mui, Toby Redshaw, Redshaw, by Chunka Mui, Toby Pripp and Olof Why companies need Why companies with directors expertise. technological Be a Geek Be Should Member Board Your Next

Ideas Leading

leading ideas 6 leading ideas spots in areas of strategic impor- low are three critical steps you can having just one IT-savvy member is tance; these include analytics, cy- take to better prepare your company problematic. To fill these seats, you bersecurity, and digital fabrication. for these challenges. may have to reach beyond the tradi- And even experts who keep up with 1. Hold out for sufficiently broad tional search targets of former particular technologies may miss and deep expertise. Although com- CEOs and CFOs. Tap into recent the general effects of rapid tech- pany leaders agree on the need to CIOs, CTOs, and other C-level nologically driven change on core attract technology-fluent directors, leaders at successful information- products, business models, and cus- they often approach the undertak- intensive companies; retired mili- tomer preferences. ing as an exercise in diversity. They tary officers with large information- Many board members are aware “check the box” by bringing in one technology commands; and senior of these deficiencies. They know that person to stand for the full techno- consulting and private equity part- their companies will either embrace logical field, rather than seeking ners with deep cross-industry ex- technological change and claim the multiple directors with relevant expertise in enterprise technology markets of the future or be put out perience and insight. transformations. Resist the urge to 7 of business. In 2015, a PwC global To assess the severity of this de- rely solely on Silicon Valley experi- survey of large-company directors ficiency in the companies we stud- ence. Startup experience is valuable, found that 85 percent of the respon- ied, we analyzed the resumes of their but addresses just a small part of the dents were dissatisfied with the way nonexecutive directors on four dis- large enterprise technology chal- their companies were “anticipating tinct aspects of technology: pure- lenge. Likewise, the “move fast and the competitive advantages enabled play disruptive digital business, en- break things” attitude in Silicon by technology.” Almost as many, 79 terprise-level IT, cybersecurity, and Valley often does not translate well percent, said their boards did not the digital transformation of For- to other industries. sufficiently understand technology. tune 500–sized enterprises. Each is When recruiting these board The pervasiveness of the prob- critical to boards’ oversight responsi- members, be wary of candidates lem is troubling for anyone who bilities, and fluency in each requires without fresh experience; in fast- cares about these companies — but a distinct body of knowledge and moving fields such as cybersecurity it also represents an enormous opportunity. At the board level, there is Resist the urge to rely on Silicon Valley a need for knowledgeable, incisive “geeks”: independent directors with experience. Startup experience is valuable, but experience and perspective in put- addresses just a small part of the challenge. ting technology to use. In the past, many boards have compensated by experience. Few experts in enter- or disruptive digital technology, relying on management or external prise-level value-chain IT could of- people who are no longer active consultants for strategic advice. But fer expert guidance on building dis- don’t always keep up with the latest the stakes are now too high to take ruptive digital business, and vice trends. If executives in the business that approach. versa. We found that more than 90 sector are scarce, look elsewhere; Boards can no longer duck the percent of the companies, including other sectors may be surprisingly responsibility for the company’s dig- technology and telecommunications relevant. In financial services, for ital transformation. They must take firms, lacked expertise in one or example, understanding sophisti- real ownership by ensuring that they more of these critical technology cated process control is increasingly are equipped to fully understand this areas. Our research revealed only important. The best prospective part of the board agenda. Other- two companies that addressed all board member may come from the wise, how can they adequately over- areas: Google and Wells Fargo. logistics industry — from, say, Fed- see their company’s strategy, invest- To address the gap, you must Ex or UPS. ments, and expense base? How can open multiple board seats for people 2. Support robust discussions of they guide profitability, manage risk, with technological experience. Just technology with the right kinds of assess management performance, as having only one woman on a practices and management struc- and ensure proper talent supply? Be- board has proven to be insufficient, tures. There are two possible mech- leading ideas

anisms for accomplishing suitably cade — for example, big data and ity of IT should inform the review robust discussions. The first is analytics, cloud computing, mobile of proposed mergers and acquisi- to establish a formal technology- technology, artificial intelligence, tions. A close link to the audit com- focused subcommittee of the full the Internet of Things, and autono- mittee is important because tech- board, on par with other oversight mous transportation — and the nology affects regulatory compliance functions such as audit or compen- potential implications each has for and ethical issues. And the relation- sation. This can be helpful in rais- the company. ship to full board strategy discus- ing critical issues and promoting They must also have a clear sions is critical. deep discussion of complex topics. view of their own company’s IT Of course, placing someone It also creates a mechanism for en- landscape: their existing hardware with world-class technology exper- gaging external advisors. and software, including estimates tise on a board does not guarantee Alternatively, set up a technol- of redundancy, age, robustness, any success. Many technically proficient ogy advisory committee that meets risk of obsolescence, and costs. For companies have lost to upstarts with 8 regularly with top management and example, how many marketing sys- a better product or service. But with- periodically reports to the board. tems, customer databases, and hu- out this expertise, boards cannot AT&T does this. It may be easier, man resource systems does the com- play their most important role: with such a committee, to attract pany have? How interoperable are intervening with substantive con- best-in-class expertise, given that those systems? The need to ask these versations about strategic decisions the time commitment is low and types of questions about a factory or early enough to make a difference. there are no full fiduciary responsi- back-office footprint would be obvi- And without these focused conver- bilities. Typically, advisory commit- ous, but boards have generally ne- sations about technological invest- tees can also rotate members more glected such inquiries regarding ments and decisions, boards cannot frequently than a board can. It must technology. The board must also fulfill their fiduciary responsibilities. be remembered, however, that an understand risks related to technol- Today, every board of directors advisory committee reports to man- ogy, the defenses currently in play, has a once-in-a-generation chance agement, not the board. This can and any weaknesses in those de- to leapfrog the competition through and will color its advice. fenses. Most important, the board technology competency. The oppor- Whatever the structure, it is im- must understand how the com- tunity is great because the task is portant for this group to address top- pany’s IT systems relate to the com- difficult, and there is no large pool ics that go beyond technology strat- pany’s overall strategy, and what ca- of talent waiting to be recruited. egy and IT governance. The most pabilities are needed to support it. Those companies that meet this important priority may be enterprise It falls to the board to ensure challenge successfully will capture strategy and the ways in which tech- that the company has a multiyear the markets of the future. + nology makes new value proposi- plan to address technology needs Reprint No. 16201 tions possible. FedEx, which is as while reducing costs and risk. Chunka Mui much a technology company as a Boards need not grant a license to [email protected] transportation icon, has used such a spend. On the contrary, the hall- is a business advisor and coauthor of board to great effect for many years. mark of computers and networks is The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups (with Paul B. 3. Set the right context. Alan that they continually get faster, bet- Carroll; Cornerloft Press, 2013). Kay, one of the foremost pioneers in ter, and cheaper. These benefits ac- Toby Redshaw personal computer conception and crue only to those with modern [email protected] design, once said, “Point of view is gear, however, so frequent upgrades is CEO of Kevington Advisors and former worth 80 IQ points.” The context are essential. global chief information officer of Aviva PLC and American Express. with which your board of directors Finally, the board must incor- views technology is a critical ele- porate its expanded technology con- Olof Pripp ment for enterprise success. They text into larger deliberations. Talent [email protected] 83 issue is vice chairman, board and CEO services must collectively understand the 10 recruiting and leadership develop- EMEA, at Korn Ferry. to 15 drivers of technology that have ment should be designed to fill gaps

taken quantum leaps in the past de- in technological ﬁelds. The critical- strategy+business leading ideas

help to think about groupings of A New Map for countries with comparable wealth (measured by GDP per capita) and institutional quality (measured by Business in Africa the World Bank Doing Business In- On the world’s most diverse continent, companies dex). Based on these criteria, African need a deep understanding of local context. countries fall into six basic categories (see map, next page). The first three described below offer the most op- by Jorge Camarate, Peter Hoijtink, skills, and conditions. They assume portunity; the others tend to be and Miles Puttergill that success is a sure thing, and, as a more challenging environments in result, their strategies turn out to be which to operate. nly a few years ago, Africa too broad. They revolve around Countries with high income and Owas being dubbed “the next growth projections rather than what strong institutions have reliable ports, 9 Asia,” and multinationals individual markets actually need. roads, legal systems, police, and edu- watched with mounting interest as Understanding distinctions is cational resources. They typically local economies boomed across the critical. But it is equally important to have a sizable middle class, along continent. Although a decline in know where your own strengths lie with a skilled workforce. Companies global commodity demand has since and to match these capabilities to the with distinct capabilities that in- ushered in a slowdown, Africa re- circumstances of each local market, clude world-class product, service, mains a promising long-term growth or to know what capabilities you and technological innovation; qual- market. Its GDP grew about 3.4 need to succeed and find partners ity management; and branding and percent in 2015, a full percentage that possess them. Either way, you’ll marketing management can thrive point above the global growth rate, also need to develop a network of lo- in these markets. For example, and is expected to increase to 4.2 cal experts to execute your strategy South Africa–based First National percent in 2016, according to World Bank forecasts. The African Devel- Many multinational corporations assume opment Bank estimates that consumer spending will reach US$2.2 success in Africa is a sure thing, and, as a result, trillion by 2030 (up more than two- their strategies turn out to be too broad. fold from $680 billion in 2008). As home to seven of the world’s mega- on the ground. This is what compa- Bank has delivered impressive prof- cities, and with 29 million youths nies that have established thriving its in Botswana, Namibia, and Swa- entering the labor force each year, businesses in Africa have done. ziland, based largely on its innova- Africa is fertile ground for invest- Many are Africa-based companies tions in such areas as mobile ment in such areas as infrastructure that have expanded throughout the applications and online banking. and manufacturing. continent. MNCs based elsewhere Such features are popular in these These figures paint an optimis- should learn from their experience. countries, where income is higher, tic picture of the continent as a infrastructure is more robust, and whole. But Africa is made up of 54 Market Matchmaking penetration of banking and mobile fully recognized sovereign states that The companies that perform best in phone services is greater than in cover a vast range of natural ecosys- Africa tend to target countries in many other African countries. tems and an even vaster range of cul- similar stages of economic develop- Countries with high income and tures, with some 2,000 languages ment. The expertise that benefits weak institutions have pockets of spoken. Unfortunately, we’ve seen their operations in South Africa wealth, and therefore purchasing too many multinational corpora- would also do so in Botswana or Na- power. But their lack of institutions tions (MNCs) take their businesses mibia, but wouldn’t get them far in places greater demands on compa- into Africa without a deep under- Mali or the Democratic Republic of nies. They will need strong capabili- standing of local market dynamics, the Congo (DRC). It can therefore ties in managing relationships with leading ideas

Africa’s Markets categories — the middle-income Analysis of wealth and institutional strength reveals six basic categories. markets with weak institutions and the low-income markets with strong Tunisia or weak institutions — companies Morocco face more acute challenges. They Algeria Libya Egypt need to be able to operate with lim-

Western Sahara ited infrastructure, less efﬁ cient and (Morocco) Mauritania less transparent regulation, and less- Mali Niger Chad Sudan skilled employees. A company going Senegal Eritrea Gambia into any of these markets has to ex- Burkina Djibouti Guinea-Bissau Faso Guinea cel at crisis management, as well as Nigeria Somalia Sierra Leone Central South Ethiopia end-to-end operations management Liberia African Sudan Republic Ivory Coast that ensures self-sufﬁ ciency and op- Ghana Uganda 10 Togo Democratic erational resilience. Republic of Kenya Benin Gabon the Congo Cameroon For the most part, companies Equatorial enter these countries to extract re- Guinea Congo Rwanda Burundi Tanzania sources, and mitigate risk as much as possible through agreements and KEY Angola Malawi Zambia contracts with the government, of- Strong Weak institutions institutions ten supplemented by guarantees Zimbabwe Namibia Madagascar High income from multilateral organizations such Botswana Mozambique as the World Bank. Other types of Middle income Swaziland companies that have expanded in South Low income Africa Lesotho these countries are those highly skilled at building and operating

Note: Map excludes the following island nations: Cape Verde, Comoros, every component of their business Mauritius, Sao Tome and Principe, and Seychelles. Source: World Bank (2014 data on GDP per capita, at constant 2005 US$); independent of external support. the World Bank's "Doing Business 2015" Index When the South Africa–based retail chain Shoprite built shopping cen- government and other stakeholders, need them to be delivered at lower ters in Uganda, for example, it es- planning for and managing security price points. Cost leadership capa- sentially created its own infrastruc- challenges and crises, and creating bilities are thus critical, along with ture for its stores. supply chain resilience to ensure cost management and low-cost ser- consistent service. Nigeria-based vice and product provision. Com- Think Global, Operate Local Dangote Group, one of the largest panies can also succeed in these Once a company has identifi ed its conglomerates in Africa, has built markets if they offer innovative target markets, it will need the right deep relationships across the coun- technology, especially at the distri- people on the ground to execute the try that enable its divisions to set up bution level, to help keep prices low. strategy. In many of Africa’s labor productive partnerships and agree- The widely publicized success of markets, companies will have to de- ments. Its cement division has ben- Kenya’s Safaricom provides a power- velop talent with the skills needed to efi ted from this capability, while ful example. Safaricom pioneered run their local operations. ensuring the resilience of its supply the M-Pesa mobile money system, They should start by embed- chain through vertical integration which uses a low-cost distribution ding a core team of home-country from raw material sourcing to pro- network to enable subscribers to set experts to oversee the new business. duction and distribution. up modest accounts with prepaid The 170-year-old South African fi - Countries with middle income sums, then make payments out of nancial-services fi rm Old Mutual, 83 issue and strong institutions have aspira- the accounts via mobile phone. No for example, has subsidiaries in the tional customers that demand pre- traditional bank account is needed. southern, western, and eastern parts

mium products and services, but In countries in the other three of Africa. In many of these regions, strategy+business leading ideas the company relies on a pool of ex- Africa development manager, the velop and execute strategies tailored pats with relevant qualifications and company turns down 95 percent of to their own market. experience for such functions as ac- the deals it is pitched. tuary work, an area in which local Sanlam Emerging Markets, a Risk and Reward talent is generally limited. These ex- South African financial-services As in all less-developed markets, pats are selected as much for their group founded in 1918, avoids com- companies will face challenges as cultural agility as for their technical petitive bids. The company prefers they enter Africa. These might in- skills, to ensure that they can con- to invest 18 to 36 months in estab- clude local insurrections, underesti- nect with local employees. lishing a trusted relationship with mated costs, or overestimated con- It is important to invest heavily a new partner and demonstrating sumer purchasing power. African in skills transfer. This often includes the unique benefits it can bring to economies are highly volatile and both conducting on-the-ground develop the partner’s business — unpredictable, vulnerable to both training and bringing local employ- including inviting management to commodity price swings and politi- ees to the home office to understand visit Sanlam’s operations in South cal instability. GDP per capita in 11 the firm’s culture and ways of work- Africa. According to Heinie Werth, Ghana has grown 106 percent during. After that, the challenge for CEO of Sanlam, the company’s ing the last 25 years, whereas in the many successful companies is how 2005 acquisition of African Life DRC, it has fallen 39 percent over to prevent competitors from poach- Assurance Company was critical to that same period. ing their talent. They should develop enabling its expansion. African Life In the end, if you incorporate compelling value propositions for provided access to Botswana, your company’s expertise with the local staff, including compensation Ghana, Kenya, Tanzania, and Zam- economic, institutional, social, and above the market average, additional bia, and focused on the low-cost infrastructural realities in local con- benefits such as pensions or housing, product offerings and mass-market texts, you can give yourself a com- career development opportunities, distribution that were missing at petitive edge. It’s a worthwhile risk, and a sense of community. Sanlam but essential to success in because if you succeed you will find Aside from developing a local these markets. Sanlam has since yourself in an enviable position: You talent pool, companies can seek out built a direct interest in 11 countries could be an architect of one of the local businesses to partner with, in the southern, western, and east- early pan-African powerhouses. + through mergers, joint ventures, or ern regions of Africa (as well as in Reprint No. 16202 simple supply arrangements. They’ll India and Malaysia). Jorge Camarate need to clearly define what they Finally, local subsidiaries won’t [email protected] want from a potential partner, and function well if policies and process- leads the financial-services practice then evaluate candidates carefully es are ill-suited to their culture. But for the African continent for Strategy&, PwC’s strategy consulting business. against these requirements. RCL as you loosen the reins, you must He is a partner with PwC South Africa in Foods, the leading South African ensure that you won’t be exposed to Johannesburg. poultry producer, takes stakes in lo- major failings of local judgment or Peter Hoijtink cal product manufacturers and dis- to ethics violations. Greg Davis, [email protected] tribution networks that will benefit CFO of Standard Bank, a leading focuses on transformational strategies for Strategy&. He is a director with PwC from its cold-chain distribution African bank with operations in Netherlands and is currently based in capability. But the company has 20 countries, attributes much of Amsterdam. He was previously based in strict requirements regarding any the bank’s success in Africa to its Nairobi and Johannesburg. partner’s ethical reputation and ability to strike a balance between Miles Puttergill track record of teaming with inter- regional compliance and risk over- [email protected] national players. Its stringent crite- sight, and its local empowerment of specializes in strategy, M&A, and emerging markets for Strategy&. He is a senior ria mean that RCL, which currently decision makers. For instance, al- manager with PwC South Africa, and is has joint ventures in several coun- though the bank establishes a con- based in Johannesburg. tries, among them Zambia and Bo- sistent corporate and investment This article is adapted from the authors’ tswana, has to be patient. According banking capability globally, it grants Strategy& white paper, “Creating Value to Pierre Rossouw, RCL’s Group country teams the autonomy to de- in Africa,” Nov. 2015. leading ideas

networks themselves. As she ex- value of networks for finding jobs, plained to s+b in January 2016, but not much about the impact Social knowing someone at a new job can these networks have after people en- help people quickly develop a strong ter organizations. Network network, and it can help some peo- For example, I worked at Proct- ple get promoted. Having personal er & Gamble as an engineer for five Effects connections can also make candi- years prior to graduate school. I end- dates less likely to shop around a job ed up with a great network, and I Stanford’s Adina offer, and perhaps even less likely to wasn’t sure how — I’m not a partic- Sterling on the pros turn it down. ularly gregarious person. I didn’t and cons of relying on But in fields that have quan- think that much about it at the time, relationships in the tifiable measures of people’s “quali- but I knew that having this network hiring process. ty” (class rank, prestigious was very beneficial to me in terms of 12 appointments, sales data, my career progression at the com- and so on), the positive pany. Later, I was able to trace my by Laura W. Geller effects of knowing some- network back to the very first person one can disappear for I met in the interview process for an ob seekers are keenly those not considered top internship when I was 18. Jaware that who they know performers. And companies can matters. A friend at a prospec- put diversity at risk by relying too S+B: How are companies using tive employer can push a resume to heavily on the Rolodexes of their social networks to find talent? the top of the pile, put in a good current staff. STERLING: One of the main ways word, or arrange an introductory companies are using social networks lunch. Companies, for their part, are S+B: You research social networks, in their recruiting efforts is the same happy to oblige. Employee referrals in the traditional sense. way they have for decades: They en- help them cut through the noise, STERLING: Everyone has a social courage their employees to refer target searches, and save money. network. You can think of it as the people who they know and think Social networks play a positive people that you know, your interac- are qualified for positions. role in the hiring process. But what tions with those individuals in terms However, a variety of factors can these useful connections tell us of frequency and duration, and the have made social networks increas- about performance on the job? Does way those people are connected to ingly important. For one, firms the advantage of knowing someone one another. Sometimes we conflate have had to become more creative carry over once an individual joins a firm? Adina Sterling has been ask- VIDEO FEATURE ing these questions since transition- Hiring through Your Employees’ ing from engineer to academic near- Social Networks ly a decade ago. Sterling had spent Stanford’s Adina Sterling dissects five years with Procter & Gamble’s popular strategies to recruit top talent. global baby care and beauty care R&D teams before leaving to pur- sue a Ph.D. in organization and social networks and social media. about how they search for and at- management. She joined the faculty Social media allows us to keep up tract top talent because of the sheer of Stanford University’s Graduate with the people in our networks in number of applicants. A few de- School of Business as an assistant more efficient ways. cades ago, recruiters could list a job professor in the fall of 2015. In graduate school, as I was ex- in a newspaper and get a few dozen Sterling has found that the ef- posed to research on social net- responses. Today a job can be post- 83 issue fects of people’s social networks on works, I began to wonder about ed on Monster.com, and within their own career and on their orga- their importance. I noticed there two hours it could have several

nization are just as disparate as the was a lot in the literature about the hundred applicants. strategy+business leading ideas

In addition, younger workers a long recruiting process, vetted STERLING: In a forthcoming study, today expect to work for companies someone, and made an offer, and Jennifer Merluzzi of Tulane and I for shorter periods of time than then that applicant shops it around, looked at the effect of networks on older employees do. Turnover is trying to increase their salary from upward mobility or promotions. We also high in certain industries, like competing firms without any inten- analyzed data from a large, private technology. Most industry reports tion of accepting the original offer. employer on over 15,000 employees cite the average tenure in tech as I focused specifically on friend- and their post-hire promotion out- under three years, with the average ships between applicants and em- comes over an 11-year period. We’ve tenure in some companies being ployees. I found through qualitative found that for African-American much lower. Firms are in the posi- interviews that managers believed employees, those who came in as re- tion of constantly looking for tal- candidates with friends in the firm ferrals had more promotions than ent. Of course, this is made all the were less likely to shop the offer those who did not. more challenging by a shortage of around and use it for leverage, be- We’re still exploring the poten- highly skilled labor in areas such as cause it would reflect poorly on their tial mechanisms behind this find- 13 engineering, IT, operations, mar- friend. In a follow-up experiment, I ing. That initial network might keting, and sales. confirmed their suspicion: People provide greater access to new rela- Companies have often tried to are less likely to hold on to offers tionships within the company or address the war for talent by offer- that they don’t intend to keep if additional resources that enable ing financial incentives. That some- their friends work at the company. mobility. It could also be that when times works. But even when it does, someone comes into a company and it’s costly to the firm’s bottom line. S+B: Besides expanding their has been vouched for through the Plus, a company can always be out- networks more organically, are there referral process, it alleviates con- bid by a competitor. It’s important other advantages for employees of cerns about how that person is to find alternative ways to recruit being hired through social networks? going to perform. To the degree and retain top candidates.

S+B: How can social relationships help? STERLING: I have found that knowing somebody in a company prior to joining — someone coming through, for instance, a referral — helps people develop more robust networks inside ﬁrms. As part of my dissertation research, I surveyed MBA students both before and after they completed internships. Those who knew somebody in the ﬁrm prior to starting formed more network connections than those who didn’t start out with a connection. This may be one reason that those Æ These whiteboard walls give hired through a network connection WhiteWalls you and your team an unlimited tend to stay with a company longer. blank slate that encourages In another study, I researched original ideas and fosters out of how networks can help managers the box solutions. deal with the strategic behavior of job seekers. It’s problematic for HR managers when they’ve gone through WhiteWalls.com 800 624 4154 leading ideas

that research (for example, in a pa- networks they were able to form ployer to investigate employee per- per published by MIT’s Emilio once they started. Having that con- formance, comparing those hired Castillo in 2008) has shown that tact mattered to their network de- through an internship, a referral, or African-Americans might not re- velopment only if they were known a traditional, more formal method. ceive the same promotion opportu- to be “good” coming in — in this It appears that those hired through nities as majority members in orga- study, being good was defined as be- internships perform better on key nizations, having that referral may ing in the top 20 percent of their law metrics such as retention and pro- provide a sort of stamp of quality. school class. If they lacked this sig- motions. I am not able to show with Lastly, it could be that those with nal, it appears the people they knew my current data that the trial experi- referrals are just better on some un- prior to starting were less willing to ence itself causally affects perfor- observed dimension than others. help them establish connections mance. But just the existence of a We cannot assume or rule out any within the company. correlation is important. of these possibilities with our cur- For companies, meanwhile, us- Why is that the case? Compa- 14 rent data, but it’s a fascinating sub- ing networks to hire — whether it’s nies assume that networks matter ject for future research. using a referral program in the tra- to hiring because they provide rich- ditional sense or using social media er channels of information to the S+B: Are there any disadvantages to cull contacts from current em- employer about an applicant. If try- to relying on social networks? ployees — can have a potentially outs also perform this function, STERLING: Oftentimes the net- serious drawback. Our networks companies can recruit people with works we have are due to things tend to connect us to people who greater levels of known information outside our control: the family we are “like us” on intellectual and so- without going through employee are born into, where we went to cial dimensions. It’s possible that networks. Although my research school, and so on. And then there employers can over-recruit through stops short of proving implications are those who feel uncomfortable their employees’ networks, leading for diversity, I believe that it could actively trying to expand their con- to a lack of intellectual diversity or show some differences versus net- nections. Some people may end diversity on other bases. And of work recruiting. And in fact I’m up without a strong network for course this is problematic, because working on projects with this hy- these reasons, and find themselves at having different perspectives is crit- pothesis in mind right now. a disadvantage. ical for creative problem solving, Tryouts hold potential benefits But interestingly, I also found innovation, and resisting a group- for employees as well. For example, that even the people who’d prefer to think mentality. consider parents of young children skip happy hour can still see their who exited the workforce for a few network grow. It depends largely on S+B: Can companies tap into some years. Their professional network their field. For example, as I’ve of the advantages of using networks has likely atrophied during their mentioned, I found that for MBA while avoiding the pitfalls? time away, and they’re probably not students — who don’t reveal their STERLING: This question is moti- going to get the same employment grades to recruiters — coming in vating a new set of projects I’m opportunities that they would have and knowing somebody affects how working on about so-called trial em- with a robust network. If a compa- large their network becomes. ployment. Generally we can think ny were to offer a tryout to these Law school students, however, of a trial as a tryout period, through prospective employees, it could help have clear signals of quality — for which a firm gets a first look at them get back into the workforce example, class rank or serving on somebody prior to hiring him or her more quickly. And companies prestigious law reviews. For lawyers, full-time; I’m specifically studying might find a new, largely untapped I found that having a pre-entry con- internships. In one study, I’m using source of talent. + tact didn’t have a direct effect on the personnel records from a large em- Reprint No. 16203 issue 83 issue

Laura W. Geller : Meet the next generation of business thought leaders [email protected] at strategy-business.com/youngprofs. is senior editor of strategy+business. strategy+business EXECUTIVE EDUCATION

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economies. These are typically na- Corporate First tions where companies have strong interests or operations, or where they have a large customer base. Recent Responders studies in corporate philanthropy Even in wealthy countries, companies can play have shown that the share of a firm’s a vital role in disaster relief. income from a given market is a good predictor of its willingness to foster social welfare in that market. by Luis Ballesteros and increasingly filled the recovery gap. Yet we also know that close to Michael Useem The data shows a convergence 90 percent of the deaths associated among three areas: unmet high so- with natural disasters in the last hat happens when gov- cial recovery costs in many devel- three decades have occurred in low- 16 W ernments lack the re- oped countries after a disaster; income countries. Put more graphi- sources to respond im- companies’ strategic decisions re- cally: Nepal lost one inhabitant for mediately to a natural disaster? garding aid; and the effectiveness every 3,000 residents from its 7.8 When Japan was struck by a 9.0 and speed of aid delivery. Compa- magnitude earthquake in 2015, magnitude earthquake and 100- nies have been able to serve as a whereas Japan lost one for every foot tsunami in 2011, it was the critical and effective stopgap in the 10,000 from its 2011 disaster. In world’s third-richest economy. But aftermath of black swans in nations contrast with the overwhelming at the time, the country’s public where the suffering is real but the business response to Japan’s seismic debt stood at more than twice the vulnerability is underestimated or event, corporate disaster giving ac- level of its GDP, and its real interest even obscured. counted for less than 5 percent of rates were negative. Japan’s leaders Nepal’s international assistance. found themselves with little in their The Fragility Factor This disparity naturally raises ques- economic arsenal to quickly draw In five of the world’s largest natural tions about whether corporate disas- down for emergency assistance. In disasters during the past five years, ter relief is truly satisfying a global the months after the disaster, companies gave more aid than for- social need. national production faltered, Ja- eign governments, multilateral agen- To answer these questions, we pan’s supply of goods contracted by cies, nongovernment organizations, looked at how a country’s capacity to an estimated 20 percent, and the and private individuals combined. finance relief and recovery in the country’s stock market and credit rating plummeted. In five of the world’s largest natural disasters We’ve seen similar scenarios in in the past five years, companies gave more aid Italy, after the L’Aquila earthquake in 2009; in New Zealand, after the than foreign governments, multilateral agencies, Christchurch earthquake in 2011; NGOs, and private individuals combined. and in the U.S., after Superstorm Sandy in 2012. All three were devel- Japan’s 2011 earthquake, for in- wake of a black swan is traditionally oped nations that, most experts as- stance, attracted an outpouring of assessed. The method of determin- sumed, could self-finance their re- donations from corporations that ac- ing international aid for disaster recovery. Yet each suffered deeply counted for 58 percent of total aid. covery mimics the way public policy when disaster struck and outstripped Of course, taken at face value, for international aid typically func- its state capacities. this type of corporate giving poses a tions. The decision-making process In a recent study of these and vexing problem. Companies are do- for identifying national financial other low-probability, high-magni- nating most frequently to wealthier vulnerability thus relies on criteria 83 issue tude disasters — calamitous black nations — some 85 percent of cor- such as a country’s GDP per capita. swans — during the previous two porate donations over the last 15 As a result, during the last 30

decades, we found that business has years have gone to higher-income years, the bulk of multilateral disas- strategy+business leading ideas

ter aid has gone to low-income coun- ture the complex aftermath of tional aid at the time of a disaster, tries, such as Haiti after its 2010 major disasters. Broadly, a state has we calculated states’ financial capac- earthquake or Nepal after its 2015 three sources for funding disaster ity to respond. We then ranked earthquake. (We are categorizing response: government assistance, the 3,115 major disasters that oc- countries using World Bank defini- private plans (such as insurance), curred worldwide between 2003 and tions; low-income nations have a GNI per capita of US$1,045 or less.) Economic development is a poor indicator Middle-income economies (those with a GNI per capita of between of social need; it fails to capture the complex $1,046 and $12,736) such as Chile aftermath of major disasters. and Mexico received just 8 percent of multilateral public disaster relief, and international aid (which in- 2013 according to the magnitude and high-income economies (those cludes aid from foreign govern- of the gap between this capacity with a GNI per capita of $12,737 or ments, multilateral organizations and the cost of a disaster — what 17 more) such as Japan and the United and NGOs, and individuals). The we have termed state fragility to States, less than 2 percent. first channel is made up of three black swans. The results defied com- But the well-documented strug- main instruments that a govern- monly held assumptions: 87 percent gles of developed countries to fi- ment can use to secure liquid re- of the 150 disasters with the largest nance fast and efficient recovery sources after sudden shocks: debt, gap occurred in medium- and high- efforts have made clear that eco- deficit, and interest rates. income countries. nomic development is a poor indi- Using the total value of govern- We next conducted a series of cator of social need; it fails to cap- ment aid, private plans, and interna- econometric evaluations using data on disaster giving and our ranking of state fragility. The data set con- sisted of the reported international contributions by firms, foundations, nonprofit organizations, foreign governments, and multilateral agencies to relief and recovery of all major natural disasters worldwide from 2003 to 2013. Our analysis revealed that corporate giving is more likely to be al- located to countries whose government is less able to supply essential goods following so-called fat-tail calamities. These states have high fragility, but in many cases don’t receive a large share of aid from traditional sources as a result of their relative affluence. In short, corporate dollars may go to some higher- income countries, but those countries are the most financially vulnerable in the wake of a black swan.

Fast and Effective As part of our study, we also sought

Illustration Hoong Yau by Tang to determine the efﬁciency of com- leading ideas

panies’ aid efforts. In our economet- corporate disaster giving (for exam- rise because more people are living ric evaluation, we found evidence ple, removing debris, delivering sup- in disaster-prone regions, such as the that when corporate giving makes plies, and rebuilding schools) affects “ring of fire” around the Pacific up at least 5 percent of total interna- recovery. The ratio of in-kind to Rim, with its earthquakes, tsuna- tional aid after a disaster — which monetary giving varies across indus- mis, and volcanoes. And many na- implies that firms are taking an es- tries and countries. But our analyses tional governments now face rising pecially active interest in a country’s revealed that when at least 30 per- public indebtedness, making recov- recovery — recipients receive 37 cent of post-disaster business assis- ery increasingly challenging. percent more aid during the first tance to a country comes in the There’s no one answer to the complex problem of responding to The entire system is in trouble: The inflation- these crises and their growing costs. adjusted annual cost of natural disasters But it’s clear that business giving is moving in a positive direction: In 18 worldwide nearly quintupled between 1980 and 2000, less than 30 percent of the 2012, from $54 billion to $250 billion. world’s largest multinationals engaged in some form of disaster giv- four post-disaster weeks than they form of in-kind giving, residents re- ing, including cash, goods, services, do when corporate intervention is ceive disaster assistance 65 percent and sometimes even direct engage- less than 5 percent of total aid. In faster than in statistically similar ment in relief support and logistics. other words, when corporate aid has countries with lower levels of corpo- By 2013, that figure had risen to arrived with substantial magnitude, rate in-kind donations. more than 90 percent. the assistance has reached the Finally, we found that corpo- Most big companies are now ground faster. rate disaster giving does not crowd giving, but all should consider giv- This is significant, because out or replace international public ing more. Our findings suggest a most experts on disaster manage- assistance. If a country that has ex- new way of thinking about disaster ment agree that the time that elaps- perienced a disaster receives no in- relief that should inform corporate es between the occurrence of a ternational aid, it’s more likely that social responsibility leaders. Financ- shock and the provision of essential businesses will donate there. But if ing recovery efforts in states ill- goods (water, food, medicine, and some amount (still insufficient for prepared to respond has become a housing, as well as the rapid resto- recovery) of international aid is sent, major challenge for the internation- ration of such staples of the eco- the likelihood of corporate giving al community — and one that cor- nomic infrastructure as communi- grows higher. The latter comple- porate aid can help overcome. + cation and transportation) largely ments the former, rather than creat- Reprint No. 16204 determines the degree of disrup- ing a substitution effect. tion. And studies on disaster risk Luis Ballesteros [email protected] management suggest that whether a Fast and Effective is a doctoral candidate in management natural shock morphs into a full- Our findings should not be inter- at the University of Pennsylvania’s Wharton School. fledged catastrophe or not depends preted as an argument for giving to greatly on the promptness of the the rich at the expense of the poor. Michael Useem response. For example, consider the That’s especially true because the [email protected] is a professor of management and the impact of Hurricane Katrina on entire system is in trouble: The in- director of the Leadership Center at the New Orleans in 2005: The conse- flation-adjusted annual cost of natu- Wharton School. quences of the hurricane’s physical ral disasters worldwide nearly quin- destruction were made far worse by tupled between 1980 and 2012, the government’s inability to quick- from $54 billion to $250 billion. ly deliver relief to victims. Public assistance now covers only a 83 issue Another sign of the business median 5 percent of the cost of nat- community’s ability to meet local ural disasters globally. The costs of

needs is the extent to which in-kind calamities also can be expected to strategy+business leading ideas

tors. The online players, which are Small Customer often more nimble and flush with digital natives, are already embracing Today, Revenue these new segmentation strategies. Smarter Segmentation Giant Tomorrow Small fixes won’t be enough to help incumbents identify the customers A new segmentation strategy can help sales they are missing. They need to re- teams identify their growth hot spots. think their approach to segmentation, moving beyond present-day by Namit Kapoor and identified as strategic priorities. Yet revenues and margins as the prima- Lavanya Manohar many of these companies, although ry driver of their sales efforts. small today, will likely become key The exhibit (next page) shows 19 ost large companies rely customers in the near future. By how measuring customer need, val- Mon bread-and-butter cus- placing them in the bottom tiers, ue, and behavior reveals growth hot tomers, those whose repeat companies may be leaving millions spots. For each factor, companies sales have long provided a steady on the table. need to ask themselves a series of stream of revenue. But with each With a new approach to seg- qualitative and quantitative ques- new digital innovation, this model mentation, incumbents can find tions. Here, coordination among loses some of its luster. Telecom their “growth hot spots,” those high- functions is critical. By deploying a companies feeling price pressure potential customers obscured by standard technology platform across from over-the-top mobile players, more traditional methods. Sales all sales-related functions, businesses health insurance payors coping leaders need to consider two critical can easily move data across different with the spread of private health but often overlooked factors when organizational units. This provides exchanges and increased consumer- assessing their current and future the backbone that sales leaders need ization, and financial-services firms customers: need and behavior. to collect, combine, and analyze a facing the rise of fintechs are all re- When combined with value, these wider variety of data in real time. examining their business models indicators will reveal the customers To determine customer need, and offerings. whose strategic direction and oper- a company would consider ques- The market is also changing for ating model come together in a way tions such as these: What percentage tech firms. Cloud startups with their that could make them huge sources of the customer’s portfolio is covered growing customer base are rapidly of revenue. Sales teams should then by our offerings? To what extent is becoming a legitimate source of tailor their deployment strategies to- the customer’s buying portfolio competition. Incumbents are trying ward these customers. aligned with our future growth to solve the problem by investing in Although growth hot spots their own cloud offerings. But in might seem elusive, they are within many cases such moves have not reach. After all, companies have ac- been accompanied by a shift in the cess to unprecedented troves of rich sales strategy. Incumbents are still customer data. But in large firms, segmenting almost exclusively by this data is often spread among vari- value, which leads sales teams to ous business units — sales, analytics, stack-rank customers on the basis marketing, and customer support — of revenues and operating margins. operating in silos. The units aren’t Because the revenue model for soft- sharing their information in a mean- ware-as-a-service (SaaS) trades up- ingful, integrated way. That’s a prob- front license fees for a subscription lem for incumbent tech firms as well model whose fees are spread over as for companies in other industries

Illustration by Tomasz Walenta several years, SaaS customers aren’t facing an inﬂux of online competi- leading ideas

plans, particularly in newer areas and making bets on products and identify growth trends and key mar- such as SaaS offerings? To what de- services? How regular and stream- ket indicators that would encourage gree does the customer require a lined are account-level processes them to shift to your higher-growth high-touch model in terms of ser- such as payments and notifications? product offerings, or they are not in- vices from sales reps? Once companies have answered fluential enough to sign off on work- To determine value, companies these questions, they can calculate a ing with you. would ask some of the more tra- score for each customer using ap- In other words, the Tier 1b cus- ditional revenue-based questions: propriate weighting for each dimen- tomer clearly needs your services or How much business do we currently sion depending on a product’s life- your products, and the products do with this customer? What is the cycle stage. Those customers that themselves are at a high value. But because of various ingrained pro- Incumbents need to rethink segmentation, cesses or mind-sets, key stakeholders moving beyond present-day revenues and don’t realize this value or aren’t em- 20 powered to act on it. You may have margins as the driver of sales efforts. to invest significant time up front in changing that behavior, helping total opportunity from this custom- rank high on both value and need them see things from your perspec- er? How important is this customer (typically about 10 percent of the tive, before you make your sales to our share of wallet? Does the cus- total customer base) make up the pitch. But odds are, that investment tomer usually buy higher-value/ growth hot spot; these should be will pay off. higher-margin goods and services? Tier 1 customers. Behavior then dis- And to measure behavior, com- tinguishes two types of customers Targeting Your Top Tier panies should ask: How empowered within this tier. After identifying your hot spots, are the buyers (procurement reps, The first group (Tier 1a) will be you will need to create sales-force product leads, etc.) to make forward- easy to work with, because their way deployment strategies specific to looking product decisions? How of thinking and operating is already these customers. progressive is the customer leader- aligned with your way of doing 1. Engage through a tailored, ship in identifying market trends business. For example, you may high-touch model. All Tier 1 cus- have a customer whose growth strat- tomers are best served by sales reps egy is closely aligned to the products with whom they have a strong per- Exhibit: Growth Hot Spots and services you sell. This same cus- sonal relationship. The sales reps Sales teams should consider need, value, and behavior when segmenting customers. tomer may be highly evolved in should make a point of meeting terms of its ability to identify mar- face-to-face at regular intervals and ket trends. And it may be organized providing tailored service. A strate- such that purchasing decisions are gic account management team or

TIER 1A streamlined — the procurement senior leader should oversee the sales TIER 1B team and product groups work to- force, setting the direction for the gether to buy as one unit. account managers who serve the top Customers in the second group tier. The role of strategic account (Tier 1b) are high in value and need, management is to take a longer-term but you will likely have to work with view of the customers’ needs and them to modify some of their prac- help provide them with customized tices. Their procurement depart- support designed to boost recurring ment may use external vendors that revenues — and to pinpoint oppor- HOT SPOT TIER 1 have their own set of metrics, which tunities to sell these customers new CUSTOMERS may or may not be aligned with or higher-end products. 83 issue VALUE those of the business leaders using 2. Focus on selling solutions, NEED your products. Or perhaps the busi- rather than individual products and

Source: Strategy& ness leaders themselves are unable to services. Selling a solution is a big strategy+business leading ideas ask for technology firms, in which should embed themselves in growth that improve the key metrics critical products typically exist in silos, each discussions with these customers. to Tier 1 accounts. Ways of rolling with its own sales reps. Further com- They need to see themselves as con- out incentives include variable pay plicating matters, these reps are es- sultants, and not just as sales reps, so with additional compensation for sentially competing for the same that they can help their customer sales of products that are aligned share of wallet. For example, one look at the market differently, iden- with the company’s growth plan; sales rep may be offering a customer tify growth trends, and select the pay linked to margin, rather than to traditional on-premises software, products that are best for their fu- volume (to mitigate the impact of whereas another sales rep from the ture. However, the shift in mind-set volume discounting on the sales same parent company is offering needed to go from being an order rep’s compensation); and quotas that customer a SaaS product. To taker to being a consultant is not based on product families, rather avoid these issues, focus on selling easy, and will require significant than volume. solutions. The idea is to tailor your training and incentives. 5. Simplify the sales process sales strategy to the customer’s spe- 4. Have a robust compensation through data and technology. Back- 21 cific needs, and include a bundle of plan. Staff incentives can be used end processes such as quoting, pric- products and services that are most strategically to encourage sales reps ing, proposal writing, and so on critical for that customer. 3. Take a “consultative selling” Account managers need to see themselves approach. Consultative selling is particularly important for the cus- as consultants, not just as sales reps. tomers in Tier 1b, who need your products but may not yet have real- to focus on high-margin growth should be frictionless, low-touch, ized it or may not have the ability to products, to retain top-performing and easy for the customer. This will act on that need. Account managers reps, and to reward the behaviors free up the sales team to focus more

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on the customer relationship. In studying sales practices at approximately 45 companies, we deter- s+b Trend Watch mined that roughly 40 percent of a salesperson’s time is spent on non-client-facing work that ideally What Keeps CEOs Up at Night? should be automated. Automation In a survey of 1,409 chief executives around the also provides the best medium world, policy threats weigh heavily: 42 percent through which to integrate data express signiﬁcant worry about overregulation. across different channels, whether involving social media, CRM, sup- The top business concern among respondents is port, or marketing campaigns. This the availability of skilled labor; here, tech CEOs may sound obvious, but it’s difﬁcult are the most anxious. 22 in practice. In many companies, the social media channel is divorced POLICY THREATS Percentage of CEOs “extremely concerned” GLOBAL Asset Management from customer support, which is TOTAL Healthcare Overregulation Banking & Capital Markets usually embedded within opera- Insurance tions, which is distinct from CRM. Better segmentation, effective Exchange rate volatility use of big data, more targeted strat- Consumer Goods

egies — it all adds up to a sales Consumer Goods Increasing tax burden Energy approach that will enable compa- Metals nies to capture their best potential Government response to fiscal for growth. deﬁcit and debt burden Engineering & Construction Implementing the new model Healthcare will require a systematic transforma- Geopolitical uncertainty tion, one that hinges on embracing Entertainment & Media change throughout a company and 0% 10% 20% 30% 40% 50% 60% 70%

on engaging the sales leadership, BUSINESS THREATS Percentage of CEOs “extremely concerned”

sales representatives, and back-ofﬁce GLOBAL TOTAL employees at all levels. It won’t be Availability of key skills Technology easy for large incumbents, but those Technology that wait may see startups claim an Speed of technological Banking & Capital Markets change Insurance ever-larger share of their market. + Entertainment & Media Reprint No. 16205 Insurance Bribery and corruption Energy Namit Kapoor Engineering & Construction

[email protected] Entertainment & Media is a leading practitioner in sales and Insurance Cyber-threats Banking & Capital Markets marketing strategies for Strategy&, PwC’s Technology strategy consulting business. He is a principal with PwC US, based in Chicago. High or volatile Consumer Goods Chemicals commodity prices Energy Lavanya Manohar Metals [email protected] Shift in consumer spending Consumer Goods is an advisor to executives in sales and and behaviors Retail marketing strategies for Strategy&. She is Entertainment & Media a manager with PwC US, based in Chicago. Consumer Goods High or volatile Transportation & Logistics 83 issue This article is adapted from the authors’ Energy energy costs Chemicals Strategy& white paper, “The Next- Metals Generation Sales Force,” Feb. 2016. 0% 10% 20% 30% 40% 50% 60% 70%

Source: PwC Global CEO Survey, Jan. 2016, pwc.com/usceosurvey strategy+business WHERE EXPERIENCED EXECUTIVES BECOME EXCEPTIONAL LEADERS

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General Management Program UPCOMING SESSIONS: AUGUST–NOVEMBER 2016 FEBRUARY–MAY 2017 Learn more www.exed.hbs.edu/gmp-sb essay GLOBAL PERSPECTIVE

same way and deliver the same out- global perspective comes — hundreds of millions of people excluded from formal citizenship. Shifting such an equilibrium is no simple task. But it is the sort of challenge to which the world’s social entrepreneurs apply their resolve and creativity. Social entrepreneurship has been variously defined over the years as any enterprise that includes social good as part of its mission, as a nonprofit that seeks to build its sus- 24 tainability through market forces, and simply even as any organization working to make the world a better place. This last catch-all is Social Entrepreneurship the most problematic, as it suggests every organization aiming for even by the Billions the smallest improvement in the status quo can be considered to be engaged in social entrepreneurship. An audacious effort to provide digital ID numbers The term thus becomes everything throughout India illustrates the potential for large- and nothing. scale change. In our view, social entrepreneurs seek something beyond better. They want to change a well-established by Roger L. Martin, Sally R. Osberg, engineer by training, he was one of but unhappy equilibrium, and and Jennifer Riel the cofounders of Infosys, the IT ser- transform it into a more just or more vices giant that helped spur India’s equitable stable state. Such social nly a decade ago, some 400 technology revolution. In his book, entrepreneurship can be practiced O million people in India Nilekani proposed providing each within any organizational struc- lacked any type of formal of India’s approximately 1.2 billion ture, including for-profit businesses, documentation. Most were impov- citizens with a unique, fraud-proof NGOs and not-for-profits, social en- erished and, without even basic identifier. The following year, In- terprises, and even government. identification such as a birth cer- dia’s then prime minister, Manmo- Nilekani’s efforts in India pro- tificate, they were marginalized han Singh, asked Nilekani to turn vide a striking example of social and unable to alter their societal this idea into reality. He appointed entrepreneurship practiced within a status. This condition made them, Nilekani chairman of a new govern- government context. It’s a novel and in effect, noncitizens, with no influ- ment agency, the Unique Identifica- notable experiment, given the sheer ence on or ability to participate in tion Authority of India (UIDAI), size of the problem — in terms of their country’s economic and legal which was tasked with creating such both geography and the number of systems. They couldn’t vote, open an identifier. The initiative came to people affected. But it is not entirely a bank account, or access govern- be called Project Aadhaar (the Hin- unique. In many regions and in dif- ment services. di word for foundation or base). ferent contexts, a discernible pattern Nandan Nilekani wrote about India’s documentation prob- has emerged for endeavors that aim this problem in his 2008 book, lem was the product of a system in to change equilibrium at a mean- Imagining India: The Idea of a Re- a miserable equilibrium. Left alone, ingful scale. This framework can

newed Nation (Penguin Press). An it would continue to operate in the help any organizational leader, in Lars Leetaru by Illustration essay

the public, private, or not-for-profit you can make sure the benefits will The basic strategy was to pro- global perspective sector, to think more clearly about go to the right person, and (b) [you vide every citizen who registered the purpose and principles of social can ensure] that the same person can with a 12-digit identifier tied to his entrepreneurship. By understand- be identified over time.” Given that or her specific biometric pattern. ing how a suboptimal equilibrium so many of India’s poor lacked for- This “Aadhaar number” could be has come to be, envisioning a new mal identification, social programs verified, using the biometric identi- future, building a model for change, were easy targets for fraud and abuse. fiers, when needed. It would provide and then scaling the solution, so- As an integrative thinker un- individuals with access to govern- cial entrepreneurs can permanently willing to choose between the best ment services and enable them to transform a miserable or unfair so- interests of individuals and those claim the rights of citizenship. But, cietal condition, rather than settling of the government, Nilekani seized importantly, the identifier had ap- for ameliorating its worst effects. on the opportunity to serve both plications beyond voting and gov- through the same initiative. He ernment programs. Financial insti- A Unique Identity knew, of course, that it wouldn’t be tutions, for instance, could use it 25 When Nandan Nilekani was ap- easy. The poor had no base docu- to verify a customer’s identity. This pointed head of the UIDAI, the ments, no way to prove their identity means that the Aadhaar number businessman became a bureaucrat. in the first place. The initial chal- promised value for a broad cross-sec- But the entrepreneur in him would lenge was to address that deficiency. tion of citizens, even if the primary not be easily co-opted. Nilekani “We had to have a fairly foolproof and greatest benefit was conferred was really in the game of applying way of establishing uniqueness,” on the very poor. the tools and principles of business Nilekani explained. to achieve social change. As he saw Fortunately, in the face of glob- Going Beyond Better it, not only would a unique identi- al security threats, governments and Change typically comes in small fier program enable India’s poor to businesses around the world were steps: Somebody figures out a way gain access to civic benefits, but it making great strides in using bio- to make the current state of things would reduce the country’s burden metrics to establish uniqueness with just a little bit better. But big, positive changes are vital to transforming equilibriums. Such shifts hap- Big equilibrium shifts happen pen infrequently and episodically, and they make a disproportionate infrequently and make a difference to the fate of our world. disproportionate difference. Governments have a track record of producing these equilibrium shifts through policy innovation, often of welfare fraud. In the end, he be- fingerprints and iris scans. “After in response to the dogged work of lieved, India could leapfrog Western a little bit of research and proof of effective social activists. Businesses nations in the scope and security of concept, we came to the conclusion have a shorter but equally important its identification tools. that if you do multimodal biomet- track record of producing positive As Nilekani told us in a 2014 in- rics, combining the irises of both shifts through their innovations, terview, “At one level, you can think eyes and the fingerprints of all 10 which are motivated both by profit of [Project Aadhaar] as one of the fingers, the digital signature — the and by the opportunity to provide world’s largest social inclusion proj- digital pattern of these — is unique something new to customers and ects. That’s one part of what it tries across a billion people,” said Nile- the world. to solve. The second thing that it’s kani. This approach enabled the Social entrepreneurship is a trying to solve is common to all so- agency to assess new registrants much newer source of positive societies that build welfare programs. against its database to ensure their cial change; its activities and mod- When you build a welfare program biometric patterns were not dupli- els navigate the extensive territory in any society, you need a way to cates. It could do so with accuracy between the modes of business-led identify your residents, so that (a) greater than 99.9 percent. and government-led transformation. essay

At the heart of the equilibrium methods of documenting iden- sidered not just the people without global perspective transformation is a unique model tity, including home-to-home cen- identification, but the registering that social entrepreneurs design for sus taking, were far too expensive, agencies, local businesses, and, im- a particular context. When we look too time-consuming, and too sus- portantly, Indians who already had at cases of successful social entre- ceptible to fraud to be of use in formal ID documents. He saw a preneurship such as the UIDAI his context. world in which there were not two — cases in which true equilibrium As a brand-new government classes of citizenship and multiple change was imagined, enacted, and appointee, Nilekani was a novice forms of ID, but a single, elegant sustained — we can discern four bureaucrat. He refused to give in system that could be used to estab- distinct stages. to the inertia that can characterize lish identity with government and 1. Understanding the problem. government agencies. But as an ex- businesses alike. He saw a world in The paradox of social transforma- perienced engineer and technology which all Indians would be better tion is that one has to truly under- CEO, he also recognized that he had off with an Aadhaar number. 26 stand the system as it is before any much to learn about the key players 3. Building a model for change. serious attempt can be made to in the system, and the specifics of To bring a vision to life, the social change it. Yet those who understand identity. He balanced a willingness entrepreneur must apply creativ- the status quo best are often those to learn in areas outside his domain ity and resourcefulness in building most deeply invested in it, whereas with a commitment to applying his a model for change — one that is those who see the imperative for expertise to a new field. sustainable because it reduces costs change most clearly tend to sit out- 2. Envisioning a new future. To or increases value in a way that can side the system. Effective social make a positive difference, every be quantified. In our view, social en- entrepreneurs acknowledge this dy- change agent needs to set a direc- trepreneurs don’t build innumerably namic and find a way to navigate it. tion. Successful social entrepreneurs varied models for change; success The process of equilibrium place the bar high and envision fun- stories have recurring themes. Effec- change therefore begins with a com- damental equilibrium change. This tive social entrepreneurs make use mitment to understanding a particular status quo, how it came to be, and the forces that hold it in place. Social entrepreneurs don’t build The process entails the successful negotiation of three characteristic innumerably varied models tensions: abhorrence of the status for change; success stories have quo versus an essential apprecia- tion of why it persists; application of recurring themes. expertise from another context versus willingness to apprentice in the specifics of the context in question; vision sustains the organization of a set of specific mechanisms em- and an openness to experiment with through the hard work of actually ployed across contexts to transform possibilities versus knowing when to producing such change. equilibriums. commit to and drive forward a spe- The vision must be specific The starting point for building cific solution. about how the dynamics of the a successful model is the value equa- Nilekani knew what the prob- system will shift and about who tion. Social entrepreneurs must find lem was — he had written about the will benefit. Creating and articu- a mechanism to turn a losing value lack of ID as a fundamental chal- lating such a vision requires the equation, in which costs are too high lenge to an equitable and prosperous social entrepreneur to take a sys- or value too low to produce sustain-

India. He also knew why the prob- temic approach, identifying the pri- able change, into a winning one, in 83 issue lem existed — the substantial struc- mary stakeholder but also consider- which the economics support sus- tural, political, and economic barri- ing players throughout the system tainability over the long term. To do ers to logging each person’s identity. more holistically. so, they can target either the value

And he understood that traditional With the UIDAI, Nilekani con- side of the equation (bringing more strategy+business essay

value in) or the cost side (reducing global perspective capital or operating costs). For the UIDAI, however, Nile- kani tackled both dimensions. On the value side, he sought to create a market-based demand for the Aad- haar number, to provide a commercial inducement attractive enough that Nilekani could get other players to cover some of the costs of driving his model to scale. As he recalled, “Different people in the system had different value propositions. Those people dealing with 27 social issues liked the social inclusion aspect. Those people dealing with fiscal issues liked the efficiency aspect. Then we had to ensure that BRACE FOR IMPACT the banks liked the fact that more and more transactions would flow Master the new rules of marketing, reinvent through the banking system. You’re your business model, or lead innovation at your reducing cash in the economy and increasing digital transactions. Ev- organization—how do you want to make an impact? erybody has a different value propo- From the moment you enter our classrooms, you’ll be struck by the sition. The challenge was to figure hands-on learning experiences and inventive business frameworks that out each stakeholder, and what are set MIT Sloan Executive Education apart. Whether you’re seeking career the appropriate value propositions growth or company profi tability, you’ll fi nd the tools you need to make that we needed to articulate.” immediate improvements and deliver lasting results. On the cost side, Nilekani also thought carefully about the Upcoming programs include: capital and operating expenditures of a program of this size. He was Dig i t al Mar ke t ing and S oc ial Me dia A nal y t ic s October 6–7 anxious to avoid crippling startup costs and overwhelming capital Rev i t alizing Your Dig i t al Busine s s Model risk for the agency as the technol- October 17–18 ogy was built out across the coun- Building, Leading, and Sustaining the Innovative Or g a n i z a t i o n try. The UIDAI developed a sys- October 27–28 tem by which enrolling agencies purchased the equipment needed Want more? Earn an Executive Certifi cate in Strategy & Innovation Courses in this certifi cate track introduce breakthrough concepts that can to get started, and were then reim- help you identify, capture, and deliver on great ideas and drive innovation. bursed a small amount for every ID issued. Nilekani explained that “the state government, banks, and post offices…all of them could act as registrars. At peak, we had more than 30,000 such enrollment sta- tions across the country.… UIDAI was doing more than 1 million unique IDs a day.” This reduced the executive.mit.edu/sb essay

UIDAI’s capital costs and distrib- our ecosystem, but only 300 people tive has continued even through the global perspective uted risk across the ecosystem. in the main organization,” he told 2014 Indian national government 4. Scaling the solution. Scal- us with a hint of pride. “Like the election, in which Singh was re- ability is a critical feature of effective brain of the system, it is highly lever- placed by an opposition party lead- social entrepreneurship. Models that aged; a small set of people design the er, Narendra Modi. Modi met with require constant reapplication of the technology, the solution, the busi- Nilekani in July 2014, after publicly same investments regardless of scale ness model.” Combined with an ap- backing Aadhaar. By January 2016, will commonly fail to produce sus- proach that distributed costs across it was reported that 92 percent of tainable equilibrium change. It will partners and over time, this design India’s adult population had been assigned numbers. The program is not without its By 2014, when Nilekani stepped critics, some of whom raise privacy concerns or question the decision 28 down, more than 600 million people to provide a number to residents had been issued their unique ID. as well as citizens. But its impact in demonstrating social entrepreneurship in action is undeniable. typically be too expensive to achieve made the system scalable and robust. From a world in which hundreds of transformational scale, especially Nilekani leveraged the assets of busi- millions of people had to live with- when the intended beneﬁciaries are nesses and government agencies to out formal identity, without real unable to pay directly for the beneﬁt. get hundreds of millions of people citizenship, and without access to Of course, scale is not measured registered in less than a decade. the formal economy, the UIDAI by an organization’s size or budget. has created a world in which every It is measured by the effectiveness Shifting the Balance resident can be counted — moving of that organization in shifting the For social entrepreneurs, “good closer a world in which every indi- equilibrium it targets — that is, by enough” simply isn’t good enough. vidual in India truly counts. + the change’s impact. High impact They confront the societal struc- Reprint No. 16206 is often tied to purposeful action tures that leave too many behind, Roger L. Martin on the part of social entrepreneurs roll up their sleeves, and undertake [email protected] to design for economies of scale; to the hard, exhilarating, and impor- is a writer, a strategy advisor, and former tant work of transforming what is dean and current institute director of the take a systemic approach and lever- Martin Prosperity Institute at the Rotman age other actors in the ecosystem in into what can and should be. School of Management at the University order to bolster and extend a shift; Nilekani’s efforts to transform of Toronto.

or to open up their models and India by giving every resident a for- Sally R. Osberg methodologies to others, expanding mal identity, and thus the opportu- [email protected] impact by inviting imitation. nity to become an engaged member is CEO of the Skoll Foundation, a philan- thropic organization that invests in social Nilekani realized early on that of the economy and to participate entrepreneurship worldwide. efﬁcient implementation would be in society, illustrate how powerful Jennifer Riel critical to producing sustainable equilibriums can be jolted off bal- [email protected] change. His team designed the pro- ance and supplanted by new ones. is managing director of strategy and gram with scale and efﬁciency in By 2014, when Nilekani stepped innovation at the Martin Prosperity Institute at the Rotman School. mind from the outset: They wanted down as chairman of the UIDAI, “scalability at the back end through more than 600 million people had Reprinted by permission of Harvard technology, scalability at the front been issued their unique 12-digit Business Review Press. Adapted from Getting Beyond Better: How Social

end through technology and pro- Aadhaar number, the numbers were Entrepreneurship Works. Copyright 2015 83 issue cess, and a business model that al- tied to 60 million bank accounts, Roger L. Martin and Sally R. Osberg. lowed multiple organizations to and more than 100 agencies were All rights reserved. become enrolling agencies.… There using the identiﬁer for authentica-

were more than 100,000 people in tion. Perhaps most telling, the initia- strategy+business BREAKING CONVENTION SPARKING INVENTION

Since its founding, MIT has fostered a spirit of ingenuity and creative disruption. As a result, our faculty and students are behind some of the world’s boldest inventions and innovative companies. That’s also why thousands of executives and senior managers from around the globe come to MIT Sloan Executive Education every year seeking hands-on experiences that can help them catalyze revolutionary change at work and in life.

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In their determination not to be innovation left behind, many traditionally non- digital companies have jumped into the market by becoming serial acquirers. The acquisitions have given these companies access to software and cloud technologies that they probably wouldn’t have developed on their own. But the spate of deal making is presenting traditional companies with a new set of challenges. In the red-hot market for digital M&A — M&A in which the 30 target is a hardware, software, IT service, or Internet company — leaders of traditional companies must not only pick the right deals but figure Will You Be Mine? out how to leverage them. Corporate development staffs and business unit As they look to enhance digital capabilities through managers are learning as they go. mergers and acquisitions, traditional companies Globally, digital deals accounted have to heed a new set of dating rules. for about 32 percent of all transactions in 2015, according to a study by Strategy&, PwC’s strategy consult- by Joerg Krings, J. Neely, employees to MasterCard’s payroll) ing business, and data provided by and Olaf Acker had virtually no impact on the com- Dealogic. That was up from about pany’s share price. 20 percent in 2011. The real spike has n the space of about 17 days Yet to dismiss these deals as in- been seen in acquirers in non-digital I in the spring of 2015, Boeing consequential because of their lim- industries, including automotive, bought a company that develops ited immediate impact would be to natural resources, retail and whole- aerial imaging software, Spanish miss the point. None of the deals sale, and hospitality (see exhibit). bank BBVA bought a design studio was a “one and done.” The deals Companies in non-digital industries that specializes in the online user experience, and MasterCard purchased an analytics company that Companies in non-digital industries helps convenience store owners figure out what they should sell at the completed 48 percent more digital checkout counter. deals in 2015 than they did in 2011. The three deals barely registered on Wall Street. The imaging company that Boeing bought were among the at least seven, eight, completed 48 percent more digital for US$25 million, called 2d3 and 10 digital acquisitions made deals in 2015 than they did in 2011. Sensing, was a tiny 40-employee by BBVA, MasterCard, and Boe- They are embarking on multiyear ef- outfit. Spring Studio, BBVA’s ac- ing, respectively, since 2011. Other forts to protect their franchises and quisition, had just 38 workers. brick-and-mortar companies were get ahead of their competitors. Although MasterCard’s deal for even more active during that period. Applied Predictive Technologies was For instance, Siemens has bought or Clear Objectives larger, the $600 million purchase invested in at least 28 digital proper- Of the roughly 20,000 digital deals

price (and the addition of some 300 ties, General Electric at least 22. announced between 2011 and 2015, Lars Leetaru by Illustration essay

about a third involved a non-tech- ity of entirely new service offerings; ously known as Reed Elsevier) has innovation nology, non-telecom buyer, accord- the French bank Société Générale been equally active, buying dozens ing to Strategy&’s analysis. (The to- bought Fiduceo in 2015 to get into of information and software com- tal deal count excludes investments the burgeoning area of financial ac- panies while disposing of some off- in digital properties made strictly for count aggregation. line properties, including the print the purposes of getting a financial As consumers of information magazine Variety. return, including investments made and entertainment have increasingly 3. Digitization of the value chain. by venture capital and private equity shifted online, media and publish- The digital acquisitions that tradi- firms.) These deals fit into three ba- ing companies have been among the tional companies make aren’t always sic categories. most avid users of M&A to re-create designed to sell something new. 1. Acquisitions of digital prod- their business models. Since 2011, Sometimes these deals are aimed ucts and services. Some deals are for instance, German media con- at helping companies do a better intended to give the acquirer a new glomerate Axel Springer, publisher job of identifying promising new product or service it can sell. The of Bild, one of Europe’s largest- products or of speeding the deliv- 31 new product could be something circulation newspapers, has used 25 ery of products they already have or that helps the acquirer expand its of- acquisitions of digital properties to are developing. fering in an area of growing impor- increase its presence in areas such For instance, when it bought tance to customers, such as smart as online classified ads and social Definiens, an identifier of bio- meters. It could be an analytics ser- media. The information and ana- markers, in 2015, pharmaceutical vice, such as the tools for assessing lytics company Relx Group (previ- company AstraZeneca was seeking patient data that 3M’s healthcare business obtained through its acquisition of Treo Solutions. Exhibit: Non-Digital Industry Investments in Digital Assets The new product could also In the last several years, mergers and acquisitions have become a more popular way for companies to gain access to much-needed technological capabilities. be a digital version of a product the Percentage-point increase in the share of deals that were digital, 2015 vs. 2011 % digital acquirer was previously selling in a deals physical form. The acquisition of 2015 Automotive 10.0 16% Elektrobit Automotive by Conti- Natural Resources 8.9 11% nental AG in May 2015 exemplifies this. Continental had already been Retail and Wholesale 7.8 21% introducing digital products and Hospitality 7.1 9% moving beyond its roots as a maker Consumer Products 6.4 12% of physical car parts — tires, brake Personal and Professional Services 6.4 24% systems, and powertrains. Elektro- Financial Services 6.2 13% bit’s software for driver assistance Chemicals 6.0 10% and infotainment may allow Conti- Entertainment 5.7 21% nental to cement its position in the Healthcare 5.2 12% digital realm. Agriculture and Forestry 5.1 7% 2. New digital business mod- Basic Manufacturing 4.8 11% els. Adding a new way of generat- Pharmaceuticals 3.5 7% ing revenue that isn’t closely bound Transportation and Logistics 3.4 8% to the physical world is a second major objective of those pursuing Construction 3.3 8% digital deals. This can mean a new Utilities 2.3 7% delivery model for a similar set of Machinery and Equipment 1.3 15% products — the goal that Walgreens Aerospace and Defense –2.1 25% had when it bought Drugstore.com –4–20246810 in 2011. In other instances, the ac- Note: Data excludes investments by venture capital and private equity firms. quisition may allow for the possibil- Source: Dealogic data for January 2011–December 2015, Strategy& analysis essay

technology that would help it iden- emphasis on cost synergies) that it area that allows them to identify the innovation tify the best patients for clinical tri- might use for a more conventional most promising digital targets. als of cancer drugs. BBVA was cer- deal. Such deals face overarching To deal with the complexity of tainly thinking about its value chain obstacles that include cultural differ- the identification stage, companies in 2015 when the bank bought ences and the acquiring company’s must be clear about how they choose Madiva for its speedy mortgage- typically light experience with digital to create value and how different approval software. Target’s 2014 M&A. Digital M&A presents chal- technologies might contribute to the purchase of Powered Analytics was lenges at every phase of the process: process. And if the buyer is making driven by a desire to give customers Identification. “Who do we want a set of acquisitions in a given area interactive recommendations and to buy?” With traditional deals — in the hope of building up a specific guidance when they were shopping one company buying another in the capability, the task gets even more in Target’s retail stores. And a steady same industry — the answer to this complicated. The people scouring stream of acquisitions in the Inter- question is usually straightforward. the landscape for M&A ideas must 32 net of Things arena, particularly of sensor and cloud technologies, is offering traditional manufacturers In the overheated state of the a way to track their products in the aftermarket and play a bigger role in digital M&A market, time is not service and support. on the buyer’s side. To some extent, the deals in the value chain category are related to IT investments that traditional The number of targets is limited have a sense of how different tech- companies have been making for by the strategic intent: to buy an nologies might interconnect and years, including investments in adjacent product, get into a particu- must be good judges of the feel and products like SAP. This makes deals lar geographic market, or consoli- fit of different target companies. in this category less experimental, in date. A company’s managers may These situations require a new set of a sense, and increases the likelihood be able to generate a preliminary screening tactics. of a fast payback. list based solely on their knowledge Valuation. “What’s it worth?” In of the market, and the initial con- digital deal making, there is often Digital Deal-Making Challenges tact could easily be one executive no obvious answer to this question. Many of these acquisitions thrust calling another. There may be no cash flow to which the acquirers into circumstances Very little of this framework the buyer can attach a multiple. The where they don’t feel as sure-footed applies to digital deals. Instead of overheated state of the digital M&A as with other types of acquisitions. one main person to approach, there market makes the appraisal process For many traditional companies, may be four or five — a company more difficult; with these deals, digital deals are what we call en- founder, investors, key members of time is not on the buyer’s side. hancement deals, since they are the team. Instead of a short set of The concept of strategic value meant to enhance the acquirer’s ex- acquisition candidates, the list may looms large. A traditional company isting set of capabilities. Both our contain dozens, some of them ex- may have great potential in a given experience working with buyers and tremely small. The acquisition ideas area but may need to chain together research we’ve conducted show that could come from just about any- a few new digital capabilities to real- these deals are among the trickiest where — contacts at major research ize the opportunity. Maybe what it’s to pull off (see “Deals That Win,” universities, patent searches, part- missing is a way of delivering a prod- by J. Neely, John Jullens, and Joerg ners at venture capital firms. The uct digitally, or of interacting with , s+b, Krings July 14, 2015). technologies are generally new and customers through the cloud. A 83 issue Certainly a company would be highly specific, and their viability target company that has — or ap- making a colossal mistake if it tried is often untested. In essence, tradi- pears to have — the missing link in to jam an enhancement deal through tional companies must now develop the capabilities chain may be able to

the same M&A apparatus (with an a brand-new capability in the M&A drive a hard bargain. strategy+business © 2016 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. essay

And in some situations, stra- and 1990s. Ray Ozzie, developer of discontinuing a free food or bever- innovation tegic value leads to prices that sim- Lotus Notes, likewise stayed at Mi- age benefit may have a subtly crush- ply don’t make sense for traditional crosoft for five years (2005 to 2010) ing effect on morale. Yet an acquirer companies. For instance, suppose a as chief technical officer and chief also needs to be sensitive to the im- commercial security company sets software architect, after Microsoft pact on the broader organization if it its sights on a startup specializing bought a company he had founded. allows an acquired unit to continue in optical recognition, perhaps in Retention is potentially more to operate by its own, more flexible hopes of using the startup’s technol- difficult in deals where the buyer is or more generous rules. ogy to create a product that would a traditional company. But tradi- In short, integrating even a control access to buildings. At $10 tional companies can improve their small digital property requires a million or $20 million, that might chances at retention — and the considerable amount of thought- be capital well spent. But if Face- commitment — of the technologists fulness on the part of a traditional book sees the technology as some- working for them after deals close company. And it isn’t only the 34 thing it could run across all the if they go beyond money and try managers or executives doing the photos its 1.5 billion users upload to identify goals the technologists deal who must be committed to and decides to enter the bidding, the contest is likely to become one the traditional company should quit. As Because digital deals don’t the CFO of a Fortune 500 company once said to us, you have to know naturally lend themselves to your walk-away price. cost rationalization, acquirers We think traditional companies largely understand this dilemma. need to tread lightly. And it helps explain why at this relatively early stage of their digital deal making, they tend to emphasize can best accomplish with the help the deal’s success. The challenges small deals over large ones. They of their new, bigger organization. of traditional-on-digital M&A are understand the need to take a little Money means a lot to the people such that before an offer is ever leap of faith, but don’t want to be who have founded a company and made, other professionals at the ac- foolish about it. are selling it. But it isn’t everything, quiring company, including human Talent retention. “How can we and earn-out clauses have their lim- resources, information technology, make sure the team stays?” When its in terms of influencing behaviors. and line managers, must buy into, AstraZeneca bought Definiens, it Deal integration. “How will support, and contribute to the post- gained access to Gerd Binnig, a we integrate this company into our deal integration plan. physics Nobel laureate who had larger operation?” Traditional deals Advocating for a light touch is founded the company. Walmart, in are often driven by the prospect of not the same as suggesting that tra- buying Adchemy, acquired the ser- cost synergies. But because digital ditional companies should not ask vices of a former engineering lead at deals don’t naturally lend themselves their digital acquisitions to make WebEx and a former head of search to cost rationalization, acquirers any adjustments at all. In conjunc- innovation at Yahoo. need to tread lightly. tion with the new company’s man- In digital-on-digital acquisi- To start with, it sometimes agement team, the buying company tions, these exceptionally talented makes sense to let the acquired com- (usually through an executive acting scientists and technologists some- pany stay in its geographic location, as a sponsor) needs to set milestones times do stay. Nathan Myhrvold and to limit any attempts at opera- for product development, talent

came to Microsoft after the com- tional efﬁciencies, at least initially, retention, and broader company 83 issue pany bought his startup for $1.5 to back-ofﬁce integration. Acquirers collaboration. Avoiding such chal- million and played a prominent must also respect cultural differenc- lenges, and instead allowing the role at the software company dur- es. Pushing change in a seemingly operation to be ring-fenced, runs

ing its dominant run in the 1980s minor area such as dress codes or the risk of forestalling a linkage to strategy+business essay

the company’s broader strategy. The to convince the digital company to innovation question is how to get the linkage. accept their offer instead of a com- New from University Multiple post-deal operating models petitive offer from a rival suitor. To of Toronto Press exist, and companies have to select succeed, they will need as much the ones that work for them on the empathy as they do cash. The of- basis of their own identity and the fer can’t just be a certain amount of unique circumstances of the ac- money, “take it or leave it.” Execu- quired asset. tives at traditional companies must place themselves in the shoes of the Motivated Sellers target company’s key decision mak- We’ve resisted putting it so bluntly ers and figure out what, on top of up to now, but when digital and tra- the payout, might matter to them. ditional companies enter a relation- The key factor might be the chance ship, things can get messy. We are to vastly increase the distribution reminded of the problems that arose of the digital company’s product. when one of the biggest U.S. con- It might be the stature of being Leadership is Half the Story sumer packaged goods companies associated with a prominent brand. A Fresh Look at Followership, Leadership, started to advertise on Google. The It might be the traditional compa- and Collaboration company’s structure was complex ny’s reputation for taking the long- by Marc Hurwitz and Samantha Hurwitz and the number of employees it had term view. These acquisition offers This book introduces the rst model to seamlessly integrate leadership, interacting with Google at one point are akin to a marriage proposal. followership, and partnerships and would have come close to filling a When you say, “I’m the one for you,” provides new ideas and practical advice Broadway theater. Neither Google and ask your partner to commit to for anyone working in an organization. nor the packaged goods company you for life, it has to ring true. + was happy with the results. Reprint No. 16207 Applying this experience to Joerg Krings M&A, big traditional companies [email protected] should maintain some degree of is an advisor to executives in the automo- centralized oversight of their digi- tive and industrials sectors for Strategy&, PwC’s strategy consulting group. He is a tal deal-making process. Not all of partner with PwC Germany based in them do. Given the organizational Munich. His focus is organic and M&A growth strategies. complexity of traditional companies, it would not be unusual if J. Neely employees from separate functions [email protected] is a thought leader in M&A transformation were off trying to buy largely similar with Strategy&. He is a principal with PwC digital companies at the same time. US based in Cleveland. His specialty is Small Business and the City The Transformative Potential of Small The process works better when a mergers and restructurings in consumer products and industrial sectors. Scale Entrepreneurship single person or group oversees all by Rafael Gomez, Andre Isakov, and the company’s digital deals and Olaf Acker Matthew Semansky [email protected] An inspiring account of the dynamism figures out how a given deal might is a leading practitioner in digital services of urban life, Small Business and the City benefit other parts of the enterprise. and technology strategy for Strategy&. introduces a new “main street agenda” Without such centralized oversight, He is a partner with PwC Germany based for the twenty-rst century city. in Frankfurt. His focus is technology and companies will miss opportuni- digital transformation. ties — opportunities to learn, share ideas, preserve capital, and take advantage of new technology. A final point: Even when they are acquiring, traditional companies have to do a sales job. They have utppublishing.com essay TECHNOLOGY

man behavior, opposite sides of the technology same coin. This approach would use technology to sense and respond to threats, and it would be just as effective — indeed, more effective — at eliminating vulnerabilities. But it would not be a purely technological or defensive solution. Nor would it view digital intrusion as a siege that must be defended against, at considerable cost. Rather, it would embrace an entirely new concept of cyberse- 36 curity as a source of strength — that is, as an opportunity to rethink the foundations of a company’s operations and customer relationships. Safety in the Cloud If your company followed this approach, you would monitor attacks The next generation of cybersecurity prevents through sophisticated pattern rec- attacks by monitoring online behavior — of ognition, deflect them through the intruders, customers, and everyone else. use of digital decoys, and learn from any attacks that did occur, in order to better prevent future threats. You would also gain a richer understand- by David Burg and Tom Archer promise their technology in other ing of your business environment, malicious ways. and a better sense of what legitimate or most businesspeople, the But imagine a different kind customers want and need. F word cybersecurity suggests a of cybersecurity, one that no longer Cybersecurity of this type exists shield. When people think depends strictly on the IT depart- today. The key is cloud computing. about protecting their enterprise ment’s engagement in a desperate, For many companies, keeping data from intrusion with information technology, they typically think of the much-publicized breaches of Moving to the right kind of the past few years: those at Target, Sony, JPMorgan Chase, Goodwill advanced cloud system represents Industries, Snapchat, the U.S. Of- a more dynamic approach to risk. fice of Personnel Management, and a wide range of other organizations. It’s understandable that most com- never-ending arms race with intrud- in the cloud has become a fact of panies take a defensive posture with ers. Instead, a company would use life. But some business leaders — respect to digital security. They cybersecurity as a way to better un- even as they recognize the benefits know that hackers from around derstand its business environment. of greater operational agility, lower the world are continuously probing It would defend itself by monitoring cost, and adaptability that come corporate networks, looking to steal activity across all its online systems, with the cloud — continue to ex- data of value — information about studying not just the moves of hack- press concerns about its security. customers, personnel, finances, pro- ers but the actions of legitimate cus- They worry that they will have less prietary research, trade secrets, and tomers as well. Both types of visits, control over sensitive corporate data

other critical assets — and to com- after all, are forms of repetitive hu- when it is stored in remote inter- Lars Leetaru by Illustration essay

linked computers. They assume that way, and hackers will always be one platforms, it is innately “virtual” — technology computer ﬁrewalls are like locks on step ahead. The problem calls for an code runs on other code, not on de- a brick-and-mortar door: The more entirely different type of solution, vices. This makes it easier to adapt, solid the barrier, the more impervi- and that’s where the cloud comes in. often immediately, to intrusions and ous the system. It’s important to note, before other changes in the environment. The truth is that applications going any further, that not all cloud- The cloud also offers simplic- and data maintained in the cloud based systems are equal. Some are ity. It creates fewer points of vulner- can be more secure than data held more advanced than others. Some ability and makes it easier to keep in on-premises corporate systems. services billed as “cloud computing” up with technological advance- That’s because moving to the right do little more than replicate an on- ments — because companies can kind of advanced cloud system rep- premises installation in a network now rely on their service providers resents a more dynamic approach to of interlinked computers. When we to build the infrastructure, hard- risk. The security of your enterprise talk about the cloud in this article, ware, software, and services re- is based not just on keeping people we are referring to offerings such as quired. It also enables companies to 37 out, but on watching people who Google Cloud Platform, Amazon scale up their systems as needed, to come in. You learn from every at- tempted attack and even from every VIDEO FEATURE use of your data. You integrate cybersecurity with marketing, custom- How To Use Cybersecurity To Gain a er service, and logistics, to develop a Competitive Advantage single way of tracking the behavior The security of barriers is based of everyone who interacts with your not just on keeping people out, company. With this type of system, but on watching people who come in. the more attacks the cloud faces, the stronger it becomes. Web Services, and Microsoft’s Azure. a degree not possible with on-prem- The Best Defense Is Analytics These advanced cloud services repre- ises computing. The standard approach to protect- sent major investments in interop- For example, Bluecore, a New ing on-site corporate networks from erability, protections, and ongoing York City–based startup, provides cyber-attacks involves the use of innovation that allow off-premises about 100 high-end e-commerce IT systems to detect and prevent enterprise IT to realize its potential. companies with the ability to send unwanted efforts to gain entry. From a pure security perspec- customers emails in response to Such efforts are premised on the tive, the virtues of the advanced their online behavior. A shopper conventional view that a company’s cloud are many. It can provide al- might make several purchases on network is like a castle inside walls. most unlimited low-cost computa- a website, but then reach the shop- The castle is protected by bolting tional power, which is often needed ping cart page, feel put off by the on more and more security measures to identify the kinds of suspicious shipping costs, and fail to complete in hopes of keeping out the bad activity that indicate the movements the transaction. Bluecore’s app can guys without rendering these net- of hackers and who they might be. detect that motive in the online be- works so impervious as to make Without the cloud platform and its havior of the customer; it can also them unusable. analytical power, it would be almost be set up to send an automated, per- Yet no such purely defensive impossible to detect such patterns, sonalized response that, say, offers tactical system can ever be truly ef- especially when monitoring huge to waive shipping costs. According fective, especially as companies digi- volumes of data, highly complex to Bluecore cofounder and CTO tize more and more aspects of their and interconnected applications, Mahmoud Arram, the ability to internal operations and external and time intervals as long as months track security was a critical factor in contacts with the outside world. Op- or years. the company’s use of cloud comput- erational technologies are becoming Because cloud software is ining — in this case, of Google Cloud too complex to be protected this dependent of particular hardware Platform. “One of our customers essay

needed confirmation of certain lev- computer that manages it and re- to detect the malware as well as technology els of security, and we were able to ceives information from it could the suspicious behavior occurring show them that we could meet their be located anywhere in the world. among the end point, network, and security requirements,” he says, in The malware is designed to move perimeter. a report that Google produced. “It through the company’s IT systems, The standard defense against made me realize that if we were run- profiling their data structures and such attacks is limited to remedia- ning our own data center, we prob- the information they store, and then tion and repair. First, the malware is ably would have run into trouble in to copy or remove any valuable data removed anywhere it can be found. that regard.” it finds, transferring it to the com- Then the vulnerable points must be Most importantly, a cloud- mand-and-control hardware. repaired and the losses and damage based system offers vast improve- By the time a cyber-attack is assessed. Since many on-premises ments in a company’s ability to detected in a typical computer sys- IT technologies are not designed counter cyber-threats because of tem on your premises, the security to work with one another, any ana- 38 the way it responds to intrusion. A technologies have already failed in lytical capability that the company’s typical cyber-attack begins with a at least three ways. The perimeter systems have can’t pull together the hacker detecting a vulnerability in technology failed to keep the un- pieces of the puzzle to “see” and “un- a company’s systems or network authorized activity out; the net- derstand” what is happening, so it’s that allows the intruder to plant work technology failed to detect the highly difficult to learn from this malware on a computing device. ongoing communications between experience. Instead, there is always The malware may never have been the command-and-control com- another cybersecurity application seen before. It is very hard to detect; puter and the infected end points; the company can bolt on, as it hopes the so-called command-and-control and the end-point technology failed for the best next time.

Romans Aqueducts

Strategy that works builds empires.

In the cloud, by contrast, secu- identified, the operational data analytics firepower of cloud-based technology rity technologies are fused together about the hazard is injected into security. Any damage assessment into an analytics platform, which the analytics platform and com- necessary is minimal, and remedia- is maintained across a wide variety pared to the entire body of accu- tion is almost instantaneous. of computer hardware systems. In mulated security technology in- real time, the system logs and ana- formation. At the same time, any Frontiers of Cybersecurity lyzes all activities taking place on threatened applications and their When companies move their cyber- the computers, including all clicks, associated data are immediately re- security to the cloud, they typically keystrokes, and Web requests. An spawned in a new, software-defined start by leaving some applications — advanced cloud service can then network beyond the reach of the at- typically the most valuable, whose compare this activity against its tackers, and the vulnerability is im- breach would create the most prob- own continuously compiled re- mediately patched. lems — on their premises. But your pository of intelligence about large The result is a dramatic reduc- company can’t fully reap the benefits threats — as well as an ever-expand- tion in the time elapsed between of this new approach until it makes a 39 ing group of algorithms to detect detecting and countering the threat. cloud-based cybersecurity program anomalies. The system also con- Moreover, because all interactions an integrated element of its overall tinually checks the integrity of the with cloud-based applications are analytics program and business op- security controls in place, and evalu- browser-based, users must be au- erations. You may have moved other ates the critical entry points of the thenticated each time they log on. aspects of your digital activities into system and what alternatives might This authentication information, the cloud already. Now is the time exist if they had to be shut down. and the increased information about to integrate cybersecurity fully into The moment a new threat is the browser session itself, adds to the the mix.

The Model T The Assembly Line

Strategy that works revolutionizes industries.

The best way to begin is by ana- metric data — as well as how they those logistics? What kinds of ef- technology lyzing how your organization oper- behave online, where they go, and ficiencies will arise as you look for ates, both internally and externally. what they appear to be looking for. ways to streamline your contacts Identify how the key people you Moreover, every individual has an with outsiders? need to protect, including the cus- “electronic fingerprint” based on You can also integrate cyber- tomers and employees whose sensi- the pace, rhythm, and recurring se- security with insights into customer tive information you handle, work quences of their keystrokes. Analysis behavior and preferences. The task and communicate. Where are they of all these patterns can help com- of monitoring intruders’ efforts to usually located? Where are they panies detect criminal intruders and break into your online systems is traveling to? You’ll want to secure the bots that make up more than 60 very similar to the task of authen- those locations. Who’s coming to percent of the traffic on the Internet ticating legitimate entrants as they work, and in which offices? Look at — before they do any damage. log in and move around your web- the devices they use to connect with Another primary goal is to iden- sites. A single cloud-based analytics 40 you, the systems in your own back tify and understand the people you system can monitor the activity of office, and the communication pat- should be engaging with (customers, customers, employees, and intrud- terns of everyone involved. suppliers, partners) and distinguish ers simultaneously. The resulting One primary goal of this analy- them from the people out to do you insights can enable your company sis is to set up early indicators of harm. For example, you might ana- to paint a picture of all the activities intrusion. Hackers can often be lyze your presence in supply chain going on in your systems, good and recognized through their entry cre- networks and the vulnerabilities to bad. This picture will become ever dentials, machine identification, which they expose you. How can more detailed as the system gathers geolocation, and (increasingly) bio- you optimize, protect, and monitor more data by tracking online behav-

Better Health Big Data

Strategy that works improves lives.

ioral paths, detecting threatening increasingly shared among com- protection go hand in hand. The technology patterns and anomalies that humans panies and governments, it will be organizations that make the integra- simply can’t see. It can then devise important to openly exchange in- tion work are those that build a sin- further heuristics to counter those formation about the attackers’ iden- gle system, sometimes from multiple activities. A great deal of cybercrime tities and the nature of the threats cloud vendors, that incorporates patient information, operations, and regulatory compliance. For exam- Analysis of patterns can help ple, Beth Israel Deaconess Medical Center in Boston, a teaching hospi- companies detect criminal intruders tal of Harvard Medical School, has before they do any damage. publicly explained the transition it is making, which it is undertaking in part because the lease on the build- involves low-probability events that they pose. With a cloud-based sys- ing housing its data center is about 41 have a high impact — just the kinds tem, this can be done without com- to expire. Instead of seeking a new of activity that big data analytics is promising anyone’s secure data, and facility, Beth Israel “embraced the especially good at pinpointing. it can be set up in a way that benefits public cloud,” as chief information The final strength of the cloud- the entire knowledge base shared by officer John Halamka put it. based system lies in its ability to cloud participants. Halamka, who is himself a combine authentication and ana- One industry that relies on in- practicing emergency physician, ar- lytics from multiple sources. As the tegration is healthcare, wherein con- ranged for an independent audit of problem of cyber-attacks becomes cerns about cybersecurity and legal security issues at three vendors —

Strategy& creates Strategy that starts with your greatest strengths and builds in strategy that works. execution at every step.

Let’s talk about what works for you. strategyand.pwc.com

Amazon, Google, and Athenahealth, pability. Every company these days you continue to invest in on-premis- technology an electronic services company that must guarantee the security of its es IT systems, you will trap yourself specializes in this industry and that customers’ data. A company with a in the ongoing sunk costs of con- is also moving rapidly toward the distinctive capability in this domain ventional cybersecurity approaches. cloud. Halamka checked into the goes further. If it’s a business-to- Each year, as intruders grow more physical security of the vendors’ data business company, it may offer the sophisticated, you’ll have to grow centers and their encryption, as he highest level of security for clients more sophisticated along with them. would with any stand-alone system. and suppliers, given the proprietary You’ll have to invest in countering But the compelling factors had more and often secret nature of the data them. And they only have to break to do with the ability of the system they exchange. If it’s a consumer- past your defenses once to unleash to maintain regulatory standards for oriented company, it may use secu- a horrendously expensive and debili- patient confidentiality, to improve rity, monitoring, and tracking to of- tating attack. administrative tasks, and to track fer personalized services that no one But if you move your IT sys- 42 behavior. “Encrypting data is some- else can match. tems and cybersecurity into the times seen as a panacea,” he wrote in But no large company can cloud, you’ll spend much less on cy- a blog post about the subject, “but if make the move all at once, given its bersecurity, because you’ll be draw- we study the major security breaches investments in massive legacy sys- ing on the expertise of many other of the past year, we’ll find that most tems and databases. Instead, it must companies. You won’t have to fund accesses occurred at the application take a logical, systematic, risk-based it all yourself. That money can now be moved into more strategically relevant endeavors — which in turn The cloud enables you to think will also help you finance any further cloud-based expansion. of security as a truly differentiating As you plan your move to the business capability. cloud, consider the applications and related data that power your most important capabilities, those level, not the data level — encryp- approach to protecting its most sen- linked most closely to your strategy. tion of data [in itself] would not sitive data as it moves it to the cloud. They should be moved first, because have helped.” Your first step should be to they will benefit most from the op- conduct a pilot program on an ap- erational flexibility and analytical Making the Move plication or data set that isn’t hugely power of the new system. This ca- Moving a corporation’s technology sensitive or mission-critical, pay- pabilities set might include customer infrastructure into the cloud is an ing attention to what is involved in service, consumer insight, logistics, enormously attractive proposition, making the move, how well the sys- or innovation. Financial systems and the promise of cloud-based tem functions in the cloud, and how and data that are sensitive, but that cybersecurity only makes it more so. it is interoperating with the associ- do not support distinctive capabili- It can allow your company to avoid ated cloud-based security systems. ties, can be moved later. spending the millions of dollars that Then, once you are comfortable This is the approach Netflix would be needed to bolt more se- with the pilot, you can begin mov- took in moving most of its systems curity onto your on-premises sys- ing more sensitive data and systems to Amazon Web Services, just as the tems. The capital saved this way to the new environment. company’s business model shifted can be put to better use funding the For each part of your opera- from mainly mailing DVDs to move itself. tions, you can build a business case, mainly streaming video. The switch

Among the virtues of moving thinking strategically about the eco- began back in 2010, when Netﬂix 83 issue cybersecurity into the cloud is that it nomic beneﬁts of moving your in- decided that converting most of its enables you to think of security not formation technology into the cloud operations to the cloud, including as a technical specialty but rather as and the way such a shift can affect the actual streaming of content —

a truly differentiating business ca- your overall cost management. If which at peak times accounts for strategy+business essay

37 percent of all Internet traffic — including Amazon’s S3 and Micro- its private information leaked to the technology would free up its software engineers soft’s Azure — storing not just credit public, much of its business would to focus on creating new services card data but information on video, likely be destroyed. rather than managing its systems. In music, and book purchases. This Within the next five or six years, the summer of 2015, the company approach is noteworthy because we expect that most companies will finally shuttered the last of its own Apple tends to be very deliberate in fully integrate cybersecurity into data centers, although it still main- its choices about both outsourcing their digital business processes. If tains several in-house commodity and security. your company is one of the first, it systems, such as human resources. Google’s cloud platform, for will help you outpace your competi- Netflix’s data is sensitive be- its part, lists a variety of enterpris- tors. The combination of advanced cause in addition to billing informa- es that base their operations in the technologies and cloud architectures tion, it contains lists of subscribers’ movie preferences and a history of what they have watched. The move Netflix decided that converting 43 to the cloud represented a recognition that this was the only way to most of its operations to the cloud protect the company’s 62 million would free up its engineers to subscriber accounts in the face of a rapidly changing and growing op- focus on creating new services. erational environment. Netflix is a firm believer in applying the concept of development operations — a Google cloud. They include Autism will enable your business to respond combination of agile software devel- Speaks, which maintains a massive more flexibly to the changing busi- opment and automated software re- database of DNA samples linking ness environment, to understand leases — to constantly maintain and family genetics to the possibility your customers in greater depth, and improve its cloud-based security. It of learning disabilities; Image32, to innovate at faster velocities, all at has developed several security ap- which allows doctors to share visu- lower cost — and all while keeping plications of its own. These include al images of X-rays and CT scans, your data more secure. + Security Monkey, which constantly always under strict patient privacy Reprint No. 16208 monitors and analyzes the compa- rules; the American Precious Metals ny’s security efforts; and FIDO, or Exchange, which serves millions of David Burg [email protected] Fully Integrated Defense Operation, customers in buying and selling such is a principal with PwC US. Based in which automatically analyzes and commodities as silver, gold, plati- McLean, Va., he leads PwC’s global and prioritizes security events depending num, and palladium; Brand Vegas, U.S. cybersecurity practice. He helps corporate clients, law firms, and the U.S. gov- on their severity. Although no sys- which sells 2,000 tickets per minute ernment in matters involving cybercrime tem is foolproof (indeed, Netflix has to attractions in Las Vegas, includ- investigations, complex data analysis, and operational initiatives. experienced the leakage of customer ing to some of its risqué nightclubs; passwords onto public websites), Energyworx, which compresses and Tom Archer the cloud has enabled the company stores electric power usage data from [email protected] is a partner with PwC US and serves on to respond quickly to such events, European homes and businesses; the board of partners for the global PwC while maintaining its ability to de- the Khan Academy, which provides network. Based in Silicon Valley, he is sign and implement new services video courses to students around PwC’s leader for its global alliance with Google. He was previously the U.S. leader quickly and efficiently. the world, and keeps track of their of the PwC technology industry practice, Netflix is just one of a number onscreen behavior; and Workiva, an and has advised multinational technology companies for more than 25 years. of enterprises with significant cyber- online service used by companies to security concerns that have moved compile and analyze the highly sen- their operations this way. Another sitive data that goes into their annu- example is Apple, which runs its al reports. If any of these enterprises iCloud services on multiple systems got caught in a cyber-attack and had feature

global perspective 44 PowerGlobal

Winners, losers, and feature strategies in the new world

Shift

economic order. global perspective BY DENNIS CHESLEY, MILES EVERSON, AND JOHN GARVEY

During the mid-2000s, when emerging markets In short, a new global economic order is now emerg- were growing at breakneck speed, the cavernous gap ing to replace the one that has existed since the end of separating industrial and developing economies began World War II. For the foreseeable future, the global to close. This convergence took place against a back- economy will be defi ned by a complex and continuous- drop of economic liberalization, built on the idea that ly shifting set of economic relationships. They will be 45 the fi nancial systems of all nations would dovetail. increasingly interconnected, to be sure, but with ever- That period is now over. Emerging nations are no changing rules for conducting business across borders. longer growing as rapidly as they were, particularly in As a business leader, how can you manage this com- comparison with developed economies; further, the plexity? How can you cross the threshold to the next fi ssures among different systems have become more economic order with confi dence and skill? The most ef- evident. In PwC’s 19th Annual Global CEO Survey, fective way is to pay attention to three basic trends: the released only 35 percent of the corporate leaders who dispersion of economic power, the continuing evolution responded said they believed the world was moving to- of state-directed growth models, and the accelerating ward greater economic union. Instead, 59 percent of disruption felt by business from technological change. these chief executives believe that multiple models will These trends may seem self-evident. But none of them coexist and compete. Consider, for example, how dif- is quite what it seems to be at fi rst glance. Further, they ferently government and business investment is con- will continue to evolve along uncertain paths. None is ducted in the United States, China, India, Japan, and likely to progress simply as a continuation of what we the European Union. These nations and regions oper- have seen in the past few years. By looking at these ate with fundamentally different assumptions about trends closely, you can help your organization take the the way an economy should be organized. The tension substantive steps needed to thrive in the new global

Illustration Otto by Steininger among these assumptions is growing, not diminishing. economic order.

46 perspective global feature economy and a platform for international cooperation. cooperation. for international economy aplatform and global to the provided stability These institutions. lateral over U.S. multi- influence and currency reserve a global as dollar’s werethe status pillars two other The growth. of global engines the werealso These dominated. and U.S. the established that networks economy trade the and postwar wereits burgeoning two first The pillars. strong on four nomic based prominence United of was the States economies. liberalized democratic, mostly cisions, with the intent de- key making economies in of other large table with the mutual gain among friendly, of head atthe sat U.S. period, the generally postwar the But dollar. throughout the against currencies float their to before of major negotiations agreed economies years 1971, in peg two off set “Nixon Shock” the for example, gold abandoned the U.S. the unilaterally When smooth. always was isn’t That a long time. sailing to the say for well fairly worked they and U.S. influence, strong to subject were (IMF), Fund Monetary International World World the the Bank, and Trade Organization, the as emerged such then, that institutions multilateral It has embraced a global leadership roleagreements ever since. The to keep brokered United international the States financial aftermath, its affairs running 1944 in session and Bretton Woods that At Conference. smoothly. by the end ofthe World catalyzed War it and was II, 70 done years. for has United more than States be ablewill to dominate of the balance payments the as country no single decades, few currency. For next the world’s the position exclusive its as reserve losing is lar U.S. The place. dol- taking is change A fundamental Trend 1:Economic Power Disperses PwC US. with aprincipal is he DC, Washington, in Based PwC. for is the leader global risk [email protected] Dennis Chesley During the 70 years after Bretton Woods, eco- the after 70 the years During happened time this somethingThe at like last was Americas cluster.Americas and Pacific, Asia, PwC’s for leader US and the advisory PwC with aprincipal is he York, New in Based forensics. and deals, in consulting, capabilities firm’s U.S. the leader,business overseeing advisory U.S. PwC’s is [email protected] Miles Everson based in New York. York. New in based US, PwC with aprincipal is He cluster. Africa and East, Middle Europe, PwC’s for leader sory advi- the financial-services and PwC, for leader markets capital and banking U.S. the is [email protected] John Garvey decided to include the RMB in the basket of currencies of currencies basket the in todecided RMB include the November in 2015, enshrined was rency IMF when the cur- elite global an as more rapid. RMB’s The status even been has pillar, third the undermined has which (RMB) as an international trade-settlement currency, alone. agenda favors its trade “consensus” that wholethe world, nation of to oversee any aglobal and erosionresent U.S.’s of an the for rules to the set ability rep- deals regional These United by the States. backed cently completed Trans-Pacific (TPP), Partnership re- the (RCEP)nomic pitted against Partnership are Comprehensive Eco- Regional and Pacific (FTAAP) over the China-backed Free Trade of Area the Asia- ongoing to The dominate. negotiations have begun agreements regional place, their In Organization. momentum World of the fading the witness Trade deteriorating; is agreements trade of multilateral ness prominence. Not coincidentally, effective- can the of Ameri- second pillar the weakened has which networks, trade influencing developing and in age it given enormous lever- rolerapid has move into this U.S. economy. weakened the first pillar, the strength of the postwar already has role This markets. global across rippled has slowdown recent its that fact the is role economic economy. of One global China’s indication powerful G20 power. fastest-growing the been Itchasing has the largest 2014, In decade. overrapidly past the became China economyChina, is most notable The challengers the among pillars. four whose in the world, global in economic terms of influence pur- has grown China’s progress on establishing the renminbi now world’s exporter. the Its also is largest China Today, all challenging are economies emerging

services Juan Pujadas. services and global leader of advisory chairman vice PwC was article contributing toAlso this

strategy+business issue 83 feature global perspective

4747

To be sure,these effortsTo the may be tempered by Nonetheless, the a new creation global of economic In this world of dispersed economic power, stability dent Xi Jinping, as quoted by the state-sponsored Xin- state-sponsored the by quoted as AIIB the that Jinping, Xi said dent 2015, February in Agency News hua will Road” Belt, One finance ambitious “One China’s infrastructure maritime and overland build to initiative linking East Asia, the Middle East, Africa, and Europe. The resulting New Silk Road, as has it been dubbed, will emerging develop increase economies, help trade between China and the and rest the make of world, use It excessof capacity in the Chinese economy. domestic will political also and interests China’s support economic around the world. recent decrease in the rate of Chinese economic growth. remains economy The U.S. strong, and the legacy of influence postwarits to dominance continues economic manythe behavior of globally focused multinational companies are and Investors also investors. waiting capital further account open to China’s for they before the RMB.adopt And capital market are investors cau- tious yet China see business about its because they don’t domi- asenvironment friendly enough to their interests. economic global of is inevitable.order Although China will replace not position its States,the United the will U.S. increasingly find it dif- regain to ficult that forget are economies other buildingnance. Don’t their and power influence, third- India, too. the world’s the by forecast is power, purchasing by largest economy its with actor IMF economic fastest grow to among in G20 economies 2016. influential an as emerge will It own interests. will prized be more than the nature But that ever. of stability will be dictated two or players. not major one by will not replace replacewill not

the U.S. will ﬁnd it the U.S. China

China’s contribution to the United Na- the to United contribution China’s

How will that financing be deployed? Chinese presi- Chinese will deployed? that financing be How China also the the led Beijing-based of creation As the for fourth pillar, China is pushing hard Economist, Although Although Development Bank. Beyond highlighting the institutional underpinning the of newglobal order, economic these two multilateral banks development will amplify influence global finance. on China’s development AsianInfrastructure Bank Investment which (AIIB), Whilebegan coop- January on operations 2016. 16, erating with its counterparts and support promote to insustainable the region, Asia-Pacific development this bank will designed a model the operate on for new global economic order — “lean, clean, and green,” nations, whichaccording A total 57 website. of its to billion inhave capital, committed are US$100 members the AIIB.of govern- the the U.S. skepticism of Despite the signatoriesment, States’ included the four of United partners and G7 the France, United Italy, — Germany, Brazil, Russia, with India, Kingdom. China also joined and South Africa the form to Shanghai-based New tions budget doubled between 2010 and 2015, and now and now and 2015, betweentions budget doubled 2010 China contributions. total of represents 5 percent U.N. effortsis increasingly engaged in peacekeep- with U.N. ing, climate change mitigation, and poverty reduction. that make special the up IMF’s drawing rights (SDRs). The RMB will a larger have in weight the five-cur- basketrency SDR than the Japanese yen and sup- the British with dollar, the to sterling.pound Over time, the reserve RMB’s currency alternative an create will institu- status port the from many nations that see an advantage in multilateral existing having a multipolar global order. economic in presence its expand to tions and build own. its to According new of ones to the global economic dominance. global economic increasingly difficult to regain its to regain difficult increasingly the United States,the United

48 perspective global feature model of state-driven investment to countries along the China’s diffuse further will projects jor infrastructure Ma- years. recent in champions national their in hand guiding astronger have exerted areas, other among sia, Rus- and America Latin Governmentseconomies. in emerging in robust with it growth associated is cause and telecom). “public shipping, energy, (such sectors interest” as rail, manufacturing) and concentrated state influence in and “competitive” as (such retail as categorized sectors control state in lessened has This privatization. partial allowing measures included which enterprises, owned of state- China’s is One example sures. liberalization economic pres- to evolving to adapt ability the requires corporation, success of alarge management effective the with not is As But inevitable. stagnation stagnant. become by definition or country, another will China soon. anytime form of capitalism traditional not by a besuperseded model will state-directed the that it clear making decade, over past the growth significant delivered model has control.state China’s state-directed and on markets of level reliance adifferent with each systems, economic political and disparate among ancing century. 20th early the in begun had shift that Atlantic; to move for economic the across polarity years 40 taken world view. Even so, asimilar it had had that countries U.K. from the U.S., to the two passed was influence 1944. in baton economic Then,jor the of shift, global ma- last from the different respect one in important be economic power global will in shift current This Trend 2:TheState-Directed ModelEvolves nities where they invest. commu- local the with trust mutual outsiders to build of the on ability depends the investments offate these overblown. be may ultimate The exploitation concerns and of Africa, parts many in popular is China edged. acknowl- widely is pointed out) more than are diverse Wenjie (as scholars TangAfrica Heiwai Chen and have forpotential exploitation. Yet China’s in investments tier nations. These have caused some concern over the fron- in China, including countries, by afew recently relationship is the natural resource investments made of of type new Agoodexample the economic systems. have nations, that different those even among leading relationships economic of quality the on depend will It The state-directed approach remains popular be- popular approach remains state-directed The economy, state-directed any beit that Some argue Today, we’re contrast, rebal- in amuch faster seeing ket direction and state direction will be more challenging bemore challenging will direction state and direction ket to mar- approaches different with environments among finance and operations rationalizing however, businesses, For spheres of influence. different with interaction to and to conduct. harder business global making tems, payment sys- of transaction interoperability the affect would over This non-U.S. rules banks. its banking exert U.S. able the would beless to and license, U.S. banking without tooperate decide a could banks international on horizon, some the CIPS Yet awell-functioning with system. U.S. to the banking need access still will bank al internation- Every dollar-denominated. are transactions 45not because SWIFT, percent replace of cross-border It will RMB. in denominated payments cross-border to SWIFT. If it proceeds as planned, CIPS alternative an as ment System announced (CIPS) was will process 2015, Inter-Bank Pay- Cross-Border China-backed the In banks. European and by American influenced ily 9,000 financial more among than payment information global changes institutions ex- which network, Telecommunicationcial (SWIFT) around the for Worldwide Society The Finan- system. Interbank world, is heav- tariffs. trade and payment delays settlement transaction including obstacles, and disruptions odic peri- expect can Businesses aligned. less be will other capital, and talentof movement the influence, of supplies, services, goods, from one sphere spheres competitive in systems parallel With structure. of influence to an- infra- and software, telecommunications, of logistics, areas the in evident most be will incompatibilities, ing operations. business national polar global economic order harmoniously, multi- new the to coexist nomic systems will add friction to multi-economy. eco- it possible different is for these Although region addresses the challenges of the turbulent global and country each as decade, next the during emerging welfare-oriented capitalism, to evolve.it likely is as more the more well the it stressed, model. Indeed, is growth as hybrid state-directed the to sustain of beenough these will systems, there management; of their quality the strengthening and enterprises state-owned by streamlining responding will stress state-directed energy exporters. But some are of prices oil collapse the and others, than better process this manage Some Road. governments Silk New will Nations will have to choose their levels of exposure payment global involves the One example potential of economic power, dispersion The result- the and probably bemore of forms will Similarly, there

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The second technology-related development is the as surprise come no should thatIt the two largest The third important is trend technology-related the Accordingly, governments will have to calibrate their ac- exchange markets with as foreign they have much tions, in the past, balance to objectives the inter- intended of with growth. the potential economic vention impact on shifting oil-produc- of The power energy. geopolitics of ing nations has been at least evident as far back as the oil crisis technologies Now, of 1973. designed to recover overturned have gas and oil of sources unconventional the balance and demand. supply Energy of The U.S. In- could U.S. the that estimates Administration formation the on exporter a net energybecome of as early as 2019, strength the of fracking if oil prices Even re- revolution. somewhat, thebound increasing use renewables will of reduce the geopolitical importance oil producers. of oil-consuming and nations, the China, U.S. are also the biggest Another in investors sign renewable energy. of the shift in fortunes is the Breakthrough Energy Coali- announcedtion Microsoft by Bill cofounder Gates and CEO Mark 2015. Facebook Zuckerberg in November This multibillion-dollar research partnership between andthe a “war just sectors cli- private public is on not technology information by effort an is It change.” mate industry leaders, including Gates; Zuckerberg; Amazon Benioff; Marc founder Salesforce.com Bezos; Jeff CEO CEO Whitman; Meg Hewlett-Packard and venture capitalists Vinod Khosla, Doerr, John and Hoff- Reid man carve to inﬂuence the of energy over a position the for technologysupply industry. geographic distribution of technological developments, which are no longer limited to developed economies. Technology innovators are more distributed around are are

New innovators around the world today, and the world around in October 2015. This malfeasance level of in 2015. October

The alternative, however, may lead draconianThe to alternative, however, Today, a variety new technologies of are emerging,Today, as required is which cybersecurity, involves ﬁrst The York Times measures that constrain business. has It been widely reported that many governments have intervened in their affects it where the to point countries’ cyber-activity, the use Regardless the Internet. of these the motive, of ac- cantions also limit growth. the potential economic for ensures cybersecurity’s presence every on business’s agenda. A global defense against cyber-threats may not be feasible, because would require an it unprecedented and international level ongoing of cooperation. including potentially dramatic breakthroughs in robotics, nanotechnology, and medicine. All of these will affect our societies and businesses. the from perspective But of inﬂuence,economic three stand They developments out. are technologies themselves. not They are political and commercial reactions technology to disruption. Internet hackers to gain continue access to intellectual intimidateproperty, adversaries, and disrupt and public affairs.private attacks The of number industrial on con- 2014, to systemstrol 2013 from rose fourfold worldwide according a Dell to Security the by report cited Trend 3: Technological Disruption Accelerates Disruption Accelerates 3: Technological Trend has alwaysTechnology been a disruptiveAfter force. investedgovernments heavily in military1945, and space research. Game-changing technologies such as satellite-based navigation and were prod- the Internet ucts these of investments. than tax and regulatory compliance. And those align- willments change time, over requiring companies de- to business. cross-border to adaptive approach a more velop Technology Technology

capital seeks them out wherever they live. they capital them out wherever seeks more distributed more

50 perspective global feature ment-owned U.S.-based large and commercial banks govern- would give Asian type of shots, this acrisis the significant benefits. With no dominant economy callingpublished October 2015. in yield could But acrisis such the as nomic crisis, of economic power, eco- you global have and apotential emerging markets. production of upend economies oil-rich the and ergy en- clean in of investments value the reduce would this that saw They prices. to along energy slump in leading production oil system, established the tension to disrupt geopolitical combine would with fracking that nized recog- observers For some industry example, energy ahead. lie you know of uncertainty types for the pare pre- combine, you can will they can’t ways the predict you Although change. of patterns create to another Trends one don’t with interact They isolation. in exist Prescription for Business stability.power and of geopolitical sources to relyon established the harder it even makes and unpredictability creates where. This come from any- can industry any in changers” “game industry. Indeed, of financial-services the structure the change it dramatically could scale, onemerges aglobal technologies of financial new mix right the If coin. bit- as such currencies, digital enables that verification for automated atechnology blockchain, to study bling industrialized world, financial the institutions In telecommunications. are landline scram- or banking dard Africa, where millions of people have no access to stan- most. For the needed mobileare that’s payments, in financially. competitors less-globalized footprint tend their R&D to outperform more global homeoutside their country. Moreover, a with those development and research conduct companies held licly pub- large of percent 94 business, consulting strategy PwC’s Strategy&, by conducted study 1000 Innovation Global latest to the For live. according example, they out world them the wherever today, seeks capital and Combine this shift in oil price with the dispersion dispersion the with price oil in shift Combine this where they emerging are technologies Important Economist suggested in a scenario ascenario in suggested one the ments’ resort. lender approval, of last aglobal They might then seek to establish, with their govern- common interest. of their awareness astronger banks focus on six key areas. areas. key on six focus you should major webelieve enterprise, for decisions an aposition in you to make If are decision makers. enced competitive. to beappropriately learn can that for companies nities opportu- to great lead can uncertainty this all fact, In bad. nomic not power. are necessarily But crises even eco- aworld in of dispersed interests oftion common management — with the rest of the business. business. of the rest the —with management liquidity and foreign exchange, forecasting, capital as —such capabilities treasury your integrate and scape need to stay other’s on You each behalf. border will transactions current on to conduct cross- enable banks which the arrangements, ing changingwill be cost-effective economic correspondent banking and clear- Another RMB. to the land- beaccess will years coming the in currency. One of advantage competitive source a reserve and atrade both as RMB of the use legitimized broadly have China’s liberalization, and with economic growth combined Europe, U.S. the and in ernment intervention ers will often mean the difference between success and and success between difference the mean often will ers stakehold- government influence legitimately to ability the regionalized, are agreements trade and levels, local petency. Cloud,”the Tom and by Burg David Archer, 36). page what you will do when an attack occurs advance in (see knowing —ideally breaches and to attacks “Safety in to beable to respond effectively ataminimum, need, involved. You will challenges business and technical the to address talent and infrastructure your align and impact, their to minimize processes business tite, revisit appe- risk your examine you closely that demand they other major risks, all Like areality. are Cyber-attacks With luck, it won’t a global take crisis the like The new environment is unfamiliar, even to experi- even unfamiliar, environment is new The 3. Recognize government relations as a key com- akey as relations government Recognize 3. the Master 2. RMB. 1. Develop a cyber-focused center of excellence. As power devolves to regional, national, and and national, to regional, power devolves As Economist imagined to spur mutual recogni- Economic weakness and gov- and weakness Economic

strategy+business issue 83 failure. This no longer applies solely to regulated industries such as banks and utilities, but to all organizations. Geopolitical risk management, government stakeholder management, and the ability to master public–private partnerships will become requirements for companies that want to prosper on a global basis. 4. Manage effectively in a multipolar world. Start by assessing how your business or policy objectives are affected by the economic and political power shift to a tions do exist in most countries, the markets learn to multipolar world, particularly in Asia, where China will embrace them, and they develop staying power. It has feature increasingly compete for dominance and India is rap- happened in every country that has made the transition idly evolving. You will also need to prepare your organi- to a global industrialized economy. Today’s volatility

zation’s logistics capabilities, so that you can move sup- doesn’t change any of that. There may never be a “new global perspective plies, goods, services, capital, and talent across spheres normal” of stability, but the institutions of stability will of influence. continue to use their influence to promote sustained 5. Cultivate talent wherever you do business. The growth and resilience, the kind that can support busi- local knowledge and language skills of the workforce, ness — because civilization needs it. The most farsight- particularly the management team, must reflect your ed leaders of these institutions are beginning to realize business footprint and opportunities around the globe. how they can play this role. + Although global rotations will still be valuable, differ- Reprint No. 16209 ences between markets under various spheres of influence will require more local or regional talent devel- Resources opment. In addition, governance models will need to Barry Jaruzelski, Kevin Schwartz, and Volker Staack, “Global Innovation adapt, carefully balancing local decision making with 1000: Innovation’s New World Order,” s+b, Oct. 27, 2015: Asia is now regional and global considerations and requirements. the top regional destination for R&D spending, a dramatic example of 51 6. Nurture innovation everywhere. Competitive dy- the issues described here. namics in this rapidly evolving world could easily be Art Kleiner, “Carlota Perez: The Thought Leader Interview,” s+b, Nov. 29, 2005: A long-wave model of technological change and financial disrupted by upstart companies whose leaders antici- capital may help explain today’s dynamics. pate trends and get ahead of them. To fight back, in- John Plansky, Tim O’Donnell, and Kimberly Richards, “A Strategist’s cumbents will need to establish an innovation culture Guide to Blockchain,” s+b, Jan. 11, 2016: Introduction to the distributed that spans the globe. The savviest companies will es- ledger technology that could be a game changer for the global financial tablish innovation centers with a relatively open-ended system. brief, to keep the company thinking ahead, regularly PwC’s 19th Annual Global CEO Survey, “Redefining Business Success in a Changing World,” Jan. 2016: Chief executives express aspirations and looking five years into the future. These efforts will ex- concerns related to the global economy. tend beyond simple technological disruptors. Work to- Bob Sullivan, John Garvey, Justo Alcocer, and Antony Eldridge, gether with other enterprises to develop complex new “Capital Markets 2020: Will It Change for Good?” (pdf), PwC, 2015: industrial ecosystems. How the structural changes affecting the financial industries can, sooner As you put all these practices into place, maintain or later, lead to equilibrium. an intense focus on your own distinctive goals — in “We All Hang Together: The Crisis of 2023,” Economist, Oct. 3, 2015: How global forces could spin into an economic crisis. part to balance the pressures of near-term volatility. Be mindful that it takes time to build institutions — and More thought leadership on this topic: strategy-business.com/global_perspective even longer to build trust in them. Yet those institu- feature

strategy & leadership 52 Illustration by John Klotnia the From side beyond their own ranks to findbeyond new leadership. their own ranks Faced volatility, with more companies looking are In September 2015,In September turnaround of Gap’s Old Navy division, of which he was named president in2012. president named hewas of which of division, Gap’sturnaround OldNavy animpressive at H&M, andengineering a15-year career over expansion international successful includedriving accomplishments Larsson’s of fashion. none Buthewas brands. retailing oriented at discount- was experience hisprior Polo.And andbreathed had not lived Larsson Stefan Larsson. executive retail Swedish to thefirm, anewcomer be would Lauren’s yet handpicked And successor within. to from promote practice at thecompany, hehadmade ita years 50 his nearly management. During andin inhisclothing design continuity forfavoring isknown Lauren because Rather, slipping. had been noteworthy theannouncement was performance 76, to about turn andthecompany’s was financial —Lauren wasn’t surprising of hiscompany thereins asCEO. to His decision hispost handoff from down step announcing hewould by hisname,madenews that bears empire fashion by DeAnne Aguirre, Per-Ola Karlsson, and Gary L. Neilson L. andGary Per-Ola Aguirre, Karlsson, by DeAnne

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54 leadership & strategy Source: Note: Incoming CEOsviaplannedturnover,bypedigree Companies are more often choosingoutsiders asCEOstheresult ofplanned successions. Exhibit 1: 1,000 1,200 principal with PwC US. PwC with principal is a San Francisco–based She consulting business. strategy PWC’s Strategy&, on topics organization for toexecutives advisor an is [email protected] DeAnne Aguirre seen more companies more seen wehave years, several last the Over That’s changing. choice. ﬁnal the as insider to an revert would board the weresimply and pro forma, interviews those often But achange. tomake wereplanning they as siders out- interview would companies Sometimes or both. suddenly, to groom asuitable successor, failed or had to CEO force out needed incumbent the of directors when only aboard made typically a move companies — resort alast been historically has ofﬁcer executive chief as outside to from serve acompany executive an Hiring of succession. CEO arena high-stakes the in largest public companies. In the latest four-year pe- four-year latest the In companies. public largest tailed study, of de- at12 Success we looked back CEO years data on incoming CEOs at the world 2,500 of a planned succession. succession. of aplanned part is it not, than often more do, they when And CEO. 200 400 600 800 0 Excludesturnover events resulting from M&A andinterims. This episode is indicative of abroader evident trend indicative episode is This As part of 2015 the part As Strategy& edition of annual the

Strategy& 2015CEO Success study Incoming Incoming GoingOutside 2004–07 14% 86% 560 OUTSIDER INSIDER

deliberately choosing an outsider outsider an choosing deliberately CEOs 2008–11 CEOs 17% 83% 748 with PwC Middle East. Middle East. PwC with apartner is He East. Middle in the practice and leadership leads Strategy&’s organization strategyand.ae.pwc.com per-ola.karlsson@ Per-Ola Karlsson 2012–15 22% 78% 949

Incoming outsiderCEOs,byturnovertype 100 150 200 250 300 with PwC US. PwC with aprincipal is he Chicago, in Based for Strategy&. ership design andorganization lead- is a thought leader on [email protected] Gary L.Neilson more independent, meaning there are fewer company company fewer are there more independent, meaning growing also are of directors Boards possess. dates in-house the candi- from those different are sets skill harder for and perspectives, CEOswhose backgrounds, to look boards to beleading appears That change. tory regula- and convergence, digitization, industry cluding —in- discontinuities signiﬁcant facing are industries of range awide in Businesses backgrounds. and cies for of amore set competen- diverse search their widen to boards encouraging are factors major structural eral CEOs at companies coming large from outside? Sev- Exhibit 1 ( from 43percent 2004–07 in up sharply turnovers, 2012–15 in sider CEOs planned during were brought in out- 74 incoming sider And selection. the percent of all That represents a 50 percent increase in the rate of out- of planned turnovers, up fromriod 14 percent in (2012–15), 2004–07. boards chose outsiders in 22 percent 50 0 Why are a higher proportion of chosen ahigher newly are Why PLANNED FORCED ). 2004–07 43% 57% 183 turnover turnover 2008–11 58% 42% 213 article were were article contributing toAlso this associate with PwC US. US. PwC with associate and senior researcher a Strategy& Herbst, Spencer editor Rob and Norton 2012–15 s+b s+b 74% 26% 281 contributing see

strategy+business issue 83 CEO Turnover high rate of planned turnovers — de- continued to favor hiring CEOs from spite the surge of activity in M&A and the country and region in which the in 2015 forced turnovers this year — conﬁrms company was headquartered. Only that companies have made signiﬁcant 17 percent of incoming CEOs in 2015 EO turnover at the 2,500 improvements in succession planning hailed from a different country. This C largest companies in the and practice. close-to-home trend was particu- world rose from 14.3 percent in 2014 Brazil, Russia, and India had the larly visible in Japan (where only to 16.6 percent in 2015 — a record highest percentage of total turnovers 3 percent of new CEOs came from high for the CEO Success study. The in 2015, at 24 percent, close to the another country) and China (6 per- higher rate was driven by a com- all-time high for these countries set cent). Western European countries feature bination of unusually strong M&A in 2012. Japan had the next-highest were most likely to hire a foreign CEO, activity and a rise in the rate of forced rate, at 19 percent — up sharply from with 19 percent coming from a dif-

turnovers. The overall rate of planned 12 percent in 2014. Nearly all those ferent country within Europe and an strategy & leadership turnovers decreased slightly, but turnovers were planned. The lowest additional 11 percent coming from a remained near the record high levels rate of total turnovers was in North different region. Globally, 72 percent of the last ﬁve years (see Exhibit A). America: Only 14 percent of U.S. and of incoming CEOs had never worked In 2015, M&A-related turnovers Canadian companies changed their in another region. accounted for 17 percent of all turn- CEO in 2015. overs, the highest share since 2007. The telecommunication services Exhibit A: A Rising Tide That’s not surprising, given the record business had the highest percentage CEO turnover rate, by succession reason US$5 trillion global deal volume of turnovers in 2015, at 25 percent, 20% in 2015. Of the turnovers not related followed by energy (23 percent, up to M&A, 22 percent were forced. from 18 percent in 2014) and ma- 16%

That’s up from the low of 14 percent in terials (20 percent). These three M&A 2014 and back to levels seen in 2012 industries, together with consumer 12% 55 and 2013. discretionary, consumer staples, and Forced 8% Planned turnovers in 2015 were ﬁnancial services, all reached ﬁve-

78 percent of the total not related year-high turnover rates. Information Planned 4% to M&A — near the 81 percent aver- technology had the lowest turnover age over the last ﬁve years. From rate, at 11 percent, and was followed 0% 2000 through 2010, the proportion by healthcare (12 percent). 2000 2005 2000 2015 of planned successions was only 65 Despite the increasingly global percent. We believe the stable and nature of business, companies Source: Strategy& 2015 CEO Success study

insiders on them than ever before. These independent activist investors often explicitly state that bringing in a board members have a broader network of experiences, new CEO is part of their agenda. and have exposure to a broader network of executives. For our part, we view the increasing attention giv- Meanwhile, investors of all types — but especially large en to outsider CEOs as a new step in the continuing institutional investors and activists — are bringing evolution of CEO succession planning. As we demon- greater scrutiny to board decision making. Aggressive strated in last year’s study, the most important reason

56 leadership & strategy feature for when considering outsider candidates, and how and outsiderfor when candidates, considering We also consider the attributes that boards should lookcharacteristics of the companies that are hiring them. the examine and hired being outsider are which CEOs planning. outsider option succession into their the to factor want may senior leaders and boards that outsider suggest trend the CEO driving other factors and But discontinuities the candidates. strongest be the to continue will insiders cases, many development. In and will have played an important role in their career well, candidates the know will They candidates. nal should of bench have adeep inter- practices succession well-designed following senior leaders and of directors gitimate choices rather than last-resort options. Boards le- become now have outsiders though even outcome, predominant and preferred the remain will this think tocontinued position. promote CEO We to the insiders 55). 2015,” in Turnover page “CEO (see turnovers forced quisition–related of rate ac- merger and high unusually by an primarily turnovers, 2015, rosein number of turnovers total the time, driven as same the At years. few last of the levels high its relatively well as by an CEOswere which in those forced out uptick near —remained in opposed to — as turnovers CEO of rate planned The to continues improve. companies atlarge sion planning s+b, Neilson, L. Favaro, Gary Per-OlaKen and Karlsson, Problem,” by Succession $112 CEO “The (see Billion significantly decline performance financial their see and lose momentum can companies successfully, off carried isn’t maneuver delicate this If leadership. of business orderly transitions to ensure is planning for succession study of incoming of study leaders. oneworld’sthe at of largest companies, based ona Track yourchances becoming of chiefa executive Are YouCEO? Likely a QUIZ In this year’s study, we look at the circumstances in in year’s study, circumstances this welook atthe In To have majority of companies large the besure, May 4,2015).May succes- that year’s shows study This to give them the best chance of succeeding. of succeeding. chance best the to them give into fold them the bring can senior leaders and boards had the next-highest share from 2012 next-highest the share had to 2015 (32 per- Utilities companies. for all 24percent average the with cent of incoming CEOs from up outsiders 38 per- made for example, services, cation 2012 to 2015, compared telecommuni- In years. several of outsiders last over the share have brought ahigher-than-average in that those are discontinuities by affected most been have that tries to approaches. envision new practices company’s the in too steeped past are candidates insider that recognize also may it. know Boards boards the and future, the in to succeed benecessary will that mations needed toskills lead companies the transfor- through the lack may candidates But models. these — business present even —and past executing records excellent Internalmanagement CEO may candidates ranks. have company’s the current befound within can ones that the from different are that sets skill and experiences with leaders need often sorapidly changing operate of digitization. rise to the reaction in models business their rethinking are companies sectors, all nearly in And policies. regulatory in major changes to adapting are banking and utilities as such dustries intensive to a consumer-intensive business model. In- asset- from an moving are services, telecommunication as such supply, Others, in prices. and demand, swings unusual and large from energy, reeling as are such industries, Some outsiders. to turning are companies more that reason principal the is Discontinuous change The OutsiderTrend Our data supports this explanation. The indus- The explanation. this supports data Our they which context in the find that Companies

strategy+business issue 83 2015: Not the executives. Since 2004, incoming over for a CEO role. The likelihood women CEOs in the U.S. and Canada that some companies aren’t recogniz- Year of the have made up 4 percent of the total, ing the potential of internal women Woman CEO compared with the global average executives may cause them to be of 3 percent. In fact, 42 percent of receptive to recruitment efforts for all the women CEOs who have been outside CEO positions. Given the rise ven though many large appointed over the last 12 years were of outsider CEOs noted in the main E enterprises continue to be appointed at North American compa- article, however, the fact that more run by women, 2015 represented a nies. But in the U.S. and Canada, only companies are considering outsid- departure from the growing gender one woman CEO was appointed in ers might improve the chances for diversiﬁcation in the C-suite. Just 10 2015 to our sample set of the world’s women CEOs in the future. women were among the 359 incom- 2,500 largest public companies — One positive trend for women ing CEOs at the world’s 2,500 largest Andrea Greenberg, who became CEO CEOs in 2015 is that female CEOs are companies in 2015. At 2.8 percent, of MSG Networks in the spin-off from no longer more likely to be forced out that was the lowest share since Madison Square Garden. At 1.1 per- than their male counterparts. From 2011, and far below the 5.2 percent cent, this was the lowest percentage 2004 to 2015, women CEOs were 27 feature peak reached in 2014. Although the of incoming women CEOs in the U.S. percent more likely to be forced out numbers of incoming female CEOs and Canada since we began tracking than men CEOs. But in 2015, for the

have always been low, there had the incoming class of CEOs in 2004 ﬁrst time, the difference was not

strategy & leadership seemed to be a slow trend toward (see Exhibit B). statistically signiﬁcant. higher numbers over the last several Women CEOs continue to be years. Despite this year’s reversal, we hired from outside more often than remain conﬁdent that demographic, men. From 2004 to 2015, 32 percent educational, and societal forces will of new women CEOs have been out- Exhibit B: Losing Ground Share of incoming women CEOs in the continue to promote greater diversity siders, compared with 23 percent of U.S./Canada in the C-suite. By 2040, as much as men. In the past, we have attributed 8% a third of the incoming CEO class this to the relatively low number of

around the world will be female (see women in senior leadership roles 6% “Women CEOs: A Slow but Steady Up- within companies. Only 14.2 percent

ward Trend,” in “The Lives and Times of the top ﬁve leadership positions 4% of the CEO,” by Ken Favaro, Per-Ola at S&P 500 companies are held by 57 Karlsson, and Gary L. Neilson, s+b, women, according to a CNNMoney 2% May 30, 2014). analysis. One of the least impressive There could be another factor at 0% results in 2015 was in North America, work. Senior female executives, like 2005 2010 2015 which has historically been the most senior male executives, often leave Note: Includes turnover events resulting from M&A and interims. welcoming of all regions for women companies when they are passed Source: Strategy& 2015 CEO Success study cent), followed by healthcare (29 percent), energy (28 leadership development practices are now providing percent), and consumer staples and ﬁnancial services more internal candidates. (both 26 percent). The share of incoming insiders was Institutional changes in the governance and leader- below average from 2012 to 2015 in industrials (21 per- ship of companies, as well as in capital markets, are also cent), consumer discretionary and materials (both 19 making it more likely for companies to choose an out- percent), and information technology (15 percent). The sider. Boards of directors have become much more inde- share of incoming outsiders at information technology pendent in recent years, due both to regulatory changes companies, in fact, was much lower than in 2004–07, made in the wake of the many post-2000 corporate perhaps because the industry has been maturing and governance scandals and to an overall drive for better

58 leadership & strategy feature in retreat, however: gender. “2015: however: See retreat, in to be seems diversity which in one is area (There erture. ap- awider through CEOs future of potential universe look CEO. by atthe contrast, the Outside directors, once was chair board when the particularly managers, insider than better business the or manage understand could anyone company outside from the that imagine to unable often are insiders Company candidates. CEO evaluate boards way to the diversity brought greater hit arecord low and of 7percent 2015. 12 in years, last precipitously fallen over the has chair board named also CEOs of incoming share The fading. are sider directors up of over made in- CEO” aboard presiding “imperial 20th-century of the world, days the the around and hold taken has management company from directors of board the 9 percent 2005. idea of in The separating independent up chair, from atruly had cent of boards wereindependent, 29 per- and companies of 500 S&P directors board percent 84 of Index, all Board Stuart cer 2015, In governance. corporate Spen- to the according cessor would be an outsider. When the outgoing CEO CEO outgoing outsider. the bean would When cessor suc- the that it was likely less the was, outgoing CEO outsider. an We tenure of longer an the the found that of choosing likelihood the affects also CEO cumbent Systems. Research of FactSet database porate activism 18 to SharkWatch,within months, according cor- the CEO their replace seat aboard investor gains activist an atwhich from 2014. companies the half Almost up 16 by percent tosubjected activists, public demands 551 Insight, world the were around Activist companies 2015, In force for shareholder activism. to according a become have more and recently,tive, funds hedge ac- more become have funds pension employee public 1990s, leadership. the Since and strategy, large nance, gover- in voices to for push their changes power and their to use have become moreshareholders willing doso. Institutional they that shareholders’ demand —is more professional argue, wewould dent —and, Womanthe CEO,” 57.) page This sea change in board independence board in change sea has This Our data shows that the background of in- the background the shows that data Our indepen- more become have boards reason Another Not the Year of other company. other be more comfortable will future the in and recently office assuming CEOs with 2015 in CEOs of incoming the age median 53, was most idea of moving the that given And illusion. such any under have been to anthen people since who workforce have entered the Few retirement. continue until might company at the career to —hadgoodreason their believe tive careers execu- 1970s pursuing the those as late — especially as company employees New alarge joining decades. several over last the dramatically changed ment has of employ- nature the that is turnovers CEO in siders outsider. outgoing an with companies forced successions;an outgoing insider chose an outsider in planned and From to 2015, 2004 only 18 percent with of companies this comparedtwice as likely to choose with weremore outsider than an was CEO outgoing whose an outsider 36 percent as the self-reinforcing.somewhat We companies found that new CEO. of former the CEO. was chair board where the companies 16 with compared 28percenters percent of time, the at outsid- not former hired CEO the was chair board the atwhich companies years, six pointment. last the Over pany CEO also the affects likelihood of outsider an ap- 17 percent. to fell successor of outsiders chosen as share the years, for or eight more office in been had outgoing CEO years, the outsider eight and outgoing four CEO’s between tenure was share the When 28percent of time. the successor as selected fell to 21 percent. outsider was an or less, for years four office in been had When the pany has been underperforming financially, as mea- financially, been as underperforming has pany com- when the successions planned and forced both in over outsider 12 tolikely select an last the years CEO more one-third have been of outside Companies CEOs. subsequent the and hiring performance poor financial Historically, there been has a strong correlation between Financial Performance A final reason for the growing prominence of out- growing for the reason A final to be seems choice outsiderThe of also CEO an formerly com- the was chair board the Whether

strategy+business issue 83 Better-performing companies tend to have better succession planning, and they are better able to judge when an outsider is the right choice.

sured by total shareholder return (TSR) over the tenure cause the companies had not been performing well, of the outgoing CEO. From 2004 to 2015, 25 percent these outsiders started with a performance disadvan- feature of outsider CEOs who were appointed in planned suc- tage. Since we began tracking succession data in 2000, cessions replaced CEOs who had generated TSRs in the departing insider CEOs have delivered higher median

bottom quartile, compared with 16 percent of the in- shareholder returns over their entire tenure in all but strategy & leadership coming insiders. In the last two years, however, boards a few of the years we tracked — often by a meaning- in all regions have become more likely to appoint an ful margin. In the last three years, however, the insider outsider in a planned succession even when the outgo- performance premium has disappeared (see Exhibit 2). ing CEO has performed well. In 2015, for example, One reason, we believe, is that the recent crop of out- high-performing companies (those in the top perfor- going CEOs includes a higher number who were hired mance quartile) hired a larger share of outsiders than in planned rather than forced turnovers, and fewer of did low-performing companies. The reason, we believe, them were themselves forced out. is that better-performing companies tend to have better succession planning, and they are better able to judge Geographic Range when an outsider is the right choice. There are signiﬁcant regional variations in the way that Insider CEOs have historically outperformed out- companies with different performance characteristics siders over their tenure — due in part to the fact that hire outsiders. 59 most outsiders were hired in a forced succession. Be- North America. Over the last 12 years, poorly performing companies in the United States and Canada were just as likely to hire an outsider CEO in forced Exhibit 2: Performance on Par turnovers as in planned ones. High-performing North In recent years, CEOs hired as outsiders have matched the performance American companies in planned successions tended of CEOs promoted from within. not to choose outsiders. Their superior performance Median total shareholder returns, by outgoing CEO pedigree suggests that choice may be because they also have 12% good leadership development and succession planning. 8% North American companies were also less likely to hire Outgoing INSIDER CEO serial outsiders than were other companies, particularly 4% Western European companies. Again, we believe this 0% shows that superior succession planning enables these Outgoing OUTSIDER CEO –4% companies to choose outsiders for strategic purposes — to change direction, for instance — and these ﬁrms –8% are then able to follow the outsiders with internal can- 2000 2005 2010 2015 didates who can continue the new direction. In forced Source: Strategy& 2015 CEO Success study successions, high-performing North American compa-

feature

60 leadership & strategy ethical lapses) rather than performance problems. performance lapses) than rather ethical some in cases, (as as, well of struggles boardroom result the are companies these among departures forced that nies hire a large proportion of outsiders. The reason is were more than twice as likely to out. beforced likely as twice were more than they —and America North 20percent in with pared 2015 com- lowest TSR quartile, the werein —athird underperformed from companies 2012at European to can companies ( companies can percent Ameri- for 34 only North with compared time, —51 turnovers forced outsider in CEO percent of the an tohire more weremuch likely companies European What’s particularly turnovers. planned and forced in companies forming for low- both high-per- and America North in than interesting higher wereclearly Europe in rates outsider hiring the is that (18U.S. Canada and percent, combined). low-performing Moreover, the in companies outsider did (30 CEOs percent) than 2015,and more far Western in hired Europe companies 2012 Between development practices. succession and leadership tively, improving in have evolved less and proac- than outsiders more reactively hiring are eral can companies, Western European companies in gen- hire outsiders. Western European companies thatforced CEOsoutwere most likely to Exhibit 3: Source: Note: Incoming outsiderCEOs,bycompanyperformanceandregion,2004–15 10% 20% 30% 40% 50% 60% 0% Excludesturnover events resulting from M&Aand interims. Western Europe. Europe. Western Strategy& 2015CEO Success study etr uoeBRIC/Other Western Europe 51% Forced Exits 55% see Exhibit 3 Exhibit see In comparison with North Ameri- Emerging HIGH LOW 40% -performing companies -performing companies 26% ). addition, outsiders In 34% U.S./Canada 47% ity. Past performance is measurable, and thus easier to easier thus and measurable, is ity. performance Past discontinu- facing when company is the needs future to meet capabilities right the has candidate internal an future. the in require will that is perspective based broader a from organization the at look to on an understanding more changes objectively.make may beable also They outsiders can up over years, built the ofcommitments what the don’t they and Because biases have plans. worldoperating and its former in strategic changes wholesale require improvement will which change its performance, in step- adiscontinuous, to make needs company the that determine also may Boards seeking. is board the skills jobs, new the past in demonstrated, have already may pany in its com- the to lead not may skills the have candidates nal next inter- happens, this When incarnation. model. business established to its or threat challenge adisruptive surmount must But outsider we’ve as sense, described above, iswhen company the candidates to succeed? CEO new enable the conditions to right the create they how can And date? candi- best the evaluate and identify they should how outside, togo determination the made have they Once within? from promoting than rather CEO outsider an consider choosing of should directors aboard When Looking Outside and Western Europe. Westernand Europe. America North in those than effective less are programs development leadership and practices gions’ governance re- these because partly and markets fast-growing these in of of talent alack because moreing outsiders partly hir- are companies We markets years. emerging believe four outsiders, up 25 from preceding the percent in 2012–15 the in executives chief incoming were period 38 percent for of example, India, and Russia, Brazil, In America. North Western and in Europe companies amuch percentage ofhiring larger outsider CEOsthan are markets other emerging and India, Russia, Brazil, The board may find it difficult to judge whether it may find board difficult The outsider an makes which in One circumstance Emerging markets. Companies in countries such as as such countries in Companies

strategy+business issue 83 Companies in emerging markets are hiring a much larger percentage of outsider CEOs than companies in Western Europe and North America.

Exhibit 4: Double Outsiders have expertise in the areas where the company faces fu- Utility companies were the most likely to hire outsider CEOs who came ture challenges. In some cases, the board may be specif- from a different industry. feature ically looking for a background in the company’s indus- Incoming outsider CEO from same prior industry, 2012–15 try. Among ﬁnancial-services companies, for example, Financial Services 92%

risk management and regulatory requirements are high- strategy & leadership Telecom Services 77% ly speciﬁc to the industry and require deep knowledge

Healthcare 75% of products and business practices. For that reason, 92

Energy 70% percent of the industry’s incoming outsider CEOs from 2012 to 2015 came from other financial-services com- Consumer Staples 64% panies. But in other industries — where technological Information 58% Technology discontinuity or industry convergence is an issue — ex- Materials 56% perience in a different industry may be more impor- Industrials 44% tant. In the utilities industry, where unbundling and Consumer 41% regulatory liberalization are changing the competitive Discretionary Utilities 28% context, 72 percent of incoming outsiders from 2012 to 2015 came from other industries (see Exhibit 4). Note: Excludes turnover events resulting from M&A and interims. In addition, many boards will want a candidate Source: 61 Strategy& 2015 CEO Success study with prior experience as a CEO, and will have a strong view of the kind of management style they deem nec- judge, but it may not be a good predictor of success in a essary for the company and its future success. Boards new context. Boards may therefore feel more comfort- may also want to test potential future CEOs by recruit- able with outsiders in these situations. But outsiders ing them first to senior positions on the leadership team should also be legitimate candidates in cases where dis- (such as chief operating officer or chief financial officer) continuous change is not an issue. Even in companies or as members of the board of directors. This affords an with robust CEO succession programs in place, inter- opportunity for the potential candidate to get exposure nal candidates sometimes are simply not ready to lead to the company and its culture, and for the board to get the company. This typically happens when a company to know the candidate. has let too many promising executives leave the company for greener pastures, or when the board has planned Easing the Transition poorly or delegated the responsibility for choosing a The board’s work is not over once it has made a selec- successor to the incumbent chief executive. tion. It must also carefully consider the way the outsider Once a determination has been made to consider CEO is introduced to the public, to the management an outsider candidate, the board should begin by iden- team, and to the rank and file. When an outsider is tifying the key desired characteristics. A candidate must brought in to deal with discontinuous change, the new

feature

62 leadership & strategy working with chief executives in many sectors and in- and sectors many in executives chief with working on job. the to From learn needed experience our space the creating —while changes fundamental to make imperative the with for results quick pressure pitfalls and with studded is that land terrain uncharted in fidently mines. He or she must balance forward. path the industry, and the company, on the or her reflections his the CEO, sharing new the guiding to and listening in time extra invest should public scrutiny. havelems drawn chairman The prob- ethical if or difficulties, performance periencing ex- is company the if execution, particularly and setting to beinvolved for want agenda how in they a standard expectations clearly. The board members should also set company’s of the view position, defining varnished and closely involved in providing support, offering un- an to be needs board The game. the toor change she plans how he to determine and position marketplace, the in company’s the on industry, the to establish perspective or on her —to develop his —early time needs leader Methodology Methodology T merged in 2015. or acquired been had that companies of alist tocompile Bloomberg used Wealso languages. many in sources electronic and printed of variety wide a using data cross-checked and 2015, 31, 1, December and 2015, January between event succession executive them a that chief had experienced among the companies identified 1, Wethen 2015. January on berg) (from Bloom- market capitalization public defined companies, by their The new outsider CEO must try to con- operate outsider try must new CEO The fied the world’s 2,500 largest largest 2,500 world’s the fied identi- study Success CEO he Strategy&, PwC’s strategy consulting consulting strategy PwC’s Strategy&, executive’s departure. an for reason the toconfirm used were sources independent other and reports press Outside succession. the exceptdata elements the for reason acceptable for was most information chief executives). Company-provided interim any as well (as executives chief incoming and outgoing the both on sought —were experience ship, nationality, and professional chairman- tenure, title, as — such details Additional 2015. in occurred achange that confirmation for gated have changed CEO its investi- was Finally, consultants from to company thatEach appeared outsider CEOs. for practices critical four wehave identified dustries, haste. However, trying to accelerate too quickly —for too quickly to accelerate However,haste. trying deliberate with and coherently moving from benefit will outsider 100 The CEO first days. the in be achieved of can what expectations against back pushing require company, the within it and may for pace change the set past mistakes. mistakes. past for any “amnesty” declare and looking, to beforward needs company the that clear shouldsider make CEO out- the To inertia, business. doing human down break of ways different requires but marketplace anew time, atthe sense have made might years previous in taken whole. actions the and with Decisions made parts company’s the integrating and expectations; resetting company’s of the model); aspect business fundamental some (for by changing frame example, the breaking company’sposition: the shaping of success; definition to unique the are that on rigorously issues to focus 2. 2. Find the right pace for change. 1. Do only only what a CEO can do. same time period) and annualized. and period) time same the over index regional main the of return the and return company’s the between difference the as (measured adjusted market regionally then was data TSR any). (if dividends of ment reinvest- included and Bloomberg from sourced was aCEO’s tenure over data (TSR) return Total shareholder 2015 ranking. Programme ment Develop- Nations United the followed Strategy& economies, emerging mature and between distinguish To region. their in changes CEO specific for reason the tolearn effort the of part as event succession each business, separately validated Only the CEO can can CEO the Only The CEO needs needs CEO The

strategy+business issue 83 The new outsider CEO must balance the pressure for quick results with the imperative to make fundamental changes.

example, in order to cut costs immediately — risks the in general, and succession practice in particular, have prospect of the CEO not only addressing the wrong is- been improving. The increased willingness, desire, and feature sues, but also missing opportunities to learn where the capacity to consider outsider CEOs is a new element real problems lie. Managing pace is a way of managing that may further improve the sophistication of succes-

expectations, which is essential for building sustain- sion planning. Although most companies will continue strategy & leadership ability and preparing the organization for the major to promote from within, in line with their long-term changes that will be needed to meet its ultimate goals. succession plans, the stigma associated with hiring Outsider CEOs have an advantage in creating a “new outsiders is dissipating. As globalization continues, the day” by resetting expectations and redefining roles with pool for available talent has never been deeper or more senior executives or with new executives if needed. densely populated. To their credit, more boards are 3. Get the culture working with you. Culture can be casting wider nets. + the primary impediment to an incoming outsider’s abil- Reprint No. 16210 ity to lead transformational change. The CEO needs to address business priorities and change in ways the organization can reasonably accommodate. Understand- Resources ing how the company’s culture influences both formal and informal behaviors is therefore essential. Outsider Strategy&’s 2015 CEO Success study, strategyand.pwc.com/ chiefexecutivestudy: The full report and data analysis of this year’s study. 63 CEOs can become more like insiders by skillfully work- PwC’s 19th Annual Global CEO Survey, “Redefining Business Success ing with the informal elements of the organization. in a Changing World,” Jan. 2016: The latest PwC Annual Global CEO 4. Continually engage the board as a strategic part- Survey shows that chief executive officers are less confident than in 2015 ner. Given the pressure being placed on today’s boards, about the outlook for the global economy and for their companies, and are particularly concerned about more stringent regulation and geopolitical and the level of accountability expected from them, uncertainty. board members need to take part in the strategic con- Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “The $112 Billion versation as it develops. The CEO’s responsibility is to CEO Succession Problem,” s+b, May 4, 2015: The financial penalties lead the board to be bolder than it otherwise might be companies pay when they plan poorly for changes in leadership — and the payoff from getting it right. in challenging the company’s leadership and direction. Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “The Lives and Times Boards today also provide complementary skills by de- of the CEO,” s+b, May 30, 2014: From 100 years back to a quarter-century sign, with specific members offering guidance in their ahead, the evolution of the chief executive officer. areas of expertise, such as finance, compensation, op- Ken Favaro, Per-Ola Karlsson, Jon Katzenbach, and Gary L. Neilson, erations, or markets. The CEO’s relationship with the “Lessons from the Trenches for New CEOs: Separating Myths from Game board can leverage that expertise. Changers,” Strategy&, Jan. 29, 2010: A guide for new CEOs negotiating in a changing business, financial, and regulatory environment. CEO transitions remain a difficult and perilous More thought leadership on this topic: task. But our years of conducting this study have made strategy-business.com/strategy_and_leadership us optimistic. We have seen that corporate governance feature

technology 64 Illustration by eBoy of Help of Circle Ninth the Beyond it. And he didn’tit. rest. about And the care with succeed and in ones jump —would right some people smarter —the in, that before coming sure, was engineer The time. their to invest willing were work help would sothey improvetheir product for the users, other told been had that They out software. his people watched dow trying and University. atBentley lab he aone-way stood behind time, For win- first the interfaces. user But people’s reactions vary, especially in response to subtle cues lik tive error. Most of expect us everyone and to feel think the same way we do. com a in grounded observation, an simply was it harsh; be to this it. weren’t He to use told didn’t they enough me he thought say smart tually He He them. ac- blamed users. his with Nonetheless, he not did empathize out. Even its inventor struggled at times to remember how to m accordingly. breakthroughs innovative develop work, and their it up, it to use transform take would they that He assumed company. his in group of colleagues asmall it among for use ately released augmenting decision He justifiably was proud making. of it and immedi- Several years ago, years Several by Elizabeth Rosenzweig Elizabeth by software. internal of design the improve productivity, and To morale employee raise One day, after much prodding, I got the engineer to visit my usability my to visit usability engineer Igot the One much day, prodding, after to figure but too hard it was this, all have achieved might program The a brilliant engineer devised a new software tool for software anew devised engineer abrilliant ake it work.

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66 technology feature (Morgan 2015). Kaufmann, Strategies and Roadmaps of author the is She Day. Usability World of director and founder the is and design interface four patents in intelligent user holds She Mass. Waltham, in at University Bentley Center the User Experience at consultant aprincipal is [email protected] Elizabeth Rosenzweig San Diego, abbreviation coined the San of University California, atthe Lab tor Design of the direc- Norman, 1995, Donald when until prominence of computer its rightful aspect science, it not did gain integral long an been has interface concept of user the for employees. systems Though in especially its value, realize companies why experience and good user sofew people’s own. his wasting including and time, up resources, company sucking sales, company hurting was design his that and he way did, the information process didn’t people smart other that realized hadn’t he firsthand, frustration Until he their saw for granted. its effectiveness taken he had designers, software other most like —that, design interface user his to rework needed he that recognized He intelligence. their blame pounding the desk in frustration. This time, he couldn’t for help, even tool, his asking to learn struggling smart ees are trapped, forced to use your company’s software company’s your to forced use trapped, software are ees employ- These conduct routine other tasks. and travel, manage email, their check expenses, and time track to day every company your in use people tools digital out. the Consider than enterprise the inside important Yet, user experience is arguably but customers, for ignore their it employees. for their even more UX of strategically importance the to attuned are businesspeople Many enterprises. large inside to down systems trickled then. since design interface about user knowledge in Web of the teroperability advance have led to asteady Web in- and browser, went transparency public. The consumer used widely first the Netscape, year same the was for “user that it experience.” happens, shorthand As Successful User Experience: This story demonstrates the strategic importance of importance strategic the demonstrates story This But lab, he our people saw in were he thought Unfortunately, too little of that knowledge has has knowledge of Unfortunately, that too little UX as a universal a universal as tries and 21 countries, were asked about their com- about their 21 wereasked and countries, tries 10 indus- representing executives, senior 2,000 Nearly 2015 PwC’s in for example, finding, IQ study. Digital one was This leaders. business among to be,especially Interest in user experienceThe DynamicsofBadUX is much higher than it used tion levels, and capabilities. employee retention but own ence, rates, their satisfac- employees’ not their only experi- transform can they of way operating, basic into their experiences such build internal experiences.isfying software When companies better, more tocreate sat- general, in design interface about user and works, mind about how human the today. business in resistance cultural passive-aggressive intractable, most the of some of cause root a become company’s way, can design this In strategy. poor UX why to the and it execute sohard is or change, embrace don’t people innovate their why wonder leaders Then problem —the fault. own believed their is colleague ment have little value, commit- and time their to and employees that a message that — just as my engineer company. the in sends pabilities interface Apoor user ca- but it diminishes poor UX, it does only guarantee atwork, employees not use many software of the that Designed.”) Well ment? (See turnover, of loss commit- “How and potential center expense, to Tell you call in cost that does what And squander? systems if Your Internal help.phone How seeking do much these time of their Software on hours the to spending relegated them, understand Is systems regardless of UX quality, and, if they don’t It doesn’t have to way. be this Enough is known like poorly is designed, interface a software When

strategy+business issue 83 How to Tell if Your pull-down menus, radio buttons, feel natural? (“The swipe moves you rollover commands, and keystroke left, just like you were sweeping the Internal Software Is commands — with no apparent logic picture to the side.”) behind which is used when? 15. Do users spend a lot of time Well Designed 8. Is it evident what each command looking for onscreen cues before they will do? can take an action? Answer yes or no to each question. 9. Does the software make people 16. Can people see the full document 1. Do you have a large and well- choose between technical options and all essential commands without staffed internal call center that (such as ﬁle formats) that are not having to scroll or search?

answers the same questions again otherwise relevant to their job? 17. Do employees post complaints feature and again? 10. Is there a universally recognized about the internal systems in online 2. On the most-visited screens, is it and consistently designed “Undo” forums?

obvious where to look first? command for all your in-house ap- 18. Does every important screen technology 3. Are there several ways to conduct plications? include a call to action so people a single activity, such as “Search” 11. Do menu commands require know what to do next? or “Import,” each with its own definitions before they can be idiosyncrasies? understood by a novice — for exam- If you answered yes to the even- 4. When people try out the software, ple, “Find replica,” “Parent preview,” numbered questions, and no to the do they smile and look relaxed? or “Open mail file copy of contacts”? others, your interface probably makes 5. Do people keep notes at their 12. Is there an easy way to return to people feel smart. If you answered yes workstations so they can remember previous screens? to the odd-numbered questions, your the steps to follow? 13. Are menu elements that have software is probably making people 6. Is the command syntax and little to do with one another placed feel frustrated. The next steps are design consistent from one screen together — for example, “Insert to confirm your findings by watching to the next? WordArt,” “Equation,” and “File”? people use the interface, and then to 67 7. Does the same screen include 14. Is there a clear match to the phys- translate your observations into a new multiple types of interface cues — ical world that makes a command and better design.

pany’s acumen with incorporating digital technologies. external, as they scramble to meet internal deadlines or Seventy-four percent of the respondents said user experi- remain within budget. ence and human-centered design skills were important Sometimes the problem is exacerbated when tech- to their business. Almost as many, 72 percent, said they nical designers chase the next new thing in their ﬁeld. had all the user experience and human-centered design Because they have a captive audience of employees, the skills they needed to deliver on their digital enterprise vi- developers see this as an opportunity to experiment sion. And customer-facing software is indeed improving. with something new. Another cause can be the agile Why, then, does the quality and user experience of or lean techniques that software companies turn to for internal enterprise software remain a problem? The an- development. These may well speed up the release, but swer has a lot to do with expedience. Good UX requires they do not, in themselves, promote good interface de- iterative, intensive attention. It is thus often neglected sign. Good design is complicated. Faster development by enterprise software developers, whether in-house or offers no guarantees of better interfaces. (continued on page 70)

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68 technology persona of its owner and the world world the and owner its of persona potentially the between a wormhole is smartphone Every owners. their of extension an become devices the more the applications, their use done. The more people choose and things innumerable get they which through device It’s the themselves. express and information, gather cate, have traditionally used to communi- people tools other the all supplants it jacket pocket) kept to the heart, next a in carried (when and hand, the in person’s movement, physical held a with is integrated smartphone the Because intimate. radically making the connections nizations, orga- and people between actions it. of use make they how toevolve owners allow that applications ized downloadable with custom- be can phones The screens. and animatable sensors, cameras, interfaces, touch access, Internet and voice with devices portable phones: about 2phones, are billion smart- toaccess indoor plumbing). those Of phones only (whereas 4.5 billion had cell had people 7billion about 2015, of computer. As personal the than popular more —far history human in devices ubiquitous most the of power. mobile The phone one is also computing great with devices sized pocket- around carry routinely people time, first the For smartphones. created by especially mobile devices, H by DanBricklin Smartphone the and Intimacy Radical Smartphones change inter-Smartphones technological turning point point turning technological a at arrived has umanity each key is a discrete input normally normally input adiscrete is key each apiano; playing like is devices old the with Interacting office. an or to adesk relegated longer no are they But ers. knows, essentiallyeveryone comput- as are, devices These machines. and through with of interacting way anew creating are contrast, desks. at working people of output the tomaximize way simply was computer a The system documents. paper shuffled once had they as computers those on windows to evoke paper. People shuffled designed were input, keyboard like typewriter- and feel and look heavy their text- with computers, Windows of Macintosh and interfaces user cal graphi- The duced by smartphones. intro- change the than smaller was it retrospect, in But time. the at shift like seemed That computers. a major personal then and mainframes for paper-based information systems its reengineered it 1990s, and 1980s, 1970s, the in when, before, a change them. for created or tablets, and smartphones for reengineered to be andcustomers may employees, need their with toconnect businesses by embody, including thousands used they processes business the and thousands of computer applications Tens of irrelevant. become will not can- that Those thrive. will ence experi- user of type tothis to adapt how out figure can that organizations) (and other Businesses relationships. the nature ofthat human concerns that but is not technological, just issue —an experience user ing a fundamental involv- issue raises binding people together. point, connection avisceral large, at The smartphone and tablet, by by tablet, and smartphone The hasBusiness gone through such thus smartphone the of rise The need to adapt. applications business and it, lecting col- and information providing both in expression, of form richer anew, has also workforce The connection. the of nature personal the of because it, using of place and time the or mation, decidedly control less over infor- its has institution The required. is tion orienta- anew self, the of extensions use their these mobile devices, elsewhere. things do they way same the work at things todo not silly seems It lives. closely to connected the of rest their so are devices the because work, at smartphones touse expect naturally for Employees, theirproductive. part, make and mistakes fewer are more tools their at, proficient and with, able comfort- are who workers because this do They systems. totheir ways gate- become tablets and phones have letMost businesses smart- tochange. businesses force last, user experience. terrible a provide systems their of afew but and all user experiences, software their addressing in appropriately little invest very Most businesses systems. internal their touse forced are who people the of front in right —or, them of rather, front in right is reason The should. they productivity unable to gain the themselves find they but do, they everything about just automate They advantage. gic strate- for technology digital to use you’re to what connection doing. free-form physical, amore you gives it hands, your with clay molding Like motion. continuous of range wider amuch involves tablet or smartphone a with Interacting separately. pressed But when businesses let people people let businesses when But long at will, smartphone The have tried businesses For years,

strategy+business issue 83 Freedom from the Form of what they are doing, and requiring photographs, and then they translate To realize the depth of this change, them to fill in data as they would on it into data that is easy to manipulate consider something that most people paper, or with a keyboard, increases and retrieve. take for granted. The form, a docu- their chances of making a mistake, Smartphone apps depend on ment in which people record data especially over time. having a user experience that people from the field, is at least as old as the The smartphone is qualitatively find natural and comfortable. (That Old Testament. In Chapter 13 of the different from a tablet. It provides may not, by the way, mean easy to book of Numbers, Moses sends 12 freedom from the form. It enables learn, if learning the app is part of spies to scout ahead and gather infor- a new approach to human–device learning the job.) As a result, the rise mation about the land of Canaan, and interaction: an approach that doesn’t of smartphones has brought much- he gives them the equivalent of fields mimic an individual sitting at a desk needed attention to the question of to fill in and boxes to check, telling with a piece of paper, doing a task. user experience. them to report on “the land, what it is For example, a real estate app As a software developer, I know like; and the population that is settled called MagicPlan uses the motion- that information technology profes- in it: are they strong or weak, are they detection and photographic capa- sionals often think they are making few or many; and what the land is like, bilities of the smartphone to capture work better simply because they’re feature where are they settled: is it good or the dimensions and features of its computerizing it. When we think that, ill; and what the towns are like, where environment. You can point a phone we are wrong. We rarely even try to

they are settled therein: are they or tablet toward the corners, doors, track the fatigue, friction, and loss of

technology encampments or fortified places; and windows, furnishings, and other fea- commitment that stems from poorly what the land is like: is it fat or lean, tures of the room and it will draw a designed technology. And poorly are there in it trees, or not?” (This floor plan for you. There are apps for designed technology is everywhere. passage is from The Schocken Bible, physicians that display customized “When the inventor of the USB Vol. 1: The Five Books of Moses, transl. images of the human body, mak- stick dies,” wrote the Twitter come- Everett Fox; cited on www.bricklin ing it easier to talk to patients about dian Cluedont, “they’ll gently lower .com/tabletforms.htm.) their situation, and other apps that the coffin, then pull it back up, turn Companies make similar re- measure patient indicators such as it the other way, then lower it again.” quests today of the field representa- heart and respiratory rates, without The time spent figuring out the right tives they send to take inventory of requiring the medical professional to way to insert a USB stick may not store shelves. To be sure, instead of look away. There are apps for fixing seem like much, but the distraction is parchment or paper, the form is now boilers, which allow building inspec- real. If someone has to call customer 69 on an electronic tablet, a device that tors and engineers to more easily service because the buttons on the can take photographs, record and recognize problems without having computer interface all look the same, play audio and video, and manage to look up the technical specs. And, that’s more lost time. If a doctor won’t many other forms of media. Yet in of course, there are a wide range of use a patient records system be- gathering information, most people GPS-based navigation apps, which cause it’s too hard to figure out or too still use the form on a tablet as must be simple enough for drivers to cumbersome and error-prone to use, though it were paper on a clipboard. use safely. that’s even worse. All these things add The doctor seeking data during sur- up. You can’t measure the productiv- gery or the building inspector looking The Business Response ity and quality that you would have at a boiler must turn away from the All these apps, and many more like gained if things were better. So every task at hand and look down at the them, are beginning to change the company loses the time, trust, and screen, to check for information or way businesses connect with their benefits of the skills of its employees, enter data, just as on paper. This is employees. The apps transcend the while assuming that it is winning. not only an inconvenience, but also a limitations of the paper form. They possible danger, because people are gather information automatically, prone to errors. Interrupting the flow or through gestures, voices, and (continued on next page)

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70 technology could be doing something more valuable. bedoing something could or when on they support lines, training, in spend time People productivity. in hours countless lose arounds depend on work- that Companies it inspired. arounds work- ingenious for the celebrated even perhaps things, of ways doing in ingrained of culture, the part comes enough work-arounds in place, bad interface design be- rather than fixing the problem, it reinforces it. With shows up. button is a of screen, because the part empty supposed on an clicking to on computer; anote to the sequence written or next be there, acommand keeping given software; the bination with even though up com- in it freezes browser because aparticular ing it never Work-arounds situation. a bad include avoid- might of best the make arounds”: that procedures unofficial they words, other In out. it figure will expect employees the that assume but they frustrating, and counterintuitive that people will come up with “work- be intimate with companies, espe- companies, be intimate with to don’t want arule, as people, Most business. for problems certain sents them. for work and them from buy the with peopleclose connection who a intimacy, radical gain will nesses Busi- and potential workers. workers, potentialfrom customers, customers, feedback of amounts great porating incor- change, will systems internal creating of process The interfaces. —totheir tools use they how and work, they how people, on — afocus nies will have to apply design thinking computer in compa- employees’ lives, primary the become smartphones As (continued from previous page) A work-around itself. But, in innocuous seem may is software the that know often designers The Certainly, radical intimacy pre- intimacy radical Certainly, is the touch point for human relation- human for point touch the is interface User their interfaces. user improving by start can They stacles. ob- these toovercome businesses inappropriate. is world social the time Blindly emulating and attention. of amount untenable an require will they believe that close relationships have thousands of and employees, either. They intimacy radical want makers in don’t companies most decision senior The through. falls it if leave and deal, abetter negotiate could she or he that expectation the including individual, the for benefits has many relationship transactional for.A purely work they those cially But mobile will devices force why shouldn’t else? everyone so rite of passage, this endured they all, on After others. hazing same the how inflict get it they and felt atfirst, to it. for- Eventually, used they gets and surrenders stays Ultimately, who everyone themselves. blame Many groan. and chafe Others elsewhere. have opportunities it.” went“We they employees through leave, if Afew all company’s to the introduced told, are technology. They what amounts to encounter an employees new involuntary companies, many In staff. hazing when they are place. first the in software the and in the lack of interest in watching people to try use problems, interface user for fixing slow times response jokes about in “stupid tricks,” the in user tion surfaces tradi- This interface. an people, for not understanding seniors or hurried especially users, to blame circles IT technology.the It atime-honored some is in tradition who can’t out those figure dismiss designers interface All of these experiences reinforce the perception the reinforce experiences of these All It also shows up in the experience of incoming Meanwhile, like my engineer colleague, many user actually profound. profound. actually is it —but inconsequential even on, tofocus thing aminor like seem it glance, may At first organization. the and person the between point connection the behavior, and ships app Note Taker HD for the iPad (2010). iPad the Taker for Note HD app capture handwriting the and 1990s), (late Trellix tool creation website the (1985), Program Demo Bricklin’s Dan tool prototyping the include innovations 1979. other in His released spreadsheet electronic the pioneering of VisiCalc, co-creator the is He Garden. Software of president and Corporation Software Alpha of officer technology chief the is [email protected] Dan Bricklin

strategy+business issue 83 Good design is transparent; people feel as if they already know how to control the technology. They don’t have to be taught how to use it.

that the company doesn’t value its employees. Subpar scientist and designer at Kodak. Kodak thrived for a UX also makes the company more vulnerable to po- century because it took something hard and made it feature tentially serious events through human error. When simple. When cameras ﬁrst emerged in the 1860s, they medical employees make mistakes, for instance, it can were big and complicated. A photographer needed a wet

be life-threatening to patients; when database managers plate measuring 11 by 14 inches to produce an image, technology use a work-around, it can inadvertently open doors to not to mention a portable darkroom and the cart and cyber-attack; and when errors are made in data entry, it donkey to pull it around. can lead to misguided decisions. George Eastman, who was a skillful inventor, ap- Even companies known for their excellent user plied his talent to creating a camera with a good user interface sometimes have breakdowns in design think- experience. He figured out how to break all this tech- ing. As a shopper, I love Amazon for its interface. The nology into small, user-friendly pieces. He created a recommendation engine, for example, allows me to sort dry form of photographic film, a flexible roll to let the and scan an enormously complex body of user-generat- dry film unspool, and a carrying case. His slogan was ed reviews and comments in a way that makes it easy to “You press the button, we do the rest.” His first hand- choose a purchase. Furthermore, Amazon continuously held camera was expensive. But in 1900 he came out improves its onscreen product and checkout pages. This with the Brownie, an affordable box camera that was in itself reinforces my interest in coming back to the simple to use. 71 store as a shopper. The Brownie’s simplicity was possible because of But I’m also a book author — which, in effect, Eastman’s user-centered approach to design. That sim- makes me a supplier to Amazon. And the user experi- plicity, in turn, made the camera extraordinarily popu- ence makes me feel like a second-class citizen. The au- lar. Eventually the everyday photographs that this cam- thor profile pages on its system are difficult to set up, era enabled changed the way people perceived events, so much so that I have yet to create one for myself, de- including the horrors of war (soldiers took it to the spite the fact that my own expertise in software should front) and the milestones of family life (it was energeti- allow me to do so fairly easily. I — and presumably a cally marketed to children). I like to say it was the first fair number of other authors — haven’t been able to get mobile device. past my perception that the company does not value my Now imagine if your own company’s internal soft- time and interest. ware and devices were just as intuitively obvious to use. Instead of making employees feel inadequate, your A UX Ethic for Internal Systems company’s user interfaces could make them feel smart. When interfaces are done well, it’s magic. Good design And that would be the start of a self-fulfilling prophecy. is transparent; people feel as if they already know how In 2005, I founded World Usability Day because to control the technology. They don’t have to be taught I was concerned about the problems of poor interface how to use it. I learned this in the 1990s as a research design and its role in blocking people from taking (continued on page 74)

72 technology feature

and talent. retaining engaging for apriority as seen should be consumers facing systems the with par to up bringing employee systems systems as well. Indeed, principles apply to internal the but systems, facing They are from customer- ence overcomes complexity. Center,experi- show how user User ExperienceUniversity from our work at the Bentley and from research historical drawn examples, These Why GoodUXWorks 13 2 capture an on image film. capture only one button needed to with device, communications handheld modern first the was inIntroduced this 1900, camera One-Button Camera Brownie, theOriginal 1 the periphery. around placed are information options and Lower-priority button). “Get started” aprominent and for?” waiting you are (“What toaction call a center, including the at the most-needed essentials puts It elections. missing kept who policy public in student agraduate by instigated was Works Democracy reminder site created by and registration voter This TurboVote HomePage 2 along the way. find you’ll what and line), blue (the going you’re where arrow), blue (the now are you where tospot easy it makes terrain, its of complexity the all for The Waze navigation interface, Waze NavigationScreen 3

strategy+business issue 83 4 5 6 Medicare Home Page Medicare Nursing Home Medicare Nursing Home The U.S. Medicare system Comparison Screen Search Page home page has been iterated The Medicare website has The images of happy people upon and improved over a five-star rating system benefiting from the services the years through in-depth that, like the ratings in described here provide an research into the needs of Consumer Reports, makes emotional boost, and direct the users, many of whom are aging it easy to compare options. visitor’s gaze left to the most or highly stressed. The home The commands and user critical element for a nursing page simplifies their search experience are common on all home search: location. by grouping similar options of the site’s pages. through visual cues — green for those starting out, yellow for data, and blue for particular types of help. The system responds to clicks quickly, which reassures visitors.

4 6 feature

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74 technology feature of what constitutes a positive user experience. When I awareness an and intelligence artificial incorporates face agoodinter- Insoftware, develop you think. might as ferent styles of processing information, aren’t as hard to on turnover. tentially po- support, and and guidance save onyou’ll internal but expensive, consider seem how may much Redesign done without having to become an expert in your tool. for people clear job who and to their want get viting in- interfaces out the technology. Make love figuring good for Not engineering. what’s goodfor people who Not them. what’sing Not goodfor what’s accounting. oneeach of terms in what’s goodfor people the us- Consider to employees experience? customers your and you what want reinforce of How them many terfaces. Taketo use. amodel. it as but easy system, people it nonetheless find remarkably complex of iPhone yore, upon the built aremarkably is Brownie the impossible? or Sound helpline, Like desk. chat forum, online an or sheet, consult acheat build Google, on command a up look to need no be should There no manual. be should There interface. obvious should people present with an interact that system cal technologi- simple Every on premise: asingle, be based development. to guide It ethic should an need riously to isagoodplace start. enterprise software of internal experience user the And of challenges. array abroad with deal to helping key humanity bethe could solution, narrow aseemingly design, interface ter user developing world. the bet- in Indeed, especially life, to important services of products and the advantage Interfaces that feel right, even for even people dif- right, feel with that Interfaces The first step is to look at your existing user in- Companies that want to take their internal UX se- to make the how 2014 and learn designers Medicare helped the task 2011 conducted between studies Usability Medicare. of comparing by covered situations living other homes and nursing facilities one. loved less of a or that health probably about their concerned are stress- most site visitors to the site, the because experienced stress under people how in interested particularly was site. the CMS use would patients, providers and care including how its users, to understand group research focus and testing group deployed usability extensive (CMS) its website and This vices www.medicare.gov. Ser- &Medicaid U.S. for the Centers from Medicare comes experiences gooduser through tion thinking with. felt comfortable people already pictures) that fit together, aform (the of all evoking shoeboxture full architec- information the and functionality, the design, screen the way the It to do with had design. screen the tiveness of that user experience was not just a matter effec- The it became. organized it, of better you the used aphoto. more to The you attach when saw you clicked first folder, bethe toptos atthe of images sothey’d your put pho- those it automatically one wedding, about the to some- email an from other photos.them you If typed tomatically organize your wedding photos, separating au- and dots the to connect metadata the It use would there. about awedding entry an to recognize enough stamp), time smart (through the it and was calendar cisco, it would Fran- San you in took If photos atawedding images. ed link those electronicdesigned an shoebox automatically sort- that images to I and Lieberman Henry researcher MIT the atKodak, was date on your Consider just one part of the site, the section on site, of section the the Consider just one part organiza- an of examples current best the of One

strategy+business issue 83 Better user interface design, a seemingly narrow solution, could help humanity deal with a broad array of challenges.

ful. They learned, for example, that the information permission, support, and encouragement — not just about nursing homes wasn’t detailed enough; among from you, but from the culture around them — to keep feature other things, it didn’t tell users whether a facility iterating and testing until they get it right. Paying atten- offered short-term or long-term care. It also was not tion to user experience may mean that it takes longer to

easy to find out how recent the data on nursing homes release a product or internal system. But when it’s right, technology was. Although the site included a five-point rating sys- the result is far fewer headaches down the road, happier tem that consumers liked, the nursing home admin- customers, and happier employees. That should mean a istrators felt it was unclear why facilities earned the happier bottom line. + ratings they did. CMS took these lessons to heart and Reprint No. 16211 revised the site accordingly. Then it again tested the site with users. The organization continues to test to see how it can improve user experience for the broadest possible audience. Another good example is the mobile mapping and Resources navigation app Waze, which is linked to its users’ calen- dars. If a user has an appointment, Waze will automati- Frank Burkitt, “A Strategist’s Guide to the Internet of Things,” s+b, Nov. 10, 2014: The digital interconnection of billions of devices is today’s most cally send that person an alert when it’s time to leave dynamic business opportunity. 75 and suggest directions for how to get there. It makes life Don Norman, The Psychology of Everyday Things (Basic Books, 1988; later easier. Because it incorporates and amalgamates user in- republished as The Design of Everyday Things): How pleasure and usability formation (about real-time traffic patterns), it also has go hand in hand. to combine a huge amount of complex data into a few Elizabeth Rosenzweig, Successful User Experience: Strategies and Roadmaps indicators, generated instantaneously. Waze’s user inter- (Morgan Kaufmann, 2015): A hands-on guide for pulling together a UX strategy, informed by an ethic of simplicity and clarity. face was apparently one of the main factors in Google’s Christopher A.H. Vollmer, Matt Egol, and Naseem Sayani, “Reimagine decision to buy the company, and its features are being Your Enterprise,” s+b, Apr. 14, 2014: How to make human-centered incorporated into Google Maps (see pages 72–73 for design the heart of your company’s digital agenda. images). Nielsen Norman Group website, www.nngroup.com: Source of articles The key question for your product or app or sys- on usability by two leaders in the field, Jakob Nielsen and Don Norman, tem: What is it meant to help users do? Consider what and their colleagues. will make them feel rewarded, and what will make PwC Digital IQ study, 2015, pwc.to/YourDIQ: Developing your UX (and other digital) capabilities. them feel hurt. Then watch people use the system, and see how many (or how few) of your assumptions are World Usability Day website, www.worldusability.org: Point of contact for design efforts aiming at simplicity and accessibility (Nov. 10 in 2016). borne out by actual experience. More thought leadership on this topic: Many of your IT design professionals probably al- strategy-business.com/technology ready know how to make things better. But they need

feature innovation

76 Illustration by Marco Ventura Lawman Moore’s responsible for putting Moore’s into Law practice. away 79 at age on 21, March 2016, “the and person most Siliconthe Valley pioneer former and Intel CEOwho passed followingIn the of story the tells Grove, Andy excerpt, Garten continues ushered that each age And inan to echo loudly today. proﬁledindividuals were not were —they just doers. thinkers Field,Cyrus pioneer the telegraph. of transatlantic the The and of includes genius Khan characters Genghis military roster The better. otherwise and more connected, it smaller, world the changed over by millennium making past the identiﬁedManagement, has 10 people who fundamentally Garten, former E. Jeffrey of dean the Yale School of In computer age possible. computer age manufacturing — made the and high-tech high-speed, high-stakes, Intel’s Andy Grovepioneered by Jeffrey E. Garten Jeffrey by From

Silk to Silicon, a colorful history of globalization, history acolorful

”

feature innovation Jeffrey E. Garten Excerpted with permission teaches courses on the from From Silk to Silicon: global economy at the Yale The Story of Globalization School of Management, through Ten Extraordinary Lives, where he was formerly the by Jeffrey E. Garten (Harper- dean. He has held senior Collins, 2016). positions in the Nixon, Ford, Carter, and Clinton adminis- trations, and was a managing director at the Blackstone Group. His website is www.jeffreygarten.com.

Andy Grove was not a pathbreaking scientist. He the semiconductors, the transistors, the integrated cir- did not author anything so important as the law asso- cuits, the microprocessors — that drove the consumer feature ciated with Gordon Moore. He was never a household electronics revolution. And he gave us a vivid picture name like Bill Gates. Unlike Steve Jobs, he was not a of how to survive and thrive in business when the only

design genius, nor did he have the same intuition for constant is mind-bending change. innovation consumer sentiment. But no person had as much to do Grove became famous for urging his staff to main- with making possible the third industrial revolution as tain an attitude of acute paranoia toward Intel’s rivals. this Hungarian immigrant who arrived in the United He traced his natural anxiety to his experience as a States in 1956. child. For he was born András Gróf on September 2, The ﬁrst industrial revolution began in late 18th- 1936, in Budapest, an inauspicious time to be a Jew century England with the mechanization of the textile in Hungary. In 1942, András’s father, George Gróf, industry. The second took off in early 20th-century a partner in a small dairy business, was conscripted America with innovations such as the assembly line by the fascist Hungarian government, which sent and mass production. The third — the one we’re liv- him to the Russian front. For years, Andras’s mother ing through today — gestated in Silicon Valley, and is Maria shuttled her son between their apartment and a powered by communications technology, particularly friend’s house in the countryside, trying to avoid the the Internet and digitization (see “A Strategist’s Guide war between the Germans and the Russians, not to 78 to Industry 4.0,” by Reinhard Geissbauer, Jesper Ved- mention the German search to round up Jews for even- sø, and Stefan Schrauf, page 86). The driving force be- tual extermination. hind this latest industrial revolution is the tiny micro- At the age of 4, András had contracted scarlet fe- processor, the closest thing to the brains of a computer. ver, which permanently damaged his hearing. To com- Historian John Steele Gordon has called the micropro- pensate, he learned to lip-read and would always sit in cessor the most fundamental new technology since the the front of the class. Over the next 20 years, he would steam engine. undergo ﬁve reconstructive ear operations. In the post- It is unappreciated just how much the very indus- war years, Gróf developed into a good student, and was trial process of making the devices has contributed to interested in pursuing journalism. But after 1952, when contemporary globalization. In large part, the computer the Soviets began clamping down on free expression, age arrived as a result of a revolution in the manage- András turned his interest to chemistry, a profession less ment of high-technology industries. Andy Grove was susceptible than journalism to capricious interference the leader of that revolution. An Eastern bloc discipli- from Communist mandarins. issue 83 issue narian with modish sideburns and a clunky hearing aid, In 1956, after Soviet tanks rolled into Budapest to Grove whipped a motley crew of early industry pioneers crush an incipient revolution, András’s aunt, an Aus- at a startup into the world’s most important and global chwitz survivor, urged her nephew to escape immediate-

technology company: Intel. He built the products — ly. George gave him the name of a cousin in the United strategy+business Grove in 1969, holding up an ad for the Intel 3101, the company’s ﬁrst product. The 3101 was the world’s ﬁrst solid-state memory device.

States. And András, with nothing but the clothes he was able devices in large quantities. Worse, Shockley’s auto- wearing and a knapsack, set out with two friends. They cratic and narcissistic temperament led him to ignore or feature crossed the Austrian border by foot, made their way to reject any proposal that was not his own. Vienna, and received permission to go to America. Af- Noyce and Moore started looking to break away

ter crossing the Atlantic in a rusty U.S. troop carrier, he and start another company. Sherman Fairchild, an ec- innovation moved in with his cousins in Brooklyn, N.Y. András, centric, wealthy playboy and entrepreneur who had who would change his name to Andrew Grove, entered founded the Fairchild Camera and Instrument Cor- Brooklyn College and soon transferred to City College poration, agreed to bankroll the defectors. They set up of New York. He graduated ﬁrst in his chemical engi- Fairchild Semiconductor about two blocks from Shock- neering class, and married Eva Kastan, an immigrant ley’s operation. The defectors from Shockley came to be from Austria, who had come to the U.S. after living for known in Silicon Valley as the “Traitorous Eight.” many years in Bolivia. After earning a Ph.D. at the Uni- It was an ideal time to start a new technology versity of California at Berkeley in 1963, he took a job business. In 1957, the space race between the United at Fairchild Semiconductor in the town of Mountain States and the Soviet Union had elevated the micro- View, south of San Francisco. electronics business to national prominence. Fairchild began to achieve pioneering breakthroughs, including The Roots of a Revolution the discovery of a process that could produce complex 79 Having escaped a violent political revolution, Grove microelectronic devices far more cheaply, and radical found himself at ground zero of a peaceful technologi- advances in the operation of transistors. Working sepa- cal one. After World War II, scientists at Bell Telephone rately and unbeknownst to one another, Jack Kilby of Laboratories, including William Shockley, invented the Texas Instruments and Robert Noyce both invented transistor — a tiny metal slab that was much smaller what became known as the integrated circuit, a silicon and more powerful than the vacuum tubes that pow- chip that replaced ﬁrst hundreds and then millions ered the earliest computers. of transistors. In 1954, Shockley set up his own semiconductor As Fairchild became the largest semiconductor lab, Shockley Semiconductor, in an old shed outside company in the world, with 11,000 employees and sales Palo Alto and recruited some of the best minds from of more than US$150 million per year, the organiza- around the country, including Robert Noyce and Gor- tional culture began to change, much to the dismay of don Moore. But the company was plagued by problems. Noyce and Moore. Fairchild’s corporate headquarters Customers such as the Department of Defense and IBM in New York imposed an East Coast–type bureaucracy required a highly reliable and repeatable process for on the company. Noyce was being forced to assume a mass-producing ever-smaller transistors. And although senior management role that he did not want or enjoy. Shockley showed an ability to create pathbreaking tech- In addition, Fairchild had not solved the quality prob-

Photograph: Intel Free Press / Creative Commons nology, he lacked the managerial skills to produce reli- lems that were endemic at Shockley. Years later, Grove Grove was a surprise choice for director of operations at Intel, as he was more of a physicist than an engineer and more of a professor than a businessman.

would recall, “The research lab and the manufactur- margin and high volume, as Fairchild did, Intel wanting location were seven miles apart. Those seven miles, ed to get so far ahead of the competition that it could feature from the standpoint of collaboration, could have been sell its products in high volumes for high margins. Al- 7,000 miles.” though the market was driven by America’s powerful

The critical importance of these organizational defense establishment, Noyce and Moore also saw the innovation ﬂaws began to come into focus after April 1965, when rapidly growing opportunities in consumer markets. Gordon Moore presented a paper in Electronics maga- At the time, the number of transistors that worked zine that described what others would later call Moore’s relative to the number produced was often well under Law. Its essence was that the number of transistors that 20 percent — an obscenely low proportion. Even mak- could be placed on an integrated circuit could double ing a small batch was highly complicated, a task that at regular intervals — every 18 months to two years. has been aptly compared to doing surgery on the head Moore’s Law pointed to the mind-blowing opportunity, of a pin, in circumstances where the slightest impu- or perhaps the inevitability, of sustained exponential rity in the air or on the material would kill the patient. growth of computer technology. To maintain the pace Workers could not eat, smoke, or even wear cosmet- of progress, a company would have to combine the free- ics on the job. Noyce and Moore had to ﬁnd a tough wheeling open-plan creativity of Fairchild’s early years manager who could run this operation while oversee- with a level of organizational discipline that had never ing an organization that would have to be preeminent 80 been achieved in any company in the transistor era. in research and development, marketing, and after-sales In 1968, Noyce and Moore decided to leave Fair- service — all the while being ruthlessly competitive. child. They wrote a three-page business plan, describ- They chose Grove, with whom they had worked closely ing their intention to build one corner of the transistor at Fairchild. business — the one focused on computer memory — into an industry. Within 48 hours they had raised $2.5 A Surprise Choice million over the phone. Grove was a surprise choice for director of operations A month after leaving Fairchild, Noyce and Moore at Intel, as he was more of a physicist than an engineer established Integrated Electronics — Intel for short and more of a professor than a businessman. His Eng- — in a half-abandoned 30,000-square-foot concrete lish was heavily accented and his cumbersome hear- building one hour south of San Francisco. At the time, ing aid looked like it had been made behind the Iron big mainframe computers were storing information in Curtain. Nevertheless, he clearly had the necessary crude devices called magnetic cores. Noyce wanted to toughness. Whereas Noyce and Moore could articulate issue 83 issue replace them with tiny transistors that could store more goals, Grove was riveted on achieving them. Noyce and information in much less space, accelerating the speed Moore could explain where the train should be heading of the entire computer by allowing different parts to and when it should arrive; Grove had the ability and de-

communicate more quickly. Rather than go for low sire to get it there on time, in good condition. Over the strategy+business Grove with Intel founders Robert Noyce (middle) and Gordon Moore (right) in 1979.

next four decades, Grove was the person most respon- problem Intel had been created to solve — replacing the sible for putting Moore’s Law into practice. magnetic core that was the bulky memory center of the feature In the early days at Fairchild, Grove, who was as- mainframe computer. Within two years, the 1103 was sistant director of research and development, had a rep- the biggest-selling semiconductor in the world, making

utation for being extremely well organized and direct, Intel the largest global producer of memory semicon- innovation sometimes abrasive. Noyce and Moore were gracious ductors. It has maintained that status ever since. and low-key. But Grove could yell, pound the table, and Grove later wrote about the pathbreaking lessons intimidate anyone. But there was a deeper difference. he learned in these early days in his widely read book The two bosses would give instructions and assume High Output Management (Random House, 1983). they would be followed. There were no penalties for ig- First, Grove wrote, every person at Intel, whether he noring them. Not so with Grove. “He imposed conse- or she worked on the manufacturing line, in the mar- quences on every employee and action in the company,” keting office, or in the R&D lab, was responsible for wrote journalist and historian Michael S. Malone. “And attaining specific targets and was held accountable for he ruthlessly enforced cost accountability on every ofthat output. Second, output was measured by the team, fice at Intel — Grove did not accept excuses for a failure and the critical role of a manager was to increase the to hit one’s numbers.” output of his or her teams. Third, a responsible organi- Grove became Intel Employee Number Three. Un- zation had to shed management layers. Supervisors and 81 like Noyce and Moore, he did not identify himself as subordinates had to be in direct and constant commu- a self-starting, job-hopping entrepreneur. The position nication. These ideas may seem commonplace today, “was terrifying,” he later recalled. But Grove quickly but at the time they broke critical ground in the science found the secret to solving Shockley’s quality problems. and practice of management. He taught himself the manufacturing techniques that Early on, Grove kept a journal to record his would dominate the computer age. It came down to thoughts on management. In his writings, he mused shaping and inspiring a workforce that functioned and about the balance required to keep the whole of Intel adapted smoothly and swiftly enough to keep up with inspired and ahead of its rivals. How does a manager the accelerating speed of the computer chip. best deal with a complex problem when a number of In 1969, Intel introduced its first chip, which could specialists must be involved? How fast can an organi- store 64 numbers (and was called a 64-bit DRAM, for zation grow and stay highly productive? Not only was “dynamic random-access memory”). Within a year, In- he preoccupied with these fundamental issues of man- tel could store 256 numbers in a chip, and within two aging, but he was defining them clearly, debating them years it could store 1,024 in a chip (called the 1103) that with colleagues, writing about them, and exploring was smaller and more energy-efficient than its predeces- them with students at Stanford University, where he sor. Thanks to Grove’s relentless refining of the manu- became a part-time professor. By 1971, the year a local

Photograph courtesy of Intel Group facturing process, the 1103 became the answer to the paper coined the term Silicon Valley, Intel was becoming The Intel 386 microprocessor, introduced in 1985, was a multitasker. With 275,000 transistors, it could process 32 bits of information at a time.

a polestar of the tech industry and Grove was becoming ing, display, calculations, and other functions — for an the axis on which Intel turned. advanced calculator. Intel responded with a proposal to feature build a single calculator that would include some 2,000 The Cult of Management electronic elements. No bigger than an index card, this

Grove came to embrace what he called a culture of device packed the same computing power as had the innovation “constructive confrontation” as the best means of coax- room-sized mainframe in 1947. Then Intel struck a deal ing maximum performance out of his teams. Fiercely with Busicom that allowed it to keep the rights to sell argumentative and well prepared, he could be brutal the brainy chip for non-calculator applications to other in challenging the less well prepared, grilling subordi- customers. The new device would soon be called a mi- nates to the point of demoralizing them. Craig Barrett, croprocessor, literally, a “computer on a chip.” It would Grove’s longtime Number Two and his eventual succes- become the brains of the personal computer and many sor, later told the Washington Post, “Occasionally we… other devices we use today, such as tablet computers suggest [to Grove] there may be an alternative to grab- and smartphones. bing someone and slamming them over the head with For the fi rst few years, Intel and several of its ri- a sledgehammer.” vals, including Motorola and Texas Instruments, were In 1976, Grove became chief operating offi cer of engaged in a fi erce race to design, manufacture, and ac- Intel, and in 1979 he became president as well. In these quire customers for the new microprocessor, and Intel 82 combined posts he subjected every production process eventually emerged as the leader. In 1974 the company and every administrative process to numerical measure- built and introduced a more advanced microprocessor, ment. All employees had to make exceedingly detailed called the 8080. Intel’s edge was the organization Grove budget projections, establish targets for their work, pre- had created, which could not only design and build mi- pare constant updates, and explain discrepancies. He croprocessors with unprecedented effi ciency but also would ask how many functioning integrated circuits provide an unmatched package of training and services a section produced, and how long it took. How many to customers. recruits were interviewed, and what was the yield? Ob- The 1970s ushered in the fi rst cycles of shortages sessed with cleanliness, Grove and his assistants would and gluts in the tech industry. Here Grove’s insights make surprise inspections of bathrooms, janitors’ clos- constituted another major advance in high-technology ets, and offi ces, and would criticize staffers for having manufacturing. The cyclical downturns were devastat- too many papers on their desks. Grove was the exact ing to the industry, and the natural response of most opposite of the leaders he saw at Fairchild Semiconduc- companies was to cut back on all spending, including tor who couldn’t translate ideas into products. He ex- R&D. Grove thought differently. He was following emplifi ed high-quality commercial output. Moore’s Law, not the business cycle. Alone among the In 1969, the Busicom calculator company from industry leaders, Grove responded to industry slumps

Japan asked Intel to design specialized chips for print- by cutting budgets, cutting jobs, and forcing staff to Getty Images Photograph: Alone among the industry leaders, Grove responded to industry slumps by cutting budgets. At the same time, he pushed Intel to expand R&D during downturns.

work longer for less money. At the same time, however, fect expression of [Grove’s] conception of business as a he pushed Intel to become the ﬁrst major company to contact sport,” said biographer Richard S. Tedlow. feature expand R&D during downturns. This required Grove Next, Intel had to cope with competition from Ja- to ignore screaming shareholders — who wanted spend- pan. By the early 1980s, Japanese companies were bet-

ing cuts to protect quarterly earnings — in order to ter than American ones at making memory chips; the innovation come out of recessions much stronger than Intel’s rivals. Japanese chips had high-quality yields of 80 percent, During the recession of 1974, when Grove cut staff compared with U.S. yields on the order of 50 percent. but dramatically boosted R&D, Intel’s stock dropped When recession hit the U.S. economy in the early 80 percent. Two years later, when the cyclical recovery 1980s, Japanese companies used their superior efficien- came, the company’s stock quadrupled in value, from cy to lower prices and increase market share — setting $21 per share to $88, as earnings rose 65 percent from off a global trade battle over the Japanese dumping of 1975 and the payroll nearly doubled. products in the United States. Then, in one of the great turnarounds for a glob- Facing Competition al company, Intel simply changed the contours of the The company saw yearly revenues grow from $9 mil- battlefield. As the company’s profits fell from $198 million (with a profit of $1 million) in 1970 to $854.2 million in 1984 to less than $2 million in 1985, Grove and lion (with a profit of $96.7 million) by the end of the Moore held a quiet but intense discussion about the dire 83 decade. It was in the 1970s, too, that Intel expanded situation. “If we got kicked out and the board brought operations around the United States and the world, in a new CEO, what do you think he would do?” Grove eventually to have facilities in several parts of Califor- asked. Without hesitation, Moore replied, “He would nia, in Oregon and Arizona, and in Malaysia. But by get us out of memories” and focus on microprocessors. the end of the 1970s, Intel would start to face serious Grove felt numb, but then recovered. “Why rivals for technological leadership in memory chips at shouldn’t you and I walk out the door, come back, and home and abroad. do it ourselves?” That’s what they did: Grove led Intel The domestic threat came from the Motorola out of memory chips and into microprocessors, a move 68000, which many experts declared superior to In- that required firing some 8,000 people and spending tel’s latest model, the 8086. Determined not to relin- more than $180 million to rebuild the company around quish Intel’s global lead in the memory business, Grove a new core business. It was transformative leadership in launched Operation Crush. He mobilized the sales and its purest and most decisive form. marketing force, offering rich bonuses to every staffer Years later, when Grove wrote about the shift in his who could keep an Intel customer — or potential second major book, Only the Paranoid Survive (Cur- customer — from choosing Motorola. After a year of rency Doubleday, 1996), he underlined the idea of an trench warfare, Intel had won, preserving its lead and “inflection point” — a moment, or a period of time, reputation in the field. Operation Crush “was the per- when a set of forces are so overwhelming that they com- Grove with Bill Gates in 1992, as Intel and Microsoft prepared to launch a new Windows video feature.

pel a fundamental change in the rules of the game for Success did not have a calming effect on Grove, a company or an industry. In his book, Grove admits who had learned to use the fear that had stalked him feature he failed to see the Japanese challenge coming and since childhood to his advantage as a leader and man- counsels other business leaders to remain vigilant to, ager, always on the watch for new inﬂection points. “I

even paranoid about, the inevitability of such inflection worry about products getting screwed up, and I worry innovation points. Involving employees who are closest to the mar- about products getting introduced prematurely. I worry ket — salespeople, middle management — can help about factories not performing well, and I worry about executives understand what is happening in the minds having too many factories,” he admitted in 1996, at the of customers. Responding to inflection points requires pinnacle of his career. an organizational structure that makes it possible for A year earlier, Grove had encountered the most information and advice to travel quickly from the field personal of inflection points: He was diagnosed with to the top officials, but then empowers leaders to fully prostate cancer. He attacked it using the same approach mobilize the company behind a chosen plan of attack. he applied to invaders in Intel’s market. He saw quickly Amid all that unstructured interaction, you have to be that medical science was divided on the best course of organized, too, he explains. “Allow chaos,” he advises, treatment. So over the course of eight months, he read “then rein it in.” When inflection points come, be ready countless books and articles and delved into the medi- to drop all previous assumptions and start from scratch. cal literature, burying himself in technical research 84 Open your mind to multiple sources of information papers. He contacted physicians from different special- and to advice that is frank, even confrontational, and ties around the country. He plotted the information he possibly contrary to what you want to hear. gathered on charts that correlated various treatments with outcomes. Ultimately he selected high-dose radia- Golden Decade tion treatment as opposed to surgery or a number of After becoming CEO in 1987, Grove presided over a other options. The cancer went into remission. golden decade in his corporate castle. Establishing Intel During Grove’s tenure at the helm, Intel’s stock as the industry standard meant that manufacturers of market value grew from $4.3 billion to $114.7 billion, other computer products — software, keyboards, sound and it rose from Number 200 on the Fortune 500 systems — had to make their products compatible with list to Number 38. Sales grew from $1.9 billion to Intel’s microprocessors. The company had become a de $26.3 billion, profits from $246 million to $6.1 billion. facto monopoly with profit margins of 90 percent. In The company was doubling in size every two years. the 1990s, the PC became the gateway to the Internet, It seemed that its own growth was following Moore’s which would open a new age of communication and Law. Intel even became one of the leading sources of collaboration, afford opportunities for other upstarts to venture capital for new startups. By August 31, 2000, challenge incumbents, and destroy and create billions when its stock reached $78 per share, Intel, now valued

in shareholder wealth. The company prospered further. at nearly $500 billion, had become the most valuable Photograph: Associated Press Grove helped create a corporate culture that cultivated individualism, innovation, and — miraculously in light of all that — exquisite teamwork.

manufacturing company in the world, worth more than of transistors on a microprocessor by 1 million times. all the U.S. automakers combined. And Intel had be- Today you can ﬁt more than 6 million transistors into feature come a truly global corporation, earning 63 percent of a space the size of the period at the end of this sentence. its revenues outside the United States. In 1990, it had In the same time frame, the price of a transistor dropped

operations in six other regions: Malaysia, the Philip- to one-fifty-thousandth of the original. By 2013, Intel innovation pines, Singapore, the West Indies, Japan, and Israel. was producing 6 billion transistors per second, or 20 By 2008, it would add dozens more nations, including million per year for every person on the planet. Grove’s India, China, Vietnam, and Brazil. It employed ap- Intel had become a symbol for our age. + proximately 82,000 people around the world. Grove, Reprint No. 16212 for all his paranoia about Intel secrets, was one of the first American high-tech CEOs to establish R&D labs outside the United States. In 1998, Grove stepped down as CEO and became chairman, pulling back from day-to-day operations to manage the board of directors. He became a sage public voice for a nation that seemed to be losing its way on management issues. 85 Processor at the Core Intel stands out not only because its product sits at the Resources core of the computer revolution but because Grove did Andrew Grove, Only the Paranoid Survive: How to Identify and Exploit so much to define and spread the management ideals the Crisis Points That Challenge Every Business (Currency Doubleday, that are now at the core of many other technology com- 1996): The best-selling memoir/high-tech management manual by the longtime CEO of Intel. panies throughout the U.S., Europe, and Asia. Grove’s influence came equally from his business achievements, Art Kleiner and Juliette Powell, “Bran Ferren on the Art of Innovation,” s+b, Oct. 21, 2015: A celebrated proprietor of R&D ateliers explains how from his capacity to communicate his thoughts and ex- companies can cultivate the rare people who create miracles. periences via his teaching and writing. He helped create Michael S. Malone, The Intel Trinity: How Robert Noyce, Gordon Moore, a corporate culture that cultivated individualism, egali- and Andy Grove Built the World’s Most Important Company (Harper tarianism, innovation, and — miraculously in light of Business, 2014): A definitive account of Intel’s origin story by a veteran chronicler of Silicon Valley. all that — exquisite teamwork. Moreover, Grove defined a management process Michael Schrage, “Genius Is a Team Effort,” s+b, Aug. 1, 2014: A look at collaborative charisma and a review of Michael S. Malone’s Intel Trinity. that continues to generate the production of computer More thought leadership on this topic: chips that are ever smaller, cheaper, and more powerful. strategy-business.com/innovation Between 1971 and 2011, Intel increased the number feature

operations & manufacturing 86 A Industrial revolutions are momentous events. Strategist’s By most reckonings, Guide to there have been only Industry three. The ﬁ rst was triggered in the 1700s 4.0 by the commercial Global steam engine and the businesses mechanical loom. The harnessing of electric- are about to feature integrate their ity and mass production operations sparked the second,

around the start of into a seamless operations & manufacturing digital whole, the 20th century. The and thereby computer set the third change in motion after World the world. War II (see “Moore’s Lawman,” by Jeffrey E. by Garten, page 76). Reinhard Geissbauer, It might seem too Jesper Vedsø, and Stefan Schrauf soon to proclaim that the fourth industrial revolution, spurred by interconnected digital technology, has begun. But Henning Kager- 87 mann, the head of the German National Academy of Science and Engineering (Acatech), did exactly that in 2011, when he used the term Industrie 4.0 to describe a proposed government- sponsored industrial initiative.

88 manufacturing & operations feature panies from many countries. countries. many from panies interoperable global value elements an in these of all hicles); embedding chain, the and shared by many com- autonomous and ve- services, ride and apps, delivery motor vehicles (including navigation tools, ride-sharing todirect algorithms use that platforms devices; mobile other and smartphones models; marketing new other tion (including and 3D printing); software-as-a-service fabrica- digital analytics; and capture data of Things; Internet the cloud sensors; computing; sophisticated intelligence; include robotics artificial advanced and energy and manufacturing sectors. These technologies the now, right to poised transform to maturity ing all com- technology, all digital major in innovations several sponding rapidly not just to human commands but to commands not rapidly sponding just to human technology, flexible re- of highly systems hyper-aware become society industrial engendered have that ery lems have been worked prob- engineering and design of the most after only out. The networks of form tangible take machin- products themselves The models. fabrication digital utilize and laboratories simulated in model, product development and design place take production. 4.0 Under machine Industry the scale to large- speed of and software fungibility the bringing operations: global of way new organizing powerful a enables change worlds. This virtual and physical joined the But together, are integrate when they they by surprise. by surprise. others catch may and companies many transforming at all. It is a signal today, doesn’t industry in name the hyperbolic seem of sweeping change you look of rapid digitization closely atthe pace When that is rapidly manufacturing. smart and chains supply smart for and applications strategies solutions, and ecosystem digital portfolios, and service in developing digital product leaders industry He supports Germany. PwC with a partner is he Munich, in Based ness. consulting busi- strategy Africa for Strategy&, PwC’s and East, Middle the Europe, in practice 4.0 leads the Industry strategyand.de.pwc.com reinhard.geissbauer@ Reinhard Geissbauer These technologies are often thought of separately. thought often are technologies These The term term The Industry 4.0 refers to the combination of of combination to the refers business models. business models. in their principles 4.0 Industry incorporate can they how on companies and transportation leading industrial He advises survey. 4.0 global Industry firm’s the for responsible is sector, products industrial and teamleadership for the PwC’s of part is He hagen. in Copen- based Denmark, PwC with apartner is [email protected] Jesper Vedsø

becoming digital enterprises. enterprises. digital becoming and capabilities operations on developing corporations global advises He Munich. in Germany, based PwC with apartner is He Germany. for practice 4.0 Industry its overseeing Strategy&, with is a leading practitioner strategyand.de.pwc.com stefan.schrauf@ Stefan Schrauf panies from 26 countries in the industrial production 96). Gross, page by Daniel Joseph Kaeser,” Interview: Leader Thought (see “The have declared that it is now a core part of their identity approach; both companies’ CEOs and senior executives the embraced Siemens GEhave fully and as behemoths the United Kingdom. Such influential global industrial and Nordic the countries, United Japan, China, States, the in particularly well, as elsewhere growing rapidly is &Co., Trumpf. and kom, Klöckner momentum The Tele- Deutsche Daimler, Bosch, BASF, includes list the the to According initiatives. strong have nies compa- industrial country’s leading of that many and populations. aging pany problems accom- the and that of urbanization, sures pres- the pollution, demand, and energy change climate new ways of including tackling inventionthe services, and of products new today’smovement develops, these trends will accelerate. So will most the As purchaser. of the product specifications to difficult the problems: the tailoring fully century, while 20th product the in amass-produced make could they as inexpensively of one batches in products as to make ability the customization: mass learning are companies These come to beupdated). has software that way same the grades for complex products after they are sold (in out up- sending to grave, produce from cradle they everything to track beginning 4.0 are Industry embrace that Companies manufacturing. forming of development. trans- But stages it already is early self-direction. perceptions and own their In 2015, PwC surveyed more than 2,000 com- 2015,In 2,000 more than surveyed PwC Germany, 4.0 in movement Industry The started its in still is infrastructure technological This with PwC Germany. Germany. PwC with Stefanie Zuberer, consultant and Germany; PwC with Montgomery, manager South Africa; Elizabeth senior manager PwC with Ushawere Bahl-Schneider, contributing to thisAlso article Economist,

strategy+business issue 83 sectors, including aerospace and defense; automotive; The cost savings are largely a result of greater chemicals; electronics; engineering and construction; efﬁciency and technological integration. Industry 4.0 forest products, paper, and packaging; industrial man- replaces redundant legacy systems, such as those for op- ufacturing; metals; and transportation and logistics. erations management and enterprise resource planning, In this global Industry 4.0 survey, one-third of the with a single, enterprise-wide, interoperable whole — respondents said their company had already achieved which is much less expensive. Because user experience advanced levels of integration and digitization, and in operational systems has improved in recent years, 72 percent expected to reach that point by 2020 (see employees tend to be happier and more productive with Exhibit 1). Industry 4.0 (see “Beyond the Ninth Circle of Help,” This momentum reﬂects expectations of rapid pay- by Elizabeth Rosenzweig, page 64). This lowers costs feature offs in business results. An overwhelming majority (86 for training, support, and staff turnover, and raises op- percent) of the survey respondents said that on the basis erations speed. Predictive analytics, when used to sup-

of their experience to date, they expected to see both port real-time quality control and maintenance, con- operations & manufacturing cost reductions and revenue gains from their advanced tributes to the savings by smoothing operations and digitization efforts. Nearly a quarter expected those im- reducing breakdowns. provements, in both cost savings and revenues, to ex- The revenue gains, for their part, come largely from ceed 20 percent over the next ﬁve years. offering new digital features and products, or from introducing analytics and other new digital services to customers. In addition, the availability of real-time data Exhibit 1: Adoption of Industry 4.0, by Sector Respondents were asked: “How would you classify the current level enables companies to offer more personalized prod- of digitization and integration [in operations, supply chain, and related ucts and customized solutions, which usually generate activities] in your company? What levels are you expecting in the next five years?” signiﬁcantly higher margins than mass-manufactured offerings. The opportunities are promising enough that NOW IN FIVE YEARS about 55 percent of survey respondents expected to see their investment returned within two years, a short 45% Electronics 77% 89 time considering the amount of capital required.

32% Aerospace and Defense 76% The Web of Technologies 35% Industrial Manufacturing 76% s your company becomes active in Industry 4.0, you’ll ﬁnd the beneﬁts go far beyond 32% Chemicals 75% extending your digital reach or selling new types of products and services. It will estab- 38% Forest Products, Paper, Pkg. 72% lish your company, your employees, and your entire ecosystem of suppliers, partners, distributors, and 28% Transportation and Logistics 71% customers as a fully interconnected, integrated digital

30% Engineering and Construction 69% network, linked to other networks around the world. Three aspects of digitization form the heart of an 41% Automotive 65% Industry 4.0 approach. • The full digitization of a company’s operations, 31% Metals 62% integrated vertically (to include every function and the entire hierarchy) and horizontally (linking the suppli- Source: “Industry 4.0: Building the Digital Enterprise,” PwC ers, partners, and distributors in the value chain and

90 manufacturing & operations feature test new offerings without a full launch. launch. without afull offerings new test to expensive less and it easier makes turn in which ket, to products mar- new to bring expensive less and easier is clear it will work well. These advances make it much when only it machinery physical the in invest and flaws, it test for design, plant anew to simulate most effortless put before It being place. in al- is software in typed beproto- —can lines assembly new entirely indeed, world. —and, products New physical of the tualization represent vir- the These most operations. ofperform the robots to programmable use which facilities, fabrication locations. geographic particular in services and products new test toeasily and disasters) natural from those for (such suddeninterruptions pensate as to com- chain the enables and supply chain, of atypical shortages out and gluts smooths the This upgrades. and maintenance orders automatically, triggers and fulfills and about others’ supply the places data levels, ceives re- transparently suppliers. Each and manufacturers, transporters, centers, distribution retailers, connect is leading-edge inventory management which systems, One example seamlessly). them among data transferring ed software upgrades instead ofed software mechanics. download- via to berepaired vehicles other and trucks, vehicle which is evolving software, to enable cars, motor- is example Another deployment. efficient more suggest and machines of various efficiency the pare next generation of this prevent and it. The breakdown equipment mechanical pending will be able to com-port or on a construction equipment For ashipping the in example, used. used are how and they functioning are how they well cates site can indi- now services and products generated by these data the detect an analyzed, and captured When them. around products im- of other activity the with along its results, and activity become own their responsive interactive, and tracking they sothat software, custom-designed with bedded how they operate, where they face delays, and how they how and they delays, face where operate, they how they into them: who those use insights provide powerful also A more advanced example is the design of flexible flexible of design the is example advanced more A Industrial products that track their own activity will will activity own their track products that Industrial The and redesign of services products • to be em- data analytics as a core enterprise capability. capability. enterprise acore as analytics data must embrace oriented which culture, digitally — anew new organizational structures, and — most importantly compliance, tax and ment, approaches new to regulatory manage- data and architecture ofclude forms IT new organizational practices and structures. These shifts in- line. assembly tothe directly mitted trans- are specs those stores, and Haier’s in retail kiosks features they want on their computers or phones, or at the to order. China in specify Customers refrigerators and machines its washing makes already for example, Haier, manufacturer come norm. appliance the The of assembly into types new integrated are robotics and software as lines, highprototyping. But as it levels becomes more sophisticated, and for primarily used is fabrication one. Currently, digital of specification of abatch as created effect, in product is, where every will customization, of of economics mass the advantage be- output to the customer need. according adjust and monitor air flow of the compressed sites can atcustomer installed machines The used. is that air compressed for only the billing is rectly, instead, and, its equipment from selling di- away moving is which Sweden, Nacka, in based compressors of air facturer basis. One of many on asubscription often examples services, as offered increasingly is Atlas Copco,Products a manu- as diverse as aircraft engines and software are accordingly. models business their tailor and directly end more customers to reach manufacturers industrial more allowing responsive, chain value the 4.0 makes Industry services. products, and processes, new these able, and negotiating printing prices accordingly. prices printing able, negotiating and avail- when are customers’ presses knowing time, press become brokers of can manufacturers the data, usage generate presses the When presses. servicing and selling from revenues of their bulk the made traditionally have For example, the manufacturers of printing machines to services. develop profitable and products data new this use can problems.work manufacturers The around Making Industry 4.0 work requires major shifts in in major 4.0 shifts work requires Industry Making take that models business enables 4.0 also Industry • customers, with Closer interaction enabled by

strategy+business issue 83 Industry 4.0 brings ﬁne-grained awareness into the machines themselves; it makes the value chain self-conscious.

To understand why analytics are so important to customers’ daily and seasonal use of machinery can help Industry 4.0, consider the last major operational revo- you improve production schedules. Data about em- feature lution, the quality and lean production approach that ployee recruiting can help you predict your next talent began in the Japanese auto industry and spread around shortfalls. Production data can illuminate opportunities

the world. Exercises such as the “five whys” and statis- to eliminate downtime or speed up throughput. Ana- operations & manufacturing tical analyses taught manufacturing engineers — and lytics can also help you balance trade-offs: for instance, people on the assembly line — to monitor the variance the data might help an oil company decide to place a in their efforts, seek opportunities for improvement, refinery offshore, even though the costs are higher, be- and attune themselves to the flow of the work. This re- cause it will yield more uptime and thus more profits. sulted in unprecedented levels of quality and reliability. Analytics can also help you meet aspirations that Industry 4.0 brings that same fine-grained awareness seemed nearly impossible before. For example, many into the machines themselves; it makes the value chain companies struggle to improve their ecological foot- self-conscious. The machines can be programmed, for print. Analytics can identify wasted materials and sug- example, to detect when they are wasting material, tak- gest ways to reclaim them, or to use them as inputs for ing an inefficient supply chain route, or going awry in other industrial processes. Analytics can also reveal new some other fashion. They can bring that information markets, or opportunities for growth in existing mar- to the attention of company leaders, in the same way kets, that were not obvious before. 91 that a GPS navigator can relay information about traffic congestion to help a driver change course en route. First Movers and Platforms In the PwC study of Industry 4.0, the most com- here are, of course, many challenges associ- monly cited difficulty in building an analytical capabil- ated with Industry 4.0. It requires openness ity was the lack of people with the expertise to conduct with data and collaboration, to an extent that the analysis. Other prominent concerns — poor data feels uncomfortable at many companies. The quality, lack of access to the right data, and lack of top- requisite technological capabilities and human level support — reinforce what has long been known: skills are often in short supply. It involves new and un- Doing analytics is difficult. The processes of Industry familiar ways of organizing production. And, perhaps 4.0 provide mountains of data about customer demands most daunting, it represents a leap of faith; investments and value chain logistics. But if you can’t make sense of must be made today, while many of the products and that data and use it to boost efficiency, grow closer to processes involved in the approach are still unknown. your supply chain partners, and develop products and Nonetheless, companies that hold back, waiting services your customers actually want, much of the ef- to see how it all turns out before investing, will fall fort is wasted. behind. As World Economic Forum founder Klaus Analytics can yield insights that help you reshape Schwab put it in his recent book The Fourth Industrial your operational designs. For example, analysis of your Revolution (World Economic Forum, 2016), “Contrary

92 manufacturing & operations feature tems) from a variety of companies — facilitating trans- —facilitating of companies tems) from avariety sys- planning resource enterprise (such as systems and devices, machines, for connecting a cloud-based system developed has providers. Each platform position as their to solidify moving already Siemens GE and are vantage. for apps app sold stores. their in 30percent revenue of the collect for example, Google, Apple and platforms. distinctive and powerful tion with posi- cemented their —all them among Microsoft and Apple, eBay, —Amazon, Facebook, Google, industries Internet and movers first of software the most successful The interact. of vendors to customers seamlessly and range wide a allows that technology interoperable and of exchange anexus movers is Aplatform create. first for funding. aqualifier as investors by seen be will it that advantage competitive implementation 4.0 provide may enough of Industry grow. Advanced up will to catch for laggards required investment the aresult, As competitors further. —even over lead their increase —and performance operational to improve them enabling their 4.0 strategies, Industry their in reinvest to capital more generate will they gains, revenue and savings cost expected their realize can ers they move more quickly than competitors. If first mov- has to do with the virtuous investments. on their returns rapid business circle they to see group the expecting among are half more kick than off whenciency, cost savings, and opportunities for innovation; rapid effi- to in payoffs befinding appear They tage. advan- competitive and of digitization levels high claim also and 2013revenues since 4.0 efforts, Industry in ers” say they have way. —have chosen the to lead total “first mov- These invested 4percent only of the representing survey, dents to our 6 percent or more of their ‘who’but weare.” also of doing things, ‘how’ the ‘what’ and the changing only not is It pace.… linear than rather exponential an at ing to the previous industrial revolutions, this one is evolv- First movers on Industry 4.0 will seek a similar ad- a similar seek 4.0 will moversFirst on Industry that platforms the is factor more compelling A still movers first by enjoyed advantage the of Some —71 respon- group of of the companies A small it’s called, further reinforces lock-in. reinforces it’s further called, as effect, network This well. up as sign customers new so ofbe able network to businesses, its own to connect to customer expects new Every to switch. difficult ingly —it increas- of is network users expanding an and ing keepdiminish- that costs with multipleoffers services, one that comprehensive —especially platform logically “lock-in.” Once acustomer to itself atechno- commits of aphenomenon because as totext economists known improve. technologies photovoltaic when els pan- rare), the relatively upgrade and are so breakdowns ment breakdowns (solar panels equip- to detect sensors use clean, panels the keep will have few moving parts, atlow It cost. deliver energy and technologies changing enable it to adopt —will data operational and financial, weather, —incorporating prowess analytic its decades, subsequent the during happens what no matter that assumes manufacturer The contract. or 30-year a 20- customer signs the exchange, price. In at acompelling them upgrades and up-front costs), maintains hefty and ate. The the manufacturer panels installs (financing the gener- power panels electric those the tomers, sell they cus- business to their panels selling of directly Instead 4.0 models. to Industry forerunners are that models revenue innovative have built for example, ufacturers, man- concept. panel Some platform solar the through to individuals. customized often offerings, new improve develop and needs, products, their ter forecast to bet- data their tomers analyzing closer to operations, cus- to bring is suppliers. net and effect The distributors to external chain into value the company’s walls own connected, with the connections extending beyond the multiple from vendors are Equipmenting. software and smoothly into product development manufactur- and moves of behavior the people system, and the in ery machin- from the gathered information, intelligence by all. for use data analyzing and collecting and them, among seamlessly logistics and operations, actions, For a over of example, 20or course the 30years, Internet 4.0 con- the in successful are Platforms themselves establish also can companies Smaller On an industrial platform of this sort, market

strategy+business issue 83 In Industry 4.0, whoever owns a platform owns access to the customer, and can place its own brand on the aggregated work of other enterprises.

solar panel manufacturer’s platform will probably be zontal integration, working with the global manufac- linked through Industry 4.0 relationships to a few oth- turers to whom they supply all manner of raw materi- feature er companies’ platforms. These in turn will inﬂuence als, parts, and components. The more closely they align other choices that solar customers make. As these cus- with the platforms of Industry 4.0, the more potential

tomers add interrelated technologies, they will likely customers they will be able to reach. operations & manufacturing find their operations locked into that ecosystem — This great integrating force is gaining strength at while competitors’ customers might be locked into a a time of political fragmentation — when many gov- different ecosystem. Ultimately, two or three platforms ernments are considering making international trade will probably cover most of the sector, just as Apple’s more difficult. It may indeed become harder to move iOS and Google’s Android currently divide the smart- people and products across some national borders. But phone sector. In Industry 4.0, as in other technological fields, whoever owns a platform owns access to the cus- Exhibit 2: Expectations for Industry 4.0, by Region tomer, and can place its own brand on the aggregated Respondents from three major regions were asked: “What cumulative work of many other enterprises. benefits from digitization [in the context of an Industry 4.0–related survey] do you expect in the next five years?” Asia-Pacific had the largest percentage of companies with high expectations. The Globalization Accelerator 100% s the fourth industrial revolution binds com- Efficiency Gains Lower Costs 93 panies and countries ever more tightly to- Additional Revenue gether through worldwide supply chains and 80% sensor networks, it will increasingly promote globalization. At the same time, it will link closely to local companies. That helps explain why the MODEST GAINS 60% Companies expecting survey results differed considerably by region. Asian gains between 10% and 29% companies, especially those based in Japan and China, expected the greatest gains from the digitization of In- 40% dustry 4.0, followed by companies in the Americas, and then Europe and the Middle East. Japanese companies are already the most advanced in this field, followed by 20% those based in the U.S. and then Europe. Companies SUBSTANTIAL GAINS in all regions expect to catch up within five years (see Companies expecting gains greater than Exhibit 2). 30% As Industry 4.0 takes hold around the world, Europe, Africa, Americas Asia-Pacific Middle East emerging nations probably have the most to gain. They can leverage digitization to gain efficiency in their hori- Source: “Industry 4.0: Building the Digital Enterprise,” PwC

94 manufacturing & operations feature ness and make sure these are aligned with your overall overall your with aligned are these sure make and ness busi- to your most value the bring will that measures gap. the Prioritize for the closing targets clear to be.Set now, where you maturity need versus digital own your critical for the successful companies we’ve companies seen. successful for the critical stepshave been six to competitors. These advantage Your Company’s Path forms. new miliar unfa- come may in risks and challenges the ofway life, technological new entirely of an brink on the we stand now, risks; new as and challenges presented new always tions? The centuries-long process of globalization has viola- to trace and about theft, IP rules global enforce to it easier make of products tracking cradle-to-grave creases, will new cybersecurity challenges arise? Or will intellectual property the As technology? ate jobs? Or with supplant them value of softwareturing location? Will this of type manufacturing cre- and services manufac- in- afull-scale beconsidered plant fabrication adigital Will them? distinguish —that for example ongoing support, and capital —intellectual intangibles the with compared value in decrease rapidly kinds all of for to goods account aworld physical which tures in ernments change their customs activities and struc- tax time. same atthe local more and global more become will Operations pieces. equipment ﬁnished to ship the withoutdustrial having in- (potentially) and components, parts, spare fabricate to and to up company set shop any anywhere, tually enable vir- will for example, 3D in printing, advances Future networks. manufacturing its own maintain nation each letting while software, their including property, intellectual their just totransfer companies by enabling overcome 4.0 could barriers those Industry Unresolved issues abound. For example, will gov- For will abound. example, Unresolved issues 1. Map out an Industry 4.0 strategy up front. strategy 1. 4.0 Map out an Industry

alacrity, soyou don’t first-mover forfeit the But youproach important. is must move with concentration; astep-by-step and ap- time 4.0. Developing takes them Industry with igital capabilities are vital to move forward Evaluate Evaluate believe their leaders want and expect. expect. and want leaders their believe on decisions they what their base enterprise, who will the throughout people to evident is commitment that sure of make top leadership, and company range full strategy.Gain commitment to this approach from the try organizations to accelerate your digital innovation. digital your to accelerate organizations try boundaries; work with startups, universities, or indus- outside company’s your leaders digital with laborate doesn’t Col- that exist. yet or infrastructure standards for to compensate sale). the pragmatically Design after (and services delivery customer tothe materials — from 4.0 end-to-endbut the concept incorporate of Industry scope, initial narrow arelatively pilots, define early the rollout. for For alarger funding secure and ganization, buy-in or- the from gain also you can successes, early for company. your works approach that the With learn help you all will but they succeed, project will every Not value. proof business of demonstrate concept and depend on the skills and knowledge you can deploy. you can knowledge and depend on skills the 4.0 will Industry Your with to work with. panies success com- right the employees attracting right oping and the devel- and for recruiting include strategies Also forward. user interfaces, thathighly functional IT infrastructure with can well-designed propel your and agile an as such enablers, Include technological ties. business processes capabili- a blueprint those (or for building acquiring) capabilities you need to achieve your goals, and develop the out detail map pilots, in your in learned lessons effective ways. Establish cross-functional analytics ca- analytics cross-functional Establish ways. effective and creative in analytics using and possibilities, data 4.0 on depends unlocking prowess your in Industry 4. 4. inBecome data analytics. a virtuoso need. you capabilities 3. the Define 2. Start with pilot projects. 2. projects. pilot with Start Use them to establish toUse establish them Building on the Success with with Success

strategy+business issue 83 Don’t buy the hype. Buy the reality. Industry 4.0 will be a huge boon to companies that fully understand what it means for them.

pabilities, tied closely to the strategic priorities of the that you can proﬁt from being part of platforms that whole enterprise, drawing on in-house staff and out- you don’t fully control. The greatest breakthroughs in feature sourced expertise. Develop ways of combining data performance occur when you actively understand con- from different parts of the business — for example, sumer behavior and can orchestrate a distinctive role for

your quality, logistics, and engineering functions your company within a complex ecosystem of partners, operations & manufacturing (which may have had separate and incompatible moni- suppliers, and customers. toring systems before this) — and apply these methods Finally, don’t buy the hype. Buy the reality. Indus- to as many domains as possible, particularly those that try 4.0 will be a huge boon to companies that fully un- differentiate your company or attract customers. Learn derstand what it means for them. Change of this nature to get value out of data through intelligent systems de- will transcend your company’s boundaries — and prob- sign, using real-time analytics to tailor products to cus- ably the national boundaries of the countries where you tomers and continually improve your processes. Think do business. + big, but start small, with “proof of concept” projects. Reprint No. 16213 5. Transform into a digital enterprise. Capturing the full potential of Industry 4.0 will probably entail major Resources changes to your company’s practices and the attitudes Frank Burkitt, “A Strategist’s Guide to the Internet of Things,” s+b, underlying them. Set the tone from the top, with clear Nov. 10, 2014: The three types of companies described here — 95 leadership, commitment, and vision from the C-suite “enablers,” “engagers,” and “enhancers” — are all active in an Industry and financial stakeholders. Foster a digital culture: All 4.0 ecosystem. your employees will need to think and act like techno- Chris Curran, Tom Puthiyamadam, and Chrisie Wendin, “Raising Your Digital IQ,” s+b, Feb. 15, 2015: This global survey of business leaders logically adept natives, willing to experiment, learn new shows how the smartest companies develop and wield their technology ways of operating, and adapt everyday processes accord- strategy — a prerequisite for success in Industry 4.0. ingly. Remember that change doesn’t stop once you’ve Reinhard Geissbauer, Jesper Vedsø, and Stefan Schraum, “Industry 4.0: implemented Industry 4.0. Your company will need to Building the Digital Enterprise,” PwC Global Industry 4.0 Survey, 2016, reinvent its capabilities continually, at faster rates than pwc.com/industry4.0: In-depth report on the survey of more than 2,000 industrial business leaders from which this article was developed. in the past, to stay ahead of the game. Tom Igoe and Catarina Mota, “A Strategist’s Guide to Digital Fabrica- 6. Adopt an ecosystem perspective. Develop com- tion,” s+b, Aug. 23, 2011: 3D printing can do to manufacturing what the plete product and services solutions for your custom- Internet has done to information-based products and services. ers. Use partnerships or align with platforms if you Helmuth Ludwig and Eric Spiegel, “America’s Real Manufacturing Ad- cannot develop a comprehensive offering on your own. vantage,” s+b, Jan. 20, 2014: Top Siemens executives describe the factors You may find it difficult to share knowledge with other (such as energy cost and speed-to-market) that will make any country, not just the U.S., ripe for Industry 4.0. companies, and you may prefer acquisition to collabora- More thought leadership on this topic: tion. But look for ways to bridge your own company’s strategy-business.com/operations_and_manufacturing boundaries — perhaps with technical standards — so THOUGHT LEADER The Thought Leader Interview: Joseph Kaeser

The CEO of Siemens describes how an industrial powerhouse founded in the 19th century is using software, sensors, and savvy to build a digital manufacturer that can thrive in the 21st century.

BY DANIEL GROSS

Cilegon, Indonesia, to a software development center in Bangalore, In- dia; from an ultrasound equipment manufacturing facility in Plymouth Meeting, Penn., to a wind turbine plant in Cuxhaven, Germany. Every business talks about becoming more digital. Buzzwords like 3D printing, the Internet of Things, mass customization, and big data are bruited at conferences and populate the fundraising decks of startups. But these concepts — and the broader notion of digitizing manufacturing — have a particular meaning for Siemens. It is in the midst of its own digital transformation. The company is putting lots of time, effort, and talent into marry- ery few companies have sur- With fiscal 2015 revenues of ¤75.6 ing information technology to the thought leader vived as many technological billion (US$82 billion) and 348,000 process by which it designs, builds, V and industrial revolutions employees, it is one of the world’s and delivers its highly sophisticated as Siemens AG. Founded in Berlin largest industrial enterprises. products. The company’s own man- in 1847, Siemens has seen — and Today, Siemens is organized ufacturing is already largely con- prospered through — the advent of into 10 divisions, most of which ducted in fully digital factories. steam, trains, electricity, the internal offer highly complicated products. Steering Siemens through the combustion engine, steam turbines, The divisions address markets such next industrial revolution is the mis- the jet engine, wind power, the per- as wind power and renewables, sion of Joseph Kaeser, who joined sonal computer, wireless communi- power generation, energy manage- the company in 1980 and rose cations, the Internet, and, now, big ment, building technologies, mobil- through the ranks of the semicon- data. While other companies man- ity, process industries and drives, ductor divisions and then into cen- aged through these consecutive and healthcare. The sun never sets tral management as chief financial industrial and information revolu- on this far-flung empire, which officer. In August 2013, he was

96 tions, Siemens has helped lead them. stretches from a steel factory in named president and CEO. Septimus Matthew by Photograph thought leader 97 Well, no one can one no predict Well, So you saw the beginnings of So you KAESER: KAESER: Siemens Past and Future Siemens Past S+B: vive will change the world. And And world. the future. My the take would be yes,are in the middle, the to close if not we change peak, another massive of bubble. will then again,But sur- the who ones vive thing. fascinating the that’s one bubble in Silicon Valley. And Valley. in Silicon one bubble sitting in San Francisco, today we’re as the regard which many people bigger tech- of an even epicenter infused bubble. ally to Cisco were a supplier and telecoms and datacoms, and the DRAM [dynamic random-access businessmemory] was still really companies from pull the with strong I introducedwhen like But Micron. myself Siemens, from as shot the big people said, “Oh, is that the mattress factory?” I responded that was it you because close, kind whenever of products from us,buy can you sleep well! this But was also a time when wasApple bucks at five a share. I the and Cupertino, in was working I-280. across just was complex Apple And people were joking about Mi- crosoft the buying for price of Apple a Snapple. Well, in 1994–95, it was was it 1994–95, in Well, More than five years, from I understand you spent several spent several you I understand Wasn’t there a boom going on? a boom going there Wasn’t broader implications of the ongoing technology revolution. still kind a depressed of environ- prices House in the Valley. ment were still down. There were a few companies talking Internet about And IP. applications andover voice net- telecommunication the then works was began Lucent bloom. to still around and was telecom very andcool, companies like Cisco and Bay Networks were thriving. You know, when Candlestick Park [the San Francisco baseball Giants’ sta- wasdium] renamed 3Com in Park that was interesting1995, I me. to had thought never companies about actu- like Cisco 3Com We or before. 1994 through 1999. I came as over through 1999. 1994 what was of CFO then Siemens which wasComponents, the semi- passive devices, andconductor, elec- trical components business. Then I becoming up ended and the I CEO, the at height about just left in 1999, I always theof bubble. remember those were tough times. S+B: KAESER: KAESER: KAESER: KAESER: S+B: years in Silicon Valley. in Silicon years — with a wide- cool Kaeser the have mien may not KaeserIn conversation, is ener- of a millennial technology executive. wear hoodies, and his doesn’t He carefully silver a in combed hair is is something he coif. But a digital of Silicon in time spent having native, (At the time, in the 1990s. Valley often locals the confesses, Kaeser confused with Siemens Simmons Siemens Today, Bedding Company.) employs more software than 17,500 engineers. Although much of the conversation about technology re- and websites, around apps volves Siemens is providing examples of IT andhow data can add a massive amount of leveragein advanced manufacturing. getic and informal favorite — one word of praise is on perspective ranging, pragmatic the issues affecting his company and his Over a one-course industry. meal in at a hotel and wine) (fish white he San 2015, Francisco in November hissketched path out favored rel- to advanced evance a 170-year-old for the in manufacturing conglomerate described He how century. early 21st manufactur- to approach Siemens’s ing brings a diverse to coherence drive andportfolio, culture, its helps and aired he the his on opinion Daniel Gross gross_daniel@ strategy-business.com is executive editor of strategy+business.

S+B: You’re the CEO of a massive, man beings are analog, and the way because by the time you see the diversified global company. With you manage your company is you numbers, it’s too late. the digitization of information, you deal with human beings from the can have information and insight top all the way to the bottom. That S+B: What is the Siemens approach into all your different operations on value chain of human resources to the use of information technology one screen. How does that affect the needs to be intact. in advanced manufacturing? way you work and manage? Do you KAESER: It’s a very powerful ap- have a dashboard of indicators on S+B: So it’s not just about the proach because we are industry lead- all the time? Are you texting 500 numbers? ers. We have a division called digital different people? KAESER: [At Siemens] we know our factory, where we merge the real KAESER: There are two aspects to numbers, usually daily, in terms of world, which is hardware, with the managing today. The information bookings and revenues. We have virtual world, which is simulation comes faster and is more accessible built a real-time system and we software. We have all the elements of than ever before. There’s a lot of data, and the challenge is how to prioritize information. As a com- “We have a division called digital pany leader — or as any manager, any person — you need to prioritize factory, where we merge the your tasks. It has become harder to real world with the virtual world.” set the priorities correctly because thought leader there’s so much information. You need to go after that information know our cash flow. But in a busi- manufacturing automation in that and understand what’s first and sec- ness like ours, which has cycles from division. We have hardware such as ond and third [in importance]. two to seven years, it’s much more control systems and CPUs. Then, The second aspect to manag- important to understand the mar- around that hardware, we have so- ing: How do you manage your com- kets. How do we recognize early in- called PLM [product life-cycle man- pany using the data you collect? dicators of a changing world? That agement] software, which allows us There’s a technocratic approach in object you see — is that going to be to simulate production and robotics which you look at the numbers. But there tomorrow? If it’s there tomor- flows ahead of time. So today, we by the time you get the numbers, it’s row, is it going to be different? build manufacturing automation issue 83 issue too late already because the numbers What’s your competitive environ- lines and design processes before a only reflect what happened in the ment? How do the customers of manufacturing plant has been built. past. At the end, managing a com- your customers change? That’s the Merging the real world with the

98 pany is still very analog, because hu- type of stuff you need to understand virtual world allows us to create strategy+business thought leader 99 That’s exactly what it is. exactly it what That’s We manufacture products products manufacture We Is this a vertically integrated Is this a vertically What does it mean to have What does it mean what many people don’t understand understand don’t people many what got “I’ve theywhen talk the of Internet about platforms. open or Things pay data, would someone why but that for me data?” KAESER: KAESER: KAESER: KAESER: energy We’ve got generation. We’ve got energygot management. We’ve and manufacturing, for automation provides industries for products like oil and that at gas, food and beverage, mining, all look that good stuff. And are there verti- We cal software hardware certain applications for on sensors. are allindustries. Those applications based through data that data, analyze and it, then make applications out of it. Think about the help turbines We a utility. for utility company analyze much how service plantspower based need its fuelon consumption, the utilization rates, and the maintenance data. S+B: S+B: that that generate automate power, manufacturing processes, that scan (likepeople CT and MRI machines), process in the sense that you’re in the sense that you’re process the machines that manufacturing collecting the data, you’re produce the data, and then and analyzing you And are writing software? you’re also making the sensors? every product you make incorporate incorporate make you product every in the and be connected sensors to approach new Is this your cloud? one of your every for manufacturing businesses? diverse they are getting getting are they say People It comes from the customers, the customers, from It comes There’s a two-step process:There’s col- data we get from hardware. The im- people hardware is what portance of often underestimate they when talk the Things.about of Internet Have ever datayou thought where about from? comes lecting data and making use it. of data, I have Once I make do how my so it of out analytics meaningful cus- has an advantage? My customer information for would pay me tomer that makes lesslife better, easier, valuable. And more or that’s costly, machines and stuff.” Exactly! It’s themachines Exactly! and stuff.” It’s you If machines. of base installed look at a high-performance energy turbine, like a gas turbine, our flag- a 600-mega- the 8000H,ship, it’s watt machine — a really cool machine! There are thousands sensors of sensor every and machine, that in has a story tell. to Every moment, software, to data delivers sensor that in the cloud. it which stores the data from their customers. But But customers. their from data the I askwhen and who what is provid- theing the data, they “It’s respond, KAESER: S+B: S+B: doesn’t it? We have more than 17,500 Siemens employs a huge Siemens employs Every moment, it delivers data.” and everyand has a story sensor tell. to in [a high-performance turbine], “There are thousands of sensors of thousands are “There software engineers in our company, thanmore many software companies And in the world. those people develop software inside the products, which is called embedded software, as well as build applications and data analytics that tools use the S+B: S+B: Advancing Data Analytics Advancing Boeing, we simulate de- the whole velopment and engineering process new airplanes.for And then, we [do simulations that whether the test] airplane can not. fly or what we call a digital twin. copy We a real-time manufacturing process theinto virtual optimize to world of up- world quality, processing engineering, real the into time, and time load — and then we back it copy I cool. pretty That’s manufacturing. believe we are the only company in thatthe world can And it. do when we simulate processes in manufac- R&D, in engineering, in and turing we can go from destructive non- to destructive testing. with Together KAESER: KAESER: number of software engineers. engineers. number of software doing? they What are and that move people and goods value in the value chain. And that’s KAESER: If you look at a company from place A to place B. That’s a lot what you need to understand. culture and what it takes to stay of products, and all those products “Where am I in the value chain? alive for the next generation or two, have sensors. But we don’t manufac- How can I remain a strong link by or maybe even longer, you need to ture sensors. However, once we get providing more value than anyone look at the purpose of the company. the data, we have the data analytics else in there?” You’d better know Why is it that I’m going to get up in platform and the cloud. For exam- what you can do with your data and the morning and go to work at that ple, we have a proprietary cloud sys- cut someone else out rather than get company? Why do I believe it is tem for on-site data. Our customers care about manufacturing and engineering data and intellectual prop- “Production is being changed. erty rights because [this type of data] is the holy grail of innovation. In the last five years, we have increased productivity eightfold.” S+B: How does this approach change your relationship with your customers and the value proposition cut out yourself. The issue isn’t just worth going the extra mile and giv- Siemens offers? that your suppliers might try to cut ing my extra five cents? The way KAESER: It changes the relationship you out. Your customers might try to we’ve been defining the purpose at massively because data analytics cut you out because they say, “I’ve Siemens is that we are a “business to thought leader gives a company a lot of information got the data, so why do I need you?” society” enterprise. [it can use] to optimize and shorten That’s the paradigm shift.… The We created that term — busi- the value chain. The value chain telecom space is a good example. ness to society — because we have consists of the supplier of your sup- Now why would you pay a lot of B2C (business to consumer) and plier, your supplier, your company, money for making a phone call if B2B (business to business) offerings. your customer, and the customer of you’ve got Skype? But we are a business that contrib- your customer. The information you utes to society’s development in the get from data can shorten that value The Industrie 4.0 Difference world, through becoming carbon chain. You can make products fast- neutral by 2025 (we’re the biggest er, more cost-efficiently, more flexi- S+B: It seems like this approach company in the world that has com- issue 83 issue bly. You can produce in lot sizes of would require a substantial shift in mitted to doing that); or saving lives; one. You can cut out different links the culture — as well as how you or providing people with reliable, of the value chain. And the links train people and present yourself safe power; or giving people a more

100 that get cut out provide the least to customers. livable life in cities. Our employees strategy+business thought leader 101

Exactly. Industrie ba- Exactly. 4.0 When you go back to theWhen you The production process is being sically takes the cost scale of to close matterzero. No what size lot you need, the unit cost the is same. about will what happen point, At some are a consumeris this: and You the go to want a car.you buy to You KAESER: S+B: S+B: into a queue, because a queue, into the plant received informationa quality about simu- the So product. that in defect fixeslation the defect and gets approval from quality management to the fix pro- put the production into cess. And then off we go. talking machines to changed. It’s man- self-optimizing a in machines ufacturing and engineering process. Using this at- we have approach, tained quality a production rate of pretty getting is That 99.9988%. Six Sigma. In the to last close five increasedyears, productiv- have we really something.ity eightfold. It’s origins of the assembly line in the origins of the assembly work said it could U.S., Henry Ford had a standardized if you only customiza- 100 years, For product. tion has been the enemy of manu- But you’re efficiency. facturing that resolves saying this approach contradiction? Oh, yeah. You will see will yeah.Oh, see You If I were to show up there, up there, to show If I were Strategist’s Guide to Industry 4.0,” Reinhardby Jesper Ved- Geissbauer, digital a it and Stefansø, Schrauf, page It 86). call We and engineering combines basically manufacturing. built Industrie 4.0–typetwin. We’ve Germany. in manufacturing plants And Germany the outside first one China. of Thousands Chengdu, in is are visitingpeople this plant. S+B: KAESER: KAESER: a highly manufacturing automated like whatflow, the in- automotive dustry uses.see what is: you But Sometimes the is flow like this [he hand one moves off the to side]. Sometimes the is flow like this [he shifts again],and it all a sudden, of the is like flow this both [he moves “What And the say, hands]. you hell what hap- Well, here?” is going on re- customer a there’s that is pens quest such as, want “I this product that with size, lot that in size, that in bot- the on dot that with color, blue So the softwaretom.” steers the as lots into process manufacturing small And as item. then someone times all see that you a sudden, of certain are products being sorted out would I notice a difference between a difference I notice would it and any other factory?

You need to change the to need You Industrie isthe 4.0 Ger- That’s mostly inward-facing. inward-facing. mostly That’s What is Industrie 4.0, and whatWhat is Industrie Next, everyone in this com- com- this in everyone Next, man version of the first man of of generation version “A (see automation manufacturing way you go to market. go to way you is The world all the let Never competencies. about hardware guys sell software, never, even them let get don’t ever! Just Our perspective it. to close is that we now sell solutions, applications, applications, sell solutions, now we systemsand comprehensive as op- selling just posed to the product. sell value instead selling of func-We tionality. a complicated It’s go-to- method. market S+B: S+B: KAESER: KAESER: S+B: S+B: KAESER: KAESER: What about external-facing efforts? What about external-facing think that’s pretty great. That’s how how That’s great. pretty that’s think we start changing the culture. call we what of the from receptionistspany, all the needs the to have to way CEO, up understanding an our ownership culture. them, I say to your were “Whatever are, you whoever do, you this if as act in the work wherever you Siemens just world, That is approach own company.” how we do business and how we manage our business. role is Siemens playing in that? role Internet, put your specs together, gaps in efficiency. Once we’ve done need different skills than blue-collar and send that order to BMW. Some- the simulation, we print the blade. workers used to have. Workers need one will check your credit history 3D printing is also a huge help in to deal with machines that are and your funds. Then, your car will bridging the gap between scale and quicker to understand what needs go straight to production and the scope. Scale used to mean that if you to be done than the workers themselves are. Their experience is dwarfed by the computer’s “experi- “By making the cars cheaper, ence,” because the computer stores all the knowledge and calibrates all you have maybe another 200 million the data. People will still be in the people who can afford a car.” factory, but they will be doing different work than they used to. Reskilling workers is a lot of hassle. factory will build it to order. Four did 5,000 blades, it was cheap, and if That’s not great news, right? weeks from now, you will have a you did only five blades, it was very car. No more waiting six months, expensive. Today, it doesn’t matter S+B: Certainly not for labor. How do or compromising at the dealership, because those five blades can be pro- we get around this? where they have 50 cars but not the duced by 3D printing. If you take KAESER: Making up the difference one you want. the scalability out of the equation, is possible only through growth. If you can expand your scope — and you can massively lower the costs of S+B: There’s been a lot of talk have a lot size of one. That’s the ap- a product, people who were unable about the ability to do mass custom- proach. It’s interesting. This is real, to afford that product will become ization through technologies such as and it’s not a bad thing to have. able to afford it. We have 7 billion 3D printing. But so far it seems like people on this planet. Of those, more of a hobbyist’s endeavor. Labor and Society maybe 4 billion would be able to KAESER: No, no, no! We use a lot of drive. But only 2 billion can afford 3D printing already. We print small- S+B: There’s a lot of concern about a car. By making the cars cheaper, volume prototypes, and that’s a very the impact of technology on jobs and you have maybe another 200 mil- thought leader important method of speeding up employment. If manufacturing lion who can afford a car. By tearing innovation. In the old days, it took becomes substantially more down the cost barrier, you enable ages to design a high-efficiency, automated, what effect will that more people to afford it and thus high-temperature blade. Today, we have on employment throughout the you secure growth. simulate it, thanks to our digital fac- supply chain? tory PLM simulation system. We KAESER: If you shorten the value S+B: Do you see barriers to the simulate the airflow, the cooling sys- chain by cutting out links, as we dis- rollout of ever more efficient tem, and the coating, which is im- cussed earlier, it results in lower cost, manufacturing technology? portant because the temperature at and that means fewer resources are KAESER: We were just having quite the edges of that turbine blade goes being used. Fewer material resources a debate and discussion with Andy issue 83 issue up 1,600 degrees Celsius when it’s in will be needed, and fewer human McAfee [coauthor of The Second use, so we’ve got to really under- resources will be needed. This is just Machine Age, which argues that rev- stand what the cooling system is all the way it works. Furthermore, the olutions in technology will sharply

102 about and how we minimize the remaining human resources will reduce the need for labor]. And I strategy+business thought leader

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If you don’t bridge the societal don’t If you That’s not going to work. So, [if work. going So, to not That’s a business you’d in the West,] you’re better make sure that your emissions go down. of go nowhere to going lot divide, you’re a else with the Industrie or Internet 4.0 anything or Things of techies and companies are talking leaders that something That’s about. of companies had better think ask themselves, to They need about. I deal do “How with the digital divide, the societal I divide? do How make sure that along I bring people contribu- meaningful a make and society?” to tion have to stop the coal-fired stop to have power to have to going you’re and plants cities.” your of pollution the stop [in you know, And “You they say, screwed world. the whole the West] are rich. You are developed now. You and you money of a lot got You’ve are driving nice cars and are you telling us we cannot now that do because already have you produced all the allowable CO emissions 2 Think the whole about This would seem to require seem to require This would He said:He “Why I respond- not?” And the reality is that we don’t That societal has impact always S+B: said, “There thing is one we really at. Will hadnever a look the major- theity society of be willing and able few the that fact the with deal to smartest, the few brainiest, are going the world?” conquer to ed that democracies [are run] by the majority vote and not so much by is thewho smartest, the fastest, and the brightest. these techno-know [of the outcome logical There is going to advances]. be a regulatory catalyst. And there is be a societal to going catalyst. The social those churches, the unions, types of nonprofit organizations say to businesses, think “You you’re out cut going to pretty cool. You’re also all the you’re middlemen, but social out justice, cut to so you going wantjust to deal go to don’t hell. We you.” with How thatbeen a massive we, I think, topic understand. to trying are also can as you a business to contribute provide society? Because don’t if you society will society, a value just to accept you. not KAESER: down. Of course we need to. Then, Then, to. need we course Of down. we talk China to and India to and to are going to “You and say, Indonesia a different type of leadership type of leadership a different and industrial technology from companies. matter of air pollution.said, We get the to CO got we’ve Illustration by Noma Bar Noma by Illustration The history modern activism of Icahn, and an Daniel Loeb. There’s entire chapter devoted to Karla Lehman effortsScherer’s wrest to of control Shearson family’sher in company away from ex- Finkhusband in proxy a Peter fight resulted that purchaseHutton’s Scherer of R.P. Fa- US$480 millionfor in 1989. raiders 1980s-era mous Michael Milken, and Perelman, Ron Nelson as get does mentions, lawyerPeltz Joe Flom. really under way in got the 1920s. Graham the was first of inves- one tors to employ activism as part of his investing And strategy. came he to challenging by the forefront an over- capitalized company return to cash to shareholders after using an analy- fundamentals.sis the of company’s Graham, a securitiesIn 1926, inves- noticed a discrepancytor, in North- balance sheet. Whileern Pipeline’s the stock languished per at $65 share, the railroad actually generat- thaned more $6 per share in annual earnings se- and investment owned curities worth $90 per share. Senior management members and repre- from thesentation Standard Oil system dominated the board, which benefited from an uninterested shareholder base. had “I treasure in shareholders focused on horizontal and vertical grabs in power for mergers the of form marketand ma- stock the In nipulations. it and 1960s, 1950s see to was common in engage companies to serial acquisitions conglomerates. build saw an The 1980s Gramm describes the dy- how take over Gramm, J.C. Penney, a professor of investing at Columbia Business School who also runs a hedge fund, of documents a host proxy battles, board position struggles, minority shareholder ascents, and hedge fund raids the of modern era. corporate namics the of market of control for public companies has evolved over the decades. During the stock mar- and 1920s, the 1890s of ket booms known become what abundance of as greenmailing — a phenomenon in which activist would investors amass a stake, threaten a takeover, to back shares their sell then and the company at a higher price. In ad- Ackman, and Graham to dition cast characters of Gramm’s includes Buffett,Warren Carl H. Ross Perot,

Dear Dear Brief by Jeff Gramm, any analysts and report- and analysts any ers perceive shareholder that trend a as activism investors have been claw-

Indeed, as Jeff Gramm in shows

emerged inemerged the last three decades. true that a marketAnd it’s beset by short-termism, large short-termism, by and capital of pools cheap and debt, ﬁckle punish who investors compa- stocks when nies post a bad quarter has created conditions shareholder for ripe takeover But activism. investors have been around as long as the market. well-researched his book lively, Chairman, companying boards their way onto and the into decision-making pro- Ben- From century. a nearly for cess ﬁghtjamin with 1926–28 Graham’s the Company Northern to Pipeline Bill Ackman’s failed 2013 attempt to HarperCollins, 2016 Dear Chairman: Boardroom Dear Chairman: Boardroom and the Rise of Share- Battles holder Activism, Boardroom Brawlers Boardroom by Jill Priluck

M Books in

books in brief 104 books in brief 105

and Reuters, and + New York Times Times York New in 1990, “I became very very became “I 1990, in New Yorker, Slate, New Yorker, Buffett since may have long left As Gramm explains, Graham’s Jill Priluck Jill Priluck [email protected] is a journalist who lives in New York City. reportingHer appeared has analysis and the in publications. other among interested in buying a wonderful business at a moderate price.” But game. activism shareholder the as Gramm in shows this engaging the value-seeking many of book, disciples Oracle of Omaha continue to wage public battles against corpo- management. rate offensives that dominate the share- the dominate that offensives As today. landscape activism holder Buffett told the Magazine press’s stock plummeted, Buffett plummeted, stock press’s the in position enormous an bought company and steered future. its has investors activist on influence waxedand waned. Buffettulti- mately moved away from Graham’s into investment of style quantitative that approach stilla simpler stands amidout the hedge sea fund of called called article in the the in article writer Ken Auletta. Saturday Evening Post Saturday Evening Gramm also offers a peek into Buffett was many of raiders one The The how the press influenceshow activist ef- adored long have Reporters forts. several swashbuckling who Texans the corporate on establishment.took was Phillips Petroleum’s poison pill poison was Phillips Petroleum’s that angered passiveshareholders and Icahn led victory to in hisbattle Icahn’s with the company in 1985. influence on thepublic company high-minded.wasn’t really “If you analyzed it,people like me are out to win, and winning he told is money,” New Yorker who usedwho the his press to advantage. the Gramm describes in 1963 how man known now primarily run- for in moved Hathaway Berkshire ning Americanon Express after read he a Street Journal Wall wake the so-called of salad oil scan- dal: A tank at the Allied Crude Veg- etable Oil Refining Corporation, the largest of one of customers American warehous- field Express’s ing subsidiary, was filled with water instead oil. When of American Ex- Young, who waged who fight a proxy for Young, C&O Railway “The in the 1940s, Street.” Wall Man of Daring Young had released publicly a seriesYoung of vicious letters to Guaranty Trust, the trustee $80 million of in debt C&O stock. secured Young’s by was a darlingPerot the of media when he took on General Motors’ Roger Smith in the 1980s. Many corporate management so and owned stock, little teams to selling in interest had little maximize value for shareholders. in 1955. 1955. in Time Benjamin Graham is omnipres- is Graham Benjamin As Gramm demonstrates, the ent throughoutent a narrative that ex- the meaning how plores the of public company has shifted the last over The purposecentury. a public of sharehold- its benefit iscompany to ers. “This means management and the board directors of harness must assets maximizethe to company’s Gramm. writes returns,” investor in the earlyBut 20th the century, market corporate and for bonds preferred stocks dwarfed the market for the stocks. In the 1950s, common the original“proxyteers,” raiders, targeted public companies as part of the to inevita-a “counterrevolution ble excesses of the managerial revo- aslution,” one told my hands,” said the hedge fund said hands,” the hedgemy fund pioneer. Graham in founded 1926 the firstpartnership that shorted perfor- collected and securities mance-based fees. After failing to convince management to pay out shareholders with a dividend, ran he a proxy fight two for seats the on board and eventually garnered the thatvotes management led dis- to tribute cashto shareholders. Proxyteers such as Robert Young Young Robert as such Proxyteers com- in large public bought interests panies were liqui- who from holders at- then and — stakes their dating tacked management. 1980s the in raiders of wave second passive up Many shareholders. woke corporate management teams owned andlittle stock, so had little interest in selling maximize to value for shareholders. Icahn and his contem- influenceporaries to board set out arrival of the 1982 despite behavior, pillthe poison — a legal device that companieslet flood the market with hostile investors once new stock amassed significant stakes. Icahn called it “legal trickery.” Ironically, it

issue 83 issue strategy+business Konnikova makes Konnikova chiavellianism. They prey on the unrealized dreams their targets, of selling them the future they desire and secretly theybelieve deserve. although that clear it can con dismiss we artists who as outliers operate beyond the the society, of norms To be sure, companies most are To confidence“If operate out- men women haven’t changed much. haven’t women Whether they operate online or in artists con person, share a “dark as Konnikovatriad,” calls traits: of it, narcissism,psychopathy, and Ma- used artistsformula con by bears similaritysome that the to one beauty, automotive, of much drives for Take, advertising. financial and example, the recent interest among many companies in the of power the belief tapstory-telling to into systems and values their of customers. Marketers construct elaborate psychological profiles to understand the unmet needs their of customers, and then craft narratives influ- to ence their behavior. fullnot psychopaths. of many But per- companies employ their 10 share which narcissistsof and Machiavellian in princes. a study cites The author of marketers, 1,000 the of range scored at thecent top narcissismfor — far the above average in the general As population. such, they were masters manipu- of lation and deception. But althoughBut the means may be The unfortunate constantly changing, the human im- and men con motivate that pulses to reach targets. vulnerable to Online scams all made of 40 percent up consumer fraud up in from 2011, 20 according statis- to in 2007, percent tics Konnikova the from cites FTC warnsand AARP. Technology, Konnikova, is ushering in a new age grift.” of “golden and super-smart phys- wasics professor suffering after a recent di- vorce. He went online seeking romance but instead himself found drug- a in involved trafficking operation. makes it Konnikova clear that technological changes, such as the kind on- of line dating the where sites professor connected with are the model, open- scaming for new up avenues artists Among many her tales is the alarm- ining his professor story a physics of 60s became who a convinced so of young him bikini for love model’s that was he tricked smuggling into drugs her. for

New by Maria The Conﬁdence Conﬁdence The y father was a used-car salesman. And was it my experience of watch-

has written a book that is so has written that a book is so so compelling. Konnikova, Konnikova, compelling. so Perhaps that’s why I ﬁnd Maria why that’s Perhaps Writing in a clear andWriting straight-

Konnikova, Viking, 2016 Konnikova, The Confidence Game: Why We Game: Why We The Confidence Time, It…Every for Fall The RaceThe Goes to the Grift by Nancy A. Nichols Konnikova’s book book Konnikova’s Game ing him that be fasci- work to me led nated with all kinds business of practices legitimate, and — some some that crossed the line. probably detailed about the art and history detailed the art about and history theof confidence man that could it almost serve as aspir- a textbook for criminals. ing forward Konnikova manner, details both lesser-known frauds Cana- (a dian falsified who doctor his creden- tials operate to success- and on went and sailors) infamousfully 19 on cases like Bernard that Madoff. of a contributing writer at the Yorker, the rangethe for narcissism. 10 percent scored at the top of of top the at scored percent 10 marketers, which found that that found which marketers, The author cites a study of 1,000 1,000 a study of cites author The M

books in brief 106 books in brief 107 107

Harvard and founder of the + Also, check with others and stand of at theFinally, up front And adage: the remember old Nancy A. Nichols Nancy A. Nichols [email protected] is a former senior editor of the Review Business Studio. Ideas Great emotions; instead,emotions; try make to sure areyou observing and listening ob- than more not if as much as jectively feeling.simply Doing so could help getting from keep you in swept up outsized and of ever- the prospect increasing from returns say, — or, falling the for unlikely affection a of bikini model. then actually listen to them. One colleague the professor, physics of example, himfor told blatantly that scammed be to and was about he dragged transporting for prison to drugs. listen? he No. Did crystal it make and company your steal or lie, cheat, don’t We clear: this Repeat the performance at here. family dinner table. Then stick to it. If it seems too good to be true, seems good to too it If it is. probably Facts like theseand others in Still, by reading Konnikova’s conversation with an acquaintance, acquaintance, an with conversation according to psychologist Robert S. And,Feldman. one according to almost cites, one- thestudy author to OK is it believe adults of quarter claim insurance their increase falsely maketo the for deductible. up intriguing will book Konnikova’s make won- up end sweat. you You’ll the in colleague your what dering and whether to, is up next cubicle there is truly a legitimate institution behind just you that where website card number. credit your logged carefully,book can you reverse engi- a fewneer pieces worthy of advice. get caught too in up your Don’t are all vulnerable fraud, to and that, aver- on ways,in we are some lies, all susceptible us of tactics business Each unsavory using to ourselves. age, three timesduring a normal The Big Con “it must be remembered that , The slope from a legitimateThe slope Konnikova reminds us that we who go who under names less sinister.” Indeed, the appeals men con of the very of hinge same some on concepts behind legitimate sales fear appeals scarcity, pitches: of to future of promises legitimacy, wealth idealized or interests, love and social consensus. business practice can a con to be a fast and slippery one. Many a corporate fraud begins with minor tweaks theto books— a few that invoices of out now revenue as recognized can be spin things and, later be made hopefully, for up have to only — ascontrol the market tanks a re- or hits. cession they further are much not outside than many of our pillars of society fraud begins with minor tweaks. minor with fraud begins a slippery one. Many a corporatea slippery Many one. business practice to a con can be a con practice to business The slope from a legitimate from a legitimate slope The side the law,” says linguist the Davidside law,” W. of author Maurer, (1940)

issue 83 issue strategy+business

By tapping into into tapping By “too big to fail.” to big “too be the only may what alternativemajor to the endlessly rotating capitalism-or-social- cage hamster that ism the has dominated the past to political– of century cuts economic punditry, Rushkoff radical the core of is- Because an Rushkoff econ- isn’t new economic system. doesneweconomic he But provide a wealth of examples of enti- promote to managing are that ties amidprosperity growth. focuses He on well-known topics such as “benefit corporations,” “employee-owned all “cooperatives,” and businesses,” whichof endeavor to spread wealth These equitably. more well-inten- efforts, aretioned just however, scratchingthe surface. And in the sues involved. He arguessues He involved. that we should promote prosperity over growth, thus a fundamental forcing reexamination what of has been hid- Luddite, No den from our view. advan- take to us on calls Rushkoff digitaltage what gives of technology us: an opportunity to restore human balance a society to that rac- is now ing toward a futurein which ma- dominate. chines be expected pro- to can’t he omist, duce a detailed description of a pose — but not bigger smaller. or not pose — but This is fully approach committed to propertyprivate and sees a strong in governments intervening for role becoming from entities block to itself re- — the 10 — the 10 digits digital Rushkoff starts with the prem- fers to analysis economic pure the that ise promulgated by the digerati has the how understand us help to failed future is unfolding. Rather than wholeheartedly embracing the mar- unfetteredket of logic technology, callingor a regime for regulation of that will halt technological progress, advocateshe a third way: “digital an is ap- Distributism distributism.” based economics to theproach on principle of “subsidiarity,” which meanssimply that every entity, government or whether corporation be as small should or big agency, as it accomplish pur- needs its be to to fingers we humans use humans we fingers and count, to build, to to program computers In in the first place.” and important this Rush- useful polemic, koff forth puts a bold understand need to thesis: that We digital technology allows us to in- stall a new “social” operating system industrial replaceto the old that one tried eliminate to the incalculable about messiness human of life. It’s time someone said this and made stick. argument the ferries well-paid from workers gen- trifying the com- to neighborhoods pany’s suburban campus. In the Rushkoffbook, unabashedly pro- humanmotes values, which,he steadfastly claims, are the sameas digital values. As he puts it, “The word (OR

by Douglas Throwing Rocks at Rocks Throwing compares the author author the compares Throwing Rocks at the Rocks Throwing . The title, of course, is course,. The title, of is It’s a theme that builds on It’s he publisher of Douglas Rushkoff’s excellent new book, (Random House, 2009) 2009) (Random House,

The reason his for disagreement Program or Be Programmed

and and focusing than Rather 2010). Books, on the economic and technological factors driving the future human- of ity, however, Rushkoff turns the lens in around Rushkoff’s earlier including work, Life Inc. Bus Google a reference recent to in incidents Sanwhich Franciscans some have demonstrated their anger at Google’s transportationprivate system, which is expressed subtitle, in the book’s GrowthHow Became the Enemy of Prosperity. to Thomas Piketty and Erik Bryn- Erik and Piketty Thomas to are noted whom — bothjolfsson of economists. Rushkoff, But a media analyst has who known become for explic- he more, his insights on technology, is no What’s economist. thinkers. these of both rejects itly dismissesHe Piketty’s preferred so- redistribution. inequality, to lution And Rushkoff is equally sure that there will machine be a “second not as Brynjolfssonage,” projects. the Google Bus, Google the Rocking the Bus by Mark Stahlman Rushkoff, Portfolio, 2016 Portfolio, Rushkoff,

Rocks at the Google Throwing Became the Growth Bus: How Enemy of Prosperity, T

books in brief 108 books in brief 109 109 + Many economists havepro- Rushkoff is throwing rocks at Mark Stahlman Mark Stahlman [email protected] is president of the Center for the Study Life. Digital of But he is a radicalhe But thinker has who tried to understand what techno logy might and accomplish when if humans actually reclaim of control their own lives. posed rewriting the rules of- have or fered schemes “saving for capital- Rushkoff bringsism.” a completely different observations set of and in- how sights this to vital and expanding con- Becauseconversation. isn’t he consider to strained by models limited and isn’t free by an education that blocks consid- is eration technological of changes, Rushkoff human prosperity can displace a the At drive. growth mechanistic same time, he belongs in the cate- techno-realistsgory of squarely who both and the dysto- utopian avoid pian outlooks. more than the Google buses. He has been a hands-on participant as well past the during observer astute an as 20 years as the has Internet taken over our lives. He deserves to be readcarefully, and his is likely voice be to our craft we as one important an paradigm.” “human new Rerum Novarum, Novarum, Rerum The previous version of dis- of version previous The In his encyclical, recent Pope the early 2000s, a persis- to pointing tent slowdown in consumption growth. Rushkoff also believes that technologies change us. Sociologists may disparage that argument as “technological determinism,” but be- from us stop can’t protests their ing shaped the we use. by tools was an early-20th-century product of what is often called Catholic social teaching. This is the approach Leo XIII his in Pope by launched 1891 encyclical tributism, from which Rushkoff guidance, schematic draws some which in English has the subtitle “Rights and Capital Duties of and has It taken many forms, in- Labor.” cluding that Day and Dorothy of her Catholic movement, Worker speciﬁcally Francis which Pope the trip to U.S. praised his on 2015 thatFrancis noted we are living now paradigm”in a “technocratic — a technology which in culturalmatrix has Francis Pope humanity. “rules” been accused being a socialist of (or his for the criticism of mar- worse) as Rush- ket an inhuman machine. his for part,koff, Catholic. is not Furthermore, general attitudes We need it, he argues, he because it, need We same as digital values. same as digital he steadfastly claims, are the the are claims, steadfastly he promotes human values, which, which, values, human promotes Rushkoff unabashedly Summers recently in noted a confer- the in ence the presentation, 1960s Nobel Prize–winningeconomist couldRobert dismiss Solow the effects of automation on employment and industrial structure. Summers, graduate anthen impressionable believed Summers him. student, But says he now believes that automation is not fundamentally transformational after all. growthabout changed. have may and realize people More more that consumption- nonstop expecting driven growth makes little sense forward.going Indeed, those who in carefullymost consumer monitor lasting noticed have countries behaviors to began that attitudes in changes developed in up show for thefor ﬁrst time, is fun- automation damentally reshaping our economic prospects. As economist Lawrence majority of countries — most nota- in Chinably — approaching eco- a recog- without development nomic of importance vital the of nition growth is a nonstarter. As Rushkoff we seriously need it, puts a new “operating system.”

issue 83 issue strategy+business El-Erian is surely right that a for The rolling and economic fi- El-Erian is a perfectVirgil for (that T-junction) and suggests policy T-junction) (that central for prescriptions banks and forward. going governments shaped that have institutions set of the capital cost of companies, for mortgagesthe of price consum- for for money ers, of and the supply ill remain banks central countries, part In understood. that is because theirof own legacy what former of Alan chairman Reserve Federal Greenspan called “purposeful ob- their do to it fuscation,” that tendency central of in bankers the of spotlight stay placed to out when and best to just mumble incoherently. nancial crises the past of decade thrusthave bankers the to forefront policymaking. economic global of the do to Faced with that governments have unwilling or unable been re- structural of spadework hard centralform, banks gained, as the title suggests, a virtual on monopoly al- And making. decision economic their done have may they though they admirably, con- have, he job cludes, reached what the of borders limited still the with do can they tools of monetary and regulatory policy that are at their disposal. It would be hardIt find to a better commentator and analyst. He tack- He analyst. and commentator issuesles complex with a sharp focus, and provides not just an over- view central how of banks worldwide have navigated the past decade, but also a road the map of current challenges and better processes mov- for ing forward. While eschewing the pre- a simple provide to temptation whatdiction lies for ahead, ex- he sees as likelyplains he most what guide to this perplexing landscape landscape perplexing this to guide Ph.D. Oxford an El-Erian, than haswho the prom- run most of some organi- investing institutional inent Har- of zations (those in the world andvard is a frequent and PIMCO) the heavy policy lifting.” After all, central banks did their heroical- job thely and 2008–09 prevented glob- a transmogrifying into from al crisis spent have They meltdown. global the past seven years taking extraor- mea- unconventional and dinary sures such as quantitative easing and at- an all in rates, interest negative financial bolster the to world’s tempt activity. economic spur and system The record charted El-Erian by has mixed,been largely because elected in most officials and governments passive, remained have countries misguided. or fragmented, Central banks have reached the the reached have banks Central the do with can they what of borders disposal. policytools their of at it is a role role a is it by Mohamed ne of the more peculiar peculiar more the of ne de- past the of features cade has been the trans-

El-Erian repeatedly emphasizes Central banks’ star turn has has turn star banks’ Central

that cannot El-Eri- be sustained long and is To end. an to coming likely credit, and the to frustrationan’s of those answers, looking simple for the a future lays author out path that is neither clear nor certain. We are headed, says El-Erian, a turn- to Some — a T-junction. ing point countries will ﬁnd a glide path to- prosper- self-sustaining greater ward ity free aggressive of central bank othersintervention; will ﬁnd themselves deeply mired more in sclerosis crisis. and that time “the has govern- for come recognize to ments that they can no central relylonger on banks to do sparked considerable controversy in many parts as But the of world. demonstrates A. El-Erian Mohamed in his informed deeply new book, Town, in Game Only The formation of a formerly quiet, be- a formerly of formation hind-the-scenes cohort of central bankers the and visible most into consequential players in shaping the arc the of global economy. Central Game in Town: The Only and Avoiding Banks, Instability, Collapse, the Next A. El-Erian, Random House, 2016

Twilight of the the of Twilight Bankers Central Karabell Zachary by O

books in brief 110 books in brief 111 111 + The (Simon & Leading Indicators: A Short Indicators: HistoryLeading of the Our World Numbers That Rule 2014). Schuster, Zachary Karabell Zachary Karabell [email protected] is the head of global strategy at Envestnet of most recently, author, the and of central banks, El-Erian omits a Whilekey point. inequality has stag- growth with along rising been the costs livingnation, of been have the including everywhere, plunging and ev- other costs food, energy, of eryday needs and desires. Surely that has bolstered living standards far be- our abilityyond to easily measure. Those changes, which canbe as- technology to part greater in cribed than the central to actions of banks, are reshaping realities our economic rapidly thanmore we can analyze or understand. Central banks may be global of town the in game only the they But are just policy. economic factor in theone immensely complicated lattice forces of that are re- asshaping the we know world it.

and rising wages, even their skills are being tested and perhaps wanting.found Few of the democratic governments in Europe, North America, and Latin America seem capable of enacting the type re- long-term of forms that the moment demands. The re- U.S. The outlook for government government for The outlook While temperamentally opti- As focuses he the limitations on action is decidedly mixed. Although can such asgovernments China’s change address gears to and attempt growth slower of issues structural paralyzedways mains many in by gridlock. And the European Union has fully never embraced a unitary fiscal policy. and economic mistic, El-Erian that notes soberly low the of out path easy no is there growth, high unemployment, and much besets that inequality rising The populist the stirrings world. of throughout the as world, reflected in the candidacies of Donald Trump and Bernie Sanders in and the U.S. as through felt a familiar list proof tests in yet have societies worldwide, to grow into governance. Nonetheless, it’s ourcollective Dante as leads he us through the a tour of purgatory of the can he global however, economy; wander off into too many tangents. These tangents are in themselves il- they luminating, but dissipate the of force latter The book. the diversity on sections and both the for need andgender intellectual diversity are compelling, yet they feel as to belong they though a different work. with quibble to hard be- Yes, thesis. central author’s the Ja- in rates interest negative tween pan and parts Europe and of contin- buyingued bond and easing a by European Central Bank con- deeply cerned deflation, about we are at not centralthe of end bank interven- home, hammers As El-Erian tions. governmentshowever, need to take structural of theup baton reform. Companies also must begin take to cash massive their with risks more reserves, and financial system par- taketicipants should fewer risks. Here, too, less action on the part of central banks could be a spur to changes. needed those both Illustration by Elwood Smith Elwood by Illustration Strategic Strategic + , Dec. 2015, vol. 2015, , Dec. “Who’s in Charge Here? Co- in Charge Here? “Who’s There are plenty of reasons to plenty of reasons are There should be of directors “Boards rms’ ROE fell sharply, to 209 fell sharply, ROE rms’ CEOs, Power Gaps, and Firm Per- and Firm Gaps, Power CEOs, Krause, Richard Ryan formance,” by Love, and Leonard Priem, Journal Management 13 36, no. Source: Source: at: Research Recent More strategy-business.com/recent_research model wherein one top executive one top executive model wherein However, holds most of the clout. fi schism ex- as the power percent, and plummeted as panded further, co- between differential the power grew. CEOs two Sometimes co-CEOs. employ rms want to keep both merged fi other occa- at the helm. On CEOs sions, siblings jointly assume control these sce- of the family business. In consider must carefully narios, boards and respon- they dole out power how in a CEOs sibility to their respective two-party the authors advise. system, leadership that the co-CEO aware in absent clear differences structure, could the co-CEOs, between power rm into a two-headed indeed turn a fi the authors write. monster,” rms nding uence be- BY MATT PALMQUIST MATT BY After combining several databas- After combining several The authors found that when the But as the gap in infl But traded U.S. fi rms that were helmed rms that were traded U.S. fi for a sustained period co-CEOs by They stretch. 10-year during a recent factors that for several controlled could affect performance, including long-term debt, number of employ- as well ees, and acquisition activity, in- members’ of board as the degree the co-CEO tier, dependence. At for the length of timethey controlled served alongsidethe two executives each other and the age difference them. between es, the authors generated a measure- based power ment of each co-CEO’s at tenure salary, on the individual’s of stock owner- rm, and level the fi and whether he or she also ship, chair position. occupied the board fi uence evenly, infl shared CEOs experienced slightly negative ROE ROE experienced slightly negative That sug- the subsequent period. over eq- gests companies that divide power inuitably may become bogged down leaders with struggles between power strategic decisions. equal sway over tween co-CEOs widened, estimated co-CEOs tween peaked at about 243 percent ROE The fi period. the 10-year over strongly supportsstrongly a twin-leadership t - licly Who’s the Boss? Who’s uence le compa- rms, much doesn’t necessarilydoesn’t translate better into results. rm performance

When companies are run by co-CEOs, sharing power equally equally power sharing run are by co-CEOs, When companies raditionally, ﬁ raditionally, like countries, have operatedlike countries, have of- with one chief executive

rm’s performance. rm’s When the authors of a new But success depends on getting But The authors analyzed 71 pub The authors analyzed

cer. But in recent years, an increas- years, in recent But cer.

fi ing number of high-profi nies — including Bed Bath & Bath nies — including Bed — Whole Foods and Imax, Beyond, have implemented a co- at times CEO structure. the impact of a co- study weighed on return rm’s CEO system on a fi they found a complex equity (ROE), the co-CEO between relationship line. It bottom rm’s and a fi structure turns out that things go better when Co- rst among equals.” is a “fi there CEO arrangements appear to benefi

the company most when a signifi the exists between gap cant power infl two leaders — when more strategic decisions is placed in over the hands of one of the two CEOs. gap the power the balance right. If too wide, fi grows That suggests that a begins to slump. in the clout af- dramatic difference eventually to the two CEOs forded in considerable distrust, andresults hamper communication breakdowns the fi T

end page 112 Ƹ=SY[MPPFILEVHTVIWWIHXSǻRHE FIXXIVKYMHIXSXLIIWWIRXMEPFYMPHMRK FPSGOSJXLISVKERM^EXMSRSJXLIJYXYVI” – BusinessWeek

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