Artificial Imagination

THE ACCOUNTABLE CEO • NEUROSCIENCE AND LEADERSHIP • BUILD YOUR DIGITAL CONFIDENCE

GLOBAL ENTERTAINMENT ARTIFICIALAND MEDIA OUTLOOK IMAGINATION Using digital technology to unlock human creativity

Summer 2017 $12.95 Display until August 29, 2017

www.strategy-business.com ARRIVE AN ELITE EXECUTIVE. EMERGE A VISIONARY LEADER.

The Advanced Management Program is designed to help ADVANCED accomplished senior executives navigate the complex global challenges facing businesses today. Along with an elite group MANAGEMENT of peers and the renowned HBS faculty, you will explore best management practices and bold new strategies that will PROGRAM disrupt your way of thinking, challenge your assumptions, and improve your ability to lead with vision and purpose.

ADVANCED MANAGEMENT PROGRAM 10 SEP–26 OCT 2017 | 02 APR–17 MAY 2018 LEARN MORE AT WWW.EXED.HBS.EDU/SB-AMP editor’s letter editor’s

The Algorithm and the Artist

How many geniuses does it take to run a company? As the influential technology and media commentator Shelly Palmer notes in our Thought Leader interview, artificial intelligence (AI) will soon be robust enough to overtake many jobs, even those that require managerial and creative skill (page 132). Business professionals, at every level of the hierarchy, will need to apply some truly artistic genius on a day-to-day basis or we, too, may be vulnerable. This is an especially critical matter for the entertainment and media (E&M) industry, which is getting more and more competitive, especially when it comes to generating original and compelling content. Hence this issue’s focus on “artificial imagination.” Three articles here, developed as part of PwC’s Global Enter- tainment and Media Outlook, explore the range of possibilities when algorithms become artists. One is the Palmer interview. Another is on page 66, where Deborah Bot- hun and David Lancefield of PwC look at AI’s growing role in the production

Illustration by Lars Leetaru and distribution of movies, songs, and writing and in how consumers experi- editor’s letter

ence them. And in “A Strategist’s Guide to Artificial Intelligence” (page 82), Anand Rao, a longstanding expert in this field, identifies three types of AI: assisted intelligence, which helps businesses improve what they already do; augmented intelligence, which makes possible new skills that were previously undo- able; and autonomous intelligence, which operates without human involvement — except, again, for those rare geniuses who can outpace the robots. Several articles cover the rapid evolution of technology and media. Augment- ed reality is transforming retail stores (page 8). Enthusiastic followers — or fans, as Christopher Vollmer calls them — are the growth engine for E&M companies 2 (page 55). And PwC’s annual look at technology acumen, the Digital IQ study, shows how companies can keep up with ever-changing tech skills (page 44). Perhaps one new high-tech function will be monitoring the accountability of chief executives. In the annual study by Strategy&, PwC’s strategy consulting group, of chief executive tenure trends, Per-Ola Karlsson, DeAnne Aguirre, and Kristin Rivera document the link between ousted CEOs and the reputation of their companies (page 98). For another take on ethical decision making, see senior editor Laura W. Geller’s interview with Kellogg professor Maryam Kouchaki (page 21). Elsewhere, neuroscientist Jeffrey Schwartz, executive coach Josie Thomson, and I talk about the “High Road,” a mind and brain function conducive to strategic leadership (page 114). And an insightful look at NYU Langone Medical Center shows how to turn around any complex organization (page 32). I personally remain optimistic that no matter how many jobs are lost to automation and artificial intelligence, the world will still need to employ human beings. Once they’re sentient, robots won’t want to cope with the multifaceted complexity of the human race. If I’m wrong, my AI replacement will have to edit a magazine for robot readers. Until that day comes, the algorithm and the artist will live in complementary coexistence.

Art Kleiner Editor-in-Chief 87 issue kleiner_art@ strategy-business.com strategy + business leading ideas 82

8 Augmented Reality Comes to Retail Kamil Klamann and Sekoul Krastev The Pokémon Go craze may have faded, but it provides clues for retailers using technology to engage consumers.

15 Connecting the Dots from Brand to Demand Emre Sucu, Matthew Egol, and Edward Landry The best consumer strategies start with knowing where and why people shop for your product.

21 Why Good Employees Do 28 Bad Things Laura W. Geller Kellogg’s Maryam Kouchaki on understanding — and avoiding — ethical breakdowns.

28 Us versus Them: Reframing Resistance to Change Elizabeth Doty How to bridge the gap between those who champion transformation and those who challenge it.

8 essays

HEALTHCARE MARKETING, MEDIA & SALES 32 Management Lessons from One 55 How to Make Entertainment and Hospital’s Dramatic Turnaround Media Businesses “Fan”-tastic Eric J. McNulty, Nathaniel Foote, Christopher Vollmer and Douglas Wilson Capturing the strategic advantages Putting people at the core is the of fan-centric businesses requires key to major improvements in functional transformation. ﬁnancial, performance, regulatory, and quality indicators.

44 TECHNOLOGY Winning with Digital Conﬁdence Chris Curran and Tom Puthiyamadam The right mix of talent, innovation, and experience will help your company master emerging technology.

features

MARKETING, MEDIA & SALES STRATEGY & LEADERSHIP 66 AI Is Already Entertaining You 98 Are CEOs Less Ethical Than Deborah Bothun and David Lanceﬁeld in the Past? How technology endowed with creative Per-Ola Karlsson, DeAnne Aguirre, intelligence changes the way companies and Kristin Rivera generate and distribute content. Why more chief executives are losing their jobs after scandals and corporate misconduct. TECHNOLOGY 82 A Strategist’s Guide to 106 CEO Turnover in 2016 Artiﬁcial Intelligence Anand Rao As the conceptual side of computer ORGANIZATIONS & PEOPLE science becomes practical and relevant 114 The High Road Less Traveled to business, companies must decide what Jeffrey Schwartz, Josie Thomson, type of AI role they should play. and Art Kleiner Neuroscience research shows 88 The Road to Deep Learning how to become a better leader. THE THOUGHT LEADER INTERVIEW 132 Shelly Palmer Deborah Bothun and Art Kleiner One of the world’s leading digital- technology commentators sees a stark future for entertainment and media companies.

BOOKS IN BRIEF 148 The Business of Tetris Laura W. Geller

151 Care Personally, Challenge Directly Theodore Kinni

END PAGE: RECENT RESEARCH 154 Control Issues Matt Palmquist Startups are valued signiﬁcantly higher and attract more ﬁnancing after their founders relinquish some power.

Cover illustration by John Hersey

Issue 87, Summer 2017 www.strategy-business.com

strategy+business Published by PwC

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 Associate Editor Chief Copy Editor Information Graphics Editorial Sally Errico Michelle Gerdes Victoria Beliveau Linda Eckstein Operations Manager errico_sally@ gerdes_michelle@ info@ info@ Natasha Andre strategy-business.com strategy-business.com strategy-business.com strategy-business.com andre_natasha@ strategy-business.com Art Director Designers Contributing Editors John Klotnia Laura Eitzen Edward H. Baker William J. Holstein Cesare R. Mainardi Jeffrey Rothfeder [email protected] [email protected] Susan Cramm David K. Hurst Eric J. McNulty Michael Schrage Ken Favaro Jon Katzenbach Gary L. Neilson Thomas A. Stewart Jennifer Thai Bruce Feirstein Theodore Kinni Rob Norton Christopher A.H. jennifer@ Lawrence M. Fisher David Lanceﬁeld James O’Toole Vollmer optodesign.com Ann Graham Tim Laseter Matt Palmquist Chrisie Wendin Sally Helgesen Paul Leinwand Juliette Powell

PUBLISHING Publisher and Senior Marketing Advertising Director Business Operations Circulation Director Production Director Business Manager Manager Judith Russo Manager Beverly Chaloux Catherine Fick Gretchen Hall Charity Delich Tel: +1 212 551 6250 Bevan Ruland Circulation Publishing Experts Inc. Tel: +1 617 521 8808 Tel: +65 9359 4784 russo_judy@ Tel: +1 973 630 6924 Specialists Inc. cﬁck@publishing hall_gretchen@ delich_charity@ strategy-business.com ruland_bevan@ bchaloux@circulation experts.com strategy-business.com strategy-business.com strategy-business.com specialists.com

PwC Chairman, Head of Global Markets Global and Asia Paciﬁc, Head of Strategy&, PwC US Public Communications PricewaterhouseCoopers and Services Americas Cluster PwC’s strategy Marketing Leader Review International Ltd. Richard Oldﬁeld Advisory Leader consulting business John Sviokla Ann-Denise Grech Robert E. Moritz Miles Everson Les Moeller Julie Weidemann Head of Global Clients, Head of Global Natasha Andre Industries, and Sectors Europe, Middle East, Consulting Thought Robert Swaak and Africa Cluster Leadership Advisory Leader Ivan de Souza Ashley Unwin

Editorial and Retail Subscriber strategy+business magazine Articles published in Business Offices Comag Customer Services contains only paper products strategy+business do not 101 Park Avenue Customer Service Tel: +1 855 869 4862 that the Forest Stewardship necessarily represent the Council™ certifies have views of the member firms New York, NY 10178 Tel: +1 800 223 0860 Outside the U.S., come from well-managed of the PwC network. Reviews Tel: +1 212 551 6222 +1 903 636 4955 forests that contribute to and mentions of publica- Fax: +1 212 551 6732 Back Issues & Reprints conservation and respon- tions, products, or services info@strategy- www.strategy- customerservice@ sible management. do not constitute endorse- business.com business.com/reprints strategyandbusiness ment or recommendation Tel: +1 703 787 8044 .info for purchase. Scan this QR code with Design Services your smartphone reader Opto Design Inc. Permissions www.strategy- to get the s+b iPad app. 150 W. 28th Street, 704 www.strategy- business.com/ New York, NY 10001 business.com/press/ subscribe Don’t have a reader? Tel: +1 212 254 4470 permissions-faqs Search for “QR [email protected] Tel: +1 973 630 6924 strategy+business code reader” in your P.O. Box 8562 app store. Big Sandy, TX 75755

strategy+business (ISSN 1083-706X) is published quarterly by certain member firms of the PwC network. © 2017 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see pwc.com/structure for further details. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see strategyand .pwc.com. No reproduction is permitted in whole or part without written permission of PwC. “strategy+business” is a trademark of PwC. Postmaster: Send changes of address to strategy+business, P.O. Box 8562, Big Sandy, TX 75755. Annual subscription rates: United States $38, Canada and elsewhere $48. Single copies $12.95. Canada Post Publications Mail Sales Agreement No. 1381237. Canadian Return Address: P.O. Box 1632, Windsor, ON, N9A 7C9. Printed in the U.S.A. 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.

Breakthrough business thinking is happening within your reach. Enroll now in these upcoming programs:

Leading People at Work: Strategies for Talent Analytics July 11–12 The Good Jobs Strategy: Delivering Superior Value to Customers, Shareholders, and Employees July 18–19 Supply Chain Strategy and Management July 25–26 Developing a Leading Edge Operations Strategy July 27–28 Driving Strategic Innovation: Achieving High Performance Throughout the Value Chain September 24–29 executive.mit.edu/sb Illustration by Federico Jordán Federico by Illustration

Ideas Leading

leading ideas 8 leading ideas 9

e hat ctures ey are Glass, l world l world ed inside retailers’ retailers’ inside ed iction of download- gle’s ad network, al- network, ad gle’s e experiences to the the to experiences e is so blurred that they essentially is so blurred and the same became one digital and and real

The Pokémon Go fad has faded, but it holds important lessons for companies companies for lessons important holds it Go fadhas but faded, Pokémon The AR, which has been around since the late 1960s, has long lived in the shadow in the shadow lived has long AR, 1960s, the late since has which around been n the summer of 2016, pedestrians on New York’s Fifth Avenue encountered encountered Fifth Avenue pedestrians York’s New on 2016, n the of summer hastily running smart- young) Central people, Park, into (mostly of crowds character names loca- and cross-street Pokémon out in hand, shouting phones at- app Go the Pokémon 6, 2016, Within July tions. release on weeks its of

Kamil Klamann and Sekoul Krastev and Sekoul Kamil Klamann

by clues for retailers using technology to engage consumers. to technology using retailers clues for The Pokémon Go craze may have faded, but it provides but it provides faded, may have craze Go The Pokémon Comes to Retail to Comes Augmented Reality breed of omniconnected consumers as nothing else had done previously. The peopl The previously. as else consumers nothing had done omniconnected of breed between game, the ﬁrst truly reality social (AR) augmented enthralled a new experience, the line where a world Go inhabit reality Pokémon of the augmented embraced who tracted 40 million daily active users and created a level of in-app engagement t tracted engagement 40 million daily in-app of active a level users and created intent on reaching theyand are, engaging on especially where consumers retailers: The intent Facebook could only envy. envy. only could Facebook of virtualof reality (VR). Whereas VR transport wants to virtua us a new to shoppers to place digital furniture and other products from the catalog into pi the catalog digital place from to into furniture products and other shoppers Goo like that, acceptance mass with platform shared a lacked that provides unique immersive experiences, AR brings thes brings And th technologies. invisible by AR and improved augmented — constantly personalized experiences. more hungry better, for experiences, liv immersive unique generally have provides that features AR IKEA example, For already we inhabit. has an released ARworld that allows app fruit. commercial AR not of part, have the most the for early ambitions But home. at rooms their of much borne Google Moreover, download. to want that didn’t consumers apps stand-alone as AR The waswhich socially perceived ecosystem awkward, has failed miserably. lows brands to simply plug in and thus removes the consumer fr I

issue 87 issue strategy+business - - e e n ity ypi- asing hase in four to to four ing loca- rasp how rasp how riences to the to riences em to sort the the sort to em c options, and c options, al shopping. al shopping. AR represents a singularAR retailers de- to represents for opportunity

Virtual shopping assistants are another likely use case. In 2013, IBM launched launched IBM Virtual assistants likely are use another case. shopping In 2013, Today, a few farsighted retailers apply are phase in of the ﬁrst, introductory Today, The Pokémon Go craze has opened consumers’ minds to similar minds to craze Go experiences consumers’ has opened Pokémon The Creating awareness.

conditions on shelves didn’t comply with display plans. with display comply didn’t shelves on conditions employees tested IBM’s AR app to report out-of-stock products and instances products when out-of-stock AR report to app IBM’s tested employees when they pointed their smartphone at the grocery shelf, allowing th allowing shelf, grocery the at smartphone their pointed they when organi or highlight value, gluten-free nutritional by there products Tesco Retailers can coupons. stocking. shelf In 2014, display use for the same app an AR shopping app that provided shoppers instant product details instant product and compariso shoppers thatan app provided AR shopping posting a generic static endcap display for laundry powder. laundry for powder. display endcap static posting a generic behavior, and live recommendation engines. Much of this will involve link this of will Much engines. involve recommendation and live behavior, similar to gel suited laundry needs, instead of powerful $5.99 more a new, of phone velop a more refined level of targeting based on demographic profiles, past in-store targeting past of profiles, level in-store refined based demographic a more on velop t Tom example, For smartphones. tracking to tion delivered with advertising an display AR could Tom’s ad on Target cally gel laundry a US$4.99 detergent. buys will allow brick-and-mortar retailers to take today’s showroom expe showroom retailers take to today’s will allow brick-and-mortar digital and physic that blend encounters creating unique next level, that will take place in a more connected future. New forms of augmented real augmented that of will future. forms New connected take in a more place more important, social — until Pokémon Go. social important, until — Pokémon more ing individual Andwas “killer” apps. there no use case make to AR popularand, matures in the medium Once strategies. omnichannel into them integrate companies are experimenting, trying arecompanies experimenting, and g audiences their understand to to distinctive what offerings they and how figure can must out companies produce use throughmust AR stages: customers four lead to creating incre awareness; loyalty. building enduring ing AR to the shopping experience. On a range of independent platforms, these platforms, a range independent On of experience. ing AR the shopping to growth its p As enters the field this environment. new into brands fit their and players, a fewthe next two dominant three to into will years, it consolidate years,five AR stakes will retailers table and com marketers, and brand for become and creat they canpanies how content bespoke curate will determine to have is clear companies it term, long the in this Over experiences medium. new unique and and purchase points; key at decision customers converting consideration; leading ideas 10 leading ideas 11

s l seel ng on ng on rience rience recom- ush and artphone ailored to to ailored ut what the what ut tions at every at tions e online and and online e face through the smart phone camera, phone face through the smart system facial fol- recognition the L’Oréal and angles, show- face movement lows like look the makeuping would what early By perspectives. different from down- had been Makeup Genius 2016, loaded more than 20 million times. And Consumers, driven their by online experi- shopping Ultimately, as AR in tegrates with big data learning, and machine with big wiltegrates we as AR in Ultimately, As AR becomes more powerful, we are likely to see a higher degree of person- As are of powerful, degree see a higher we likely to AR more becomes Increasing consideration.Increasing As AR matures, we will start to see applications that combine th combine that applications see to start will we matures, AR As Virtual are the taken experiences first that step brands have toward “try-on” of the wool in the cashmere sweater, but alsoreveal but special in the cashmere deals the wool sweater, of that are t as — such the in a discount ski advance of profile season. your toward a shelf in a clothing store will not only provide information about the origin about information provide will only in not store a clothing a shelf toward alization ofin-store product recommendations. pointing Perhaps your sm intelligent personal shoppers that can provide consumers with information, consumers that can provide shoppers personal intelligent dependi special deals bundle for and coupons, look and even ducts, pro mend and behaviors. preferences the consumer’s installed on more thaninstalled smartphones. unique more 1 billion on that built a range of try-on apps for makeup, hair, and fashion; the app has the app been and fashion; hair, makeup, for a range try-on apps that built of it has inspired similar efforts from innovators such as Meitu, a Chinese company a Chinese company as such Meitu, similar has inspired effortsit innovators from nius app, which allows shoppers to virtually to which allows shoppers app, nius try bl shades different of on using AR to raise customer engagement. In 2014, L’Oréal released its Makeup Ge- released its L’Oréal In 2014, using AR engagement. raise to customer tions will grow, pushing physical retailers to deliver memorable interac memorable deliver retailers pushing to physical willtions grow, ences, already expect a high level of engagement. In years to come, these expecta- already In yearsences, come, to expect engagement. a high of level point. touch the on mascara the makeup is “applied” making Once before a purchase decision. machines would look like on their countertop, customizing colors to see which best see which to customizing colors countertop, their like on look machines would Then, using an AR app and photos of their kitchen at home, they the see what could home, at their kitchen of using anThen, AR and photos app offline environments. Ultimately, retailers will have to think retailers will to have hard abo Ultimately, offline environments. expe could is like, People regardless the experience medium. of ideal shopping coffee. freshly brewed of the aroma by surrounded machines in-store, Nespresso product recommendations. product of personalization of in-store of in-store of personalization see a higher degree see a higher degree powerful, we are likely to to likely are we powerful, As AR becomes more more As AR becomes

12 leading ideas leading ences of shoppers. For example, Walgreens’ Aisle411 app allows sho online the in-person and bridging programs, between gap the existing experi- unattainable. otherwise are that grams first-time opportunities than for affords customers.per transaction l AR ultimatelyit achieve. Further, can repeat customers tend to spend 60perce long the in more are term, efforts ROI its sustainable marketing higher the an and pointing a smartphone at a Nike ad in then delivered are that purchases to their homes. make and ucts Similarly, u shops public in tual Shoppers places. company’s the use can app to browse AR pr critical decision-making points. shoppers’tracks movements experiences at AR on- offering engaging offline, and automated befully one-to-onelikely personalized and seamlessly that marketing points store the chase within or aisle at checkout the counter. The ultimate goa coupon personalized and phones offers pur- at key to likely —we seelocalized are Bluetooth-enabled communicate nearby with shoppe can that devices on shoppingthe Nike’s cart website. shopping locate and product the store lists, the augmented within using ind real for Tango Google’s customers Tango-enabled with for search products, smartphones can add them to leveraging app, navigation in-store without GPS. using 2017, InMarch Lowe’s Innovation announced Vision, Labs its environment the ing they’re situated in, including space, orientation, a ables mobile to bemore devices sentient about world the around them, understand- to monthly shipments support. request and pods, warranty coffee of assorted matches order backsplash, the asingle machine the with click, immediately subscribe to provide on return investment. have to to beable will tackle into may AR bethe biggest challenge This purchase. yet to has prove AR toity its drive converting foot in mettle cons traffic, The current generation stores of allow apps to with already integrate AR Building enduring loyalty. enduring Building China’s created 1,000 store, more vir- online grocery Yihaodian, than largest As AR becomes integrated AR other with As technologies beacons — such as Converting consideration toaction. consideration Converting Technologies such as Google’s Tango platform will come to he The more adept acompany isat loyalty, creating the Runner’s World Al Al AR’s Pokémon showed abil- Go though , a user can jump to straight can , auser oor mapping. Now Lowe’s Lowe’s Now mapping. oor lp. Tango en- ppers to dis- nd motion, oyalty pro- oyalty rs’ smart- ideration nt more ity. l will l will pon od-

strategy+business issue 87 purpose noun \`pər∙pəs\ “h at moment I realized I could impact my company’s success— no matter what the challenge.”

upcoming strategy & innovation programs Deﬁ ne your Wharton moment. NEW Mastering Innovation: The Strategy Programs at Wharton Executive Education will From Idea to Value Creation set your direction and make your purpose clear. You will jun. 11–15, 2017 • san francisco learn from world-renowned business leaders and academic Creating and Implementing Strategy strategists. You will discover the most e ective pathways to jun. 12–16, 2017 • sep. 18–22, 2017 overcome current challenges. And when you leave, you will be poised to help your organization achieve immediate growth. NEW E ective Execution Become the competitive advantage. of Organizational Strategy sep. 25–29, 2017 execed.wharton.upenn.edu/strategy The Strategic Decision-Making Mindset nov. 14–17, 2017

14 leading ideas leading chased that brand before. on how based seekout often deals you’ve b best also the one can chases, that pur- products suggests that phone your on application an having behaviors. their online into offline and heading as well Imagine asupermarket and correspond that programs loyalty create to customized ashopper’s in exact reta and brands allow face-to-face and will turn, in experiences. This, tal shopping to seegreater integration start likely digi- the experience, between we will store’s aisles. cover in-store products to well deals collect points loyalty and as by exp been by incentivized abrand. to orping of lead him her assistant specific asupermarket aisles have through that th allows app consumer on enable that might an counter. asetting Athrifty geted manner, behaviors lead aspecific exact that the shopper encouraging to the shoppers’ more them afar to loyalty allow in programs use behaviors. will This (better and more and (better ambitious) space. platform AR social the to emerge fill and Pokémon Goitself may have been it afad, probably long not for take will another sired action integrated become and seamlessly into experience. the altho And pay dividends how only stores foot learn if brands to and traffi translate chase apps, may regret they notchase more potential the of investigating AR aggressivel to not rue e-commerce, in earlier investing or aFacebook presence, or mob now years routinely to take used that happen months. in retaile Justshifts as a seniorassociate with PwCUS. business. BasedinNew York, heis egy&, PwC’s strategy consulting innovation strategies for Strat- brand companies ongrowth and advises retailing andconsumer [email protected] Kamil Klamann As AR and other technologies mature, stores will gain a much b shoppersAs improve become more can to acclimated their idea the AR that Augmented reality clearly has the power the However,Augmented clearly has retail. to transform reality it wi To be sure, some skepticism is warranted. But in the 21st cent strategies for Fortune 500brands. sive experiences andengagement treal focused oncreating immer- interactive agencybasedin Mon- agement atiGotcha AR/VR,an is vice president ofproduct man- [email protected] Sekoul Krastev ased on your past pur- past your on ased ury, paradigm Reprint No. 17201 No. Reprint etter idea of loring the c intoc de- terests as as terests rs came came rs e shop- ile pur- ilers to tar- ugh ugh y.

+ ll ll

strategy+business issue 87 leading ideas 15

ail , in ds to find consum- demand windows demand why, with an understanding of the the of one- to tied that isn’t one choice, dimensional demographics or a nar- have Companies need. defined rowly understanding is who of knowledge a deep combine an to with shopping, and when, and where, and why, and functional of emotional benefits As make you those con- products. their he notion of a typical consumer, one whose gender, age, ethnicity, and age, ethnicity, gender, whose one a typical of consumer, notion he about can code assumptions accurate zip make be used to reasonably char- is a thing the predictable past. most of The purchasing behavior, actually may consumers variability be their — today’s of acteristic

Given this complexity, it’smore critical than ever for bran

Emre Sucu, Matthew Egol, and Edward Landry Egol, and Edward Sucu, Matthew Emre

nections, you gain insight about the speciﬁc situations, or or situations, the speciﬁc gain about you insight nections, ers in the moment. Doing so requires a more integrated view of what drives what view of integrated a more so requires Doing in ers the moment. pers, including mobile apps andsocial apps media. mobile including pers, hundreds of brands, and new niche products launch every week. People can shop every launch week. People products and brands, niche new of hundreds engage to with shop- marketers for ways are And far there more sites. commerce occasion they are shopping for. This trait is a logical extension of today’s ret today’s of This trait is a logical extension for. theyoccasion are shopping of consist now categories packaged Many consumer goods (CPG) environment: e- array and of a huge stores, convenience stores, warehouse supermarkets, at they’ll choose different brands depending on where they are shopping and the they are shopping where they’ll on brands depending different choose wich ingredients may choose one brand of deli meat when planning a child’s planning a child’s when meat deli of brand one choose may ingredients wich close based on different factors at different times. Someone shopping for sand- for shopping times. different Someone at factors different based on close which consumers want or need to make a purchase. These windows open and make to open a purchase. need These windows or want consumers which demographics. tied to one-dimensionaltied to drives choice, one that isn’t choice, drives integrated view of what view integrated moment requires a more a more moment requires Finding consumers in the Finding consumers by where and why people shop for your product. your shop for and why people where The best consumer strategies start with knowing with knowing start strategies consumer The best from Brand to Demand to Brand from Connecting the Dots Dots the Connecting T

16 leading ideas leading Source: crowded isbeer, The ﬁrst markets. of awide brands, with range acategory how categories reveals A look retail demand windows large work at two in IsPrologue Past way interact they consumers. with develop impro new ones. The dramatically getit companies that right will how in their current sell and market changes they products,then make well as as need to most windows those identify are promising that for their brands, and have value onlywill way the it if companies execute changes their strategy. They’ understand way the people products decisions. evaluate make and Yet concept the ers, but it’s relevant equally across industries: company Nearly every needs to nel, and occasion ( occasion and nel, ment along brand, to the path by consumer, purchase more linking directly chan prepare aquick, healthy snack at home. Context iseverything. school store lunch during agrocery trip, but another when stopping at adeli to occasion. Brand selection isdependentonconsumers usingaparticularchannelto shopfor aspecific Exhibit: Demand windowsDemand engage- create and opportunities to drive better targeting consumers inthe Strategy& What motivates moment? AnatomyofaDemandWindow Why see exhibit see ). among traction CPGlead- The concept isgaining consumer segment? meets theneedsof How doesdecision Which brandbest across allthree the consumers making varyby dimensions? What Who for theoccasion? consumers shop Where do Where ve the ll ll -

strategy+business issue 87 leading ideas 17

- r n- ur- r their urveys. iques in iques y that information with Any given product has a long list of potential potential list of has a long product Any given

The good news is that the technology required to identify demand windows Companies learn about consumers’ penchants and practices by looking at at looking and practices by penchants consumers’ learnCompanies about The retail aThe at channel — and speciﬁcally options the range available of 1. Identify your ideal windows. 1. Identify your three steps: steps: three To implement a strategy start windows, based demand on with the following implement To The Execution Challenge innovative ways that integrate and exploit a broad set of data sources. set of a broad and exploit that ways integrate innovative these capabilities by applying established quantitative marketing techn quantitative established applying by these capabilities need strong analytics strong risk falling canneed you you build or capabilities behind. But as chasing the next shiny thing in digital marketing technology. To be sure, you you be sure, as To chasing thing shiny the next in digital marketing technology. behavior inside physical stores. the same isn’t windows demand seeking out words, cutting-edge. In other is not useful insights, enables companies to understand the demand windows fo windows the demand understand useful to companies enables insights, s primarily consumer at looked companies a decade ago, Only products. Today, they still look at survey p results. history, browsing — their behavior online consumers’ detailed data about But they can overla chases, reviews, online and social metrics media activity that track — plus their data on what they’ve bought in the past. bought That fo data, and it mine thethey’ve ability to what data on package at the convenience store when they’re in a pinch. in a pinch. they’re when store package the convenience at buying online, but, knowing the per-diaper price is high, will look for a small is high, will for price look knowing the per-diaper but, online, buying sumers may always pick up a jumbo pack of diapers at the big-box store or when when or store the big-box diapers at pack of jumbo a up always may pick sumers then stop after work at a local corner store with a much smaller selection. Co smaller selection. with a much store a local at after corner stop work then upscale grocery chain with a huge selection of craft brews over the weekend, but but upscale grocery craft the weekend, of chain over selection brews with a huge child begins crawling. child begins crawling. a largeto go may Consumers — also decisions. affects location given shoppers’ ral brand of diaper for a newborn, and then focus on durability when their their when durability focus on and then a newborn, for diaper ral of brand another category rife with options. Some consumers will buy a premium natu willa premium consumers buy Some category with rife options. another craft that pairs brew is diapers, well with a meal a restaurant. second The at beer when watching a football game at home but upgrade to a more complex complex more a to upgrade but watching a football game home when at beer styles, and price points. Some consumers prefer an easy-to-drink prefer domestic consumers Some styles, points. and price demand windows, but only a select few are the right choice for your company. company. your for few choice are a select the right only but windows, demand Illustration by Phil Marden Phil by Illustration

e e the ir different ir different doubtedly buy buy doubtedly A detailed understanding of to ensureto that consumers, hobbyist for Consider, for example, promotions and other related content that create a that create content related and other promotions example, for Consider, At this early also stage, make to that you need sure a par- the market size of 2. Tailor your sales and mar keting approach. approach. keting and mar sales your 2. Tailor

occasions. even It segmented user reviews ing, and the and digital serve consumers these to advertising, different including decisions about which stores to sell in, promotions, coupons, packag- coupons, promotions, sell to in, stores which about decisions including and office workers. The company tailored its channel and marketing its tailored strategies, company The and office workers. keted and sold through and separateketed sold campaigns aimed craft at students, hobbyists, can help you engage the consumer at the right places and the right times, engage at resulting in the consumer mor you can help mar- type new a it which scissors, developed of recently company One interests. old segmentation approaches cannot. The right channel and marketing right cannot. The strategies approaches segmentation old specific their to and relevant rich consumers for personalized experience more demand windows allows you to engage consumers in a way that a company using that in a company a way engage to consumers allows you windows demand and sales. higher connections authentic ticular demand window is sufficient to justify to target with to is sufficient it effort the ticular required window demand just isn’t there. there. isn’t just higher alcohol content. Many beer drinkers in that region un region that in drinkers beer Many content. alcohol higher in that fit market. capabilities The compete to rightfully not would decide brewer similarnario and modeling, other tools. specialize in creating with beers new the local But sporting events. before store salecanned the convenience at on beer Analytics it. gaug for you can ones new help develop to or products current sce- through market simulations, various options, from available profit potential areas. For example, a craftareas. example, might For brewer naturally with these match be a better else. Certain will windows demand innovative packaging, or something something or packaging, innovative whether new product it’s development, and that your company does best, best, does company your that and things that your brand is known for for known is brand your that things own capabilities. There will There own capabilities. be specific clear understanding of your company’s company’s your clear understanding of The winnowingThe begins process with a leading ideas 18 leading ideas 19

- - y p he he lop lop tia- l be rsec- t hast r thanr eks, rath- indow. Tar- indow. such as time-to- as such Beyond improving market- improving Beyond

Once you have used demand windows to shape your sales and your marketing shape to windows used demand have you Once Analytics analyticswill level, a micro At efforts guide your can here. hel 3. Innovate to create new products and services. products new to create 3. Innovate pany would use if just considering simple demographics, for example, “What example, do for demographics, simple use considering if just pany would strong capabilities in product packaging. It identifies parents looking to bu looking to parents packaging. identifies in capabilities It product strong w demand as a high-potential kids’ their lunches for products healthy com- the what from approach a different requires consumers geting of this group nect with consumers and drive growth, consider a deli meat company tha company meat a deli growth, consider and drive consumers with nect To see how companies can bring it all together, using demand windows to con- to windows using demand all can companies it bring together, see how To Windows of Opportunity you more precisely target innovation opportunities for your brand at the inte at brand your for opportunities target innovation precisely more you You’l business. your and occasion channel, that for is right consumer, of tion consumers and which develop, to product what predict accurately more to able track your return on innovation investment through metrics through investment innovation on return your track are more likely to purchase it. On a macro level, you can you use analytics level, a macro On purchase likely it. to better to are more market and R&D productivity. results, you can improve the effectiveness of your next promotion in we next promotion your the effectiveness of can results, you improve er than months. strategy, employing analytics ini specific measure the to resultsof you employing enables strategy, and quickly gauging window the demand aimed a specific at digital promotion tives more accurately. For example, your company might run might pro thousands of company your example, For accurately. more tives staging as a such testing on By copy experiments, new year. in a given motions crease in sales compared with previous product launches. crease product in with sales previous compared example, saw only the reviews from hobbyist users. The result wasusers. in- result The a huge the reviews hobbyist only from saw example, recyclable or biodegradable packaging. biodegradable or recyclable turer with strong capabilities in sustainable manufacturing capabilities turer a demand with strong identifies efforts minimizing on can materials and offering innovation focuscompany its delivered in the right context to enhance their emotional connection, rathe connection, enhance to emotional their context in the right delivered new products. They are able to create products with the features consumers want, with the features consumers products create to They are able products. new instance, if manufac a diaper For making improvements. simply incremental t the environment, their impact on reduce looking new parents to for window ing strategies for current products, demand windows can help companies deve companies can windows demand help products, current for ing strategies 20 ideas leading light, more the become. your brand attractive will wantthey or need at amoment time. in The more about you them think this in individuals, with preferences shaped by who The consumers isclear: sage looking at your they products online or on shelf the are are, where profitability. and bring growth will that advantage For company leaders, t help can companies develop they wins, amore source of sustainable competit ers who most to are offering likely quick want or need than their brand. Rather product the that ahit.indicating was to send pictures of in empty the lunch bring boxes home scho their kids after parents asking boost engagement, such as it campaign, media could create asocial healthy recipes or picky with eat subjects blogs tackle dealing such that as ers the demand in window, —for delivered channels instance, digital through shopping for school coming the week. of school the totimed beginning the year, or over weekend the when parents are stores, It lunch grocery where traditional would packages. target families many is adirector withPwCUS. group. BasedinChicago, he PwC’s strategy consulting strategies for Strategy&, in growth andgo-to-market is anadvisorto executives [email protected] Emre Sucu want theirbrand. consumers most likely to companies to findthe Demand windows enable regional lunch to are eat?” or meat like preference “What age of acertain kids In acrowded field, demand win dows enable companies to find consum- the contentThe company create original could also potential to consum- engage Given company the its expertise, could on focus developing kid-friendly principal withPwCUS. Based inNew York, he isa consumer markets practice. strategy withStrategy&’s is athoughtleader indigital [email protected] Matthew Egol company promotions could then run The healthy. and portioned, priately fit alunch in to open, box, easy appro- product the that enoughfact to issmall in-store the ating displays highlighting do shopping big their weekly trip, cre-

+ he isaprincipalwithPwCUS. Strategy&. BasedinNew York, keting andsales strategies for is aleading practitioner inmar- [email protected] Edward Landry they are, and what Reprint No. 17202 No. Reprint he mes- ers. To ive s?” ol,

strategy+business issue 87 leading ideas 21 rgrad niver- differ- anding — anding — Kouchaki studies the causes of rst in Tehran, and earning an MBA in Tehran, Univer- the Kouchaki came the to at way, the along behavior in or- in 2007 a Ph.D. pursue to U.S. ganizational of School Eccles David Utah’s of sity AfterBusiness. two years as a post- doctoral fellow at the Ethics Harvard for at Center Univer- Edmond J. Safra Kellogg in 2014. joined she sity, with a particularunethical behavior, ex- and human psychology for how focus on cheat, to nature found come She’s into play. likely makesthat music anxiety-inducing more people on unde Maryam Kouchaki Maryam or outsiders observing a scandal the situ- organization, or outsiders or a company at let leaders did How incomprehensible. or seems implausible often ation with the wrongdoing? go along Why so many did people happen? it so long? for go on it did And why

The view from inside a scandal-plagued inside organization is considerably viewThe from

by Geller by W. Laura and avoiding — ethical breakdowns. — ethical and avoiding ing deception. Maryam U ing deception. Northwestern Kouchaki, at an assistant professor — whether it’s a small lie or a giant fraud, a one-time act of dishonesty or an dishonesty or act ongo- of a small a giant a one-time fraud, or lie it’s — whether After career. academic as studying her an physics of unde theme a prominent ent. We know that, in business as in life, good people sometimes do bad things do that, know sometimes inas business in life, good people We ent. has understanding Management, made this of phenomenon KelloggSchool sity’s Kellogg’s Maryam Kouchaki Maryam Kellogg’s Do Bad Things Bad Do Why Good Employees Employees Good Why

Photograph courtesy of Kellogg School of Management at Northwes at Management of School Kellogg of courtesy Photograph tern University tern

22 leading ideas leading KOUCHAKI: S+B: be avicious circle more strives to —one make virtuous. Kouchaki that have request implications. significant can unethical The res even asmall attime work, actions their identi their there closely with are intertwined strategy+business she arecent in ployees explained with interview As organizations. and become emboldened up when to wrongdoing. witness speak they soshe looks And forcause. interventions help can people that behave morally and proud, may us ways that not make but always certain we by are alost no means InKouchaki’sings. view, we may humans to behardwired behave and react in Butdeeds. she’s not simply interested documenting in our fail- diagnosing and ample, cheaters that and more are memories to likely have of fuzzy their mis- tral music, We playing agame. while tral found who those were that to listening listen to anxiety-inducing music,participants others and to more cal benefitstheir short the in term. moment, into goes brain the defensive only mode about —people thinking are self-interested in gage behaviors would avoid. they that otherwise in Because whenstate of And people position, threat. this in are more are they to likely en- need resist to they temptations. morally and resources act put It a them can in decisions. when Butcosts making when people feel pressured, deplete it can the tion atransformation isgoing through unknowns. many with from performance pressures or competition. Or it their could org bethat result It goals. can may unrealistic come from managing Their anxiety stressed. of organization. level,any type any in decisions. We susceptible happen it to to one all dishonesty; any can are of a us irrelevant,ingly but have profound can on individuals’ effects moral behavi number of contributing factors. may They besubtle even and sometimes seem- Kouchaki has also researched how ethical breakdowns affect individual em- individual breakdowns researched affect how also ethical has Kouchaki In one experiment, Ihadsome and [UNC’s Desai] my colleague Sreedhari Under people rationally about normal circumstances, benefits think and For example, from Ioften hear employees and feel exhausted they that What can make people more susceptible to ethical lapses?

When we look at scandals retrospectively, we can always ident , because people, because (herself included) spend amount alarge of their ming orming neu- ty. Thus ult can ult can or and aniza- that that ify a t t

strategy+business issue 87 leading ideas 23

- g, ci- sly sly ven ven un- y their ey misreported misreported ey be that there are are there that be r study, we asked asked we study, r dishonest. Elsewhere, . Over time, people’s time, people’s . Over ethical amnesia ethical memory of their past unethical ac- detailed less and less becomes tions types other to ac- vivid compared of neu- more or are positive [that tions Harvard’s Francesca Gino] we’ve we’ve Harvard’s Francesca Gino] call we what for evidence found This is an area of research that we don’t know much about, espe about, much know don’t we that research of area an is This Corporate scandals often reveal a pattern of unethical behavior. What behavior. of unethical a pattern reveal often scandals Corporate There’s been research on unethical research been on organizational cultures, and obviou There’s I set out to determine if it is also possible that this dissonance leads people that this is also dissonance leads people ifit possible determine to I set out S+B: anxiety-inducing music were more likely to cheat. In anothe In cheat. to likely more were music anxiety-inducing engaged managers their in unethical have by to behavior. tween those who describe a higher level of anxiety of level a higher reported tween describe those who were and those who participants to think about a time when they felt pressured and anxious.participants pressured think they to a time felt when E about just recalling those instancesmade people be- a correlation found we through survey more and supervisors employees, data from likely to be KOUCHAKI: KOUCHAKI: drives people to be dishonest repeatedly over time? over repeatedly be dishonest to people drives that only bad people behave unethically behave is false. people bad that only cially when it comes to organizations. One assumption could assumption One organizations. to comes it when cially things. bad the notion do what, But matter no and that those people, people, bad getting helps people to eliminate or reduce feelings threat, and of in reduce so doin eliminate to or people getting helps pants who cheated were less clear than those who did not. This motivated for- clear This less than motivated were not. did those who cheated pants who the distress and dissonance. types of actions.” less vivid compared to other to vivid compared less becomes less detailed and detailed less becomes th if game; a in cheat to opportunity the people gave We tral]. of their past unethical actions unethical of their past “Over time, people’s memory time, people’s “Over them to recall the details of the game. We found the memories of the parti of the memories recall to them found the details the game. We of their performance, they could earn more money. A few days later, we asked we A few days later, money. they performance, earntheir could more to forget about what they’ve done. And, in fact, in a number of studies [with studies [with And, of in fact, in a number done. they’ve what about forget to comes to dishonesty. Among the more powerful They justif is justiﬁcation: Among the more dishonesty. to comes dehumanizing by dishonesty. the victim their example, of for behavior, bad are various things people might do to overcome the dissonance they feel when it when they feel dissonance the overcome to do might thingsare various people such cultures sustain repeated bad behaviors. Other research Other has that cultures there sustain shown such behaviors. bad repeated

24 leading ideas leading We each have multiplework. I’m more over likely adefensive as time, strategy, to segment my identit identities that we could be at any momen KOUCHAKI: S+B: KOUCHAKI: contribute to dishonesty. S+B: of entitlement dishonesty. and becomecreative mind-set, creative or that it encourage and can reduces fe less valuable. being seen as celebrated. It also isstill But all we are when we think can tap into — a skill people can learn. people learn. into tap can —askill can eve issomething should creativity they idea the emphasize that And lines. ignoring behaviors moral guide- or acceptable, are against rule-breaking warn and whether were people they other with practical or creative with people. people were were to less creative likely lie than people, behaved same the also and creative people than agroup in whereunethically creative. everyone was Pr identified creative who and as were their group in rare were more to likely participan topants complete to hadopportunity lie, people they which in atask who were each assigned orwhere rare common. randomly was partici- their respective we personality asked When then We “non-creative”]. were “creative” others and [defined “practical” for of purposes stud the the a survey that gave them feedback about their personalities. S dishonest.being not and entitled feeling rules bepunished.break between There isalink and them hold we and can they to think Then,dard. start when special, they are people they think special, as them treat We people. creative in more than others.” In some ways, other people’sity. For create example, it asense of can entitlement, “I that deserve afeeling behavior rei novation. However, we about have to what elsecomes think along creativ- with When creativity is seen as common, isseen as creativity When it doesn’t lead to creativit necessarily To avoid phenomenon, this of leaders risk-taking should what establish types In one study [with Syracuse’s Lynn Vincent], out to fill participants we asked What happenswhen employees are pressured to cutethical corners? You’ve alsostudied how the“darkside”ofcreativity can

Encouraging creativity is critical for organizational learning and in- and learning for iscritical creativity organizational Encouraging Let’s say I’m employee an Ifeel pressured and to behave at badly t to one of two groups groups two of one to t ome were told they nforces this feeling to a different stan- different a to t. When our behave actical actical elings elings ryone y as y as y. y y

strategy+business issue 87 leading ideas 25 nd nd d, we d, we loyees’ loyees’ ning of el badly nagers to do do to nagers | magnatag.com/ddxt magnatag.com/ddxt |

[email protected] 800 4154 624 With outlining the Project StepTracker® the In White’s Mr. case, projects are listed “I actually have my Project StepTracker® h systeme Project StepTracker® provides h development cycle from start to i nish,development cycle Mr. from start to i White believes that project management and communication will be streamlined as his team heads into the new year. hanging above my desk. a permanent It’s reminder progressing of how we’re a project. on I’ll have team members come in and out during meetings and take a look at how we’re progressing. Right we have a whole lot of now, green and yellow magnets running from left to right so I know what our current status is.” your team with a large-scale overview of the entire project development process, using color- coded magnets to indicate whether or not a milestone has been met. down the left sideof the board with individual across running milestones the top. cult to to cult How to Guarantee Employee Employee Guarantee to How Development is Exceeding Expectations Exceeding is Development developments has been a priority for White Mr. since he took the on position in “Beforeearly I took 2016. on the role, our projects were primarily tracked using some form of an online spreadsheet. wasIt a little dii bit understand how far along we were in the development process because people would rarely post updates, leading to communication errors. Whether was it forgetting to update something, or Looking for an alternative solution for the software not syncing wasn’t it properly, something that worked for me.” tracking project management milestones, Mr. White contacted the team at Magnatag® Visible nd the best-suited tool for Systems to help i the Project Management team. Tasked with nding something that wasi not only visually engaging, but also built to manage a number of developing projects, the Magnatag® Sales team recommended magnetic the StepTracker® dry erase system. Corporate scandals show people’s reluctance to speak up about un- speak to about reluctance up scandalsCorporate people’s show

Disengaged employees may not be motivated to speak up when they wit- speak up when they to may not be motivated Disengaged employees For example, I’ve found that just receiving requests from ma from requests receiving just that found I’ve example, For ne of the biggest responsibilities Matthew White, Director of Programs at the Zygo Corporation, faces a on

As Project Managers, we all know that Ensuring that every member of the team ADVERTISEMENT business proposals often undergo numerous naliterations product. before All reaching the i the while, the responsibility it’s of people like White,Mr. to ensure important steps of the development process do not fall behind. is task on and inthe know with the latest daily basis is the overseeing of projects from the early stages of development to the they moment are purchased by a customer. KOUCHAKI: KOUCHAKI: ness wrongdoing. How can leaders counter that effect? counter leaders can How wrongdoing. ness likely to do bad things. Moreover, they would want to have their home life a home their have to want they would bad things. do likely to Moreover, ethically doesn’t just influence your morality, it also the mea it influences morality, your influence just ethically doesn’t — and more they less, will disengagedimprove to become and unmotivated S+B: something unethical, and contemplating such requests, can emp requests, such influence something unethical, andcontemplating un- otherwise or behave cheat, Being and asked performance. lie, to motivation as meaning- And work see their this work. because is important, your if people fe life I would separate, thinking,their work identities, my I integrate “If all the time.” feel likefeel are various selves in our conflict.

identities are integrated, they are in sync. When our identities are they segmente are are in sync. integrated, When identities our identities O

26 leading ideas leading KOUCHAKI: S+B: of unethically. behaving identities, which lead people to feel less authentic to thus ahigher and likeli er i feelings integrated of that authenticity found I’ve And behaviors. and better better in moralengage behavior, comp lead people authenticity also aging up, to speak can to to and feel less stressed, hope, other and personal, positive Inmy I’ve research, effects. found encour- that shown psychological the has benefitsture of authenticity. It to leads self-est of other —regardless self people’s expressing true their and concerns. The lit toaccording one’s it’s And values. personal and self true about people discoverin personal experiences, preferences, thoughts, feelings, behaving and beliefs and up. speak psychological barriers toical to and doing feel encouraged to right the thing, mode. Employees typ- the survival in to resources need balance psychosocial the becom they and fear, and stress experience they lost, or ened may behave threat- when badly are resources feel pressured. their key they When the box. outsideonly helps think box the individuals but helps outs also them speak convention require of and confidence. way, appearance the Inthis creativit up. Creativityto behaviors isabout in speaking outside are that engaging of rently working on le aproject also shows that how can creativity encouraging tions. Interestingly, given my about research entitlement, and creativity I’ moral muteness working on am and anumber of solu- projects examine that behaviors workplace. the in ethical I’ve interested been very question the in of help people to stay authentic. stay to people help don’t yet, have but data that I’m effecti bean it optimistic that very will them to ask reflect on that ferent their activities an daily surveys Ihave For weeks, them respond two self]. dif- their to true and beliefs and three aboutexercise morning the in their values personal early [in think which they Authenticity been shown has to besuch aresource. It isabout your owning Another factor I’ve looked at isauthenticity. We earlier why people discussed How can people stay authentic? I’m working on astudy now which employees in complete asimple dentities lead to great- to lead dentities ared with segmented e defensive. They are are They defensive. e d experiences. I ve way to m cur- hood y not eem, era- ide ad g g

strategy+business issue 87 leading ideas 27

Reprint No. 17203 Meet the next generation of business thought leaders thought leaders of business generation Meet the next

: When I teach my MBA students about ethics, I focus on self-reﬂection — — ethics,self-reﬂection I focus on about MBA students When my I teach

at strategy-business.com/youngprofs. Laura W. Geller Geller W. Laura geller_laura@ strategy-business.com ofis senior editor strategy+business. they can mistakes, their learn failures. from moral their from and even ployees need to believe that believe team their to andneed organization their are places when ployees mitting, even to ourselves, that we’ve done something bad is difﬁcult. For real is difﬁcult. something bad For done that we’ve mitting, ourselves, to even safe. Em- psychologically feel make to people have leaders learning happen, to actively recognizing when one does something wrong or right. Of course, ad- right. or somethingdoes wrong recognizing one actively when

28 leading ideas ideas leading leading by Elizabeth transformation andthosewhochallenge it. How to bridgethegapbetween thosewhochampion Change to Resistance Us versus Them: Reframing support and change, the get it.” consciouslyboard, or from themselves who those unconsciously “don’t distancing silence, to champions begin interact change more naturally on already those with innovate die.” or we will Faced negative with questi critical remarks, old “The sand. the business isnot back,” coming one CEO told me. “We have to to oners. those And amission, putting one’s seem like such reactions can head in you naysayers isafew between your and whin- and goals stands that all seem that A discount their perspective, assuming that if we are right, t right, are we if that assuming perspective, their discount th with engage don’t we truly resisters, as people of think we When “us an proaching with versus pushback. them” change increases mind-set actually upside of champions current the change to When refuse state. risks. seethe They relationshipsbuilding for long the term. To them, resisters seem greedy or blind. For example, who those passionate are about customers hyper-focused are on tion to upside the of vision their future downside the and of today’ chronic groups. and issues organizations champions in Change tend to pay atten- “Jake” management polarity in with —amethod Jacobs, for expert an dealing Gradually, to begins form “us” between awall “them” and — for being predictable.Such isno less resistance frustrating it Attimes, can Conversely, resisters pay attention to downside the the and of change the “In reality, side each attention ispaying to different things,” says Robert Doty with it. you it’stive future the creating, are for to humans struggle natural isnotsome Change arational resistance. process; no matter how posi- nyone to knows attempting organization expect an to in lead change resisters who openly or quietly oppose it. Unfortunately, ap-

hey must be wrong. be must hey em. We tend to to We tend em. champions ons, or stony s status quo.s status who who

strategy+business issue 87 leading ideas 29 ing The less to to less guard- er issues such as such issues er anies swing back back swing anies o divestiture, cus- divestiture, o (Newfane Press, 2011), the result is an oscil- (Newfane 2011), Press, In the worst-case scenario, “us versus them” thinking devolves into factions factions thinking into them” versus devolves “us scenario, In the worst-case think we resistance. reframe Rather is to how than about as- solution The . Guardians see what needs to be protected, and the trust. Guardians that can be protected, to needs see what be de-

discuss an issue, resisters assume they are hopelessly naive or sinister actors trydiscuss actors sinister assume naive or an resisters they issue, are hopelessly each is only half-right.” each is only of really author never engage. Fritz, Robert According to but that compete with very progress.” little movement, suming as them treat critical to better thinkers do would we are resisters, to pull the wool over everyone’s eyes. To them, it can it ﬁscally seem them, reck eyes. To everyone’s over pull wool the to soft to business the of aspects ﬁnancial the from attention divert “But says Jacobs. Which “They is right? them experience. both are,” of customer Managers for Least Resistance of Path t acquisition decentralization, centralization to from and forth, like a rocking of chair: lots explains. “It’s he focus,” shareholder focus to tomer ians lation between changes, rather than real advancement. “Comp advancement. real than rather changes, between lation Illustration by Richard Mia Richard by Illustration

30 leading ideas leading as would dobetter to treat them thinkers are resisters, we Rather thanassuming critical keeps you honest momentum, where of face the dysfunctional in highlights and gives respect you with greaterout. intelligen your But guardians engaging for stand and your You values. to tough calls w differences havemake real will “commitment drift.” helped company first the surface avoid abaddecision second the and to avoid would effort the Their That become worry? hollow. to the risks these Bringing forask history. the about Next, ask could go downsides the What of change. the should beprotected? strengths haveWhat we What promised? Getspecific, and about by upsides the asking you of start current the reality. isimportant? What “us” “them” and process outlined into by Jaco abridge. “getting Inthe unstuck” new direction the outsisting of spite; too are great. he risks the knows ley Tucci riskmanagement the movie the in officer as have they because important information you may bemissing. Remember Stan- spect. You gather input, not away to as getthem to buy into but change, the imperfect information you), just biases, and like you demonstrate genuine re- backed them —and up actions. overances his through time questions the edged, were legitimate. he assur- gave Seeing this, them practical From past. the in had occurred employees’ the point of view, he later acknowl- lous. But, he fact, in hadprovided to the contrary, no assurances such and abuses had no intention of it using way, that their concerns haddismissed and ridicu- as he new data wanted that vinced to would capture a punitive in beused way. He one executive Iworked frontline his learned that with professionals wer honest keep us of face the in self-delusionGuardians or blind spots. For example, stroyed by abroken promise questions? hard the or ask ashortcut. elsewill Who guardians. Let’s You beclear: aren’t for permission asking You to change. need to still between wall the turn youOnce you can have your guardians, recognized When you approach guardians as responsible, you adultsWhen as (who approach thinking have guardians the company’sthe initiative. new values company, Iheard people about joking to support concerns. his Inanother companyhis he —and hadgooddata ried outsourcing that would hamstring wrong? One Ispoke wor- manager with Margin Call Margin ? He isn’t re- e con- ork bs, bs, ce, ce,

strategy+business issue 87 leading ideas 31

o d ns used + Reprint No. 17204 For their part, their guardiansFor clarifying of can job a better do they what are pro- of leadership needed to create a successful create term. to needed the long organization leadership for of safety and reliability without sacriﬁcing customer responsiveness?” This is the kin responsiveness?” sacriﬁcingsafety customer without and reliability respond quickly to customers. Rather than overriding or dismissing them, he dismissing Rather them, than or customers. overriding to quickly respond asking increase we might his teams, as innovation, “How a focus for the tension Throughout this process, you will learn about misconceptions and assumptio willthis misconceptions you process, Throughout learn about to change in the current situation as well as the possibilities for the future. the for as as well possibilities the situation changeto in current the handle the biggest risks, you can add your perspective, highlightinghandle can the biggest risks, perspective, needs your you add what shift the oscillating from int pattern “We Fritz, According want. to the future you safeguards are needed. Having acknowledged others’ valid points and planned to and to planned safeguards valid points others’ Having acknowledged are needed. approach to can how you decide together, care. Then, see the risks and don’t pions hard to it made because safety the procedures resisting added ees were precautions tecting, and articulating it in a constructive way — don’t just assume just change cham- tecting, and articulating — don’t way in a constructive it his employ- discovered he me manager plant told one example, For now.” that work to clear up in your communications. in your clear up to a shared purpose the focus that things on we buildsan on when advancing pattern Elizabeth Doty [email protected] of Harvard lab fellow is a former Edmond J. Safra University’s Ethics and founder for Center Momentum, a of Leadership on the that focuses consultancy of keeping challenges practical commitments. organizational essay HEALTHCARE

healthcare

Management Lessons from One Hospital’s Dramatic Turnaround Putting people at the core is the key to major improvements in ﬁnancial, performance, regulatory, and quality indicators.

by Eric J. McNulty, Nathaniel Foote, and Douglas Wilson Illustration by Lars Leetaru essay

ssuming the leadership of a 165-year-old institution that appears to healthcare be in long-term decline can be a daunting task — especially if it faces deep-rooted financial challenges, eroding market position, drops in A quality, a fading reputation, an aging physical infrastructure, and an influential cadre of veterans satisfied with “good enough.” This was the challenge Bob Grossman faced when he became the dean and CEO of NYU Langone Medical Center in July 2007. In the 10 years since, however, rather than preside over further decline, Grossman has led the institution, which comprises both NYU School of Medicine and NYU Hospitals, to an im- 33 pressive comeback. The dramatic turnaround engineered by Grossman offers lessons for any manager seeking to overcome chronic underperformance. Confronting an entrenched, entitled workforce — the tenured faculty in an academic medical center — he and his team succeeded in raising performance standards throughout the enterprise, while simultaneously increasing staff commitment levels. The result has been significant improvements across key financial, performance, regulatory, and quality indicators: • From an operating loss in 2007 of US$120 million, NYU Langone now earns an operating margin of 10 percent and is investing heavily in infrastructure, equipment, and people. A new building that includes a children’s hospital is under construction. The institution continues to expand its ambulatory care for patients in the greater New York City area. Since 2007, the faculty group practice has grown from 600 to 2,700 physicians at more than 150 locations, and overall revenues have more than tripled. • NYU Langone now consistently receives five stars for overall performance and is ranked by U.S. News & World Report as one of the 10 best hospitals in America. • For four years running, NYU Langone received top rankings for overall patient safety and quality of care from Vizient, formerly the University Health- System Consortium (UHC). • The medical school has risen in U.S. News & World Report’s rankings from 34 to 11 in seven years — one of the more rapid increases in the magazine’s history. • Research grant funding from the National Institutes of Health (NIH) rose essay

healthcare from $122 million in 2008 to $189 million in 2016, despite NIH funding re- maining virtually ﬂat nationally. NYU Langone achieved these dramatic results even though it had to con- tend with several challenges, including the destruction wrought by Superstorm Sandy in 2012. And although much of the discussion involving the reinvention of healthcare delivery revolves around technology or new business models, NYU Langone’s transformation has had people at its core. Grossman knew that a more committed, engaged workforce would be the primary competitive factor in a service-driven, knowledge-intensive business such as healthcare. By focusing on 34 three mutually reinforcing elements, Grossman and his team unleashed the motivation to excel at all levels across the institution. The elements were (1) creating belief in an inspiring stretch vision and then translating it into tangible improvements for each area; (2) championing data transparency as a powerful source of focus and motivation; and (3) committing to upgrading and supporting talent in key roles.

An Inspiring Stretch Vision Grossman, educated at Tulane University and the University of Pennsylvania, was 60 years old and a nationally recognized neuroradiologist when he was named CEO. In his October 2007 investiture speech, just four months into his tenure, he laid out a bold 10-year vision to restore NYU Langone to its status as a “world-class, patient-centered integrated aca demic medical center.” The language he used was carefully chosen. Integrated signaled the combination of the hospitals and the medical school, which had been separated in the 1990s as the precursor to an attempted merger with another organization. It also highlighted the need for greater collaboration across functional disciplines; department boundaries; and the three missions of research, education, and clinical care. World-class was also a signiﬁcant term. Grossman was declaring that the institution would be judged by externally validated standards, and would measure up against the very best centers of academic medicine — places such as Harvard, the University of issue 87 issue Pennsylvania, and Johns Hopkins. In an interview, he later recalled, “I wanted to articulate the vision early and let people know I meant it.”

But the gap between the aspirations and reality was glaring. The School of strategy+business essay

Medicine was losing more than $12 million every month on its operations, and healthcare the hospital was not making enough to support the school’s losses. Even among the leadership team, many openly questioned whether Grossman’s vision could actually be achieved, and there was far greater skepticism among the clinicians and researchers who would be critical The gap between the to its success. Grossman and the senior aspirations and reality team had launched an ambitious range was glaring. The School of initiatives, and key leaders across the institution were now working at a fre- of Medicine was losing 35 netic pace and experiencing overload more than $12 million and conflict. every month. “Building belief in the vision was critical,” Grossman said. “I also wanted to show the institution that it was much better than what [critics] perceived, yet at the same time, [I wanted stakeholders to] embrace the brutal facts.” He decided to engage the leadership team and the broader organization in a structured dialogue about the vision. The senior team jointly crafted a concise document they named the “Statement of Strategic and Organizational Direction” and shared it with the entire organization, along with a call for input. In addition, a task force of 12 leaders below the senior level conducted confidential interviews with more than 100 people, representing a cross-section of the organization’s extended leadership. The unvarnished key findings from the data were then shared with the senior team. There was good news — the great majority of respondents agreed with the need to transform the organization and viewed the vision as personally meaningful. However, they also viewed NYU Langone as ill equipped to achieve any of its strategic priorities, and they were hungry for greater clarity about how the vision could be achieved. Additionally, respondents saw the organization’s deep silos and the senior team’s lack of effectiveness as critical obstacles to success. In light of the feedback, the senior team focused and reoriented its agenda. To clarify the path needed to achieve the vision, Grossman drafted a one-page, “50,000-foot” strategic road map, providing an overview of the sequencing and interrelationships among the key initiatives, such as the implementation of an integrated IT platform, the complete renovation of the emergency department, essay

healthcare and the introduction of a new medical school curriculum. The senior team then undertook a 60-day drill-down to develop “10,000-foot” plans for each of the three core missions — research, education, and patient care — including a view of the support and coordination requirements from key functions. In parallel, Grossman and the vice deans responsible for the missions began meeting weekly to get a broader view of operations, and the entire executive team redoubled their efforts to improve collaboration and break down silos, focusing on the potential for integration. Previously, fragmented responsibility between the medical school and hospitals had made it easy to accept some problems as 36 unsolvable. (A damaged wall from a leaking pipe went unrepaired for six weeks as the hospital and the School of Medicine debated financial responsibility.) Con- solidated responsibility within newly integrated functions such as finance, IT, and real estate and facilities clarified accountability for results, and practical improvements could finally be made without bickering. Integration would also mean working in more cross-functional and multi- disciplinary teams. So Grossman and his direct reports allocated scarce discretionary funds to make early investments in research “centers of excellence” such as brain aging, multiple sclerosis, and skin cancer, forming new collaborations among researchers from a wide range of complementary disciplines. Similarly, they designated a short list of strategic clinical areas such as cancer and musculo- skeletal disorders where they could focus their efforts to combine clinical excellence, translational and clinical research, and a patient-centered approach. Once the mission road maps and corresponding functional plans were complete and fully vetted, Grossman and the team engaged in a second wave of broad organizational engagement. In November 2008, about a year after the original investiture speech, they brought more than 500 key individuals together to discuss NYU Langone’s future. In four large group meetings, executives described each of the mission road maps and the sequence of strategic steps they would take to realize the vision. They highlighted the progress that had already been achieved on key initiatives, including record-breaking fund-raising results issue 87 issue (more than $300 million total in 2008), and gave participants the chance to share their own assessment of progress. The skepticism that had greeted the ini-

tial announcement was turning to belief. According to Grossman, “Other people strategy+business essay

began to say we could be a great institution. We had awakened their imagination healthcare to the possibilities.”

Empowerment through Data In addition to providing inspiration and direction from the top down, Gross- man was a great believer in the importance of working from the “data up.” As chair of the radiology department from 2001 until his promotion to dean and CEO in 2007, he had seen how data had the power to transform performance. NYU Langone’s radiology department had not ranked among the nation’s top 37 40 in 2001 when Grossman arrived. But Grossman deployed benchmarking to compare its performance, metric by metric, with that of the top five departments in the country, identifying the specific dimensions along which the department needed to improve. By 2006, the radiology department was considered one of the best in the country. Starting in 2008, Grossman In addition to providing sought to bring the same approach inspiration from the top to bear across each of the medical down, Grossman was a center’s departments, the critical great believer in the performance units that served as the focal point for accountability importance of working for the entire faculty. The leader- from the “data up.” ship team charged a task force of forward-thinking department chairs with addressing the question “What would departmental excellence look like in the context of a ‘world-class, patient-centered integrated academic medical center’?” In effect, they were asking the task force to translate the implications of the vision all the way down to the organization’s most important frontline performance units. Taking input from all the chairs, the task force highlighted the key dimensions that would define excellence, the relevant metrics, and the potential sources of data for measuring progress. Once these had been agreed to, the information technology department created an online dashboard. Initially, the dashboard served as the basis for individual department review meetings among the chair, Grossman, and the vice deans, but after a year Grossman opened access to the entire dashboard to all the depart- essay

healthcare ment chairs. “It was a single source of truth,” Grossman said. “I was able to look at data every day from my office and know what was happening throughout the institution. It did not take long, and soon others were looking as well and making improvements in their own departments as well as learning from others.” Data transparency was a powerful motivator. Each department chair could see his or her own progress, and compare it with that of peers. Performance demands were not simply being imposed from the top of the hierarchy. Rather, the departments set aspirations and could judge their own progress, using metrics and corresponding data that they had helped define. 38 Data transparency was an equally potent catalyst in making improvements in hospital operations and patient care quality. Traditionally, most hospitals — including NYU Langone — had not widely shared clinical outcomes data. Bernard Birnbaum, the new head of hospital operations promoted by Grossman, formed a high-level task force on quality aimed at sharing data more broadly. Starting with a focus on mortality and length of stay, the task force doggedly surfaced the data and followed where it led, even if it meant having difficult conversations with some of the most powerful and productive clinicians. Pursuing data transparency not only gave people a greater understanding of their own role in the larger enterprise, but also signaled a commitment to meri- tocracy and demonstrated results.

Supporting People Grossman recognized that upgrading talent in key positions was a prerequisite for achieving his vision. But in an academic setting, leaders don’t necessarily have the ability to make wholesale changes quickly. He understood when to move rapidly and when to have patience with talent challenges. On his first day as dean and CEO, Grossman consolidated functional support areas between the medical center and the hospital. He used it as the opportunity to replace five of his direct reports and promote more aggressive managers in their stead. It was clear that the center’s 33 department chairs, who exerted power over issue 87 issue department resources and the career prospects of faculty, were among the most influential people in the institution. But there was a challenge. It was typical

for chairs to rise to their position on the basis of their excellence as indivi dual strategy+business essay

researchers or clinicians, or owing to recognition in the broader field — not on healthcare the basis of organizational or leadership skills. What’s more, many of these vet- eran physicians were entrenched in the legacy mind-sets Grossman was seeking to change. Early vacancies in neurosurgery and psychiatry let Grossman establish a new profile for what sorts of people he wanted to see as NYU Langone department chairs: those high in emotional intelligence and executive leadership capabilities. Over time, as he filled positions, Grossman balanced national searches and internal promotions. Anticipating the need to navigate around some entrenched in- 39 cumbents, Grossman and the leadership team instituted six-year chair terms and established a faculty committee to redraw department boundaries, for example, combining parasitology with microbiology. Grossman matched the heightened expectations of the department chairs with an increased willingness to invest in their success, upgrading the role and managerial abilities of the department administrators to ensure each chair would have a key right-hand person to help in running his or her department. He provided the resources to recruit the top faculty nationwide in priority areas and to fund key initiatives. The leadership team created an extensive orientation program for chairs who were newly recruited or promoted, and ultimately evolved it into an in-depth leadership develop- Over time, Grossman ment program open to all the chairs. used progress on Over time, Grossman used pro- department metrics as gress on department metrics as an incontrovertible performance standard an incontrovertible for chairs. Some of them chose to step performance standard down, appreciating the extent of the for department chairs. change in expectations for their role. In other cases, Grossman used the new term limits to create opportunities for replacement. By 2015, 30 of the 33 department chairs had been replaced. These moves were, in part, a means of addressing an even more difficult, deep-seated problem — low faculty productivity. When Grossman took over, 25 percent of the research faculty were attracting no research funding whatso- essay

healthcare ever. And the benefits structure encouraged lifetime employment, with no of- ficial retirement age. Grossman and the leadership team established a faculty committee to address the issue, fully cognizant that similar committees had been established in 1997, 2004, and 2006, only to wither in the face of faculty opposition. This time, buttressed by strong backing from the board of directors, leadership maintained its resolve. “If a faculty member objected and tried to make an end run to the board, then Ken Langone, the chairman, would stand shoulder to shoulder with me,” Grossman said. “The faculty learned I had the full support of the board 40 throughout the process.” The committee used external benchmarking to demonstrate that the most respected academic medical centers had explicit productivity expectations, thus paving the way for a three-year phase-in of productivity standards at NYU Lan- gone by 2010. A “step down” program introduced in 2008 created incentives for retirement, and 50 faculty members ultimately took the offers. As department chairs faced increasing accountability for the overall productivity of their departments, they began to allocate resources such as lab space to reflect individual faculty productivity. Grossman and the leadership team knew they had the support of the top quartile — the most productive faculty. “We needed to convince the great majority in the middle that they would actually benefit from meeting the higher expectations of a top-performing institution,” Grossman said. Early successes in winning grants, providing additional financial resources, and improving rankings all contributed to growing support. By taking on the toughest issues, while slicing them into manageable pieces in order to avoid large-scale confrontations, Grossman and his team succeeded at winning supporters.

Surviving the Storm On the night of October 22, 2012, it seemed as though all the momentum built over the previous ﬁve years — if not the institution itself — might be swept away issue 87 issue by Superstorm Sandy. Unprecedented storm tides breached the barriers protect- ing the buildings on the east side of Manhattan, entering NYU Langone’s base-

ments and knocking out all backup generators. More than 300 patients, many strategy+business essay

in critical condition, were evacuated down blacked-out emergency stairwells by healthcare NYU Langone clinicians, house staff, and students. The entire hospital facility was forced into indefinite shutdown. The crisis became a true test of the organization’s resilience, and leaders at all levels rose to the challenge. Despite extensive damage, the hospital resumed core functions in 59 days — sooner than anyone expected. Grossman continued his weekly staff meetings despite the degraded physical surroundings, sending a signal that they would all carry on. On the day after the storm, he told his leadership team, “This is not a disaster. It’s a tremendous opportunity to start anew 41 and rebuild for the future.” Student lectures were suspended for just a week and then relocated to other facilities. Clinical rotations were relocated to more than a dozen other hospitals for three months, and the entire healthcare staff was seconded to other hospitals around New York City. Had there been problems with the culture or the level of commitment to the institution, this upheaval could easily have resulted in a dramatic loss of the best staff to their new host institutions. Instead, NYU Langone experienced 100 percent staff retention through this difficult period, undoubtedly aided by its decision to keep all staff on full salary throughout the closures (a move that astounded the unions). Restoring all services quickly and retaining all staff at a cost of millions of dollars would not have been possible if Grossman and the senior team had not fundamentally strengthened the institution over the previous five years. If anything, the crisis actually galvanized further improvements. Despite all the disruption, the following year NYU Langone ranked first in quality and patient safety among all academic medical centers, according to the University HealthSystem Consortium 2013 Quality and Accountability Study. Meanwhile, by making an innovative settlement with the federal government, the devastated emergency department closed for 18 months to undergo a thorough expansion and upgrade.

An Organization Transformed At the heart of the NYU Langone transformation was Grossman’s legitimacy as a leader. He held himself to the same aspirations and high standards he applied to the organization. He consistently relied on data to measure performance and essay

healthcare achievements and to avoid playing favorites. Grossman integrated his heightened expectations with personal strategic insight and creativity. He was also backed up by a united board including Langone, the visionary chair. The board gave Grossman a clear mandate, reinforced by an unprecedented level of capital donations, and stood by him on even the most contentious of issues, such as raising faculty productivity. NYU Langone has forged a path to rejuvenation. A vision can create a unity of purpose and spur everyone in an institution to reach higher and contribute to improvement. Data transparency enables everyone to see benchmarks and mea- 42 sure progress. And efforts to upgrade and support talent bring energy and build commitment. Many other institutions might beneﬁt from following NYU Lan- gone’s three-part prescription for organizational transformation. + Reprint No. 17205

Eric J. McNulty Nathaniel Foote Douglas Wilson [email protected] [email protected] [email protected] is the director of research at is a coauthor of Higher Ambition: is executive fellow at the Center Harvard University’s National How Great Leaders Create Eco- for Higher Ambition Leadership Preparedness Leadership nomic and Social Value (Harvard and the CEO of Next Solutions. Initiative and a contributing Business Review Press, 2011) editor of strategy+business. and writes extensively on the role He writes frequently about of organizational design. leadership and resilience. issue 87 issue strategy+business strategy+business ATTACK BUSINESS CHALLENGES WITH BOLD NEW STRATEGIES

Global executives come to MIT Sloan Executive Education to learn powerful frameworks and business strategies they can immediately apply to complex problems. Led by our world-renowned faculty, our 40+ short courses will help your team overcome its toughest challenges.

Plan your attack—enroll now in these upcoming programs: Leadership by Design: Innovation Process and Culture June 27–28 Creating High Velocity Organizations June 27–28 Digital Marketing and Social Media Analytics June 29–30 Marketing Innovation July 11–12 Implementing Improvement Strategies: Dynamic Work Design July 20–21

executive.mit.edu/sb Open enrollment courses, executive certiﬁcates, and custom programs for your organization essay TECHNOLOGY

technology

Winning with Digital Conﬁdence The right mix of talent, innovation, and experience will help your company master emerging technology.

by Chris Curran and Tom Puthiyamadam Illustration by Lars Leetaru essay

oday, if there’s a problem with the heat or hot water in your hotel room, technology you call the front desk and wait for maintenance to arrive. At some chains, you have the option of reporting the issue using a mobile de- T vice. But in the near future, many hotel rooms will be wired with connected devices that report potential breakdowns to maintenance and may even automatically fix them. Smart-building technology will turn the heat up when your app’s locator notices you are on the way back to your room. Of course, such developments have significant implications for hotel staff. George Corbin thinks about them from a scientific perspective. As the senior vice 45 president of digital at Marriott, Corbin oversees Marriott.com and Marriott mobile, and is responsible for about US$13 billion of the company’s annual revenue. He notes that the “skills half-life” of a hotel industry worker is about 12 years, at least for those working in conventional areas such as sales, operations, and finance. In other words, if people leave jobs in these functions, they could come back in 12 years and half their skills would still be relevant. But on the digital side, the skills half-life shrinks to a mere 18 months, according to Corbin. Virtually every other industry faces similar dynamics. Digital competency is practically mandatory in many sectors; if you don’t get on board, you’ll fall behind competitors that do. And yet the knowledge required for widespread digital competency is often in short supply, and the related skills in agility and collaboration are often difficult to achieve in large companies. In a few years, an 18-month skills half-life may seem like a luxury. As a result, many executives’ confidence in their organization’s “Digital IQ” — their ability to harness digital-driven change to unlock value — is at an all-time low. That’s one of the main findings from the 2017 edition of PwC’s Digital IQ survey. We interviewed more than 2,200 executives from 53 countries whose companies had annual revenues of at least $500 million, and found that executive confidence had dropped a stunning 15 percentage points from the year before. These company leaders said that they are no better equipped to handle the changes coming their way today than they were in 2007, when we first conducted this survey. Back in 2007, being a digital company was often seen as synonymous with using information technology. Today, digital has come to mean having an orga- essay

technology nizational mind-set that embraces constant innovation, flat decision making, and the integration of technology into all phases of the business. This is a laudable change; however, in many companies, workforce skills and organizational capabilities have not kept pace. As the definition of digital has grown more expansive, company leaders have recognized that there exists a gap between the digital ideal and their digital reality. The ideal is an organization in which everyone has bought into the digital agenda, and is capable of supporting it. What does this look like? It’s a company in which the workforce is tech fluent, with a culture that encourages the kind of 46 collaboration that supports the adoption of digital initiatives. The organizational structure and systems enable leaders to make discerning choices about where to invest in new technologies. The company applies its talent and capabilities to create the best possible user experiences for all of its customers and employees. Simply upgrading your IT won’t get you there. Instead of spending indis- criminately, start by identifying a tangible business goal that addresses a problem that cannot be addressed with existing technology or past techniques and then develop the talent, digital innovation capabilities, and user experience to solve it. These three areas are where the new demands of digital competence are most evident. They are all equally important; choosing to focus on just one or two won’t be enough. Our findings from 10 years of survey data suggest that the organizations that can best unite talent, digital innovation capabilities, and user experience into a seamless, integrated whole have a higher Digital IQ, and are generally further along in their transformation. Our data also shows that the companies that use cross-functional teams and agile approaches, prioritize innovation with dedicated resources, and better understand human experience, among other practices, have financial performance superior to that of their peers. It’s time for company leaders to build their digital confidence and their digital acumen; they can’t afford to wait. issue 87 issue Getting Tech Savvy “We are now moving into a world with this innovation explosion, where we need

full-stack businesspeople,” says Vijay Sondhi, senior vice president of innovation strategy+business essay

and strategic partnerships at Visa, drawing an analogy to the so-called full-stack technology engineers who know technology at every level. “We need people who understand tech, who understand business, who understand strategy. Innovation is so broad- based and so well stitched together now that we’re being forced to become much better at multiple skill sets. That’s the only way we’re going to survive and thrive.” In the past, digital talent could lie within the realm of specialists. Today, having a baseline of tech and design skills is a requirement for every employee. Yet overall digital skill levels have declined even further since our last report, published in 2015. Then, survey respondents said that skills in their organiza- 47 tion were insufficient across a range of important areas, including cybersecurity and privacy, business development of new technologies, and user experience and human-centered design. In fact, lack of properly skilled teams was cited this year as the number one hurdle to achieving expected results from digital technology investments; 61 percent of respondents named it as an existing or emerging barri- er. And 25 percent of respondents said Lack of properly skilled they used external resources even when teams was cited this they had skilled workers in-house, be- year as the number cause it was too difficult or too slow to work with internal teams. one hurdle to achieving The skills gap is significant, and expected results from closing it will require senior leaders to digital investments. commit to widespread training. They need to teach employees the skills to harness technology, which may include, for example, a new customer platform or an artificial intelligence–supported initiative. They will also need to cross-train workers to be conversant in disciplines outside their own, as well as in skills that can support innovation and collaboration, such as agile approaches or design thinking. Digital change, says Marriott’s Corbin, is driven by using technology in ways that empower human moments. “Rather than replace [human interactions], we are actually finding it’s improving them. We need the human touch to be powered by digital.” One way that companies can accomplish these goals is by creating a cross- discipline group of specialists located in close proximity (we refer to this as a sand- essay

technology box), whether physically or virtually, so each can observe how the others work. Such teams encourage interaction, collaboration, freedom, and safety among a diverse group of individuals. Rather than working in isolation or only with peer groups, members develop a common working language that allows for the seamless collaboration and increased efﬁciency vital to moving at the speed of technology. And this approach avoids the typical workplace dysfunction that comes with breaking down silos: Because business issues are no longer isolated within one discipline, but rather intertwined across many, colleagues from disparate parts of the organization are able to better understand one another and collaborate to 48 come up with creative solutions. Part product development, part project management, the sandbox ap - proach enables your workforce to visualize the journey from conception to prototype to revelation in one continuous image, helping spread innovation throughout the organization. The culture of collaboration can speed adoption of emer ging technologies. For example, this approach enabled the Make-A-Wish Foundation to bring employees together from across the organization, including some whose role in developing a new tech-based feature may not have been obvious, such as a tax expert and a lawyer. In just three months, using this approach, the foundation created and operationalized a crowdfunding platform to beneﬁt sick children.

Investing in the Future At GE Healthcare, engineers are experimenting with augmented reality and assistant avatars. “Part of my job is to help pull in [great innovations] and apply them through a smart architecture,” says Jon Zimmerman, GE Healthcare’s general manager of value-based care solutions. “The innovations must be mobile native, because…our job is to be able to serve people wherever they are. And that is going to include more and more sensors on bodies and, if you will, digital streaming, so people can be monitored just as well as a jet engine can be monitored.” Amid an increasingly crowded ﬁeld of emerging technologies, companies issue 87 issue need strong digital innovation capabilities to guide their decision making. Yet this achievement often proves challenging as a result of organizational and ﬁ-

nancial constraints. Our survey revealed that fewer companies today have a team strategy+business essay

dedicated to exploring emerging technologies than was the case in years past. technology Many are relying on ad hoc teams or outsourcing. Moreover, 49 percent of companies surveyed said they still determine their adoption of new technologies by evaluating the latest available tools, rather than by evaluating how the technology can meet a specific human or business need. Equally troubling, spending on emerging technologies is not much greater today, relative to overall digital technology budgets, than it was a decade ago. In 2007, the average investment in emerging technology was roughly 17 percent of technology budgets, a surprisingly robust figure at the time. Fast-forward 10 49 years, and that rate has grown to only about 18 percent, which may Spending on emerging well be inadequate. technologies is not It’s time to change these trends. much greater today, You’ve identified a problem that ex- relative to overall digital isting technology cannot solve, but you shouldn’t just throw money at technology budgets, than every shiny new thing. A digital in- it was a decade ago. novation capability must become a central feature of any transformation effort. This approach goes beyond simply evaluating what to buy or where to invest, to include how best to organize internal and external resources to find the emerging technologies that most closely match the direction and goals of the business. Nearly every company is experimenting with what we call the “essential eight” new technologies: the Internet of Things (IoT), artificial intelligence (AI), robotics, drones, 3D printing, augmented reality (AR), virtual reality (VR), and blockchain. The key is to have a dedicated in-house team with an accountable, systematic approach to determining which of these technologies is critical to evolving the business digitally and which ultimately will end up as distractions that provide little value to the overall operation. This approach should include establishing a formal listening framework, learning the true impact of bleeding- edge technologies, sharing results from pilots, and quickly scaling throughout the enterprise. Perhaps most important, organizations need to have a certain tolerance for essay

technology risk and failure when evaluating emerging technologies. Digital transformation requires organizations to be much more limber and rapid in their decision making. Says GE Healthcare’s Zimmerman, “One of our cultural pillars is to embrace constructive conflict. That means that when an organization transitions or transforms, things are going to be different tomorrow than they were yesterday. You must get comfortable with change and be open to the differing thoughts and diverse mind-sets that drive it.” In a promising development, signs indicate that companies are starting to focus on bringing digital innovation capabilities in-house. According to the New 50 York Times, investments by non-technology companies in technology startups grew to $125 billion in 2016, from just $20 billion five years ago. The Times, cit- ing Bloomberg data, also noted that the number of technology companies sold to non-technology companies in 2016 surpassed intra-industry acquisitions for the first time since the Internet era began. Walmart, General Motors, Unilever, and others are among the non-technology giants that made startup acquisitions last year. General Electric, whose new tagline is “The digital company. That’s also an industrial company,” spent $1.4 billion in September 2016 buying two 3D printing businesses in Europe. Other companies are engaging in innovative partnerships. In January 2017, at the annual Consumer Electronics Show, Visa, Honda, and IPS Group — a developer of Internet-enabled smart parking meters — teamed up to unveil a digital technology that lets drivers pay their parking meter tab via an app in the car’s dashboard. By “tokenizing” the car, or allowing it to provision and manage its own credit card credential, they essentially make it an IoT device on wheels. “The car becomes a payment device,” explains Visa’s Sondhi. “And taking it even further, we can turn it into a smart asset by publishing information that’s related to the car onto the blockchain. This can enable a whole host of tasks to be simplified and served up to the driver, such as pushing competitive insurance rates or automatically paying annual registration fees.” issue 87 issue Solving for “X” At United Airlines, Ravi Simhambhatla, vice president of commercial technol-

ogy and corporate systems, views digital innovation as a way to break free from strategy+business essay

habits ingrained in his company over nine decades because they are no longer technology relevant to its customers and employees. The company plans to use machine learning to create personalized experiences for its customers. For example, when someone books a flight to San Francisco, its algorithm will know if that person is a basketball fan and, if so, offer Golden State Warriors tickets. “What we have been doing is really looking at our customer and employee journeys with regard to the travel experience and figuring out how we can apply design thinking to those journeys,” says Simhambhatla. “And as we map out these journeys, we are focused on imagining how, if we had a clean slate, we would build them today.” 51 With the right digital skills and capabilities comes great opportunity to improve the experience of both your employees and your customers. One constant that emerges from 10 years of Digital IQ surveys is that companies that focus on creating better user experiences report stronger financial performance. But all too often, user experience is pushed to the back burner of digital priorities. Just 10 percent of respondents to this year’s survey ranked creating better customer experiences as their top priority, down from 25 percent a year ago. This imbalance between respondents’ focus on experience and its importance to both customers and employees has far-reaching effects. It creates problems in the marketplace, slows the assimilation of emerging technologies, and hin- ders the ability of organizations to an- Companies that create ticipate and adapt to change. better user experiences Part of the reason user experience report stronger financial ranks as such a low priority is the fact that CEOs and CIOs, the executives performance. who most often drive digital transformation, are much less likely to be responsible for customer-facing services and applications than for digital strategy investments. As a result, they place a higher priority on revenue growth and increased profitability than on customer and employee experiences. However, user experience is also downgraded because getting it right is extremely difficult. It is expensive, outcome focused as opposed to deadline driven, and fraught with friction. However, unlike so many other aspects of technological change, how or- essay

technology ganizations shape the human experience is completely within their control. Companies need to connect the technology they are seeking to deploy and the behavior change they are looking to create. And making this connection will only become more critical as emerging technologies such as the IoT, AI, and VR grow to deﬁne the next decade of digital. These and other technologies that simultaneously embrace consumers, produ c ers, and suppliers will amplify the impact of the distinct behaviors and expectations of these groups on an organization’s digital transformation. Companies that focus too narrowly on small slivers of the customer experi- 52 ence will struggle to adapt, but overall experience-and-outcome companies that seamlessly handle multiple touch points across the customer journey will succeed. That’s because, when done right, the customer and employee experience translates great strategy, process, and technology into something that solves a human or business need. You have the skills and the capabilities; now you need to think creatively about how to use them to improve the user experience in practical yet unexpected ways. Says United’s Simhambhatla, “To me, Digital IQ is all about ﬁnding sustainable technology solutions to remove the stress from an experience. This hinges on timely and contextually relevant information and being able to use technology to surprise and delight our customers and, equally, our employees.”

The Human Touch When talent, innovation, and experience come together, it changes the way your company operates. Your digital acumen informs what you do, and how you do it. For example, Visa realized back in 2014 that digital technology was changing not only its core business but also those of its partners so rapidly that it needed to bring its innovation capabilities in-house or risk being too dependent on external sources. It launched its ﬁrst Innovation Center in 2014; the company now has eight such centers globally, and more are planned. Visa’s Innovation Centers are designed as collaborative, co-creation facilities issue 87 issue for the company and its clients. “The idea was that the pace of change was so fast that we couldn’t develop products and services in a vertically integrated silo. We

want the Innovation Centers to be a place where our clients could come in, roll strategy+business connection noun \ kə∙`nek·shən\

“h at moment I realized I was now part of a network that would truly empower me.”

Deﬁ ne your Wharton moment. comprehensive executive programs: Your success is built upon the connections you make. Through the Comprehensive Executive Programs at Wharton Executive Executive Development Program Education, you’ll become part of a powerful network that will sep. 10–22, 2017 • nov. 5–17, 2017 propel you forward. You’ll hone your business acumen and Advanced Management Program sharpen your leadership skills. And you’ll emerge empowered oct. 1–nov. 3, 2017 to e ect immediate change within your organization—and throughout your career. Transform into your best version. General Management Program a ﬂ exible six-program learning journey execed.wharton.upenn.edu/connect essay

technology up their sleeves, work with us, and build solutions rapidly within our new, open network,” says Visa’s Sondhi. “The aim is to match the speed and simplicity of today’s social- and mobile-first worlds by ideating with clients to quickly deploy new products into the marketplace in weeks instead of months or quarters.” Across industries, company leaders have clearly bought into the importance of digital transformation: Sixty-eight percent of our respondents said their CEO is a champion for digital, up from just one-third in 2007. That’s a positive development. But now executives need to move from being champions to Sixty-eight percent of 54 leading a company of champions. our respondents said Understanding what drives your their CEO is a champion customers’ and employees’ success for digital, up from just and how your organization can apply digital technology to facilitate it one-third in 2007. with a flexible, sustainable approach to innovation will be the deeper meaning of Digital IQ in the next decade. “It’s the blend that makes the magic,” says GE Healthcare’s Zimmerman. “It’s the high-impact technological innovations, plus the customer opportunities, plus the talent. You have to find a way to blend those things in a way that the markets can absorb, adopt, and gain value from in order to create a sustainable virtuous cycle.” + Reprint No. 17206

Chris Curran Tom Puthiyamadam [email protected] [email protected] is a principal with PwC US is a principal with PwC US based in the Dallas–Fort based in New York. He leads Worth area. He is the chief the ﬁrm’s digital services technologist for the ﬁrm’s new practice, which helps clients ventures practice, and he leads create next-generation the development of PwC’s experiences for their customers, ongoing Digital IQ research. employees, and partners. He is also the advisory markets and competencies leader. issue 87 issue strategy+business strategy+business essay MARKETING, MEDIA & SALES

marketing, media & sales

How to Make 2017–21 Entertainment and Media Businesses “Fan”-tastic Capturing the strategic advantages of fan-centric businesses requires functional transformation.

by Christopher Vollmer Illustration by Lars Leetaru essay

marketing, media & sales o promote Mr. Robot, a dystopian video series about hacker culture on the USA Network starring Christian Slater, NBCUniversal recognized it needed a new playbook for audience development that went well be- T yond linear TV. To forge a passionate following of tech-savvy millennials, it created original content for Facebook Live, Reddit, Snapchat, YouTube, and Twitch, Amazon’s platform for gamers. The network also developed a virtual reality simulcast for San Diego Comic-Con 2016, and created a Mr. Robot experience in a Manhattan storefront where visitors could “hack” an Evil Corp ATM machine. What did these efforts have in common? They all encouraged Mr. Ro- 56 bot viewers to stay connected with storylines and characters in the environments where viewers desired that emotional and social connectivity. These experiences thus turned viewers into fans, and fans into zealots. An entertainment and media (E&M) offering today simply cannot thrive without the economic, social, and emotional power of fans. Devoted followers are as critical to feature films, video games, and sports teams as they are to Mr. Robot. Premium content is expensive, and getting more so. Distribution is a brutal battle for shelf space where only brands that are “most wanted” can hope to win. The steady march of digital technology has ushered in a direct-to-consumer environment characterized by greater choice and user control. There is simply too much competition for users to allow E&M businesses to survive on experiences that cater to casual “eyeballs” or infrequent users. In today’s hypercompetitive land scape, entertainment and media businesses designed around and for fans command multiple strategic advantages. They know more about who their users are, what they want, and how and where to deliver it. Fans spend more per capita and are less likely to churn. Today’s fans recruit tomorrow’s. To regularly make the kind of transition exemplified by NBCUniversal’s Mr. Robot, E&M companies need to orient themselves around fans. They need capabilities that help them operate in new, more flexible ways across content, distribution, and user experience. They must become fan-centric. The good issue 87 issue news is that they can accomplish all these objectives by focusing on five key functions: user/fan insight, content and experiences, distribution, monetiza-

tion, and operations. strategy+business essay

User/Fan Insight marketing, media & sales As user behaviors rapidly evolve and consumption occurs across an ever-expanding universe of distribution environments and platforms, companies with the deepest, most direct insight into their fans have a decisive advantage. Unfor- tunately, too many large E&M companies remain focused on analyzing out- puts such as ratings, unique visitors, and time spent rather than drilling into the functional, emotional, and social behaviors that translate into fandom for their brands. And although most companies sit on a treasure trove of ﬁrst-party data, few have organized their people, processes, and technology to mine those insights 57 into fan preferences at the necessary operational scale.” It is not surprising that fan insight capabilities have evolved most quickly in the music industry. In the pre-digital era, top artists such as the Beatles and the Grateful Dead recognized the value of interacting directly with fans and creating fan communities (the Beatlemaniacs and the Dead Heads, for example). Through their fan clubs, these bands learned about who their fans were, what they liked, and where they lived. This continued focus helps explain why contemporary artists such as Taylor Swift and Beyoncé have been so successful in leveraging social media to crack the code for fan development and fan activation. Global music services such as Spotify show what is possible when fan insight capabilities are more fully realized. Spotify has a database of more than 100 million users, including 50 million paid subscribers, which provides information about any artist’s listeners. The Spotify Fan Insights service enables artists to sort through listening data and to zero in on their heavy listeners and sharers (i.e., their fans) versus their more casual consumers. Then they can start building a more powerful fan base. Development of these powerful insight capabilities does not happen over- night. Since 2014, Spotify has purchased three companies (the Echo Nest, Seed Scientiﬁc, and Preact) to bolster its analytics capabilities and help it better understand how casual users can morph into higher-value fans (subscribers).

Content and Experiences For many consumer entertainment and media businesses, avid or loyal fans — who typically represent 10 to 20 percent of a franchise’s user base — can drive 80 essay

marketing, media & sales percent or more of that franchise’s overall business value. Content efforts therefore must prioritize initiatives aimed at super-serving them — deepening engagement with avid fans and simultaneously extending the brands and franchises associated with these passionate fans into new areas. Avid fans cannot get enough of the content they love. They binge on it. They share it. They talk and post about it. They create more of it. They might watch The Americans, a spy drama on FX, and then listen to Slate’s podcast about each episode. Avid fans will seek out content-fueled interactions across a diversity of experiences, provided those interactions ignite and fuel their emotional 58 connection with, say, a sports team, a film, or a video game. For many fans, the quality of these experiences is further amplified when it translates into social connections; fan-to-fan relationships; and active communities united by shared passions, values, and interests. In recent years, the National Football League has placed growing strategic emphasis on its own media assets, including the NFL Network, a 24/7 pay-TV network that has become a US$1 billion business. Providing blanket coverage of events such as the draft and the NFL combine, the NFL Network enables fans to indulge their passion for football year round. The NFL’s RedZone pay- TV channel, which allows fans to watch the most exciting plays of every game, further feeds the voracious appetites of fantasy football aficionados who follow players on multiple teams. These committed fans now have more football to consume than ever before, they are watching more and spending more, and they are more engaged. The New York Times Company’s “subscription-first” growth strategy is aimed at expanding its roster of subscribers from the current 3 million to 10 million. In effect, this is a fan-first strategy. It emphasizes super-serving users who are regular readers and most willing to pay for a print or digital subscription and who create the most value for advertisers.

Distribution issue 87 issue As user behavior and content consumption — especially among younger users — trend more toward social media, mobile devices, and streaming, E&M com-

panies have to adapt to ensure they are building and strengthening their fan strategy+business essay

bases. For many players, this means developing powerful owned and operated marketing, media & sales showcase destinations, and designing experiences on partner platforms that grow and deepen the fan base. E&M companies can take some pointers from luxury brands. The products of Burberry can be found at such global retailers as Saks Fifth Avenue, Harrods, and KaDeWe. However, the fully expressed world of Burberry can be experienced only at the company’s global flagship store in London, Burberry Regent Street. At Burberry Regent Street, which opened in 2012, consumers can shop the company’s full lines for men, women, and children. The store also curates 59 events featuring new creators in music, film, theater, and art. Burberry has used Regent Street to pilot innovations, including interactive displays and mobile apps that deliver in-store notifications and offers. This “showcase” approach to owned distribution is relevant for entertainment and media brands that, like Burberry, possess a critical mass of passionate fans who will reward the richest, deepest experience with their time and money. The WWE Network, World Wrestling Entertainment’s subscription video on demand (SVOD) product, with 1.5 million subscribers, is a compelling illustration of how a media company can add a premium distribution platform to its arsenal while furthering relationships with distribution partners such as NBC-Universal, Facebook, and YouTube. This service has become WWE’s preferred home for popular pay-per-view events such as WrestleMania, along with new series including 205 Live and WWE Fastlane as well as archival content. The WWE network is now the second-largest specialty SVOD network, after Major League Baseball’s MLB.TV. Even the largest, most well-regarded E&M content brands need the distribution scale that third parties can generate. Companies should thoughtfully select distribution partners that can create robust fan value versus lower-value eyeballs. The distribution partner needs to deliver concentrated reach efficiently in terms of either avid fans (therefore resulting in incremental engagement) or convertible fans (casual users who can be cultivated into avid fans). The partner ideally also shares information on users and fans to help further inform business as well as creative decision making. As noted, with Mr. Robot, NBCUniversal’s USA Network has strategical- essay

marketing, media & sales ly expanded its digital distribution roster to add platforms including Amazon’s Twitch, Facebook Live, and Reddit. For shows with broader fan bases, NBCUni- versal has relied on partnerships with players such as Verizon’s AOL to post video clips from shows including The Blacklist, Saturday Night Live, and The Tonight Show on the AOL On video network.

Monetization Companies that build fan bases have to be able to capture their premium value effectively. Given that fans engage across many properties and feel increasingly 60 skittish when content and advertising are out of context, E&M companies have to become more sophisticated with respect to data, segmentation and measure- ment, and technology to succeed commercially. Selling fans, after all, has different requirements than selling eyeballs. Companies must develop sales structures, processes, and decision rights that extend not only across a company’s entire port-

Romans Aqueducts

Strategy that works builds empires. issue 87 issue

folio, but also into business partners’ properties. Sales teams need to know how marketing, media & sales to translate the factors that drive relevance and emotional connection with their fans into compelling “fit-for-purpose” solutions for their marketing customers. Finally, sales teams must ensure that their advertising and promotional efforts amplify the quality and intensity of a fan’s experience. Several entertainment and media players — companies such as NBCUniver- sal, Time Warner’s Turner, Viacom, and, more recently, Disney — have reimag- ined their advertising sales capabilities to take better advantage of their audience scale across brands and screens through new combinations of data, technology, 61 and advertising products. This approach is also enabling these companies to move away from their historical focus of selling specific shows, dayparts, networks, and brands, and toward selling fan-based segments. Over time, this should lead to fewer but higher-impact ad executions, less clutter, and less waste — benefiting fans, marketers, and the media properties.

The Model T The Assembly Line

Strategy that works revolutionizes industries.

marketing, media & sales Given the realities of user fragmentation, companies have to better understand the behavior of their fans beyond their own properties. NBCUniversal has built a strategic network of digital partners that includes AOL, Vox, BuzzFeed, Snapchat, and, most recently, Apple’s News app to further scale its sales and technology capabilities and extend the depth of its fan communities. These partnerships enable NBCUniversal to sell advertising packages associated with its premium content that incorporate some inventory from each of these partners. For example, NBCUniversal has developed a version of its singing contest The Voice for Snapchat, which involves integrating relevant Snapchat inventory for 62 The Voice (e.g., ﬁlters, lenses, Snap ads) into the mobile- or video-centric solutions that NBCUniversal offers marketers. Following fan passions creates a natural pathway to identifying new revenue opportunities for E&M companies — especially live events, which millennials ﬁnd particularly compelling. Condé Nast — with a brand portfolio that includes

Better Health Big Data

Strategy that works improves lives. issue 87 issue

such stalwarts as Glamour (and its Women of the Year Awards franchise) and marketing, media & sales newcomers such as Pitchfork, which specializes in music festivals — views live events as an attractive mechanism by which to bring leading personalities together with avid fans while increasing its revenues. The potential benefits: more revenue via sponsorship and ticket sales, new sources of first-party data that support fan development efforts for its brands, better solutions for advertisers through improvements to activation, and stronger social distribution and fan recruitment achieved by tapping into avid fans’ social networks. With advertisers as well as distribution partners, sales teams must act 63 more like strategic consultants than traditional sellers to design and execute the collaboration models and client-oriented solutions required by working with third parties. Internally, they need to team more seamlessly across functions. In most cases, these requirements will profoundly change the profile of what constitutes the ideal sales leader and sales team. How well companies ex-

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

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

marketing, media & sales ecute this transformation of the sales function will play a decisive role in their future success.

Operations The fifth and final key function E&M companies will have to pursue involves operations. The highest-performing companies tightly link revenue and cost agendas. As this industry transitions to a direct-to-consumer world, senior executives need to (1) focus on what they do best in terms of serving fans, (2) align their cost structure, and (3) organize their operations accordingly. To win with 64 fans, E&M companies must get fit for growth — growth that is both profitable and sustainable. Reallocating resources in order to grow is a difficult task that requires making tough choices and wrenching trade-offs. Will these changes make a difference for fans? Answering this question has to be the starting point for identifying any significant alterations or improvements to company operations. Not everything companies do creates meaningful differentiation with fans or, secondarily, with marketing or distribution partners. Today, brands and products that are not heavily populated by avid fans are essentially commodities. Consider the many zombie pay-TV networks with low ratings, sustained primarily by an aging video bundle that fewer distributors and consumers appear prepared to support. Going forward, the preferential economics of fan-centric businesses com- bined with the necessity for both better internal collaboration within company portfolios and more holistic external relationships with partners will compel E&M companies to structure their operations in new ways. Business processes across the enterprise can be designed to optimize both the cost-to-serve and fan satisfaction, avoiding overserving casual users and underserving loyal fans. Any activity that does not demonstrably improve fan value should be as lean and efficient as possible and is therefore a potential candidate for automation, consolida- tion, or outsourcing. issue 87 issue Today’s fast-changing E&M landscape further rewards companies with superior flexibility and speed. All of these factors will drive companies to pursue

operational improvements in two areas: (1) process innovation and clustering of strategy+business essay

similar activities to increase fan scale and optimize variable costs in such areas as marketing, media & sales sales, marketing, product development, and production; and (2) centralization, outsourcing, and portfolio rationalization designed to attack ﬁxed costs in areas such as G&A expenses and IT.

Future of Fans Even in a period of disruption, some realities endure. The most valuable con- stituents in the E&M industry are the active, loyal, and passionate fans. As the industry transforms in response to the direct-to-consumer model, those compa- 65 nies that fully embrace a fan-centric approach to their business, functions, and operating culture will emerge as the new leaders. + Reprint No. 17207

Christopher Vollmer [email protected] is PwC’s global advisory leader for entertainment and media. He focuses on developing strategies for revenue growth, building digital businesses, and creating innovative user experiences for leading companies across media and technology for Strategy&, PwC’s strategy consulting business. Based in New York, he is a principal with PwC US. feature marketing, media & sales 66 Illustration by John Hersey I YOU ENTERTAINING ALREADY AI BY BOTHUN DEBORAH AND DAVID LANCEFIELD generate and distribute content. distribute and generate companies way the intelligence changes creative endowedwith How technology into business operations industries. many global within rapidly —is working its learning and way decision making, requirethat intelligence, human speech such recognition, as wrote for lyrics track. the sound the musician and ahuman mixed and posed by AI, Flow The melodycalled Machines. harmony and were com- system intelligence (AI) artiﬁcial written by an was which Computer Science Laboratories Paris in produced song, the 2017–21 AI — the new set of technologies that perform tasks new setof —the technologiesAI perform tasks that stop.” for distinctive its authorship. was The ditty Sony’s road that could never /Iwish car backseat the in shine lyrics: “Good sun- day uplifting vaguely and beat ing “Daddy’s Car,” derivative hadasooth- tune, of aBeatles of 2016, fall n the Japan. apop in released song was

IS IS

67 feature

marketing, media & sales & media marketing,

feature

68 sales & media marketing, with US. PwC isaprincipal she York, inNew Based place. market- distribution and contentthe changing to inadapting clients assisting on focuses She practice. media and entertainment global PwC’s leads pwc.com deborah.k.bothun@ Deborah Bothun the factorsthe of production both customer and experience. You impact see the can technologies. new for ground proving ral surrounding business models entertainment in you and media, and have anatu- innovation. low the Throw in barri regulatory level and of financial, legal, of creativity, content, technology know-how, consumer and passion to ki levels long has necessary hadthe industry tion E&M the networking, or social most other isn’t industries. Which surprising. form the in Whether of digitiza- manufacturi healthcare, influence services, it an on isexerting financial cent it said aPulitzer. could win song, but only 12 percent it said could write a 24 percent of respondents could, by 2025, AI said create Hot aBillboard 100 creative. tochines betruly InPwC’s Consumer Intelligence Series (CIS) surv technology. skepticism And justifiable seems when it comes to of ability the ma- tected you or are, less the able you to are benefit in from advances many the audiences. with rely on creative services connecting and ucts content, experi brands, and prod- E&M ingenuity people and Theman most ideas. successful exchanging germ of business the value the added and to it stem from contribution the of hu- creative are played industries these which the both in all, its potential. After Some members have of entertainment the down- industry media (E&M) and Artificial intelligence is starting to transform the role the to transform of —in creativity intelligence isstarting Artificial much very is already present yet AI And creative the in industries, just as The more creative you conventional the are, wisdom holds, more the pro- ing group. group. ing consult- strategy PwC’s forStrategy&, trends mega- and innovation, digital leadership, on regularly comments and andwrites companies, entertainment and executives of media senior advises he inLondon, Based UK. PwC with is apartner david.lancefi[email protected] David Lancefield David Lancefield director Sally Potts. Sally director PwC and Rao Anand pal princi- PwC were article to this contributing Also New York Times York New bestseller and 7per- and bestseller ng, and and ng, ck-start ck-start ences ers ers ey,

strategy+business issue 87 IT IS POSSIBLE FOR AI TO REACH DEEP INTO COMPANIES’ CORE OPERATIONS TO FOSTER CREATIVITY AND ORIGINALITY AT SCALE.

clearly at two extremes in virtually every market: in startups, where innovation and disruptive media models are tested, and in industry giants that are facing an urgent need to alter their 20th-century processes, technology, and structures.

Working Hand in Hand As AI becomes more powerful, a sense persists in the entertainment and media industry that there is a trade-off between creativity, ingenuity, compelling content, and originality on the one hand, and standardization, scale, optimization, and repetition on the other. Left brain and right brain. Instinct and execution. Cre- ativity develops the concept, the ﬁlm, the ad campaign, the song, the app; standardization is required to turn it into a marketable product, a functioning, scalable business. In this view, creative work is the preserve of humans, and if AI can play any role, it will be in a small way. Left entirely to its own devices, the thinking goes, technology would produce bland material, or, worse, go off the rails. But this polarized view takes into account only the extremes — as if every ad jingle writer is Mozart and every computer is HAL from 2001: A Space Odyssey. We have been conducting extensive consumer and executive research via surveys, and holding conversations with leaders throughout the E&M and technology, media, and telecom sectors. And we’ve concluded that the reality lies between these two extremes. AI has the potential to help transform companies by reimagining the ways in which people and machines interact — as workers, content creators, and consumers. It is possible for AI to reach deep into companies’ core operations to foster creativity and originality at scale. When it comes

feature

70 sales & media marketing, are goingare to goout of business. Your competitors destroy you.” will technology. in shift Ifyou don’t out figure how to it use benefit and from it, you benefitbusiness can from Internet,” the one said leader. “It fundamenta isthat a if novels.500 benefit asking “For islike abusiness if can from AI me, asking tion Month (NaNoGenMo), coders wrote generated turn, in that, programs some their from cues AI-generated onetake playlists. During National Novel Genera- signed by computer-based person’s platforms. and The typical services, de- already effect, diet media is,in First supply isthe AI. forces driving of new product important structural two nutritionists. Every day, millio “Human vs.Machine”). of electricity —it’s arrival the with on advance apar industrial is an big that (see will leaders technology As synergies. of set a be fact in may machines to creative and humans intelligence, between purported the fact, trade-off in Machine vs. Human H compelling and terrifying about AI, AI, about terrifying and compelling particularly is something But hope. and fear of doses equal inspired Grappling new technologies with be unavoidable will for leaders of because powerful technologiespowerful has of advent the istorically, and rules-based, such as admin- as such rules-based, and process-driven, that repetitive, are those are jobs “at risk” most the that Weknow 2030s. the by automated being of risk high at are jobs U.K. of percent38 of U.S. jobs and 30 percent Economic that up Outlook to suggests UK PwC recent most labor. Our place todis- potential the has clearly which the new jobs that will emerge. will that jobs new the for them preparing and machines, by displaced be will who workers turing manufac- and service many the for training toskills resources devoting should consider companies process, the fighting than Rather jobs. teller bank or positions support istrative ns of Spotify listeners tell you, AI AI you, tell l a l a s, s,

strategy+business issue 87 The second structural force is demand. The industry shift is being driven by consumers’ desire to move to a world in which they have greater customization, spontaneity, and personalization in the way they consume content, communicate, and engage in commerce. More than half (55 percent) of millennials in the CIS survey said they would like to select their media by curating a list that draws heavily on AI recommendations, or simply have it selected altogether by a bot. The acceleration of AI is arriving just in time to meet the demand for new forms of digital experiences, to cope with the growing complexity of curating and accessing digital media, and to address evolving concerns about security and privacy. Thus considered, AI is both a strategic imperative and an immense opportunity — to improve efficiency, create new and better user experiences and products, free up human labor for more intense creative efforts, and contribute to value creation. It can be applied to all areas of corporate endeavor: process, monetization, distribution, and creative work. To date, many companies have been in AI denial. Some are beginning to experiment, focusing on specific activities (e.g., the back office or customer service). Others are taking a strategic, organization-wide view. But in order to make the most of AI, leaders have to learn to think more analyti- cally about the challenges and opportunities at hand.

Grasping Opportunities No single path is best for integrating AI into the E&M business. The key is to understand the dimensions in which AI can aid, abet, optimize, enhance, and, yes, occasionally replace human work — and to learn from what companies are

feature

72 sales & media marketing, risk profiles, its and to ability execute. ganization’s about views value creation protection, and its appetite for chan multiple The level quadrants. of investment quadrant depends each in on o an quadrant. each in Companies may have in activities initiatives and fall that doesn’t apply necessarily here. bederived business significant value Infact, can for underperformers upper the and right is home to most the evolved companies, sumption applying which the lower in matrix, to a2x2 typically quadrant left automated. or whether fully are AI functions the We should note as- the that horizontal considers axis) whether the activities involve people working al at innovations creating primarily consumer the in experience. The other (t workflows or at existing optimizing primarily whether aimed are functions the dimensions strategiesand two in ( ciples projects. too of approach use the AI for AI This evaluating examines today,organizations we’ve framework illustrative created of an or orresources impose new requirements on you your and colleagues. capabilities will allow you doing.already Next, prioritize to the whether opportunities you assess and pursue AI effectively. Doing Exhibit: completing thetask(fullautomationvs.workingalongsidepeople). Where youaredependsonthetargeteduser(workersvs.consumers)andAI’srolein Source: Optimization Workflow Innovation Consumer PwCanalysis Drawing on clients work with our interviews this who leading for are their TheCreative Intelligence Matrix Fully Automated AI-generated filmscoring,stockmusic AI-generated sportssummaries Content editing(e.g.,movietrailers) Content tagging Newsletter curation,creation,distribution Programmatic adbuying Churn predictionengines Credit controlprocessautomation Customer serviceprocessautomation Freedom fromRepetitiveTasks Google Photosmovieassistant Google Photosfacerecognition Facebook TimelineMovieMaker AI-generated music Simplifying ContentCreation see exhibit see ). One (the considers axis) vertical Human Works withAI Insights gainedfromsocialmedia Insights gainedfromvideo Monitoring/filtering ofcomments Mitigation ofregulatoryrisks Maximization ofcontentlicensing Maximization offilmrevenue Acceleration ofsalesteamreadiness Better, MoreCreativeDecisions Digital assistants(e.g.,Alexa) Content curation(e.g.,Spotifyplaylists) Recommendations (film,TV,music) Video exploration(contentinteractivity) (content enhancement) Athletic performancemonitoring Improving theConsumerExperience so will either free up ganizing prin- ganizing r current ongside ge, its he is is to r- ls ls

strategy+business issue 87 Freedom from Repetitive Tasks Because of the availability of proven, off-the-shelf artificial intelligence solutions, many companies start in the lower left quadrant — automating processes, often in human resources and finance. Many media companies have lagged in putting effective back-office processes and technology into place. Thus, the potential for the application of AI is great. One U.K. media company that is a leader in the exhibitions industry is experimenting with back-office automation, and expects it will help the company boost margins from activities such as credit control and customer acquisition. But these efforts aren’t confined to the back office. Historically, the out-of- home ad industry hasn’t kept up with other media-buying trends. One of the brands within a large ad holding company in Japan developed an AI-based solution for making purchasing decisions on out-of-home advertising locations, such as billboards. By deploying bots, the unit has automated the online bidding process for clients. Efforts aimed at creating content can also fall into this quadrant. News services (for example, the Associated Press) are now using AI platforms such as Wordsmith to generate short articles that summarize a baseball game via sta- tistics or that are based on the earnings reports of publicly held companies. A movie studio has used IBM’s Watson to create trailers. By watching an entire film and selecting six minutes’ worth of scenes, the AI solution can do in less than 24 hours what normally takes 10 to 30 days. When Shelly Palmer, a leading media technology consultant, publishes his daily newsletter, he writes one new article and algorithms aggregate additional articles (see “The Thought Leader Interview: Shelly Palmer,” by Deborah Bothun and Art Kleiner, page 132). Next, AI generates four versions of the newsletter, one aimed at maximizing engagement, another at maximizing clicks, and so on. Programs then mine data on subscribers to determine which of the four versions will be sent to each recipient.

feature

74 sales & media marketing, emerging preferences for people products who designing are intended to appeal compelling to client. the beespecially will paigns of cam- which ad products and have previous types in and arisen campaigns, tool provides recommendations challenges on to target, which individuals adreps When input team. ad sales information on upcoming client the meetings, help aconsumer’s direct, online journeys actions. and them of to and factories” allow measure, constructing “data studios are that forforms. content Beyond eyeballs measuring at aspeciﬁc new the time, aired windowsacross premium downstream such as cable video-on-demand and plat- solution recommendations makes that for monetizing and marketing conten the chatter surrounding anew moviesocial release, one AI-powered an isusing studio and uptake of initial analysis Using an campaigns. back to shape marketing their hibit’s lower right quadrant. more professionals tothat use make intelligent can decisions, seen ex the in as complex yet repeatable, freeing up generating and insights thus ti powerful morebooks work effectively. a can alongside that out people AI tasks to carry bedeveloped can to —algorithms helpadvertising campaign execute play- the an distributing planning aﬁlm, publishingprocess and —editing amagazine, of you rule thumb if says that haveA useful aplaybook awork for managing Better, More Creative Decisions COMPLEX YETREPEATABLE. TO CARRY OUTTASKS THAT ARE AI CANWORK ALONGSIDE PEOPLE One of contributions isto most the shed powerful make light on can AI A major company U.S. digital isdeveloping AI-powered an interface for its real-time and feed- better at applyingStudios getting are analytics advanced that that ten me re re - t t

strategy+business issue 87 to large audiences. An advertising holding company in the U.S. has teamed up with technology partners to develop a proprietary AI tool that scours social media platforms and delivers insights into what types of ads resonate with consumers. Creative directors and writers thus approach the creative process with a better handle on what might be expected to work well.

Simplifying Content Creation A useful way to think about consumer-facing innovation is to look at it through the lens of “customer jobs.” Harvard’s Clayton Christensen has put it this way: “Customers don’t simply buy products or services; they ‘hire’ them to do a job.” And customers — whether they are the end consumers or companies — are hiring AI to do a growing array of jobs. In the upper left quadrant of the exhibit, AI fully automates the creation of content, material, or services aimed at consumers, and the work becomes more experimental. Here the company is, in effect, going all in on the ability of AI to create a compelling product or service. In many instances, the sub- stitution for creative intelligence is complete. Facebook’s Moments app has a tool that creates short ﬁlms out of the videos and photos that users post on their timelines. Many of the early experiments in E&M have been in music. Sony’s efforts in Japan to use AI to write pop songs stand as one example. Bobbie Barrat, a high school student in West Virginia, trained a computer to rap in a week using open source software on a Linux-driven laptop. Having cut its teeth on 6,000 Kanye West lines, the computer can generate somewhat authentic rap verses. “Originally it just rearranged existing rap lyrics, but now it can actually write word by word,” Barrat said. But companies are also testing whether machines can effectively create useful advertising content. McCann Japan decided to pit its AI director against the human creative director to create a 30-second ad for Clorets gum. When it asked the Japanese public to vote on which was better (without disclosing the authorship of the ads), the concept generated by the human director was preferred, but only by a 54 to 46 percent margin. Elsewhere, AI has been taught to improve the user experience of online read-

feature

76 sales & media marketing, viewing experiences forviewing fans. informationsport. this The company uses to provide also richer, more interact measurements getinstant on for metrics performance key can their Athletes junction sensors with to provide unprecedented visibility into thei AND CANTAKE THEMDOWN. DON’T MEETASITE’SSTANDARDS ON THEIROWN —WHICHCOMMENTS COMPUTERS CANDETERMINE— ery vs.Filtering”).ery Netflix’sfeed, and recommendation (see engine just are beginning the “Discov- play Spotify such examples as new ways.in Familiar Facebook the lists, ne enable and peoplenew services content with to discover engage and bran and ofexamples how companies combine computer and human to create expertise engagement, upper Inthe transactions. and right quadrant of exhibit the are potential speed-to-market, the and for enhances and interactions, increases and differentiatora powerful for consumer-facing businesses. It improves be itsWith to ability enable can customization personalization AI and at scale, Improving theConsumerExperience ments don’t meet them down. asite’s take can and standards computersby machine learning, determine —on can their own —which com- U.K. the in able are to intelligently to leverage AI filter comments. Empower Using users. and Google’s Perceptive publishers the software, such as forit to humans monitor isdifficult the comments many being posted by readers upers by comments cleaning sections. On sites platforms, news many social and Tagasauris, aNew York–based developed media technology has startup, an- A global technology company isworking to athletes with deploy co in AI r performance. r performance. precision Economist ws- ive ed ed ds ds n-

strategy+business issue 87 notation programs that break television shows and films down into shots and scenes, and document key elements of the story (characters, themes, locations, music, product placements, etc.). Its consumer-facing app connects events, people, and locations in the show to real-world locations, actors, and social content. This provides viewers a visual-first deep dive into the drama as it unfolds — episode to episode and season to season. JD.com, a Chinese online retailer, has established an AI lab to investigate perception and cognition with computer learning algorithms. The results will be applied to face recognition and text and image searching. But the first use will be a virtual reality fitting room for customers to try on clothing and other products.

Organizing for AI The universe in which AI operates is a ﬂuid one. Your company may easily ﬁnd itself engaged in activities in every quadrant of this matrix. Some of the apps on your phone today are purely for work, some are purely for play, and some are useful for both. The same holds true for AI. This framework should help you understand what are the best areas in which to launch AI pilots, where the low-hanging fruit is, and what it will take to move AI opportunities forward in the near term. Before you start, it’s important to have a handle on the maturity of the AI technology you will be dealing with. There’s a vast difference between chatbots and

Discovery vs. work more effectively. based on consumption habits, our First, although consumers personalized bubbles become nar- Filtering tend to seek out and access content rower and more difficult to penetrate. on a range of platforms, very few In many instances, consumers are ontent discovery is one of companies have developed tools that becoming defined by what they are C the most common ways enable search and discovery across likely to like. The result is that they are media consumers benefit from AI. multiple platforms such as Ama- less apt to find new types of con- Overwhelmed by the exponential rise zon, HBO, Netflix, Hulu, and iTunes. tent and perspectives outside their in online content, people rely on MightyTV, launched by a former prescribed comfort zones. Having algorithms to serve up curated lists Google executive in 2016, aimed to become proficient at making recom- and recommendations on the plat- let consumers do just that. But it was mendations based on past usage, forms they favor: Spotify, Netflix, and acquired by Spotify in March 2017 and AI’s next step of evolution may be to Amazon, for instance. But the indus- immediately dissolved. figure out ways to pierce the carefully try must address two challenges if Second, as more content dis- constructed filters and broaden the it is to make discovery and curation covery is determined by algorithms horizons of discovery.

feature

78 sales & media marketing, nections their employees, consumers, with and their partners with and have like- to begs be mined for and Companies’ advantage. needs to con-that bemanaged actions create these data of view avideo —all every media, poston social every absorbing and ating exponential transaction, isrising at rate. an every Every tweet, compani The that volume regimes. data of regulatory of unstructured more complex, ever-longer with engaging supply confronting and ava chains, getti into are expand they organizations necessity to it. new markets, use As tions entirely. revolution IT The same possible made AI has that isincreasing t workhave an AI alongside professionals key tasks over or to certain take ofume repetitive, work. rules-based support mind-sets and that architectures organizational amassive v standing how to companies work. do you must that evolve E&M organize from long the how in you changes investment, some work,targeted as well fundamental as and progress require aleap any quadrantand in of of will Making our faith. matrix ments your within reach already. are require inve Others significant will executiveIf you an industry, the are in of many ele- isthat goodnews the these shown ishere by above, examples many the As now AI industry. for E&M the Shaping Strategy and respond. on the matrix, it’s easier to identify how your business stra on other the Curve”). (see Maturity AI “The automated newsletter generation on the one self-driving and hand, automobil Maturity Curve Maturity The AI AI’s maturity curve (page 82). In the Inthe 82). (page curve maturity AI’s of stages three out lays Rao Anand I cial Intelligence,” our colleague colleague our Intelligence,” cial toArtifi- Guide n “A Strategist’s The case for hiring AI into for business the AI whether isto iscompelling, hiring The case goal the Once you have asense of where your company’s current or plans pilots sit sort tabs. The next stage is is stage next The tabs. sort self- Gmail’s Google of Think tasks: rules-based labor-intensive of costs the reduces AI but decisions, the all phase,first reinforced learning leading to better to better leading learning reinforced self- with way, asymbiotic in together mented , in which people and AI work work AI and people which , in assisted , humans make aug- driven stock trading. trading. stock driven algorithm- of Think oversight: or involvement human little very with decisions the makes AI and rules autonomous is stage third The review. user and mendations based on past behavior recom- Netflix of Think decisions: tegy needs to prepare , in which people set the the set people which , in es are gener- are es d func- stment riety riety ol- ng ng he es es -

strategy+business issue 87 wise escalated and intensiﬁed. Regardless of how proﬁcient a person is with Excel, he or she can’t hope to stay on top of and make sense of the torrent of bits, bytes, comments, opinions, purchases, and signals that our systems generate daily.

More Than a Tool AI is not IT. It’s not simply a tool or a function that can be outsourced or placed in a silo. Rather, it is increasingly evolving into an element of strategy. So leaders, and their boards, have to deﬁne the strategic role of AI. They also need to understand how it is playing into the strategy of their competitors, both direct and indirect. Then they must ask themselves where AI can have the biggest impact that can translate into shareholder or enterprise value. Is the primary goal to cut costs or manage margins? Or is it to drive new revenue growth and create a new 79 level of engagement with customers? While these questions are being answered, leaders have to decide on the important ﬁrst steps to take in embracing AI. Most leaders in the E&M world did not grow up in the industry talking about or using AI. And neither did most of their direct reports. In order to combat the hype and fear surrounding AI, leaders must educate themselves and their colleagues — especially those who work in creative areas — on the potential of AI. They need to move quickly, because the institutionalization of AI is happening much faster than most people realize. As one executive put it, AI is now part of the “stack” — the set of software that serves as infrastructure for a business. The capabilities E&M companies require if they are to succeed in adopting

feature

80 sales & media marketing, with it — to disrupt existing processes and activities. Companies have to make activities. Companies it and havewith processes —to to disrupt make existing to invite new employee must this bewilling Leaders people the —and who work the waythe their company relates to its employees. of technology. language the in Rather, about may they need to reordering think It’sshift. not simply amatter of CEOs top and leaders more becoming conversant to implement companies that have means acultural to This make them islarge. opportunities avthe number the resources and inherent of skilled AI in between on gap In adopting the afocus important, talent because AI, iscritically The HumanElement consumption media and even it to if betracked, would lower their costs. cent of respondents to their online allow were e they said unwilling privacy. and expectationsand surrounding transparency Inour CIS survey, 47 pe formust governance build capacity the data besensitive and to norms, regulations, public-and doing so, partner-generated and value. they While extract and sources combine factories: data can that from data systems proprietary,calls power them. have They to Todd invest to colleague create what our PwC Supple toboard, today’s in succeed competitive e and companies must retain dynamics, computer and data neednies to attract on are scientists. once And specialists those amounts of Compa- data. staggering secure and mine, analyze, collect, manage, Factors”). Success cal on At its rests root, of ability the people AI machines and into broad two fall categories: (seeAI organizational and data “Checklist of Success Factors Checklist ofCritical As Shelly PalmerAs puts isanew employee it, AI help can drive productiv that • Channel AI into the busi- • intothe AI Channel new the as • AI Position • factories data Build leading its development. its leading those empower and tonurture environment right the creating ness, competition. ofthe ahead stay and ity productiv- todrive here team, ofyour member AI projects. your power and to feed • Embrace education education • Embrace the on • down Double throughout the business. the throughout create advocates AI and awareness to raise insight. creative and ﬂow their increase and game their toraise potential the them offers that AI sure people understand Make human element. ntertainment third-party, ailable ailable Criti- ity. m- to to r- e e

strategy+business issue 87 feature marketing, media & sales 8181 e n vel, vel, lated + . he devel- he Reprint No. 17209 w pressure on on pressure w and others are using auto- es on the qualities of real experience. , Mar. 22, 2017: A look at some early, Mar. 22, 2017: Washington Post Washington Adweek ve Process,” , Feb. 16, 2017: How the 2017: , Feb. 16, , June 7, 2016: Four strategies 2016: , June 7, that work in this dynamic new world. s+b Wired g_media_sales , Jan. 26, 2017: How the, Jan. science 26, of big 2017: data analytics can contribute to the art of s+b , Feb. 9, 2015: The most successful 2015: , Feb. 9, advertising today convincingly tak s+b Paradoxically, the advent of AI means companies have to double down o down double AI to of means have companies the advent Paradoxically, AI is not coming to destroy your business. But neither is it here to save your your save to here is it neither But business. your destroy AI coming to is not Deborah Bothun and John Sviokla, a Media Company. What?” Now “You’re Resources Lauren Johnson, “How 4 Agencies Are Using Artificial Intelligence as Part of the Creati producing movie and TV content. More thought leadership on this topic: strategy-business.com/marketin Todd Supplee and AlexTodd Mannella, “Quantifying Entertainment,” mated systems to cover the news. Frank Rose, “The of Immersive Power Media,” disruptions in the advertising industry. Joe Keohane, “What News-Writing Bots Mean for the Future of Journalism,” with flexible, engaging workplaces, companies can create greenfield sites, insu can engaging sites, companies greenfield with flexible, create workplaces, who work with AI. Beyond the usual imperatives of appealing to younger workers with workers AI. the usual appealing younger of Beyond to work imperatives who experiment to freedom more that provide operations, the day-to-day from themselves and their working environments more open and attractive the peopl to open more environments andworking their themselves ingly, as with Sony’s AI-generated pop song, they can produce harmonies. they harmonies. song, can pop produce AI-generated as with Sony’s ingly, and managed properly, standardization and creativity don’t have to clash. to Increas- have standardization and creativity don’t and managed properly, the flow of their work rather than the processes that govern it. When understood than When rather understood it. the processes work their that govern of the flow ate more value — to unleash creativity, to exercise judgment, and to think and to about judgment, exercise to unleash — to value creativity, more ate to be much better than AI-generated content. AI will us all than better force content. be better.” be much to AI-generated to in t moment a pivotal has at arrived it Rather, disruption. from business nies that growth. their critical gener- are to to most AI space humans gives more rity,” as Jon Cook, chief executive officer of the ad agency VML, put it. “We have have ad agency the VML, “We of officer it. executive chief put Cook, as Jon rity,” AI the very parts of can compa- of be a catalyst way, reinvigoration the right for and creating more engagement within and outside companies. “At a certain a le “At companies. within and engagement outside and creating more medioc- I think ad agency general laziness of AI and content a lot can out drive If engaged within in it. work the E&M who of industry and the people opment repetitive, process-driven activities, they simultaneously impose ne impose simultaneously they activities, process-driven repetitive, the next wave, for innovating context, understanding the competitive tionships, the human element. As automation and machine learning release people from from learning and machine people release As automation the human element. time building rela- more spend will to be able Employees value. deliver to people feature technology 82 Illustration by The Heads of State I A GU A must decide what type of AI role they should play. should rolethey AI of type what decide must companies tobusiness, relevant and practical becomes science computer of conceptual side the As BY to determine howto maximize yields for eachplot. precipitation, soil quality, and other agricultural data temperature and erosion records, expected that are 10 meters square. on local app The draws (and, the in entire fact, continental U.S.) into plots Climate Basic, Heepke’swhich divides farmland intelligence app He asmartphone called uses (AI). in Illinois farm his 4,500-acre because of artificial Jeff Heepkeknows 2017–21 A NTELL N RT A ND R STR I A O I DE TO F A

I where to plant corn plant to where TEG C I GENCE I A

I L ST’S

on on

83 feature

technology

feature

84 technology Intelligence Institute. Intelligence Artificial the Australian research scientist at chief formerly was and ofSydney University the intelligence from inartificial aPh.D. holds He services. consulting for analytics and data PwC’s leader innovation an is He inBoston. based US PwC with is aprincipal [email protected] Anand Rao est cropsest country’s the in history. produced intelligence has across larg- the industry the noted, of use artificial this U.S. the watering afternoon. or that Department As of irrigating Agriculture coldIf arainy front by, to pass isexpected to Heepke avoid which areas knows how it long bebefore will your company isaffected? agricul like industry earthbound an ness operates. transform it if And can deploymentthe way the of busi change people to likely fundamentally are that isgeneratingbusiness. new AI approaches to business models, operations, and increasing frequencyincreasing of severe storms. —forits example, northward the effects migration of arable for land corn, or t isfeddata into them. One result isabetter of understanding and climate change sors planted improve fields the they more in insight sothat and as their accuracy tinued models, to upgrade integrating from equipment AI the data farm sen- and the company’sgiving models added legitimacy. Since then, Monsanto con- has lined, less and expensive automated process. claims farmersand both benefit from amuch having less labor-intensive, more stream- check; no questions no companies necessary. asked, paper The insurance filing ers who have to bought supplement insurance their government coverage geta a region, or it adrought occurs, yield adjusts numbers local downward. Farm- offers app amore operates that also AI autonomously. advanced Ifastorm hits Climate Corporation,Climate Silicon the Valley–based developer of Bas Climate Applications like this are typical of the new wave of artificial intelligence of i new the wave of typical Applications artificial are this like Monsanto nearly paid US$1 billion to buy Corporation Climate 2013, in er Michael Fitzgerald. er Michael writ- and Morrison, Alan senior research fellow PwC Baccala, Michael leader innovation assurance and principal PwC were this article contributingAlso to ture, ture, ic, ic, he n n -

strategy+business issue 87 feature technology 8585 hat tally ming espondents said said espondents (Pearson, Stu- 1995), Artificial Intelligence: A Modern Approach A Intelligence: Artificial In their book book In their Reports on artificial intelligence tend to portray it as either a servant, as mak- artificialeither it portray Reports on to tend intelligence purpose software is in the phrase “take actions.” AI enables machines to respond purposesoftware AI machines respond to enables is in the phrase “take actions.” affect that environment.” The most critical difference most between The AI and general- affect that environment.” ligent agents that receive percepts from the environment and take t actions the environment from percepts agents that receive ligent art Norvig AI define designing intel- Russell and as building of and “the Peter to life. will respond to people (and one another) in ways that feel as another) if they one are (and co will people to respond tially your products and services, as well as your office and factory equipment, and services,tially products as your well as office and your factory equipment, affected; so will enterprise structures. Technological systems, including poten- systems, including affected; structures. so will Technological enterprise decision making, collaboration, creative art, making, research creative will and scientific decision all collaboration, be change work processes and might create jobs in the long run. nature The of in the long jobs processes and create might change work of productivity. It will eliminate jobs, to be sure, but it will it also but fundamen will be sure, to It eliminate jobs, productivity. of stroying privacy. But for business decision makers, AI decision is primarily business an enabler for But stroying privacy. ing all technology more responsive, or an overlord, eliminating and de- jobs an or overlord, responsive, ing all more technology dam, page 44). IQ survey of senior executives worldwide, 54 percent of the r the of percent 54 worldwide, executives senior of survey IQ Puthiyama- Chris Curran by and Tom “Winning with Digital Confidence,” ligence, but are not yet poised to take advantage of it. In PwC’s 2017 Digital 2017 take In PwC’s to poised it. advantage yet of are not but ligence, organizationstheir had the skills necessary with succeed (see this to technology Many business leaders are keenly aware of the potential value of artificial of value the potential are aware of keenly leaders Many business intel- said 20 percent only making But they were in substantial AI investments today. An Unavoidable Opportunity An Unavoidable

feature

86 technology ﬁrm Tractica estimated 2016 revenues at just $644 million. But it expects ho for system at teenagers wheel. the guidance driver–like GM’sinstance, 2016 Chevrolet from data sensors feeds Malibu into abackseat way people live. number Agrowing at improving aimed are behavior; human for technologies, translation i represent language and shifts car fundamental others, —and tickets connected such reversedbot, of as thousands has parking at minor —DoNotPay, appsSome targeted frustrations are AI online legal an zon Google and Echo Home, much and of emerging the Internet. Industrial ognition apps such as Facebook Picture Search, digital assistan sort entries that programs voice by importance, recognition i systems, to alternative perspectives. perspectives. alternative to for news” inconsistencies counter and tect by scanning “fake routing and people never clicked on topic that before. Tomorrow’s beable aggregators will to d AI time, to anticipate what peopleNow it isincorporating broader about data way the readers’ interests over change are likely to want to see habits. media ior population, who those larger the with hadsimilar particularly next adjusting selections the accordingly. Next user it individual aggregated way the peopletracking spent they clicked time the and on and articles reading, on people’s based articles to curate beh it requests. Then evolved to analyze sophistication in years. few last during the dramatically been acontinual force of history the computing in since 1940s, the grown has (seelarge 88). Road to page “The DeepLearning,” technology, This which has to interactions improve world the software with by its analyzing own activity at controldirectly therefore and can’t anticipate. from programmerson do world the that n to own their signals signals at large, Despite all this activity, the market for AI is still small. Market research research Market small. activity,Despite this isstill for market the all AI AI applications include use AI smartphone assistant daily in digital all for example, hadlong software, aggregation News AI relied on rudimentary or ability the ofThe fastest-growing ismachine learning, of category AI , even if they have ts such as Ama- mage rec- mage s’ behav- s, email s, email n the n the avior, ck- ot e-

strategy+business issue 87 feature technology 8787 ﬁng • Doctorless hospitals • Creative arts • Creative engines • Artificial wildlife habitats • Artificial wildlife • Scientific discovery • Automated 3D bioprinting • Automated ). They). comple- ee main ways that that ways main ee • Self-navigating drones • Decentralized functions corporate (e.g., HR and accounting) • Personalized medicine see Exhibit 1 see Exhibit • Automated machine translation • Autonomous investing • Self-driving vehicles • Management for cockpits decisions business AI that improves what your business is already doing. is already business what your AI that improves AI that acts on its own, choosing its actions on behalf of your business goals. business choosing its actions on behalf of your AI that acts on its own, AI that enables your business to do things it couldn't otherwise do. do things it couldn't to business your AI that enables • Autonomous mining • Augmented movie • Augmented script writing • Robot musicians • Legal e-discovery • Autonomous • Assisted • Assisted • Augmented • Guided personal budgeting • Customer service chatbots • Medical image • Medical classification • Automated insurance • Automated claims processing • Bomb disposal robots • Precision planting advice • Robotaxis BASIC FORMS OF AI BASIC FORMS Anticipated AI Applications 2015 2020 2025 2030 • and or- people what improves available, widely now Assisted intelligence, organizations andables peo- • en today, emerging intelligence, Augmented • the future, and de- creates for developed being intelligence, Autonomous willMany companies in all make investments three next the few during PwC research and analysis Science and Science Environment Management Healthcare Arts and Communications Personal Finance Mobility ment one another, but require different types of investment, different staf different types different require investment, of but another, one ment considerations, and different business models. most of this technology in your enterprise, consider the thr the consider enterprise, your in technology this of most canbusinesses will or use AI: ganizations are already doing. otherwise do. things do to they couldn’t ple own. their machines that act on ploys ( years, variety drawing a wide applications from of like Monsanto, buying AI companies specializing in their markets. To make the AI buying specializing companies markets. in their To like Monsanto, nies, and large, are companies established recruiting learning deep and, talent Salesforce.com, and other tech companies are snapping up AI up software are companies snapping tech and other compa- Salesforce.com, total funding in 2016 reached a record $5 billion. Google, Facebook, Microsoft, Microsoft, Facebook, Google, billion. $5 a record reached total funding in 2016 In late 2016, there were about 1,500 AI-related startups and alone, AI-related in theU.S. 1,500 about were there 2016, In late ey stick–style growth, reaching $15 billion by 2022 and accelerating thereafter. 2022 by billion eystick–style growth, reaching $15 Source: Exhibit 1: Estimated dates of commercial availability for products and services incorporating the three forms of artificial intelligence. of artificial forms the three incorporating and services products for availability of commercial dates Estimated

feature

88 technology check —for data example, when verified read paper and are checks by abank’s cross- and to beused verify compliance. form can regulatory and This of AI activities of a human being; and back-office functions such billing, as fina robotic process automation, agents simulate on the which software-based in include These automatedtasks. assembly other of and lines physical uses r value itthe provides. peoplemakes more efficient or without altering email way the use they changing from data with of millions The algorithm,tabs. other trained users’ ema into incoming sorts email “Primary,”Gmail “Social,” “Promotion” and defaul activity. intelligence value the of amplifies Assisted existing For example, Goog Assisted Intelligence — in which software systems beat beat systems software which — in ways. practical in useful but brains, natural with comparison in limited and slow extremely — still networks neural multilayered ing build- began researchers emerged, microprocessors graphics-enabled high-powered and computing, cloud networking, high-bandwidth as Then, aworm. of brain tothe complexity, in comparable, roughly was system AI proficient most the 2000, as recently As debate. fierce of subject the been has viability future its McCarthy, John and Minsky Marvin as such scientists computer legendary by led 1950s, the in beginnings ceptual con- its From value. practical has technology the agree experts of ity T Deep Learning Deep The Road to Assisted intelligence tendsAssisted to involve repeatable clearly defined, rules-based, in AI’s history when amajor- when history AI’s in moment first the be may his The best-known AI triumphs triumphs AI best-known The

accomplish this. For instance, an AI AI an instance, For this. accomplish to heuristics) as known (also tions conditional uses approach instruc- first The thereafter. act programs the way the influence get they reactions and responses the is, —that ence experi- from learn programs both, In life. everyday of complexities the through tonavigate programs AI for necessary capabilities inference the todevelop how on thought of schools amistranslation. or failure, afactory crash, vehicle autonomous an of same the You say can’t risks. serious no with failures multiple through trained be can software The outsiders. not players, the only closed-loop systems: They affect also are games The tie. or loss, win, a in ends game every outcomes; well-defined and rules prescribed have games These applications. business day-to-day most from fer —dif- poker, soccer Go, and chess, expert human players in in players human expert There are currently two main main two currently are There Jeopardy , (continued onnext page) after after typed frequently most words three the for looking of strategy the chose Google complements. those toseek it semination perhaps appear, will word next the for tions word the in Type learning. machine of ple exam- agood is feature completion” engine’s search Google “next-word The so. todo instructions specific following without ability, making this inference- through standing under- its builds then It it. around world the about inferences to make examples, specific using taught, is machine The learning. machine as recent past. the in evident were that emotions for checking by tostart it instructed that aprogram following by conversation a in emotions the interpret would bot artificial artificial, The second approach is known intelligence, selection . No one has programmed programmed has one . No . With huge amounts of of amounts huge . With and several sugges- several and , and , and obots; nce, line line le’s ils, ils, in- t t

strategy+business issue 87 feature technology 8989

a e. es inue to improve as as improve to inue “order to cash” (re- cash” to “order Assisted intelligence apps often involve computer models of complex realiti complex of models computer involve often Assisted apps intelligence The Oscar W. Larson Company used assisted intelligence to improve its its improve used Larsonto assisted Company intelligence OscarThe W. to reduce truck rerolls by 20 percent, a rate that should cont should that rate a percent, 20 by rerolls truck reduce to ticular After issue. analyzing service data on calls, the AI software how showed rescheduled because the technicianrescheduled lacks parts, the tools, expertise a par- or for the software patterns. learns recognize to more One costly and irritating problem is “truck rerolls”: service calls be to that have rerolls”: is “truck problem costly and irritating One nance and repair for point-of-sales systems and fuel gas at dispensers stations. nance point-of-sales and repair for tor, which among other services to the oil and gas industry, provides mainte- services provides other and gas the oil among which to industry, tor, ﬁeld service operations. This is a 70-plus-year-old family-owned general contrac- general family-owned This is a 70-plus-year-old serviceﬁeld operations. tion that was formerly available only from people. people. from only available that wastion formerly ware processes. In “opportunity to order” (basic sales) and sales) (basic order” to “opportunity In processes. ware the software guidance offers and direc- orders), ceiving customer and processing ATM. Assisted intelligence has already become common in some enterprise soft- enterprise in some Assisted has common already intelligence ATM. become comes from each launch, the model’s predictions will become ever more accurat more will ever become predictions model’s the each launch, from comes automaker introduces new cars and the simulator incorporates the data on out- the data on incorporates cars new and introduces the simulator automaker success of any tested variation, thus assisting car variation, any Astested success in the of design of launches. the than 200,000 variations for the automaker to consider and simulates the potential the potential and simulates consider to than automaker the 200,000 for variations gies, marketing approaches, and vehicle price ranges. The model spells out more more spells out ranges. model price The and vehicle marketinggies, approaches, for motor vehicles, and the variations in those pat terns for different city topolo- different for terns in those and pat the variations vehicles, motor for about the types of trips people make, and the types demand those affect the ways people about trips supply of ufacturer has developed a simulation of consumer behavior, incorporating dat incorporating behavior, consumer of a simulation ufacturer has developed that allow businesses to test decisions with less risk. For example, one auto man- auto one example, risk. with less For testthat decisions allow to businesses

feature

90 technology they were more automatically responsive to your customers? Which o questions: What products or servicesinterpreting To data. could evaluate where to deploy intelligence, assisted c you easily make m and involved you cost the at who hire, marshaling must beskilled staff the isin per employee,margins average and to time completion for Much processes. of ments conventional in business labor such metrics productivity, as reven intelligence platforms. assisted should with Success lead tosoftware impr Exhibit A: Source: layers deep. For example, when pro- when example, For deep. layers many concepts of hierarchy nested a as them stores and world the of representations learns that network neural amultilayered is system ing learn- Adeep important. increasingly become has learning deep called ing behavior. of terns pat- about accuracy uncanny provide can learning machine available, data (continued from previous page) Government Automobiles Healthcare Insurance INDUSTRY Banking PwCanalysis AI-based packages of this sort are available on more and more The type of machine learn- machine of type The Potential ApplicationsofDeepLearning acceleration speed,androominess attributes, suchasstylishness, x-rays, andotherdiagnostic images abnormalities inCT scans, MRIscans, Automatically identifypotential images submitted bypolicyholders claims costs directly from accident Compute automobile insurance video footage from allbranches Detect andprevent cyberattacks Identify most appealingmarketing Detect suspiciousATM activityon GOAL machine conversation, language language conversation, machine as speech comprehension, human– complex approach challenges such to way a promising tobe appears deep learning image recognition, Besides features. facial speciﬁc then and faces, then and noses, and mouths, eyes, then level, basic the at lines curved and lines straight blocks: building simpler of hierarchy a on based objects recognizes it images, of thousands cessing suspicious activities law enforcement data banks;extract imagesrelated to cost ofdamagedparts heuristics, classify accidents byseverity ofdamageand system to analyze accident imagesand,basedon large-scale pattern recognition diagnostic labscontributing imagesto thesystem for categorize large volumes ofimages;jointhepool assigns attributes to eachmodel alerts humaninvestigators to past intrusions,isolates potential intruders, and monitors keystrokes, recognizes typingpatterns linked agency Internet portals andgateways, onethat DEEP LEARNINGAPPLICATION Process footage along withimagesfrom otheravailable Establish heuristics for basicclaimsanalysis; train claims Deploy adeeplearning system, trained to analyze and Build adatabase thatincorporates auto sales data and Create anautonomous system operating onmultiple not transparent. are processes decision its and data; of amounts enormous processing by only learn will it architecture; IT conventional beyond power, far computing enormous with cessors pro- multiple requires It problems. all for suitable not is network neural ing learn- adeep brain, toahuman chine ( navigation vehicle and translation, see Exhibit A Exhibit see Though it is the closest ma- closest the is it Though ). ). ore marketable if onsider two f your cur- enterprise ues orues ove-

strategy+business issue 87 feature technology 9191 ify, ify, on- ime. ime. nels, nels, en mo- en like assisted intel- assisted like For example, Netflix example, usesFor learning machine something algorithms do to investments in personalization (and AI). Left outside this Left AI). are virtuous c circle outside in (and personalization investments profits per movie, and a more enthusiastic audience, which then enables more more enables which then audience, enthusiastic and a more movie, per profits eos to user preferences more accurately. This leads to reduced costs and higher This reduced leads to accurately. more preferences user eos to its recommendation list — and it enables Netflix to tailor its next round of vid- of Netflix next round tailor enables its to list — and it recommendation its They use it to choose videos more tailored to the way they feel at any giv any at feel they way the to tailored more videos choose to it use They and adjusts that the system observation time that records Every happens, ment. chan video other wonder No networks. and television advertising ventional Spot as such channels music recorded as well as Amazon, and HBO as such similar to models. moved have alty, after just a few minutes. This gives consumers more control over their t over control after This more a few minutes. gives just consumers alty, customer, can easily switch from one premium video to another without pen- without another to video premium can one easily from switch customer, those of the audience at large. A Netflix user, unlike a cable TV pay-per-view large. at unlike A Netflix the audience TVthose of a cable user, pay-per-view mitting enterprises to do things they couldn’t do before. Un before. do couldn’t they things do to enterprises mitting on but behavior, of patterns the customer’s on just based themselves, not found Augmented intelligence software lends new capability to human activity, per- software intelligence capability new human to activity, lends Augmented have not probably would customers suggest choices before: done hasmedia never Augmented Intelligence change accordingly. more powerful with more intelligence? fundamentally the task, the it nature of models ligence, alters and business rent processes and practices, including your decision-making practices, would be practices, would decision-making processes your and practices, including rent

feature

92 technology uct features, warranty costs, repeat rates, costs, more purchase and warranty general uct purchasing features, awide number track of can prod- without system For AI all AI. example, an nation to look for would or products, that processes not services, bepossible a data, and (as and data, noted above) farming. audits, epidemiol patterns in interpreting finding regulations, financial ing applicationsStates. Similar emerging of are sifting for data other types conducted United the in by attorneys, associate ajob satisfying least the rated as reduce rote the But wo research. dramatically yet replace they legal human inferences about their relevance to acurrent proceeding. Systems don’t these like short avery providing in time, of thousands cases through run research, can gal le- in specializing opinions. astartup past through hours Luminance, of sifting searchable are online, relevant finding most precedents cases requires many still their loyalty. to sparktainment people’s industry emotions, their curiosity, satisfy g and refine ability the of from enter- the further choicesaccumulating these will of swordplay type from one action aparticular movietrace to another. Data to seeonlyask love, in scenes where Streep or aMeryl isfalling character to story; algorithms decision probably The unit oftices. viewing will become scene, the not the will link entertainment prac- change industry further will AI and human ship between scenes to audience emotions. A c I A WHERE M TO S FALL LGOR I GHT To develop applications like these, you’ll need to marshal y Another current of use augmented Though intelligence research. legal isin Over time, as algorithms grow more sophisticated, the symbiotic relati A UD A I I A I THMS W ENCE EMOT SK TOSEEONLY SCENES NG MERYLSTREEPCH I N LOVE. N LOVE. I LL L I ONS. I NK SCENES NK SCENES A CONSUMER CONSUMER A R A CTER CTER onsumer might our own imagi- , includ- ogical ogical on- ain ain rk t t

strategy+business issue 87 feature technology 9393

- s at at n- based ta from ta from tion. Aretion. senior deci- ry and related related and ry pen source code. code. source pen n processes, an aug- an processes, n The success of an augmented intelligence effort depends on whether it has it whether on effort depends intelligence an successThe of augmented The greatest change from augmented intelligence may be felt by You won’t find many off-the-shelf applications for augmented intelligence. intelligence. augmented for applications many off-the-shelf find won’t You sion makers, as the new models often give them new alternatives to consider th consider to alternatives new them give makers, often as models the new sion margins, innovation cycles, customer experience, and revenue growth as pote and revenue experience, cycles, customer margins, innovation calls, or spark innovation in some way? way? calls, in some spark innovation or track assess your this capability, things. new do to To company your enabled own decisions. products? Could you use this information to redesign your products, avoid re- avoid products, your redesign to use this you Could information products? your of impact the from conditions, and economic as such competition tors, a high number of repairs associated of with line of a particulara high or number material, region, Are innovation tial new your Also disruption: impact on proxies. your watch o in modifications allow which of most cloud- on applications intelligence can augmented bespoke you build ever, platforms, decisio critical enterprise most your of nature unstructured the Given indust your of rest the historical da voluminous require would application from intelligence mented data with along company, own your This system the will distinguish help external as fac- demographics). (such fields metrics, bringing unusual only noteworthy correlations your or atten to cessing, plus specialized interfaces tailored to your company and industry. How and industry. specializedcessing, company plus your to interfaces tailored They involve advanced forms of machine learning machine of and natural advanced forms languageThey involve pro- doing to conventional taxi companies? conventional to doing doing to some part of the business ecosystem what, say, ride-hailing services are part ecosystem say, the business what, some of to doing

feature

94 technology of natural language processing, these are still niche applications, still are these very processing, still and language of natural their cleverness their Notwithstanding and pioneeringplay games. guessing u whoties look person the like holding phone), the bot can friends that virtual and recognition translation, facial (including language of suggestions English cel onuse smartphones, offers relatively sophisticated voice recognition ers, most The for program, designed of primarily which China. was them in media platformsocial WeChat, active us- close daily million to which has 800 Thegeneral closest use. autonomous isTencent’s sofar service and messaging not —are programs translation yet ready for language full-ﬂedged and cars ing inherently space for stations, perform and people. othertain unsafe tasks include examples early robots of dispose bombs, ma that data, gather deep-sea people better are than algorithms other at identifying cumstances, people. Ot isconducted trading Nasdaq autonomously) recognition. facial and Insome cir- examples include automated stock the in (about market trading 75 percent of out involvement human direct or oversight widespread in —are today. use Very autonomous few decisions make that with intelligence —systems systems Autonomous Intelligence lose value. their will or they must they showguide, consistency, their decisions, explain counter and biase not huma are any just systems like infallible; alternatives, AI but skeptical. also don’t experience should match They or past their feelings. beopen gut to those A DON’T YET REPL DON’T YET BY REDUCE THEROTEWORKCONDUCTED RESE UGMENTED The most eagerly anticipated forms of autonomous intelligence —self-driv- A SSOC A RCH. BUTTHEYDR IA I TE NTELL A A TTORNEYS. CE HUM I GENCE SYSTEMS GENCE SYSTEMS A A N LEG M A T I C A A L LLY , Chinese-to-, Early Early ebri- her in- se se s, s, n n -

strategy+business issue 87 feature technology 9595 - op op hen hen t mix ex AI ap- can reasonably reasonably can hnology should be be should hnology ht data is gathered gathered is data ht

• something — responsive new around business your build seek to Do you a contin- on they sit clean-cut; AI of these is not forms among transition The • in existing upgrading your primarily Are interested you processes, reduc- will companies Most • technology? new a genuinely developing Are you Despite the lead time required to bring the technology further thetechnology bring any along, to time required the lead Despite and self-driven products, or services and experiences that incorporate AI? services T or that incorporate and experiences products, and self-driven probably with a small group of services from a cloud-based provider. provider. services with of a small a cloud-based from group probably market. in your the leaders of one become may you own, building your of the three approaches works best for you. you. best for works the threeof approaches start then If so, with productivity? assisteding costs, intelligence, and improving compl with more probably approach, intelligence an augmented pursue cloud. the on resident plications can if you justify AI but platforms, else’s offbe better primarily usingsomeone As you contemplate the introduction of artiﬁcial of articulate intelligence, wha introduction the As contemplate you First Steps First these systems act in to their best interest. it may be companies’ ability to build in enough transparency for people to trust to transparency people in enough build for to ability be companies’ may it will generate vast amounts of information, more than humans than more information, of amounts vast generate will efforts devel with other to along University, partnershipwith Carnegie Mellon all at be technological — challenge not greatest may intelligence’s Autonomous business prepared to base a strategy on advanced digital tec digital advanced on options. of group strategy a limited around tions a base ﬂig to much so prepared example, business for Things of Internet The now. intelligence aircraft, thinking autonomous about seriously commercial In interpret. million all; thus, has Boeing it process a $7.5 announced can’t that engineers AI airplanes when systems will predict that example, can, maintenance. need for menu- and rule-driven programs, which conduct fairly rudimentary fairly conversa conduct which programs, and rule-driven menu- limited by technology. Some of the most popular AI apps, for example, are example, small, popular AI the most for of apps, Some technology. by limited

feature

96 technology eventually ( to moveexpecting toward autonomous between assisted and augmented, while egy, somewhere companies many begin uum. Indeveloping strat- their own AI inable before its appearance. create and new jobs befound weren’t it that everywhere that will meaning i (and pioneer) deep learning Ng recently Andrew “AI said, new isthe electrici timated it at 6percent, at by least 2025. On other the head Baidu hand, Research put 47 percent of jobs the U.S. the in at risk;a2016 Forrester report research es- Osborne of Oxford University’s no though one Frey for knows be devastating, Benedikt Michael sure. and Carl engineering replaceit labor human at will lower on employment effect the —and cost school could have cal services.” business-differentiating apremium and ties, model for discrete, (or freemium model) for simple activi- pricing model to beintroduced: afree ﬂatten out.el and We atiered expect pricethe adhere toward mod- autility US, “we for PwC should services see directoring emerging in technology ture,” writes Daniel Eckert, a manag- ma- to continues technology “As this ware becomes more commoditized. cline over 10 next the soft- the as years seem expensive now, de- will costs the At the same time that AI threatens the loss of an almost unimaginable num- unimaginable loss the threatens almost of an AI that time same At the isoften soldAI on premise the that Though investments may in AI see Exhibit 2 ). ).

Exhibit 2: Source: theworkforcethatAIwillcomplement problems(forexample,overreachinprogramtrading) rights,andtransparency business strategy Considertheimpactonemploymentandinvestindeveloping • SetupcommunicationspracticestoexplainAI-relateddecisions • Setupgovernancestructurestomonitorpossibleerrorsand • Establishclearpolicieswithrespecttodataprivacy,decision • 4. Ensureappropriategovernance Fosteradecision-makingcultureopentoideasfromAIsupport • Embracecloudplatformsandspecializedhardware • EmbedAIthroughoutyourbusinessprocesses • 3. InstitutionalizeyourportfolioofAIcapabilities RecruitengineersandotherprofessionalswhounderstandAI • Automateyourexistingbusinessprocessesordevelopnewones • Useautomationtoimproveyourcurrentdecisions • UseAItoupgradeyourmostcriticaldistinctivecapabilities • Redesignproductsandservicestoincorporatemachinelearning • Develop anenterprise-wideAIcapability 2. Planlong-terminvestmentsinautonomousintelligence • Considernewbusinessmodelsbasedonimprovedproductivity • Decidewhichbusinessestodisruptandenhance • IntegrateAIintoyourexistingdigitalandanalyticsplans • Develop anAIstrategyalignedwithyouroverall 1. PwCanalysis StepsinAdoptingArtificialIntelligence culated that AI will mag- ty,”

strategy+business issue 87 feature technology 9797 wo technolo- Reprint No. 17210 , Feb. 1, 2017: View from 2017: , Feb. 1, s+b , Nov. 11, 2013: Compelling 2013: 11, article, Nov. on New Yorker al Internet Revolution,” ming?” + ions from AI and IoT,” PwC, 2017: Together, these Together, PwC,ions t from AI 2017: and IoT,” lture. , Jan. 3, 2017: For 40 years,, Jan. 3, 2017: the Stanford professor has steered the increasingly complex and s+b It is still types which say early to It too will companies success- of be the most inside one of the leading AI platform creators. Michael Specter, “Climate by Numbers: Can Firm a Tech Help Farmers Survive Global War gies will have as great an impact as the personal computer did. Lawrence M. Fisher, “Siri, Who Is Terry Winograd?” Raman Chitkara, Anand Rao, and Devin Yaung, “Leveraging the Upcoming Disrupt Resources meaningful interactions between humans and computers. Art Kleiner and John Sviokla, “The Thought Leader Interview: Bill GE’s Ruh on the Industri Climate Corporation’s AI models and their potential impact on global agricu More thought leadership on this topic: strategy-business.com/technology relevant way, than they be. otherwise ever way, would relevant small, have taken AI to heart as a way to become far more capable, in a far more in a far taken more small, capable, have AI far heart more to become as to a way Corporation, Oscar W. Larson, Netflix, and many other companies large Larson, Netflix, companies and and many other Oscar W. Corporation, be the most successful. The dominant players will successful.be the most be those players that, like dominant The Climate end, we cannot even say for sure that the companies that enter the field first will the field that sure that the companies enter for cannot say even we end, ful in this area — and we don’t yet have an AI model to predict it for us. In the for it an predict AI have to yet model ful in this area don’t and — we playing field. field. playing longer need scale to compete with large because companies, scale AI compete need to the haslonger leveled be for independent businesspeople, including farmers like Jeff Heepke, who no no who farmers like Jeff Heepke, including businesspeople, independent be for be the biggest obstacle for large companies. The greatest opportunities may thus may large opportunities greatest The companies. for be the biggest obstacle people skilled learning in deep and analyticspeople technology to well turn — may out ber of jobs, it is also a hungry, unsatisfied employer. The lack of capable talent — talent capable lack of The unsatisfied is also employer. it a hungry, jobs, of ber

feature

98 leadership & strategy

strategy+business issue 87 feature strategy & leadership 99

at a large publicly held held a large at publicly

As boards CEO Success direc- shows, study of this year’s

tors, institutional investors, governments, and the media are governments, investors, institutional tors, accountability a far of to level higher executives chief holding and fraud ethical corporate lapsesfor than they indid the past. the last Over several garnered often years, CEOs have headlines all misleading for for regula- reasons: the wrong failing and for de- cutting to corners; for and investors; tors unethical in their illegal or prevent conduct or correct, tect, the of cases, some high-profile involving organization. Some brib- companies featured oil have largest corporations, world’s officials and banksing government defrauding customers. company may seem to be quite comfortable — high pay, ex- — high pay, comfortable be quite to seem may company social elevated status, benefits, jets. and accesscellent private to seat, is increasingly becoming perch a hot the comfortable But lines. red cross especially CEOs and their employees when The job of a chief executive officer The job of a chief executive corporate misconduct. losing their jobs after scandals after jobs and their losing by Per-Ola Karlsson, DeAnne Aguirre, Rivera and Kristin Why are chief executives more the Past? Than in inThan Less EthicalLess Are CEOs Are Illustration by André Da Loba Da André by Illustration

100

feature

strategy & leadership & strategy with PwC Middle East. Middle PwC with isapartner he Dubai, in Based business. ing consult- strategy PWC’s Strategy&, for East intheMiddle practice leadership and change, organization, the leads strategyand.ae.pwc.com per-ola.karlsson@ Per-Ola Karlsson Second, governance regulation become countries many and in has both more pro- come more suspicious, more critical, less and forgiving of corporate mis aresult of as five trends. First, public the operate dramatically changed be- has has developedleadership in governance countries. —especially practices toing improve for their both processes choosing replacing and CEOs their and companies over shows our data Infact, companies continu are that years. many doubt that’s on based our own experience working case, the hundreds with of more wrongdoing However, past. corporations the in at large today than we successions 2007–11 in to 7.8 percent 2012–16, in a68percent increase. capitalization rose globally), lapses from for 4.6 perce ethical dismissals of successions companies there at largest (those the by top the in quartile Western and more North America in was crease dramatic Europe. Inour sample successions 2007–11 in to 5.3 percent 2012–16, in a36percent The in- increase. ogy,” 109.) page Globally, rose lapses from 3.9 for ethical dismissals percent of all indiscretions. See“Methodol sexual and resumes, ronmental inflated disasters, CEO or other employees; examples include fraud, bribery, insider tradi or improper removalthe result the of of CEO the as ascandal conduct by the a percentage CEO successions. as lapses of (We for all ethical define dismissals publicest companies 2016. in have lapses been But for rising as ethical firings quite remains Therees were small: only 18 at world’s the such cases 2,500 la But over 15 last the environment the years, context and which companies in show cannot perhaps data —and Our no could —whether data there’s To besure, number the of CEOs laps- who forced are for from office ethical PwC US. with isaprincipal she Diego, inSan Based forStrategy&. tiveness effec- inteam expert an and Leadership and Culture for of Innovation Center the Katzenbach of leader global is the [email protected] DeAnne Aguirre

based in San Francisco. inSan based is she US, PwC with ner leader.markets Apart- and clients forensics global the as serves team and controls and risk fraud PwC’s leads [email protected] Kristin Rivera

editor Rob Norton. editor and US, ofPwC Fehon, Anjali and Herbst, Spencer Neilson, Gary were this article contributingAlso to s+b contributing behavior. ng, envi-ng, nt of all nt of all market market rg- - -

strategy+business issue 87 feature strategy & leadership 101101 erg- edia in ut eth- ut . . Our data rise of digital commu- digital of rise

Add it all up, and you get greater scrutiny of CEO behavior, a greater desire desire a greater behavior, CEO of scrutiny get greater and all you it Add up,

supply chains that increase counterparty risks. Fourth, the Fourth, risks. counterparty increase that chains supply m of and news the proliferation cycle 24/7 the Finally, risk than before. ever ing markets where ethical risks are heightened, and relying on extended global ethical extended ing markets and on relying where risks are heightened, more to them oversee has who and exposed executives nications the companies in real time information century and amplifies negative publicizes the 21st active and more punitive. Third, more companies arepursuing growth companies in em Third, more punitive. and more active share of incoming CEOs who also serve as chair of the board at the world’s 2,500 also who CEOs incoming serveshare as of the chair world’s the board at of also shows that the concentration of power in a single person is declining: The person in a single power of also that the concentration shows 2012 to 2016 theovers share to fell 2016 2012 sharply, of forced to 20.3 turn percent for 31.1 percent of total turnovers at the 2,500 largest the 2,500 at from whereas companies, total turnovers of percent 31.1 for overs has dropped significantly. From 2007 to 2011, forced turnovers accounted accounted turnovers forced 2011, 2007 to From significantly. has dropped overs stering corporate governance. Over the last decade, the number of forced turn- forced of the last Over the number decade, governance. corporate stering ment, boards continue to get better at planning smooth successions and bol- planning successions at get better to smooth boards continue ment, corporate culture sends and reinforces clear, well-understood messages abo well-understood clear, and reinforces culture sends corporate improve- that is still although for shows there study room this year’s Globally, ance programs are truly world-class, and — even more important — that important their ance more and programs — even are truly world-class, Improvement Room for nizations can protect themselves by making and compli- by themselves nizations can thatsure controls their protect ical conduct. But there’s good news for CEOs, their leadership teams, and their leadership CEOs, their boards. Orga- good news for there’s But for swift allfor and for a smaller margin parties and justice action, error of involved. of CEO behavior. behavior. of CEO past. But there is more scrutiny scrutiny is more there But past. wrongdoing today than in the in the than today wrongdoing We doubt there’s more more there’s doubt We

102

feature

strategy & leadership & strategy BRIC countries (from 3.6 percent to 8.8percent; 4.2 percent to 5.9 percent), the in and in 2012–16), in Western Europe (from successions 2007–11 in to 3.3 percent (from Canada and 1.6 percent of all rose U.S. the lapses in sharply ethical successions attributable ofshare all to (the China and BRIC countries). The ern Europe; India, Russia, Brazil, and West- U.S. the Canada; and analyze: of major each in the three regions we and —on basis ﬁve aglobal years last lapses increasedpercent 2016. in signiﬁcantly 10 to 2002 in percent 48 from steadily, over beenbiggest companies dwindling has the were even higher at companiesmost pronounced lapses for ethical regions. those in dismissals that The fact in the top quartile by marketregulation, communications, operating attentio media risk, digital and ca businessthe environment we’ve cited public —in opinion, governance and Western and U.S. Canada and Europe in stem changes the from that fact the However, for ethical dismissals We the in lapses believe the rising numbers that for of ethical dismissals Source: CEOs fired for ethical lapsesisrising. Although forced turnovers are generally declining,theproportion of Exhibit 1: 68.9% 27.2% 3.9% Planned lblU.S.and Global 2007–11 Strategy& 2016CEOSuccessstudy 79.7 % 15.0% 5.3% 2012–16 CEOTurnover byRegion see Exhibit 1 Exhibit see Forced (other) 72.1% 26.2% 1.6%

Canada 2007–11 80.9% 15.8% 3.3% 2012–16 ). 63.4% 32.4% 4.2% Forced (ethicallapses) Western Europe 2007–11 pitalization in 68.0% 26.1% 5.9% 2012–16 n — are n —are 69.7% 26.7% 3.6%

BRIC 2007–11 83.2% 8.1% 8.8% 2012–16

strategy+business issue 87 feature strategy & leadership 103103 3.2% 2.4% 3.3% s have been been have s 7.8% bal Economic Economic bal in 2016, and and 2016, in 0.8% 1.8% , compared with 44 44 with compared , 2007–11 2012–16 3.0% 4.6% The Bigger They Are They The Bigger Strategy& 2016 CEO Success study Strategy& 2016 CEO Success Largest quartile Third quartile Second quartile Smallest quartile Exhibit 2: The CEOs at the largest companies are significantly more likely to be to likely more significantly are companies the largest The CEOs at lapses. ethical for ousted Source: Share of CEOs in the U.S. and Canada and in the U.S. and Canada Share of CEOs forced out of office for Western Europe by market cap quartile ethical lapses, ). Despite the global increase in dismissals ethicalDespite for in lapses, companies When we compared the reasons for dismissal the ti- also who for CEOs the reasons held of When compared we The higher rate dismissals of for see Exhibit 2 see Exhibit cent in 2012–16, compared with 5.9 percent in Western Europe Western in percent 5.9 with compared 2012–16, in cent statute and anti-bribery conduct codes of for requirements legislative difference. This in- the CEO to suggests44 titles percent that awarding joint 131st place. dismissals per- such of — 3.3 incidence and Canada the lowest U.S. the have employees of expected behaviors and values organizational the Both globally. percent with 24 compared months, 24 the preceding over — a only those with the CEO title of percent ethical with 17 lapses, compared China in 79th place (tied) out of 176 countries analyzed,countries and Russia was in 176 of out China (tied) place in 79th Glo PwC’s to respondents U.S. of two-thirds Nearly reason. likely key risk and areas policy covering in place the and setting conduct out of code cases that and organization corruption their ported bribery had experienced of dismissed for were titles with CEOs joint of percent that 24 found we titles, both International’s Corruption Perceptions Index 2016 ranked Brazil, India, and 2016 Index Perceptions Corruption International’s is one regulation governance stringent More in countries. the BRIC 8.8 percent agreed that example, organization their strongly had a for SurveyCrime 2016, re- respondents U.S. of percent And 14 only globally. respondents of percent States. significantly in the United tightened hold chair board not dismissal did of tle who with those CEOs for the reasons of companies operate. Among the BRIC countries, for example, Transparency Transparency example, for Among countries, the BRIC operate. companies tion in the countries in in these which the countries tion the historical pervasiveness of corrup- the historical pervasiveness of as well, but in an amplified way, given given in an way, amplified as but well, BRIC countries reflects these changes countries BRIC ethical in lapses the in companies ( and are subject to the greatest scrutiny to and are subject ones most affected by these changes changes these by affected most ones because thelargest are companies the these regions supports that hypothesis, hypothesis, that supports regions these

104

feature

strategy & leadership & strategy forged this newforged era of this CEO accountability. isomnipresent.dia, We identified five the believe tectonic that above shifts have so of glare relentless the and channels, television cable outlets, online some recent cases, into the tens of billions of dollars. And media atte companies have that penalties face porate rocketed —in The financial officers. quickly. it And isnot uncommon to seemultiple indictments of c criminal chief executive of acompany caught up isoften amajor in dismissed scandal attention media and dollars, often limited to was business the press. Today, th frommodest, the tens ranging of to millions the low hundreds of of millions tions of corporate were officers tended penalties extremely Financial rare. t of corporate misbehavior of rarely led CEO. the prosecu- to dismissal Criminal late 20th century, even the most serious, large-scale, and widely How much level the of has CEOaccountability risen recent in Inthe decades? A SeaChangeinAccountability investigated,duct to or less likely beraised, are on. acted employees normal, of as allegations lapses and miscon- to may seeethical begin forming poorly. It’s also possible that when an organization’ less shareholdertract have companies that been per- media scrutiny and than have may thus above-average and that results, at-those been achieving financial It’s Why? reasons. possible long-serving companies with CEOstend that to be tenuredian of 6.5 compared for 4.8 years, with years CEOs forced out for other roles the isabasicseparating tenet of goodgovernance practice. that consensus the among experts validates and lapses, riskof the ethical creases and moreand on avoidance corporate offshoring the and tax of re jobs, as well as widespread was ity well documented. and Media attention more focused also has activ- illegal and where werefew criminally, unethical charged even instances in settlements, and fines companies many large paid Although aftermath. the in tions executives and received government bailouts, l to seeming while suffer sis of Great the 2007–08, Recession, slow the and ensued. recovery that Corpor forbeen declining But decades. cri- accelerated decline the has since financial the Public opinion. We found CEOs forced that also out hadame- lapses of for office ethical Confidence and trust in large corporations large in Confidence CEOs trust and and have

s leadership is static, publicized cases ntion, from cial me- cial cord- o be o be ittle or- a- e e

strategy+business issue 87 feature strategy & leadership 105105 l. .S. in 1975 said said 1975 in .S. regulatory and legisla- and regulatory Heightened public criticism and skepticism of

Governance and regulation. The upshot: Only 37 percent of people consider CEOs credible today, ac- today, credible CEOs consider people of percent 37 Only upshot: The One effect these measures of shift hasOne to been accountability the focus of

down 12 percent from last year. last from 12 percent down consider CEOs credible today — — today credible CEOs consider Only 37 percent of people of people 37 percent Only Gallup poll, whereas 34 percent of citizens surveyed in the U the in surveyed citizens of percent 34 whereas poll, Gallup old survey, and down 12 percent from just last year. According to a long-running a long-running According last to just year. from percent 12 and down survey, old said so in 2016. Those are the areas that, although not illegal, do not promote goodwill. areThose the areas promote illegal, that, although not not do the 17-year- for — an all-time low Barometer Edelman Trust the 2017 to cording percent 18 only business, in big conﬁdence of lot” deal” great they “a had “a or high rates of executive compensation and rising income inequality in genera income and rising compensation executive high of rates sance have been increasing. Between 1996 and 2011, the mean fraud sentence the mean sentence fraud and 2011, Between increasing. been sance 1996 have from companies to individuals. Indeed, prison sentences for corporate malfea- corporate for sentences prison individuals. to Indeed, companies from to a zero-tolerance approach toward bad behavior in the C-suite. behavior bad toward approach a zero-tolerance to side of such laws, companies in the U.S. and many other countries have moved moved have countries and other many in the U.S. companies laws, such of side to detect, discourage, and punish corporate wrongdoing. To keep on the right keep on To discourage, detect, to wrongdoing. and punish corporate 2010, which imposed new regulations and standards, included further and regulations new standards, imposed which measures included 2010, similar measures were enacted in many other countries. The Dodd-Frank Act of Act of similar Dodd-Frank The countries. in enacted many measures other were Com scandals,Com and fundamentally regulation, changed corporate nature the of the Sarbanes-Oxley 2002, and Act in enacted World- the of wake the Enron of mandated much more formal and extensive compliance practices. In the U.S., practices. In the U.S., compliance formal and extensive more much mandated or market crashes — have ratcheted up scrutiny of CEOs and corporations and and corporations CEOs of scrutiny up ratcheted market crashes — have or executives and corporations have translated directly into directly translated have corporations and executives the last Over 20 years, action. passed — generally tive laws new after scandals

106

feature

strategy & leadership & strategy creased corporatecreased oversight.) overly inflection point an stringent, trend the potentially in toward signaling currently under way U.S. the in about whether business become regulation has dropped crimes eral from 50 to 43months. (It’s noting worth adebate that is period, sentence same the mean the During fed- years. for two to all almost nearlyfor U.S. doubled in individuals courts federal —from just over on in 2016 CEO Turnover a return of the slow trend toward toward trend slow the of a return marks This class. incoming the of percent 2016 in —3.6 CEOs women 12 appointed companies Globally, CEOs Women 2000s. early the of rates percent to50 25 the than lower far but 2015, in 7percent from 2016in slightly —up 10 percent just was chairman board named also were who CEOs incoming of share The practices: succession than percent. 75 more was turnovers planned of share the that arow in year seventh the was This 2000. since rate third-highest the 81percent, 2016 in was turnovers planned of share the M&A, of a result as removed CEOs Excluding common. more tobe continue planning, cession suc- good of indicative generally are which turnovers, Planned globally: governance corporate in provement im- continuing the reaffirms data turnover Our activity. acquisition and merger in toadrop largely due 2016, in 2015 in to14.9 percent 16.6 percent of high record its from decreased nies T world’s 2,500 largest compa- largest 2,500 world’s the at CEOs among urnover Another sign of improving CEO CEO improving of sign Another sion rates was unusually narrow. narrow. unusually was rates sion succes- regional lowest and highest the between spread The percent. 14.2 at Canada, and U.S. the in ond-lowest sec- and BRIC, than other countries emerging in percent, 13.6 at lowest, was Turnover Canada. and U.S. the for except studied we region every in fell turnover CEO (15.2China percent). and (15.3 percent), Europe Western (15.5 percent), Japan by followed 17.2 at India, and percent, Russia, Brazil, in highest was turnover CEO Demographics Regions, Industries, 2016. in CEO woman incoming single a have not —did services telecom and technology, consumer staples, information industrials, healthcare, — industries five However, percent). (5.4 services financial and percent) (7.3 discretionary consumer by lowed fol- percent, 13.6 at CEOs, women incoming of share highest the had companies utilities industries, Among percent. 5.3 at CEOs, women ing incom- of share second-highest the had China years. three previous the for fallen having after to 5.7 percent rebounding Canada, and U.S. the in highest was CEOs women incoming of share the studied, regions the Of 2015’s percent. 2.8 from a recovery and years, several last the over ring occur- been had that diversity greater cent, down from 23 percent in 2015. 2015. in percent 23 from down cent, 18 per- years: five in level lowest its to fell however, company, the outside from hired CEOs of number The 53. of age median the was as 10at percent, changed, little was Ph.D.s with CEOs incoming of share The years. five last the in share highest the degrees, MBA 2016 of had class incoming in 2015. percent 83 from up 2016, in percent —87 headquarters company their of location the as country same the from CEOs tochoose continue companies of majority alarge And regions. other in worked had there CEOs incoming of 47 percent experience; work tional interna- with CEOs tohire likely most were companies European Western 2015. in percent 28 2016in from percent to24 todecline, continued with international work experience turnover. CEO of rate highest the have not did services com tele- years, five in time first the For (16.1 companies percent). energy and (16.4 percent) companies industrial by followed was this CEO; anew pointed —ap- percent —20.8 companies all of one-fifth than more where nies, compa- utilities at highest 2016 was Thirty-six percent of the the of percent Thirty-six CEOs incoming of share The in turnover industries, Among e year e year in-

strategy+business issue 87 feature strategy & leadership 107107

ized ngly, the ngly, lobal growth op- growth lobal Beyond providing new channels for in- channels for new providing Beyond The threats The face that in the companies Moreover, society’s rising reliance on data and digital technologies — in- data and digital reliance on rising technologies society’s Moreover, Business operating environment. In recent decades, power hasalso decades, power and CEOs toward shiftedIn recent from away The rise of digital communications. The growing interconnectivity of businesses, as operations have global have as businesses, operations of interconnectivity growing The ties fraud. Thingsof the develop- — has outpaced Internet emerging the rapidly cluding example, puts him- or herself at risk for being investigated by the SEC for securi- for the SEC by investigated being risk for at herself him- or puts example, lic company CEO who tweets inaccurate information about the company, for for the company, about tweets who CEO inaccurate information company lic for ethical lapses. A company’s digital communications can provide irrefutable can digital provide communications ethicalfor lapses. A company’s ethical A pub- for watch. lapses that her will accountable his occur or on be held discretion, the use of email, the use text of messaging,discretion, and tweets risks has new created and their existence increases misconduct, the likelihood of evidence that a CEO a truly independent chair, up from 9 per cent in 2005. in 2005. cent 9 per from up chair, a truly independent rectors at S&P 500 companies were independent, and 27 percent of boards had of percent and 27 independent, were 500 companies S&P at rectors 2016, according to the Spencer Stuart Board Index, 85 percent of all of board di- percent Stuart85 the Spencer Index, Board according to 2016, a board largely composed of personal friends and company insiders are gone. In are gone. insiders and company friends personal of a board largely composed boards and large shareholders. The days of an “imperial CEO” presiding over an over days The of “imperialboards presiding and largeCEO” shareholders. home-country legal requirements for global operations. Not surprisi Not operations. global for legal requirements home-country oped markets, in terms of both complying with local legal complying both markets, systems of inoped and terms meeting cal lapses than — particularly — is higher and devel- bribery in more corruption in study. than our countries BRIC regions in other portunities are increasingly found in emerging economies, where the risk of ethi- the risk of where portunities economies, in are emerging increasingly found ethical in the resulting higher from lapses turnovers is much CEO of percentage normal course of business have multiplied in recent decades. G decades. recent in multiplied have business of course normal their vendors. their vendors. have to be cognizant of the risks present in their vendors, and in the vendors of of and in the vendors be cognizant in vendors, their to the riskshave of present panies don’t only have to worry about risk in their own business. They also in risk business. own their worry about to have only panies don’t and supply chains have lengthened, also exposes companies to more risk. Com- also more lengthened, chains exposes to companies have and supply

108

feature

strategy & leadership & strategy business ecosystem. business aresult spending of their as their digitizing cybersecurity ported raised having published.first 2017 Inthe edition of survey, the 59 percent of respondents recent 2015 in 12 study the since was in global the increase biggest years —the number of these types of security incidents across all industr public media. and or conversations embarrassing of unethical exposing goal conduct and to the vate data and electronic communicationsbuilt, online. used and purchased, Hackers have pri- the succeeded accessing in of companies and ex inherent are privacy that and being designed, devices many the in cybersecurity to for other risks and the mitigating measures rules, ment standards, of systems, the public’sthe company’s the eventually —and —solution of choice. pressure-cooker environment, it’s for removal the of easy CEO the to become from erupt influential individnews, directly or media, on arise social pressured to respond when instantly problems, or crises, inquiries in appear distribution. global ers, critics, now hackers attains Companies and quickly are widely. What’s more, negative information by revealed whistleblowers, sh Web-based information ensures that data and news travels financial quickly a live work and relatively in anonymity. No longer. The lightning-fast fl tury, most executives alow companies and could public maintain profile, an tive opinion and news about businesses executive and conduct. cen- 20th Inthe The 24/7 news cycle. news The 24/7 The 2016 Global State of Information found Survey the that Security The changing nature of amplified nega- media The has changing ies rose by 38 per- ecutives with the uals. In this Inthis uals. ort sell- ow of the the nd d d

strategy+business issue 87 feature strategy & leadership 109109

oy- very succession event as part of the effort to learn the reason for specific CEOchanges in their region. dis- To tinguish between mature and emerging economies, Strategy& followed the United Nations Development Programme ranking. 2015 Total shareholder returndata over a CEO’s tenure was sourced from Bloomberg and includes reinvestment of dividends (if any). shareholder Total return data wasthen regionally market adjusted (measured as the difference between the company’s return and the return of the main regional index over the same time period) annualized.and Each company that appeared Finally, Strategy& consultants to havechanged its CEO was investigated for confirmation that a change occurred in 2016, and additional details — title, tenure, chairmanship, professionalnationality, experience, and so on — were sought on both the outgoing and incoming chief executives (as well as any interim chief executives). Company-provided information was acceptable for most data elements except the reason for the succession. Outside press reports and other independent sources were used to confirm the reason for an departure.executive’s worldwide separately validated each

From our own experience in advising companies that have experienced eth- experienced that have in advising companies experience own our From he CEO Success studyidenti- ﬁed the world’s 2,500 largest

public companies,public their by defined market capitalization (from Bloom- berg) on January 2016. We then 1, identified the companies among the top 2,500 that had experienced a chief executive succession event between January 2016, and December 1, 31, and2016, cross-checked data using a wide variety of printed and electronic sources in many languages. For a listing of companies that had been acquired or merged in 2016, we also Bloomberg.used T Methodology controls minimize opportunities for bad behavior; and (3) preventing empl preventing and (3) behavior; bad minimize for opportunities controls employees to act unethically; making to processes and financial business sure (2) employees cal acts, by (1) ensuring that the company isn’t creating pressures that creating pressures influence isn’t ensuring that the company cal acts, (1) by of ethics and integrity, but it also that every ensure it to needs team — and e but ethicsof and integrity, engage in illegal unethi- or employees when that are always present conditions corporate culture. An effective culture must clearly state the company’s values culture. An company’s the state effective clearly corporate culture must organizational ecosystem address the underlying must company’s the behaviors, ing fraud and other misconduct and withstanding misconduct ing and fraud other regulatory is your scrutiny those reinforce To they every do day. those values and in live the work embrace ical lapses, we have observed that the single most important force for prevent- for force important that observed ical most the single have lapses, we that to them — understands will the critical few behaviors enable employee exposure to potential threats?exposure potential to lapses that occur can their limit anywhere in organization. So how their leaders members will increasingly be held accountable (often personally) for ethical for personally) (often will accountable members increasingly be held threats and And board and issues. the reality leaders, is that senior CEOs, Large face a large and expanding organizations undoubtedly spectrum of Build a Culture of Integrity Build a Culture

110

feature

strategy & leadership & strategy achieving targetsover allelse. incentives that prioritize ethical lapses typicallyhave Companies that getcaught in three steps: inoculate following themselves the from such can concernspanies by taking for example, target, may inadvertentlyings of kind pressure. create Com- this prides that organization itself on An never aquarterlytargets. missing e to can’t admit they ployees may beunwilling managers and meet performance a misconception. Rather, pressures tend social to create problems. larger Em tions) driver of to bad often behavior. primary bethe are assumed But is this (such or bonus stock op- as packages pressures Financial or incentive. sure by some triggered of pres- kind cally fluences. ization, pressure and ( sors opportunity, to fraud as rational- precur- elements as the three necessary triangle,”the “fraud which identified Cressey’s 1950 classic conception of borrowsing from sociologist Donald line of think- This rules. the breaking fromees ways to finding rationalize lapses typically have incentives over prioritize typically lapses that targets a achieving inadvertently bad conduct. encouraging ethical in getcaught Companies that 1. Organizational and external in- 1. andexternal Organizational • culture. whetheryouhave andcontrol” a“command Recognize Unethical behavior is typi- see Exhibit 3 ). Exhibit 3: Source: compensation structure, pressures setthe Leadership style, internal/external Strategy& 2016CEOSuccessstudy incentives, and Organizational and External context for Influences behavior EthicalBehaviorEcosystem decisions andrationalize behavior according Individuals make to theirpersonal Decision Making code ofethics Integrity Culture Individual Ethical of

controls discourage You may be processes anda Strong business strict systemof Processes unethical Business behavior ll else,ex-ll arn- -

strategy+business issue 87 feature strategy & leadership 111111 l only only Are your current con- current Are your If your company has an company exces- If your Is an employee hotline or similar similar or hotline employee an Is Are you aware of the full aware of Are you range po- of Employees who break rules the who must Employees Are you encouraging your managers encouraging your Are and em- you Weak business practices or lax financial controls controls financial lax or practices business Weak Insist on an open-door policy. Determine profile. your unique threat Take a close look at your existing compliance program. at your existing look compliance a close Take Consider whether you need structural whether you need Consider reform. Assess your employee reporting systems. reporting employee your Assess 2. Business processes. Business 2. 3. Individual ethical decision making. • • • • • liver bad news or flag news or ethical bad liver issues. posing managers and employees to pressures that pressures discourage to speaking managersposing de- to and employees up and up-to-date by following three following steps: by and up-to-date and similar laws elsewhere. Make sure your processes and controls are and similar strong Make processes and laws elsewhere. your controls sure the last two decades by the requirements of the Sarbanes-Oxley of the last two Act in the U.S. the requirements decades by countries have robust financial controls, and these have been strengthened over over strengthened been and these have financial robust controls, have countries create opportunities for unethical behavior. Most large companies in developed large in developed companies Most unethical for opportunities behavior. create may have exposure. have may and economic climate in those places? Consider all third parties in Consider climate those places? you which to and economic tential threats that exist in places you operate or plan to operate, and the politica operate, plan threats to tential or that exist operate in places you first convince themselves that known a process are themselves first their actions as justifiable, convince ployees to raise issues that trouble them in informal dialogue, rather than in informal dialogue, them rather raise that trouble to issues ployees as reviews? formal occasions such performance on ing model, and the laws and regulations spanning your geographic footprint. footprint. spanning geographic and and the laws regulations your ing model, dated and tested to deal with any changes to your business strategy, your operat- your deal to and strategy, tested dated with any changes business your to trols sufficient to mitigate the threats across all operations? They should be up- They the threats should mitigate all to across sufficient trols operations? on-one coaching to help the CEO develop an appropriate tone. tone. an appropriate develop the CEO coaching help to on-one board level to act as a check and balance? Part of the remediation may be one- may act as and to balance? a check level board the remediation Part of the wrong approach, do you need a stronger governance infrastructure governance a stronger need the at you do approach, wrong the sively purpose-driven culture that reflects a strong or charismatic CEO modeling CEO modeling charismatic or culture that reflects a strong purpose-driven sively creetly report issues — and if so, are your employees aware of it? aware of employees are — and your issues if so, report creetly feedback mechanism in place that employees can use to ask questions or dis- or can ask use to questions that mechanism in employees place feedback

112

feature

strategy & leadership & strategy three steps: prevent process and follow the understand this root it by taking from taking organization’sthe or culture leadership implicitly condones it themselves that convincekeep their they job Inother or meet cases, their performance targets. their conductrationalization. isn’t really In some wrong, cases, or they that feel it they have no alter and cultural nuances? frequent training and enough adapted messaging is the and languages to local froming top the consistently and clear understood across organization, the and cal standards now in effect have now evolved effect in standards from of those Inaperverse cal times. earlier perceptions reflect extent may the not to regulatory, which legal, fully ing. But it’s operate companies which in today. reality the We believe th eitherperts inside or outside firm. the — and this is especially likely in crises. When in doubt, seek gui how without understanding act decisions the relate fully make to they rules the dilemmas ethical facing individuals because occur lapses ethical In some cases, communicate and amplify key messages throughout messages organization. the key communicate amplify and authorityformal but who example, experience, lead through or reputation, to leaders, who lack individuals “informal” engage should teams also Leadership show happen. that of how transcripts emails with studies publish mistakes case ways to inculcatepowerful awareness of what not to do. Some leadership tea not— and away shying out from turned that those —isone badly of most the stories Sharing situations about difficult how and were they resolv staff? and conductforcing report about their direct with messages by ethical engaging what say their they communications? in senior Are rein- leaders managers and • • The low level of public confidence and big in trust business may bedismay- • yourcommunications strategy. Clarify Drive engagement from thetop. engagementDrive from Don’t go it alone. Do leaders and managers have access to have Doleaders informed access managers and advice? Are the leaders’ Are be haviors consistent with Is the com Isthe messag- ethics and pliance native if they are to is justified because . Companies can . Companies can dance from ex- and ethi- and at public ing ing ms ms ed ed s s

strategy+business issue 87 feature strategy & leadership 113113

re re l CEO ’s study. Reprint No. 17208 nd poor and the challenge , May 4, 2015: The ﬁnancial, May 4, 2015: penalties companies s+b , Apr. 22, 2016: Strategy&’s 2015 CEO, Apr. Strategy&’s 22, Success 2016: 2015 m,” m,” s+b . t’s Next?” The latestt’s Jan. PwC 2017: Annual Globa e companies.e zation’s inabilityzation’s to close the gap between rich a _leadership the Year of the Woman,” xecutivestudy.com: The full report and data analysis of this year Not +

In the meantime, the only course for CEOs who wish to avoid being part being wish avoid who to CEOs course for the only In the meantime,

PwC’s 20th AnnualGlobal CEO Survey, “20 Years Inside the Mind of the CEO: Wha Strategy&’s CEO Success 2016 strategyand.pwc.com/chiefe study, Resources Survey shows chief executive ofﬁcers are increasingly concerned about globali pay when they plan poorly for changes in leadership — and the payoff from getting right it More thought leadership on this topic: strategy-business.com/strategy_and study showed a sharp decline in the number of women named to the top post at larg Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, Billion “The CEO $112 Succession Proble

of sustaining trust in the digital age. DeAnne Aguirre, Per-Ola Karlsson, and Gary L. Neilson, “2015: standards have evolved. have standards to which legal and ethical ethical and legal to which not fully reflect the extent the extent reflect fully not Public perceptions may may perceptions Public tions of misconduct. On an On organizational that means misconduct. ensu to of working level, tions the truth, seeking advice and following it, and responding swiftly and responding the truth, seeking it, any allega- and advice to following sufﬁcient in this unforgiving climate. On a personal level, that in this meanssufﬁcient telling unforgiving level, a personal climate. On are effective in processes all and controls the businesses and company’s that your board colleagues, is to lead by example. Talking the talk is necessary. But it’s not not thetalk board colleagues, Talking it’s example. by lead But is to is necessary. ior is in fact being detected and punished. and is in punished. fact detected being ior ethical for their lapses, and for dispatched leaders share rising of small the of but positive effect on public opinion over time — by demonstrating that behav- bad demonstrating time — by over opinion effect public on positive way, the increasing incidence of CEO dismissals CEO ethical of a for have lapses may the incidence increasing way, ture of integrity. integrity. of ture geographies in which you operate, and and striving maintain build to operate, a true cul- in you which geographies

feature organizations & people

114 feature organizations & people 115115 115 by JEFFREYby SCHWARTZ, JOSIE THOMSON,AND ART KLEINER Neuroscience research to how shows a become leader. better D

E L

E V

A R

116

feature

organizations & people & organizations H (HarperCollins, 2002). 2002). (HarperCollins, Brain the The Mindand Brain 2016), ed., 20th-anniv. Collins, LockBrain best of three orcoauthor the author and Angeles, Los fornia, ofCali- University at the psychiatrist is aresearch [email protected] Jeffrey Schwartz ing things around, but things ing she wasn’t included strategic in conversations. Instead, hit firm the along revenues, stretch of dwindling for had ideas Natalie turn- individual.) “Natalie,”mission story, to this tell but of name company the real the we use cannot or who is in her 40s,professional organization, alinchpin econo services its in local reported directl goals. beneficial lofty, enterpriseshelping navigating and their limits, t transcend organizations help on can youtice of qualities the strategic take leadership: inspiring othe prac- your this Over time, in organization. patterns,beneficial scale, at alarger action. and toward You more patterns of replicate effective thinking can those you around those and you, how and setacourse affect you they can dynamics brain (the physical organ associatedmoments of choice inside mind the (the human with locus of mental activity) a that activity). I (Avery, 2011), (Avery, and You Your Not Are Neuroscientists what to happens learn psychologists and at beginning are For example, consider of director resources ahuman for case the aregional (Harper- sellers:

organizational changes. changes. organizational and personal of making means as coined, he that terms density, tention at- and neuroplasticity self-directed to identify scholar first the He was ave you ever you ave and uncertain circumstances? better decisions, time and time again, even in difficult importantly, how do you develop habit the of making How do you out to figure do? right the thing More of people or more. hundreds affect could consequences tions aren’t obvious, aren’t ethics the clear, the and of kind isthe decision This make? where op- best the

principles. based on neuroscience practice ship coaching a leader- developed and Schwartz with closely worked has she survivor, cancer A two-time Australia. Brisbane, in based ship coach leader- award-winning is anindependent, [email protected] Josie Thomson had a difﬁcult executivehad adifﬁcult decision to f you understand these y to the CEO. When this article. this article. underlying concepts the articulate and to research since 2008 Thomson and Schwartz with working been has strategy+business of is editor-in-chief [email protected] Art Kleiner my. (We have per- nd the oward . He . He the the rs, rs,

strategy+business issue 87 feature organizations & people 117117

y ; now, she has rela- has she now, ; Most people are screwups, and are screwups, people Most If this goes on much longer, I won’t be able to cope, and to cope, be able I won’t much longer, on goes this If She has also felt at times that the ﬁrm’s leaders don’t don’t leaders has times also at that She the ﬁrm’s felt

I’m just the head of HR, and the real work happens in sales and finance. in HR, the head of happens I’m just and the real work Stress took its toll. For years, Natalie worked 70 hours or more per week. per more or hours 70 years, Natalie worked For toll. its took Stress As she reflects, she reframes these messages, choosing alternative ways of As of ways reframes reflects, she these she alternative messages, choosing Fortunately for Natalie, there were people, including an executive coach, coach, an executive including people, were there Natalie, for Fortunately This article is derived from a book in progress, be publishedto by Columbia University Press in 2018. She felt herself panicking: herself felt She to lose job. my I’m going ity to hide her chronic irritation. As a result, her performance reviews slipped. reviews performance slipped. As her a result, irritation. chronic her hide ity to but necessary that the allowed firm survive. to but decision marriage anxious, the abil- lost Her came was the rocks, and work she she on to accounting staff offshore. About 30 local people lost their jobs. It was a painful It their jobs. lost accounting staff 30 local About people offshore. layoffs — were delegated to her. One year, she had to move the firm’s financial the firm’s move had to she year, One her. to delegated — were layoffs all personnel issues — including sexual cases, — including issues all harassment bullying personnel claims, and ing through the firm’s problems — sometimes in as areas — sometimes such knows well, she problems ing through the firm’s looking at her situation. These don’t come out of thin of air; practices out think- she come These don’t situation. her looking at they rise into her awareness. her they into rise She used to assume these were accurate statements of reality of statements accurate were these assume to used She as brain messages, as can simply them which she beled dispassionately observe enthusiasm, she adopted a regimen of practices that included mindfulness. practices that of included a regimen Ever adopted she enthusiasm, who helped her see what was happening. First haltingly, and then with growing and then haltingly, First was see what happening. her helped who tends to see everyone but herself as prone to error. error. to as herself prone but see everyone to tends the deceptive brain messages that underlie her stress. For instance, knows she stress. she brain For messages her the deceptive that underlie day, soon after waking, she spends 30 minutes alone, focusing her attention on on attention after focusing her soon waking, alone, 30 minutes spends day, she managed.need to be tightly respect her.

118

feature

organizations & people & organizations functions ofthebrain, andthedescriptionsinitalics represent associated mental activity. These two recurring patterns ofmental activityhave close relationships withtheirassociated brain circuits. Thenamedcenters represent Exhibit 1: Source: stead of people laying off, she’s now reduced recruiting. She amount the also has of opportunities because pointed she around part turned has —in out. in- And were Advocate a Wise for enterprise. larger the The company’s prospects have about strategy. there When isapossible crisis, people she to if her turn as ﬁrst, sheshe She said. spoke isnow invited things the and regularly into conversati Advocate. perspective. Wise and the construct for We this guidance call developedshe has her in mind: adisinterested observer whom consult she can waythe others respond upon follow and that aconstruct she calls up. this, Inall decisions, critical bring up. she she makes reminds herself As to pay attention to how leaders various the of company the might respond to points the she will avaluablecould contribution. make Before about major any she meeting, thinks for example, to again, which she and ways in again alternatives,these returning proposing —and growth strategic approaches. She her refocuses attention on mergers domains, such as and less but in familiar also training, and recruiting brain functionassociated Mammalian-evolved with strong emotion Amygdala, insula,and Jeffrey Schwartz,JosieThomson,ArtKleiner, andWiseAdvocate Enterprises orbital frontal cortex Natalie began this discipline around this 2013, began Natalie way the affected it and gradually “Something is “Something Warning wrong.” Center HighRoadandLow Road function, associated with responses and planning Reptilian-evolved brain automatic responses. Human-evolved brain Lateral prefrontal cortex “Do whatfeelsright.” function, associated Executive Center with goal-directed “Do whatismost Habit Center Basal ganglia needed.” Ventral medialprefrontal cortex Dorsal medialprefrontal cortex “What othersare thinking “What Self-Referencing Center “Who Iam,whatwant, “Who and whatotherswant.” Self-Referencing Center Subjective valuation and whatothers Deliberative Mentalizing Reactive will do.” } leadership. Messages thatcall onthe develops your capacity for strategic Is invoked bymentalizing andmindfulness; THE HIGHROAD Advocate travel easily along thiscircuit andreinforce it. leadership capability. but provides nomovement toward strategic Focuses onsolving problems andexpedience, THE LOW ROAD circuit andstrengthen it. long-term value, travel easily along this concerning selfandothers Processes information Medial prefrontal cortex Self-Referencing Center , focusing onbroad perspective and Deceptive messages Wise ons

strategy+business issue 87 feature organizations & people 119119

t it. it. esis tal ac- d with two two with d The focus of your attention in critical critical your attention in of The focus he shift that Natalie made was conscious, pragmatic, and replicable; shifthe pragmatic, and that replicable; was Natalie made conscious, a hypoth- reading story exemplifies this can Her anyone make too. it be called could esis — it the Wise — about Leadership hypothesis large of organizations, effective leaders espe- become people the way As it happens, these two patterns of mental activity are associate are activity mental of patterns two these happens, As it In most business decisions, you are likely to focus your attention in one of of in one attention are focus your likely to you decisions, business In most You might think might this standard is just nothing practice, You good management aspects of the prefrontal cortex — dorsal (higher) for the High the and ventral Road for cortex (higher) — dorsal aspects the prefrontal of cognitive habits: mindfulness (clear-minded awareness of one’s own men own one’s of awareness mindfulness habits: (clear-minded cognitive is tactical; Low The Road benefits. the High is strategic. Road strategic leadership can be developed by combining two often-misunderstood two combining often-misunderstood by can leadership be developed strategic the Wise hypoth Leadership all complexity, its For next). and are do likely to and broader makingmind, with longer-term the case fundamental for solutions cially at times of turmoil and change. This hypothesis suggests that better, more more andcially change. turmoil times suggests This of at hypothesis that better, are thinking people other what to attention and mentalizing close tivity) (paying principle: core one to down boiled be can ifests as itself call within construct we mental the the a voice the Wise Advocate: rapidly and efficiently as possible. The other pattern, the High Road, often man- the High often Road, pattern, other The as possible. and efficiently rapidly tions aimed at giving you what you want and giving others what they as what want, and giving want others you what aimed giving at tions you call one pattern of mental activity the Low Road, because it favors expedient ac- expedient activity mental favors call the because Low of Road, pattern it one moments of choice can build your capacity to be an effective build your capacity can leader. choice of moments We form. in them schematic shows page) two 1 (previous Exhibit ways. basic

The leverage came from transforming her thoughts. By refocusing her attention, her refocusing By came transforming thoughts. leverage The from her rewards, threats, or “burning platform”–style pressure — could force her into her force — could pressure rewards, threats, “burning or platform”–style T tential for this for changetential external was all nothing incentives, there — no but along, Attention of Focusing The Power on pleasing her bosses an po- The to withher perspective. pleasing inﬂuential strategic leader on that at time. in that company became needed she the leader kind of years ago. Natalie made a deliberate transition, from a harassed from functionary transition, ben a deliberate years made Natalie ago. special. And you may well be right. But it was beyond Natalie’s skill set four Natalie’s was beyond it But well be right. special. may And you work 70 hours per week. per hours 70 work of oversight and number of approvals in the HR function; she no longer has to longer no she in the HR function; approvals of and number oversight of

120

feature

organizations & people & organizations known as Hebb’s law: “Neurons that fire together wire together wire together fire that “Neurons law: Hebb’s as known neuroplasticity now 1950s. the in aphrase with findings his He summarized called self-directed neuroplasticity.called will eventually affect choose wherecan to your focus attention, your and choices, made the mind, in the physical them. Inaddition,dressing isnot. brain the makeup away mind the isactive in that You of your brain.obsessive-compulsive disorder, often elude or resist purely physical Th solutions that fact the to mental problems, addiction, such as depress relocate of evidence Further brain. to the co can other parts areas aged intended to refocus injured the person’s attention, of functions the d those For existence. receive and example, when training people damage brain suffer adistinc has aphysical with circuit often associated although brain, the also in brain. the in activations arise the and that passive. and Peoplecal do not consciously choose emotions the experience they functional magnetic resonance scans. imaging This (fMRI) activatio ismade away isactivated in visible that picture,a frightening amygdala the by of for Thus, brain. the example, whenflowing to people parts those shown are of demonstrate brain the areas observable activation, form often the in of blood subjectsexperimental way to encouraged pay are attention particular in source the of strategic them illuminates ship leadership. between neuroscience, psychology, ethics), and research, organizational then Leadership hypothesis is true (and it is consistent with current habit-forming. Road Road Low are the circuits, and High both the Wise Ifthe brain and mental activity link RoadRoad seem Low and apt they to Because us. sits above isone High This brain. the in ventral the names the reason area that (lower) for people Road. Low When the hold upright, their heads dorsal the area Canadian scientist Donald Hebb discovered one of the core pr isnotBut mental experience. activity as same brain the Mental activity, The interaction hypothesis. to When iscentral this mind brain and between is phenomenon is knowledge about .” In other words, words, other .” In the relation- the ways of ad- n is physi- inciples of mes from s, certain s, certain ion, and am- t t

strategy+business issue 87 feature organizations & people 121121

s, te te u chose u chose r to what you you what to r ly use self-directed self-directed use ly ARE ARE FOCUS YOUR ATTENTION. YOUR FOCUS In a somewhat similar way, your brain circuits are strengthened by the brain are by strengthened circuits your similarIn a somewhat way, This process is loosely analogous a powerfulThis the way to search is loosely process works. engine facility and sophistication in leadingfacility others. and sophistication your brain. This makes it easier to stay on the High Road, and gives you greater greater the High brain. This and you gives Road, on your stay makes to easier it the High Road in your mind, those choices strengthen the related circuits in circuits strengthen related the those choices mind, Highthe in your Road Road is indeed a road less traveled. But as you learn to make choices that favor that make favor learn as to choices you But traveled. less a road is indeed Road gain much of their power. But it is also possible to conscious to possible also is it But power. their of much gain and toward ends, constructive train more to brain toward your neuroplasticity the High comfortable; At ﬁrst, the Low is more Road role. leadership a stronger diction and obsessive-compulsive disorder, among many other human frailtie many other among disorder, and obsessive-compulsive diction choices you make about where and how to focus your attention. That’s how ad- how That’s attention. focus your to and how where make about you choices echo the choices of your past. your of choices the echo before, because it is designed with the assumption that this is close this is that assumption the with designed is it because before, future the results in your for; already looked you’ve what of get more You want. partswill the brain that together associa activated of are physically continually and results that the terms yo prominently will it feature more engine, HOW TO HOW search use the Google next time The you you. to presented the items of lection YOU MAKE ABOUT WHERE AND WHERE MAKE ABOUT YOU se- also your ware and It records takes tracks on click the results that note. you STRENGTHENED BY THE CHOICES THE CHOICES BY STRENGTHENED a particular for example, phrase, search for the soft- or When Google, you term the future — in fact, it can become totally automatic. can futurethe totally automatic. — in fact, it become YOUR BRAIN CIRCUITS BRAIN YOUR in that same pathway follow to becomes it and the easier brain, in your becomes ity occurs in your mind, the more entrenched the associated neural pathway entrenched ity occurs the more mind, in your with one another in the future. The more frequently a pattern of mental activ- mental of a pattern frequently in the future. another more The with one

122

feature

organizations & people & organizations L involved when you observe others being rewarded. not are these purely concerns;various kinds, selfish for example, Road Low is the close What thedeal? might others want? is valuable relevant. and “subjective as known isalso Road valuation”: activity It isconcerned what with related perceived are primarily to or self. the stimuli processes Low as sensory prefrontal cortex (vmPFC). This center is spontaneously Self-Referencing Reactive the first act Center; it ventral the with medial isassociated Road mostLow of time. the tration, elation, relief. and workplace Ineveryday most life, of occupy us t often elicits emotions, activity powerful This desire, such anxiety, fea as or needs the of others your in organization, you probably are on Road. Low the your needs incentives, and about rewards design or satisfying think deals, make encing Center) element isakey of Road. Self-Referencing The overall High the prefrontalmedial cortex). (the see,the other we’ll half As Deliberative Self-Referencing the called of system alarger Center (associated entire the with Cruising theLow Road their mindstotransformorganizations. executive decisionmakerscanuse Neuroscientists arelearninghow Use Their Brain Use TheirBrain How StrategicLeaders VIDEO FEATURE It is important to note that the Reactive Self-Referencing C major RoadThe Low connects three of functions We brain. the the call involved expedient an in way. challenges these meeting in you When Road pattern isthe of mental activity, related the and circuits, brain problems to solve, situations and to The Low pass, tests to manage. of Weife isaconstant challenges. barrage have promises to fulfill, What’s in it for me? How isit much worth? How might we

Though powerfully related to incentives of of incentives to related powerfully Though ivated when thought enter is just half Self-Refer- r, frus- he

strategy+business issue 87 feature organizations & people 123123 h- Emo- lates your your lates The Power Straight fromStraight author Daniel Goleman calls that phenomenon the “amygdala (Random House, 2012). 2012). (Random House, , a reference to the power of signals from this circuit. But though they signals this But of from circuit. the power to , a reference Some gifted and charismatic, albeit narcissistic, leaders are extremely skilled are extremely gifted leaders narcissistic, andSome charismatic, albeit The third major brain function on the Low Road is the Habit Center. This Center. is the Habit the Low Road brain on function thirdThe major The second function of the Low Road is the Warning Center. It is associ- It Center. the is the Warning Low Road function of second The the Gut competitors. Former GE CEO Jack Welch titled one of his books of one titled Welch Jack CEO GE Former competitors. they want,” powerfully and decisively, and they thus come across as across and masterful they thus come powerfully and decisively, they want,” at traveling the Low Road. They can “read a room” and “give the people what the people and “give a room” They the Low traveling Road. canat “read of Habit Making use of this center is the subject of Charles Duhigg’s bestseller Charles Duhigg’s Making of is the subject this use of center as car. walking your and steering brushing teeth, your stairs, up locking the door, because they have become automatic through repetition. These are actions such such These are actions through repetition. automatic become because they have and actions — basic behaviors that don’t generally require conscious attention attention conscious require generally that don’t behaviors — basic and actions times called the “lizard brain.”) The Habit Center manages automatic thoughts manages Center times automatic called Habit The the “lizard brain.”) ter with such intensity that they override all thinking other that they override and response. intensity with such ter Intelligence tional is some- manifested (It early itself in animalin the brain), the base of evolution. (especially those related to the experience of past can of threats) the this experience activate to cen- those related (especially something is worth pursuing or avoiding. Anxious danger impending feelings avoiding. something is worth pursuing of or is also (As associated Center with the High we’ll Road.) see, the Warning hijack.” typicallyfunction, associated with the basal wit deep are ganglia located (which tex. This center generates feelings of fear, gut-level responses, and the sense that and the sense responses, gut-level fear, feelings of generates Thistex. center ated with threeated parts the brain: the amygdala, of insula, cor- frontal and orbital tive valuation. valuation. tive we’ll see later, it’s different on the High Road, which is much less prone to subjec- to prone less the High is much which Road, on different it’s we’ll see later, you’re on the Low Road, this inner monologue will be oriented to yourself; as to will be oriented the this Low Road, monologue on inner you’re hopes and fears, daydreams about the future, and interprets experience. When experience. and fears, the future,hopes daydreamsand interprets about monologue: the voice inside your mind that thinks about people, articu that mind thinks your people, inside about the voice monologue: the way you perceive yourself and relate to others. It correlates with your inner inner with your correlates It others. to and relate yourself perceive you the way Center is involved in many aspects of your personality and identity, especially in in many personality aspects and identity, your of is involved Center

124

feature

organizations & people & organizations T Leading ontheHighRoad moreare to likely emerge when you Road. travel High the of of purpose the enterprise, the long-term the and value it to brings world the — of conventional the wisdom of their industry. Strategic —co insights leaders who spend most of to free their break on time unlikely Road Low the are mayRoad, your and prosper career you them if shrewdly. answer But business How quarter? we price ourstock? should next our employees accept? right What myboss does now?What want, must Iproduce by value there. real has line ( other of expedience, messages including rationalizations for ethica crossing an of this aleader enterprise as ers have nowhere else togo ( frequently fromsages from all-or-nothing Road, Low ranging the arise thinking aren’ttend signals to these feel true, accurate. Deceptive brai necessarily Yet what else could hold the inevitable waves of robber barons check? in enormous reduced productivity, costs, entrepreneurial diminished vi and sure, were not completely adequate, were they often because ill-placed, bore regulations community cen and obvious legal two the Smith that means, said temptationsthe of corruption exploitation. and How would capitali ic, creative people, individually. acting But hadever resisted no society human You’re either awinner or in aloser this company The Low Road is familiar and emotionally and business in it because powerful RoadThe Low isfamiliar Smith’s other famous work, No one will notice thesenumbers if wemanipulate for foundational his book known best Smith, Adam philosopher economic 18th-century he of the industrializing world of on energet- based of goodfaith the industrializing the was consideringdecades the problem capitalism. in The vitalit of virtue What would consumersWhat would pay for What our product? bonus will ). Natalie’s chronic worries ( ) were deceptive many Soare Road Low messages. The Theory of MoralThe Theory Sentiments The Wealth of Nations Questions like these trigger the Low Low the trigger these Questions like ) to complacency ( I will never be taken seriously betaken seriously I will never ). ). , spent his last two , spent two last his , ﬁrst published, ﬁrst Our bigOur custom- nsiderations sm survive? sm survive? n mes- tality. y - l l

strategy+business issue 87 feature organizations & people 125125 unions ions n re- on principally principally on What is he thinking? What is she thinking? What will they will do What is she thinking? What is he thinking? What These are High Road questions. These areHigh questions. Road Second, instead of the Reactive Self-Referencing Center, the High the Road Center, the Reactive Self-Referencing instead of Second, This type activity mental is typical of the High Like Low Road. Road of its consideration of what others are thinking future others act what what of of and evaluations consideration gion above the vmPFC. The Deliberative Self-Referencing Center is activated by by is activated Center Self-Referencing Deliberative The the vmPFC. above gion they might perform. associated with the dorsal (upper) medial prefrontal cortex (dmPFC), a brai medial cortex (dmPFC), prefrontal associated with the dorsal (upper) connects to a function we call the Deliberative Self-Referencing Center. This is Center. call we a function Self-Referencing to connects the Deliberative next? cortex. Thus, the High Road also channels feelings of urgency. cortex. the High Thus, also Road channels urgency. feelings of links the Low associated Road, with to the amygdala, insula, frontal and orbital associated brain regions. The first is the same Warning Center function that Center first The is theassociated same brain Warning regions. counterpart, the High Road connects three major centers of the mind and their and their mind the of centers three the Highcounterpart, connects Road major based positive outcome, you are willing to consider it. it. are willing you consider to outcome, based positive happy in the short run, but if that is a requisite part of a longer-term, broader- part a longer-term, of if that is a requisite run, but in theshort happy trying to make everyone happy. You don’t necessarily want to make anyone necessarily make to want anyone don’t You trying happy. make to everyone you act with it in mind, you stop looking for the most expedient outcome or or outcome expedient the most looking for stop in you mind, act with it you but it is always there, an inner source of guidance ready to be cultivated; when when guidance be cultivated; of is always an source to there, ready inner it but see yourself and your actions as others might see them. It may not be obvious, be obvious, not may It see them. might as actions others and your see yourself tem. It has the dispassionate perspective of a clear-minded observer, helping you you helping observer, a clear-minded of perspective has the dispassionate It tem. desires, needs, and success, but to the overall long-term value of the entire sys- the entire of value the overall long-term to desires, needs, and success, but resembles his solution. That voice within the mind is oriented not just to your your to just not within the oriented is mind That voice his solution. resembles based on what he called the “impartial spectator.” Our Wise Advocate closely Our closely Wise Advocate called he what based the “impartial on spectator.” in 1759 and significantly expanded in 1790, proposes a soluti a proposes 1790, in expanded significantly and 1759 in

126

feature

organizations & people & organizations sustained attention. attention. sustained genuinewith whether worth: isimportant something enough close, to deserve Road Low If the isconcerned subjective with Road isconcerned value, High the on what they’re or what they’re Road. High the thinking trigger to likely do will others’ thoughts, motives, actions; future and just inquiring about reflect and thropologist might. You don’t have to be entirely accurate in gered when about an- you an people think them as terms, studying abstract in being explored.tions still Road are isoften It trig- High the that likely seems tant attribute. later identifiescess life, in Executive the Center source the all-i of as this low test” experiments, children’s which linked to ability self-regulate su with University psychologist research Walter Mischel, creator the of “mar the self-regulation, or the inhibition of habitual impulsive and behaviors. Col subtle connections among them. Finally, of home isthe brain the part of this a situation from multiple to according perspectives act potential the and and Center. cognitive center with to ability the associated flexibility: This isalso you you to pass, might generate bring changes those Executive the in activity center. When you reflect on your most meaningful aspirations, and pl tion accessible soyour conscious attention work can it, with islocated th in prefrontal lateral the with Working cortex. memory, to ability the keep informa- By linking it to the High Road, our hypothesis suggests that the Wise Ad- it Wise the that Road,By to our hypothesis High the suggests linking its evolving, and related implica- research Road toBrain isstill High the function onThe Road third Executive isthe High the Center, associated your perception of an how shmal- umbia mpor- see ing ing c- is

strategy+business issue 87 feature organizations & people 127127 - n. n. ﬁgure

ore frequently frequently ore

llustrating simple simple llustrating What makes them tick? makes them tick? What . When you mentalize,. When you PAY PAY theory of mind theory of

he Low Road and the High Road are both oriented toward achiev- toward and Low the High Road arehe Road oriented both make you with how concerned both somewhat ing goals; they’re They can tell apart. be hard to sometimes in the world. way your betweenAnd can switch the them yet make all difference the to ENHANCE YOUR PERSPECTIVE. ENHANCE

Social neuroscientists have studied mentalizing in some detail. studied mentalizing have in In typical some Social neuroscientists How, then, can you develop that capacity orga- — in and yourself in your can develop then, you How,

tion to achieve more signiﬁcant goals, they move their mind m mind their move they goals, signiﬁcant more achieve to tion history up to today, have appeared to understand this. By managing this. understand to By appeared atten- their have today, history to up Mentalizing and Mindfulness hance your perspective. The most accomplished leaders, from the earliest human from leaders, accomplished most The perspective. hance your the High and they Road, strengthen accordingly. Wise their Advocate onto

you will tend to rewire the pathways of your brain in ways that significantly en significantly that in ways brain your of pathways the rewire to will tend you When you repeatedly pay attention to it, because of self-directed neuroplasticity, neuroplasticity, self-directed because of it, to attention pay repeatedly When you vocate is not just a metaphor. It represents a real, recurring mental phenomeno a real, recurring mental represents It a metaphor. just is not vocate THAT PATHWAYS OF YOUR BRAIN IN WAYS IN WAYS BRAIN OF YOUR PATHWAYS YOU WILL TEND TO REWIRE THE REWIRE TO WILL TEND YOU WHEN YOU REPEATEDLY REPEATEDLY YOU WHEN ATTENTION TO THE WISE ADVOCATE, WISE TO THE ATTENTION experiments, people are asked to look at groups of pictures i pictures of groups at look to asked are people experiments, tice, mentalizing, has also called been your ability and success as a leader. ability and successyour as a leader. the High first The Road. prac- evoke to activities seem mental Two nization?

need to intervene), you consider people more dispassionately, trying to dispassionately, more people consider you intervene), to need instead of focusing on the desires and problems around you (and whether you you whether (and you around and problems desires the on focusing instead of ﬁlm. or novel a in characters were they if as out, them they about, do will next?What and why? are they What really thinking T

128

feature

organizations & people & organizations become influential. iscorrelated mentalizing with that associated ideas with areas brain in tivity fectively. of Falk University the Emily found of th also Pennsylvania has sophisticated of understanding other people helps others that ef- them manage others; it with time people than at it who develop skilled are amore nuance Road circuit. High the with which isassociated Some people have easier an consistentlyger mentalizing, Deliberative the activates Self-Referencing Center, behaviors the stories. pictures the explain and in exercise, This designed to trig- stories, describing or simple to read passages situations. to asked are Then they they’ve dues. their paid some people stop to beagoodmentalizer. doingmental strength It’s work, hard soit’s to see why easy it when theytors, everyone and rise bosses, no else,while one pays attention to them. It takes to a position job the because holders about to expected mentalize of are their customers, inves- influe some One that individuals. could jobs argue considered are low-status precisely salespeople) and caretakers, tend to consistently about mentalize higher-st example, people who have others ajob requires (such that serving assistants, as feel, behave” and —tend to perceive low-status themselves as F individuals. how understanding in aid others cognitive that think, processes social in engage most frequentlymentalize one who —those as are, study puts it, “more to likely pursue toward it apath leadership. as But often don’t. they The people who Considering the benefits of you’d mentalizing, executives expect to eager And yet forAnd leaders, aspiring becomes even mentalizing more important as nce. They feel at ac- atus atus or d, ly

strategy+business issue 87 feature organizations & people 129129

t d ch an le but but le e have been exposed exposed been have e Some of the most ef- most the of Some CAN ARTICULATE ARTICULATE CAN EFFECTIVE EFFECTIVE Wendy Hasenkamp, currently the science director of the Mind & Life the Mind In- of director the Hasenkamp, science currently Wendy But that is not enough, in itself, for consistent High Road leadership. The The High leadership. Road consistent for in itself, enough, that is not But when they started thinking about the day’s activities, obligations, hopes, fears, hopes, they startedwhen activities, obligations, thinking the day’s about prefrontal cortex was activated). But when their minds inevitably wandered — wandered minds their inevitably when But cortex was activated). prefrontal thus to the High Road (specifically, in the brain, the dorsal part dorsal the in the brain, lateral the of High the (specifically, thus to Road basic breathing exercise brought people to the Executive Center function an function Center Executive the to people brought exercise breathing basic changes your brain. brain. your changes in this which University research Emory at in Massachusetts,stitute conducted through your mind. This practice also induces self-directed neuroplasticity; i neuroplasticity; This mind. through also practice your self-directed induces tive skills. For example, you gain skills. you tive example, an moving thoughts enhanced of For awareness tention back to your breath. As you do this regularly, you develop new cogni- new develop you this As do regularly, breath. you your to back tention extremely beneficial form, you focus your attention on your breathing. Ea breathing. your on attention focus your you form, beneficial extremely at- your and bring catch yourself, you a tangent, on wanders mind time your other necessary practice is mindfulness. Millions of peopl of Millions mindfulness. is practice necessary other tention in conversation. in conversation. tention what other people think, because of the intensive, high-voltage way they at- way pay high-voltage think, because the intensive, people of other what and why it is important. They give the impression of genuinely caring about genuinely of impression the They give is important. it and why your attention to some regular aspect of your experience — in one common and articulate what other people are thinking, what those people intend to do next, next, do to are thinking, intend people articulate people those other what what in a comfortab sit You meditation. of this in the context to practice basic draw You folded. legs with straight, your perhaps spine your position, upright fective senior executives have a well-developed ability to mentalize. They to c ability well-developed a have executives senior fective they rise to higher levels of responsibility and authority. and responsibility of levels higher to rise they AND WHY IT IS IMPORTANT. WHY IT AND WHAT OTHER PEOPLE ARE THINKING THINKING ARE PEOPLE OTHER WHAT SOME OF THE MOST MOST THE OF SOME SENIOR EXECUTIVES SENIOR

130

feature

organizations & people & organizations activity returned Road to ( High the activity toturned on focus meditators their as breathing, to do, trained are their men re- prefrontal they ventral Road. When Low the medial with cortex, associated showed the in scans activity brain —the their breathing other than or anything from this circuitfrom to Road this cir- High the activity you your to use mind shift it to needs be.The more than active Road yourLow in ismuch brain more But you’re unless quite the unusual, sult your Advocate Wise amount. afair with How us? will Itriumph? this problem? Whocan webring on board authority: with sociated as- questionsleadership typically than Road, mayHigh becloser to authentic These questions, strongly linked to the really about?WhyamIthinking this way? self. — you about to mentalize begin your- become practices both routine for you —to extent the mentalizing and that Road. to thus High the and strengthen thoughts feelings, and Warning Center, people’s to enhance from Road Low ability to disengage the connectionenhance the Executive between Center the emotion-based and emotional to increased with appears and intelligence. Ingeneral, mindfulness reduction stress with helped linked why are has practices these explain fulness, What amIlikely todo? What amI As aleader,As you con- may already you When combine mindfulness Hasenkamp’s on research attention, focused other and on research mind- How will we ﬁx ﬁx we will How see Exhibit 2).

Self-Referencing Center andtheLow Road. prefrontal cortex (inblue),akey brain area associated withtheReactive to themindfulattentive state. Activated areas includetheventral medial wandering” period,whenthesubjects’ mindstook onthoughtsunrelated and theHighRoad.Thebottom imageshows brain activityduringa“mind yellow highlightsakey brain area associated withtheExecutive Center period whenthesubjectspaidclose attention to theirbreathing. The with mindfulness. Thetop imageshows brain activityduringa“focus” subjects performing abreath awareness exercise classically associated the HighRoadandLow Road.Eachisacomposite brain imagefrom colleagues show how mindfulness maycorrelate withactivityrelated to Two brain fMRIimagesfrom research byWendy Hasenkampandher Exhibit 2: NeuroImage, Meditation: AFine-Grained Temporal Analysis of Fluctuating Cognitive States,” Source: Wendy Hasenkampetal.,“MindWandering andAttention duringFocused July 2011 Mindfulness andtheHighRoad the Low Road associated with prefrontal cortex, Ventral medial the associated with prefrontal cortex, Dorsal lateral Mind Wandering of MindfulAttention Sustained Focus

High Road

tal tal , ,

strategy+business issue 87 feature organizations & people 131131 h nd. nd. ve func- sophy of Nature Reviews Reviews Nature

Reprint No. 17211 , May 2013: Links, May 2013: mentalizing (and , Jan. Suggests 2012: that mentalizing activ- NeuroImage ne-Grained Temporal Analysis of Fluctuating Cognitive Psychological Science Psychological ons. agation,” gnition: A transcultural neuroimaging approach,” luding the impartial spectator concept). izing Network,” _and_people d) to the ability to influence others. (Little, Overview Brown, 2014): of research by Mischel and others on the executi (Cambridge University Press, 2009): A guide to the moral and political philo + Adam Smith and the Character of Virtue , July 2011: Explorations, July 2011: of the impact of mindfulness. The Marshmallow Mastering Test: Self-Control , 2008: Articulates features of the Self-Referencing Center and its functi Invoking the High Road is not a miracle practice. It is not a sure path a sure to is not It practice. a miracle theHigh is not Road Invoking NeuroImage Neuroscience Shihui Han and Georg Northoff, “Culture-sensitive neural substrates of human co the dorsal medial prefrontal cortex, associated with the High Roa Resources Emily Falk et al., “Creating Buzz: The Neural Correlates of Effective Message Prop Ryan Patrick Hanley, capitalism’s founding father, exploring his ideas about virtue in a market age (inc HasenkampWendy et al., “Mind Wandering and Attention during Focused Meditation: A Fi States,” Walter Mischel, ity increases for people who perceive their status to be lower. More thought leadership on this topic: strategy-business.com/organizations tion of the brain, which is strongly linked to the High Road. Keely Muscatell et al., “Social Status Modulates Neural Activity in the Mental guidance for the enterprise that the Wise Advocate provides for your own mi own your for that provides the Wise Advocate guidance enterprise the for the application of the principles described here, you can provide the same kind can of you provide here, described the principles of the application upon to play a more visible leadership role within organization. And your wit role leadership visible a more play to upon cuit, the more effective you will be as a leader. You may, like called feel Natalie, may, You will effective you be as the more a leader. cuit, Advocate frame of mind. mind. frame of Advocate any situation — in your organization or in your personal life personal — with in a Wise your organization or — in your any situation With regular practice, it can become habitual for you to step back and look at at and back look step to With regular you can habitual for it practice, become of beneficial opportunities, more likely to act on them, and more able to do so. so. do to able and more them, act likely on to more opportunities, beneficial of ence this as the development of an dialogue aware of inner that makes more you thisence as development the to be a reliable process for building your leadership acumen. You may experi- may You acumen. leadership building your for process be a reliable to wealth, success, promotion, or any other material or social benefit. But it seems it But social or material benefit. any other or wealth, success, promotion, THOUGHT LEADER

The Thought 2017–21 Leader Interview: Shelly Palmer

One of the world’s leading digital-technology commentators sees a stark future for entertainment and media companies.

BY DEBORAH BOTHUN AND ART KLEINER thought leader Photograph by Peter Ross 132 thought leader 133

- e e y th lly big or or lly big hat’s left? left? hat’s His back- ﬁcial intel- or twoor ma- Live with Regis with Live Data-Driven Think- and and Spin CitySpin Who Wants to Be a Millionaire? Who Wants and and , and conducting the London Symphony Orchestra. Currently, he he Currently, Orchestra. Symphony London the , and conducting (Digital Living Press, 2016). As one of the world’s premier voices on on voices premier the world’s of As one (Digital Living 2016). Press, To be a successful company in entertainment and media — or in most be a successful in most and media — or in entertainment company To oday is the slowest rate of technological change you will ever experience will change experience you ever technological of rate slowest is the oday in your lifetime,” wrote Shelly Palmer in his e-book the accelerating pace of digital technology, he is increasingly preoccu- he digital pacethe accelerating of technology, ing Monday Night Football Night Monday

What prospects do you see for media companies? media companies? see for do you What prospects For the past decade, as a venture capitalist and CEO of his the past capitalist consulting own of and as CEO decade, For a venture Even in technology, there aren’t many midsized companies. W companies. midsized many aren’t there technology, in Even Palmer startedPalmer the clarinet, playing his sax- ascareer age a musician, at 12

S+B: S+B: PALMER: and related fields over the next few years. over fields and related recently talked with Palmer in New York. Conscious of the intertwined of trajecto Conscious talkedrecently in York. New with Palmer arti how explore to sought we and media, in technology trends of ries affect could (AI) models media,ligence advertising, in business and churn the leading-edge technologies such as smart home systems as and such data smart analytics. home leading-edge technologies W on the evolution of advertising, marketing, and related businesses, along wi along businesses, marketing, advertising, of and related evolution the on firm and marketing agency, the Palmer Group, Palmer has focused his attention has focused his Palmer attention Group, Palmer the firm and marketing agency, media and daily life, with a special smart focus on cars and smarthomes. popular and prescient email newsletter that covers the impact of technology on on technology of the impact email that covers newsletter popular and prescient and Kathie Lee a of and digital tech on-air expert media and the proprietor York’s 5 New is Fox ible, and independent. Successful rea are either today media companies and independent. ible, are companies reallyMedium-sized today. vulnerable industries, actually — either you need immense scale or you need to be tiny, flex- be tiny, to need scale immense you need or actuallyindustries, you — either see so many large organizations you together. merging why really That’s little. opted by broadcast TV with server-based text, TV knownbroadcast — was as ad- enhanced with server-based television experimenter with analog and digital synthesizers. He holds pa tents f tents with analog pa and digitalexperimenter holds synthesizers. He syncing for — a method which of one technologies, television interactive jor pied with helping companies and individuals prepare for the dramatic and individuals for companies changes prepare h with helping pied sees coming, particularly and media. in entertainment was He also an earl York. New around in venues in the 1970s and flute ophone,

ground also includes writing the theme music for for music writing the theme alsoground includes T

‘‘ Deborah Bothun Art Kleiner deborah.k.bothun@ kleiner_art@ pwc.com strategy-business.com leads PwC’s global en- is editor-in-chief of tertainment and media strategy+business. practice. She focuses on assisting clients in adapting to the changing content and distribution marketplace. Based in New York, she is a principal with PwC US.

Twitter? There are a lot of thriving small companies, but it’s hard for them to grow to scale. They’re much more likely to get bought ﬁrst. We’ve seen a signiﬁ- cant increase in [US]$20 million to $30 million “acqu-hires” — the acquirers buying companies only for their teams of brilliant people, as opposed to choosing companies because they are going concerns.

S+B: How do you see media companies monetizing content in this new world? PALMER: There are only three business models for media: I pay, you pay, or someone else pays. Either I pay the media (with subscription fees or my data), or you as the media pay your costs (because there’s value in having me in the audience), or someone else, like an advertiser, pays you for access to me. The media industry used to be perfectly structured to take advantage of all three models. But today, with quickly changing consumer behaviors, it’s getting extremely difﬁcult for many old-fashioned media companies to make money. thought leader Add to that the cross-purposes of the three major publicly traded large entities in the advertising-supported media model: ad agencies, media entities, and brands. Each has a different way of creating shareholder value. Agencies need to make a proﬁt. Media companies need to get the highest possible price for each impression. And brands need to drive velocity. These three goals are not in concert with one another. issue 87 issue And, by the way, consumers don’t care about any of this. Consumers want all their media for free, and they want simple, interoperable platforms. It sounds

great, but Apple and Google have no interest in interoperability. That would strategy+business 134 thought leader 135

- e- he he ng it is it ing it. ing it. ll three, al media, As three are only types I said, there and the successful models, of com-

What models do you see that will resolve this? see that will resolve What models do you The rest of Silicon Valley tends to disrupt traditional business by taking by traditional disrupt business to tends t Valley Silicon rest of The That said, the financial make to finan- a fortune will community continue of members who don’t use the rest of the Web; they interact only through only Face they interact the Web; use the rest of don’t who members of mean having everything work on each other’s devices. Facebook has a large devices. Facebook group mean having everything each other’s on work fact that consumers want something like interoperability does not mean that not does like something want interoperability fact that consumers book. Why would any of these companies want to give up their boundaries? The boundaries? their up give to these want companies any of Whybook. would it. provide to smart the business for panies seem to combine them. The cable television industry combines a industry combines television cable The them. panies combine to seem monetiz take And companies data the cable as your and they’re well, for). for instance. You pay for cable ostensibly because your antenna’s not good enough, not because antenna’s your ostensibly cable for pay instance.for You pay just channels, you which the premium for still see ads to (except and you have digit near as pure-play granular other or nowhere as Facebook They’re S+B: S+B: PALMER: require a sustainable business to emerge. emerge. to a sustainable business require is not always equally accretive to all of the shareholders, and it does not usually not does and it always all equally to is not the accretive shareholders, of ciallystartups engineering maki and taking That kind profit of public. them retail. Otherwise, make to they’ll way Cash a living. no has change have to hands. subscriptions, sell a service, or use another means to drive velocity for a brand at at a brand sella service, for means use velocity drive another or to subscriptions, net media companies will have to figure out a way to get advertising support, sell support, advertising get to a way figure will to companies media out net have consumer’s side and giving consumers everything aw and giving consumers side they — free. That’s want consumer’s Inter- theday, of At the end making care about money. don’t as as you long some but they have a good-enough data set to drive hundreds of billions of dollars in sales for their clients. Speaking of data-driven companies, Amazon is about as “data rich” a company as you are likely to find. It probably owns the greatest database of consumer consumption on the planet. Amazon is legendarily protective of its data, and almost every manufacturer complains about Amazon’s “walled garden.” But it hasn’t stopped very many companies from selling on the platform. I’m fascinated by one twist: A search on Amazon is more valuable to many advertisers than a search on Google because consumers are more likely to buy there. Consumers have been trained: If you want to buy something, go to Amazon first, look it over, and “add to cart.” YouTube is another good example for content owners because of its ability to aggregate hyper-targeted audiences at scale. A few weeks ago, a friend of mine came over to jam and wanted to play some bebop. It was super fun, but after the session, I felt like I could use some remediation around the bebop melodic minor scale. So I went on YouTube to look for some drills that wouldn’t bore me to tears. If you type “bebop melodic minor scale” in the YouTube search bar, you get thousands of videos. You might never live long enough to watch them all. Some were mind-blowingly good. The two musicians I liked the most made money by selling transcriptions of famous solos and giving private music lessons over Skype or FaceTime. Others offered paid subscriptions to their newsletters or sold lesson books. And that’s just one field in an almost infinite list. I typed in “quilting,” just to see what would happen, and I got a very similar result. The downside of these models is very serious. They hyper-fragment the audi- thought leader ence and encourage people to filter out anything that feels uncomfortable to them. There’s a very strong confirmation bias for all content today, regardless of whether it’s entertainment, news, or just information. It will grow even stronger as technology improves. As content distributors, we are fighting the hardest fight ever: getting through the personal filters of people who have opted into their own world view. Many have no interest in getting out of it. issue 87 issue I think this will be a huge problem going forward and I don’t know what will break the cycle. Back in a simpler time, you could read your favorite newspa-

per and occasionally discover new things. Sure, it had a bias. You understood strategy+business 136 thought leader 137 s, a, sts ost the n or or n story of story of ybody. I ybody. more local, more

d to elicit a speciﬁc speciﬁc a elicit to d There are reallyThere three kinds

How does this work in practice? in practice? does this work How Data is cash, and it should be treated treated be hygiene. data and should governance, data it and cash, is Data a data need P&L. like cash. You S+B: PALMER: of data. dataof own First-party is your For a message to have the best chance of success, it must be delivered be delivered must the best success, chance it of have a message to For

You have written that advertising will “evolve into a data-driven, value- a data-driven, into will “evolve that advertising written have You Second-party data is simply someone else’s first-party data. like Companies companies. Acxiom Third-party outside data by is collected PALMER: be treated like cash.” like be treated Data is cash, and it should it should is cash, and Data recognize the value of data. of value the recognize “Few enterprises fully fully enterprises “Few opinion. That’s over. Today, you get what an algorithm “thinks” you’re m an get what algorithm “thinks” you you’re Today, over. That’s opinion. S+B: what thatwhat the also was, difference bias between and news you and understood Be Data-Driven Learning to which explores this thesis. explores which likely to engage with, and everything it serves up is designe is up serves it everything and with, engage to likely response from you. The free and open Internet has bias than confirmation to anything susceptible tribal, and more in the hi made people the World,” Destroy May Zone Comfort humankind. an “Your I wrote essay titled centric game of ‘capture the consumer.’” What do you mean? What do you the consumer.’” game of ‘capture centric Palmer Group, we’ve found that few enterprises fully that few recognize enterprises dat found of the value we’ve Group, Palmer this requires a modification in corporate culture. In our work with clients at with clients work culture. In our in corporate this a modification requires process is to encourage data-driven thinking across the enterprise. In most cases, thinking data-driven In most encourage is to process the enterprise. across to the right person at the right place at the right time. The best way to lead this lead to best The time. way the right at place the right at person the right to and they analyze and index it until they have complete profiles on ever on profiles and they analyze complete until they have it and index can li for think example, ask, for Acxiom You tracks almost 4,000 propensities. and Experian acquire and aggregate data on customers from many different place different many from and Experian and aggregate customers acquire data on visit a location. visit ated by customer behavior, such as a propensity to click a particular click to butto as a propensity such behavior, customer by ated from cookies, email subscriptions, orders, or sales receipts. Or it may be gener- may it Or sales or receipts. orders, cookies, emailfrom subscriptions, company’s asset, which you are directly responsible for collecting. It may be may It collecting. for are asset, directly you which responsible company’s of people who are 150 percent over-indexed on luxury automobiles and 200 percent over-indexed on craft beer, and geofence them. Button press, boom, here are the people. All the best-practice purveyors of third-party data do their best to verify it, but it’s still third-party data, and thus less accurate than first- or second-party. When you operate with a data P&L, you tend to favor deals that leverage your data by combining it with first-party data from other organizations. This will almost always create additional value, because data is more powerful in the presence of other data.

S+B: Why does data become more powerful when you share it? PALMER: If I know your name and email address from first-party data, I have the beginning of a profile. Add your Social Security number from second-party data, and I can go to Experian and find out about your mortgage from third-party data. Now I know not only exactly where you live, but how much discretionary thought leader spending money you might have. The more complete the profile, the better and more complicated the questions I can ask. Interestingly, although many executives have significant experience working with numbers and making decisions, very few have been trained to make decisions using data. To get the most out of an algorithm, you must ask the right questions. issue 87 issue S+B: For example? PALMER: “How do we increase sales?” is not a data-driven question. It may

sound like one, but it isn’t. A better question from a marketer who had access to strategy+business 138 thought leader 139

n ty, ty, set ng; it depends That’s a fabulous question to ask. But your ability to answer Wouldn’t it be better to ask, “Given everything we’re doing, where are the are doing, where we’re everything “Given ask, to it be better Wouldn’t Cognitive computing is still in its infancy, so if you needed to do this today, this do today, to needed so if you is still infancy, in its computing Cognitive mostly empty truck headed to another location. You could decide to run to a sale. decide could You location. another truck to empty mostly headed S+B: right answer could significantly increase margins. You could save on advertisi on answerright save could significantly could increase margins. You a on them ally put could knew you then that these grillsmoved, get had to the data sets. of tion same-store sales, predicted weather patterns, inventory levels, and so on. The and so on. levels, inventory patterns, weather sales, predicted same-store rein climates. warmer If you stores units to unsold shipping by save could you asked are ques- as a million the right things if do you There could a marketer you Con necticut?” To answer it, you would use a variety would data: of you answer parking densi it, lot To necticut?” Con year that I can in Danbury, sell Depot a full-price barbecue grill the Home at a purpose-built data management platform might be “What’s the last the of day be “What’s might platform data management a purpose-built PALMER: Danburys with the best hidden opportunities?” Danburys with the best on the level of technology you have deployed. If you’ve got an appropriate data an got appropriate If you’ve deployed. have you technology of level the on would probably take thousands of lines of code, and only a couple of people i people of take a couple and code, only lines thousands of of probably would you’d have to write a pretty sophisticated algorithm to accomplish the task. algorithm accomplish a pretty to It sophisticated write to have you’d auto- a certain can’t at the algorithms that you are so large point and so complex tern-matching tools you need, you’re golden. golden. you’re need, you tools tern-matching occasionally trading, stock be scratching heads, their because, as with automatic and someone at your disposal the pat- your at create to knows data enough who science and someone would it wrote who the people was Even written. it how know would the world pilot them anymore. [See “A Strategist’s Guide to Artificial Intelligence,” by Anand Rao, page 82.]

S+B: You mean there are too many layers of cognitive thinking to be able to understand its reasoning. PALMER: That’s right. People think of algorithms as decision making on autopilot. But that’s the worst metaphor ever. With actual autopilot, the person ﬂying the plane watches the controls and can always take over if something goes wrong. That’s not possible with a complex algorithm. If the program misbehaves, the only way to ﬁx it is to stop it, take the whole system down, recalibrate it, and then test it to see if the outcomes are better or worse.

S+B: But if the algorithm is too complex to be controlled, what qualifies a human being to judge the outcomes correctly? PALMER: This scares me to death! I call it “digital monoculturalism.” If you have only five cognitive clouds — Microsoft, Google, Amazon, IBM, and Ap- ple — each one will have some bias inherent in its programming, invisible to outsiders and inevitable. These five highly biased tool sets will make decisions for thousands of executives around the world. And who programs those?

Automating the Media Enterprise

S+B: In the past, you’ve said that machines will eventually be able to do everything that human beings can do now. How do you see this today? thought leader PALMER: I said they would do almost everything. But that’s not the story. There are four general types of tasks: manual repetitive (predictable), manual nonrepetitive (not predictable), cognitive repetitive (predictable), and cognitive nonrepetitive (not predictable). An assembly line worker performs mostly manual repetitive tasks, which, depending on complexity and a cost-beneﬁt analysis, can be automated. A CEO of a major multinational conglomerate performs mostly cog- issue 87 issue nitive nonrepetitive tasks, which are much harder to automate. The rapid advances in machine learning systems are allowing us to auto-

mate the low end of the cognitive nonrepetitive task spectrum, which was previ- strategy+business 140 thought leader 141 s s, uire ld. ld. artists rtists who of middle man- jobs to go will be be will go to jobs That leaves journeyman creative . Detective Spooner, played by Will by played Spooner, . Detective person is not Chaucer, Shakespeare, Chaucer, is not person Miran- Lin-Manuel Mamet, or David Mozart,da — or the Beatles, Ma- or handful a tiny Only human donna. of all ex- exceed generation each in beings creativity. pectations of can be done which absolutely activity, I, Robot That’s a loaded question. If you can artificial If you have you question. intelligence, a loaded That’s How will AI affect people in media enterprises — particularly particularly — in media enterprises people AI affect will How The first white-collar jobs that machines will take are those There’s a great line in the movie in line the a great movie There’s things like pathology and radiology. The last white-collar last The neyman radiology. creative people (graphic artists, and background music composers, pathology like things agers, commodity salespeople, report writers, accountants, bookkeepers, writers, jour- report agers, commodity salespeople, do who doctors and some rooms), hotel paint pictures used decorate to who athletes, politician professional teachers, school and elementary preschool Also, and health mental thejudges, very professionals. a few creative well req performed that Theseare when geniuses. are truly jobs innovative safehumanity; until the machines actually they are incredibly rule the wor S+B: PALMER: creative people? people? creative nitive nonrepetitive spectrum, not so much. spectrum, not nonrepetitive nitive for a big shakeup; C-suite corporate management, at the higher end of the cog- of the end higher at management, corporate C-suite shakeup; a big for learning systems can So the learn trucking drive. to and taxi are industries in ously thought to be the sole bastion of human beings. For example, machine machine example, human beings.For of bastion be the sole to thought ously able from average human creativity. human creativity. average from able probably can have artificial creativity. In many ways it would be indistinguish- would can artificial it In many ways have probably creativity. used to write — for advertising, long-form industrial films, and documentarie long-form advertising, — for write used to average human creativity.” average human I music the background full of many years. AI. music by A lot time for I wrote indistinguishable from tiful him looks in the eye and asks, Sonny average The masterpiece?” “Can you?” have artificial creativity... robot write a symphony?” asks Spooner. “Can a robot turn a beau- a canvas “Can a robot into asks Spooner. a symphony?” write robot can you intelligence, Smith, is questioning Sonny, the main character robot, about a murder. “Cana a murder. about the main character robot, Sonny, is questioning Smith, artificial can have you “If — could easily be created by AI. My job didn’t call for brilliance every day. I needed to be consistently good and occasionally brilliant. Music is an emotionally communicative language, and proficiency in it is rare, but it is possible for machines to be consistently good at it. It won’t work for every client or in every use case, but it will work for enough clients to put a huge dent in the business. The same is true for basic expository writing. The questions your seventh- grade English teacher taught you to answer — who, what, when, where, why, and how — are an algorithm. Of course machine learning systems can be trained to write that prose. And they will.

S+B: Then how does a creative person get the experience needed to develop into, say, a Billy Joel or an Elton John? PALMER: There couldn’t be a Billy Joel or an Elton John today. They are both super talented, but neither was a superstar out of the gate. They had record labels thought leader that believed in them and gave them time to pay their dues and develop. That doesn’t happen today. Of course, that’s commercial intellectual property, which has very little to do with artistry and creativity at a world-class level. AI doesn’t change things for artists who are willing to starve for their art. A dancer will still make crazy sacriﬁces to keep dancing every day. Nor does AI change the prospects of the very largest issue 87 issue companies. But it completely devastates the middle of the business, the rote creative work.

A lot of what marketing people do is at risk. If you’re a marketer, you build strategy+business 142 GAME PLAYER

GAME CHANGER

The Oxford Executive MBA Go from a game player to a successful game changer. The Oxford Executive MBA is your opportunity to transform yourself and your ambitions. This modular programme offers you the chance to join one of the world’s most powerful networks and create a new future for your organisation and for yourself as a leader. The Oxford Diplomas in Strategic Management Join us and develop the extra focus required to perform consistently at the highest level. Diplomas in: • Financial Strategy • Global Business • Organisational Leadership • Strategy and Innovation

Find out more and download brochures: www.sbs.oxford.edu content pillars that support the brand, mission, and vision of the company. You have boxes to check — the piece will be knowing, educational, cheerful, what- ever it is — and if the piece of copy doesn’t meet all criteria, you rewrite it until it does. If that’s not an algorithm, I don’t know what an algorithm is. And that’s how you get 3,000 marketers who all think for themselves to put out messages with a uniﬁed voice. If you’re telling me I can’t automate some of that, then you don’t understand automation. Even if just 20 percent of white-collar jobs are automated, the ramiﬁcations for media companies will be immense. For example, suppose I could get a machine to create and produce an invitation to a gala event, with a Chagall-style visual and drop shadow behind a font that evokes my brand. You might argue that doing this would increase the productivity of my art director, and that would be the main effect. But there were 10 art directors in the department before; we just sent at least thought leader two of them packing. And there probably will be more laid off over time, in all categories of corporate employee, because every CEO knows that the company’s competitors are also taking cost out of the system this way. Along the way, we’ll see enormous and unprecedented productivity advances. One small example: The Palmer Group has 5,000 old videotapes in temperature-controlled storage. They need to be transferred to digital, but we’ve been issue 87 issue putting it off because nobody, including me, wanted to spend the money to have an army of library science majors go through and metatag the clips. Recently, we

did an experiment. We put a few videos through an open source video recogni- strategy+business 144 thought leader 145

n ity rom rom ag the ve before. before. ve ter than what a a what than ter do this for thousands We believe in the gig economy; on any given day, our staff our expands day, any to given on in believe the gig economy; We How does the digital shift affect the way you look for talent in your in your talent for look the way you shift affect the digital does How We try to recruit people by building a yellow brick road to the Palmer Group Group the Palmer to road brick building a yellow by try people recruit to We S+B: S+B: is more likely ha to be consistently didn’t we knowledge incorrect. of body a of part So we’re about become will It to videos. old of it. in doing are involved beautiful: people No aspect this of isn’t one Only content as well as a human intern would. It may actually be bet be actually may It would. intern human a as well as content the it AI because when even system do, tags would something incorrectly, person tion softwaretion set, and with very effort, little tool the system metat could PALMER: own organization? organization? own and share notes, and suddenly Facebook has a recruiting and training Facebook and suddenly programand share notes, opers make some of their code available on GitHub, people start to contribute start contribute to people GitHub, on available code their of makeopers some or two each night contributing to open source projects. We stole that idea f that idea stole We projects. source open to twoor each contributing night language has which scripting own its Facebook, called software React. Its devel- per-skilled technology person available to us is looking for the next opportun us for to is looking available person technology per-skilled are returning to sustainable full-time jobs. Our experience is different. Every su- Every are is different. returning Our sustainable full-time experience to jobs. WeWork. I recently read an article saying that the gig economy is over and people and people is over an read article saying I recently that the gig economy WeWork. o and events meetups host We projects. very cool with us, on working working fit the needs of our business. We use flexible shared office use organizations space flexible like We business. our the of needs fit in a full-time down be tied to job. want and they don’t price, a higher at and they’ll in the field the elites by be in company great that we’re show — to an hour with us spend also to work ask who the coders We topics. key technology for coders, without paying a nickel for it. And who doesn’t want to impress the people at Facebook?

S+B: Do you recruit your content professionals the same way? PALMER: No, because the talent pool for creatives is so vast. We know many people because of, for example, my background in TV. It’s harder to ﬁnd pro- grammers, because companies are competing so heavily for them right now.

S+B: You make it sound like the most important thing — the making of content — will not change much at all in the future. PALMER: There’s a 40,800-year-old cave painting in El Castillo, Spain, that is said to be one of the oldest known. The artist created that content for one purpose and one purpose only: to be seen. The artist felt something or needed to explain something and created the work to communicate it. Today, a television commercial is there to be seen; a book is to be read; a song is to be heard. If you don’t have a point to get across, you don’t need the television, the printing press, or a stream on the Internet. And if you do have something powerful to say, your job is to get it across, no matter what technology you use or business model you work under. That hasn’t changed, and it probably never will. + Reprint No. 17212 thought leader issue 87 issue strategy+business 146 MEET THE NEXT GENERATION OF BUSINESS THOUGHT LEADERS

strategy-business.com/youngprofs Illustration by Noma Bar Noma by Illustration

n e animals, and pace, to form rows of of rows form to pace, Brief ecades before you lost your ﬁrst few hours to Candy Crush, Tetris Tetris Candy Crush, to ﬁrst few your hours lost you ecades before concept The worldwide. game video had cast players spell over its Curtain the behind Iron deep originated which in the Tetris, of shapes of different manipulate You simple: deceptively is 1980s,

Unlike many modern addictive games, Tetris has no plot, no cut Tetris was the brainchild of a Soviet engineer, Alexey Pajitnov, working on working Alexey Pajitnov, engineer, wasa Soviet the of brainchild Tetris

Affairs, Public Ackerman, by Dan 2016 by Laura W. Geller Lauraby W. The Game That Hypnotized the World, Effect: The Tetris The Business of Tetris of Business The ends, and then you play again, play and again, you and then ends, and again. and his colleagues was knew special it — it Pajitnov the game in 1984, invented bricks, or tetronimoes, as they fall at an increasingly fast increasingly an at fall they as tetronimoes, or bricks, the game ca lines. But in A Russian the background. tune plays horizontal folk game The start and up. the pieces pile to move wrong — one quickly turn you on When he Sciences. the Russian of at Academy puter com desktop an outdated no lifelike animation. And yet Tetris is one of the most popular video games popular video all the most of of is one lifelikeno And animation. Tetris yet that code tracesof the waning Union. origins to its the Soviet days of authorized copies have earned close to US$1 billion in total sales. Not bad for a piece for bad in total sales. billion Not US$1 to earned close have copies authorized time. It has been downloaded more than 500 million times on mobile devices, than and more 500 mobile million times has on downloaded been It time.

Books in D

books in brief 148 books in brief 149 d s. crat crat sked with licens- , Dan Ackerman, a journalist and editor , Dan a journalist Ackerman, and editor The Tetris Effect: Hypno- Game That The The Tetris Ackerman introduces a large cast of characters, and over the course of the a large the course of Ackerman cast introduces characters, and over of The game’s soaring popularity, and its potential for massive profits, quickly profits, massive for potential and its soaring popularity, game’s The The story of the next five years, the next the five story The to leading of up There’s Henk Rogers, the surfer-turned-programmer who ultimately foun ultimately who the surfer-turned-programmer Rogers, Henk There’s were licensed and sublicensed by an ever-widening web of software of web companie an by ever-widening and licensed sublicensed were Ackerman painstakingly describes how the rights to Tetris for various channels various for Ackerman painstakingly Tetris the rights to how describes places. Coders, lawyers, and executives jump in and out of the all narrative, of while in and out lawyers, jump Coders, places. and executives dizzying and times at and as toggles forth back between players he different prising that Tetris was one of the world’s first ‘viral’ hits.” first ‘viral’ hits.” the world’s of was one that Tetris prising effect The and machinations. can be motivations their about learn we more book psychological triggers, and basic human greed,” Ackerman writes, “it’s not sur- not Ackerman “it’s writes, triggers, humanpsychological and greed,” basic censing rights. “With such a perfect combination of widespread dissemination, dissemination, widespread of a perfect combination “With rights. such censing tives from Japan, the U.K., and the U.S. literally raced to Moscow to vie for li- for vie to raced Moscow literally to and the U.S. the U.K., Japan, tives from tale. And in execu- in early 1989, point, At one world. the business of attracted the attention room console rights to Tetris, is a complex, winding complex, is a Tetris, to rights console room tized the World it. unravels CNET, site tech the at moment in 1989 when Nintendo secured the living Nintendo when in 1989 moment was difficult imagine. to even Tetris outside the country, let alone commercializing it, commercializing it, alone let the country, outside Tetris pre-glasnost and pre-perestroika, the notion of taking of the notion and pre-perestroika, pre-glasnost mouth and floppy disk, like a piece of samizdat. disk, of like a piece and floppy But mouth spread quickly throughout the academy by word of of word by the academy quickly throughout spread tions mogul the bureau Maxwelltions Robert Kevin; Belikov, and Nikoli his son, and little else. Among some of the other key players are the British communica- are the British keyplayers the other of and else. Among some little Japan Airlines and the Soviet state-run Aeroflot with a tourist visa, with a tourist a checkbook, AirlinesJapan Aeroflot state-run and the Soviet the book opens with Rogers flying into Moscow on a plane jointly operated by by operated jointly a plane on Moscow flying with Rogers into opens the book (Elorg),tic an division enigma of the Soviet Ministry of Trade ta years profited. as for others and watched Tetris, created who engineer himself working on behalf of Nintendo. His story is perhaps the most breathless; breathless; the most His story is perhaps behalfhimself Nintendo. on working of called bureau Electronorgtechnica a Soviet for served aswho negotiator lead the course, Pajitnov, and, of agencies; state by developed technology ing rights for

issue 87 issue strategy+business

o n ey c stressc ul ran- on the on + article, “This Is Your Brain on Tetris,” he de- he Tetris,” on Brain Your Is “This article, Wired (another term he coined, to describe an electronic drug) is also an ode to the game itself. A chapter of the book is the book of is alsochapter A the angame to itself. ode . In 1990, while staying with a friend in Tokyo, Goldsmith Goldsmith whilestaying in Tokyo, with a friend . In 1990, pharmatronic Tetris effect Tetris In his epilogue, Ackerman writes that “Tetris is bringing order to disorder. disorder. to is bringing order Ackerman that writes In his “Tetris epilogue, This is a recur r ing theme throughout this fast-paced, gripping book: Playing Playing book: gripping this fast-paced, throughout ingtheme r This is a recur The Tetris Effect The Tetris

Laura W. Geller Geller W. Laura [email protected] is senior editor of strategy+business. can prevent victims from being repeatedly terrorized by painful by Th terrorized victims repeatedly being can from memories. prevent can and mathematicians game d end, will inevitably Tetris classic “A assessment: sity researcher has shown that playing Tetris shortly after a trauma shortly experiencing has that Tetris researcher playing sity shown post-traumati of the symptoms of some the game, by victimsis altered avoid words, In other percent. cravings their roughly 24 by reduced Tetris played who ers Eve study. and scientific academic of level Tetris’s popular games inspired have Ackerman’s can the vortex appreciate into sucked been us who’ve those of But those damn— blame Z shapes.” brain and can shape a player’s thoughts. Ackerman notes that an Ackerman Univer- Oxford notes thoughts. brain and can a player’s shape are because remembered inthe which events the way but the events, can remember and drink- that smokers that study found a 2014 Ackerman also mentions disorder. in the war against be a weapon to gamethe addictive behavior. can addictive prove the eternal struggle against daily of life, in all the onslaught It’s colorf its few grandiose? But Maybe. A bit the sky.” from fall seeming to you domness, on and physics. in philosophy is steeped can be “won” Tetris whether of the question a casualthe same when thing and I do you game after goes wrong pieces a dozen terns, and the repetitive activity it inspires, enables Tetris to imprint itself imprint to Tetris enables inspires, activity it and the repetitive terns, effect the game the brain. has on can pat- actually repetitive brainTetris change is wired. game’s your The the way the term term the devoted to the story of journalist Jeffrey Goldsmith, who is credited with coining credited is who journalist the story of Jeffrey to Goldsmith, devoted trying to fit together. In a trying together. fit to ticed that he started seeing people and carsticed started that the street as was that he on he pieces people seeing played the game for six straight weeks, barely stopping to eat and the game six drink, to straight for played weeks, and no- stopping barely scribed the scribed

books in brief 150 books in brief 151 e r, r, er er der- tion- ance (praise , it must be a night- must , it strong relationships, without Radical Candor Radical

t’s been a long time since I was a wage slave. But if today’s workplace is any- workplace iftoday’s I was time since But a wage slave. a long been t’s thing like Kim what Scott in describes mare. People are picking their noses, stinking up the joint with body odor, odor, with body stinking are noses, their picking the joint up mare. People and tucking the ofﬁce underwear their furniture. into They call each other Or maybe that’s just business as usual in Silicon Valley, where Scott, an en- where as business usual just Valley, in Silicon that’s maybe Or rela that interpersonal conviction Radical Scott’s from stems candor In Scott’s convincing telling, radical candor is a simple yet powerful yet telling, mana- radical convincing is a simple candor In Scott’s

by Kim Scott, St. Martin’s Press, 2017 Press, St. Martin’s by Kim Scott, Humanity, Your without Losing Boss Kick-Ass Candor: Be a Radical by TheodoreKinni Care Personally, Challenge Directly Care Personally, “dumb-ass” and cry a lot. It sounds like preschool for grownups. for like sounds “dumb-ass” preschool and cry It a lot. founded Candor Inc., a training firm built around the concept of radical a training of cando Inc., the concept around Candor firm built founded her own, coaching CEOs at Twitter, Dropbox, and Qualtrics. In 2016, she co- she and Qualtrics. In 2016, Dropbox, coaching Twitter, at own, CEOs her managers. With those unimpeachable credentials in hand, Scott struck out on on managers. in hand, Scott credentials struck With out those unimpeachable joined Apple University, where she designed and taught a course for first-time first-time and taught a course designed for she where University, Apple joined worked for her Harvard Business School classmate Sheryl Sandberg. Then, she she Then, Harvard Sandberg. classmate Sheryl her for School Business worked sales and service at Google’s AdSense, YouTube, and DoubleClick, where she she where and DoubleClick, YouTube, AdSense, sales and service Google’s at trepreneur, executive, and ex ecutive coach, spent a decade or so. She ran online She so. a decade or spent coach, ecutive and ex executive, trepreneur, which she developed. writes. “If you think you can “If thatwrites. these you things do your three res ponsibilities as a man ager: (1) to create a culture of guid culture a of create to ager: (1) as a man ponsibilities three res your sh results drive collaboratively,” to and (3) and keep the team cohesive; boredom ships are the currency of management. “They determine whether you can you fulfill whether “They determine management. are of the currency ships un to (2) that direction; in will the right moving keep everyone and criticism) stand what motivates each person on your team well enough to avoid burnout or you are kiddingyou yourself.” deliv To has twoIt “dimensions”: relationships. building such for gerial tool damn, sharing more than just your work self, and encouraging everyone who who and encouraging everyone self, damn, than work sharing your just more first dimension is about being more than ‘just professional.’ It’s about giving a about It’s than ‘just more being professional.’ is about first dimension radical candor, you need to both care personally and challenge directly. “The both care to personally and need challenge directly. you radical candor, I

issue 87 issue strategy+business

r ” lt, lt, tell on is preferable is preferable on derstand why their their why derstand empathy.” Not wanting hurt the to Not empathy.” say didn’t she feelings an of employee, anything hisprob- performance about without At the same time, candor lems. care Scott — which labels “obnoxious — is also problematic. aggression” Apple told frequently who Jobs, Steve ﬂirted is sh**,” work “Your employees tell me? I thought you all you me!” cared I thought tell me? about What makes is the radical a good idea such candor anyone anyone reports to you to do the same,” writes Scott. “The second isn’t work their when telling people involves dimension measure up, don’t employees Andwhen good enough.” “makingback, hard feed tough managers deliver must a higha team, and holding on calls what does who about bar results.” for performance ignore or fact managers many that so avoid and organizational employee that undermine problems testimonial: a personal results. Scott offers After launch- guy a great whose ing a software startup, hired “Bob,” she The author also makes the point that you can’t skimp on either candor or or candor either skimp on also can’t makes that author The you thepoint The ultimate irony is that when managers don’t candidly address an em- managers is that don’t when irony ultimate The

care. Scott had been giving Bob care without candor — what she calls she — what candor care. “ruinous giving care Scott had been Bob without me?” he said. “Why didn’t said. “Why he didn’t me?” aggressi telling, obnoxious In Scott’s aggression. with obnoxious they stand with where know the boss. because least ruinous at people to empathy the courage to fire Bob, it felt like a sucker punch to him. “Why didn’t you you him. to “Why punch didn’t like a sucker felt it the courage Bob, fire to gry. Worse, it affected the rest of her team; they couldn’t un couldn’t they team; her of rest the affected it Worse, gry. When Scott finally up too. loses mustered the employee shortcomings, ployee’s Scott says), she tried to work around the problem. But Bob’s continued subpa continued Bob’s But the problem. around work to tried she Scott says), making workload, increasingly resentful her her and to an- added performance As a resu in her. confidence and they lost correcting the situation, boss wasn’t tanked performance their — and the so did startup. work didn’t live up to his resume. Instead of confronting Bob (“Feedback is hard, (“Feedback Bob confronting of Instead his resume. to up live didn’t work stand with the boss.stand the with people know where they they where know people empathy” because at least least at because empathy” is preferable to “ruinous “ruinous to is preferable “Obnoxious aggression” aggression” “Obnoxious

books in brief 152 “This explains the advantage that a**holes seem to Must Reads for all have in the world,” writes Scott. Business Leaders In the spirit of radical candor, I should note that although it starts off strong, Radical Candor becomes less interesting once Scott gets beyond explaining the core concept in the first couple of chapters. The issue is that she’s seeking to elevate a very good and useful idea into a full-blown management philosophy. That transformation leads her into broader topics that don’t always lend themselves to simplified solutions, such as employee development and personal growth tra- The Sustainability Edge jectories, and results improvement cycles. How to Drive Top-Line Growth with Triple- Bottom-Line Thinking The second half of the book is devoted to a col- by Suhas Apte and Jagdish N. Sheth lection of briefly explained tools and techniques in- The Sustainability Edge illustrates how business leaders can embed sustainability in volving how managers can go about integrating radi- a truly holistic and transformative way. cal candor into their work. These recommendations include be humble; give feedback immediately; and praise in public, criticize in private. And they are roughly stitched together under the rubrics of building relationships, giving and getting guidance, team building and motivation, and accelerating performance. First-time managers will find this toolbox particularly valuable, although veterans are likely to be familiar with much of it. Leadership in the Eye The bottom line: Radical candor is a terrific tool of the Storm Putting Your People First in a Crisis that every manager should use, and Radical Candor is by Bill Tibbo a terrific reference for first-time managers. + This book shows how leaders can identify and cultivate the skills required to not only meet the challenges but seize the opportunities that arise in a crisis.

Theodore Kinni [email protected] is a contributing editor of strategy+business. He also blogs at Reading, Writing re: Management and is @tedkinni on Twitter. utppublishing.com Illustration by Elwood Smith Elwood by Illustration r- s are.

BY MATT PALMQUIST Control Issues

According to a new study of more than startups U.S. more 6,000 of study high-potential a new According to Whether in Silicon Valley or any of the other startup the around the other any of hubs or Valley Whether in Silicon n the two years after Lew Cirne founded Wily Technology in 1997, he as- Technology Wily after Lewn the two years Cirne founded raised two and employees, 50 team, hired sembled an experienced executive seats board of ﬁve three relinquish he also had to But funding. VC of rounds a by decided that Cirne should be replaced promptly who to his investors,

ﬁnancing after their founders relinquish some power. some relinquish founders their after ﬁnancing

Startups are valued significantly higher and attract more attract more and higher significantly valued are Startups retained by founders, the author discovered, the less valuable their companie valuable the less discovered, the author retained founders, by dilemma has a profound impact on the firm’s long-term value. The more power power more The value. long-term the firm’s on impact dilemma has a profound that launched between 2005 and 2012, how one navigates this early-stage founder’s navigates this founder’s early-stage one how between and 2005 2012, that launched trol and increasing the value of a young firm. and a young increasingtrol the of value pany founder must surrender. Founders face a trade-off between retaining Founders con- surrender. must pany founder come aboard to provide much-needed resources, the more autonomy the com- autonomy resources, the more much-needed provide aboard to come that led to his ouster. that led to his ouster. despe firms, their founders grow dilemma is all familiar. too To Cirne’s world, key hires or who investors the more But checkbooks. their for reach investors mitted. But the founder was still chagrined about the early decisions he made the founder was still chagrined about the early mitted. But that financing, makes buzz” and the need kind “social of skilledately employees, US$375 million — a far larger haul than Cirne could have brought in, as he ad- brought haul than Cirne could have US$375 million — a far larger CEO with a stronger business background. CA eventually bought the firm for CA eventually business background. CEO with a stronger

end page 154 end page 155

- + ss by.” by.” age in , Feb. 2017, , Feb. Strategic Management Journal Management Strategic

“The Throne vs. the Kingdom: Founder Control and Value Creation Creation Value and Control vs. the Kingdom: Founder Throne “The But the author also discovered a potential downside to ushering founders founders ushering to downside also a potential discovered the author But For every additional position of power a founder occupies (being both CEO occupies founder a power of every position additional For Not only do these findings have major implications for how entrepreneurs entrepreneurs how for implications these major findings do only have Not More Recent Research at: strategy-business.com/recent_research in Startups,” by Noam Wasserman, Wasserman, Noam by in Startups,” Source: But this trade-offBut effect kicks after in only three years, st that at delicate they raise, depending on which variables he used to measure a founder’s control. control. measure used a founder’s to he variables which they raise, on depending look and employees founder–CEO pause. Stakeholders ative can investors give to step down and instead, in the words of Cirne, remain “parent of my ba power see a 35.8 percent to 51.4 percent decrease in the amount of financing decrease of in the amount percent 51.4 to percent 35.8 see a power technical typically expertise le visionary or outlook become founders’ which cre- a charismatic or And replacing notes. he the fences,” for “swing to pressure refuse who than security founders rather ing for growth seek out spurts should out the door: heightened risk. Bringing VCs into the picture can ratchet up the can up the picture ratchet into risk. Bringing VCs heightened the door: out propriate time. propriate author also that retain startups found of author an founders level additional whose they’ll whether and determine be willing the ap- at cede power motivations to the company’s value decreases by between 17.1 percent and 22 percent. The The and 22 percent. percent decreases value betweenby 17.1 thecompany’s their understand to founders diligence on due their do should ing enterprise and chairman, for example, as opposed to controlling just one of those roles), those roles), of one just controlling to asand chairman, example, opposed for maximize be part to want a fast-grow- hiresreturns their who and of potential who want to work at or invest in a promising startup. Investors who seek to seek to who startup. Investors in a promising invest or at work to want who should set up and structure set up they also firms, their should but carry the people for lessons crucial growth to than the resources a firm has attracted. vol. 38, no. 2 38, no. vol. Certificate of Excellence in CHALLENGE OR Global Business

OPPORTUNITY? Asian Institute of Management The Philippines EGADE Business School, Tecnológico de Monterrey Mexico ESMT Berlin Germany FGV Escola de Administração de Empresas de São Paulo Brazil Haas School of Business, University of California Berkeley USA HEC Paris France Hong Kong University of Science and Technology Business School China IE Business School Spain IMD Singapore, Switzerland Indian Institute of Management Bangalore India Koç University Graduate School of Business Turkey Lagos Business School, Pan-Atlantic University Nigeria London School of Economics It’s up to you. Through our Certiﬁcate of and Political Science, Department of Management Excellence in Global Business you can choose United Kingdom National University of Singapore advanced courses from 19 top schools Business School Singapore UBC Sauder School of Business in 18 countries. Learn from some of the best Canada UCD Michael Smurﬁt Graduate business school faculty in the world and Business School Ireland University of Cape Town Graduate School of Business build a true global perspective at the same time. South Africa Universitas Indonesia Faculty Search for the right program for you: of Economics Indonesia Yale School of Management globalnetwork.io. USA

TO SET YOURSELF APART UPCOMING OPEN ENROLLMENT PROGRAMS, 2017

THINK BOOTH Strategic Business Leadership July 10–14

Led by highly regarded University of Chicago Booth School Mergers & Acquisitions of Business faculty and leaders in industry, our Executive July 24-28 Education programs offer the latest academic theory coupled Essentials of Effective Management with business know-how and practical real-world applications. September 11-1 5 New Product Innovation, Development Learn more about our programs at and Implementation Strategies ChicagoBooth.edu/ExecEd September 18-22 or call our team at 312.464.8732

CHICAGO HONG KONG LONDON SINGAPORE