Harvard Business Review 3 HBR.ORG Features September 2016

SEPTEMBER 2016

36 The Big Idea Why Your Company Needs a Foreign Policy John Chipman 82 Business Models Turning Services into Products Mohanbir Sawhney 104 Managing Yourself How to Tackle Your Toughest Decisions Joseph L. Badaracco

WHAT DOES YOUR CUSTOMER REALLY WANT? HOW TO FIGURE IT OUT PAGE 45

HERMÈS BY NATURE

September 2016 Contents

45SPOTLIGHT ON CONSUMER INSIGHT ABOVE Marijah Bac Cam 46 CUSTOMERS 54 STRATEGY 64 MARKETING X-pression I The Elements of Value Know Your Customers’ Building an Insights Engine Oil and canvas on Companies can increase both “Jobs to Be Done” A customer-centric approach cardboard revenue and customer loyalty The secret to creating products and is vital for driving growth, and by judiciously selecting from 30 services that customers want to buy Unilever’s insights and analytics fundamental attributes to augment Clayton M. Christensen, Taddy Hall, group exempliﬁes the 10 necessary their value proposition. Eric Almquist, Karen Dillon, and David S. Duncan elements. Frank van den Driest, John Senior, and Nicolas Bloch Stan Sthanunathan, and Keith Weed ON THE COVER: ROSEMARY CALVERT/GETTY IMAGES CALVERT/GETTY ROSEMARY ON THE COVER:

September 2016 Harvard Business Review 3 HBR.ORG Features September 2016

36 76 82 90

THE BIG IDEA NEGOTIATIONS STRATEGY MANAGING YOURSELF Why Your Company How to Make the Other Putting Products The Scandal Effect Needs a Foreign Policy Side Play Fair into Services The effect of a tainted firm on To navigate the geopolitical Challenge it to final-offer How professional services your résumé may be long- complexities of the modern arbitration, in which firms can improve their offerings lasting—but it can be survived. world, companies have to reasonableness can prevail. and increase profitability Boris Groysberg, Eric Lin, George “privatize” foreign policy. Max H. Bazerman and Mohanbir Sawhney Serafeim, and Robin Abrahams John Chipman Daniel Kahneman JUSTIN C. HARDER/CLAUS STUDIOS C. HARDER/CLAUS JUSTIN

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124 IN EVERY ISSUE IDEA WATCH EXPERIENCE 10 From the Editor 20 TALENT 104 MANAGING YOURSELF 12 Contributors Why People Quit Their Jobs How to Tackle Your 16 Interaction Tech surveillance and social media Toughest Decisions monitoring provide clues that can 28 Strategic Humor Five practical questions can help companies reduce attrition. help ensure that you make 121 Executive PLUS Making clickbait videos for the “gray area” choices in the right way. Summaries C-suite, why inclusion remains so Joseph L. Badaracco challenging, and more 109 CASE STUDY 26 DEFEND YOUR RESEARCH An Office Romance Should you stay or move Making a Backup Plan Gone Wrong on after an office romance Undermines Performance A star salesperson struggles ends? page 109 Could thinking about alternative to navigate a bad breakup with paths to your goal make you a coworker. J. Neil Bearden less likely to succeed on the first one you try? 114 SYNTHESIS Is Project Europe Doomed? 31 HOW I DID IT The European Union faced ARZU’s Founder on major problems even before the Shaping Culture Through Brexit vote. David Champion Social Enterprise Earning power, education, and 124 LIFE’S WORK medical care became the three Jimmie Johnson legs of the ARZU stool. The NASCAR champion talks about Connie Duckworth

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From the Editor Thriving in a Volatile Global Landscape

ifteen years ago, Henry Kissinger published a book with the provocative title Does America Need a Foreign Policy? Kissinger was concerned that with the Cold War over, policy makers had become reluctant to articulate a clear vision of U.S. self-interest. FWe’re putting forth a provocative idea of our own in this month’s Big Idea, “Why Your Company Needs a Foreign Policy” (page 36). In the article, John Chipman, chief executive of the London-based International Institute for Strategic Studies, argues that companies, too, need a strategy for protecting their interests in an increasingly unstable world. For Chipman, things changed two years ago, when Russia invaded and then annexed Ukraine’s Crimean peninsula. It was the first major strategic crisis in Europe in a generation, and as I write, Europe faces another crisis: Britain has voted to leave the European Union. A shifting world order requires multinationals to adopt a new approach to global risk management. The shift derives from several megatrends, including America’s growing unwillingness to intervene in faraway hot spots, an increase in officially imposed economic sanctions, and political uncertainty in the developing world. To cope with all this, Chipman says, companies need to effectively “privatize” foreign policy— internalizing many of the elements traditionally employed in statecraft. They need to collect external intelligence, identify allies, and even develop their own relationships with foreign governments. For most companies, this is a dramatic change. But Chipman suggests that in today’s tumultuous geopolitical climate, expertise in international affairs and effectiveness at corporate diplomacy will become a critical new source of competitive advantage.

Adi Ignatius, Editor in Chief JOHN VON PAMER JOHN VON

10 Harvard Business Review September 2016

Contributors Today Bazermancontinues to usemany of was alifemaster intournament bridge asa Nobel Prize–winnerDanielKahneman, thinking abouthow to change theincentives transform the game ofnegotiation by decisionmakingunderuncertainty,thinking, the skillshelearned at thetable—strategic teen andmademoney gambling. Eventually, Max Bazerman gave uphisalternative On page 76, Bazermanandhiscoauthor, and understanding how others arrive at their school interfered withcards—one hadto go. decisions—in hisresearch onnegotiations. career path, 38 years ago, asacardplayer. He of theothersideto actethically. cards interfered withgrad school, andgrad 12 Harvard Business Review September 2016 “According tohim,evena As a PhD candidate at As aPhDcandidateat (page 45), was born in wasborn in (page 45), Charcoal. “Ihave not creative sidewasher on page 82looks atthe an interview with Nitram an interviewwithNitram and creativity,” in shesaid I have kept hismessage Laos andgrew upinFrance. Northwestern’s Kellogg Now aprofessor at She says that theperson See more ofherworkat this Marijah BacCam,this School, he continues his School, hecontinueshis saatchiart.com/mbc. study ofinnovationthrough selected because itsspeedy Mohanbir Sawhney month’s Spotlightartist potential of digitization potential ofdigitization revolution. Hisfeature new-product development. new-product development. peeling avegetable should mundane activitysuchas UPenn’s WhartonSchool, who mostencouraged her with creativity andfantasy.” to transform higher-end the lens ofthedigital to test hypotheses about to testhypothesesabout turnarounds madeiteasy infuse all my daily acts infuse allmydaily acts in myheartandtryto in asculptural way, but be donewithenthusiasm knowledge work. business—an industry he business—an he industry innovation intheﬁlm learned topeelvegetables focused hisresearch on

father.

“Suddenly, everyone was in China John ChipmanwasinChina Joseph Badaraccocredits global markets. To survive, geopolitical volatilityon of strategic shocks and choosing acourse ofaction decades hastaught those ethics anddecisionmaking centuries andcultures, out theprinciples that on theeveofRussia’s a foreign policythink and for the past two and forthepasttwo annexation of the Crimea. annexation oftheCrimea. In thisissue,hepresents a unclear (page 104). five-question framework for five-question framework for says Chipman,companies subjects around theworld. should guide multinationals policy. Onpage 36, helays need acorporate foreign recalls. Hisorganization, meant andhowtheWest meeting withseniorleaders problems. Asaprofessor, tank, studies the effect studiestheeffect tank, when thepathforward is wherever theyoperate. would react,” Chipman wanted toknowwhatit important thinkers, across he has continued to study he hascontinuedtostudy have addressed complex his Jesuithighschoolwith fostering hisinterest inhow HBR.ORG

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SENIOR EDITORS ART DIRECTOR, Alison Beard PRODUCT Scott Berinato Karen Player Lisa Burrell ART DIRECTOR, HBR David Champion (Paris) Matthew Guemple Sarah Green Carmichael Eben Harrell DESIGN DIRECTOR, Maureen Hoch HBR PRESS Jeﬀ Kehoe Stephani Finks Daniel McGinn EDITORIAL Melinda Merino PRODUCTION DIRECTOR Gardiner Morse Dana Lissy Curt Nickisch SENIOR PRODUCTION Steven Prokesch EDITORS Ania Wieckowski Adria Reynolds Practice what we teach: Innovation. MANAGING EDITOR, Jennifer Waring HBR PRESS Christine Wilder Allison Peter ASSOCIATE DESIGN SENIOR ASSOCIATE DIRECTOR, DIGITAL Innovation isn’t a stripe on a chromosome. It can be taught. So EDITORS Marta Kusztra Kate Adams SENIOR INFORMATION can building a corporate culture of innovation. And for thousands Susan Francis DESIGNER Walter Frick of senior global business leaders, Stanford Executive Education Matt Perry ASSOCIATE EDITORS DIGITAL DESIGNER has shown the way. By tapping the innovation engines that power Courtney Cashman Laura Guillen Gretchen Gavett Erica Truxler SENIOR PRODUCT Silicon Valley. By providing open access to the minds that have MANAGERS educated generations of the world’s most successful innovators. ARTICLES EDITORS Emily Ryan Christina Bortz Kimberly Starr Susan Donovan Come to the source. There’s only one: Stanford. PRODUCT MANAGER, Amy Meeker AUDIO AND VIDEO Martha Lee Spaulding Adam Buchholz ASSISTANT EDITORS SENIOR PROJECT UPCOMING PROGRAMS Kevin Evers MANAGER JM Olejarz Lisa Gedick Nicole Torres PROJECT MANAGER Influence and Negotiation Strategies Program VIDEO PRODUCER Theodore Moser Melissa Allard October 9 – 14, 2016 PRODUCTION EDITORS EDITORIAL Jodi Fisher DEVELOPER Dave Lievens Finance and Accounting for the Nonfinancial Executive Tyler Machado SENIOR PRODUCTION November 13 – 18, 2016 PHOTO EDITOR/ SPECIALIST RESEARCHER Robert Eckhardt Andrew Nguyen Executive Leadership Development: PRODUCTION EDITORIAL Analysis to Action SPECIALIST ASSISTANT Alexie Rodriguez Kenzie Travers January 8 – 20 and April 23 – 28, 2017 CONTRIBUTING STAFF (two-module program) STAFF ASSISTANT Kathryn K. Dahl Christine C. Jack Steven DeMaio CONTRIBUTING Kelly Messier The Emerging CFO: EDITORS Katie Robinson Strategic Financial Leadership Program Karen Dillon Kristin Murphy Romano Amy Gallo Dana Rousmaniere February 26 – March 3 and April 30 – May 5, 2017 Jane Heifetz Bonnie Scranton John Landry Loann West (two-module program) Andrew O’Connell Anand P. Raman

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RECENTLY Most corporate environments TRENDING ON need a little of all three strategies HBR.ORG the authors mention. Sometimes How to Know deadlines and collaborative projects If Someone Is require a more accepting approach, Ready to Be a Manager where you devote yourself to work. BY ANNA RANIERI But it’s important to balance that with the revealing approach—being Stop Doing Low-Value Work open about your life outside work— BY PRISCILLA to preserve a healthful culture. CLAMAN Jason Walton, executive, Mortenson How Will Construction You Measure Your Life? It takes courage for a manager BY CLAYTON M. CHRISTENSEN to demonstrate the revealing behaviors and encourage them What to Say among his or her team, especially if and Do When Your Employee the company culture supports only Has Another “ideal” workers. However, I’ve seen Job Offer The Challenges of a that when employees are given the BY AMY GALLO support to be their whole selves, The Countries 24/7 Workplace they willingly go the extra mile That Would Profit Most HBR article by Erin Reid and Lakshmi Ramarajan, June and perform better overall. from a Cashless Caroline Foote, marketing manager World BY BHASKAR CHAKRAVORTI, People today are under intense pressure I loved the recommendation that RAVI SHANKAR while it’s up to individuals to protect CHATURVEDI, to be “ideal workers”—totally committed AND BENJAMIN MAZZOTTA to their jobs and always on call. But after their personal time, it’s usually a leader in the organization who can Where interviewing hundreds of professionals, and must drive the culture toward Predictive accepting a balanced life. Analytics Is Reid and Ramarajan concluded that such Having the Devashish Pandey, senior consultant, Biggest Impact selfless dedication is often not only Deloitte Consulting BY JACOB LARIVIERE, PRESTON MCAFEE, JUSTIN RAO, VIJAY K. unnecessary but actually harmful to What about responding to e-mails NARAYANAN, AND individuals and their firms. The authors after work with “I don’t receive WALTER SUN discuss three strategies for coping with e-mails on my personal phone” or 4 Ways to Be “I don’t share my personal phone More Effective demanding workplaces—accepting, at Execution number at work—if I’m needed in BY JACK ZENGER AND JOSEPH passing, and revealing—and the risks the evening, I should be given a FOLKMAN associated with each. company phone and compensated for being on call.” It would be very helpful if managers understood how difficult being a Sophia Wallingford, data analyst 24/7 employee is and adopted the authors’ ideas for creating a saner Workers are increasingly aware of workplace. However, I’m afraid that, with its gentle tone, this piece will the importance of balancing health, be lost on many people, who don’t have a clue what they’re doing to their happiness, and a career—and those workers. This isn’t a new issue, but it’s an easy one for a boss to ignore. who aren’t burn out inevitably. A As the economy improves, I’m hearing more about people who are well-oiled machine is much more looking for new jobs because their workplaces are toxic and demand efficient than one that has run itself unreasonable time commitments. And more people are turning off into ruin. their phones altogether when they leave work. Amanda Luecht, administrative assistant, Michele M. Horaney, principal, Thought Leader Public Relations Premier Island Management Group

16 Harvard Business Review September 2016 HBR.ORG

Defend Your Research: spots versus those percentages Generalists Get for generalists? That also may be a factor. I’m skeptical about these Better Job Offers Than conclusions because I see a larger Specialists move toward specialization even HBR article by Nicole Torres, June in the most generalist industry When Jennifer Merluzzi and of all: consulting. Damon Phillips conducted Pedro Nuno Chaves Ornelas, manager, a study of nearly 400 financial services advisory, EY Turning Around a Team recent graduates of top Does this research consider the potential selection bias for HBR article by Michael D. Watkins, U.S. business schools who June had gone into investment generalists? If I were an investment Most leaders don’t have the banking, they found bank recruiter, I would probably INTERACT WITH US hire generalists only if they were luxury of building a team The best way to that the MBAs who had truly exceptional but might from scratch. They’re put in comment on any specialized in investment article is on banking were less likely accept weaker performers who charge of an existing team, HBR.ORG. You can are specialists. also reach us via and they need guidance to receive multiple job Nicholas Rait, senior strategy consultant, E-MAIL: hbr_ offers and were offered Deloitte Australia on how to raise their [email protected] FACEBOOK: smaller signing bonuses game. Watkins suggests a In today’s world being able to three-step approach: Size facebook.com/HBR than the MBAs who had TWITTER: twitter. diverse backgrounds. swiftly shift your focus from one up the personnel you’ve com/HarvardBiz area to another is key; nothing inherited, reshape the Correspondence Isn’t it possible that investment is siloed today. Strategy blends may be edited for team, and accelerate team space and style. banks offer a lower bonus to a with operations, technology with development. specialist because they know they people, and art with science. And can get away with it? They realize underneath it all comes culture. The biggest constraint, in my that a specialist in finance will To really master one area, you opinion, is the organization’s culture have less desire and fewer options need to be able to master a few. and the “allowed” pace of change. to go outside the industry. Also, Yuval Dvir, head of online partnerships, The author touches on this at a what are the relative percentages Google for Work high level, but experience shows of specialists hired compared that not moving swiftly to replace Nowadays the description for a with the total available specialist certain members on your team will particular job often involves so increase frustration and hinder a many roles and responsibilities that new manager’s plan. A new manager HBR SURVEY generalists are more likely to be should try to negotiate the leeway How do you respond to texts and hired, since they are the ones who to replace people prior to signing e-mails from colleagues in the evening? will be able to move around within on to the role. Here’s what our readers say: the organization, fulfilling multiple Jean Y. Sabbagh, vice president of roles. Specialists are also needed marketing, SaaS ALWAYS REPLY AND, IF REQUESTED, BANG % OUT SOME WORK (“I’LL HAVE IT FOR YOU but in a different capacity. 24 IN FIVE MINUTES!”) Mubashir Bashir, service development A new leader has to provide manager, E-Resolute stability while also moving the team RESPOND AND GIVE THE IMPRESSION THAT forward. I’ve worked with clients % THEY’RE WORKING (“AM ON IT—WILL TAKE If you look again at the same sample 25 A FEW HOURS”) who suffered because the new of investment bankers, I’m sure leader brought stability but did not you’ll find that many candidates DON’T ALTER THEIR PLANS UNLESS IT’S bring vision or develop a strategic % URGENT (“AT A SHOW—WILL GET TO who joined as generalists eventually 51 THIS TOMORROW”). THEY MAY NOT EVEN direction. Thus they became victim RESPOND THAT EVENING. became specialists. So how do you to a revolving door of leaders. distinguish that? SOURCE THE HIGH-INTENSITY WORKPLACE SURVEY, Michelle Riley Jones, senior HR BY ERIN REID AND LAKSHMI RAMARAJAN Roopa Kamath, consultant, Vasista consultant, The Fahrenheit Group Enterprise Solutions

September 2016 Harvard Business Review 17 WHAT DID ONE DOCTOR DISCOVER DURING THE EBOLA CRISIS?

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DISCOVER THE FUTURE OF HEALTHCARE EDUCATION AT ROSALINDFRANKLIN.EDU PAUL GARLAND Clickbait videos for Clickbait videosfor The surprising power The surprisingpower The argument against GOVERNANCE 24 of “passive” investors SOCIAL MEDIA 22 having aplanB the C-suite DEFEND YOUR RESEARCH 26 September 2016 Harvard BusinessReview PAGE 22 equal. is created diversity Not all Compiled byHBReditors 19 IDEA WATCH

TALENT WHY PEOPLE QUIT THEIR JOBS Tech surveillance and social media monitoring point to new triggers.

magine that you’re looking at your really affects people is their sense of how company- issued smartphone and you they’re doing compared with other people in Inotice an e-mail from LinkedIn: “These their peer group, or with where they thought companies are looking for candidates like they would be at a certain point in life,” says you!” You aren’t necessarily searching for a Brian Kropp, who heads CEB’s HR practice. job, but you’re always open to opportunities, “We’ve learned to focus on moments that so out of curiosity, you click on the link. A allow people to make these comparisons.” few minutes later your boss appears at your Some of the discoveries are unsurpris- desk. “We’ve noticed that you’re spending ing. Work anniversaries (whether of joining more time on LinkedIn lately, so I wanted to the company or of moving into one’s current talk with you about your career and whether role) are natural times for reflection, and you’re happy here,” she says. Uh-oh. job-hunting activity jumps by 6% and 9%, It’s an awkward and Big Brother–ish sce- respectively, at those points. But other data nario—and it’s not so far-fetched. Attrition reveals factors that have nothing directly to has always been expensive for companies, do with work. For instance, birthdays—par- but in many industries the cost of losing ticularly midlife milestones such as turning good workers is rising, owing to tight labor 40 or 50—can prompt employees to assess markets and the increasingly collabora- their careers and take action if they’re un- tive nature of jobs. (As work becomes more happy with the results. (Job hunting jumps team-focused, seamlessly plugging in new 12% just before birthdays.) Large social gath- players is more challenging.) Thus compa- erings of peers, such as class reunions, can nies are intensifying their efforts to predict also be catalysts—they’re natural occasions which workers are at high risk of leaving so for people to measure their progress relative use of an ID to enter and exit the building that managers can try to stop them. Tactics to others’. (Job hunting jumps 16% after re- or the parking garage—to identify patterns range from garden-variety electronic surveil- unions.) Kropp says, “The big realization is that suggest a worker may be interview- lance to sophisticated analyses of employees’ that it’s not just what happens at work—it’s ing for a job. Companies sometimes retain social media lives. what happens in someone’s personal life that outside firms, such as Joberate, to monitor Some of this analytical work is generating determines when he or she decides to look employees’ social media activity for indica- fresh insights about what impels employees for a new job.” tions that people are scouting for new op- to quit. In general, people leave their jobs Technology also provides clues about tions. (Among other things, such firms look because they don’t like their boss, don’t see which star employees might be eyeing the at whom employees are connecting with.) opportunities for promotion or growth, or exit. Companies can tell whether employees Joberate CEO Michael Beygelman compares are offered a bettergig (and often higher pay); using work computers or phones are spend- this emerging science to the way that credit these reasons have held steady for years. New ing time on (or even just opening unsolicited scoring can predict which consumers will fail research conducted by CEB, a Washington- e-mails from) career websites, and research to repay loans. Although some companies based best-practice insight and technology shows that more firms are paying attention hire Joberate to help them anticipate which company, looks not just at why workers quit to these things. Large companies have also individual employees might think of leaving,

but also at when. “We’ve learned that what begun tracking badge swipes—employees’ others use the intelligence to zero in on GARLAND PAUL

20 Harvard Business Review September 2016 HBR.ORG

FROM THE ARCHIVE “The geographic boundaries of these units [zip codes] divide the country into areas which in fact can be deﬁned economically and, even more important, culturally—rather than into areas, 1967 like counties, which are deﬁned politically and are almost meaningless for marketing purposes.”

“ZIP CODE—NEW TOOL FOR MARKETERS,” BY MARTIN BAIER (HBR, JANUARY–FEBRUARY 1967) departments or locations with high “likely THE IDEA IN PRACTICE to leave” scores so that they can work on “THIS IS AN EARLY-WARNING SIGNAL” team building and overall engagement. One large tech company uses it to target people Genevieve Graves studied astrophysics before joining hiQ Labs, it might lure away from other firms. Some a start-up that applies predictive analytics to talent management. investors use it to identify companies that She says the fields aren’t as dissimilar as they sound: “Most of the may soon face turnover in key positions. “If techniques I used as an astronomer—machine learning, scientific the CIO and the head of sales are both likely computation, large data-management tools—directly translate, but to be job hunting, you have to ask what’s up,” now I study people instead of galaxies.” She spoke with HBR about Beygelman says. the emerging science of predicting attrition. Edited excerpts follow. Lori Hock, the CEO of Hudson Americas, a recruitment process outsourcing company What does hiQ Labs do? that uses Joberate, values predictive intel- We use public and internal company data to predict turnover risk. We also provide ligence because it helps her reduce clients’ tools to help with skill mapping, succession planning, internal mobility, and career attrition—and spot things that may be driv- development. It used to be about retention, but now it’s also about getting the most ing it. “Is it a bad manager?” she says. “Is from the employees you have. there a training component? Are we under- valuing certain positions? It gives you a nice What public data do you look at? opportunity to think about what the trig- We read online résumés and profiles. We consider an employee’s social media ger might have been—and to ask questions footprint, which indicates visibility to recruiters. For instance, is an engineer before you lose talent.” participating in open-source code projects? We look at work histories (to get a sense Some firms, such as Credit Suisse, take of how frequently an employee changes jobs) and at the opportunity landscape, this tack with employees identified as being meaning how much demand there is for a particular employee’s skills. These things at risk of leaving: Internal recruiters cold- don’t necessarily mean someone is job hunting—they just indicate recruiter attention. call the employees to alert them to openings People trying to predict attrition often think of “push factors” that make people want inside the company. In 2014 the program re- to leave their jobs, but public data can point to “pull factors” that indicate recruiters duced attrition by 1% and moved 300 employ- might be wooing someone who’s not actively looking. ees, many of whom might otherwise have left, into new positions. Credit Suisse estimates What do managers do with the information? that it saved $75 million to $100 million in Once they know which people to worry about, they rehiring and training costs. can have check-in conversations. Do employees Researchers agree that preemptive find their work challenging and interesting? intervention is a better way to deal Do they see a clear trajectory? (For knowledge with employees’ wandering eyes workers, attrition usually isn’t driven by than waiting for someone to get an compensation.) The data is an early-warning offer and then making a counter- signal that lets managers intervene. offer. CEB’s data shows that 50% of employees who accept a coun- Why do employers find this valuable? teroffer leave within 12 months. Attrition can be expensive, especially with “It’s almost like when you’re in a rela- knowledge workers. We focus on industries tionship and you’ve decided you want such as finance, technology, pharma, and to break up, but your partner does some- biotech, which have high-value contributors. thing that makes you stick around a little A lot of company knowledge walks out the longer,” Kropp says. “Employees who accept door when an employee leaves. You can hire a counteroffer are most likely going to quit somebody with the same skill set, but it takes at some point very soon.” months for that person to get up to speed. HBR Reprint F1609A And when managers leave, they may take a whole team with them. ABOUT THE RESEARCH “The New Path Forward: Creating Compelling Careers for Employees and Organizations,” by CEB (white paper)

September 2016 Harvard Business Review 21 IDEA WATCH HBR.ORG

People who act unethically on the job recall their misdeeds less vividly than they recall their good behavior—a phenomenon researchers call “ethical amnesia.” “WE’RE UNETHICAL AT WORK BECAUSE WE FORGET OUR MISDEEDS,” BY FRANCESCA GINO AND MARYAM KOUCHAKI

SOCIAL MEDIA ORGANIZATIONS MAKING CLICKBAIT VIDEOS FOR THE C-SUITE WE CONFLATE DIFFERENT KINDS Many companies are now creating online videos aimed at global OF DIVERSITY decision makers. To understand executives’ consumption habits, researchers at Alpha Grid (a media company owned by the iversity can be measured on a host Financial Times) and Unruly (a video ad tech ﬁrm) surveyed 87 of dimensions—ethnicity, gender, senior business and government leaders about when, why, and D skills, and so on. A group may be diverse on one or more dimensions and ho- how they watch. The researchers oﬀer these tips: mogeneous on others. But people are really bad at recognizing this subtlety. If a group is diverse in any way, a flaw in our cognitive DO DON’T processing can lead us to perceive it as diverse in every way—a distortion that might help explain why inclusion remains so challenging for many companies. 54% That’s the conclusion of Stanford 3:00 University researchers who conducted several experiments to assess people’s perceptions of diversity. In one, participants looked Air live broadcasts mid-afternoon. at several groups of faces; all the groups were two-thirds male, and some were racially di Keep it short. More than half the leaders Executives watch mostly at night (54%), - surveyed said they generally won’t watch over lunch (30%), or upon waking up (10%). verse. When asked about the level of gender videos that are longer than three minutes. Consider e-mailing video links after hours. diversity, subjects were more likely to report groups with racial diversity as having more gender diversity. In another experiment, groups that wore different-colored T-shirts while working on a task were more likely to + later say that their team was gender-diverse than were groups that wore T-shirts of the same color—even though all the groups had Feature VIPs. More than two-thirds said the same mix of men and women. The effect that the most appealing clips include a exists for less obvious markers of diversity respected figure, such as a journalist or Obsess about mobile. Fully 82% of the too. For instance, participants in two other a big thinker. leaders surveyed watch primarily on a experiments erroneously judged groups laptop or a desktop. to have high ethnic diversity when those 76% groups included people with a variety of programming skills. The researchers hypothesize that these flaws in judgment occur because when assessing diversity, people use any indication of heterogeneity as a heuristic—a shortcut that Highlight key takeaways. The most- Rely on the executives to make videos involves generalizing on the basis of specific often-cited reasons to click on a video go viral. Although they frequently share information. According to one of the research- include “relevance to industry” and “to videos with colleagues, they do so chiefly ers, Stanford assistant professor Lindred gain information for my job.” by e-mail (76%) and typically send a link Greer, this might explain why Silicon Valley to just one recipient. has historically employed men of various SOURCE “THE SCIENCE OF BUSINESS SHARING,” BY ALPHA GRID IN PARTNERSHIP WITH UNRULY ethnicities but relatively few women: Hiring

22 Harvard Business Review September 2016 You’ve earned your money, but are you owning it?

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In a retail chain that implemented a bonus plan for high-performing employees, sales rose on average—but fell in cases where workers thought the bonuses were unfairly awarded or unattainable. “DO INCENTIVE PLANS FOR EXEMPLARY EMPLOYEES LEAD TO PRODUCTIVE OR COUNTERPRODUCTIVE OUTCOMES?” BY CAROLYN DELLER AND TATIANA SANDINO managers see the ethnic diversity, which To see how passive ownership affects gov- masks the lack of gender diversity. “The ernance practices, researchers at Wharton question ‘Are we diverse?’ turns out to be and Boston College studied companies near difficult to answer correctly across multiple the cutoff point between the Russell 1000 dimensions,” Greer says. (a large-company index) and the Russell The researchers warn that an inaccurate 2000 (a smaller-company index). Because view of diversity can lead to poor manage- of the way those indexes are constructed, ment. If a leader overestimates the variety the smaller of the companies in the Russell of skills among the members of a multieth- 1000 (say, the bottom 250) have lower per- nic team, for instance, she might direct the centages of passive investors than the larger team toward solving new problems instead of the companies in the Russell 2000, but the of implementing existing solutions. Perhaps firms are otherwise fairly similar. The most important, the researchers say, their researchers analyzed governance findings call into question much of the lit- practices in the two sets to try to erature on whether diversity improves team determine how passive owner- and organizational performance, because a ship affects policies, behavior, lot of studies have used self-reported mea- and performance. surements of diversity. New studies that ac- Surprisingly, they found that count for distortions in how people perceive higher passive ownership is associ- groups, they write, “might allow us to draw ated with a larger number of inde- more-robust scientific inferences about the pendent board directors. Firms consequences of diversity.” with high passive ownership are also more likely to remove take- ABOUT THE RESEARCH “Spillover Bias over defenses and dispense with in Diversity Judgment,” by David P. Daniels, Margaret A. Neale, and Lindred L. Greer dual-class share structures—actions associ- (working paper) ated with good, shareholder-friendly governance. Moreover, the researchers found that higher passive ownership is associated with Passive fund managers can’t do this— greater profitability and firm value. In effect, GOVERNANCE they’re forced to hold, say, an S&P 500 stock, passive investors seem to be enhancing per- regardless of their view of the company’s formance by pushing for proven governance DEBUNKING THE strategy, simply because the stock is in the in- reforms without much costly monitoring. MYTH OF THE dex they’re tracking. (Some critics refer to the Should we think of these institutional PASSIVE INVESTOR passive camp as “lazy investors.”) Although investors as “passive-aggressive” instead? the financial community has mixed views of One of the researchers, Boston College’s Ian “activist investors” and their tactics, which Appel, says no. Passive “does describe how ver the past 20 years, the share of are often seen as heavy-handed, proponents they pick stocks,” he explains, but it doesn’t mutual fund assets owned by index argue that shareholder influence is part of suggest that they’re meek or lazy when it O funds, or “passive” investors, has what makes capitalism work. As the hedge comes to dealing with management. Firms nearly tripled—a development often seen as fund manager Bill Ackman has put it, “Active with stock held by large index funds “ap- hurting corporate governance. oversight…is essential to the country’s long- pear to be confronted by a more contentious When active investors use their discretion term business performance.” Passive inves- shareholder base.” to buy or sell shares of a company, they’re tors counter that although they can’t threaten voting on the firm’s strategy and rewarding to sell shares, they can influence company be- ABOUT THE RESEARCH “Passive Investors, Not Passive Owners,” by Ian R. or punishing its leaders for performance. havior through proxy votes and other means. Appel, Todd A. Gormley, and Donald B. Keim Even when they’re not buying or selling, “We’re going to hold your stock...when ev- (Journal of Financial Economics, July 2016) they’re often engaged in a dialogue with eryone else is running for the exits,” says F. executives, using the threat of selling to per- William McNabb III, the CEO of Vanguard, the suade managers to shift strategy or increase indexing powerhouse. “That is precisely why Some of these articles previously appeared in diﬀerent form on HBR.org. dividends or buybacks. we care so much about good governance.”

24 Harvard Business Review September 2016 GREAT LEADERS NEVER STOP EVOLVING

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However, the costs of making backup plans DEFEND YOUR haven’t previously been examined, and we believe that acknowledging both costs and RESEARCH benefits can lead to better, more informed MAKING A BACKUP decision making. But the tasks in your experiments were pretty simple and the rewards were— PLAN UNDERMINES no offense—sort of lame. Would you get the same results if you studied people PERFORMANCE in high-stakes situations? We would actually predict that the effect would be more significant, and when we conducted The study: Jihae Shin of Wisconsin School of Business and her a separate survey, interviewing people from coauthor, Katherine Milkman of Wharton, gave 160 university the general public about their real goals, students a sentence-unscrambling task and promised an energy we found correlational evidence supporting that hypothesis. Those who had thought bar to those who performed it well. Before receiving the text through backup plans reported devoting to work on, half the participants were asked to think about less effort to the goals they were trying different ways they could obtain free food on campus should to achieve: getting a promotion, earning they fail to earn the snack. People prompted to think about those a graduate degree, or becoming a vet, backup plans unscrambled significantly fewer sentences, on for example. Also, the participants in our average, than people who hadn’t been asked to formulate a plan B. lab studies spent less than 10 minutes thinking about their backup plans— a tiny investment of their attention—yet The challenge: When we think about what we’ll do if we fail it significantly affected their motivation to achieve our goals, are we less likely to succeed? Can and performance on goal pursuit. In real backup plans backfire? Professor Shin, defend your research. life, when the stakes are higher, we would expect people to devote more time and energy to mapping out detailed backup plans. And as that reduces effort over a Shin: That was our hypothesis, and it HBR: So they weren’t just distracted? Or sustained period, it could result in even proved true not only in this study but in tired from too much thinking? We did more significant negative effects. follow-up experiments that took the test to see whether cognitive fatigue could The idea for this research actually came same approach but offered people be causing the poor performance, but from my own experience in the job market. different rewards—saved time or an participants asked to brainstorm about As I was pursuing an academic faculty job, extra dollar in their pockets. We think other things before unscrambling the I had the option of thinking about a backup that when achieving a goal requires work, sentences did just fine. That confirms that plan—pursuing an industry job—but I found not luck, making a backup plan can hurt cognitive fatigue wasn’t driving our effects. myself not wanting to, because I worried performance by reducing the desire for that it might make me less determined to that goal. We saw this in our third study, But aren’t we taught the importance of not achieve my primary goal. in which we surveyed participants about putting all our eggs in one basket? There how much they wanted the promised are certainly important benefits to making So, to use another cliché, we need to always reward of $1. Those who had been asked to backup plans. One is the psychological act as if failure is not an option? The punch think through backup plans reported that comfort it brings: People think, “I’m going line of this research could certainly be they wanted the cash less than others. They to be OK even if I fail, because I can then do this: If you prepare for failure, you may might not have been aware of this shift in X or Y.” It reduces the perceived uncertainty be more likely to fail. But the practical their mindset while working, but they were of the situation. Another benefit is that if advice we would give is more nuanced than less motivated, so they put in less effort, you fail, you don’t have to dwell on it; you that. We’re not suggesting that you always which hurt their results. can quickly implement your backup plan. avoid making backup plans. But maybe you

26 Harvard Business Review September 2016 HBR.ORG

My aunt always told my cousin, an aspiring dancer, that she should get a teaching degree to fall back on. Was she wrong? Success and performance depend on many factors. For some people, not making a backup plan might indeed be beneficial in helping them put their best effort forward. Some parents assume that having a backup plan is always a good thing, yielding nothing but positive outcomes. Given our findings, we’d suggest that they at least consider the possible negative effects.

Aside from your job search, have these ﬁndings changed how you operate at work? Yes, I now sometimes try to delay making a backup plan until after I’ve could hold off on doing so until you’ve really done everything I can to accomplish put as much effort as possible into your my first goal. For example, when Katy primary goal. If you’re a manager of a and I were working on this research project, team working toward a certain objective, I didn’t think about other projects we could consider asking a second group, consisting do if this one failed. of different people, to come up with the backup plan rather than your A team. I don’t have another Q&A to run If you’re an entrepreneur, think about in September if this one turns out committing to one start-up idea for a period badly. Good. That means you’ll make of time, instead of planning for and being sure it doesn’t. ready to jump to another project as soon as Interview by Alison Beard

PAUL GARLAND PAUL things go south. HBR Reprint F1609B STRATEGIC HUMOR IDEA WATCH 28 Harvard Business Review friends’ liking? your Facebook Is everythingto September 2016 “Well, Iguess it’s oneway to This month’s winningcaptionwassubmittedby CAPTION CONTEST Hilton, KwaZulu-Natal, SouthAfrica. de career prospects. that destroys my post somethingonline I’m bored. IthinkI’ll v elop acan-can doattitude.” contest, go to contest, To enterourcaption HBR.org. Mike Vos of HBR.ORG

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HBR.ORG HOW I DID IT… ARZU’S FOUNDER ON SHAPING CULTURE THROUGH SOCIAL ENTERPRISE by Connie Duckworth

The Idea The author wanted to improve the lives of Afghan women, despite considerable cultural obstacles. Her nonproﬁt found a way to attach education and health care to their employment as rug weavers and to raise their standing in the community. MATTHEW GILSON MATTHEW

September 2016 Harvard Business Review 31 HOW I DID IT

first visited Afghanistan in 2003, financial model and the cultural fit as part of a U.S. delegation fo- seemed to align. I cused on improving the lives of I spent months carrying those women. I was particularly interested four rugs in a wheelie bag around in women’s economic empowerment, Washington, DC, trying to line up some and my initial thought was to create a initial funding. In the summer of 2003 business around some sort of product I set up a 501(c)(3) nonprofit and began that Afghan women could manufac- working to create an entirely new and ture and we could sell for a profit in socially responsible supply chain. The the United States. term “social enterprise” wasn’t well- Until that trip, I had no idea what known back then; I was calling this a we were up against. Afghanistan was “self-funded enterprise,” meaning that dangerous: Planes turned off their although we could accept donations lights to land in Kabul, and we were to fund our operations, our long-term the first group of civilians allowed to goal was to be profitable. It has proved stay in-country overnight since the harder than I ever expected—13 years war began. The villages had no elec- later we’re still not turning a profit. But tricity, so it was difficult to imagine we have been able to document sig- creating a light manufacturing facility. nificant improvements in the lives of Women were still regarded as chattel, the Afghan women we employ—their and they weren’t permitted to leave earnings have jumped dramatically, their homes to take a job. So it was and most now have cell phones, for hard to see how my plan could ever instance—along with a real cultural I happened to be in New York on empower them. shift in how these women are viewed 9/11, and it was a terrifying day, both On the last day of the trip, our mili- by their families and society. We be- for me and for my family back in tary convoy stopped at a dusty NGO lieve that our model, which is based Chicago. At the time, my four chil- shop. U.S. soldiers were stationed to on behavioral economics, would work dren were aged five to 11. The 800- protect us, and we were given 10 min- well with other products and other mile drive home after the bridges utes. I looked around quickly and saw economically underserved people, reopened gave me a long opportunity mostly trinkets. The only higher-end whether in developing countries or to think, and I realized that it was time products were locally woven carpets. here in the United States, in poverty- to make a change: I opted to retire at I bought four small ones and took stricken urban or rural areas. It all age 46. Within months I was asked to them home to Chicago. I knew noth- starts with a job. join the U.S.-Afghan Women’s Council, ing about rugs, but I began studying a bipartisan public-private partner- the industry. I learned that few other Bitten by the Start-Up Bug ship focused on Afghan women. As industries in the world rely as much I’ve always been fascinated by busi- the “business representative,” I made on child and slave labor. That made ness, even as a teenager. After attend- the Afghan economy my priority. very appealing the idea of building a ing the University of Texas, I went to It’s hard to comprehend the scale responsible, sustainable business that Wharton, and then I spent a couple of of need in Afghanistan, but I quickly would employ only adults and treat years working in the oil industry. In became convinced that charity and them humanely. Afghanistan has a 1981 I joined Goldman Sachs in the foreign aid weren’t working. Most of rich history of carpet weaving, and bond department. I liked the work. the aid earmarked for Afghanistan most of the work is done by women In 1990 I became one of the first four never even leaves the United States— in their homes. But the profits go to women to be made partner there, it’s taken as commissions and fees by middlemen, whom we would have and the first from a sales or trading contractors and subcontractors. The to disintermediate in order to pay the function. In the late 1990s I helped U.S. has spent billions in the country, weavers a higher wage. In developed Goldman start an electronic trading and from what I’ve seen on my four economies, large handwoven wool business, which it later spun off. Once visits, there’s very little to show for rugs sell for as much as $8,000, and bitten by the start-up bug, I began it. Even well-run, well-intentioned there’s a robust market for them. The thinking about what I might do next. charities are usually just pulling on

32 Harvard Business Review September 2016 HBR.ORG

In addition to providing employment Earning power, education, and for weavers, ARZU operates medical care: Those became the three three preschools and supplements government K–12 schooling with legs of the stool we were building. As English and computer classes held we learned how to buy wool, contract at its community centers, which are with dyers, and create the most salable open to ARZU families and others. rug patterns, we also had to arrange for four-wheel-drive vehicles and chap- erones to transport pregnant women to and from clinics. The approach has worked: Since 2006, when we began the health care initiative, none of our workers has died in childbirth—in a country with one of the world’s highest maternal death rates. Nor has any one of them lost an infant during birth. In all, our program has helped more than 800 babies come into the world. We employed design thinking as we worked on the larger goals of the project. Instead of looking at the problems through our own lens, we tried to understand them from the point a single thread, such as education or Three Legs of the Stool of view of users—the rural women we health, rather than stepping back to As our understanding of the product would serve. For instance, you might think about poverty alleviation as a and the local environment grew, our think that to improve pregnant wom- human-centric activity. People need goals became more ambitious. We en’s access to medical care, you need an ecosystem that attacks the larger wanted to create a sustainable busi- to build hospitals or train doctors. But set of problems holistically. I believe ness model linking well-paying jobs in rural Afghanistan the real problems that building viable local businesses is to certain behaviors that over time are a much deeper cultural norm (not a more promising way to drive change. would shift the cultural norm. The allowing women to leave home with- To create a self-funded enterprise centerpiece is what we call our “so- out a female chaperone) and logistics that sells rugs, I first needed to learn cial contract,” negotiated with male (safe transportation and tracking of a lot about the product and the mar- heads of household. If a family wants appointments). Design thinking in- ket. I showed the rugs I’d brought back to weave for ARZU (“hope”), they volves looking at how people actually to carpet dealers, who said they were must agree to these conditions: All live and developing a system that suits junk—they’d never sell in the high- children, including girls, must attend their lives. That’s what we do. end U.S. market. It turns out that a lot government school full-time, and Once we had a business model in of factors go into “quality” beyond the all adult women must be “released” place, recruiting weavers required an actual weaving: patterns, colors, dyes, from the family compound in order intensive, house-to-house outreach. the finishing, the wool itself—all are to attend ARZU’s literacy classes or In every village our representatives variables in a very complex supply to be transported to a clinic when first met with the tribal elders to ex- chain. The first rugs I’d bought had tra- pregnant. (Although these rural vil- plain our concept and to get permis- ditional and tribal patterns, and many lages have clinics nearby, families are sion to work there. Then teams of of them were dyed the orange-red often reluctant to let a woman go to men and women began knocking color of madder root. The weavers— one for prenatal care or during labor, on doors. Because Afghanistan is a the people my organization wanted even if there’s a danger she will bleed gender-separated society, only the to employ—were just one link in the to death.) We created incentives for female reps could talk to the women— chain. To make this venture work, women to seek education and health a lesson we learned early on. We ex- we’d have to get involved in every care tied to a job, the way they are in plained that we would be paying the

ELISA BOGOS (TOP); ARZU STAFF (BOTTOM) ARZU STAFF ELISA BOGOS (TOP); step of the process. some developed economies. local market rate for weaving as a

September 2016 Harvard Business Review 33 HOW I DID IT HBR.ORG

salary, rather than delaying payment impact. The ARZU story is compelling to buy food, clothing, and shoes—the (often for months) until a rug had to consumers, but getting the story basics. The next year they typically been completed and sold. And we out is hard work. start to pay down debt. Some of the would pay an additional 50% of that Today revenue from our rugs cov- money goes for small frills, such as rate as a bonus for the highest-quality ers 100% of the cost of goods and all toys for their children on a holiday. work, as an inducement for weavers social programs. As a 501(c)(3), we (Many of the children have never not to cut corners or make mistakes; take donations, but I’ve been a little previously received a gift.) Over time lower-grade products wouldn’t sell. stubborn about that. We don’t have these earnings have a material impact At first people were skeptical, but a development person, and we don’t on well-being. Today 55% of the fami- once a few weavers had signed on and actively fund-raise. I’ve really wanted lies own their own home, and one began talking about the bonuses they to focus on demonstrating that a even owns a car. were receiving, word spread quickly, high-quality, ethically made product Significant changes have occurred and many more families wanted to can create sufficient sales to be self- beyond that material success. All our join our operation. Today we have a supporting. Although we’re not there weavers are now literate (whereas waiting list of weavers. yet, we’ve been fortunate in that a 90% of Afghan women remain illit- handful of private foundations have erate), and 20% are putting a child Getting the Story Out helped us bridge our funding gap from through university, thus expanding When we launched ARZU, I thought time to time. But because distribution opportunity for the next generation. the supply chain and the ground op- has taken so long to develop, we’ve Working and earning money develops erations—the processes that lead to a been left undercapitalized. dignity and self-esteem. These women finished rug—would be the hard parts. are typically the primary breadwin- But our biggest challenge hasn’t been All our weavers are now literate ners in their homes. They’re leaving in Afghanistan; it’s been marketing the house more often. Many of them and distributing the rugs back in the (whereas 90% of Afghan now have radios, so they’re listening United States. We have just three U.S. women remain illiterate), to news of the wider world. Perhaps employees, not including me (I work and 20% are putting a child most important is the cultural shift in as CEO pro bono); they are focused on how men, whether family members design, distribution, and data. through university, thus or village leaders, view women: as ca- The rug industry is highly frag- expanding opportunity for pable human beings or “like any man mented, with thousands of distrib- the next generation. in the village,” as our team often hears. utors and retailers, and trying to We think this model could work connect with each of them is very elsewhere—whether in a developing labor-intensive. We’ve had to do brand ARZU is still relatively small. economy in the Middle East or Africa building on a slim budget, one client at We currently employ 55 people in or on the South Side of Chicago. Once a time. We sell through multiple chan- Afghanistan to manage the operation, we prove that it can be profitable un- nels, including interior designers and and depending on the season, we may der the almost impossible operating commercial design firms that put rugs have 400 or more women weaving for conditions of rural Afghanistan, it in the offices of socially responsible us. Another 150 women do piecework. should be replicable and scalable any- corporations, but those, too, are frag- About 30% of our weavers are wid- where. The key is to make sure the mented markets. We also sell direct. ows; their husbands were killed by market for your products is big and es- Our rugs have won several presti- the Taliban or in the war. Most of the tablished with real buyers—you can’t gious design industry awards, and a re- weavers spent several years in refu- do that with souvenirs or trinkets. It’s nowned group of architects (including gee camps in Pakistan and returned expensive to build a consumer brand. Robert A.M. Stern, Frank Gehry, and with very little. We closely track how And you need to work backward: the late Zaha Hadid) have designed their lives improve as they work with Rather than starting in the B2C mar- modern patterns and gifted them to us. On average, our weavers earn 68% ket, go B2B from the start. Becoming us in support of our mission. Our rugs more than the average per capita in- part of somebody else’s supply chain are very price-competitive with other come in Afghanistan—a measure that can lead to employment and uplift for handmade rugs, and customers learn includes male salaries in urban areas. millions of people around the world. that they have a humane and prosocial In the first year they use the money HBR Reprint R1609A

34 Harvard Business Review September 2016

THE BIG IDEA

36 Harvard Business Review September 2016 HBR.ORG

WHY YOUR COMPANY NEEDS A FOREIGN POLICY

MULTINATIONALS MUST ADDRESS GROWING GEOPOLITICAL VOLATILITY. BY JOHN CHIPMAN JUSTIN C. HARDER/CLAUS STUDIOS C. HARDER/CLAUS JUSTIN

September 2016 Harvard Business Review 37 THE BIG IDEA WHY YOUR COMPANY NEEDS A FOREIGN POLICY

“neighborhood watch” schemes, and a growing num- IN FEBRUARY 2014, RUSSIA ber of vigilante groups as well as countries eager to challenge the rules of the game, many parts of the INVADED THE UKRAINIAN world look and feel unstable. Companies cannot PENINSULA OF CRIMEA, assume, in any region of the world, that the strategic status quo will be sustained by neat balances of AND THE FOLLOWING power or unbreakable promises of foreign policy assistance from superpower states. MONTH, IT ANNOUNCED In this new reality, the most successful multinational companies will be those that make expertise CRIMEA’S ANNEXATION. in international affairs central to their operations, adopting what can best be described as a corporate THIS SUDDEN ACT MARKED foreign policy. Such a policy will have two goals: to improve a company’s ability to operate in foreign en- THE BEGINNING OF THE FIRST vironments through effective corporate diplomacy, MAJOR STRATEGIC CRISIS and to ensure its success wherever it is engaged through careful geopolitical due diligence. IN EUROPE IN A GENERATION Multinationals operate in many very different environments and in many industries; however, sev- AND SERVED AS A WAKE-UP eral principles underlie successful corporate foreign policy wherever it is practiced. Adhering to them can CALL TO BUSINESS LEADERS. provide a new source of competitive advantage.

As the crisis was unfolding, the Bank of England sur- Geopolitical Risk Today veyed business executives on their views of systemic When my organization, the London-based geopo- risk and in June published the striking results: 57% litical think tank IISS, hosted a workshop for exec- cited geopolitical risk as the greatest challenge fac- utives in 1994 on the topic “Do companies need a ing their business, up from 13% the previous year. foreign policy?” the session was quite muted. At the Subsequent Bank of England surveys have all ranked time, companies were content to consider the still geopolitical risk as the most challenging risk to man- relatively novel concepts of CSR and stakeholder age—above cyberattacks, financial disruption, and engagement as part of a global business strategy but even an economic downturn. thought foreign policy was a step too far. Avoiding Geopolitics is back—just witness the recent politics—standing above or apart from the political Brexit decision, which will dramatically change the fray—was the preferred method for protecting inter- future shape of the EU as much as the UK’s relation- ests and advancing reputation. Now when I speak ship to it—and not just in Europe. A more confident to executives, most realize that their company must China has taken measures to assert its territorial adopt a stronger foreign policy attitude. There are claims in the East and South China Seas. In the several key reasons for this shift. Middle East, advances by Islamic State of Iraq and The decline of U.S. intervention. All the chal- the Levant (ISIL) and its declaration of a caliphate lenges to the global order in recent years have been have threatened the territorial integrity of several made without any swift or decisive rebuke from states. ISIL’s advances in Libya and the activities of America or its allies. It is true that a diverse coalition other terrorist groups in West Africa have further de- that includes the United States is engaged in mili- stabilized governance across large territories there. tary operations to defeat ISIL, that NATO has seen The internal politics of Africa and Latin America, too, its sense of purpose in Europe revived, and that the are often mercurial. United States is engaged in a “pivot” toward Asia. Yet Adding to the climate of destabilization, the the speed of events and America’s sluggish reactions United States is no longer certain to intervene if the suggest that we are in an age of “living tactically” status quo in some region or other is challenged. while strategic structural adjustment takes place With no clear “world policeman,” few effective before our eyes. Future American presidents may

38 Harvard Business Review September 2016 HBR.ORG

Idea in Brief THE CHALLENGE THE SOLUTION IN PRACTICE Several global forces are complicating the To navigate the geopolitical complexities A corporate foreign policy has two geopolitical environment for multinational of the modern world, companies have components. Geopolitical due diligence companies: increasing global instability to “privatize” foreign policy, internalizing involves the assessment of local, combined with a decline in U.S. many of the elements traditionally regional, and transnational risks facing intervention, the proliferation of economic employed in statecraft. a company. Corporate diplomacy aims sanctions as a tool of statecraft, and to enhance a company’s ability to increased trade among developing nations. operate internationally and to ensure its success in each particular country with which it is engaged.

be more assertive, but the appetite for intervention multi national Kinross Gold resisted that pressure, among U.S. policy makers and the public alike is on arguing that having operated in Russia for 20 years, the wane. The world will be less stable as a result, it had an obligation to shareholders and its Russian which is the first reason multinational companies employees to attend. The French oil and gas giant must focus anew on geopolitical risk. TOTAL persisted with investment in Myanmar in Increase in economic sanctions. The second the early 2000s despite that country’s pariah status, reason companies must improve their ability to man- also helping to keep the lights on in neighboring age geopolitical risk is the proliferation of economic Thailand. International success depends on busi- sanctions as an instrument of foreign policy—an ness leaders’ having the foreign policy acumen to emphasis that has increased the ties between global distinguish between what they can and can’t do in a commerce and geopolitics. The United States is, sanctions environment or tough diplomatic climate. and will remain for some time, a sanctions super- Increase in south-south trade. The thicken- power, and the European Union also wields con- ing flows of commerce among emerging nations siderable sanctions power. When the EU joined the without the West as intermediary, and the volatil- United States in imposing sanctions on Iran, many ity of domestic politics in high-growth markets, is European companies were disabled from trading the third reason multinationals must become more with that country. The United States and the EU have, adept at corporate foreign policy. Businesses in the with their G7 colleagues, imposed heavy commercial developing world are finding opportunities in new sanctions on Russia, constraining trade there. The markets and discovering new rivals. These relation- reach of U.S. sanctions is particularly powerful, as ships require a sophisticated understanding by mul- non-U.S. companies worry that their ability to trade tinationals. A U.S. company investing in Ghana, for in the United States may suffer if they sustain trade instance, needs to understand not just America’s relations with countries or entities sanctioned by foreign policy toward Ghana and Ghana’s inter- Washington. Companies have become used to con- nal politics but also Chinese policy toward Ghana, sulting officials in Washington and Brussels, and in given Beijing’s commercial clout there. Investing in other European capitals to alert them to any unin- Myanmar requires an understanding of its complex tended consequences of sanctions policies. Such con- internal politics but also an appreciation of its rela- sultations will be a persistent feature of international tions with China, India, and the other ASEAN states, commerce for the foreseeable future. all of whom have important interests in the country. Good businesses are smart about understand- The uncertainty of domestic politics in high- ing the sanctions environment and how quickly it growth markets poses specific geopolitical chal- may evolve. They also know how to conduct busi- lenges. Sanctions may be lifted against Iran, but ness as usual when bilateral relations decline but how many companies would be confident investing foreign policy pressure stops short of legal sanc- there unless they understood the relations between tions. At the height of the tension with Moscow over all the domestic actors and the links between some Ukraine, for example, Canada’s government tried companies and the government and the security ap- to persuade its businesses to boycott an economic paratus? Geopolitical due diligence is vital before forum in St. Petersburg. The CEO of the mining even contemplating first steps.

September 2016 Harvard Business Review 39 THE BIG IDEA WHY YOUR COMPANY NEEDS A FOREIGN POLICY

What Is Corporate Foreign Policy? in the face of a coup, state intervention, the actions To navigate the geopolitical complexities of the of local oligarchs, a change in the political fortunes modern world, companies have to, in effect, “priva- of a key local partner, or a radical shift in public tize” foreign policy—that is, they must internalize sentiment toward the company. many of the elements traditionally employed in The reality in the 21st century is that companies statecraft. For nation states, a foreign policy requires cannot escape politics, nor can they consistently that a country define its interests, collect and ana- pretend to be politically neutral. The answer is lyze external intelligence, find regional and local al- to embrace the need to engage politically and dip- lies, and cultivate an environment conducive to its lomatically. Today’s corporate foreign policy has success. A country must be mindful of the cultural two components: geopolitical due diligence and conditions in which it operates, adapting its style of corporate diplomacy. engagement as necessary while remaining true to its moral principles. Multinational companies must do New Principles of all these things and more. Geopolitical Due Diligence Companies today take direct control of their in- Just as companies conduct regulatory, legal, finan- ternational image and reputation. Few, if any, wish cial, and other due diligence, they must also conduct to be seen principally as the commercial arm of a geopolitical due diligence. To do this, they have tra- particular nation, as was the East India Company ditionally relied on country risk reports, but in an while Britain held imperial sway from the 17th to age of transnational and local threats, geopolitical the late 19th centuries. Nor would companies wish due diligence needs to occur not just at the country to follow the example of the United Fruit Company, level but at other levels and in other spheres as well. which was complicit with the U.S. government in Companies must: the 1954 coup in Guatemala. That experience left a Assess transnational risk. Broad, regional risks may pose a greater threat than country risks, as the Norwegian oil company Statoil learned in CSR AND OTHER TOOLS DO January 2013. A gas facility in Algeria that it ran, along with BP and the Algerian state oil company LITTLE TO HELP A COMPANY Sonatrach, suffered a terrorist attack that led to the CAPTURE OPPORTUNITY death of 40 people from 10 nations. Following a full investigation by a former Norwegian head of intel- OR PROTECT INVESTMENTS ligence, Statoil realized that its corporate safety approach did not account for geopolitical threats IN THE FACE OF to security—and that such threats could not be understood solely on a country-by-country basis. The GEOPOLITICAL UPHEAVAL. terrorist attack, attributed to al Qaeda, was conceived in Mali, launched from southwest Libya, and legacy of distrust of multinationals, and companies carried out in Algeria. Only a rigorous assessment spent the latter part of the 20th century bending over of transnational and regional threats might have backward to appear politically neutral. anticipated this risk. Indeed, since at least the mid-1980s, companies Effective geopolitical due diligence requires that have sought to show that they were doing good in companies develop an understanding of both coun- society and have worked hard to present themselves try and transnational risk and then assess both un- as distinctly apolitical. They have adopted a range der a broader geopolitical overlay. Statoil now tests of strategies in this effort, including CSR, brand and its country risk, transnational threats, and broader reputational risk management, and stakeholder geopolitical trends analysis at a high management management, along with defensive and public rela- level, separately from formal capital expenditure tions actions to address concerns of NGOs or even planning exercises. It engages a very sophisticated co-opt them. Yet this toolbox of corporate external team of internal analysts to assess geopolitical risk activities has done little to help a company capture on a continual basis and has international affairs opportunity or protect operations and investments experts brief the board.

40 Harvard Business Review September 2016 HBR.ORG

Pay attention to regional political trends. more often than not, would have meant forgoing Due diligence at this level isn’t just about risk assess- all opportunities there. ment—it’s also about sensitivity to regional political Don’t neglect home and near-abroad risk. developments. International companies that are While it’s natural to place the most attention on seen to be supportive of well-conceived regional ini- places a company might least understand, the great- tiatives can build a geopolitical support base that po- est geopolitical and commercial risks often occur sitions them to capture future value. For example, as close to home. For example, the referendum on Mexico, Colombia, Peru, and Chile place greater em- British membership in the EU had large ramifica- phasis on the integration of their countries through tions for UK businesses, so many began actively to the creation of the Pacific Alliance (PA) trading bloc, campaign to remain in the Union in the spring of private sector firms that support the goals of the al- 2016 in advance of the vote, calculating that silence liance may do correspondingly well there. Although on this “political” issue was not in the best interests the Brazilian government views the PA as an unwel- of their workers or shareholders. come rival to the Mercosur trading bloc, Brazilian It is not unusual for companies to overlook politi- companies have taken a more positive view. The cal and economic developments close to home that large Brazilian financial institution BTG Pactual, for they would successfully perceive further afield. Vale, instance, opened offices in all four countries once the Brazilian mining company, has generally orga- the Pacific Alliance was established. nized itself well in its investments in Mozambique, Assess local in-country risk. States that are making an enormous effort to develop a refined perceived to be generally unstable may still have understanding of that country. On the other hand, large sections that are conducive to investment. it experienced striking difficulties in neighboring For example, oil and gas firms have invested in the Argentina, a country one would expect it to under- north of Iraq in the area administered by the Kurdish stand well. In 2011, it made a major investment in the Regional Government because they are confident western province of Mendoza, but when exchange that the relative security there will permit continu- rate controls and exceptionally high inflation radi- ous operations. An international shipping company cally increased costs at the Rio Colorado mine, it renewing its political risk insurance for the Port of became commercially unviable. In April 2013, af- Surabaya, in a stable region of Indonesia, should not ter a meeting between the presidents of Brazil and be moved by the incidence of terrorist activity in Bali. Argentina, an agreement was reached for Vale to exit The Mexican state of Sinaloa has murder rates simi- Argentina. Abandoning the project cost Vale several lar to those in El Salvador, the homicide capital of billion dollars—a blow that could have been avoided the world in 2015, while murder rates in the state of had it taken a more prudential approach to investing Chiapas are no higher than those in Hawaii. In Africa, in its neighbor. too, threats are often local: Kano and Baga, in Nigeria, are extremely dangerous, Lagos dramatically less so. New Principles of Decisions about doing business in one part of a Corporate Diplomacy troubled country aren’t simple or straightforward, Good geopolitical due diligence includes careful as- however. Several years ago the Indian firm Reliance sessment of the local, regional, and international sold its interest in Kurdish Iraq to Chevron, wishing forces at play before, during, and after any invest- to position itself to take advantage of the potentially ment. The role of corporate diplomacy is twofold: to larger opportunities emerging in southern Iraq from enhance a company’s general ability to operate inter- which it might have been barred because of opera- nationally and to ensure its success in each particular tions in the north. Companies from countries in- country with which it is engaged. The general inter- cluding Korea, the U.S., and Austria took different national reputation of a company can be affected by approaches: Some judged that they could trade with its success or failure in any given country, and like- both southern Iraq and the north; others decided wise a company’s ability effectively to enter newly to bet only on the north. Regardless of the strategic attractive markets or gracefully exit from suddenly decision, each company had to have in mind a co- unappealing ones depends on its broader reputation. herent foreign policy approach toward the various In the pursuit of those goals, companies can Iraqi entities with which it was engaged. Neutrality, neither comport themselves like NGOs—beating the

September 2016 Harvard Business Review 41 THE BIG IDEA WHY YOUR COMPANY NEEDS A FOREIGN POLICY

drum of a single moral issue and advocating resolu- States, Huawei has succeeded in gaining contracts tion of that issue above all other priorities—nor act as with smaller carriers, such as SpeedConnect, that substitutes for governments and attempt to provide have operations in rural areas across the country. It local populations with all the public goods they need. has gone to great lengths to demonstrate its inde- Rather, they must cultivate wide and deep relations pendence from the Chinese government. In a rare in- with both government and society. Wherever they terview, in which he acknowledged the perceptions wish to operate, they must identify the various stake- of his company as a front for the PLA, Ren noted that holders, understand which groups may be support- the company’s goal was “to make people perceive ive of company goals and which are likely to protest Huawei as a European company”—a pretty clear, if or oppose them, and develop strategies to engage eccentric, endorsement of the idea that companies each constituency effectively. sometimes need to detach themselves from their Four key principles underpin an effective corpo- home country’s foreign policy. rate diplomacy strategy. Where possible, develop a transnational Develop your own foreign policy stance. character. The larger a multinational company be- The first principle of corporate diplomacy is that comes, the more important it is to develop a transna- companies must develop their own approach to tional character. That’s because when a company or foreign governments, rather than manipulate or be an investor group is seen as having a clear national manipulated by the policies of their home country. origin, it risks bearing the brunt of a political dis- To be sure, home-nation muscle can have its ad- pute. For example, in 2008 the French supermarket vantages. The Italian firm Trevi, for example, won chain Carrefour was boycotted in China in retalia- a contract in 2016 to repair the heavily damaged tion for protests in Paris by pro-Tibet demonstrators. Mosul dam in Iraq—just months after Italian Prime Business suffered until Carrefour, with help from Minister Matteo Renzi announced the deployment the Chinese government, made a strong case for its of 450 troops to defend the dam against ISIL. The international credentials, pointing out that most UK’s “prosperity agenda” calls on foreign embassies of its employees in China were Chinese. Today the and high commissions abroad to support the aims of company is seen not as French but as a transnational British companies internationally. Japan supports its globalized player in the retail market. companies economically when they seek business Deracination comes with two major caveats. The opportunities outside the domestic market. first is that declaring publicly what nationality you All that said, companies that align themselves too are not can be effective in certain situations. Japanese much with their home government often encoun- companies have pushed into Africa and Latin ter problems. It is not clear that Monsanto gained America in part by distinguishing themselves from hugely when the U.S. government lobbied intensely Chinese companies, which have gained a reputation in its behalf to encourage European consumers to for exploitation in many areas of those continents. be more accepting of genetically modified foods. Second, companies should not become so state- Sovereign wealth funds have for almost a decade less that they feel no obligation to pay taxes any- been trying to convince governments and publics where. The failure to pay a decent tax on earnings abroad that they can take decisions independently can itself denote a failure of good foreign policy of their home government’s foreign policy concerns practice: It can damage a company’s reputation and of the day. Often, big businesses are better off when lead to strong government action—as evidenced by they develop a character of their own while craft- the recent legislative backlash against U.S.-based ing a foreign policy approach. In entering the U.S. companies seeking corporate inversions. market, China’s Huawei telecommunications firm Diversify your political relationships. experienced difficulties at the federal level because Companies must engage all actors rather than at- of its founder Ren Zhengfei’s links to the People’s tempt to mitigate geopolitical risk just through good Liberation Army (PLA). The United States was con- government contacts (on the one hand) and good cerned that Huawei’s telecom systems could be used social practices (on the other). It is the dynamic re- to relay data to the Chinese security apparatus. In lationship between the government, the business response, Huawei shifted its focus to the state level. elite or oligarch class, and civil society that needs Having been shut out of Tier 1 carriers in the United to be appreciated. In high-growth markets where

42 Harvard Business Review September 2016 HBR.ORG

domestic politics are particularly volatile, the in- state-owned mining company, argued that its at- ternal balance of power between key actors in the tempts to exercise its option to buy a stake in the economic and political spheres must be continually national assets were ignored by Anglo, which instead monitored. Companies need to be alert to fast-paced began negotiations to sell 24.5% of the operation to change in these relationships and be ready to adapt. Japan’s Mitsubishi for $5.4 billion. Anglo was ada- The Spanish oil company Repsol, operating in mant that it was within its rights to arrange a better Argentina as YPF, for a time took comfort in the fact deal for its shareholders and accused Codelco of us- that a senior businessperson close to then-President ing bullying tactics to prevent the sale. A standoff fol- Nestor Kirchner owned a large share of the operation lowed that became extremely costly to both sides. It and was on its board. When Kirchner’s wife, Cristina was resolved only when Anglo agreed to sell a 30% Kirchner, succeeded him as president, she national- stake in its mining assets to Codelco at a discount to ized YPF, and Repsol’s principal contact was power- market price, thus damaging Anglo’s overall position less to prevent it. While Repsol could have done little in Chile. While Anglo could properly argue that it was differently to prevent a nationalization—which prob- acting in its shareholders’ fiduciary interests, and ably hurt Argentina more than the oil company—the while the ultimate agreement saved face on all sides, experience serves as a cautionary tale that cultivat- Anglo should have realized that it was unlikely to win ing contacts so closely associated with a particular re- such a dispute in a foreign market against a state firm gime or stakeholder creates a single point of vulner- and taken action more quickly to end the standoff. ability and does little to mitigate geopolitical risk. The best political risk insurance remains a wide and deep set of relationships that strengthens the company’s COMPANIES MUST DEVELOP implicit political license to operate effectively. Don’t sabotage yourself. Political risk is not THEIR OWN APPROACH TO just something that happens to corporate bystanders. FOREIGN GOVERNMENTS, It can also be caused by inept company action, such as taking long-standing partners for granted or acting RATHER THAN MANIPULATE to advance shareholder value without regard to local circumstances. Companies need a genuine under- OR BE MANIPULATED standing of the political and foreign policy interests of the countries in which they invest so that they can BY THE POLICIES OF THEIR be fleet-footed in responding to political change. In October 2015, MTN, the South African–based HOME COUNTRY. cellphone provider, was fined $5.2 billion in Nigeria for failing to cut off service to 5 million unverified AT BOTTOM, geopolitical volatility is no different from subscribers who had not provided their addresses other forms of volatility. As long as a company’s geo- when buying SIM cards. The Nigerian government political assessment processes are comprehensive had passed legislation requiring registration as a and its corporate foreign policy shrewd, business security measure to help prevent insurgent groups leaders should be able to navigate these challenging such as Boko Haram from using untraceable mobile times. In judging the quality of a company, investors phones. A casual observer of Nigerian politics—let will continue to look at traditional indicators of com- alone a major investor in the country—would be mercial attainment. Increasingly, however, they will expected to recognize that the battle against Boko mark companies also on their foreign policy aptitude Haram was a top national priority. In addition, MTN and their corresponding business resilience in the should have been attuned to the rivalry that exists face of geopolitical shock. HBR Reprint R1609B between its home country and Nigeria—the two largest economies on the continent—and had the diplo- John Chipman is the director-general and chief matic intelligence to act sensitively with regard to executive of the International Institute for Strategic Nigerian authorities. Studies. He serves on the board of the Abraaj Group, a global growth-markets private equity ﬁrm based in Mining giant Anglo American’s misadventure Dubai, and as special adviser to the chairman of Reliance in Chile in 2012 is another example. Codelco, a Industries, based in Mumbai.

September 2016 Harvard Business Review 43 Online Exclusives

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hbr.org/magazine HBR.ORG SPOTLIGHT 46 54 64 The Elements Know Your Customers’ Building an of Value “Jobs to Be Done” Insights Engine by Eric Almquist, by Clayton M. Christensen, by Frank van den Driest, John Senior, Taddy Hall, Karen Dillon, Stan Sthanunathan, and Nicolas Bloch and David S. Duncan and Keith Weed

Consumer Insight ARTWORK Marijah Bac Cam Dandelion Ink and marker on paper

September 2016 Harvard Business Review 45 SPOTLIGHT ON CONSUMER INSIGHT ARTWORK Marijah Bac Cam, InkPulse For Winter ~III~ SPOTLIGHT Ink, acrylic, spray paint, and pastel on paper HBR.ORG

Eric Almquist is a partner John Senior is a partner with Bain & Company’s with the Customer Customer Strategy & Strategy & Marketing Marketing practice and the practice. Nicolas Bloch global head of consumer is a coleader of Bain’s insights for Bain. Strategy practice.

The Elements of Value Measuring—and delivering— what consumers really want BY ERIC ALMQUIST, JOHN SENIOR, AND NICOLAS BLOCH

hen customers evaluate a product or service, they weigh its perceived value against the asking W price. Marketers have generally focused much of their time and energy on managing the price side of that equation, since raising prices can immediately boost proﬁts. But that’s the easy part: Pricing usually consists of managing a relatively small set of numbers, and pricing analytics and tactics are highly evolved. What consumers truly value, however, can be difficult to pin down and psychologically complicated. How can leadership teams actively manage value or devise ways to deliver more of it, whether functional (saving time,

September 2016 Harvard Business Review 47 SPOTLIGHT ON CONSUMER INSIGHT

reducing cost) or emotional (reducing anxiety, pro- important; instead we explore what underlies that viding entertainment)? Discrete choice analysis— statement. For example, when someone says her which simulates demand for different combinations bank is “convenient,” its value derives from some of product features, pricing, and other components— combination of the functional elements saves time, and similar research techniques are powerful and avoids hassle, simplifies, and reduces effort. And when useful tools, but they are designed to test consumer the owner of a $10,000 Leica talks about the quality reactions to preconceived concepts of value—the of the product and the pictures it takes, an underly- concepts that managers are accustomed to judging. ing life-changing element is self-actualization, aris- Coming up with new concepts requires anticipating ing from the pride of owning a camera that famous what else people might consider valuable. photographers have used for a century. The amount and nature of value in a particular Three decades of experience doing consumer re- product or service always lie in the eye of the be- search and observation for corporate clients led us holder, of course. Yet universal building blocks of to identify these 30 fundamental attributes, which value do exist, creating opportunities for companies we derived from scores of quantitative and qualita- to improve their performance in current markets or tive customer studies. Many of the studies involved break into new ones. A rigorous model of consumer the well-known interviewing technique “laddering,” value allows a company to come up with new com- which probes consumers’ initial stated preferences binations of value that its products and services to identify what’s driving them. could deliver. The right combinations, our analysis Our model traces its conceptual roots to the psy- shows, pay off in stronger customer loyalty, greater chologist Abraham Maslow’s “hierarchy of needs,” consumer willingness to try a particular brand, and which was first published in 1943. Then a faculty sustained revenue growth. member at Brooklyn College, Maslow argued that We have identified 30 “elements of value”—fun- human actions arise from an innate desire to ful- damental attributes in their most essential and dis- fill needs ranging from the very basic (security, crete forms (see the exhibit “The Elements of Value warmth, food, rest) to the complex (self-esteem, Pyramid”). These elements fall into four categories: altruism). Almost all marketers today are familiar functional, emotional, life changing, and social im- with Maslow’s hierarchy. The elements of value ap- pact. Some elements are more inwardly focused, pri- proach extends his insights by focusing on people as marily addressing consumers’ personal needs. For consumers—describing their behavior as it relates to example, the life-changing element motivation is at products and services. the core of Fitbit’s exercise-tracking products. Others It may be useful to briefly compare Maslow’s are outwardly focused, helping customers interact thinking with our model. Marketers have seen his hi- in or navigate the external world. The functional ele- erarchy organized in a pyramid (although it was later ment organizes is central to The Container Store and interpreters, not Maslow himself, who expressed Intuit’s TurboTax, because both help consumers deal his theory that way). At the bottom of the pyramid with complexities in their world. are physiological and safety needs, and at the top In our research we don’t accept on its face a con- are self-actualization and self-transcendence. The sumer’s statement that a certain product attribute is popular assumption has been that people cannot attain the needs at the top until they have met the ones below. Maslow himself took a more nuanced view, realizing that numerous patterns of fulfillment The elements of value can exist. For example, rock climbers achieve self- actualization in unroped ascents of thousands of feet, extend Maslow’s ignoring basic safety considerations. Similarly, the elements of value pyramid is a “hierarchy of needs” heuristic model—practical rather than theoreti- cally perfect—in which the most powerful forms of by focusing on people value live at the top. To be able to deliver on those higher-order elements, a company must provide at as consumers. least some of the functional elements required by

48 Harvard Business Review September 2016 THE ELEMENTS OF VALUE HBR.ORG

Idea in Brief THE CHALLENGE THE ANSWER THE OPPORTUNITY What customers value in a The authors describe 30 The elements of value work product or service can be “elements of value” that meet best when a company’s leaders hard to pin down. Often four kinds of need—functional, recognize their ability to spark an emotional beneﬁt such emotional, life changing, growth and make value a as reducing anxiety is as and social impact—and that, priority. Companies should important as a functional one when optimally combined, establish a discipline around such as saving time. How increase customer loyalty and improving value in three can managers determine revenue growth. areas: new-product the best way to add value to development, pricing, and their oﬀerings? customer segmentation.

a particular product category. But many combina- used metric for customer loyalty and advocacy— tions of elements exist in successful products and and the company’s recent revenue growth. services today. Our first hypothesis was that the companies Most of these elements have been around for that performed well on multiple elements of value centuries and probably longer, although their mani- would have more loyal customers than the rest. The festations have changed over time. Connects was survey confirmed that. Companies with high scores first provided by couriers bearing messages on foot. (defined as an 8 or above) on four or more elements Then came the Pony Express, the telegraph, the from at least 50% of respondents—such as Apple, pneumatic post, the telephone, the internet, e-mail, Samsung, USAA, TOMS, and Amazon—had, on av- Instagram, Twitter, and other social media sites. erage, three times the NPS of companies with just The relevance of elements varies according to one high score, and 20 times the NPS of companies industry, culture, and demographics. For example, with none. More is clearly better—although it’s ob- nostalgia or integrates may mean little to subsis- viously unrealistic to try to inject all 30 elements tence farmers in developing countries, whereas into a product or a service. Even a consumer pow- reduces risk and makes money are vital to them. erhouse like Apple, one of the best performers we Likewise, throughout history, self-actualization has studied, scored high on only 11 of the 30 elements. been out of reach for most consumers, who were Companies must choose their elements strategically, focused on survival (even if they found fulfillment as we will illustrate. through spiritual or worldly pursuits). But any- Our second hypothesis was that companies thing that saved time, reduced effort, or reduced doing well on multiple elements would grow rev- cost was prized. enue at a faster rate than others. Strong performance on multiple elements does indeed correlate Growing Revenue closely with higher and sustained revenue growth. To test whether the elements of value can be tied Companies that scored high on four or more ele- to company performance—specifically, a company’s ments had recent revenue growth four times greater customer relationships and revenue growth—we than that of companies with only one high score. collaborated with Research Now (an online sam- The winning companies understand how they stack pling and data collection company) to survey more up against competitors and have methodically cho- than 10,000 U.S. consumers about their perceptions sen new elements to deliver over time (though most of nearly 50 U.S.-based companies. Each respondent of them did not use our specific framework). scored one company—from which he or she had Next we explored whether the elements of bought a product or service during the previous six value could shed light on the astonishing market months—on each element, using a 0–10 scale. When share growth of pure-play digital retailers. This, too, companies had major branded divisions such as in- was confirmed empirically. Amazon, for instance, surance or banking, we conducted separate inter- achieved high scores on eight mostly functional views focused on those divisions. We then looked elements, illustrating the power of adding value at the relationships among these rankings, each to a core offering. It has chosen product features company’s Net Promoter Score (NPS)—a widely that closely correspond to those in our model. For

September 2016 Harvard Business Review 49 SPOTLIGHT ON CONSUMER INSIGHT

example, in creating Amazon Prime, in 2005, the company initially focused on delivering reduces cost No other elements and saves time by providing unlimited two-day shipping for a flat $79 annual fee. Then it expanded Prime can make up for a to include streaming media (provides access and fun/ entertainment), unlimited photo storage on Amazon significant shortfall servers (reduces risk), and other features. Each new element attracted a large group of consumers and on quality, which has helped raise Amazon’s services far above commodity status. Prime has penetrated nearly 40% of the U.S. the greatest effect on retail market, and Amazon has become a juggernaut of consumer value. That allowed the company to consumer advocacy. raise Prime’s annual fee to $99 in 2015—a large price increase by any standard. many consumer interactions easier and more convenient. Mainly digital companies thus excel on saves Patterns of Value time and avoids hassles. Zappos, for example, scored To help companies think about managing the value twice as high as traditional apparel competitors did side of the equation more directly, we wanted to un- on those two elements and several others. Overall, it derstand how the elements translate to successful achieved high scores on eight elements—way ahead business performance. Are some of them more im- of traditional retailers. Netflix outperformed tradi- portant than others? Do companies have to compete tional TV service providers with scores three times at or near the top of the pyramid to be successful? as high on reduces cost, therapeutic value, and nos- Or can they succeed by excelling on functional ele- talgia. Netflix also scored higher than other media ments alone? What value do consumers see in digital providers on variety, illustrating how effectively it versus omnichannel companies? We used our data has persuaded customers, without any objective to identify three patterns of value creation. evidence, that it offers more titles. Some elements do matter more than others. Brick-and-mortar businesses can still win Across all the industries we studied, perceived qual- on certain elements. Omnichannel retailers win ity affects customer advocacy more than any other on some emotional and life-changing elements. For element. Products and services must attain a certain example, they are twice as likely as online-only retail- minimum level, and no other elements can make up ers to score high on badge value, attractiveness, and af- for a significant shortfall on this one. filiation and belonging. Consumers who get help from After quality, the critical elements depend on employees in stores give much higher ratings to those the industry. In food and beverages, sensory appeal, retailers; indeed, emotional elements have probably not surprisingly, runs a close second. In consumer helped some store-based retailers stay in business. banking, provides access and heirloom (a good in- Moreover, companies that score high on emo- vestment for future generations) are the elements tional elements tend to have a higher NPS, on aver- that matter (see the exhibit “Which Elements Are age, than companies that spike only on functional el- Most Important?”); in fact, heirloom is crucial in ements. This finding is consistent with previous Bain financial services generally, because of the con- analysis showing that digital technologies have been nection between money and inheritance. The transforming physical businesses rather than annihi- broad appeal of smartphones stems from how lating them. The fusion of digital and physical chan- they deliver multiple elements, including reduces nels is proving more powerful than either one alone. effort, saves time, connects, integrates, variety, fun/ That accounts in part for why E*TRADE has invested entertainment, provides access, and organizes. in physical branches and why retailers such as Warby Manufacturers of these products—Apple, Samsung, Parker and Bonobos have launched physical stores. and LG—got some of the highest value ratings (See “Digital-Physical Mashups,” by Darrell K. Rigby, across all companies studied. HBR, September 2014.) These patterns demonstrate Consumers perceive digital ﬁrms as oﬀering that there are many ways to succeed by delivering more value. Well-designed online businesses make various kinds of value. Amazon expanded functional

50 Harvard Business Review September 2016 THE ELEMENTS OF VALUE HBR.ORG The Elements of Value Pyramid Products and services deliver fundamental elements of value that address four kinds of needs: functional, emotional, life changing, and social impact. In general, the more elements provided, the greater customers’ loyalty and the higher the company’s sustained revenue growth.

Social impact

SELF- TRANSCENDENCE Life changing

PROVIDES SELF- HOPE ACTUALIZATION

MOTIVATION HEIRLOOM AFFILIATION/ BELONGING Emotional

REDUCES REWARDS ME NOSTALGIA DESIGN/ BADGE ANXIETY AESTHETICS VALUE

WELLNESS THERAPEUTIC FUN/ ATTRACTIVENESS PROVIDES VALUE ENTERTAINMENT ACCESS Functional

SAVES SIMPLIFIES MAKES REDUCES ORGANIZES INTEGRATES CONNECTS TIME MONEY RISK

REDUCES AVOIDS REDUCES QUALITY VARIETY SENSORY INFORMS EFFORT HASSLES COST APPEAL

excellence in a mass market. Apple excels on 11 el- revenue. Companies can improve on the elements ements in the pyramid, several of them high up, that form their core value, which will help set them which allows the company to charge premium prices. apart from the competition and meet their custom- TOMS excels on four elements, and one of them is ers’ needs better. They can also judiciously add el- self-transcendence, because the company gives away ements to expand their value proposition without one pair of shoes to needy people for every pair overhauling their products or services. bought by a customer. This appeals to a select group Companies have begun to use our method in of people who care about charitable giving. several practical ways, instilling a “hunt for value” mentality in their employees. Although many suc- Putting the Elements to Work cessful entrepreneurs have instinctively found ways These patterns are intriguing in their own right, and to deliver value as part of their innovation process, they illuminate how some companies have chosen that becomes harder as companies grow. The leaders to navigate upheaval in their industries. Ultimately, of most large organizations spend less time with cus- however, the elements must prove their usefulness tomers, and innovation often slows. The elements

ICONS BY NIK SCHULZ ICONS BY in solving business challenges, particularly growing can help them identify new value once again.

September 2016 Harvard Business Review 51 SPOTLIGHT ON CONSUMER INSIGHT

Some companies have refined their product Structured listening. Working with Bain, the designs to deliver more elements. Vanguard, for in- company interviewed current and prospective cus- stance, added a low-fee, partly automated advice tomers across the United States, individually and in platform to its core investment services in order to groups. The goal was to understand consumers’ pri- keep its clients better informed and, in many cases, orities for a checking account, their frustrations, their to reduce risk. A chainsaw manufacturer that felt un- compromises, and their reasons for using multiple differentiated used the elements of value to identify institutions for banking services. specific ways of making future products distinctive. “Ideation” sessions. We then used the elements It focused on quality (defined as the results of us- to explore where improvements in value might reso- ing its products), saves time, and reduces cost. These nate with consumers. Bain’s survey data had identi- three elements had the greatest effect on customer fied the elements that tend toreinforce customer ad- satisfaction and loyalty, and the company was able to vocacy in consumer banking, among them provides build competitive advantage with them. access, heirloom, and reduces anxiety. Those insights, Other companies have used the elements to combined with the consumer research, informed identify where customers perceive strengths and ideation sessions with a project team consisting of weaknesses. They start by understanding which ele- people from all customer-touching departments ments are the most important for their industry and across the bank, not just marketers. how they stack up on those relative to competitors. The sessions explored which elements might be If a company trails in the crucial elements, it should used to form the nucleus of a new offering. For exam- improve on them before attempting to add new ple, provides access and connects held appeal, because ones. A large consumer bank found that although it the bank might be able to provide access to mutual fared relatively well on avoids hassles and saves time, funds or connect consumers with financial planners. it did not score well on quality. The bank did exten- In the end, however, the team decided that neither sive research into why its quality ratings were low element was feasible in this business, primarily for and launched initiatives to strengthen anti-fraud reasons of cost. Instead it developed 12 checking- operations and enhance the mobile app experience. account concepts that were built around reduces cost, The broadest commercial potential of the ele- makes money, and reduces anxiety. Reduces cost high- ments of value model currently lies in developing lighted low fees, while reduces anxiety emphasized new types of value to provide. Additions make the automatic savings. Reduces anxiety was particularly most sense when the organization can deliver them important, because most of the targeted consum- while using its current capabilities and making a rea- ers were living paycheck to paycheck and struggling sonable investment, and when the elements align to save money. with the company’s brand. Customer-centric design of prototype con- Sometimes selecting an additional element is cepts. Each concept approved by the project team fairly straightforward: Acronis and other software contained a different mix of product features, fees, providers added cloud backup and storage services and levels of customer service. Many of these new to reinforce their brand promise of reduces risk for concepts could be delivered through an improved computer users. Another key element in cloud smartphone app that would increase customer en- backup is provides access, because users can reach gagement with the bank. Almost all the targeted their files from any computer, tablet, or smartphone consumers used smartphones for financial services connected to the internet. (consistent with our earlier observations on the It’s not always so obvious which elements to many elements of value delivered by these devices). add, however. One financial services company The financial services company then conducted recognized that if it could attract more consumers further one-on-one interviews with consumers and to its retail banking business, it might be able to got fast feedback that allowed it to winnow the 12 cross-sell insurance, investment advice, and other prototypes down to four concepts for enhanced products. But how could it do that? The company value. Then, on the basis of the feedback, it refined arrived at the best answer through three largely them in the fourth, quantitative stage: qualitative research stages followed by a fourth, Rigorous choice modeling. Having designed highly quantitative stage. the four prototypes, the project team tested them

52 Harvard Business Review September 2016 THE ELEMENTS OF VALUE HBR.ORG Which Elements Are Most Important? What customers value in products varies by industry. Here are the top ﬁve elements inﬂuencing loyalty for 10 types of businesses. with thousands of customers using discrete choice APPAREL RETAIL TV SERVICE PROVIDERS analysis, which requires people to make a sequence QUALITY QUALITY VARIETY VARIETY of explicit choices when presented with a series of AVOIDS HASSLES REDUCES COST product options. The researchers began by amass- DESIGN/AESTHETICS DESIGN/AESTHETICS SAVES TIME FUN/ENTERTAINMENT ing a detailed list of the attributes for each prototype—ATM fees, overdraft fees, credit monitoring, DISCOUNT RETAIL CONSUMER BANKING QUALITY QUALITY customer service hours, and so on. They presented VARIETY PROVIDES ACCESS respondents with several sets of checking accounts REDUCES COST HEIRLOOM SAVES TIME AVOIDS HASSLES that varied on these attributes, asking them to select REWARDS ME REDUCES ANXIETY which prototype from each set they preferred. This GROCERY BROKERAGE process was repeated several times, as attributes QUALITY QUALITY changed according to an experimental design, VARIETY MAKES MONEY SENSORY APPEAL HEIRLOOM until the team derived the winning combination REDUCES COST VARIETY of attributes. REWARDS ME PROVIDES ACCESS Two clear finalists emerged, which the bank re- FOOD AND BEVERAGES AUTO INSURANCE cently launched in the marketplace. It will use cus- QUALITY QUALITY SENSORY APPEAL REDUCES ANXIETY tomer demographics and the increase in demand to VARIETY REDUCES COST gauge the eventual winner. DESIGN/AESTHETICS PROVIDES ACCESS THERAPEUTIC VALUE VARIETY Getting Started SMARTPHONES CREDIT CARDS QUALITY QUALITY The elements of value work best when a company’s REDUCES EFFORT REWARDS ME leaders recognize them as a growth opportunity and VARIETY HEIRLOOM ORGANIZES AVOIDS HASSLES make value a priority. It should be at least as impor- CONNECTS PROVIDES ACCESS tant as cost management, pricing, and customer loyalty. Companies can establish a discipline around improving value in some key areas: New-product development. Our model can customers and likely prospects to learn where the stimulate ideas for new products and for elements to company stands on the elements it is (or is not) de- add to existing products. Managers might ask, for ex- livering. The survey should cover both product and ample: Can we connect in a new way with consum- brand, because examinations of the two may yield ers? Can our customers benefit from integration with different insights. For example, the product itself other software applications? Can we add therapeutic may deliver lots of value, whereas customers have value to our service? difficulty getting service or technical support. Pricing. Managers commonly view pricing as The elements of value have an organizational di- one of the most important levers in demand man- mension as well: Someone in the company should be agement, because when demand is constant, higher tapped to explicitly think about, manage, and moni- prices accrue directly to profits. But higher prices tor value. One pay-TV executive, lamenting the suc- also change the consumer value equation, so any cess of Netflix, told us, “I have a lot of people working discussion about raising prices should consider the on product features and service improvements, but addition of value elements. Recall how Amazon’s I don’t have anyone really thinking about consumer judicious increases in value helped justify higher value elements in a holistic manner.” prices over time. The concept of value remains rooted in psychol- Customer segmentation. Most companies ogy, but the elements of value can make it much have a formal method of segmenting their custom- less amorphous and mysterious. Abraham Maslow ers into demographic or behavioral groups, which emphasized the bold, confident, positive potential presents an opportunity to analyze what each of of psychology. The elements can help managers these groups values and then develop products and creatively add value to their brands, products, and services that deliver those elements. services and thereby gain an edge with consumers— Whenever an occasion to improve value presents the true arbiters of value. itself, managers should start with a survey of current HBR Reprint R1609C

September 2016 Harvard Business Review 53 SPOTLIGHT ON CONSUMER INSIGHT SPOTLIGHT

Know Your Customers’ “Jobs to Be Done” Is innovation inherently a hit-or-miss endeavor? Not if you understand why customers make the choices they do. BY CLAYTON M. CHRISTENSEN, TADDY HALL, KAREN DILLON, AND DAVID S. DUNCAN

54 Harvard Business Review September 2016 HBR.ORG ARTWORK Marijah Bac Cam, Blue Landscape Charcoal, ink, marker, and pencil on paper

or as long as we can remember, innovation has been a top priority—and a top Ffrustration—for leaders. In a recent McKinsey poll, 84% of global executives reported that innovation was extremely important to their growth strategies, but a staggering 94% were dissatisﬁed with their organizations’ innovation

September 2016 Harvard Business Review 55 SPOTLIGHT ON CONSUMER INSIGHT

performance. Most people would agree that the vast Madness time. Marketers who collect demographic majority of innovations fall far short of ambitions. or psychographic information about him—and look On paper, this makes no sense. Never have busi- for correlations with other buyer segments—are not nesses known more about their customers. Thanks going to capture those reasons. to the big data revolution, companies now can col- After decades of watching great companies fail, lect an enormous variety and volume of customer we’ve come to the conclusion that the focus on cor- information, at unprecedented speed, and perform relation—and on knowing more and more about cus- sophisticated analyses of it. Many firms have estab- tomers—is taking firms in the wrong direction. What lished structured, disciplined innovation processes they really need to home in on is the progress that the and brought in highly skilled talent to run them. Most customer is trying to make in a given circumstance— firms carefully calculate and mitigate innovations’ what the customer hopes to accomplish. This is what risks. From the outside, it looks as if companies have we’ve come to call the job to be done. mastered a precise, scientific process. But for most of We all have many jobs to be done in our lives. them, innovation is still painfully hit-or-miss. Some are little (pass the time while waiting in line); What has gone so wrong? some are big (find a more fulfilling career). Some The fundamental problem is, most of the masses surface unpredictably (dress for an out-of-town busi- of customer data companies create is structured to ness meeting after the airline lost my suitcase); some show correlations: This customer looks like that one, regularly (pack a healthful lunch for my daughter to or 68% of customers say they prefer version A to ver- take to school). When we buy a product, we essen- sion B. While it’s exciting to find patterns in the num- tially “hire” it to help us do a job. If it does the job bers, they don’t mean that one thing actually caused well, the next time we’re confronted with the same another. And though it’s no surprise that correlation job, we tend to hire that product again. And if it does isn’t causality, we suspect that most managers have a crummy job, we “fire” it and look for an alternative. grown comfortable basing decisions on correlations. (We’re using the word “product” here as shorthand Why is this misguided? Consider the case of one of for any solution that companies can sell; of course, this article’s coauthors, Clayton Christensen. He’s 64 the full set of “candidates” we consider hiring can years old. He’s six feet eight inches tall. His shoe size often go well beyond just offerings from companies.) is 16. He and his wife have sent all their children off to This insight emerged over the past two decades in college. He drives a Honda minivan to work. He has a course taught by Clay at Harvard Business School. a lot of characteristics, but none of them has caused (See “Marketing Malpractice,” HBR, December him to go out and buy the New York Times. His rea- 2005.) The theory of jobs to be done was developed sons for buying the paper are much more specific. He in part as a complement to the theory of disruptive might buy it because he needs something to read on innovation—which at its core is about competitive a plane or because he’s a basketball fan and it’s March responses to innovation: It explains and predicts the behavior of companies in danger of being disrupted and helps them understand which new entrants pose the greatest threats. The focus on But disruption theory doesn’t tell you how to create products and services that customers want to buy. Jobs-to-be-done theory does. It transforms knowing more our understanding of customer choice in a way that no amount of data ever could, because it gets at the and more about causal driver behind a purchase. customers has The Business of Moving Lives A decade ago, Bob Moesta, an innovation consultant and a friend of ours, was charged with helping bolster taken firms in the sales of new condominiums for a Detroit-area building company. The company had targeted downsizers— wrong direction. retirees looking to move out of the family home and

56 Harvard Business Review September 2016 KNOW YOUR CUSTOMERS’ “JOBS TO BE DONE” HBR.ORG

Idea in Brief WHAT’S WRONG WHAT’S NEEDED WHAT’S EFFECTIVE Innovation success rates are Marketers and product developers Successful innovators identify shockingly low worldwide, and focus too much on customer proﬁles poorly performed “jobs” in have been for decades. and on correlations unearthed customers’ lives—and then in data, and not enough on what design products, experiences, customers are trying to achieve and processes around those jobs. in a particular circumstance.

divorced single parents. Its units were priced to living room, a large second bedroom for visitors, and appeal to that segment—$120,000 to $200,000— a breakfast bar to make entertaining easy and casual; with high-end touches to give a sense of luxury. on the other hand, they didn’t need a formal dining “Squeakless” floors. Triple-waterproof basements. room. And yet, in Moesta’s conversations with ac- Granite counters and stainless steel appliances. A tual buyers, the dining room table came up repeat- well-staffed sales team was available six days a week edly. “People kept saying, ‘As soon as I figured out for any prospective buyer who walked in the door. A what to do with my dining room table, then I was generous marketing campaign splashed ads across free to move,’” reports Moesta. He and his colleagues the relevant Sunday real estate sections. couldn’t understand why the dining room table was The units got lots of traffic, but few visits ended such a big deal. In most cases people were referring up converting to sales. Maybe bay windows would to well-used, out-of-date furniture that might best be be better? Focus group participants thought that given to charity—or relegated to the local dump. sounded good. So the architect scrambled to add But as Moesta sat at his own dining room table bay windows (and any other details that the focus with his family over Christmas, he suddenly under- group suggested) to a few showcase units. Still sales stood. Every birthday was spent around that table. did not improve. Every holiday. Homework was spread out on it. The Although the company had done a cost-benefit table represented family. analysis of all the details in each unit, it actually What was stopping buyers from making the de- had very little idea what made the difference be- cision to move, he hypothesized, was not a feature tween a tire kicker and a serious buyer. It was easy to that the construction company had failed to offer speculate about reasons for poor sales: bad weather, but rather the anxiety that came with giving up underperforming salespeople, the looming reces- something that had profound meaning. The decision sion, holiday slowdowns, the condos’ location. But to buy a six-figure condo, it turned out, often hinged instead of examining those factors, Moesta took an on a family member’s willingness to take custody of unusual approach: He set out to learn from the peo- a clunky piece of used furniture. ple who had bought units what job they were hiring That realization helped Moesta and his team the condominiums to do. “I asked people to draw a begin to grasp the struggle potential home buyers timeline of how they got here,” he recalls. The first faced. “I went in thinking we were in the business of thing he learned, piecing together patterns in scores new-home construction,” he recalls. “But I realized of interviews, was what did not explain who was we were in the business of moving lives.” most likely to buy. There wasn’t a clear demographic With this understanding of the job to be done, or psychographic profile of the new-home buyers, dozens of small but important changes were made even though all were downsizers. Nor was there a to the offering. For example, the architect managed definitive set of features that buyers valued so much to create space in the units for a dining room table by that it tipped their decisions. reducing the size of the second bedroom. The com- But the conversations revealed an unusual pany also focused on easing the anxiety of the move clue: the dining room table. Prospective customers itself: It provided moving services, two years’ worth repeatedly told the company they wanted a big of storage, and a sorting room within the condo

September 2016 Harvard Business Review 57 SPOTLIGHT ON CONSUMER INSIGHT

development where new owners could take their Jobs are never simply about function—they time making decisions about what to discard. have powerful social and emotional dimen- The insight into the job the customers needed sions. Creating space in the condo for a dining room done allowed the company to differentiate its offer- table reduced a very real anxiety that prospective ing in ways competitors weren’t likely to copy—or buyers had. They could take the table with them even comprehend. The new perspective changed if they couldn’t find a home for it. And having two everything. The company actually raised prices by years’ worth of storage and a sorting room on the $3,500, which included (profitably) covering the cost premises gave condo buyers permission to work of moving and storage. By 2007, when industry sales slowly through the emotions involved in deciding were off by 49% and the market was plummeting, what to keep and what to discard. Reducing their the developers had actually grown business by 25%. stress made a catalytic difference. These principles are described here in a business- Getting a Handle on to-consumer context, but jobs are just as important the Job to Be Done in B2B settings. For an example, see the sidebar Successful innovations help consumers to solve “Doing Jobs for B2B Customers.” problems—to make the prog ress they need to, while addressing any anxieties or inertia that might be Designing Oﬀerings Around Jobs holding them back. But we need to be clear: “Job A deep understanding of a job allows you to innovate to be done” is not an all-purpose catchphrase. Jobs without guessing what trade-offs your customers are complex and multifaceted; they require precise are willing to make. It’s a kind of job spec. definition. Here are some principles to keep in mind: Of the more than 20,000 new products evaluated “Job” is shorthand for what an individual in Nielsen’s 2012–2016 Breakthrough Innovation re- really seeks to accomplish in a given circum- port, only 92 had sales of more than $50 million in stance. But this goal usually involves more than just year one and sustained sales in year two, excluding a straightforward task; consider the experience a per- close-in line extensions. (Coauthor Taddy Hall is son is trying to create. What the condo buyers sought the lead author of Nielsen’s report.) On the surface was to transition into a new life, in the specific circum- the list of hits might seem random—International stance of downsizing—which is completely different Delight Iced Coffee, Hershey’s Reese’s Minis, and from the circumstance of buying a first home. Tidy Cats LightWeight, to name just a few—but they The circumstances are more important than have one thing in common. According to Nielsen, customer characteristics, product attr ibutes, every one of them nailed a poorly performed and new technologies, or trends. Before they under- very specific job to be done. International Delight stood the underlying job, the developers focused on Iced Coffee let people enjoy in their homes the taste trying to make the condo units ideal. But when they of coffeehouse iced drinks they’d come to love. And saw innovation through the lens of the customers’ circumstances, the competitive playing field looked totally different. For example, the new condos were competing not against other new condos but against Jobs are never the idea of no move at all. Good innovations solve problems that formerly had only inadequate solutions—or no simply about solution. Prospective condo buyers were looking for simpler lives without the hassles of home ownership. function—they have But to get that, they thought, they had to endure the stress of selling their current homes, wading through powerful social exhausting choices about what to keep. Or they could stay where they were, even though that solution would become increasingly imperfect as they aged. It and emotional was only when given a third option that addressed all the relevant criteria that shoppers became buyers. dimensions.

58 Harvard Business Review September 2016 KNOW YOUR CUSTOMERS’ “JOBS TO BE DONE” HBR.ORG

Identifying Jobs to Be Done Jobs analysis doesn’t Do you have a job that needs to be SNHU found when it reached out to spent a frustrating few hours waiting require you to throw out done? In a data-obsessed world, it older learners. in an emergency room for his son to the data and research might be a surprise that some of the get a strep-throat test. MinuteClinics greatest innovators have succeeded What work-arounds have people can see walk-in patients instantly, you’ve already gathered. with little more than intuition to invented? If you see consumers and their nurse practitioners can Personas, ethnographic guide their efforts. Pleasant Rowland struggling to get something done prescribe medicines for routine research, focus groups, saw the opportunity for American by cobbling together work-arounds, ailments, such as conjunctivitis, Girl dolls when searching for gifts pay attention. They’re probably ear infections, and strep throat. customer panels, that would help her connect with deeply unhappy with the available competitive analysis, and her nieces. Sheila Marcelo started solutions—and a promising base of What surprising uses have so on can all be perfectly Care.com, the online “matchmaking” new business. When Intuit noticed customers invented for existing service for child care, senior care, that small-business owners were products? Recently, some of the valid starting points and pet care, after struggling with using Quicken―designed for biggest successes in consumer for surfacing important her family’s own care needs. Now, individuals—to do accounting for packaged goods have resulted from insights. Here are five less than 10 years later, it boasts their firms, it realized small firms a job identified through unusual uses questions for uncovering more than 19 million members represented a major new market. of established products. For example, across 16 countries and revenues NyQuil had been sold for decades as jobs your customers approaching $140 million. What tasks do people want to a cold remedy, but it turned out that need help with. avoid? There are plenty of jobs in some consumers were knocking back Where do you see noncon sump- daily life that we’d just as soon get a couple of spoonfuls to help them tion? You can learn as much out of. We call these “negative jobs.” sleep, even when they weren’t sick. from people who aren’t hiring any Harvard Business School alum Rick Hence, ZzzQuil was born, offering product as from those who are. Krieger and some partners decided consumers the good night’s rest they Nonconsumption is often where the to start QuickMedx, the forerunner wanted without the other active most fertile opportunities lie, as of CVS MinuteClinics, after Krieger ingredients they didn’t need.

thanks to Tidy Cats LightWeight litter, millions of cat also essential to create the right set of experiences for owners no longer had to struggle with getting heavy, the purchase and use of the product and then inte- bulky boxes off store shelves, into car trunks, and up grate those experiences into a company’s processes. the stairs into their homes. When a company does that, it’s hard for com- How did Hershey’s achieve a breakout success petitors to catch up. Take American Girl dolls. If you with what might seem to be just another version don’t have a preteen girl in your life, you may not of the decades-old peanut butter cup? Its research- understand how anyone could pay more than a hun- ers began by exploring the circumstances in which dred dollars for a doll and shell out hundreds more Reese’s enthusiasts were “firing” the current prod- for clothing, books, and accessories. Yet to date the uct formats. They discovered an array of situations— business has sold 29 million dolls, and it racks up driving the car, standing in a crowded subway, play- more than $500 million in sales annually. ing a video game—in which the original large format What’s so special about American Girls? Well, it’s was too big and messy, while the smaller, individu- not the dolls themselves. They come in a variety of ally wrapped cups were a hassle (opening them re- styles and ethnicities and are lovely, sturdy dolls. quired two hands). In addition, the accumulation They’re nice, but they aren’t amazing. Yet for nearly of the cups’ foil wrappers created a guilt-inducing 30 years they have dominated their market. When tally of consumption: I had that many? When the you see a product or service that no one has success- company focused on the job that smaller versions fully copied, the product itself is rarely the source of of Reese’s were being hired to do, it created Reese’s the long-term competitive advantage. Minis. They have no foil wrapping to leave a telltale American Girl has prevailed for so long because trail, and they come in a resealable flat-bottom bag it’s not really selling dolls: It’s selling an experience. that a consumer can easily dip a single hand into. The Individual dolls represent different times and places results were astounding: $235 million in the first two in U.S. history and come with books that relate each years’ sales and the birth of a breakthrough category doll’s backstory. For girls, the dolls provide a rich extension. opportunity to engage their imaginations, connect Creating customer experiences. Identifying with friends who also own the dolls, and create and understanding the job to be done are only the unforgettable memories with their mothers and first steps in creating products that customers want— grandmothers. For parents—the buyers—the dolls especially ones they will pay premium prices for. It’s help engage their daughters in a conversation about

September 2016 Harvard Business Review 59 SPOTLIGHT ON CONSUMER INSIGHT

the generations of women that came before them— box. It’s not the same as walking down the aisle in about their struggles, their strength, their values the toy store and picking a Barbie off the shelf.’” and traditions. In recent years Toys “R” Us, Walmart, and even American Girl founder Pleasant Rowland came Disney have all tried to challenge American Girl’s up with the idea when shopping for Christmas pres- success with similar dolls—at a small fraction of the ents for her nieces. She didn’t want to give them hy- price. Though American Girl, which was acquired persexualized Barbies or goofy Cabbage Patch Kids by Mattel, has experienced some sales declines in aimed at younger children. The dolls—and their the past two years, to date no competitor has man- worlds—reflect Rowland’s nuanced understanding aged to make a dent in its market dominance. Why? of the job preteen girls hire the dolls to do: help artic- Rowland thinks that competitors saw themselves in ulate their feelings and validate who they are—their the “doll business,” whereas she never lost sight of identity, their sense of self, and their cultural and why the dolls were cherished: the experiences and racial background—and make them feel they can stories and connections that they enable. surmount the challenges in their lives. Aligning processes. The final piece of the There are dozens of American Girl dolls repre- puzzle is processes—how the company integrates senting a broad cross section of profiles. Kaya, for across functions to support the job to be done. example, is a young girl from a Northwest Native Processes are often hard to see, but they matter American tribe in the late 18th century. Her backstory profoundly. As MIT’s Edgar Schein has discussed, tells of her leadership, compassion, courage, and processes are a critical part of an organization’s loyalty. There’s Kirsten Larson, a Swedish immigrant unspoken culture. They tell people inside the com- who settles in the Minnesota territory and faces hard- pany, “This is what matters most to us.” Focusing ships and challenges but triumphs in the end. And so processes on the job to be done provides clear on. A significant part of the allure is the well-written, guidance to everyone on the team. It’s a simple but historically accurate books about each character’s life. powerful way of making sure a company doesn’t Rowland and her team thought through every unintentionally abandon the insights that brought aspect of the experience required to perform the job. it success in the first place. The dolls were never sold in traditional toy stores. A good case in point is Southern New Hampshire They were available only through mail order or at University, which has been lauded by U.S. News & American Girl stores, which were initially located in World Report (and other publications) as one of the just a few major metropolitan areas. The stores have most innovative colleges in America. After enjoying doll hospitals that can repair tangled hair or fix bro- a 34% compounded annual growth rate for six years, ken parts. Some have restaurants in which parents, SNHU was closing in on $535 million in annual children, and their dolls can enjoy a kid-friendly revenues at the end of fiscal 2016. menu—or where parents can host birthday parties. Like many similar academic institutions, SNHU A trip to the American Girl store has become a spe- once struggled to find a way to distinguish itself and cial day out, making the dolls a catalyst for family survive. The university’s longtime bread-and-butter experiences that will be remembered forever. strategy had relied on appealing to a traditional stu- No detail was too small to consider. Take the dent body: 18-year-olds, fresh out of high school, sturdy red-and-pink boxes the dolls come in. continuing their education. Marketing and outreach Rowland remembers the debate over whether to were generic, targeting everyone, and so were the wrap them with narrow cardboard strips, known as policies and delivery models that served the school. “belly bands.” Because the bands each added 2 cents SNHU had an online “distance learning” aca- and 27 seconds to the packaging process, the de- demic program that was “a sleepy operation on a signers suggested skipping them. Rowland says she nondescript corner of the main campus,” as presi- rejected the idea out of hand: “I said, ‘You’re not get- dent Paul LeBlanc describes it. Yet it had attracted ting it. What has to happen to make this special to the a steady stream of students who wanted to resume child? I don’t want her to see some shrink-wrapped an aborted run at a college education. Though the thing coming out of the box. The fact that she has to online program was a decade old, it was treated wait just a split second to get the band off and open as a side project, and the university put almost no the tissue under the lid makes it exciting to open the resources into it.

60 Harvard Business Review September 2016 KNOW YOUR CUSTOMERS’ “JOBS TO BE DONE” HBR.ORG

Doing Jobs for B2B Customers

Des Traynor is a cofounder of We had too many “typical new. And two, the words they Intercom, which makes software users” who had little described our product with were that helps companies stay in in common, going by traits really different from the words like demographics or job we used. People using it to sign touch with customers via their titles. Because we didn’t up new customers kept using websites, mobile apps, e-mail, really understand why people the word “engage,” for example. and Facebook Messenger. were coming to the platform— We used the term “outbound what they were using it for—we messaging,” which has a very Intercom, which now has more than charged a single price for access to different feel. 10,000 customers and grew fourfold the entire platform. According to Bob, this is really common: in 2015, adopted a jobs-to-be-done As soon as I grasped the distinction between Companies fall in love with their own jargon. They perspective to clarify its strategy in 2011, “customers” and “problems people need help focus on the technology being offered rather than when it was still an early-stage start-up. with,” a lightbulb went off. I called my cofounder the value being delivered. Traynor spoke about that experience Eoghan McCabe and said, “We’re going to build a with Derek van Bever and Laura Day company that is focused on doing a job.” What did you learn about the jobs you were of Harvard Business School’s Forum being hired to do? It turned out that people And how did you figure out what the relevant had four distinct jobs: First, help me observe. for Growth & Innovation. Here is an job was? We got in touch with innovation Show me the people who use my product and edited version of their conversation. consultant Bob Moesta, who has a lot of practical what they do with it. Second, help me engage— experience with this approach. Bob and his team to convert sign-ups into active users. Third, help FORUM: How did you come across the “jobs” conducted individual interviews with two types me learn—give me rich feedback from the right approach to innovation and strategy? of customers: people who had recently signed on people. And finally, help me support—to fix my TRAYNOR: Somewhat by accident! In 2011 with us, and people who had dropped the service customers’ problems. Intercom had just four engineers and some or changed their usage significantly. modest VC backing. I was asked to speak He wanted to understand the timeline of How much did you change the business about managing a start-up at a conference. events that led up to a purchasing decision and once you understood the different jobs your Clay Christensen opened the conference and the “forces” that ultimately pushed people into customers had? A lot. We now offer four mentioned “jobs to be done.” that decision. Bob has a theory that customers distinct services, each designed to support one always experience conflict when considering a of those jobs. Our R&D group—120 people―has And that made an impression because…? new purchase—what he calls “the struggling four teams, one for each job, and we’ve gone We were searching for direction at the time. We moment.” There are pressures pushing them to deeper and deeper on each job. knew we wanted to help internet companies talk act―to solve a problem by “hiring” a solution— Essentially, we realized that we’d been offering to their customers―and to make that personal. and forces like inertia, fear of change, and a one-size-fits-none service. The initial price felt We knew that the features we shipped were anxiety holding them back. His overall objective high because no customer needed everything we valuable—but we didn’t really know who was was to explain, in the customers’ words, what were selling. using us. Customer support? Marketing? Market caused people to resolve the conflict and “hire” research? Nor did we know exactly what they Intercom, and then how well Intercom performed. How did that change work out? Our conversion were using us for. I listened in on four interviews live—and tried rate has increased, since prospects can now buy not to jump to judgment. Two things stood just the piece of the site that suits their initial job, How had you approached those questions out. One, prospective clients who sampled our and we’re able to establish multiple points of sale until then? We were using a personas-based services were usually flailing. Their growth had across client organizations, since there is now a approach to segmentation, but it wasn’t working. flattened, and they were ready to try something logical path for relationship growth.

On paper, both traditional and online students SNHU’s online program was in competition might look similar. A 35-year-old and an 18-year-old not with local colleges but with other national on- working toward an accounting degree need the same line programs, including those offered by both courses, right? But LeBlanc and his team saw that the traditional colleges and for-profit schools like the job the online students were hiring SNHU to do had University of Phoenix and ITT Technical Institute. almost nothing in common with the job that “com- Even more significantly, SNHU was competing with ing of age” undergraduates hired the school to do. On nothing. Nonconsumption. Suddenly, the market average, online students are 30 years old, juggling that had seemed finite and hardly worth fighting for work and family, and trying to squeeze in an educa- became one with massive untapped potential. tion. Often they still carry debt from an earlier college But very few of SNHU’s existing policies, struc- experience. They’re not looking for social activities or tures, and processes were set up to support the a campus scene. They need higher education to pro- actual job that online students needed done. What vide just four things: convenience, customer service, had to change? “Pretty much everything,” LeBlanc credentials, and speedy completion times. That, the recalls. Instead of treating online learning as a team realized, presen ted an enormous opportunity. second-class citizen, he and his team made it their

September 2016 Harvard Business Review 61 SPOTLIGHT ON CONSUMER INSIGHT HBR.ORG

focus. During a session with about 20 faculty mem- But perhaps most important, SNHU realized that bers and administrators, they charted the entire ad- enrolling prospects in their first class was only the be- missions process on a whiteboard. “It looked like a ginning of doing the job. The school sets up each new schematic from a nuclear submarine!” he says. The online student with a personal adviser, who stays in team members circled all the hurdles that SNHU constant contact—and notices red flags even before was throwing up—or not helping people overcome— the students might. This support is far more critical in that process. And then, one by one, they elimi- to continuing education students than traditional nated those hurdles and replaced them with experi- ones, because so many obstacles in their everyday ences that would satisfy the job that online students lives conspire against them. Haven’t checked out this needed to get done. Dozens of decisions came out week’s assignment by Wednesday or Thursday? Your of this new focus. adviser will touch base with you. The unit test went Here are some key questions the team worked badly? You can count on a call from your adviser to through as it redesigned SNHU’s processes: see not only what’s going on with the class but what’s What experiences will help customers make going on in your life. Your laptop is causing you prob- the progress they’re seeking in a given circum- lems? An adviser might just send you a new one. This stance? For older students, information about unusual level of assistance is a key reason that SNHU’s financial aid is critical; they need to find out if con- online programs have extremely high Net Promoter tinuing their education is even possible, and time Scores (9.6 out of 10) and a graduation rate—about is of the essence. Often they’re researching options 50%—topping that of virtually every community col- late at night, after a long day, when the kids have fi- lege (and far above that of costlier, for-profit rivals, nally gone to sleep. So responding to a prospective which have come under fire for low graduation rates). student’s inquiry with a generic e-mail 24 hours SNHU has been open with would-be competitors, later would often miss the window of opportunity. offering tours and visits to executives from other ed- Understanding the context, SNHU set an internal goal ucational institutions. But the experiences and pro- of a follow-up phone call within eight and a half min- cesses the university has created for online students utes. The swift personal response makes prospective would be difficult to copy. SNHU did not invent all its students much more likely to choose SNHU. tactics. But what it has done, with laser focus, is en- What obstacles must be removed? Decisions sure that its hundreds and hundreds of processes are about a prospect’s financial aid package and how tailored to the job students are hiring the school for. much previous college courses would count toward an SNHU degree were resolved within days instead MANY ORGANIZATIONS have unwittingly designed of weeks or months. innovation processes that produce inconsistent and What are the social, emotional, and func- disappointing outcomes. They spend time and money tional dimensions of the job? Ads for the online compiling data-rich models that make them masters program were completely reoriented toward later- of description but failures at prediction. But firms life learners. They attempted to resonate not just don’t have to continue down that path. Innovation with the functional dimensions of the job, such as can be far more predictable—and far more profitable— getting the training needed to advance in a career, if you start by identifying jobs that customers are but also with the emotional and social ones, such as struggling to get done. Without that lens, you’re the pride people feel in earning their degrees. One doomed to hit-or-miss innovation. With it, you can ad featured an SNHU bus roaming the country hand- leave relying on luck to your competitors. ing out large framed diplomas to online students HBR Reprint R1609D who couldn’t be on campus for graduation. “Who did you get this degree for?” the voice-over asks, Clayton M. Christensen is the Kim B. Clark Professor as the commercial captures glowing graduates in at Harvard Business School. Taddy Hall is a principal with the Cambridge Group and the leader of Nielsen’s their homes. “I got it for me,” one woman says, hug- Breakthrough Innovation Project. Karen Dillon is the ging her diploma. “I did this for my mom,” beams former editor of Harvard Business Review. David S. Duncan a 30-something man. “I did it for you, bud,” one fa- is a senior partner at Innosight. They are the coauthors of the forthcoming Competing Against Luck: The Story ther says, holding back tears as his young son chirps, of Innovation and Customer Choice (HarperBusiness/ “Congratulations, Daddy!” HarperCollins, October 2016).

62 Harvard Business Review September 2016 standup2cancer.org #reasons2standup #su2c

(:;9(A,5,*(*(5(+0(5)9,(:;*(5*,9-6<5+(;065*(5(+0(5047,90(3)(526-*644,9*,*(5(+0(505:;0;<;,:6-/,(3;/9,:,(9*/ *(5*,9:;,4*,33*65:69;0<43033@65*636.@-(99(/-(>*,;;-6<5+(;065.,564,*(5(+(3(<9(A0:205-(403@;9<:; 5(;065(36=(90(5*(5*,9*6(30;06565;(90605:;0;<;,-69*(5*,99,:,(9*/6=(90(5*(5*,99,:,(9*/-<5+(330(5*, ;/,7(92,9-6<5+(;065:;)(3+90*2»:-6<5+(;065 :;(5+<7;6*(5*,90:(796.9(46-;/,,5;,9;(054,5;05+<:;9@-6<5+(;065,0-(**/(90;()3,69.(50A(;06504(.,:-964;/,:;(5+<7;6*(5*,9(5+:/6>: ;/,(4,90*(5(::6*0(;065-69*(5*,99,:,(9*/((*90::;(5+<7;6*(5*,9»::*0,5;0-0*7(9;5,9 SPOTLIGHT ON CONSUMER INSIGHT SPOTLIGHT

Building an Insights Engine How Unilever got to know its customers BY FRANK VAN DEN DRIEST, STAN STHANUNATHAN, AND KEITH WEED

64 Harvard Business Review September 2016 HBR.ORG ARTWORK Marijah Bac Cam, Irradiation #2 Digital on paper SPOTLIGHT ON CONSUMER INSIGHT

perational skill used to confer long- term advantage. If you had leaner Omanufacturing, made higher-quality products, or had superior distribution, you could outrun competitors. But today those capabilities are table stakes. The new source of competitive advantage is customer centricity: deeply understanding your customers’ needs and fulﬁlling them better than anyone else.

You need data to accomplish this. Yet having A New Strategy troves of data is of little value in and of itself. What When Unilever released its first-quarter results increasingly separates the winners from the losers in April 2016, CFO Graeme Pitkethly, address- is the ability to transform data into insights about ing analysts, announced a major new initiative to consumers’ motivations and to turn those insights shift resources to local markets around the world. into strategy. This alchemy requires innovative orga- He noted that consumers are increasingly seeking nizational capabilities that, collectively, we call the brands and products that align with their cultural “insights engine.” identity and lifestyle. The result is that local firms, The vital role of the insights engine was revealed particularly in emerging markets, are growing fast in a global market-research study led last year by and strengthening their competitive positions. The the strategy consultancy Kantar Vermeer. The study, new program, he explained, would clarify account- called Insights2020 (i2020), involved interviews and ability and make Unilever’s marketing teams more surveys of more than 10,000 business practitioners agile both globally and locally. worldwide (see the sidebar “About the Insights2020 Country business heads had recognized the rising Research”). Of the factors that were found to drive popularity of local brands, and the implications were customer-centric growth, none mattered more than being discussed separately at many levels across the a firm’s insights engine, embodied in its insights and firm. A presentation to the operating board by CMI’s analytics function. (While these go by many names— head, coauthor Stan Sthanunathan, drew on this in- including “I&A,” “consumer and market insights,” telligence and on CMI’s own review of what was hap- and “customer intelligence”—for simplicity we refer pening. Sthanunathan walked the board members to them as insights functions here.) through an analysis of why local brands were grow- In this article we describe the elements of the in- ing, what threat this posed, and how Unilever could sights engine and show how it works at consumer compete. The presentation focused attention, cata- goods giant Unilever. The firm’s 400-plus brands, lyzed the conversation about strategy, and ultimately which include Dove, Knorr, and Axe, generated led to changes in both organization and mindset. $60 billion in revenue in 2015, propelling underly- Unilever’s new initiative showcases the type of ing sales growth of 4.1% for the year. Performance high-level advisory role that leading insights func- at that level requires the full engagement of the tions are increasingly taking. A decade ago, this company’s 169,000 employees, who span func- sort of strategic involvement by a customer intel- tions from supply chain and R&D to marketing and ligence operation was almost unheard of. The mar- finance. But as we’ll show, it’s the insights engine, ket research department typically was a reactive manifested in the firm’s Consumer and Market service unit reporting to the marketing function, Insights (CMI) group, that underpins Unilever’s fielding marketing requests, and producing perfor- customer-centric strategy. mance management reports. Over time, however,

66 Harvard Business Review September 2016 BUILDING AN INSIGHTS ENGINE HBR.ORG

Idea in Brief THE IMPERATIVE THE RESEARCH THE CASE Operational skill once conferred A study involving more than 10,000 Unilever’s CMI group embodies the competitive advantage; now it’s table practitioners examined the strategies, so-called insights engine through its stakes. The new source of advantage is structures, and capabilities that distinguish expertise in synthesizing data, close customer centricity: deeply understanding high-performing, customer-centric collaboration with other functions, your customers’ needs and fulﬁlling them companies. Having an independent innovative use of new technologies and better than anyone else. insights and analytics function that programs, and whole-brain mindset that participates fully in business planning balances creative and analytical thinking. and strategy is key.

market research departments have been shifting of the executives at overperforming firms (those from merely supplying data to interpreting it— that outpaced competitors in revenue growth) said distilling insights about consumers’ motivations and that their company was skilled at linking disparate needs on the basis of their behavior. data sources, whereas only 34% of the executives at Driven by the imperative to become customer- underperformers made the same claim. centric, leading firms are now completing the trans- This proficiency in using data is evident in high- formation of market research groups into true in- performing firms across industries, including phar- sights engines with a fundamentally strategic role. maceuticals, financial services, hospitality, and At Unilever, CMI’s prominently communicated consumer packaged goods. And to improve, many mission is “to inspire and provoke to enable trans- firms are creating dedicated data groups, under se- formational action.” Note that the word “insight” nior executive leadership, to consolidate, manage, is missing—intentionally. That’s because insights and analyze data and distribute it throughout the merely provide a means to the desired end: action organization. At Unilever, CMI has taken on this role. that drives business growth. For any insights group that serves as a data In the pages that follow, we describe 10 charac- aggregator, interpreter, and disseminator, the first teristics of superior insights engines, gleaned from challenge is to integrate massive and disparate sets the i2020 research and our experience at Unilever. of both structured and unstructured data from such We divide these into two broad groups: operational sources as product sales figures, spending on me- characteristics, such as functional independence dia, call-center records, and social media monitor- and experimental orientation, and people character- ing. This may amount to tens of millions of pieces istics, such as business acumen and well-balanced of data. The data sets are customarily owned by dif- analytic and creative thinking styles. ferent teams—sales data by sales, media spending by marketing, customer interactions by customer Operational Characteristics service, and so on. Seven of the key characteristics relate to the way Working closely with IT, CMI implemented a insights engines operate. global marketing-information system, accessible to all marketers throughout the company, that in- Data synthesis tegrates data and presents it in consistent formats. Until recently, large firms had an advantage over This ensures that all users, wherever they reside smaller rivals simply because of the scale of their in the firm, see the same information in the same market research capability. Today research that way—what CMI calls “one version of the truth.” once took months and cost millions can be done for Thus if marketing and finance are both looking at a fraction of that price and in mere days. What mat- first-quarter shares of Dove soaps in any market seg- ters now is not so much the quantity of data a firm ment, they’re viewing the same numbers and units, can amass but its ability to connect the dots and ex- derived using the same methodology and displayed tract value from the information. This capability dif- in the same manner. Likewise, they see precisely the ferentiates successful organizations from less suc- same picture when they look at data across brands, cessful ones: According to the i2020 research, 67% retailers, or regions.

September 2016 Harvard Business Review 67 SPOTLIGHT ON CONSUMER INSIGHT

Unilever’s global marketing-information sys- A full accounting of how CMI marshals technology tem has dramatically reduced the debates about to synthesize data is beyond the scope of this article, data definitions, methodology, and interpretation but two major programs are illustrative. The first, that led to competing (and sometimes wrong) con- CMI’s People Data Centre, combines social media clusions. It has also freed CMI from much of the and business analytics with data mining of Unilever’s resource- intensive reporting work that mires many customer-care lines and digital marketing channels, firms’ insights groups, allowing it to shift its focus which capture millions of conversations a day in 40 from simply providing data to delivering insights languages. CMI can rapidly turn raw data from those and recommendations for action. sources into business impact. When the firm’s Knorr Consider CMI’s role in Unilever’s campaign to brand launched its “Love at First Taste” campaign, improve consumers’ heart health. The firm was for example, it was inspired by research showing selling cholesterol-lowering spreads and drinks, that most people are attracted to others who like the but the hurdle was getting consumers to consis- same flavors they do. So Knorr found singles with tently use them. CMI’s research generated quanti- shared tastes, set them up on food-based blind dates, ties of data about consumption patterns. The ini- and filmed the results. Then it released the video on tial insight was that for behavioral change to stick, social media and engaged with people who’d been people had to use the products for at least three identified as “food influencers.” In the first three weeks. The further insight was that the best way to weeks, the video received 100 million views. get that long-term commitment was through peer Another CMI program, PeopleWorld, addresses pressure—engaging a group to work together. That the problem “If only Unilever knew what Unilever insight then powered the marketing team to cre- knows.” Often the answer to a marketing question ate a program called It Takes a Village, which chal- already exists in the firm’s historical research; find- lenges the people of an entire town to lower their ing it is the challenge. But using an artificial intel- cholesterol. The program, now in communities in ligence platform, anyone within Unilever can mine more than 10 countries, includes cholesterol testing, PeopleWorld’s 70,000 consumer research documents nutrition advice, cooking guidance (involving the and quantities of social media data for answers to firm’s products), and group breakfasts and exercise. specific natural-language questions. For example, a To date, 85% of people taking the challenge have brand manager might ask, “What hair-care problems lowered their cholesterol. concern middle-aged men in India?” PeopleWorld CMI’s approach to data gathering and analysis computers would intuit what’s needed, search the is often technology-intensive. For example, while vast repository of information on hair loss, dandruff, monitoring Twitter chatter in response to a Ben & and similar topics, and instantly deliver a high-level Jerry’s “free cone” promotion, a CMI team noticed overview. Through a set of related queries, the man- a strong relationship between chatter and sales in- ager could get a clear picture of the distinct and over- creases in most regions—but not all. A real-time lapping hair-care concerns of younger or older men analysis of the slow spots revealed that stockouts and those in different countries—information that there were inhibiting sales, allowing Unilever to might yield insights about consumer needs in various head off similar problems with future promotions. markets and how to meet them. Anyone within Unilever can mine its 70,000 documents and vast social media data to gain insights about consumer needs.

68 Harvard Business Review September 2016 BUILDING AN INSIGHTS ENGINE HBR.ORG

ABOUT THE INSIGHTS2020 RESEARCH To understand the organizational strategies, structures, and capabilities required to drive customer-centric growth, a global team launched the Insights2020 initiative in 2015. Independence Researchers conducted in-depth interviews with more than 350 business, Superior insights groups sit decisively outside market- marketing, and insights and analytics (I&A) leaders, along with online surveys of ing and other functions and often report to someone more than 10,000 practitioners in 60 countries. Kantar Vermeer led the project in in the C-suite—the CEO, the chief strategy officer, or partnership with Esomar, the Advertising Research Foundation, LinkedIn, and Korn the chief experience officer. The i2020 research shows Ferry. The Wharton School engaged an expert panel to validate and extend the that insights leaders in overperforming organizations research, and an analysis of LinkedIn’s 400-million-member database discerned report to these senior executives more than twice as the interaction behaviors of executives at the most customer-centric firms. often as their counterparts in underperforming orga- Respondents were divided into two groups—overperformers and nizations do (29% versus 12%). Kantar Vermeer’s work underperformers—on the basis of their companies’ three-year revenue growth with dozens of firms across industries indicates that relative to their competitors’. The firms were then compared across an array of marketing and I&A dimensions. The results confirmed a strong correlation this number is increasing, and we expect that in time between customer centricity and revenue growth and identified the essential this will be the typical arrangement. features of high-performing, customer-centric organizations. These fell into At Unilever, Stan Sthanunathan reports to a three broad categories: a superior ability to provide a consistent, personalized, member of the executive board—coauthor Keith meaningful experience across all touchpoints; a singular commitment from Weed, who leads marketing, communications, every department to meeting customer needs; and the presence of an insights and sustainable business functions. This reporting engine—typically an independent I&A function that participates fully in business structure makes CMI a fully independent function planning and organizational strategy. Of these three categories, the insights with direct lines to the CEO. In this position, CMI engine—the focus of this article—had the largest impact on revenue growth. can be objective, collaborate on an equal footing Further analysis revealed the 10 characteristics of superior insights engines with other functions, and challenge or even set the detailed in this article. To gauge your firm’s performance on each characteristic direction of functional and organizational proj ects and see how you compare to average and top-performing organizations, try out the Insights2020 benchmarking tool here: www.Insights2020.org/Benchmark. and strategy. Take CMI’s push to make advertising pretesting a standard procedure. Because Unilever is the world’s second-largest media spender, improving advertis- Integrated planning ing performance by even a few percentage points can For most companies, the business- and brand- translate into hundreds of millions of dollars in re- planning cycle is the driving force behind strategy duced costs and new revenue. And yet in the past, ads development and execution. This is where deci- were often launched without hard data about their ef- sions are made about where to play and how to win. fectiveness. To change that, CMI implemented a disci- And it’s here that resource allocation and budget- plined testing program; using consumer surveys and ing are formalized and performance is monitored software that reads facial expressions, the CMI team against goals. If insights groups are to help drive can now see if people find the ads authentic, relevant, strategy, their activities must be aligned during the and conversation-worthy—before they’re aired. Poor planning cycle with those of strategic planning, mar- ads are killed while powerful ones are given the go- keting, finance, sales, and other functions. That’s ahead, and CMI collaborates with marketing to boost why substantially more overperforming firms than their performance. Ad creators originally saw the test- underperforming ones (61% versus 46%) include in- ing program as a threat to creativity and resisted it. But sights leaders at all key stages of the planning cycle. it proved so effective that marketers now embrace it, We find that insights-function involvement in the cy- knowing that it helps them do their best work and that cle varies by industry; it’s especially strong in retail. successful ads figure into their bonus computations. Here’s how CMI participates in the planning CMI’s independence is enabled by having au- cycle: “Where to play?” is fundamentally a question tonomy over its own budget, a mandate to drive of where to direct growth investments—in existing, business performance, and accountability for help- adjacent, or new markets. To help determine this, ing other functions achieve business targets. Thus CMI uses a bespoke software tool called Growth when CMI recommends, for example, extending a Scout, which mines millions of data points on con- brand into new local markets, it works in close part- sumer demand across demographics, regions, and nership with marketing on the strategy and execu- countries to quantify the potential value of deeper tion, because falling short would be as much CMI’s category or brand penetration. A typical application responsibility as marketing’s. might be to gauge the impact of, say, increasing the

September 2016 Harvard Business Review 69 SPOTLIGHT ON CONSUMER INSIGHT

penetration of shower gels by 10% in Thai markets. More broadly, CMI’s structural alignment with The results could help Unilever prioritize growth the rest of the organization and its integration into opportunities and decide where it could most the planning cycle create natural channels for often- profitably invest additional marketing or product- daily collaboration. For example, CMI’s organiza- development resources. Recently, the CMI home- tional structure includes teams that focus on per- care team used Growth Scout to uncover poten- sonal care, home care, foods, and refreshments, and tially lucrative new markets for Unilever detergent the team leaders are colocated with the presidents brands by identifying demographic segments with of the same product categories in the broader orga- weak penetration. nization. This helps ensure that when the strategy Once decisions have been made about where discussion turns to, say, expanding a personal-care to play, another custom-built software tool, called brand into a new market, CMI and other functions Growth Cockpit, helps guide “How to win?” strate- are participating in conversations together and work- gies. The tool provides a one-screen overview of a ing as partners. Being held accountable for business brand’s performance in a market relative to the cat- results also provides an incentive for CMI to collabo- egory. By rapidly building a visual picture of how the rate with all commercially oriented teams, since that brand compares on a host of metrics—market share, is the best way to influence the key performance penetration, pricing, media spending, and more—it indicators for each team’s operations. points managers to growth opportunities. It’s understood across the firm that insights can Additionally, CMI employs other tools to help come from anyone at any time. Therefore, CMI en- answer questions about which product benefits courages every employee to engage with custom- marketing should emphasize, which ads are most ef- ers to gain insights about their needs and the role of fective, what marketing budget allocations will yield Unilever products in their lives, and it provides tools the highest return on investment, and what pricing to help. Through a program called People Voice, for is optimal. CMI then plays a central role in tracking example, all employees, from factory workers in the performance of marketing initiatives against tar- Asia to members of global brand teams and up to the gets and advising on tactical adjustments that may CEO, can connect directly with customers at events improve performance. with themes such as “sustainability” and “shopper experience.” Another option is for employees to use Collaboration an “always-on” platform, provided through a start- The i2020 study found that on average, 69% of re- up called Discuss.io, to arrange virtual meetings spondents from overperforming firms said they with consumers anywhere. A typical request might work closely with other functions and customers, be: “I want to meet a South African soup lover next compared with just 52% of those in underperforming week at 4 PM.” The employee then gets an automated companies. This emphasis on collaboration is evi- calendar invite to a live video chat. Some category dent particularly among tech start-ups, but we’re presidents use the platform to engage with people in also seeing it among giants such as Alibaba and a country they plan to visit, asking about their needs Google, and it’s certainly the norm at Unilever and and exploring opportunities for Unilever. This helps other large CPG firms. the presidents focus their conversations with local In traditional market-research functions, the managers when they arrive. emphasis isn’t so much on collaboration as on be- To record their insights, employees use an in- ing an effective service provider. Insights functions house app that captures their observations from live like CMI have a distinctly different role that empha- chats or other consumer interactions. For example, sizes shared goals and partnerships. We saw this in an employee might note that people she talked CMI’s work with IT to create “smart” information- with in Algeria equated “sustainability” with wa- sharing platforms, like PeopleWorld, that anyone ter conservation. Such notes, stories, pictures, and at Unilever can use. Similarly, CMI consciously col- videos of employees’ communications are stored laborated with marketing, shedding its image as a centrally and analyzed by CMI, which uses video “policeman” monitoring performance and instead mining and other technologies to identify behav- coming to be seen as a helpful partner in creating ioral patterns across regions and groups and to gen- effective communications. erate insights about consumer needs. For instance,

70 Harvard Business Review September 2016 BUILDING AN INSIGHTS ENGINE HBR.ORG

THE WORKINGS OF THE INSIGHTS ENGINE Whole-brain thinking is at the core of the insights engine, powering two parallel processes that allow companies to understand and fulﬁll customers’ needs. The ﬁrst involves gathering data from disparate sources, integrating it into a universally accessible database, mining it for insights, and then recommending concrete actions related to strategy and marketing. The second process starts with the use of new technologies and other inputs to foster a culture of experimentation. The insights engine team then strives to spread a customer-centric mindset throughout the organization, expanding employees’ capabilities with training, tools, and an emphasis on collaboration.

WHOLE-BRAIN DATA SOURCES TALENT ACTIONS INTERNAL STRATEGY Financial, customer Where to play and how to win relations, sales MARKETING & TRADITIONAL RESEARCH COMMUNICATIONS Qualitative and quantitative INTEGRATION INSIGHTS Product launch, repositioning, NEW DATA SOURCES Global marketing- GENERATION optimizing creative Social listening, eye tracking information system Teams draw integrates data into conclusions about consistent formats consumer motivations for companywide use. and needs and then recommend actions.

EXPERIMENTATION DISSEMINATION Teams test and scale tech Customer-connection INNOVATION INPUTS and training programs capabilities are pushed to ORGANIZATIONAL TECH START-UPS within a risk-taking, the whole organization. CAPABILITIES Shark Tank screening experimental culture. ORGANIZATION-WIDE of new technologies CUSTOMER INTELLIGENCE NEW PROGRAMS Every employee seen as Leadership, customer a source of insight communications, business CAPABILITY BUILDING partnering, product ideation Customer-connection training and tools COLLABORATIVE ORIENTATION Engagement with other functions, suppliers, and end users reports from employee visits to customers’ kitch- addressing sustainability issues, another platform ens in China revealed that because of high heat and that sources and gives prizes for creative marketing tight space, grease buildup on surfaces is a common concepts, and a mentoring program that connects problem. Brand teams are now trying to determine start-ups with Unilever experts who advise on prod- what product innovations and messaging can help uct and brand development and marketing strategy. provide a solution. Much of the Foundry’s work revolves around the About 30,000 people participate in People Voice “challenges” it posts on its site—requests for propos- programs annually. In addition to helping Unilever als to address a specific problem, such as consumers’ understand consumers’ needs, the programs re- quandaries over what to cook for dinner or how to inforce the idea that it’s everyone’s job to uncover live a more sustainable lifestyle. insights—a challenge that motivates and engages Under the Foundry’s aegis, CMI’s Shark Tank ini- employees at every level. tiative applies a technique borrowed from the CNBC show of the same name. A dozen or so start-ups pitch Experimentation new technologies to a CMI executive team. Each has Overperforming companies are three times as likely five min utes to tell its story, followed by five min- as underperformers to embrace a culture of experi- utes of Q&A. After the presentations, the team votes mentation, the i2020 research shows (40% versus on which ideas to pilot and which to reject. Since its 13%), and B2B firms in general are more experimen- inception two years ago, Shark Tank has screened tal than B2C companies. Unilever is an exception in more than 650 technologies, piloted more than 175, the B2C world, having formalized experimentation and scaled up 37. in a variety of ways, most visibly in its 2014 launch One of the start-ups brought in was Discuss.io, of the Foundry. Originally a marketing-technology the online consumer-connection video platform. start-up incubator, the Foundry has since expanded Another was weseethrough, which uses wearable to include hackathons, a collaboration platform for technology to observe what consumers actually

September 2016 Harvard Business Review 71 SPOTLIGHT ON CONSUMER INSIGHT

do—which is often not what they claim to do. Test strategy. The team has identified certain societal, subjects for weseethrough wear Google Glass while technological, environmental, political, and eco- engaging in routine tasks, such as cleaning, cooking, nomic pressures, or “macro forces,” that are shaping or shopping. The company then analyzes the video the world—including a shift of economic and tech- captured by the headsets to discern behaviors that nological growth to the East (India and China) and consumers themselves may be unaware of. For ex- South (Africa and South America), and growing envi- ample, people may think it takes longer to clean the ronmental stress. Among its programs, HCF runs cul- living room than the bathroom, but in fact the re- tural awareness workshops and prompts brand and verse is true. Insights like that have helped Unilever category teams to discuss how various macro forces adapt its portfolio of products to address consumers’ might affect both consumers and Unilever. In one unarticulated cleaning needs. conversation about increased mortality among children under five, the Lifebuoy soap brand team ze- Forward-looking orientation roed in on data showing that over 40% of the deaths To get a handle on the future, market researchers occur among infants less than a month old, and many traditionally focused on the past. They might have could be prevented with handwashing. This has led reviewed a project launch months after the fact, for to a sweeping handwashing education program that instance. Most firms today have shifted substantial has changed the behavior of 337 million people in attention to studying the present, monitoring con- 28 countries. In villages in India, mothers reported sumers in real time to anticipate what they’ll do next. that the incidence of diarrhea in family members The most sophisticated practitioners—those with dropped from 36% in 2013 to 5% in 2014. insights engines like CMI—take the next step, using predictive analytics and other technologies, along Aﬃnity for action with new organizational structures, to both antici- The most influential insights functions focus as pate and influence behavior. Though overperform- much on strategy as on data. Indeed, i2020 found ers currently aren’t far ahead of underperformers that 79% of insights functions at overperforming in this regard (32% versus 28%), the i2020 research companies participated in strategic decision making suggests that the gap is widening, and we expect the at all levels of the organization, compared with just trend to continue. 47% at underperforming companies. Consider how CMI worked with Google and CMI’s action orientation manifests itself in two Razorfish to develop a program that leveraged real- broad ways: in its specific recommendations to time media monitoring to anticipate hairstyle trends other functions and in the recruitment and training and shape demand for related products. Unilever is of “action-oriented” employees. one of the largest players in the global hair-care mar- Look, for example, at CMI’s engagement with ket, with brands including Suave and TRESemmé, marketing regarding market development. CMI but like its competitors, it had struggled to differenti- pointed out the large “size of the prize” that Unilever ate itself. Using a custom tool to analyze hair-related stood to gain by expanding the markets it operated Google searches (there are about a billion a month), in. Company leaders acknowledged this as the firm’s the program identifies styling trends and rapidly biggest growth opportunity. CMI helped break the creates how-to videos featuring (but not directly challenge into three parts—generating more product promoting) Unilever products on a YouTube channel users, more usage, and more benefits for users—and called All Things Hair. There visitors can browse by then helped identify ways to attack those challenges. hair type and buy relevant Unilever products. Now For instance, in the area of more usage, CMI sug- live in 10 markets, All Things Hair has had more than gested that promoting nighttime use of toothbrushes 125 million views since its launch in 2013, and the re- and toothpaste could boost business growth and tie search shows that it’s three times as likely to drive in with Unilever’s social mission of improving oral purchases as conventional advertising is. hygiene. CMI facilitated a workshop that highlighted At a broader level, CMI created a team called the importance of dads in teaching their children to Human and Cultural Futures (HCF), dedicated to brush. That resulted in a marketing campaign with a imagining the future, examining developments song encouraging kids to brush at night as a way to in key regions, and exploring the implications for have fun and bond with their fathers.

72 Harvard Business Review September 2016 BUILDING AN INSIGHTS ENGINE HBR.ORG

Insights teams must think holistically, exercising creative, rıght-brain skills and analytical, left-brain ones.

On the staffing side, from top to bottom, CMI The energetic and interactive training pushes invests in development programs designed to ex- people out of their default thinking styles and gets pand people’s capabilities beyond the expected them to engage in creative problem solving with functional skills (research and analysis) to “action” colleagues they might not normally connect with. skills—communicating, persuading, facilitating, A recent workshop, for example, brought together leading. The idea is to help employees become bet- people from marketing, R&D, CMI, and other areas ter at turning insights into business results, whether and asked them to brainstorm ways to boost hair- by conceiving of a new business opportunity or by conditioner sales in Southeast Asia. Their insight selling it within the organization. was that consumers were reluctant to risk buying a product when they weren’t sure of its benefits. People Characteristics This led to the idea of launching an inexpensive The operational characteristics that distinguish su- trial-size packet. perior insights engines are complemented by three In other CMI workshops, the focus is on linking traits characterizing the people who are part of them. data about markets and brand performance to the actual consumer experience. Marketers, R&D staff, Whole-brain mindset and others in the organization will go to people’s For an insights engine to be collaborative, experi- homes to wash clothes or cook a meal, seeing first- mental, and so on, it needs a culture that breaks hand how users engage with Unilever products. from the past. Historically, the members of insights Workshop participants also connect directly with organizations focused on analytics. That left-brain both loyal and lapsed customers and hear outside orientation served them well, but today’s insights speakers present case studies on customer engage- teams must think holistically, exercising creative, ment. And they join in ideation sessions with col- right-brain skills as well. leagues across functions to imagine new growth High-performing organizations are particularly programs and develop detailed action plans. adept at integrating the two types of approaches; In all cases, employees leave these workshops far more respondents from overperformers than with new collaboration tools, and they become role from underperformers agreed that their insights models and evangelists for whole-brain thinking. functions were skilled at whole-brain thinking (71% versus 42%). Achieving balance between right- and Business focus left-brain thinking requires a two-pronged effort: Historically, organizations’ right-brain thinkers— recruiting whole-brain talent and encouraging marketing creative teams, for example—have not the mindset across the existing organization. Few naturally focused on the business side. But i2020 people are purely right- or left-brained. But orga- found that respondents from high-performing nizational work often favors analytical thinking, so firms were much more likely than those from low- conscious efforts to unleash people’s creative side performing firms to believe that their insights func- are particularly vital. tions were business-focused (75% versus 50%). One approach that CMI uses is Upping Your Elvis At Unilever, CMI has implemented an array of workshops, run by a company of the same name. programs to build business acumen. Recall that

September 2016 Harvard Business Review 73 SPOTLIGHT ON CONSUMER INSIGHT HBR.ORG

In its marketing presentations, CMI has moved away from charts and tables and toward provocative storytelling.

the vision of the CMI team is “to inspire and pro- personal care, foods, and other categories. These voke to enable transformational action.” CMI sees describe global demographic, consumption, and developing insights as a means to an end—customer- other trends that are relevant to each category. centric business growth. To reinforce the connec- Rather than bludgeon audiences with data, the tion between insights and growth, staff bonuses are presentations include compelling imagery and vi- linked to the wider business unit performance. This gnettes to advance a story line that has implications creates shared accountability with other functions, for strategy. encourages CMI teams to take responsibility for For an initiative targeting senior citizens, the CMI growth, and motivates them to go the extra mile. team found a novel way to bring the experience of Teams are trained to think outside their traditional older consumers to life. Instead of simply reporting areas through “CMI Academy” courses on topics how seniors struggle with products, CMI had mar- such as finance for nonfinance managers and -ef keting executives don old-age simulation equipment fective business partnering. As a result of these and then try to read labels and handle Unilever prod- and other programs, teams now instinctively ucts such as shampoo. Encumbered by gear that re- consider the business impact of their work and of duced their mobility and vision, the marketers gained every recommendation they make. a real appreciation for the obstacles the elderly face. One outcome of the event is newly designed ice Storytelling cream packaging that’s easier to read. The i2020 research imparts a final lesson about what makes for a strong insights engine: good storytelling. MUCH OF what insights engines at any firm do is At overperforming firms, 61% of surveyed execu- gather and analyze data. But today that is the mini- tives agreed that people in their insights functions mum needed for success. Being able to translate this were skilled at conveying their messages through capability into customer-centric growth is what dis- engaging narratives; at underperforming firms, only tinguishes winners from losers. The insights engine 37% agreed. is critical to this process—in fact, it’s the most impor- At Unilever, CMI has embraced storytelling. tant driver identified by the i2020 research. But by Traditionally its presentations were data-intensive, itself, even the most advanced insights engine can’t built on the assumption that a fact-filled talk would make a firm customer-centric. That requires leader- be more persuasive than a fact-based one with less ship from the top to ensure that every function, from data and more narrative. Although data has its place, R&D to marketing to CMI itself, maintains a singular CMI has moved away from charts and tables and to- focus on understanding and meeting consumers’ ward provocative storytelling, embracing an ethos fundamental needs. HBR Reprint R1609E of “Show, don’t tell.” Increasingly, CMI is making its Frank van den Driest is the chief client oﬃcer and points with memorable TED-style talks and other a founding partner at Kantar Vermeer, a brand and experiential approaches. marketing strategy consultancy. Stan Sthanunathan is For example, early in the business-planning cycle, the executive vice president for consumer and market insights at Unilever. Keith Weed is the chief marketing CMI does market-by-market presentations to lead- and communications oﬃcer at Unilever and chairman of ership and staff, including the heads of Unilever’s Kantar Vermeer’s Insights2020 board.

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For a full list of titles visit hbr.org/guide-series AVAILABLE IN PAPERBACK AND EBOOK FORMAT • US $19.95 hbr.org/guide-series 1-800-988-0886 OR +1-617-783-7500 How to Make the Other Side Play Fair

76 Harvard Business Review September 2016 HBR.ORG

Max H. Bazerman is the Daniel Kahneman is a Jesse Isidor Straus Professor professor of psychology and of Business Administration public aﬀairs emeritus at at Harvard Business the Woodrow Wilson School School and a codirector and the Eugene Higgins of the Center for Public Professor of Psychology Leadership at Harvard Emeritus at Princeton Kennedy School. University.

THE FINAL-OFFER ARBITRATION CHALLENGE GIVES NEGOTIATORS A VALUABLE NEW TOOL.

NICK VEASY BY MAX H. BAZERMAN AND DANIEL KAHNEMAN

September 2016 Harvard Business Review 77 HOW TO MAKE THE OTHER SIDE PLAY FAIR

Please answer two quick questions: 1 When negotiating, do you want the other side to be reasonable? 2 Is it a good idea to be reasonable in negotiations?

Everyone we ask says yes to the first question, but an- and then, if the other side is unreasonable, challeng- swers diverge in response to the second. Academics ing it to take the competing offers to an arbitrator lean toward yes, but businesspeople and lawyers of- who must choose one or the other rather than a com- ten hesitate. In legal disputes, contested insurance promise between them. We conceived the final-offer claims, and similarly adversarial negotiations, they arbitration challenge in the course of our work with point out, the other party is likely to open with an the global insurance company AIG. As we’ll describe, inflated claim or a lowball offer. If the other side’s the strategy could be used in negotiations well position is unreasonable, these practitioners suggest, beyond insurance. it makes little sense to be reasonable yourself. Suppose a customer claims that a problem with The Challenge in Action a product you sold him resulted in a $10 million loss Insurance companies pay billions of dollars every to his business. After careful analysis, your legal year to settle claims, employing hundreds of people team concludes that the fair value of his claim is just to evaluate and negotiate tens of thousands of cases. $5 million. How do you respond? A common reflex is There is good reason to believe that their employ- to come back with, say, $1 million. The familiar and ees’ decisions are not always optimal, resulting in dysfunctional negotiation dance that follows can overpayment on some claims and needlessly costly be costly for all involved. The parties may eventu- negotiation over others. AIG’s CEO, Peter Hancock, ally converge on a figure close to $5 million, but only who was familiar with Daniel Kahneman’s Thinking, after spending a lot of time and money to get there— Fast and Slow, invited TGG, the consulting firm with and harming their relationship in the process. which Kahneman is affiliated, to explore solutions. It would be to everyone’s advantage if parties Kahneman recruited Max Bazerman to examine the routinely came to a negotiation with a reasonable company’s approach to negotiation. What began offer in hand: If starting positions are realistic, the as a brief engagement became a large-scale, long- offers will be more or less aligned, and any negotia- term proj ect to sharpen AIG’s ability to efficiently tion that follows should be relatively civil, speedy, resolve claims and reach reasonable settlements, re- and fair. But how can a negotiator who wants to be duce costs, and improve its reputation for fairness. fair from the start ensure that his or her counterpart Success with this intervention, Hancock reasoned, will be reasonable as well? could ultimately confer competitive advantage. This question inspired us to propose the final- AIG used the final-offer arbitration challenge in offer arbitration challenge, a new negotiation strategy a difficult negotiation with a man who had been -in for reaching fair agreements efficiently, even when jured while working in a factory it insured. The com- dealing with seemingly unreasonable opponents. pany didn’t want to overpay on the claim, but it also Leveraging an approach first applied in labor nego- didn’t want to appear unfair in the eyes of its customer, tiations in the 1960s, the strategy allows one side to the factory owner. Drawing on the assessments of encourage reasonableness on the part of the other several outside experts, AIG estimated the claim’s by making a demonstrably fair offer at the outset fair value at $1 million to $1.1 million and made an

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Idea in Brief THE PROBLEM THE SOLUTION THE RESULT The two sides in an adversarial negotiation A new negotiation strategy can efficiently The threat of losing in a final-offer rarely bring their most reasonable offers to lead to an equitable agreement: One arbitration will typically bring an the table. Rather, each stakes out a position side presents an objectively fair offer, unreasonable adversary back to the to its advantage and seeks to give up as little challenging the other to make its own best table with a more reasonable offer. The as possible. This common approach is often offer and then allow an arbitrator to decide insurance giant AIG tested this strategy in costly to all involved. which of the two is more reasonable. an injury claims case, leading to a rapid, fair settlement.

offer of $850,000. The claimant’s attorney coun- It is rational for claims executives to argue that tered with $2.6 million—an amount he vehemently if they make a reasonable opening offer of 90% of a insisted was fair. claim’s true value and the other side counters with AIG, confident that its position was reasonable an unreasonable 1,000%, they will be poorly posi- (and that the claimant’s wasn’t), responded with tioned for the usual process of exchanging conces- a final-offer arbitration challenge: Pre sent the two sions. The final-offer arbitration challenge curtails offers to a professional arbitrator, who would make this process by sending a credible signal that the a legally binding decision about which was more other side should not expect much more movement. reasonable. By forbidding an arbitrator to split the We are confident that the challenge will often bring difference between two offers, this procedure neu- the other party to reasonableness. tralizes any incentive to be unreasonable, because the arbitrator is unlikely to choose the less reason- When to Use the Challenge able offer. (See the sidebar “A Primer on Final-Offer Prior to this work, the use of arbitration was typi- Arbitration.”) In a conventional arbitration or a cally established as the default for obtaining agree- typical judicial process, the arbitrator is allowed to ment long before the actual negotiation started. That choose a value between the two figures. Although is, it was mandated if the parties couldn’t reach an conventional arbitration may be efficient in compari- agreement on their own. A unique feature of our ap- son with a lengthy court process, it tends to reward proach is that one side in a dispute can present the unreasonableness, because the parties believe that final-offer arbitration challenge at any time. the arbitrator will land somewhere between their of- We suggest that parties we are advising deter- fers. The more unreasonable your offer is, therefore, mine, before or during a negotiation, the range of the better you are likely to fare. possible settlements an objective observer would The final-offer arbitration challenge worked be- consider fair and then make a reasonable offer. If cause it exposed the unreasonableness of the other the counteroffer is unreasonable, they should ask side’s position: The claimant’s attorney, realizing if the other side really believes that its offer is fair. If that AIG was convinced of its position and unlikely the answer is yes, they should propose that the two to be flexible, abruptly reduced the demand by more offers be submitted to final-offer arbitration. If you than half, from $2.6 million to $1.25 million. AIG re- are sure that your offer is more reasonable than the iterated its relatively fair offer of $850,000. A rapid counteroffer, you can be confident of prevailing if series of offers and counteroffers ensued, and the the other side accepts the challenge. But it rarely will. claim was settled in a matter of days for $1.05 million. The point of the challenge is to credibly signal that Notice that the parties in this case ultimately you believe your offer is fair and you won’t improve avoided arbitration but did converge on a number on it unless the other side returns to the table with a close to AIG’s opening offer. We expect that as the far more reasonable proposal. challenge strategy is used more widely, this result The challenge strategy makes sense in any dis- will be common: The party subject to the chal- pute where four conditions are met: You have made lenge will quickly return to the table with a more a reasonable offer that has been countered with an reasonable position. unreasonable one. You are confident of what a fair

September 2016 Harvard Business Review 79 HOW TO MAKE THE OTHER SIDE PLAY FAIR

A Primer on Final-Oﬀer Arbitration

Final-offer arbitration—also known remaining far apart in the expectation drives the parties toward agreement, as “baseball arbitration” because of that the arbitrator would simply split dramatically raising settlement rates. its use in Major League Baseball salary the difference between them. In that In the rare case when arbitration is disputes—was first suggested in the case, the more unreasonable your offer, actually invoked, each party competes 1960s by the labor relations scholar the better you fared. Thus many people to be more reasonable than the other. Carl Stevens as a strategy for driving questioned the wisdom of arbitration. “The suggestion was not received parties to agreement. Conventional Stevens created final-offer arbitration to with overwhelming enthusiasm by the arbitration was already in frequent address the problem and to encourage labor-relations community,” Stevens use as an alternative to strikes for negotiators to solve disputes on their own. recounted in 1976. “Indeed, there resolving disagreements between Under final-offer arbitration, was a tendency to write it off as an management and labor. In conventional reasonableness is rewarded rather unworkable ‘gimmick.’” Many people arbitration the two parties make their than punished. The two parties submit criticized the requirement that the cases to a neutral third party whose their final offers, and the arbitrator arbitrator choose the lesser of two ruling on the issue at stake is binding. must select one or the other. Although evils rather than what was actually fair. Essentially, conventional arbitration this may prevent the arbitrator from Nevertheless, final-offer arbitration has serves as an efficient judicial process. choosing a number he or she believes proved to be a strong alternative to But research showed that parties were is truly fair, the riskiness of the process courts and strikes.

resolution would be. Escalating the dispute into an impasse in a merger negotiation when the par- litigation would be costly. Neither side can easily ties have agreed to all but one of the deal’s compo- walk away. nents. Rather than allow the negotiation to collapse What is “fair” or “reasonable” lies on a spectrum over one small dispute, the parties could subject from objective to subjective and thus from clear to the lone contested element to final-offer arbitration, ambiguous. With many insurance or legal claims, potentially preserving the merger. (See the sidebar historical data or rec ords from similar cases can pro- “Saving the Deal.”) vide a solid basis for determining a fair settlement. The value of a new car totaled in an accident is easy Building Your Reputation to determine and hard to dispute. But personal in- The obvious benefit of employing this strategy is jury claims involving emotional suffering require economic: A more efficient negotiation is a lower- more-subjective evaluations. The challenge should cost negotiation. But the strategy potentially has be reserved for disputes in which the objective value another, less obvious benefit—enhancing a com- of a claim is fairly clear; the more ambiguous the pany’s reputation for fairness. That was one of Peter value, the greater the uncertainty about where an Hancock’s goals. Several considerations are relevant arbitrator’s decision will fall. when using the strategy to this end. To determine fairness in an injury case, an insur- We recommend that you begin a negotiation ance company could assemble several independent with a reasonable offer—to the extent that you have experts, give them the facts, and ask each to gauge a good assessment of what is fair—and that you do the claim’s value. If their conclusions are fairly well so before an unreasonable one is put on the table. aligned, the insurer can be confident of its offer. If a This flies in the face of much conventional wisdom, group of experts returns with widely divergent val- but it will strengthen the reputational signal you’re ues, you know that “fair” is ambiguous—and, there- trying to send. (It will also leverage the anchoring ef- fore, that using the challenge strategy will be risky. fect, steering the other side toward reasonableness Having established what’s fair, ask, “Can either from the start.) In a more typical negotiation, both party easily walk away?” In a typical buyer-seller parties open with unreasonable positions and only transaction, if the parties’ positions are polarized later move to a reasonable stance. But if the goal is and neither side is inclined to bargain, a final-offer to signal fairness, beginning the dysfunctional dance arbitration challenge isn’t useful, because the other will work against you. side can simply abandon the negotiation. In a le- We discourage use of the challenge when both gal dispute, however, where walking away isn’t sides are being unreasonable. Although you may win an option, the strategy can make sense. the dispute, you won’t have improved your reputa- This approach is most applicable to resolving tion—and you may have diminished it. Furthermore, disputes, but we can also imagine how it might help it’s highly uncertain what an arbitrator faced with close a deal. For example, it could be used to break two unreasonable offers will decide.

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Getting Started Companies interested in using the final-offer arbitration challenge will most likely pilot it. If that goes well, Saving the Deal they may choose to roll it out more widely. Adding the challenge strategy to a tool kit requires develop- Consider how the final-offer arbitration challenge ing new negotiation skills and may mean leading a might be used to rescue a merger negotiation when the parties are close to an acquisition price. The significant organizational culture change. As noted, target firm wishes to reach agreement quickly to opening a negotiation with their most reasonable avoid a hostile takeover attempt by a different position is anathema to many practitioners. company. The target and the acquirer are only Let’s look first at the technical part—learning $30 million apart—a small percentage of the roughly new skills. In most companies where some negotia- $800 million price. The disagreement is over the tion ability is required, basic soft skills—such as how valuation of one piece of the business: a new project to read the other side or find opportunities for joint about which the target, unlike the acquirer, is gain—are commonly taught. But companies rarely enthusiastic. There is not enough time to extract teach the negotiation analytics skills that business this project from the deal—for example, by selling schools do. A company planning to use our strat- it off as a separate company. egy must train its negotiators to objectively assess Either side could propose moving forward with the agreement while quickly setting up final-offer fairness—including how to conduct formal analysis arbitration to determine whose valuation of the on the basis of previous negotiations and how to project is fairer. We predict that such a proposal aggregate assessments from multiple experts. And, would result in a negotiated agreement, making of course, negotiators must learn the mechanics of the arbitration unnecessary. And if either side was issuing the final-offer arbitration challenge. They bluffing about its valuation of the new project, the need to be instructed in the legal logistics of set- final-offer arbitration challenge should bring it back ting up the process, local arbitration laws in coun- to the table in a more concessionary mood. tries around the world, and how to access arbitra- tors through organizations such as the American Arbitration Association. company’s negotiator lost, he or she may have mis- These methods have been disseminated across judged what constituted a reasonable offer. To re- AIG through an international training program we duce the danger of such misjudgments, we propose devised for many hundreds of adjusters involved in that a broader team, including the negotiator’s man- claims worth tens of billions of dollars. An important ager, review the offer in advance. When a bad out- part of the training has been to teach skeptical ad- come suggests a misjudgment, the company—not justers the logic of abandoning negotiation tactics an individual negotiator—should own the decision. they’ve long found natural. Getting buy-in for the Above all, it’s critical that endorsement of the new approach, which puts being fair first, is essential. program at the highest level be visible throughout The leadership challenge can’t be overempha- the organization. At AIG materials for the training sized. Although leaders at the highest level may program were conspicuously branded “The AIG Way see an argument for change, those further down in of Negotiating,” and Hancock publicly emphasized the managerial ranks may push back against doing both the reduced litigation costs and the reputational some things very differently. Actively creating a sup- benefits he hoped would result. portive environment means rewarding negotiators for using the strategy—and not punishing them for WE ENCOURAGE negotiators to use the final-offer -ar negative outcomes. bitration challenge not as a hostile act but as a civil Suppose a claims adjuster proposes final-offer mechanism for signaling an honest belief in the fair- arbitration and his company loses. That’s not neces- ness of their offers. Fully implementing the strategy sarily a bad thing; the company shouldn’t expect to requires leadership commitment and investments win every case that goes to arbitration. Consistent in training. But if it reduces costs, improves cus- success might suggest that the company tends to tomer satisfaction, and boosts your reputation, the make overly generous offers. However, if the gap investment is sure to be worthwhile. between the competing offers was large and the HBR Reprint R1609F

September 2016 Harvard Business Review 81 PRODUCTSPUTTING SERVICESINTO HBR.ORG

Mohanbir Sawhney is the McCormick Foundation Chair of Technology at the Kellogg School of Management, where he also directs the Center for Research in Technology & Innovation. He has advised two companies mentioned in this article: Littler and EXL.

A REVENUE-GROWTH PLAYBOOK FOR CONSULTANTS AND LAW FIRMS BY MOHANBIR SAWHNEY PAUL BLOW PAUL

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High-end professional services firms that cater to corporate clients have a clear upside: Because they provide specialized expertise, their offerings can be very lucrative. But there’s a less obvious downside: If a consulting firm, say, or a law practice wants to double its revenue, it has to double its staff of consultants or attorneys.

Consultancies, law firms, ad agencies, and other professional services firms struggle to nudge their gross margins above 40% as they achieve scale. Contrast that with product companies like Google and Adobe, which don’t have to deal with the same cost structure and which enjoy gross margins of 60% to 90%. Technology offers professional services firms a way out of their predicament. By leveraging the power of algorithm-driven automation and data analytics to “productize” aspects of their work, a number of innovative firms are finding that, like Google and Adobe, they can increase margins as they grow, while giving clients better service at prices that competitors can’t match. Productivity rises, efficiencies increase, and nonlinear scale becomes feasible as productized services take over high-volume tasks and aid judgment-driven processes. That frees up well-paid professionals to focus on jobs that require more sophistication—and generate greater value for the company. There are distinct challenges, however, in developing products to embed in services. The nature of a product and its role in a business’s value proposition are not the same for a services firm as they are for a company that manufactures goods. This means that services firms must take a different approach to creating, managing, and monetizing products. In the following pages I present a guide to product development for professional services firms. I describe the three key stages of the process: discovering potential

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Idea in Brief THE PROBLEM WHY IT HAPPENS THE SOLUTION Although high-end professional Traditionally, professional services Smart professional services firms services firms are knowledge- firms have been able to grow only are automating aspects of their intensive businesses that can by selling more of their services. work, essentially developing charge premium prices, they That means adding more people, products that can be combined traditionally struggle to realize which adds significantly to costs with employees’ expertise to the same returns as product and keeps revenue growth linear. deliver better service at lower or platform firms such as Adobe cost. The firms improve revenue and Google. by shifting away from billable hours to a fee for each customer transaction and finally to outcome- based pricing.

products by identifying opportunities for automation; makes them highly efficient and effective at perform- developing the products and enabling them to process, ing particular services. (They also work out of home analyze, and learn from data; and monetizing them by offices on a flexible schedule, which reduces the -com building a revenue model that captures benefits from pany’s overhead.) Data analysts, meanwhile, focus on automation and the application of analytics. reviewing, interpreting, and translating data on behalf of lawyers and work at a lower price point. Embedded Products in Service Oﬀerings Littler uses a dashboard that enables clients to In a professional services firm, a product is created when track discrimination charges filed with the Equal some aspect of a service is automated, infused with Employment Opportunity Commission. The dashboard analytics, and monetized differently. This involves sys- provides data-driven insights to proactively address tematizing the service, leveraging data to improve it au- business risks, which in turn lowers legal costs and tomatically, and then changing the method of payment speeds up the process of managing pending cases. In for the resulting improvements. some instances, this can help prevent the cases from The product, therefore, is embedded in the service of- escalating to litigation. fering and sold as an element of it. Services remain the Similarly, Littler CaseSmart–Litigation provides a center of gravity, and customers continue to buy the ser- streamlined method for HR clients to manage the litiga- vice offering, not the product per se. From the customer’s tion process in cases where they are being sued by indi- perspective, little changes other than the pricing of the vidual plaintiffs. A dashboard interface provides insights service. That drops because the value created by the new on employment issues while tracking the progress of le- product is shared between the firm and its customers. gal cases, and that technology is coupled with attorney As an illustration of a service provider with embed- services. Again, the offering improves the speed and ded products, consider Littler, a global employment and quality of Littler’s work while lowering costs for both labor law practice. Littler does legal work for companies Littler and the client. It also allows clients to look across in more than a dozen countries. To improve the quality their portfolios of litigation and identify recurring fac- and efficiency of its services, it has “unbundled” the tors that may be contributing to those cases (for example, tasks involved in their delivery and assigned them ei- they can determine whether there’s a pattern involving ther to people with specialized knowledge or to products a particular jurisdiction, decision maker, or policy and with automation and analytics capabilities, depending then proactively manage that issue). on the level of sophistication involved. Essentially, the To share the benefits of these innovations, Littler has firm has reengineered its legal services by developing entered into alternative fee arrangements (AFAs) with offerings that are powered by technology and humans. clients that save them money while boosting the firm’s One example is Littler CaseSmart–Charges. This of- revenue. Instead of billing for the hours its attorneys fering helps HR professionals and in-house attorneys spend on claims, Littler uses a fixed-fee model in which better manage employee discrimination claims and charges are based on productivity (per grievance or com- complaints by combining software, project management plaint). This change has resulted in lower legal costs for tools, and the skills of flextime attorneys (FTAs) and data clients—they’ve reported drops ranging from 10% to analysts. FTAs focus on specific tasks in the litigation 35%—which has enabled the CaseSmart team to win new process and have deep subject-matter expertise, which business. Revenue doubled from 2014 to 2015, and in

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spring 2016, Legaltech News heralded Littler as a Client By productizing this service, EXL was able to sig- Service Innovator of the Year, and BTI Consulting Group nificantly increase the number of claims it processed, named it one of the 22 law firms that were best at AFAs. reduce the costs of handling them, increase the amount of money recovered, and prevent overpayment on new Discovering Opportunities claims. In fact, for one client, EXL’s payment integrity Whereas product manufacturers’ ideas for new offer- tool recovered $50 million in three years and prevented ings are driven by an external focus on customer needs, an estimated $20 million in further overpayments. professional services firms identify product opportuni- Once you’ve identified patterns in your services, ties inside their businesses. They’re looking not for un- you’ll want to evaluate which tasks are best suited for met needs but for untapped potential to automate the productization via automation. To do this, you need services they’re already delivering successfully. to sort them according to two variables: the frequency Consider EXL, an operations management and with which they’re performed and the level of sophis- analytics company I advised as a board member for tication (meaning knowledge or intelligence) required a decade. One service that EXL provides to its health to perform them. (A high-sophistication task in an ad- insurance clients is medical claims management, spe- vertising agency, for example, might involve develop- cifically as it relates to overpayment caused by fraud or ing creative assets for a new marketing campaign. A low- abuse. Years ago that service was manual: EXL employ- sophistication task might involve optimizing search ees would examine medical claims for incorrect coding, engine marketing for a brand.) subrogation, payment errors, nonbeneficial services, The tasks that meet two criteria—they’re performed and other causes of overpayment. They’d investigate frequently and they require little sophistication—are claims that seemed questionable and then focus on the low-hanging fruit for productization. That’s because recovering undue outlays. the algorithms that drive automation are very good at After processing millions of claims, EXL began performing high-volume, repetitive tasks. Volume is to recognize patterns in the circumstances that sur- also important for improving the algorithm over time; rounded instances of overpayment. It discovered that the more input the algorithm receives, the more it will certain procedure codes, diagnosis codes, providers, learn and the better it will perform. patients, locations, and other variables were system- To get a better sense of opportunities that fall into atically associated with fraudulent or erroneous ac- this category, consider this analogy: When you drive tivity. With those insights, EXL was able to develop a long distances on the highway, you repeatedly perform tool that could scan and analyze claims for the relevant certain tasks that require very little intelligence, such attributes. Each claim earned a score that predicted the as maintaining a steady speed and keeping an eye on likelihood of abuse or fraud, and the ones flagged as the lanes to your left and right. These high-volume, suspect went up for review. low-skill tasks are ideal for automation—and, in fact, the technology already exists (think cruise control and blind-spot monitors). By contrast, low-volume tasks don’t provide TASKS THAT MEET TWO CRITERIA— enough data on which to base automation, while high- sophistication tasks are not easily automated because THEY’RE PERFORMED they require strategic decision making. For professional services companies, these opportunities simply FREQUENTLY AND aren’t worth the investment. Developing Products THEY REQUIRE LITTLE Professional services firms have the advantage of already knowing what they’re marketing and whom it’s SOPHISTICATION for. These companies aren’t creating something out of —ARE THE LOW-HANGING FRUIT nothing; they’re converting something (a service) into FOR PRODUCTIZATION. something else (a service with embedded products). This changes the process of developing and improving an offering in profound ways. In early-stage

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development, a product company will design various prototypes and try them out on sample customers, with a view to determining the key components in a value proposition. Smart professional services firms, however, aren’t trying to identify desired features. Instead, they use prototypes merely as a foundation on which to build precision, sophistication, and complexity. These improvements are typically driven by the ability of the product to gather and analyze data automatically, thus harnessing technology to create a “smart” product that improves itself. Deloitte, a leading audit, consulting, tax, and advisory services firm, provides a good example. Its Argus tool makes use of machine-learning techniques and natural-language processing to analyze electronic documents for auditing purposes. Argus can “learn” from every interaction it has with humans and every document it processes, so it gets better at identifying and extracting key accounting information over time. Within a few months of its release, Argus had already high-touch professional services firms. Specialized been used by more than 1,000 auditors to analyze more knowledge, strategic thinking, and sophisticated deci- than 30,000 documents. sion making are integral to the delivery of high-value When products that are embedded in a service are services, so people at those firms must play a bigger role basically software, improvements are more frequent than products do. It’s also preferable for professional than with stand-alone products, whose improvement services firms to do some hand-holding with clients, be- usually involves the launch of a new generation or cause that’s how they usually make their money. And model. As I’ve pointed out, the tool is always learning it’s usually best to keep products on company premises, from and adapting to its users, and it’s arguably mis- where they can remain proprietary and protected as leading to draw strict boundaries between prototypes, a source of competitive advantage. finished products, and generations of finished products. A professional services firm may sometimes find it These incremental product improvements have advantageous to turn a tool into a stand-alone product broader business implications. As the basic functional- and then spin it off and sell it.However, after creat- ity of a product grows more sophisticated, the enabling ing such a product, the company will almost always technology can be expanded to other uses. For example, return to the business of providing a service. This ob- Deloitte is now applying the platform behind Argus to servation brings us to the final stage in the product- its consulting business. creation process. Note, however, that embedded products do not replace service offerings; instead they strengthen the Monetizing Products value proposition that service offerings present. Argus For an embedded product to be worth developing, you amplifies Deloitte’s auditing services but does not serve have to figure out how to capture its value. If your firm’s as a substitute for them. For instance, if a client re- services have become more efficient or effective, it quested the development of a maturity model for cyber- doesn’t make sense to continue with a pricing model security readiness, an auditor would need to have stra- that’s based on time and materials. Indeed, if the goal tegic discussions with the company to devise guidelines, behind productizing services is to push beyond a lin- policies, and tools. That’s because such work involves ear growth rate, you must change your monetization complex analysis and decision making that exceed the model—or risk getting paid less for your work. capabilities of an embedded product like Argus. Two monetization levers—transaction-based pricing For similar reasons, self-service products (such and outcome-based pricing—correspond to the produc- as the basic legal and accounting tools offered by tivity gains and intelligence gains that automation and LegalZoom and TurboTax) are rare in the context of analytics respectively deliver. Once your company adds

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A TALE OF TWO PLAYBOOKS Product companies and professional services firms have different views of products, and they take different approaches to creating and managing them.

PRODUCT COMPANIES PROFESSIONAL SERVICES FIRMS

VIEW OF PRODUCTS Products are the key focus and primary source Products arise when a service is infused with AND SERVICES of revenue. automation, analytics, and monetization. Services surround the product; they complement Products are embedded within a service to enrich or augment the product as add-ons. it; they do not replace it.

DISCOVERY OF PRODUCT Products are conceived in response to Products are conceived when patterns are found OPPORTUNITIES marketplace needs or customer problems. in the services already provided to customers.

PRODUCT DEVELOPMENT Products are designed to address needs or Products convert an existing service into a more problems identified during the discovery stage. efficient or effective one. Prototypes are created to crystallize markets, Prototypes are created as a foundation on which customer segments, product specifications, and to add precision, sophistication, and complexity. product features.

PRODUCT MONETIZATION Customers pay for a product or its use. Customers pay for a service that has the product embedded within it.

automation to a service, it must shift to transaction- that’s five times higher ($1,000), a better approach is to based pricing to capitalize on the increased quantity of propose a per-agreement price with a discount thrown the offering (because automation improves productiv- in for good measure. Thus you might charge the client ity). And once your company adds analytics to a service, $3,500 for two contract reviews—less than the previ- it must shift to outcome-based pricing to capitalize on ous cost of $4,000. Your client will be pleased with the the increased quality of the offering (because analytics reduced fee, and you’ll both come out ahead. enables smarter decision making). In other words, this Reaping the monetary value of analytics, however, is a sequential process in which you transition from requires moving from transaction-based pricing to out- getting paid for inputs (time and materials) to getting come-based pricing. Consider this example from EXL: paid for throughputs (transactions) to getting paid for While managing collection calls for a utility company, outputs (outcomes). Note that this progression requires EXL developed an algorithm that scored each delin- both time and trust. You need maturity and experience quent customer on the likelihood that he or she would with the process to establish the correct pricing struc- pay the bill following a phone call. EXT used that infor- ture at each of these stages. And you need to build trust mation to prioritize the calls to make, and the efficiency with your clients before attempting to convert them to of the collections process increased dramatically as a a new pricing model. In practice, this process can take result. However, to be compensated for that increased several years. value, EXL would have to get paid for results it delivered When segueing from billable hours to transaction- (recovering money from overdue bills) rather than for based pricing, it’s important to do your math. Consider each transaction (each call). EXL is investigating that your revenue under a time-and-materials-based model, model for the future. calculate how your costs and margins will change as a Pricing outcomes is more difficult than pricing result of automation, and adjust your fees accordingly. transactions, because it requires qualitative judgments Doing these computations will prevent you from pricing as well as quantitative assessments. A professional ser- your service too high and creating a dissatisfied client, vices firm has to figure out how to define value, mea- or going too low and ending up with subpar margins. sure it, and attribute value creation to the proper source. Here’s an example: Let’s say that your company re- To negotiate outcome-based contracts with clients, views legal agreements at a rate of $200 an hour and therefore, you may need relatively high-level salespeo- each agreement takes about 10 hours, resulting in a fee ple or product specialists with consulting or creative of $2,000 per agreement. Now suppose you automate strengths. In addition, you may have to elevate the con- that process so it takes only two hours per agreement, versation to top decision makers at the client company, which translates to a fivefold productivity gain. Since because the negotiation may be too strategic to be left your client won’t be happy about paying an hourly rate to employees accustomed to buying your services on a

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time-and-materials basis. Finally, it pays to pilot your really value long-term goals, because the benefits of product and new billing model with customers with product-enabled services may take time to blossom. whom you’ve built a trusted relationship and who are To measure an embedded product’s performance, prepared to participate in the experiment. Make sure therefore, professional services companies have to they understand that you’ll be rolling out the product change how they define success. Instead of focusing and new billing model with other clients. on classic service-based metrics (such as client sat- Changing the structure of your contractual agree- isfaction or process efficiency), use product-based ments may influence the types of clients you pursue metrics (such as ideas generated, prototypes created, in the future. For example, you may want to focus on or level of automation achieved). companies that have highly repeatable problems. Or Beyond the organizational changes, all services you may decide to concentrate on opportunities where firms contemplating embedding products in their offer- you can clearly measure and determine the source of ing need to recognize that doing so comes with a hefty the strategic value you’ve created. This is one of the price tag. Accepting this reality can be uncomfortable. reasons that EXL primarily provides collection services Although product companies understand that costs to companies, as opposed to, say, helping companies come long before sales, and although entrepreneurs can improve their customer satisfaction rates. It’s a lot eas- rely on funding from venture capitalists with that same ier to measure efficiencies or effectiveness generated understanding, investing ahead of revenues is an alien by the former. concept for firms that provide services. It’s important to accept that you have to spend money without knowing People and Processes exactly how you’re going to get paid. Successfully developing products to embed in a service Productization is also a source of fear for many em- requires more than just a sound process. A firm’s cul- ployees. The flip side to the benefits of intelligent auto- ture and people’s mindsets have to change. So does the mation is that firms will need fewer people to manage a organizational structure. Here are three things that are process. So when robots take over manual tasks, compa- necessary for success: nies generally move to a model in which they offer fewer • A unit dedicated to product development. In the but more-demanding jobs. Employees with the best same way that product companies build innovation skills and knowledge will keep their jobs, while those units to incubate ideas, services companies should set tied to repetitive manual tasks will find themselves at up teams devoted to developing products internally. risk. In theory, you could even remove people altogether. It’s important to make such a team somewhat au- It’s therefore easy to conclude that intelligent autonomous; it needs its own budget, people, goals, and tomation pits humans against robots. I’d argue that’s metrics. But keep it connected to the business units, not the case. Algorithms are created and improved by since that’s where product ideas will arise. Create a humans, and technology is nothing without people to two-way exchange in which business units can come guide it. Thus the future workplace will not be about to the product team with ideas—and vice versa—while you versus robot; it will be about you and robot. It’s you empower the team to incubate those ideas. also worth noting that intelligent automation will ul- • A cross-functional approach. The product develop- timately leave employees with more-meaningful jobs ment team should include people with expertise in and companies with more-profitable business models. three areas: the business domain, IT, and pricing. You need domain experts to provide firsthand knowledge THE WORLD of professional services stands ready to be about clients, work processes, and business patterns. transformed by analytics and automation. That’s good You need IT experts to add automation and intelligence news for services firms; they can leverage the power to your services and ensure that the product can inte- of embedded products to break free from the linear- grate with existing systems. And you need business growth trap. But there’s another, perhaps more press- analysts who can appropriately price your services. ing, reason why they should put products into their • A diﬀerent dashboard. The client-facing units within offerings: Customers are increasingly demanding it. By services firms have a tendency to examine and eval- following the steps outlined in this article, professional uate their performance and budgets almost daily. services firms can increase their profitability and gain Product-management organizations can’t work this an advantage over their competitors. way, and it’s important to get the organization to HBR Reprint R1609G

September 2016 Harvard Business Review 89 Boris Groysberg is a Sciences and Leadership, professor of business United States Military administration at Harvard Academy. George Serafeim Business School and a is the Jakurski Family coauthor, with Michael Associate Professor of Slind, of Talk, Inc. (Harvard Business Administration Business Review Press, at Harvard Business 2012). Eric Lin is an School. Robin Abrahams assistant professor in the is a research associate at Department of Behavioral Harvard Business School. THE SCANDAL EFFECT When companies misbehave, executives pay a price on the job market—even if they had nothing to do with the trouble.

BY BORIS GROYSBERG, ERIC LIN, GEORGE SERAFEIM, AND ROBIN ABRAHAMS

90 Harvard Business Review September 2016 FREDRIK BRODEN September 2016 Harvard BusinessReview HBR.ORG 91 THE SCANDAL EFFECT

September 2015 Volkswagen was found to have intentionally set controls on its diesel engines to misrepresent their emissions levels. Some 11 million cars worldwide had the “defeat” program installed. This discovery led to an immediate plunge in Volkswagen’s Istock N price; government investigations in North America, Europe, and Asia; the resignation of its CEO and the suspension of other executives; the company’s record loss in 2015; and a tab estimated at more than $19 billion to rectify the issues. The scandal did incalculable damage to Volkswagen’s brand.

Imagine that you are an engineer in Mexico, or an HR A surprisingly high proportion of professionals executive in the United States, or a logistics expert are vulnerable to this kind of bias. In our sample in Poland. You worked for Volkswagen from 2004 to of job changers, 18% of the executives had worked 2008, before the new emissions controls were even for a company that had been involved in a financial in place, and you never worked in the divisions that scandal. Of course, if companies involved in non- created the deceptive programming. Lately you’ve financial scandals—product-safety issues, labor been unhappy in your current job and have been disputes, customer-relations fiascos, and so forth— thinking about making a change. Your long-ago were included, the proportion would be even higher. association with VW shouldn’t be a problem—right? Because the scandal effect is lasting, even a com- Wrong. Our research shows that executives with pany you left long ago could have an impact on your scandal-tainted companies on their résumés pay a current and future job mobility. You can’t control penalty on the job market, even if they clearly had this risk, but you can and should plan for it. nothing to do with the trouble. (See the sidebar The business press illuminates the variety of “About the Research.”) Overall, these executives scandals that can affect an organization’s reputa- are paid nearly 4% less than their peers. Given that tion: Fortune listed the five biggest scandals of initial compensation in a job strongly affects future 2015 as Volkswagen’s, the FBI’s indictment of FIFA, compensation, the difference can become truly Toshiba’s accounting problems, Valeant’s secret re- significant over a career. lationship with the pharmacy company Philidor, and Interviews with senior leaders at international the arrest of Turing Pharmaceuticals CEO Martin executive search firms complemented our quanti- Shkreli (already excoriated in the media for price- tative analysis and corroborated our findings. One gouging) for stock fraud. Inc., too, published a list, European headhunter recounted the difficulty of which included Goldman Sachs’s use of confidential placing an executive who had once worked for a information; indictments of nine New York City en- bank that had recently experienced a scandal, al- ergy companies for corruption; the hack of VTech, though the executive had left the company a decade which exposed its insecure data; and the revelation before the trouble even started. The headhunter’s that Exxon Mobil “deliberately misleads the public client, a managing director, resisted meeting the can- about climate change.” didate for some time. “It’s too risky,” he finally said. For the purposes of our study, we defined “scan- “Even though the guy has been out of the bank for 10 dal firms” as companies that had been cited in the years, I cannot consider him for this search.” databases of the U.S. Government Accountability

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Idea in Brief THE FINDING THE REASON THE ANSWER Executives with scandal-tainted The stigma that arises from If you have a scandal-tainted companies on their résumés pay scandal plays an outsize role ﬁrm on your résumé, you should a penalty on the job market— in hiring decisions because address the matter forthrightly, even if they had nothing to do judging other people accurately establish relationships with with the misbehavior. is diﬃcult and because those people who can attest to your making executive hires tend character, and consider taking a toward conservatism. “rehab job.”

Office (GAO) or the U.S. Securities and Exchange immoral. Researchers have become increasingly in- Commission’s Accounting and Auditing Enforce- terested in organizational stigma since the financial ment Releases (AAER) for misstating earnings. Over collapse of 2008. An entire industry may be stigma- the past few years the absolute number of compa- tized by society at large for its core functions—think nies that filed restatements has held steady at about of sex work, weapons manufacturing, or tobacco 800 to 850. However, the size of those companies production, for example. People who choose to work has increased, which means that more employees in such industries are aware of the risks, unlike the are vulnerable to the scandal effect. executives in our study. Noncontroversial companies don’t incur organizational stigma merely because Organizational Stigma of missteps or failure—there must be a sense that The modern concept of stigma is most closely as- they actively engaged in wrongdoing, transgressing sociated with the sociologist Erving Goffman, who important norms and values of their industry. in 1963 defined it as “the phenomenon whereby an individual with an attribute which is deeply discred- ited by his/her society is rejected as a result of the Because the scandal eﬀect attribute.” A stigma, which may be fair or unfair, un- is lasting, even a company dermines a person’s credibility in the social role he or she is attempting to play. You might not think ill of you left long ago could your real estate agent if you discovered that she was a semiprofessional poker player in her spare time, have an impact on your but the same discovery about your child’s Sunday school teacher could be disconcerting. current and future job The dynamics of stigma are robust across di- mobility. You can’t control verse circumstances: The “what” may change, but the “how” is constant. A stigmatized person—and this risk, but you can and frequently his family and associates as well—is iso- lated, avoided, demeaned, or not taken seriously in should plan for it. his chosen role. If someone is stigmatized for an ethically neutral, uncontrollable, or irrelevant attribute Companies that are tainted by scandal suffer from (think of race, gender, or physical disability), we stigma the same way individuals do. Other organiza- see the marginalization as unjust. But when the tions may sever relationships with them or try to take attribute is perceived as both controllable and im- financial advantage of the situation. Stigmatized moral, it becomes socially acceptable to discriminate companies may be mocked in the media, have their against the stigmatized. charitable donations rejected, see employee morale To understand how a corporate scandal can hurt plunge, and experience an exodus of talent. And or- an individual’s career, we turned to the concept of organizational stigma is contagious, not only for em- ganizational stigma, which occurs when a company’s ployees but sometimes even for other companies in actions are widely seen as fundamentally flawed or the same industry that have done no wrong.

September 2016 Harvard Business Review 93 THE SCANDAL EFFECT

Why is stigma so sticky—so hard to shake and so accomplishments listed on his résumé. Alternatively, easily transferred among people and groups? Here she can construct a patchwork approximation of his are three reasons: character by consulting her knowledge of all the in- Stigma isn’t always rational. Social scientists stitutions he has been affiliated with. The latter ap- generally agree that the stigmatization process is a proach—creating a mental model of an unknown product of evolution. Bos et al. (2013) have described quantity using various known quantities on the it as primarily about “keeping people down…keeping résumé—is easier, almost automatic. “The image of people in [and]…keeping people out.” In other words, the company is stronger than the individual image,” stigma serves to maintain status hierarchies, enforce as one recruiter put it. norms and values within a community, and help Thus it’s not surprising that hiring managers often people avoid contact with contaminated others— evaluate candidates according to their former affilia- aims that are actually similar on an emotional level. tions—whether consciously or not. One headhunter Infectiousness, moral wrongdoing, and unacceptable told us about a client, the CEO of a big bank, who “otherness” are linked in the human mind to disgust. declared that he wouldn’t even interview any candidates from two particular banks that had failed. The CEO didn’t care that several candidates from one of Women are hurt more by those banks claimed they hadn’t been able to do their the scandal eﬀect than men jobs because the boss was such a tyrant. In the CEO’s view, the headhunter said, somebody with integrity are: They receive 7% less in who was unable to do his job would have voted with his feet. We’ve heard plenty of similar anecdotes. compensation, whereas men There are motives to be conservative. Organizational stigma results from the judgments receive only 3% less. And an of multiple groups, whom researchers have dubbed elite education appears to “arbiters.” Legal arbiters are regulatory agencies and court systems; social arbiters, or opinion makers, in- protect against the eﬀect. clude academics, journalists, and advocacy groups; and economic arbiters are the business community, Indeed, experimental psychology offers volumi- including executive search firms and companies nous evidence that our judgment of other people, that are hiring. These groups are responsible for in- and even of physical objects, is often based less on vestigating and explicating corporate scandals and rational assessment than on a kind of magical think- for imposing and addressing their consequences. ing that seeks to avoid moral or physical contagion. The complicated nature of most corporate People photographed with undesirable others are of- scandals makes arbiters’ tasks inherently difficult. ten themselves judged less desirable—a kind of guilt Furthermore, each group of arbiters is concerned by association. And research subjects were less likely not only with the objective truth of the situation but to want drinks that had been stirred with a brand- also with the kind of evidence and narrative its au- new comb, or a sweater that was once the property dience will accept. Lawyers must make arguments of a serial killer. that juries can understand; reporters must write sto- Judging other people accurately is hard. ries that readers will find plausible; businesses must Another reason organizational stigma can adversely make decisions that customers and shareholders affect innocent individuals is that accurately assess- will consider reasonable. If the truth is too compli- ing someone you do not know is very difficult. Hiring cated, it may not be acted on. Some headhunters re- managers often use cognitive shortcuts, heuristics, ported being unable to “sell” candidates from scan- and stereotypes—consciously or unconsciously—to dal firms because they could not craft a compelling assess candidates. Negative information and stereo- narrative for their clients. After a few such incidents, types have disproportionate influence. many decide that it is not worth the investment of A hiring manager can attempt the laborious energy—even if they believe the candidate is inno- process of first assessing a candidate’s traits and cent and qualified. And because their own credibility skills and then discerning how they relate to the is at stake, arbiters are naturally motivated to be

94 Harvard Business Review September 2016 HBR.ORG Joining a “Scandal Firm” When stigmatized companies hire managers, the balance of power shifts to the individual. Those who seek to join a company that has weathered a scandal may get a premium conservative. Defending the stigmatized can lead for doing so. “When scandal firms survive,” one headhunter to being stigmatized oneself. told us, “the people who move into them are compensated Given these cognitive, emotional, and market more positively than those who were there before.” considerations, it is a wonder that any executives from scandal firms manage to find subsequent However, compensation is a blunt they look great, and if it doesn’t, employment. What helps them bounce back? instrument, and search consultants it’s not their fault, so they can are likely to look for candidates probably recover—or, more likely, Different Factors, Different Effects whose skills or experience make somebody in the late stage of a Multiple considerations determine whether, and them a good fit for those particular career or whose company got sold, how much, a corporate scandal will affect the career circumstances. “Companies that so there’s not much personal risk.” of an innocent employee or former employee. have been through some kind of negative publicity absolutely have Some job candidates may be National culture. We found that scandal pen- to exercise a little danger pay,” one attracted by the challenge of alties are more pronounced in countries with stron- recruiter acknowledged, “although managing a turnaround. One ger regulatory and governance systems, such as the it’s not just ‘Hey, you’ve got to pay recruiter spoke of the “mixture of United States and Denmark, where executives with out 40% more.’ Say that I knew John ego and humility” that would lead an scandal firms on their résumés receive compensation Doe lived in Europe before, and his executive to join a scandal firm: “It’s more than 6% lower than that of other executives family really wanted to move back; an acknowledgment of the extent (holding past compensation levels constant across we could use that to our advantage.” of the problem and the need to executives). In countries that have weaker laws, such do due diligence far beyond what as Russia, Spain, Colombia, and Bahrain, differences One recruiter noted that taking a you would normally do if you in compensation are not statistically distinguishable. job with a scandal firm could be a were accepting a role. And it’s a Countries with strong laws have regulatory enforce- worthwhile move for an early- or willingness by [the hiring company] late-career leader—that is, a short- to open itself up so that the full ment mechanisms, well-developed accounting and termer with a high level of risk extent of the issue can be resolved. auditing systems, sturdy corporate governance sys- tolerance: “Some very aggressive, If you’re the person who does it, tems, and intermediaries that allow information to talented young people might take you are marked as special. How be disseminated efficiently. These factors indicate a job like that because they want a wonderful would it be if you were the that a country has both the capacity to discover and chance to be CEO—if it works well, person who saved Lehman Brothers?” punish crime and the motivation and desire to do so. A country’s size may play a role as well. In a smaller nation, people in the same industry are those in senior positions, whose compensation is more likely to know one another, so the truth about more than 6.5 % lower than that of executives with a corporate scandal—who is innocent and who’s no such association. Effects are mixed for junior ex- not—may be easier to uncover. In a country as large ecutives, some of whom manage to escape any nega- as India or the United States, the news of a scandal tive impact. “The higher up you go in the leadership spreads instantly, but personal knowledge of the structure or the power structure at large, the more individuals involved is less likely. people are permanently punished for their affiliation,” Job function. Damages from financial scandals says one recruiter. “At the board level, people are so are of course most sharply pronounced among those occupied by the optics that the substance no longer in finance-related careers: Executives formerly at matters. They just steer clear of any taint whatsoever.” scandal firms receive initial compensation almost Gender. Women are hurt more by the scandal 10% lower than that of other finance executives, and effect than men are: They receive 7% less in com- the gap widens over time. For example, if a finance pensation, whereas men receive only 3% less. The expert with a scandal on her résumé finds a position greater visibility of female leaders may account for at a new company that ordinarily pays, say, $200,000, this: It’s easier for a company to hire a reputation- and her compensation grows by 3% each year for the ally challenged worker who will remain in the back next 20 years, her first year’s pay will be reduced by office than one who will be high profile. And women $20,000 (10%), and over those two decades her lost from scandal firms, especially those in a male- compensation will amount to almost $540,000. dominated industry, may feel that they approach the Seniority. The burden of previous association negotiating table with two strikes against them and with a scandal-tainted company may be greater for thus don’t push on compensation as hard as they

September 2016 Harvard Business Review 95 THE SCANDAL EFFECT About the Research Using proprietary data from a global executive placement firm, along with detailed career histories, we analyzed 2,034 executive job moves across multiple functions, industries, seniority levels, and geographies from 2004 to 2011. For more of this in financial services than anywhere, each move, we captured geography, position title, industry, given the financial crisis. But at this point I think there’s a feeling that it’s happened to everyone.” company names, individual attributes such as gender and Also, industries or niches within them may have education, and compensation levels from both prior and different standards regarding risk and their response placed positions. Nearly half the placements were for to stigma. For example, “the private equity guys positions other than C-level, president, or vice president. are more forgiving than anyone else,” according to one recruiter. “What they care about is how good a Prior and placed jobs had a mean only restatements, and the AAER total compensation of $294,000 and database captures SEC enforcement person is at his job, how much he really gets done. $331,000, respectively. On average, actions that have been flagged with They will go deep, deep, deep to understand the the executives had almost 19 years an AAER designation. The employment particulars of what that person did versus what the of professional experience. Of the of these executives clearly predated institution did, the inside politics of it.” Remember placed executives, 18% were women any misdeeds, and they were never that stigma involves being put outside the dominant (a notably higher proportion than legally implicated in a scandal. value system. If an industry’s value system stresses in data sets relying exclusively on the presumption of innocence, nonconformist C-level executives). We measured the impact on first- thinking, and independent empirical research, the year total compensation when an unfairly stigmatized may benefit. Of the executives studied, 18% had executive with a scandal firm on Subgroups within the stigmatized company. worked at a company marked by his or her résumé was placed by an Some organizations function—and are perceived— earnings misstatements captured in executive search firm. Each executive either the GAO database or the AAER was benchmarked on past-year as a more unified whole than others. But if a scan- database. The GAO database captures compensation at the prior company. dal is clearly the product of one person, group, or company division, it may be easier for employees elsewhere in the organization to escape the stigma. otherwise might, or as their similarly stigmatized As one search consultant noted, “Enron U.S. and male peers do. Enron Europe were two very different situations. Education. An elite education appears to protect There were no issues, as far as I remember, with against the scandal effect. Alumni of scandal firms the European operation. Those executives actually who were also alumni of Ivy League schools received continue to have very strong careers, because Enron offers moderately lower (2.0%) than did peers within Europe was seen as very innovative at the time out scandal firms on their résumés, whereas non-Ivy when the energy markets were being deregulated.” graduates were offered almost 4% less. We see a similar phenomenon in the Michael Executive search consultants suggest that the Milken–Drexel Burnham Lambert scandal. Milken following factors may also be in play: was indicted on 98 counts of fraud and racketeer- Industry culture. Some industries are more ing in 1989, and Drexel filed for bankruptcy in early lenient about what is deserving of organizational 1990. The functional and geographic division of the stigma. Bankruptcy may destroy the reputation of a firm into Drexel West (California, where Milken and financial institution but not of a software company, his junk-bond department were located) and Drexel at least not in the 21st century. When an entire in- East (New York, home of the equities department) dustry has been hit with multiple scandals or fail- helped the New Yorkers survive with their careers ures, as banking was, the reaction of the companies intact. “In Drexel East, the research department that survive may be mixed. One interviewee noted was not just highly regarded on the Street,” recalls that nonstigmatized firms may be more risk-averse the analyst Abby Joseph Cohen. “It was a group in protecting their reputations: “Even the people of people who were reasonably well liked and indi- who maybe weren’t entirely clean or pure don’t vidually credible.” Geography, function, and leader- want to touch anyone who’s unclean or impure, be- ship can all contribute to the existence of separate cause they don’t want to borrow anyone else’s prob- subcultures within a firm. lems or inherit anybody else’s scandal.” Another re- Niche skills. Drexel analysts did well after the cruiter, however, argued that the banking industry bankruptcy in part because some of them had spe- has become more tolerant: “People are generally cialized skills or a narrow professional focus. Such open-minded. It may partly be because we get a lot people may be protected after a scandal. As one

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headhunter put it, “I find that in narrow industry to surviving after a corporate scandal. Recruiters niches where people deeply know their competitors, were quick to tell us that employees from a scandal there’s a lot of fact-finding around the individual. firm need to be the ones to bring the topic up. “I’d And in those cases the individual can transcend the definitely opt for addressing it head-on, both to larger misfortunes of the firm.” headhunters and to anybody they’re meeting in an Niche specialists have two major advantages: interview context,” said one. They are not easily replaced, and—more important— Recruiters generally do additional due diligence they are likely to be known personally by potential on candidates from scandal firms. “We would do a hiring managers. “In certain niches individual repu- standard 360-degree reference process, but we would tation is more important than public opinion,” one probably want to talk to a few more people than nor- recruiter explained, “because these people would mal,” said one. “In an average search, we talk to five never necessarily move out of their own sector, and to eight references. Maybe we have to do eight to 10 so would not be confronted with a layman’s view of references to cover people from a scandal company. what happened.” Indeed, that’s how things played If I’m the client, I may want to talk to some of those out for specialists at one failed investment bank. The references directly. On top of that I would certainly bank was known for playing fast and loose and for recommend a third-party background check as well tacitly encouraging misbehavior. But “there was a lot as the standard criminal background check.” of recognition of the talent inside,” says one recruiter. “And a lot of that talent, because of the way that firm was structured, was very specialist-oriented. People Some industries are more would work in the same niche their entire careers. lenient about stigma. That talent got snapped up in an instant. I would say almost no taint adhered to the technical experts in Bankruptcy may destroy their specialty fields.” The eye of the beholder. Misstating earnings the reputation of a ﬁnancial (the type of scandal we examined in our study) represents a profound breach of public trust, confirmed institution but not of a by the legal system and clearly defined. But beyond software company. such clear-cut examples, the extent of organizational stigma also depends on which stakeholder group is affected. For example, Walmart and Amazon are Because they understand their clients’ concerns, stigmatized by some groups for their labor and other executive recruiters can help candidates create a business practices, yet are popular with sharehold- full, clear, and succinct narrative for hiring managers and customers. A recent and fascinating case is ers. A headhunter who recruited the CFO of a scan- that of Blue Bell Creameries, whose ice cream was dal firm to another financial institution described recalled in 2015 after a listeria outbreak led to three the process: “The candidate spent a lot of time help- deaths. Despite allegations that the company had ing me understand and articulate that the parts of known about the food-safety issues for years, many the world over which he had responsibility were not customers remained intensely loyal to the product. the parts of the world that were blowing up on the Given that the desire to avoid illness is a fundamen- company’s balance sheet.” tal psychological reason for stigmatization, the loy- Reputation. According to Goffman, stigma alty of Blue Bell’s customer base suggests that we functions as a kind of reputational bankruptcy, in still have much to learn about how organizations do which the actual self cannot make good on the im- or do not become stigmatized. plicit promises of the virtual self. The best course of action for an executive stigmatized by scandal is to Bouncing Back borrow, as it were, reputation and legitimacy from How can you survive a corporate scandal? Insights someone else. Managers who have extensive exter- from our field research suggest three steps: nal networks, or who are in fields that emphasize Forthrightness. Truth is the best friend of the individual reputations, may be able to acquire such innocent. Transparency and full disclosure are key cover through existing relationships.

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For many others, executive search firms can compete with the scandal narrative. Your eventual serve as both the reference and the sponsor. Indeed, goal is to make the rehab job the first piece of data the importance of the research that these firms per- people associate with you. form lies not only in the exonerating information One recruiter told us about a banker whose em- but also in the time and energy that gathering such ployer had been caught in a fraud; the banker man- information represents. Search firms are hired by aged to find a rehab position at a smaller institution companies, not by job seekers, and will not invest in and eventually became its leader. “It was an op- an in-depth background check unless they already portunity for him to get back into a bigger role with believe in the candidate’s innocence and value on a smaller company in a market where he still had a the job market. Their investigations provide a form good reputation,” the recruiter recalled. “Later, we re- of reputational voucher. cruited him to be a chief executive. We went through Rehab. After proving your innocence and estab- all our due diligence on his background, as did some lishing relationships with people who can attest to of the board members, to make sure that not only your character, the final step may be to take a “re- was there no culpability, but there was no sort of lin- hab job.” One headhunter noted that although some gering reputational damage—which there was not. executives—especially those with a dedicated re- I think he needed that in-between job. I don’t think cruiter and an “enlightened” hiring firm—can make you could’ve taken him right out of where he was a job change at the same level of responsibility and and plugged him in to be CEO somewhere else.” compensation, many candidates from stigmatized The tactics for surviving an organizational scan- companies need to “seek a lower-level job which dal depend on multiple factors: what phase of your you can do with one arm tied behind your back.” He career you’re in, your skill set, the industry, the continued, “You look so compelling compared with overall labor economy, how willing you are to make the next person who might do it that you’re almost changes. But the basic strategy is the same: Get the guaranteed to get the job. Inevitably it’s at a lower facts on the table, borrow someone else’s good name, level of compensation.” and take a job that will allow you to prove yourself The purpose of the rehab job, whether or not again. The scandal effect can’t always be predicted it represents a step backward in compensation or or controlled, but it can be survived. responsibility, is to create a persuasive story to HBR Reprint R1609H

98 Harvard Business Review September 2016 8th Global Peter Drucker Forum Nov. 17 - 18, 2016 Vienna THE ENTREPRENEURIAL SOCIETY

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Sara Armbruster Tim Brown Clayton Christensen Sarah Cliffe Maelle Gavet VP Steelcase CEO Ideo Harvard Business School Harvard Business Review COO Priceline Group

Gary Hamel Lisa Hershman Philip Kotler Roger Martin Mariana Mazzucato London Business School Vice Chair SCRUM Alliance Kellog Martin Prosperity Inst. University of Sussex

Rita Mc Grath Efosa Ojomo Sally Osberg Alex Osterwalder Rajeev Vasudeva Columbia Business School Harvard Business School CEO Skoll Foundation Business model innovator CEO Egon Zehnder

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Delivering an Award-Winning Customer Relationship

With businesses in all industries under pressure to innovate and deliver high performance in a rapidly changing environment, customer service has emerged as a tool for brand differentiation. In the insurance business, delivering a distinctive customer experience can be a powerful competitive advantage. Harvard Business Review recently spoke with Brian Winters, Head of Customer, Distribution & Market Development, Zurich Global Corporate in North America, about how Zurich’s customer relationship model is helping drive customer engagement.

Zurich’s customer relationship strategy is for our GRLs to be the lead interfaces on the rest of the Zurich corporate customer designed to help differentiate it in the behalf of Zurich. It also established the key portfolio, with over four times the product highly competitive, corporate customer processes for their interactions with all Zurich density, an average nine points higher in marketplace. What went into the businesses globally. retention, and up to 10 points higher on development of your strategy, and how Net Promoter Scores. do you act on it? How do you grow relationships and Customers tell us they consider our Zurich is a large, complex organization. A lot maintain a differentiated experience Relationship Leaders to be extensions of of customers told us they wanted access to a when accounts traditionally buy their own teams. They depend on them dedicated “champion” who could help them insurance once a year? for deep insights into their challenges and navigate our organization and capabilities. Many of the transactions with large to help them solve complex problems. This Beginning in 2002, Zurich pioneered a customers come up at different times during approach has become a cornerstone of customer relationship model centered on the year. Our Relationship Leaders meet with how we do business. the role of the Global Relationship Leader, or strategic customers regularly to determine We are proud to note that our customer GRL. Our objective was to transform Zurich what lines are coming up for renewal and any relationship model earned us a 2016 from a product-focused company to a truly new lines and exposures to consider. We, of Strategic Account Management Association customer-centric organization recognized as course, engage brokers in this process, too. (SAMA) Excellence Award — the ﬁ rst time an industry-leading differentiator. Early on, we had to convince brokers that a global insurance carrier has won a there was no need to feel threatened by this respected SAMA award in the group’s more approach. We earned trust by demonstrating How does Zurich go about delivering an than 50-year history. that we understood their concerns. We also award-winning customer experience? showed that our approach could actually Our highly trained GRLs act as our primary make brokers’ and customers’ lives easier, strategic account managers. Among the key such as in dispute resolution. For all sides, this attributes we seek in candidates are proven new paradigm has been a real win-win. business savvy and the ability to create an Learn more about us at zurichna.com. effective and compelling strategic plan for What overall impact has this customer assigned customers. Execution is critical. relationship model had on your business? Get access to the Zurich solutions and risk We also introduced a document called a Results on all key metrics over the past 10 insights on the Zurich Team Charter, signed by the chief executives years have shown that this model delivers Virtual Literature Rack. Download to your iPad of all of Zurich’s global businesses. The Team superior performance. Our strategic from the App Store or Charter established the global mandate customers have consistently outperformed visit zurichvlr.com.

The information in this publication was compiled from sources believed to be reliable for informational purposes only. All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. We trust that you will customize these samples to refl ect your own operations and believe that these samples may serve as a helpful platform for this endeavor. Any and all information contained herein is not intended to constitute advice (particularly not legal advice). Accordingly, persons requiring advice should consult independent advisors when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and sample policies and procedures, including any information, methods or safety suggestions contained herein. We undertake no obligation to publicly update or revise any of this information, whether to refl ect new information, future developments, events or circumstances or otherwise. Moreover, Zurich reminds you that this cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances. The subject matter of this publication is not tied to any specifi c insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy.

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Can’t find your account number? Contact customer service: In the U.S. and Canada: harvard@cdsfulfillment.com • For international subscriptions: [email protected] CHRISTOPHER DELORENZO Experience YOUR MOSTDIFFICULT DECISIONS HOW TO THINKTHROUGH CASE STUDY 109 Navigating the office romance aftermath of a failed ofafailed aftermath PAGE 104 Is theEuropean doomed? doomed? currency union SYNTHESIS 114 September 2016 Harvard BusinessReview Jimmie Johnson on Jimmie Johnsonon why NASCAR racing why NASCARracing is a team sport is ateamsport LIFE’S WORK 124 103 EXPERIENCE

very manager makes tough Managing calls—it comes with the job. EAnd the toughest calls come in the gray areas—situations where Yourself you and your team have worked hard to gather the facts and done the How to Tackle best analysis you can, but you still don’t know what to do. It’s easy to become paralyzed in the face of such Your Toughest challenges. Yet as a leader, you have to make a decision and move forward. Decisions Your judgment becomes critical. Judgment is hard to define. It is a fusion of your thinking, feelings, by Joseph L. Badaracco experience, imagination, and character. But five practical questions can improve your odds of making sound judgments, even when the data is incomplete or unclear, opinions are divided, and the answers are far from obvious. Where do these questions come from? Over many centuries and across many cultures, they have emerged as men and women with serious responsibilities have struggled with difficult problems. They express the insights of the most penetrating minds and compassionate spirits of human history. I have relied on them for years, in teaching MBA candidates and counseling executives, and I believe that they can help you, your team, and your organization navigate the grayest of gray areas. This article explains the five questions and illustrates them with a disguised case study involving a manager who must decide what to do about a persistently underperforming employee who has failed to respond to suggestions for improvement. He deserves a bad review, if not dismissal, but higher-ups at the company want to overlook his failings. How should the manager approach this situation? Not by following her gut instinct. Not

by simply falling into line. Instead, DELORENZO CHRISTOPHER HBR.ORG

In a six-month study of call center employees, those with adjustable desks, which allow them to stand or sit as they wish, were about 46% more productive (as measured by + completed calls per hour) than those with traditional desks. “CALL CENTER PRODUCTIVITY OVER 6 MONTHS FOLLOWING A STANDING DESK INTERVENTION,” BY GREGORY GARRETT ET AL.

she needs to systematically work man to seek to promote what is Kwame Anthony Appiah has said, through the five questions: beneficial to the world and to “No local loyalty can ever justify What are the net, net consequences eliminate what is harmful.” forgetting that each human being has of all my options? In today’s complex, fluid, responsibilities to every other.” What are my core obligations? interdependent world, none of us can How can you figure out specifically What will work in the world as it is? predict the future with total accuracy. what these duties oblige you to do in Who are we? And it’s sometimes hard to think a particular situation? By relying on What can I live with? clearly about gray-area issues. What’s what philosophers call your “moral To grapple with these questions, important is taking the time to open imagination.” That involves stepping you must rely on the best information your mind, assemble the right team, out of your comfort zone, recognizing and expertise available. But in the and analyze your options through your biases and blind spots, and end you have to answer them for a humanist lens. You might sketch putting yourself in the shoes of all yourself. With gray-area decisions, out a rough decision tree, listing all key stakeholders, especially the you can never be certain you’ve made potential moves and all probable most vulnerable ones. How would the right call. But if you follow this outcomes, or designate certain people you feel in their place? What would process, you’ll know that you worked to act as devil’s advocates to find you be most concerned about or on the problem in the right way— holes in your thinking and prevent afraid of? How would you want to be not just as a good manager but as a you from rushing to conclusions or treated? What would you see as fair? thoughtful human being. succumbing to groupthink. What rights would you believe you had? What would you consider to be Net, Net Consequences It’s sometimes hard to think hateful? You might speak directly to The first question asks you to the people who will be affected by thoroughly and analytically consider clearly about gray-area issues. your decision, or ask a member of every course of action available to You need to open your mind, your team to role-play the outsider or you, along with the full, real-world, victim as persuasively as he or she can. human consequences of each. Gray- assemble the right team, and Again, you must look past area problems are rarely resolved in a analyze your options through economics and your business school flash of intuitive brilliance from one training. Yes, managers have a legal person; as a very successful CEO told a humanist lens. duty to serve the corporation—but me, “The lonely leader on Olympus that’s a very broad mandate that is really a bad model.” So your job is When you make important, includes the well-being of workers, to put aside your initial assumption difficult decisions, you affect many customers, and the community in about what you should do, gather a people’s lives and livelihoods. The which they operate. You have serious group of trusted advisers and experts, first question asks you to grapple obligations to everyone simply and ask yourself and them, “What hard with that reality. because you are a human being. could we do? And who will be hurt or When you face a gray-area decision, helped, short-term and long-term, Core Obligations you have to think—long, hard, and by each option?” We all have duties—as parents, personally—about which of these Don’t confuse this with cost- children, citizens, employees. duties stands at the head of the line. benefit analysis, or focus solely on Managers also have duties to what you can count or price. Of shareholders and other stakeholders. The World as It Is course, you should get the best But the second question gets at The third question pushes you to data you can and apply the relevant something deeper: the duties we look at your problem in a clear-eyed, frameworks. But gray-area problems have to safeguard and respect the pragmatic way—seeing the world require you to think more broadly, lives, rights, and dignity of our fellow not as you would like it to be but as deeply, concretely, imaginatively, men and women. it is. Ultimately you need a plan that and objectively about the full impact All the world’s great religions— will work—one that will move an of your choices. In the words of the Islam, Judaism, Hinduism, individual, a team, a department, or ancient Chinese philosopher Mozi, Christianity—emphasize this an entire organization through a gray “It is the business of the benevolent obligation. The contemporary ethicist area responsibly and successfully.

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The phrase “the world as it is” Who Are We? understanding and analysis of the points toward Niccolò Machiavelli’s According to an old African adage, situation. The other involves the thinking—a perspective that might “I am because we are.” Put differently, values, ideals, vulnerabilities, and seem surprising in an article about our behavior and identities are experiences of whoever will be making responsible decisions. But shaped by the groups in which we making the decision. A seasoned his view is important, because it work and live. As Aristotle said (and executive once told me, “I wouldn’t acknowledges that we don’t live in as a vast body of scientific literature go ahead with something just a predictable, calm environment has since confirmed), “Man is by because my brain told me it was the populated with virtuous people. nature a social animal.” So this right thing to do. I also had to feel it. The world Machiavelli described is question asks you to step back and If I didn’t, I had to get my brain and unpredictable, difficult, and think about your decision in terms my gut into harmony.” shaped by self-interest. Sound of relationships, values, and norms. Ultimately you must choose, plans can turn out badly, and bad What really matters to your team, commit to, act on, and live with the plans sometimes work. Much of company, community, culture? How consequences of your choice. So it what happens is simply beyond can you act in a way that reflects must also reflect what you really care our control. Leaders rarely have and expresses those belief systems? about as a manager and a human being. unlimited freedom and resources, If they conflict, which should take After considering outcomes, duties, so they must often make painful precedence? practicalities, and values, you must choices. And a great many To answer those questions, you decide what matters most and what individuals and groups will pursue might think about the defining stories matters less. This has always been their own agendas, skillfully or of a particular group—the decisions the challenge of taking on any serious clumsily, if not persuaded to do and incidents that everyone cites responsibilities at work and in life. otherwise. when explaining the ideals to which How will you figure out what That is why, after considering you are collectively committed, what you can live with? End your consequences and duties, you need you have struggled to achieve, and conversations with others, close to think about practicalities: Of the what outcomes you try hard to the door, mute the electronics, and possible solutions to your problem, avoid. Imagine that you are writing stop to reflect. Imagine yourself which is most likely to work? Which is a sentence or a chapter in your explaining your decision to a close most resilient? And how resilient and company’s history. Of all the paths friend or a mentor—someone you flexible are you? you might choose in this gray area, trust and respect deeply. Would you To answer those questions, you which would best express what your feel comfortable? How would that need to map the force field of power organization stands for? person react? It may also be helpful around you: who wants what and This question comes fourth to write down your decision and your how hard and successfully each because you shouldn’t start with it. reasons for it: Writing forces clearer person can fight for his aims. You Unlike the first three, which require thinking and serves as a form of must also ready yourself to be you to take an outsider’s perspective personal commitment. agile and even opportunistic— on your situation and consider it maneuvering around any roadblocks as objectively as possible, this one In Practice or surprises—and, when the situation addresses you as an insider, at risk Now let’s turn to our case study. calls for it, to play hardball, asserting for adopting an insular, limited Becky Friedman was the 27-year-old your authority and reminding others view when you consider norms and manager of a 14-person technology who is the boss. values, because we are naturally group responsible for clothing sales It’s easy to misinterpret the third inclined to take care of our own. at an online retailer. One of her team question as an “out”—an excuse to So counterbalance that tendency members, Terry Fletcher, a man 15 do what’s safe and expedient instead with the thinking prompted by the years her senior with a longer tenure of the right thing. But the question previous questions. at the company, wasn’t doing his is really about what will work if part. Although his previous boss you bring persistence, dedication, Living with Your Decision had routinely given him scores of creativity, prudent risk-taking, and Good judgment relies on two 3.5 on their five-point performance political savvy to the task. things: One is the best possible scale, Friedman didn’t believe his

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work merited that; and whenever she also take her capitulation as a sign of She concluded by suggesting that presented him with opportunities weakness, which could keep her, he spend the next several months to develop his skills and ramp up a relative newcomer, from moving continuing to do his job while also his contributions, he failed to follow up in the leadership ranks. looking for another one. She was through. So she wanted to drop Middle-ground options, such surprised and relieved when his his rating to 2.5 and put him on a as presenting Fletcher with further immediate anger over the bad rating performance improvement plan development opportunities or giving subsided and he agreed to consider (PIP), on a path to dismissal. Soon, him another warning, seemed more her plan; in fact, he had already however, two of the company’s vice promising but carried their own risks: been toying with the idea of leaving. presidents, good friends of Fletcher’s, Would they be effective in changing He spent the next several weeks caught wind of her plans and paid her his behavior? Would they still result looking for other positions, inside the a visit. They asked whether she was in backlash from the VPs? Friedman company and elsewhere, and soon sure about what she was doing and also thought about what she, her joined another company. Friedman, suggested that the real problem might team, and her organization cared meanwhile, continued to thrive. She be her management. about most. As a woman in computer had, of course, been lucky; there was Suddenly the situation was no science, she knew what it was like no guarantee that Fletcher would longer black-and-white. Friedman to be marginalized, as Fletcher respond so positively to her feedback. had entered a gray area and felt stuck. was among the whiz kids in her But she’d put herself in a good To find a way out, she turned to the department, and she felt compelled position by getting the process right, five questions. She considered her to help him. At the same time, her and she’d been prepared to try other, options—stick to her plan, abandon equally thought-through tactics if the it, or find a middle ground—and their first didn’t work. consequences. She reminded herself Imagine yourself explaining of her basic duties to her fellow your decision to a close friend WHEN YOU FACE a gray-area problem, human beings, including Fletcher, her or a mentor—someone you be sure to systematically answer team, and the VPs. She evaluated the all five of the questions, just as practical realities of her organization. trust and respect deeply. Becky Friedman did. Don’t simply She weighed the defining norms and Would you feel comfortable? pick your favorite. Each question is values of her various social groups. an important voice in the centuries- And she thought carefully about her How would that person react? long conversation about what counts own abiding sense of what really as a sound decision regarding a matters in life. group prided itself on exceptionally hard problem with high stakes for She suspected that if she pushed professional performance, and other people. forward and gave Fletcher the rating her company, although young, Leadership can be a heavy he deserved, she and her team would had always claimed and generally burden. It is also a compelling, crucial suffer retribution: The VPs could proved to be a meritocracy with challenge. In gray areas, your job withhold resources or even force high standards and a sharp focus on isn’t finding solutions; it’s creating her out of the company. She also customer needs. them, relying on your judgment. As worried about Fletcher, who seemed After much deliberation, an executive I greatly respect once off-balance and appeared to have Friedman decided to try a counseling told me, “We really want someone few things going well in his life. How session with Fletcher. She opened by or some rule to tell us what to do. would a poor review and a possible telling him that she had decided to But sometimes there isn’t one, and job loss affect him, not just financially give him a 2.5, but that she wouldn’t you have to decide what the most but also psychologically? If Friedman put him on a PIP because it would relevant rules or principles are in chose option B, however, she would be too demeaning. She then asked this particular case. You can’t escape still have a deadweight on her team, him to consider the department’s that responsibility.” which might prevent the group from recent hires—all of whom had strong HBR Reprint R1609J achieving its ambitious goals and technical skills—and honestly Joseph L. Badaracco is the John demoralize its most talented and evaluate whether he would be happy Shad Professor of Business Ethics at diligent members. The VPs might or successful working alongside them. Harvard Business School.

September 2016 Harvard Business Review 107 ADVERTISEMENT

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her pay. And given her standing in the company, they Case Study were really more like peers. He liked her, respected her, and wanted to get to An Office know her better. So she’d said yes, and they’d had a pretty amazing time together. Romance Brad: Fun night Elizabeth: Maybe too much fun? Brad: Never too much. Dinner again Friday? The new Thai? Gone Wrong Elizabeth: OK, but let’s keep btwn us for now? A star salesperson struggles to navigate a bad breakup Brad: Sure ;) with a coworker. by J. Neil Bearden They managed to keep the fledgling relationship secret for three weeks. But then two colleagues spotted them at a restaurant across town on a Saturday night, and they were forced to come clean. By Monday morning, it seemed like everyone in the office knew. There were whispers from Brad: Drinks after the last session? Ada: Not bad looking either… some of the women and what felt Elizabeth: The whole gang? It was true. Brad wasn’t her boss. He like relentless, albeit good-natured, Brad: Just me. Others ﬂying back. led the finance team. She reported teasing from the guys in sales. Elizabeth: OK. Hotel bar@7? to the head of sales, who reported “Hey, Lizzie, I thought you were J. Neil Bearden Brad: See u there. to the COO, and she and Brad rarely is an associate after customers, not coworkers!” Nothing happened that first night. interacted at work. They’d only professor of She hoped that would be the Yes, Brad had flirted, and Elizabeth gotten to know each other in the decision sciences extent of the fallout, but the next day at INSEAD. had flirted right back. They’d spent past couple of months, after she’d her boss pulled her aside. two hours at the bar. But she knew been asked to present at a “Look, Elizabeth, I like both you better than to take it further. He was few investor conferences, and Brad, and what you do privately the CFO of their company, a software repurposing the spiel she’d is your business. But please keep start-up with about 75 employees. successfully given to so many it out of the office. I don’t She was its star salesperson. They customers. Still, when just a want this to distract you were at a conference, with industry few days after their drinks in or, well, detract from your contacts all around, using expense the hotel, he’d asked her out reputation around here.” accounts. Maybe the flirting would on a “real date,” Elizabeth Elizabeth’s embarrassment lead to something; maybe not. But if initially demurred, quickly turned to frustration. it did, she wanted things to start right. wondering if it was She sure hoped Brad was getting a good idea. But the same lecture. Ada: Ready for your big date? he’d assured her Elizabeth: Nervous they wouldn’t be Ada: Girls night! Still busy w/ B? Ada: Because he’s your boss? ;) breaking any rules. Elizabeth: No. Elizabeth: He’s not! Just C-suite. He didn’t evaluate Ada: ?

CHRISTOPHER DELORENZO CHRISTOPHER And super smart. her or even set Elizabeth: Long story.

September 2016 Harvard Business Review 109 EXPERIENCE

Case Study Teaching Notes

J. Neil Bearden teaches the case on which this one is based in His stammering made Elizabeth Brad smiled. “Thanks for his MBA and executive MBA ethics courses. suspicious. “Yeah,” she said casually, understanding, Lizzy. I knew you WHAT DREW YOU TO THIS CASE? “I was supposed to give him some would be a professional about this.” It’s based on a story that a student shared in class. numbers beforehand. Do you know After he left, she went into the I decided to teach it when I saw her peers’ reactions. who else was going?” ladies’ room, closed herself in a stall, There was deep disagreement over “the right thing to Now the young man looked and cried. do,” and people became emotional, which made for confused. “I think Claudia? They left a great discussion. I’ve now taught the case to nearly together.” Elizabeth forced a smile. Ada: Come out tonight? 1,000 people, and it always has a big impact. Many Claudia was the newest recruit to the Elizabeth: Will just bring you down. students tell me they’ve been in or around similar sales team—young, eager, pretty. Ada: Still bad? situations, and most can identify with it in some way. “Great, thanks.” She tried calling Elizabeth: Constant PDA. and texting Brad, but he didn’t Ada: Let me distract you! HOW DOES THE DEBATE TYPICALLY UNFOLD? answer. So she met Ada and the girls Elizabeth: Thx but no. Burying Some people think the protagonist is responsible for the situation she’s in and should therefore “suck it for a bit and went home alone. myself in work! up” or leave. Others blame the company’s leaders for She could handle it, she thought, if fostering an unprofessional environment and argue Brad: Sorry re yesterday. Work they would just stop flaunting their that she should seek legal recourse. People have a emergency. Left phone in Uber. relationship in front of her and hard time seeing the legitimacy of opposing views. Elizabeth: You couldn’t borrow a everyone else. She felt a brief rush phone? Or email? of vindication when she heard that WHAT DO YOU HOPE STUDENTS TAKE Brad: Busy w/ board stuff. the newly appointed head of HR— AWAY? Working all night. a seasoned executive brought One lesson is that office relationships can have Elizabeth: With Claudia? in to provide “adult career consequences. Another is the importance of empathy. I hope the case encourages students, Brad: We should talk. supervision” to the especially men, to think of their subordinates and Cafe@11? growing start-up— colleagues as human beings with real feelings and Afterward, she was instituting an to treat them accordingly. realized that anti-fraternization he’d chosen the policy. But she company café so soon learned Ada: Tell me over wine! Sal’s@8 that she wouldn’t that it applied After two months of romantic dinner make a scene. And only to people with dates, daily texts, and even a brief she didn’t—even when reporting relationships, meet-and-greet with her parents, she he told her that he had and Brad and Claudia HBR’s fictionalized and Brad had hit a lull. He claimed he case studies indeed been out with Claudia the would have been grandfathered was busy with work, but it was the present problems night before, and several times before in regardless. middle of the quarter, with no major faced by leaders that. They couldn’t fight the “instant The CEO even seemed to reference in real companies management or board meetings and offer solutions connection,” he explained, and them at the all-staff meeting he’d on the docket. He’d promised they from experts. because things were getting serious, called to announce the new rules— would meet for dinner after work he had to stop seeing other people. “Of course, we’re not trying to break that Thursday, so she’d initially Elizabeth wondered if she was the up any happy couples!”—which declined Ada’s invitation. But when only one Brad was giving this speech prompted Brad and Claudia, seated she finished her last call for the to that day. They’d never talked about evening and stopped by his office, exclusivity, but she’d assumed…She she found it empty. felt blindsided, hurt—and angry. But “Have you seen Brad?” she asked she kept her cool. one of the CPAs who happened to be “Obviously, I’m surprised and, passing by. justifiably, upset,” she said in as even He looked up at her, then down a tone as she could muster. “Clearly, at his shoes, cheeks suddenly pink. this wasn’t what I thought it was, and “Er, I think he said he had, um, a last- you aren’t who I thought you were, so minute meeting, er, out of the office.” it’s probably best that it’s over.”

110 Harvard Business Review September 2016 HBR.ORG

together in the front row, to exchange its entrepreneurial culture. She cutesy smiles. Elizabeth could feel was a top performer at one of people watching her for a the industry’s most talked-about reaction, some with concern, start-ups, the heir apparent to Tell us what you’d do in this situation. most with schadenfreude-fueled her boss, and perhaps an eventual Go to HBR.org. curiosity. She acted as if she hadn’t an empty conference room. “Claudia contender for the C-suite. seen anything, stared at her phone, mentioned that she’s going to New Ada was right about her and pretended to respond to an York, too,” she said. “Does it really compensation, too: With salary, extremely urgent e-mail. make sense for both of us to be there bonuses, and stock options (which when we still have work to do to hit still had a year to vest), her package Elizabeth: Can I ask a favor? our numbers for the month? It’s an was sort of insane. She couldn’t Brad: ? investor conference, not a sales event.” leave. But after everything with Brad, Elizabeth: Would you mind toning Her boss looked at her pointedly making a clean break was looking it down w/C at the oﬃce? and told her to close the door. more and more appealing. Brad: Tone down what? “Sometimes investors can become A recruiter had contacted her Elizabeth: You know what I mean. customers or lead us to new ones, as just the week before about a role Brad: Not sure I do. We’re trying you well know, Elizabeth,” he said. at a Fortune 500 company—a big, to stay out of your way. But you “But the main reason management impersonal organization where no have to get over this. wants Claudia there is so she can one knew or cared about anyone As Elizabeth walked into the see what you do up on stage. If we else’s love life. But that position office the next morning, Claudia groom her to do it, I’ll have more would be a lateral move, with less intercepted her. “Do you have a of your time, which, between you autonomy and financial upside. minute, Elizabeth?” and me, is a much better allocation Other start-ups reached out, almost Had Brad said something to her of resources.” He lowered his voice. daily, but she wasn’t sure she was already? “Honestly, if you could get past the, up for taking that sort of gamble on “What is it?” Elizabeth said, in uh, personal situation here, you’d be another small company. a colder tone than she’d intended. a great mentor for her.” Another option was transferring: Claudia bristled. Elizabeth couldn’t believe it. Of The executive committee had just “I just wanted to let you know that course, she was trying to get past decided to open a London office, and the executive team has asked me to it. But sending her on a business the new European sales manager come to the investor conference trip with her ex-boyfriend and was looking for a number two. But in New York next week. They his fiancée and asking her to that would mean taking a step back want me to watch you give mentor the woman so that she in her career and moving away from your presentation.” She paused. could take over a high-visibility friends and family—and she’d still “And you should probably role that Elizabeth herself had have to occasionally deal with Brad hear this from me first: created? That was too much. and Claudia. Brad and I are engaged.” Should she, could she, just suck it Elizabeth felt like the Elizabeth: I might need up? Or was it time to move on? wind had been knocked to quit. out of her. This was them Ada: You love your job! “staying out of her way”? You’re great at it! You make “Oh,” she said, trying to marshal so much $$! Should Elizabeth stay her emotions. Unfortunately, it didn’t Elizabeth: Don’t love it anymore. at her company? work. “Well,” she added, sounding Ada: You can’t let B&C ruin your life. See commentaries on the next page. even icier than before, “I wish you Elizabeth: Then I can’t see them both the very best of luck. You seem every day... just perfect together.” Elizabeth got calls from headhunters She gave herself a few minutes all the time, but she’d always ignored to collect herself and then tracked them. She did love her job, most of down her boss, who was working in her colleagues, her company, and

September 2016 Harvard Business Review 111 EXPERIENCE The Experts Respond

and her professional reputation that anti-fraternization edicts are Elizabeth would be suffer any further. Perhaps she has somewhat naive. grounds for a lawsuit, but consider Her real mistake was in letting better off taking the high financial and emotional herself become too invested in her talents to an costs of fighting that battle. She someone who wasn’t as invested employer that will would be better off taking her in her, and failing to think through talents to an employer that will the consequences of that playing appreciate them. appreciate them. out at the office. Every relationship There’s no question that many involves taking a risk—you might companies will find her to be an get hurt or you might hurt the extremely attractive candidate. A other person—but those risks successful female sales manager are amplified when you date a with a knack for talking to coworker. Elizabeth needs to investors is a rare commodity in remember that, recognize her the technology world, and her blind spots, and be more careful current employer wouldn’t dare next time. We can’t always control give her anything but a glowing emotional connections, but for at recommendation. least a couple of years, she should So in negotiations with make an effort to keep her love and prospective employers, she work lives separate. should have no qualms about asking for a compensation package Karen Firestone is equivalent to her current one, Comments from the the chairman and including the stock options she HBR.org community CEO of Aureus Asset would leave on the table should she switch jobs. A key driver A Welcome Distraction Management and of gender income inequality is The transfer to London offers the author of Even the women’s failure to demand the Elizabeth a quick out and a Odds: Sensible Risk- same pay and benefits that men way to demonstrate strong Taking in Business, get. Elizabeth shouldn’t be shy leadership and a commitment Investing, and Life. about declaring her value in the to the company. She dated marketplace and accepting an Brad for two months, not two offer from the highest bidder. years. She can easily distract I WOULD NEVER advise Elizabeth If anyone asks why she’s leaving, herself with the new professional to leave her current job before she should tell them she’s done opportunity and a second she secures a new one, but I do a great job and is ready for chance at love in the UK. think she should immediately something bigger. I’m not at all Jessica Dunyon, strategic management and aggressively pursue other worried about her ability to rise consultant, jQuotient opportunities. Her current work in another organization. environment is toxic for her, in part At the same time, she needs Move On because of the company’s male- to learn from this experience Elizabeth should move on because dominated, chauvinistic culture and and use better judgment in the she’s still not over Brad, and it’s Brad’s insensitive behavior, but also future. I don’t blame her for hindering her performance and because she’s unable to control accepting an invitation to drinks judgment. A different company her reactions and put the episode with a colleague, or even for dating may not give her better benefits or behind her. someone at the office. People a bigger pay package, but it will She’s upset and distracted, and do those things all the time, and give her the ability to grow and her manager is treating her like some workplace romances work learn new skills. damaged goods; she needs to out happily, as may be the case for Rishabh Khanna, executive, get out before her performance Brad and Claudia. In fact, I believe Confederation of Indian Industry

112 Harvard Business Review September 2016 HBR.ORG

A Glass Ceiling? the same way are celebrated by the Elizabeth should definitely stay corporate “boys club.” But she is with the company. She has earned a strong performer and a leader in her position there through sheer her group, so she shouldn’t lose her passion and hard work. We often confidence. Now is when she most talk about the glass ceiling that needs to call on her professionalism stops women from progressing in and business savvy to prove her their careers; in this case, Elizabeth resilience and worth. is building her own ceiling. Although the limited facts in Gayathri Sivasubramanian, associate this case provide no basis professor, PGP College of Engineering for Elizabeth to make a legal & Technology complaint against her company, Companies Beware Wendi S. Lazar is a I do see an unhealthy dynamic in I had a similar situation occur at partner and coheads the organization—one in which a company where I was a group the individuals and people at or below her level are leader. Ultimately, two of the “managed,” while C-suite executives three parties involved left the the executives and are free to act as they please. We company, hamstringing growth professionals practices see Elizabeth being told to keep and productivity. My advice for at Outten & Golden, an her relationship “out of the office” small, emerging ventures: Make employment law firm. and to get over her “personal sure you have a policy in place to situation,” but there is no evidence deal with these situations, because that Brad has been counseled they can very quickly undermine AT THE MOMENT, Elizabeth to keep his affairs low-key or to your future success. isn’t in the right state of mind stop dating subordinates. To the Stefan Pagacik, founder and principal, to make a decision that will contrary, the CEO appears to smile iAdvisor dramatically alter her career fondly on “the happy couple.” and her financial situation. Her The company’s new anti- What Would Drucker Do? emotions are running high, and fraternization policy is an attempt The communication from giving up without negotiating a to set some guidelines, but it Elizabeth’s boss about how she graceful “mutual” exit would not falls short in failing to cover should cope with the situation be in her best interest. And with relationships outside reporting lines. suggests management bias. My time, she may find that she can And it’s an entirely inadequate advice, to quote Peter F. Drucker: psychologically move on without replacement for strong leadership “If you notice integrity issues with leaving the company. So my on the sensitive issues of personal the leadership of your company, advice to her would be to stick and professional boundaries and you should dissociate yourself from it out at least until her stock power imbalances. the company.” options have vested. In the Elizabeth must carefully consider Rudra Swain, audit senior meantime, she should build her her situation in the context of the manager, Deloitte case for fair compensation for company culture when deciding her years of success and whether to stay or go. If the CEO investment—and possibly for and HR director don’t change what uneven if not illegal treatment— seems to be a very male-dominated Elizabeth isn’t in should she choose to leave. environment in which inappropriate As a successful, high-level behavior from people in power goes the right state of employee, Elizabeth should have unchecked, she should leave—for mind to make a realized the risks involved in an the right opportunity at a time of decision that will office romance. The reality is her choosing. that women who run astray of HBR Reprint R1609K alter her career. corporate socializing rules are often Reprint Case Only R1609X demonized, while men behaving Reprint Commentary Only R1609Z

September 2016 Harvard Business Review 113 EXPERIENCE

en years ago, Project Europe nations. It’s perhaps not surprising Synthesis looked like a resounding that the United Kingdom voted in T success. A reunified Germany a referendum earlier this year to stood at the core of the world’s withdraw from the EU. Many voters Is Project second-largest market, the European and policy makers believed that the Union—an economic giant of 27 country’s economy and its security Europe countries, many of which shared a would benefit from the divorce. common currency, the euro. Citizens What went wrong? Three new of the EU were free to live and work books attempt to make sense of Doomed? in any member nation, and controls Europe’s economic crisis, and all put across most borders were light. For much of the blame on the design of the Probably, unless something is done a time it looked as if the EU had single currency and the approach taken achieved what Francis Fukuyama by euro-zone governments to manage about the euro. by David Champion described as “the end of history.” the fallout from the Great Recession. But Project Europe’s future Nobel laureate Joseph Stiglitz pulls looks a lot less rosy now. Worries few punches in The Euro, a masterly over immigration, brought to a analysis of how the new common boil by the refugee crisis, have currency has served only to deepen contributed to a general resurgence preexisting economic differences in right-wing nationalism. All this is among member states. In the face exacerbated by a persistent, region- of his data, it’s hard to disagree with wide depression that has triggered his conclusion that the euro is doing a series of sovereign debt crises and today what the gold standard did in contributed to growing economic the 1930s and that the governments

inequality across the member involved—especially Germany’s—are DELORENZO CHRISTOPHER

114 Harvard Business Review September 2016 HBR.ORG BOB SUTTON: WHAT I’M LISTENING TO 99% Invisible, created and hosted by Roman Mars “This delightful, wise podcast is, in the broadest sense, about design. Mars and his coconspirators celebrate the best we humans have to oﬀer, without ignoring our foibles, and make seemingly dull topics fascinating, I think because they show so much empathy for their subjects and interviewees.” Bob Sutton is a professor at Stanford University and the coauthor of Scaling Up Excellence (Crown Business, 2014).

once again turning a crisis into a flow and their economies would dialogue of the deaf. Rather than work catastrophe. He argues that German boom. But most experts agree that through their differences, they muffle leaders are guilty of confusing private there is little evidence to back this them with compromises in the hope and public virtue: They believe that theory of “expansionary austerity.” that an economic recovery will bail good people, like Germany’s famously Stiglitz’s solution is rapid fiscal everyone out. Given the increasing frugal Swabian housewives, pay their integration to compensate for the loss unlikelihood of that scenario, the debts, and good countries should do of the monetary tools (exchange and authors call for greater understanding the same. It’s an appealing notion for interest rates) with which national between the two camps. They believe The Euro: How an electorate with memories of the a Common governments normally regulate that each new crisis can prompt a Wirtschaftswunder decades, when Currency their economies, and he sketches a small step toward greater integration— Threatens the the country rebuilt its war-shattered blueprint for how to achieve it. He the evolution of the European Central Future of Europe economy and transformed itself, Joseph E. Stiglitz acknowledges the political hurdles but Bank, now the EU’s premier institution, according to popular narrative, into an W.W. Norton, 2016 says that if they can’t be overcome, EU is an example—and as integration industrial powerhouse through hard leaders will have no alternative but to deepens, the seemingly interminable work and discipline. German voters abandon the euro—possibly returning flow of crises will abate. Bottom line: feel, unsurprisingly, that bailing out a to national currencies or creating two Europe will muddle through. profligate Greece should not be their or three workable new currency zones. British journalists Larry Elliott and reward for adopting the euro. But real The second book is less Dan Atkinson, authors of the third life is not that simple. apocalyptic. The Euro and the Battle and most readable book, Europe Isn’t The big problem is that Europe is of Ideas, by economist Markus Working, don’t agree. They present emphatically not what the economist Brunnermeier and historian Harold a diagnosis and gloomy prognosis Robert Mundell would consider a James, both from Princeton, and Jean- similar to Stiglitz’s, but offer only the natural currency zone. The euro’s Pierre Landau, a political scientist at briefest discussion of ways forward. The Euro and the architects knew this and tried to force Battle of Ideas France’s Sciences Po, presents the In the end they seem to favor a return economic convergence by imposing Markus K. European crisis as a battle between to national currencies, since it would Brunnermeier, limits on government spending Harold James, two very different theories of how be easiest to implement. Still, their and borrowing that were designed and Jean-Pierre economies work—a German one book offers useful insight into why so Landau to make everyone in the union act anchored in accountability and a many people thought the euro was Princeton University more like its dominant economic Press, 2016 belief in free markets versus a French a good idea in the first place: In the power, Germany. But this was an model anchored in solidarity and the eyes of many politicians, financial impossibility. Leaving aside the fact idea that markets should be managed. markets are little more than casinos, that Germany itself repeatedly broke More comprehensive than The where shady types make money at the agreed-upon budget-deficit and Euro, the book is a difficult read, the expense of hardworking people. debt-to-GDP-ratio limits after the combining a dense explanation of Abolish separate currencies and you euro’s introduction, each EU country macroeconomics with a rather livelier abolish speculation, making the world counted its fellow members as major history of ideas. But it does bring out a better place. Back in 2000 it was an trading partners. If all became export the nuances of the crisis, which is not easy sell, and felt modern. Integration powerhouses, to whom would they as cut-and-dried as Stiglitz suggests, equaled social progress; those against export? They couldn’t all be Germany. Europe Isn’t and it demonstrates (with some irony) it were on the wrong side of history. Working Instead, the euro has created a that France and Germany have often And that origin story explains Larry Elliott and dangerous dynamic of divergence, in Dan Atkinson swapped philosophies. Before World why “Europe isn’t working.” The which nations’ economic differences Yale University Press, War II, for instance, France was the single currency was a political, not an 2016 become increasingly entrenched. country insisting on accountability, economic, initiative—an attempt to The result is that ordinary working market forces, and adherence to a give history a shove, as Lenin put it a stiffs in, for example, Greece lose jobs gold standard, while Germany was century ago. Unfortunately, as Lenin’s and pensions so that large banks in all for a managed economy. successors realized and as Project (you guessed it) Germany stay afloat. For Brunnermeier et al., the Europe’s managers will learn, history Germany, meanwhile, insists that if underlying problem with Europe is doesn’t take kindly to being shoved. debtor countries could just put their that policy makers on both sides of the David Champion is a senior editor finances in order, investment would ideological divide are engaging in a at Harvard Business Review.

September 2016 Harvard Business Review 115 COUNTRY STUDY SPECIAL SPONSORED SECTION HTTP://GUINEA.WINNE.COM THE REPUBLIC

Capital: Conakry OF GUINEA GDP: 6.624 billion USD (2014) LABOR · JUSTICE · SOLIDARITY Population: 12,275,527 (2014) Source: World Bank

This Promotional Case Study was produced by World Investment News for September 2016 edition of HBR. Publisher: Pascal Belda; Executive Director: Stéphanie Huertas; Project Director: Omar El Asfari; Project Associate: Daria Skarzynska; Editor: Stan Aron; Creative Director: Daniel Martínez; Special thanks to: HE Alpha Condé, President of the Republic of Guinea, HE Abdoulaye Magassouba, Minister of Mines and Geology, HE Abdoulaye Yéro Baldé, Minister of Minister of Superior Education and Scientiﬁc Research, Dr Ibrahim Khalil Kaba, director of Cabinet at the Presidency and Mrs Touré Hadja, chief of cabinet of the Prime minister, Dr. Frédéric Kolié, the Republic of Guinea’s ambassador to Spain and Leonardo Vaquerizo, general director of Palm Camayenne, and each of our sponsors.

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Guinea’s new Finance Sector %DQN OHDVHĥSXUFKDVLQJ DJUHHPHQWV DQG WKH modernization of payment systems. ³$ VWDEOH ¿QDQFLDO V\VWHP DQG FXUUHQF\ DUH already attractive indicators for foreign investors. Now, investors also have the possibility DR. LOUCENY NABE Governor of the Central Bank of of repatriating a the Republic of Guinea SRUWLRQ RI WKHLU SUR¿WV Hotel Millenium Suites -www.milleniumsuites.com resident Condé’s reforms managed thanks to exchange WR VWDELOL]H LQÀDWLRQ LQ *XLQHD EHIRUH regulations and the The private banking sector also has plenty of P2014. Together with the Central Bank of operating income law,” URRPWRJURZZLWKRQO\İRIWKHSRSXODWLRQ WKH5HSXEOLFRI*XLQHDĪ%&5*īWKHFRXQWU\ says BCRG Governor using banking services, making the market ripe passed laws regarding banking, the Central Louceny Nabe. IRUPLFUR¿QDQFHLQVWLWXWLRQV Afriland First Bank

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ANAIM Strengthens the Mining Industry and Guinean Society

policies, we’re building a city where future employees of mining companies will be able to live. The ANAIM’s ambition for the years As West Africa recovers from the Ebola crisis to come is to take over certain of the and business activities return to normal, CGB’s prerogatives to create ANAIM- Guinea’s mining sector shows notable LAMINE CISSÉ ambition to ramp up its bauxite mining specific structures for fundraising Director General activities, taking advantage of having the and investments As mining remains the backbone of majority of the world’s bauxite reserves to Guinea Conakry’s economy, the ANAIM become the leading player on the global aims to contribute more to the industry bauxite market. The ANAIM is, therefore, in most cutting edge IT systems and is a by investing in new mining infrastructure a unique position to provide support to this reference in the medical sector. thanks to a corporate restructuring. developing industry. “But we need more financing to build The Agence Nationale d’Aménagement “Our ambition is for other actors of the new infrastructure. New investors and des Infrastructures Minières (ANAIM), mining industry to come to Guinea. To mining stakeholders will be profitable which translates to the ‘National Agency this end, we plan to improve existing to the state in terms of revenue but also of Mining Infrastructure Organization’, infrastructures in other regions of Guinea, in terms of local employment,” says Mr. a national company founded in 1995, such as the Conakry-Kindia railroad, which Cissé. manages infrastructure which is key to will enable the exploitation of the mines of the mining industry, such as railroads that region,” says Mr. Cissé. “The ANAIM’s Thanks to its contributions to Guinea’s and the Kamsar Port, used by major ambition for the years to come is to take over socio-economic fabric, the ANAIM sees companies such as CBG, SMB and EGA- certain of the CGB’s prerogatives to create itself as one of the country’s flagship GAC. ANAIM-specific structures for fundraising institutions. and investments.” “The other challenge of the mining sector is to ensure the security of mining The ANAIM manages more than mining- installations through the presence of specific infrastructure, making it a vital part policemen,” says Director General of the Guinean society with projects such Lamine Cissé. “When it comes to housing as the Kamsar hospital, which uses Africa’s

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o fully take advantage of its natural resources and geostrategic position, Port of Conakry TGuinea is upgrading its infrastructure, West Africa’s Rising Port most notably with a railway between Bamako DQG&RQDNU\ĦDSDUWQHUVKLSZLWK0DOLZKLFK The Port of Conakry’s geostrategic leads all the way to the port of Conakry. position, cutting edge technology We have the same standards and This will facilitate not only the exportation and competitive prices make it a we offer the same services as of locally mined bauxite, but also the transit other regional ports such as the RIJRRGVWRDQGIURPQHLJKERULQJ0DOLDQG force to be reckoned with in West port of Dakar, but at a lower price. other landlocked countries. As a result, Africa. Conakry’s port has been expanding to Regarding shipping container accommodate the expected boom in transit, Having nearly tripled its throughput from management, we’re number one notably towards the South American market. 2014 to 2015, the Autonomous Port of in the region thanks to cutting Conakry is quickly establishing itself as edge equipment. Thanks to the a major player in the West African port industry. vision of the president of the Republic of Guinea, we will be Accounting for 95 to 98% of customs able to become a regional leader. revenue in the Republic of Guinea, the Port MAMADOU DIALLO CELLOU of Conakry is crutial to the West African “The Ministry of Transport is currently National Director of the nation’s economy. “One could even say the Merchant Navy working on several projects of internal Port of Conakry is the flagship of Guinean transport infrastructure development, companies,” said a spokesperson of the which will make us even more port. competitive,” said the port’s spokesperson, who also highlighted Conakry’s location on Despite Guinea’s economic slowdown the southwestern tip of West Africa which between 2013 and 2015, the port was able makes it the ideal port to do business with KEITA KABASSAN OULABA to process 157,000 containers in 2015 South America. Direction SOGEAC compared to 57,000 in 2014, thanks to an upgrade in capacity undertaken by This, in addition to its partnership with Bolloré Africa Logistics, a major partner of foreign ports, including in the United Office des Chargeurs the port’s. An Office Dedicated to the Guinean States, make Conakry’s port a key player in Shipping Industry the region. “We have the ambition of becoming one of the biggest ports in West Africa. In 2017, “We have the same standards and we As business returns to Guinea Conarky we’ll start the construction of a second offer the same services as other regional following the end of the Ebola Crisis dock. Since His Excellence President ports such as the Port of Dakar, but at a and the reopening of the borders, Alpha Condé took office, we’ve signed a lower price. Regarding shipping container the Guinean Shipping Office (Office public-private partnership (PPP) contract management, we’re number one in the Guinéen des Chargeurs) is dedicated with the Bolloré Group. We’ve obtained exclusively to helping international region thanks to cutting edge equipment. many changes in terms of infrastructure trade to and from the country. Thanks to the vision of the president of and modern equipment, which we needed the Republic of Guinea, we will be able to The Guinean Shipping Office was to compete with the ports of Abidjan and become a regional leader.” founded in 2010 by President Alpha Dakar.” Condé, in order to set a framework to To achieve this ambitious goal, the Port of facilitate both imports and exports at Conakry’s port was founded with the Conakry’s goal is to attract international all of Guinea’s trade hubs. merger of several independent entities in partnerships and investment. “The Port of Because much of Guinea’s business 1982. Since then, it has been ceaselessly Conakry has always wanted for economic is conducted informally, the office expanding and modernizing thanks to operators to come here, or even to become is not yet as well-known as it should financing from Guinea’s central bank and shareholders in the Port of Conakry. For the be. Director General Sekou Camara the privatization of the dockers. moment, our partner of choice is Bolloré intends to change that. – they came here first – but we’re always President Alpha Condé has signed a open to other offers.” “The Guinean Shipping Office is partnership with his Malian counterpart, here to facilitate exchanges between President Ibrahim Boubacar Kéita, to build importers and exporters in Guinea. a train line between Bamako and the Port We’re here to create a single counter of Conakry. The port’s geostrategic position to enable the importer and exporter therefore grants Mali and other landlocked to get their paperwork in order and West African countries direct access to the facilitate customs’ work,” Mr. Camara, Atlantic Ocean, giving them a new route for says. imports and exports.

Mrs. Touré Hawa Keita, formerly Secretary General of the Ministry of Commerce, has taken the helm of the Port of Conakry as Director General in June of 2016.

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University of Koﬁ Annan

private university in Guinea Conakry. Thanks to its wide palette of courses, its solid integration into Guinea’s socio-economic fabric, its national and international partnerships, it DR OUSMANE KABA aims to gradually improve the services it has President-Founder Of the Koﬁ Annan University of to offer its students as well as the community. Guinea With 10,000 students, the Koﬁ Annan university is the oldest and most important

République de Guineé Université Gamal Abdel Nasser de Conakry UGANC

WWW.PALMCAMAYENNE.COM BP: 1147, Conakry www.uganc.org

Republic of Guinea SOCIETE DES EAUX DE GUINEE Labor - Justice - Solidarity Ministry of Public Works FONDS D’ENTRETIEN ROUTIER Water for all

Contributing to the financing of the Fifteen years providing Guinean road network. HBR.org safe drinking water to all .org of Guinea’s urban centers Almamya district, Kaloum Building C, 3rd floor P.O. Box: 2691 - Conakry E-mail: [email protected] Rep. of Guinea http://segguinee.com/fr/

MTN is a leading emerging market mobile operator connecting 229 million subscribers across Africa and the Middle East. Société Guinéenne du Patrimoine Minier A trustworthy mining partner Our investment in digital inclusion projects, products and services helps us meet the demand for affordable, digitally HBR.org connected solutions in our markets, including Guinea Conakry. A major actor in the mining sector, striving to build an emergent Guinea

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HBR.ORG EXECUTIVE SUMMARIES SEPTEMBER 2016

SPOTLIGHT ON CONSUMER INSIGHT

HBR.ORG really SPOTLIGHT 46 54 64 What do customers want? This The Elements Know Your Customers’ Building an of Value “Jobs to Be Done” Insights Engine by Eric Almquist, by Clayton M. Christensen, by Frank van den Driest, John Senior, Taddy Hall, Karen Dillon, Stan Sthanunathan, and Nicolas Bloch and David S. Duncan and Keith Weed month’s Spotlight looks beyond traditional marketing approaches and explores new models for understanding customers and creating hit products.

Consumer Insight ARTWORK Marijah Bac Cam Dandelion Ink and marker on paper

September 2016 Harvard Business Review 45

CUSTOMERS STRATEGY MARKETING The Elements of Value Know Your Customers’ Building an Insights Eric Almquist, John Senior, and “Jobs to Be Done” Engine Nicolas Bloch | page 46 Clayton M. Christensen, Taddy Hall, Frank van den Driest, Stan Karen Dillon, and David S. Duncan Sthanunathan, and Keith Weed page 54 page 64

What consumers truly value Firms have never known more The most successful companies can be difficult to pin down and about their customers, but their don’t just have good products and psychologically complicated. But innovation processes remain strong distribution systems—they universal building blocks of value hit-or-miss. Why? According to have a deep understanding of do exist, creating opportunities Christensen and his coauthors, customers. That naturally requires for companies to improve their product developers focus too much lots of marketing data, but the performance in existing markets on building customer profiles and authors say it also takes an “insights or break into new markets. In the looking for correlations in data. To engine”—a set of structures, people, right combinations, the authors’ create offerings that people truly and processes that can translate analysis shows, those elements will want to buy, firms instead need to data into actionable strategy. pay off in stronger customer loyalty, home in on the job the customer is How do high-performing greater consumer willingness to try trying to get done. organizations achieve this kind a particular brand, and sustained Some jobs are little (pass the of customer centricity? Extensive revenue growth. time); some are big (find a more research by the lead author’s firm Three decades of experience fulfilling career). When we buy a indicates that seven operational doing consumer research and product, we essentially “hire” it to characteristics are critical for a observation for corporate clients help us do a job. If it does the job superior insights and analytics led the authors—all with Bain & well, we’ll hire it again. If it does a group: It must be adept at Company—to identify 30 “elements crummy job, we “fire” it and look for synthesizing data, independent of value.” Their model traces its something else to solve the problem. from other functions, integrally conceptual roots to Abraham Jobs are multifaceted. They’re involved in business planning, Maslow’s “hierarchy of needs” and never simply about function; they collaborative, willing to experiment extends his insights by focusing on have powerful social and emotional with new technologies and people as consumers: describing dimensions. And the circumstances programs, future oriented, and their behavior around products and in which customers try to do them active in strategic decision making. services. They arrange the elements are more critical than any buyer In addition, the people who are part in a pyramid according to four kinds characteristics. Consider the of the insights engine share three of needs, with “functional” at the experiences of condo developers key traits: They have a whole-brain bottom, followed by “emotional,” targeting retirees who wanted to mindset (they think creatively as “life changing,” and then “social downsize their homes. Sales were well as analytically), they focus impact” at the peak. weak until the developers realized on business growth, and they are The authors provide real-world their business was not construction effective at getting their messages examples to demonstrate how but transitioning lives. Instead of across with engaging storytelling companies have used the elements adding more features to the condos, rather than dry recitations of data. to grow revenue, refine product they created services assisting The authors discuss each design to better meet customers’ buyers with the move and with their characteristic in turn, using the needs, identify where customers decisions about what to keep and consumer goods giant Unilever as perceive strengths and weaknesses, to discard. Sales took off. a case study. Unilever’s Consumer and cross-sell services. The key to successful innovation Markets and Insights group, the HBR Reprint R1609C is identifying jobs that are poorly epitome of a powerful insights performed in customers’ lives engine, has helped the company and then designing products, generate impressive revenue and experiences, and processes around sales growth. those jobs. HBR Reprint R1609D HBR Reprint R1609E

September 2016 Harvard Business Review 121 EXECUTIVE SUMMARIES Features

THE BIG IDEA

INTERNATIONAL BUSINESS NEGOTIATIONS STRATEGY MANAGING YOURSELF Why Your Company How to Make the Other Putting Products The Scandal Eﬀect Needs a Foreign Policy Side Play Fair into Services Boris Groysberg, Eric Lin, John Chipman | page 36 Max H. Bazerman and Daniel Mohanbir Sawhney | page 82 George Serafeim, and Kahneman | page 76 Robin Abrahams | page 90

THE BIG IDEA THE WHY YOUR COMPANY NEEDS A FOREIGN SCANDAL POLICY

MULTINATIONALS MUST ADDRESS GROWING GEOPOLITICAL VOLATILITY. BY JOHN CHIPMAN EFFECT A REVENUE-GROWTH PLAYBOOK PUTTING FOR CONSULTANTS AND LAW FIRMS When companies misbehave, executives BY MOHANBIR SAWHNEY pay a price on the job market—even if How to Make they had nothing to do with the trouble. PRODUCTS BY BORIS GROYSBERG, ERIC LIN, the Other INTO GEORGE SERAFEIM, AND ROBIN ABRAHAMS THE FINAL-OFFER ARBITRATION CHALLENGE GIVES NEGOTIATORS A VALUABLE NEW TOOL. Side Play Fair BY MAX H. BAZERMAN AND DANIEL KAHNEMAN SERVICES

After a relatively quiet period High-end professional services Executives with scandal-tainted following the end of the Cold A tactic firms, unlike product companies, companies on their résumés pay a War, geopolitics is back. With the borrowed traditionally experience only linear penalty on the job market, even if United States displaying a reduced revenue growth. That’s because they clearly had nothing to do with appetite for violent confrontation, from labor selling more services means adding the trouble. Because the scandal there are now no world policemen, more professionals, which limits effect is lasting, a company you left few effective “neighborhood watch” negotations profit margins. However, savvy long ago could have an impact on schemes, and a growing number providers of consulting, legal, your current and future job mobility, of vigilante groups and countries can help. accounting, and other services not to mention your compensation. eager to challenge the existing rules are using technology to their Overall, executives who suffer from of the game. Companies cannot benefit. They are automating the effect are paid nearly 4% less assume, in any region of the world, In legal disputes, contested certain routine aspects of their than their peers. You can’t control that the strategic status quo will insurance claims, and similarly work to essentially “productize” this risk, the authors write, but you be sustained by neat balances of adversarial negotiations, one those tasks. By combining those can and should plan for it. power or unbreakable promises party is likely to open with an products with human attention to They offer three steps to help you of foreign-policy assistance from inflated claim or a lowball offer. matters requiring more knowledge survive a corporate scandal. superpower states. And if the other side’s position is or judgment, they can give clients 1. Be forthright. Transparency In this new reality, the most unreasonable, it may make little better service at a lower cost. and full disclosure are key to successful multinational companies sense to be reasonable yourself. This article provides a guide overcoming the stigma. Executive will be those that make expertise But if everyone routinely came to to product development for recruiters, who do due diligence on in international affairs central to a dispute with a realistic starting professional services firms. The candidates, can help you create a their operations, adopting what position, the offers would be more author describes the three key full, clear, and succinct narrative for John Chipman, the chief executive or less aligned, and any negotiation stages of the process: (1) To hiring managers. of the International Institute for that followed would most likely be discover potential products, identify 2. “Borrow” reputation and Strategic Studies, calls a corporate relatively civil, speedy, and fair. opportunities for automation by legitimacy from others in your foreign policy. How can a negotiator who wants looking for patterns in your services network, establishing innocence A corporate foreign policy has to be fair from the start ensure and zeroing in on the tasks that by association. Executive search two components. Geopolitical due that his or her counterpart will be are performed frequently and firms can also act as references and diligence involves the assessment reasonable as well? The authors require little knowledge. (2) To sponsors. of local, regional, and transnational propose the final-offer arbitration develop products, use algorithms 3. Take a “rehab job,” one at risks facing a company. Corporate challenge, which leverages an and artificial intelligence to create which you so clearly excel that diplomacy aims to enhance a approach first applied in labor “smart” tools to handle high-volume, it creates a persuasive story to company’s ability to operate negotiations in the 1960s. You can low-sophistication tasks. (3) To compete with the scandal narrative. internationally and to ensure its employ this tactic by opening with monetize your products, stop HBR Reprint R1609H success in each particular country a demonstrably fair offer and then— charging for time and materials, with which it is engaged. if the other party is unreasonable— and shift first to transaction-based Chipman lays out the principles extending a challenge to take the pricing and then to an outcome- of geopolitical due diligence and competing offers to an arbitrator based model. corporate diplomacy and argues who must choose one or the other In conjunction with this process, that their successful execution can rather than a compromise between it’s important to create a cross- be a new source of competitive them (the usual outcome of functional team that focuses on advantage for multinational conventional arbitration). product development. And take businesses in a time of increased The authors describe how AIG the long view—you’ll have to invest geopolitical volatility. used the approach and how other time and money before you reap HBR Reprint R1609B companies can begin to adopt it. the benefits of embedding products HBR Reprint R1609F in services. HBR Reprint R1609G

122 Harvard Business Review September 2016 HBR.ORG How I Did It Managing Yourself

ORGANIZATIONAL CULTURE ARZU’s Founder on Shaping How to Tackle Your Toughest Decisions Culture Through Social Joseph L. Badaracco | page 104 Enterprise Connie Duckworth | page 31

HOW I DID IT… The author visited The toughest calls managers have • Who are we? ARZU’S FOUNDER ON SHAPING CULTURE THROUGH SOCIAL ENTERPRISE Managing E by Connie Duckworth Afghanistan in 2003 as Yourself to make come in situations when • What can I live with? How to Tackle Your Toughest part of a U.S. delegation Decisions they have worked hard to gather All five questions must be focused on improving by Joseph L. Badaracco the facts and have done the best answered, according to the the lives of women. analysis they can, but they still author: “Each question is an Her idea was to start don’t know what to do. Then important voice in the centuries- The Idea a business that would judgment—a fusion of thinking, long conversation about what employ the women of feelings, experience, imagination, counts as a sound decision that country to make a and character—becomes critical. regarding a hard problem with product she could sell The author offers five practical high stakes for other people.” in the United States. Some locally woven rugs questions to improve your odds of If you work through these caught her eye; she carried them back home making sound judgments: questions, you’ll know that you’ve and started looking for initial funding. She set • What are the net, net approached the problem in the up a 501(c)(3) nonprofit and began working consequences of all my options? right way—not just as a good to construct an entirely new and socially • What are my core obligations? manager but as a thoughtful responsible supply chain. • What will work in the world human being. ARZU’s goal was to create a sustainable as it is? HBR Reprint R1609J business model linking well-paying jobs to behaviors that over time would shift the cultural norm. The company negotiated a “social contract” with male heads of household that set conditions for women in the home to become its weavers: All children (including girls) must attend government school full-time, and all adult women must be “released” from the family compound to attend ARZU’s literacy classes or for transport to medical clinics when pregnant. Once the business model was in place, recruiting weavers required an intensive, house-to- house outreach. But as word spread that the company would pay the local rate as a salary (rather than piecework) and that women could earn a bonus for highest-quality work, families sought to join the program. Today ARZU has a waiting list. All the company’s weavers are now literate (whereas 90% of Afghan women remain illiterate), and 20% are putting a child through university. Working and earning money has developed their dignity and self- esteem, and the men of their villages have come to view them as capable human beings. HBR Reprint R1609A

POSTMASTER Send domestic address changes, orders, and inquiries to: Harvard Business Review, Subscription Service, P.O. Box 62270, Tampa, FL 33662. GST Registration No. 1247384345. Periodical postage paid at Boston, Massachusetts, and additional mailing offices. Printed in the U.S.A. Harvard Business Review (ISSN 0017-8012; USPS 0236-520), published monthly with combined issues in January–February and July–August for professional managers, is an education program of Harvard Business School, Harvard University; Nitin Nohria, dean. Published by Harvard Business School Publishing Corporation, 60 Harvard Way, Boston, MA 02163. EXPERIENCE HBR.ORG Life’s Work How have technology and the advent of big data aﬀected your sport? They’ve changed our preparation for events. We have amazing tools to catalog and diagnose problems. We have machines to improve on-track activity, such as wind tunnels. We’re doing all we can with those. But NASCAR doesn’t allow a lot of these tools at the track on race weekends. During the race, I’m the computer. I’m the only one out there who can feel what’s happening in the car. We try to match that up with what the technology said should be happening.

How did you master the job of representing sponsors? The team always tries to maximize the value we give our sponsors. My mom drove a school bus and my dad was a heavy equipment operator, so they didn’t have Jimmie Johnson began racing small motorcycles on dirt the means to take me racing. I learned at a young age that to tracks at age five. By 2002 he’d made it to NASCAR’s elite chase my dream, I had to appeal Sprint Cup Series, where he eventually won six championships to corporate America. (putting him just behind Richard Petty and Dale Earnhardt, who NASCAR great Jeff Gordon won seven each). Off the track Johnson, now 40, competes in retired at age 44. How long will you continue? When the half-marathons and triathlons. Interviewed by Daniel McGinn fire burns out, when it feels like work, and when I don’t want to be away from my daughters, who are two and six, HBR: In NASCAR, how much of has to absorb and digest then I’ll step down—or if I’m winning can be attributed to that information and make concerned about my safety. If the car versus the driver? the right changes. you worry about getting hurt Johnson: People who aren’t while making a split-second Read the complete familiar with racing don’t How do you instill a sense of decision, you’ll make the wrong interview online at realize that NASCAR is a team teamwork when most of the one. I’ve seen guys driving at HBR.org. sport. I drive for Hendrick glory goes to the driver? It’s 53 or 54, but I don’t think I’ll Motorsports, which has four really just a matter of being be in the car that long. I have cars on the racetrack. There’s around and connected with other interests in racing, such the same equipment among top the team. It’s easy to do that as the 24 Hours of Le Mans and teams. All the drivers can drive, with the 15 people who travel off-road truck racing. I’m also and all the crews can build to the track each weekend, but interested in other endurance great cars. The real magic is in they are a small percentage of and adventure sports. I’ve done the chemistry and collaboration our employee base: 100 people a half-Ironman and I really between the driver, the team, are working in the shop where want to do a full one. Even if and the crew chief, who is like my car is built. We try hard to I step down from the NASCAR a head coach in other sports. I connect with the others because grind, the competitive spirit have to verbalize the sensations we know how important the will stay alive in me forever.

I feel in the car, and the team team dynamics are. HBR Reprint R1609L ETHAN HILL

124 Harvard Business Review September 2016