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www.hbr.org February 2007

72 How Managers’ Everyday Decisions Create–or Destroy– Your Company’s Strategy Joseph L. Bower and Clark G. Gilbert

80 Cocreating Business’s New Social Compact Jeb Brugmann and C.K. Prahalad

92 In Praise of the Incomplete Leader Deborah Ancona et al.

104 Reputation and Its Risks Robert G. Eccles, Scott C. Newquist, and Roland Schatz

116 Understanding Customer Experience Christopher Meyer and Andre Schwager

20 THE HBR LIST Breakthrough Ideas for 2007

57 HBR CASE STUDY Off-Ramp–or Dead End? Sharman Esarey and Arno Haslberger

129 MANAGING YOURSELF Discovering Your Authentic Leadership Bill George et al.

141 FIRST PERSON …page 72 Raising Haier Zhang Ruimin

154 EXECUTIVE SUMMARIES

159 PANEL DISCUSSION

©2006 Accenture. All rights reserved. eerho vr50o h ol’ otscesu opne.Fra in an For companies. successful most world’s the of 500 over on research at ourstudyofandexperience withhighperformers, visitaccenture.com/research eko hti ae ob Tiger. a second not be preparation, on to takes High performers notonly seizeopportunities,theyplanforthem. They concentrate it what know We - usig htsjs n nigfo u comprehensive our from finding one just That’s guessing. - et look depth

Pitney Bowes mailstream solutions His medical history is just beginning. But should this information ever fall

manage the fl ow of confi dential into the wrong hands, it’s more than a clerical mix-up, it’s a legal nightmare.

medical records, making customers Using our file-based processing solutions, healthcare service providers feel more secure – even the smallest. can deliver government-mandated patient communications with rigorous INNOVATIONS FOR THE

What will we put our stamp on next?

accuracy. So everyone breathes easier. This is just one of the ways Pitney

Bowes is merging the boundaries of mail and data into mailstream solutions that are helping many Fortune 500 companies stay compliant, competitive and profitable. What’s next? Visit pb.com/whatsnext and see for yourself. 6 104 116 92 80 72 Harvard BusinessReviewHarvard continued onpage10 experience. plays andenhancingcustomer probing, aroleinmonitoring, ences. Here’s aprocesstoensurethateverycorporatefunction to theunvarnished oftheircustomers’ reality subjective experi- Customer satisfaction isjustasloganunlesscompaniesface up Christopher MeyerandAndreSchwager Understanding CustomerExperience andcontrolling threats. cess formeasuring, identifying, tors thataffect ofriskisthefirststepinbuildingapro- thistype thethreefac- risk.Understanding quately managereputational Reputations make orbreakcompanies,yet mostleadersinade- Robert G.Eccles,ScottC.Newquist,andRolandSchatz Reputation andItsRisks be abletomake upfor theirmissingskillsby relyingonothers. willthey – complete –ashaving bothstrengths andweaknesses nizations willbe.Onlywhenleadersacceptthemselves asin- tobeallthingspeople,thebetterstop trying off theirorga- person atthetopwho’s got it allfiguredout. The soonerleaders It’s timetoendthemyth ofthecompleteleader:flawless and PeterM.Senge Deborah Ancona,ThomasW. Malone, Wanda J.Orlikowski, In PraiseoftheIncompleteLeader eradication ofpoverty. to realbreakthroughsinthecreationofnew markets andthe The innovative businessmodelsthey’re developing areleading business together, rivals, notaswary buttrusted partners. Companies andNGOsarefindingmutual benefitingoinginto Jeb BrugmannandC.K.Prahalad Cocreating Business’s NewSocialCompact driving strategyinyour business. strategy. This powerful insightwillchange how you thinkabout the company eitherintooroutofalignmentwithitsannounced timeamanagerallocatesresources,thatdecisionmovesEvery Joseph L.BowerandClarkG.Gilbert Destroy –Your Company’s Strategy How Managers’EverydayDecisionsCreate–or Features | February 2007 FEBRUARY 2007 | hbr.org 116 72 104 80 92

Cover Art: Aude Van Ryn

FEBRUARY 2007

14

Departments

12 COMPANY INDEX 102 STRATEGIC HUMOR

14 FROM THE EDITOR 129 MANAGING YOURSELF Ideas with Impact Discovering Your Authentic Every idea grows from an encounter – Leadership between a hypothesis and reality, between Bill George, Peter Sims, Andrew N. McLean, a curious mind and an anomalous fact, be- and Diana Mayer tween an oyster and a grain of sand. Such How do you become an authentic leader? convergences are celebrated in this year’s A new study shows that you do not have to 20 HBR List, our annual survey of breakthrough be born one. You can learn to be authentic by ideas that will have an impact on business understanding your life story and by develop- today and in the years ahead. ing self-awareness.

20 THE HBR LIST 141 FIRST PERSON Breakthrough Ideas for 2007 Raising Haier Ordinary people, not “influentials,” are the Zhang Ruimin best word-of-mouth marketers…leaders 57 The CEO of Haier explains how he has grown should embrace the word “hope”…patriarchy with the challenges he has tackled in trans- is making a comeback…health care costs are forming a struggling appliance company into falling (it’s spending that’s on the rise)…and a world-class global enterprise. other thought-provoking ideas.

148 LETTERS TO THE EDITOR 57 HBR CASE STUDY Off-Ramp–or Dead End? Is pursuing shareholder value a good way to manage a company? Sharman Esarey and Arno Haslberger Cheryl Jamis is an ambitious marketing di- rector in line for a promotion. She’s also the 154 EXECUTIVE SUMMARIES dedicated mother of a young daughter. When increasing demands on her time 159 PANEL DISCUSSION threaten to spiral out of control, Cheryl faces Let’s Eat a tough choice: Should she stay with her Don Moyer company or chuck it all? Commentators in- 129 Corporate cannibalization can be a waste of clude Monica McGrath, Rebecca Matthias, resources – but sometimes the need to inno- Robert Maricich, and Evelyne Sevin. vate calls for creative destruction, in which a new product gobbles up the market for an existing one.

141

10 Harvard Business Review | February 2007 | hbr.org

COMPANY INDEX | February 2007

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

ABN AMRO Bank ...... 80 FINCA International...... 80 Monsanto ...... 80, 104 Whole Foods Market...... 80 Accion International ...... 80 Ford ...... 20, 92, 104 MySpace.com ...... 20 Wipro ...... 80 African Co-operative for Hawkers and Forest Stewardship Council...... 80 NEC Philips Unified Solutions ...... 80 The World Bank...... 80 Informal Businesses...... 80 France Telecom ...... 116 Nestlé ...... 20, 80 WorldCom ...... 80, 104 African National Congress ...... 92 Gap ...... 20 New York Stock Exchange...... 129 World Diagnostics...... 80 Africare...... 80 GE Capital...... 80 Next ...... 92 WPP ...... 72 Amazon ...... 116 GE Healthcare...... 20 Nike ...... 80, 92 Xerox...... 104, 129 Ameresco ...... 80 General Electric ...... 20, 72, 104, 129, 141 Nippon Steel...... 20 Yamaichi Securities...... 20 American Airlines ...... 104 General Motors ...... 72, 80, 104 Nissan...... 20 Young & Rubicam ...... 129 Amgen...... 129 Gilead ...... 116 Nokia ...... 20 Aon ...... 80 GlaxoSmithKline ...... 80, 104 Novartis ...... 129 Apparel Industry Partnership...... 80 Google ...... 20 Novo Nordisk ...... 20 AUTHOR AFFILIATIONS Apple...... 92, 116 Grameen Bank...... 80 Opel ...... 72 Aquent ...... 20 Groupe Danone ...... 80 Palm ...... 116 Ashridge Business School...... 57 AT&T...... 72 Haier Group...... 141 Pan African Congress ...... 92 Bain & Company ...... 20 Bain & Company ...... 129 Harley-Davidson ...... 20 Pan Am ...... 20 Brigham Young University ...... 72 Banco ABN AMRO Real...... 80 HCA ...... 20 PepsiCo...... 20 Citigroup ...... 129 Banco de España...... 20 HCL Infosystems ...... 80 Pick ’n Pay Retailers ...... 80 Columbia University ...... 20 Banco del Pichincha ...... 80 The HealthStore Foundation ...... 80 Piper Jaffray ...... 129 EDGAR Online ...... 20 Bancosol ...... 80 Hewlett-Packard ...... 80, 116, 129 Pixar ...... 92 Fraser Consultancy ...... 20 Bang & Olufsen...... 20 Huntsman International...... 129 Polycom ...... 20 Globis ...... 20 Bank of America ...... 80 ICICI Prudential Life Insurance ...... 80 Pratham ...... 80 Globis Management School ...... 20 Barclays Bank ...... 80 IDEO ...... 92 Procter & Gamble ...... 20 Haier Group...... 141 BearingPoint ...... 116 IDPMS...... 80 Rite Aid...... 104 Harvard Business School...... 72, 129 Bell Labs ...... 20 Indian Institute of Science ...... 80 The Rockefeller Foundation...... 80 Harvard Law School ...... 20 BellSouth ...... 72 Intel...... 20, 72, 80, 92 Royal Dutch Shell ...... 80, 92 HEC School of Management ...... 20 Best Buy ...... 20, 116 International Monetary Fund...... 80 Sandoz ...... 129 Hitotsubashi University’s Graduate BMW...... 116 Internet Based Moms ...... 20 The Self Employed Women’s School of International Corporate BP ...... 80, 104 Intuit ...... 116 Association ...... 80 Strategy...... 20 Bristol-Myers Squib ...... 20 JFE Steel...... 20 Shell Foundation ...... 80 Media Tenor Institute for Media CA...... 104 Kimberley Process...... 80 Siebel Systems ...... 116 Analysis ...... 104 Canon ...... 20 Kleiner Perkins Caufield & Byers ...... 129 Sogebank ...... 80 Medtronic ...... 129 CARE...... 80 Knight Ridder ...... 72 Southwest Airlines ...... 92 MIT Center for Collective Intelligence. . . . 92 Caterpillar...... 20 Korea Stock Exchange...... 20 SSP ...... 80 MIT Leadership Center ...... 92 CCD Madurai...... 80 Kroger ...... 129 Standard & Poor’s ...... 20 MIT Media Lab ...... 20 Charles Schwab ...... 129 L’Association pour le Développement Starbucks ...... 80 MIT Sloan School of Management . . . 20, 92 Chevron...... 80 de la Région de Kaya ...... 80 Sumitomo Mitsui Banking ...... 20 Monitor Group...... 20 Chrysler...... 104 LEGO...... 20 SunGard ...... 20 New America Foundation ...... 20 CH2M Hill ...... 80 Life Insurance Corporation of India ...... 80 Technorati...... 20 New York University ...... 20 Ciba-Geigy ...... 129 Livedoor ...... 20 Telenor ...... 80 Northwestern University’s Kellogg School Cisco Systems...... 116 Local Sustainability...... 80 Tesco...... 20, 80 of Management ...... 20 Citibank...... 92 L’Oréal...... 20 Thomson ...... 72 Perception Partners...... 20, 104 Citigroup ...... 129 Main Market Distribution ...... 80 Time ...... 129 PricewaterhouseCoopers...... 20 Club Méditerranée ...... 20 Malawi Union of Savings and Credit Toyota ...... 20, 72, 92 Radboud University Nijmegen...... 20 Coca-Cola ...... 80 Cooperatives ...... 80 Twynstra Gudde ...... 92 Santa Fe Institute ...... 20 Conservation International ...... 80 Marine Stewardship Council...... 80 Tyco International ...... 104 Satmetrix Systems ...... 116 Dell ...... 116 Marks and Spencer ...... 80 Unilever ...... 80 Siemens ...... 20 Direct Relief International...... 80 Marvin Windows and Doors ...... 116 United Technologies ...... 20 Siemens Medical Solutions...... 20 EBay ...... 20, 92, 129 McDonald’s ...... 20, 80 University of Pennsylvania’s Wharton Society for Organizational Learning . . . . . 92 EDGAR Online ...... 104 McKinsey & Company ...... 129 School ...... 129 Stanford Graduate School of Business . . 129 Eli Lilly ...... 20 Medtronic ...... 129 University of the Western Cape ...... 92 Strategic Alignment Group ...... 116 Enron...... 80, 104 Medtronics ...... 20 University of Zurich...... 129 United Nations Office on Drugs and Enterprise Rent-A-Car ...... 116 Meetup ...... 20 U.S. Securities and Exchange Crime ...... 57 Exxon Mobil ...... 80 Mercedes-Benz ...... 116 Commission ...... 129 University of California at Berkeley’s Haas Facebook...... 20 Merck ...... 80, 104 US West ...... 72 School of Business...... 20 Fairtrade Labelling Organizations Microcare ...... 80 Vocalpoint...... 20 University of Michigan’s Stephen M. Ross International ...... 80 MicroSave...... 80 Volkswagen...... 72 School of Business...... 80 Faitière des Unités Coopératives d’Epargne Microsoft...... 20, 80, 116 Wachovia ...... 80 Webster University Vienna ...... 57 et de Crédit du Togo...... 80 MIT Leadership Center ...... 92 Wacoal ...... 20 FedEx ...... 116 Mixi ...... 20 Wal-Mart ...... 20, 92

12 Harvard Business Review | February 2007 | hbr.org

FROM THE EDITOR

Ideas with Impact

VERY IDEA GROWS from an en- Though globalization is a trend that counter – between a hypothesis has been around for a long time, it still and reality, between a curious seems new. It’s striking, when you think Emind and an anomalous fact, be- about it, how much more international tween one civilization or field of study the dialogue of business has become and another, between one oyster and and how many companies have emerged one grain of sand. For the past ten, 15 from obscurity to become global brand years, people have used the word names. One of them is Haier, the Chi- “convergence” to describe trends in the nese appliance maker. Thanks to the communications space: As books and enterprise of Ke En from HBR’s Chinese articles, audio and video recordings, edition, we’re able to bring you “Raising telephone calls, and documents of all Haier,” Zhang Ruimin’s first-person ac- kinds have been produced in the uni- count of his wild ride as Haier’s chief versal language of 1s and 0s–even cash executive, from his first day in 1984, has undergone this metamorphosis – when he learned that the company didn’t formerly distinct industries have con- have enough money to pay its workers, verged. Incumbents have faced upstarts and intruders from to now, when Haier is established as a global competitor across boundaries that used to be distinct: Vide Apple selling with annual sales in excess of RMB100 billion. music or Comcast selling telephone service. Yet some of the biggest problems in business are the old- A number of such convergences are celebrated in this est. The lead article in this issue is about one of them, and it year’s HBR List, our annual ingathering of a score of ideas that represents the summation of three decades of research by we believe will shape and reshape business in the months and Harvard Business School’s Joseph Bower. Senior executives years to come. Klaus Kleinfeld, CEO of Siemens, and Erich have long been frustrated by the disconnection between the Reinhardt, head of its medical division, write about how plans and strategies they so carefully devise and the actual be- health care and the health care industry will change as bound- havior of the managers subordinate to them in the company. aries between medical and therapeutic disciplines are eroded The complaint is as old as business, as old as organizational by information technology. Michael Mankins probes the cash- life. (You can find it in Xenophon.) Bower and his coauthor, management practices of private equity firms for ideas that Clark Gilbert, have approached the problem from the ground public companies can apply. Geoffrey West, head of the Santa up, recognizing that every time a manager allocates resources, Fe Institute (whose very existence is predicated on the idea that decision moves the company either into or out of align- that interdisciplinary consilience produces new thinking), de- ment with its announced strategy – and neither the manager scribes newfound mathematical science challenging the nor the top executives realize it at the time. Thus to the well- conventional wisdom that small organizations have an advan- known leadership aspects of alignment the authors add an tage when it comes to innovation. organizational and procedural one, an understanding of re- More than ever, this year’s HBR List was a global effort. Senior source allocation processes that mostly take place under the editors David Champion and Paul Hemp led the team, the for- strategic radar. This is a powerful insight that has engaged mer working from France, the latter from our offices in Massa- Bower and a whole generation of scholars who have worked chusetts. Our continuing partnership with the World Economic with or been inspired by him. It will change how you think Forum took us to Tokyo, where a WEF regional summit gave about driving strategy in your business. us the opportunity to hold a side meeting. A couple of dozen scholars, businesspeople, and other experts joined me, HBR senior editor Anand Raman, and the WEF’s Jonathan Schmidt and Sheana Tambourgi for a daylong discussion that inspired several ideas you can read about in these pages and that were

discussed at the WEF’s annual meeting in Davos. Thomas A. Stewart Meganck Robert

14 Harvard Business Review | February 2007 | hbr.org

EDITOR AND MANAGING DIRECTOR Thomas A. Stewart DEPUTY EDITOR AND ASSISTANT MANAGING DIRECTOR Karen Dillon EXECUTIVE EDITOR Sarah Cliffe ART DIRECTOR Karen Player

SENIOR EDITORS SENIOR David Champion PRODUCTION (Paris) MANAGER Diane Coutu Dana Lissy Bronwyn Fryer EDITORIAL Paul Hemp PRODUCTION Julia Kirby MANAGER Gardiner Morse Christine Wilder M. Ellen Peebles SENIOR DESIGNER Steven Prokesch Jill Manca Anand P. Raman EDITORIAL SENIOR EDITOR, PRODUCTION HBR ONLINE COORDINATORS Eric Hellweg Josette Akresh- Gonzales ASSOCIATE EDITORS Tisha Clifford Roberta A. Fusaro EDITOR FOR Andrew O’Connell BUSINESS DEVELOPMENT CONSULTING EDITOR John T. Landry Bernard Avishai COMMUNICATIONS MANUSCRIPT DIRECTOR EDITORS Cathy Olofson Christina Bortz Lisa Burrell COMMUNICATIONS ASSOCIATE Andrea Ovans Siobhan C. Ford Martha Lee Spaulding CONTRIBUTING STAFF EDITORIAL Kaajal S. Asher MANAGER Kassandra Duane Lilith Z.C. Fondulas Amy L. Halliday EDITORIAL Amy N. Monaghan COORDINATOR Annie Noonan Rasika Welankiwar Lindsay A. Sweeney STAFF ASSISTANT Annette Trivette Elizabeth Waldman

A NOTE TO READERS The views expressed in articles are the authors’ and not necessarily those of Harvard Business Review, Harvard Business School, or Harvard University. Authors may have consulting or other business relationships with the companies they discuss.

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Volume 85, Number 2 February 2007 Printed in the U.S.A. Execute.Execute.

Achieve.Achieve. IntroducingIntroducing thethe newnew membersmembers ofof thethe BalancedBalanced ScorecardScorecard HallHall ofof FameFame forfor ExecutingExecuting StrategyStrategy Bank of Tokyo-Mitsubishi UFJ • Brigham & Women’s Hospital • CaiFor • Chilectra China Resources Microelectronics • Delta Dental of Kansas • Gerdau Açominas • Korea East-West Power LG.Philips LCD • Luxfer Gas Cylinders • Marriott Vacation Club International • Metro de Madrid National Federation of Coffee Growers of Colombia • Sprint Nextel • United States Postal Service Each of these organizations executed strategy to achieve breakthrough performance results, putting them in a class of their own. The new Balanced Scorecard Hall of Fame Report 2007 shows you how they did it. Order your copy today and save 20%. Call 1-800-668-6705 (617-783-7474 outside the U.S.) and mention code LPADIP24, or order online at www.BSRHOF.org. Strategy is important. But it’s the execution that counts.

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REPRODUCTION Copyright © 2007 Harvard Business School Publishing Corporation. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission. ONTARIO HAS BEEN GRANTED MORE PATENTS THAN SWEDEN, SWITZERLAND, OR AUSTRALIA. Ontario has always done its part to keep the U.S. Patent Office working overtime. Canada as a whole ranks eighth in the world in the number of patents granted, almost half of which originated in Ontario. Many great innovations were developed here, in technology, automotive and life sciences. And the pace of innovation continues into genomics, robotics and holography. Innovation comes naturally in Ontario because our 44 universities and colleges produce the highest ratio of university-educated workers; 56% have a post-secondary education, the highest rate in the industrialized world. In fact, our spirit of innovation and quality of life also attract renowned scientists, researchers and engineers from around the world. Our approach to business is equally innovative. We are committed to commercializing groundbreaking science with generous R&D tax incentives, public research institutions, and economic strength attractive to investors. In a knowledge-based economy, Ontario’s belief in innovation is one of a kind. There’s no better place in the world to do business.

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Paid for by the Government of Ontario. the HBR Breakthrough Ideas for 2007

The Accidental Borrowing from the Act Globally, 1 Influentials* 8 PE Playbook 15 Think Locally* Duncan J. Watts Michael C. Mankins Yoko Ishikura

Entrepreneurial Japan When to Sleep on It Seeing Is Treating 2 Yoshito Hori 9 Ap Dijksterhuis 16 Klaus Kleinfeld and Erich Reinhardt Brand Magic: Harry Potter Here Comes XBRL 3 Marketing 10 Robert G. Eccles et al. The Best Networks Are Frédéric Dalsace et al. 17 Really Worknets* Innovation and Growth: Christopher Meyer Algorithms in the Attic 11 Size Matters* 4 Michael Schrage Geoffrey B. West Why U.S. Health Care 18 Costs Aren’t Too High The Leader from Hope Conflicted Consumers Charles R. Morris 5 Harry Hutson and 12 Karen Fraser Barbara Perry In Defense of “Ready, What Sells When Father 19 Fire, Aim” An Emerging Hotbed of 13 Knows Best Clay Shirky 6 User-Centered Innovation* Phillip Longman Eric von Hippel The Folly of Business in the Nanocosm 20 Accountabalism Living with Continuous 14 Rashi Glazer David Weinberger 7 Partial Attention Linda Stone

Copresented by Harvard Business Review * and the World Economic Forum List

Our annual survey of emerging ideas considers how nanotechnology will affect commerce, what role hope plays in leadership, and why, in an age that practically enshrines accountability, we need to beware of “accountabalism.”

VERY YEAR, THE EDITORS of Harvard Business Review have organizations hosted a brainstorming seminar in Tokyo at the enviable challenge of putting together the HBR which some two dozen experts from different backgrounds List, tapping our network of authors and sources to find debated which emerging ideas are the most important, gen- E twenty essays that will satisfy our demanding readers’ erating a number of List candidates in the process. And sev- appetite for provocative and important new ideas. For this eral of the List essays – marked by asterisks on the preceding year’s List, we decided to bring those readers into the process. page and in the text–were on the agenda of the WEF’s annual Last May,we posted an invitation on our Web site asking read- meeting in Davos, Switzerland, last month. ers to identify the ideas they thought would emerge as break- Given the broad net cast, it’s no surprise to find a wide throughs in 2007. array of authors and ideas represented, including (to name The response was gratifying. More than 100 ideas were sub- just a few) Geoffrey West of the Santa Fe Institute on the mitted, from which we picked six for development. One of (somewhat surprising) relationship between innovation and these, an essay on “conflicted consumers” by the British con- organizational size, Siemens CEO Klaus Kleinfeld and Siemens sultant Karen Fraser, was selected for publication. We will re- Medical Solutions president Erich Reinhardt on the conver- peat this process for next year’s List, and we hope that you, gence of imaging technology and biotech, and the Tokyo ven- our readers, will participate even more fully. ture capitalist Yoshito Hori on the growing entrepreneurial- In the same quest for ideas, HBR has once again joined ism of Japanese society. We hope you’ll find these and the

John Hersey John forces with the World Economic Forum. Last spring, the two other essays in the List as stimulating as we do.

hbr.org | February 2007 | Harvard Business Review 21 The HBR List Breakthrough Ideas for 2007

1 | MARKETING STRATEGY | the most influential members of a pop- influence through networks – is the 2 ulation simply don’t interact with that presence not of a few influentials but, many others. Yet it is precisely these rather, of a critical mass of easily influ- 3 The Accidental noncelebrity influentials who, accord- enced people, each of whom adopts, 4 Influentials * ing to the two-step-flow theory, are sup- say, a look or a brand after being ex- 5 posed to drive social epidemics, by in- posed to a single adopting neighbor. Re- 6 In his best-selling book The Tip- fluencing their friends and colleagues gardless of how influential an individ- ping Point, Malcolm Gladwell ar- directly. For a social epidemic to occur, ual is locally, he or she can exert global 7 gues that “social epidemics” are however, each person so affected must influence only if this critical mass is 8 1driven in large part by the ac- then influence his or her own acquain- available to propagate a chain reaction. 9 tions of a tiny minority of special indi- tances, who must in turn influence To be fair, we found that in certain 10 viduals, often called influentials, who theirs, and so on; and just how many circumstances, highly influential people are unusually informed, persuasive, or others pay attention to each of these have a significantly greater chance of 11 well connected. The idea is intuitively people has little to do with the initial in- triggering a critical mass – and hence a 12 compelling – we think we see it happen- fluential. If people in the network just global cascade – than ordinary people. 13 ing all the time – but it doesn’t explain two degrees removed from the initial Mostly, however, cascade size and fre- 14 how ideas actually spread. influential prove resistant, for example, quency depend on the availability and The supposed importance of influen- the cascade of change won’t propagate connectedness of easily influenced peo- 15 tials derives from a plausible-sounding very far or affect many people. ple, not on the characteristics of the ini- 16 but largely untested theory called the Building on this basic truth about in- tiators – just as the size of a forest fire 17 “two-step flow of communication”: In- terpersonal influence, Dodds and I stud- often has little to do with the spark that 18 formation flows from the media to the ied the dynamics of social contagion started it and lots to do with the state influentials and from them to everyone by conducting thousands of computer of the forest. If the network permits 19 else. Marketers have embraced the two- simulations of populations, manipu- global cascades because it has the right 20 step flow because it suggests that if they lating a number of variables relating concentration and configuration of can just find and influence the influen- to people’s ability to influence others adopters, virtually anyone can start tials, those select people will do most and their tendency to be influenced. one. If it doesn’t permit cascades, no- of the work for them. The theory also Our work shows that the principal re- body can. What seems in retrospect to seems to explain the sudden and unex- quirement for what we call “global cas- be the special influential quality of a pected popularity of certain looks, cades”– the widespread propagation of particular person (or group) is, there- brands, or neighborhoods. In many such cases, a cursory search for causes finds that some small group of people was wear- ing, promoting, or developing whatever it is before anyone else paid attention. Anecdotal evidence of this kind fits nicely with the idea that only certain special people can drive trends. In recent work, however, my colleague Peter Dodds and I have found that influentials have far less impact on social epidemics than is generally sup- posed. In fact, they don’t seem to be required at all. Our argument stems from a simple observation about social influence: With the exception of celebrities like Oprah Winfrey – whose outsize presence is pri- marily a function of media, not interpersonal, influence – even

22 Harvard Business Review | February 2007 | hbr.org fore, mostly an accident of location and | POLITICAL ECONOMY | by capital-intensive industries in which timing. big manufacturing companies are run Although at odds with the dominant Entrepreneurial by people who’ve patiently worked interpretation of the two-step flow, our their way up through the organiza- results are actually consistent with a Japan tion – has come from a confluence of great deal of influentials research – in forces. One is a shift in public percep- particular, the finding that influence In 2006, Japan experienced an tions of employment. When the finan- in any given circumstance depends not economic revitalization after cial giant Yamaichi Securities collapsed only on such personal characteristics as nearly a decade of deflation, in 1997, people began to question the expertise, charisma, and popularity, but 2 bankruptcies, and sagging prof- long-standing assumption that working also on the details of the circumstance its. The stock market has bounced back, for a large company meant a job for life. itself. Sometimes people are influential with the Nikkei 225 Index rising to This questioning has led to an erosion because they are outspoken and gre- more than 200% of the low it reached in of employee loyalty. Young Japanese garious, other times because they are 2003. Office space and labor are scarce. workers today have no expectation of introspective and reflective. Sometimes Corporate earnings are at a record high. lifetime employment or career advance- they are central members of particular Analysts, the media, and the Japa- ment based on seniority; they focus on groups, and other times they are periph- nese government attribute this growth furthering their careers through switch- eral. Sometimes they are innovators, to the turnaround of big traditional cor- ing jobs or acquiring advanced degrees. and sometimes they are laggards. There porations, such as Toyota, Canon, Nis- The new mentality has in turn are, in fact, so many ways for people to san, and Nippon Steel, and to industry changed public perceptions of entrepre- be influential, and so many kinds of consolidation, which has created finan- neurs, who for the first time are re- influentials, that it is almost impossible cial giants like Sumitomo Mitsui Bank- spected – and exciting – role models for to generalize from one situation to an- ing and JFE Steel. Structural changes ambitious young Japanese. Kenji Kasa- other. What our work clarifies, however, implemented by the Koizumi govern- hara became an instant celebrity at 31 is that such generalizations are difficult ment are often credited with sparking when the company he founded, a not because of insufficient data but be- the comeback. But these observers are MySpace-like social-networking firm cause any focus on individual attributes alone overlooks the importance of net- work effects. Understanding that trends in public opinion are driven not by a few influen- tials influencing everyone else but by An entrepreneurial Japan – which once many easily influenced people influenc- ing one another should change how would have seemed oxymoronic – may companies incorporate social influence into their marketing campaigns. Be- ultimately overshadow the much touted cause the ultimate impact of any indi- start-up cultures in China and India. vidual – highly influential or not – de- pends on decisions made by people one, two, or more steps away from her or him, word-of-mouth marketing strate- gies shouldn’t focus on finding sup- posed influentials. Rather, marketing missing a big part of the story. Japan’s called Mixi, went public in September dollars might better be directed toward rebound is also being fueled by emerg- 2006 and reached a market capitaliza- helping large numbers of ordinary peo- ing companies in knowledge-intensive tion of ¥229 billion (approximately ple – possibly with Web-based social industries – companies led by entre- $2 billion) within a few days. Hiroshi networking tools – to reach and influ- preneurs in their twenties and thirties. Mikitani, the founder and CEO of ence others just like them. A newly entrepreneurial Japan, some- Rakuten, the largest e-commerce com- thing that once would have seemed oxy- pany in Japan, has imitated some Sili- Duncan J. Watts ([email protected]) is a moronic, may ultimately overshadow con Valley entrepreneurs by buying professor of sociology at Columbia University the much touted start-up cultures in professional baseball and soccer teams. in New York. He is the author of Six Degrees: China and India. An entrepreneurial Japan has been The Science of a Connected Age (Norton, The rise of this new Japan – so differ- further nurtured by, and reflected in, 2003). ent from the “old”Japan, characterized a favorable IPO environment. From

hbr.org | February 2007 | Harvard Business Review 23 The HBR List Breakthrough Ideas for 2007

1 2001 to 2005, 747 Japanese compa- | MARKETING STRATEGY | proach. Instead of seeking to build im- 2 nies – compared with 617 in the United mortal brands that generations mature 3 States–went public. Of those that went Brand Magic: into and then out of, they could create public in 2005, 96% – up from 94% in brands around a given cohort of cus- 4 2004 – opened their first day of trading Harry Potter tomers. As the customers matured, the 5 above their offering price. Chinese and brands would evolve with them. The 6 Korean companies are increasingly look- Marketing aim would be to match the needs of ing to float their shares in the Japanese that cohort at any moment in time. We 7 market. The typical brand manager is call this “Harry Potter marketing,”after 8 New ventures also benefit from Jap- an ageist. It goes with the ter- the fictional schoolboy wizard who 9 anese strengths. For instance, Japan has ritory, because whatever the grows older with his readers. 10 a highly developed telecommunica- 3 formal customer segmentation How would it look in practice? Let’s tions infrastructure, including a robust driving a brand strategy, the segments assume that instead of targeting 11 broadband network. Its average Inter- will almost certainly be differentiated Frenchwomen “of a certain age,”Innéov 12 net user fees are far lower than those by age. targeted women born between 1955 13 in other developed countries – just six Innéov, a line of nutricosmetics and 1965 and launched a brand called 14 cents per 100 Kbps, compared with jointly owned by L’Oréal and Nestlé, is Souplesse (Suppleness) in 2005. Be- 24 cents in South Korea, $1.77 in the a case in point. Its main product, a nutri- cause this customer pool would not 15 United States, $1.89 in China, and $2.77 tional supplement called Firmness, tar- change over time, the company could 16 in Germany. Japan also enjoys the gets women aged 45 to 55. One of the explicitly manage for brand loyalty, re- 17 world’s highest penetration rate for the Firmness brand manager’s greatest wor- sponding to the actual preferences of 18 mobile Internet, with 90 million mobile ries is that if too many “older”consum- its customers rather than trying to sell phone users, many of whom have 3G ers (that is, above 55) are stuck to her them a predesigned set of preferences. 19 handsets. 20 Perhaps most important, the Japa- nese economy is still the second largest in the world, representing more than Like Harry Potter, the fictional schoolboy wizard who grows half of the entire Asian economy. Its older with his readers, brands that mature with their users new ventures can reach critical mass quickly, which gives them an advantage can prove particularly durable. over new ventures in, for example, China and India. Japan’s strong base in an array of key technologies and indus- tries – from digital animation to robot- brand, 45-year-old potential consumers This more balanced dialogue would en- ics to nanotechnology – creates fertile might get the impression that Firmness hance the targeted cohort’s emotional ground for start-ups in these areas. is “not yet for them – thank goodness.” bonding with the brand. For example, When the new Japan is noticed, the Like Firmness, most brands target a the brand could continue to capitalize attention is often negative. People specific age group, either explicitly or on the fact that many of its consumers point to allegations of securities fraud implicitly, through the choice of media grew up in the age of disco or thrilled to made against the Internet service pro- used to advertise them. To serve cus- the tunes of ABBA. vider Livedoor, or to insider trading tomers outside that age group, the com- Various components of the market- charges brought against the flamboyant pany has to create new brands. As cus- ing mix would be affected. The propor- financier and shareholder-rights activist tomers mature, the company must tions of active ingredients in Souplesse Yoshiaki Murakami. But the country’s replace them with younger ones and would progressively change to take cus- increasing entrepreneurial vitality sug- encourage the previous customers to tomers’ aging into account. The com- gests that in its next stage of prosperity, switch to an allied brand rather than pany might want to retain the same Japan will be a competitive source of to a competitor. celebrity (the French actress Carole Bou- innovation as well as a leading eco- The big problem with this approach quet, perhaps, or the fashion icon Inès nomic power. to branding is that it positively discour- de la Fressange) to endorse it for many ages customer loyalty – and, as we all years, creating further emotional bond- Yoshito Hori ([email protected]) is the chair- know, it’s a lot cheaper to keep custom- ing. However, her message about the man and CEO of Globis Capital Partners, a ers than to find new ones. To get around product’s benefits would change over Tokyo-based venture capital firm, and the this problem, we propose that compa- time. When most members of the co- dean of the firm’s Global Management School. nies like L’Oréal consider a new ap- hort had reached the age of 55, the em-

24 Harvard Business Review | February 2007 | hbr.org phasis could switch from “attacking the | KNOWLEDGE MANAGEMENT | adapted a century-old theorem about first visible signs of aging”to “providing matrices to software for ranking Web a complete skin treatment.” Distribu- Algorithms in pages according to links from other tion strategies should take into account sites. Networks like the Web can be ex- the evolution of the cohort’s shopping the Attic pressed as matrices, and a relatively sim- habits. When the majority of the cohort ple calculation gives a ranking of how had reached the age of 65, for instance, For a powerful perspective on well each site is connected to the rest of L’Oréal might make beauty salons a re- future business, take a hard the Web. That formula for automatic tail option because older consumers look at mathematics past. As ranking – which could be understood spend relatively more time there. 4 computing gets ever faster and and appreciated without a PhD–is one Unlike traditional brands, Souplesse cheaper, yesterday’s abstruse equations of the most lucrative algorithms ever. would face a certain death. For most are becoming platforms for tomorrow’s The math was there for the taking. brand managers, this would be a disas- breakthroughs. Companies in several Why should past work, often quite ter; but L’Oréal would already have industries are now dusting off these for- theoretical, be so useful now? Done in launched other Innéov skin creams for mulas and putting them in the service the absence of high-speed, low-cost subsequent cohorts. Would this con- of new products and processes. computational capacity,that work put a stant churn be expensive? Perhaps. But Procter & Gamble has been restruc- premium on imaginative quantitative the continual relaunching and reposi- turing its supply chain with complex thinking. With today’s high-powered tioning of age-specific brands is also ex- “expressive bidding” algorithms–based processors and broadband networks, pensive – and our preliminary work on 1950s linear-programming equa- those abstractions can point the way to with L’Oréal suggests that Harry Potter tions–that allow suppliers to bid online practical software that leaps over cur- marketing would not necessarily be with bundled offerings of products and rent operational constraints. Disruptive more so. For one thing, evolving Harry service levels rather than with standard- opportunities abound. Potter brands would presumably profit ized lots. Google’s search engine was “There are huge hidden assets in the from greater brand loyalty. Of course, possible only because the founders operations-research community,” says this sort of marketing won’t work in all industries, and it needs to with- stand the test of, well, time. But it could be used for food, health care, clothing, and the media. This per- spective can help explain why, for instance, Club Med and Gap, whose original successes were each due to a single generation’s strong emo- tional bonding, have experienced a downturn in their sales. One last word: A world of cohort- specific brands will probably favor first movers, because if they do their job well, second entrants will find differentiation difficult. This sug- gests that fans of Harry Potter should proceed quickly.

Frédéric Dalsace ([email protected]) is an assistant professor at HEC School of Management in Paris. Coralie Damay ([email protected]) is a doc- toral student at HEC School of Man- agement. David Dubois (duboisd@ northwestern.edu) is a doctoral student at Northwestern University’s Kellogg School of Management in Evanston, Illinois.

hbr.org | February 2007 | Harvard Business Review 25 The HBR List Breakthrough Ideas for 2007

1 the MIT professor Richard Larson, a pi- nealing” algorithms into software for ers could even plug into enterprise-wide 2 oneer in probabilistic modeling tech- optimizing product placements on probability estimates. niques.“If you gave an army of 20 grad store shelves. Or look at “genetic” algo- Only recently have these academic 3 students the mission to rake through rithms, which were intellectual curiosi- research tools become part of every- 4 the published literature of the past 30 ties when they arose in the 1970s to day business practice in fields such as 5 years, they would find stuff that has un- demonstrate how Darwinian principles engineering and financial services. The 6 tapped business potential worth bil- of fitness and inheritance could be used rate at which they are intelligently lions of dollars. There are many clever to “evolve”solutions to problems. Nokia adopted could be a differentiator in the 7 ideas my students worked on decades and a few other companies are explor- wider marketplace. Cheap algorithms 8 ago that in today’s networked environ- ing them in product development. are like cheap labor and cheap capital– 9 ment would not be an academic exer- Nokia starts, say,with a design for a new a valuable resource when judiciously 10 cise but a real business opportunity.” cell phone, and uses genetic algorithms employed. Take, for example, an algorithm that to evolve the design of the phone’s an- The big-box retailers Wal-Mart and 11 measures the statistics of any queue. tennae within the constraints of the Best Buy, for example, are widely re- 12 This algorithm can automatically assess phone’s form factor and battery power. garded as having superior analytic in- 13 performance along a wide range of vari- Genetic algorithms in which solutions frastructures. But they don’t just hire 14 ables. Larson and his colleagues devel- are evolved can deliver results superior the smartest “quants”; they push to oped the algorithm in the early 1990s to those from analytic algorithms in make their mathematical tools accessi- 15 with an eye to improving automated which solutions are designed. ble to others. They substitute on-screen 16 teller machines, but it has gotten little This work offers the possibility of representations and visualizations of 17 notice otherwise. Now that companies major advances, but an equally large data for complex numerical equations. 18 increasingly automate customer-service opportunity may lie in simply getting They’re constantly rethinking when management, this algorithm is a natu- more managers to use existing quantita- mathematics should automate a deci- 19 ral tool for monitoring the quality of tive tools in their decision making. sion and when it should simply assist 20 repeated processes. There’s no doubt, says the Stanford Uni- the decision maker. Applied systemati- Sometimes the equations come from versity professor Sam Savage, that liter- cally, these tools may help solve what far afield. Consider the mathematics de- ally millions of business spreadsheets is perhaps the biggest challenge facing veloped to help physicists determine would benefit from the stress-testing retailing: how to efficiently sift through the optimal cooling time for crystal- of key assumptions with “Monte Carlo” the mountains of data that are now lizing molecules packed together as random number generators. To im- being collected. tightly as possible. Tesco, the British re- prove the reliability of their individual Whether looking for breakthroughs tailer, is working these “simulated an- business plans, Savage observes, manag- or just trying to improve decision mak- ing, companies will benefit from greater sophistication around even simple Panning for Gold on Dusty Shelves mathematics. A decade ago, big firms began to realize that they were sitting on a treasure trove of underutilized pat- Today’s high-speed, cheap computers have given abstruse mathematical advances imme- ents and know-how that could be com- diate practical relevance. With the help of “mathematical entrepreneurs,” companies can mercialized for willing buyers. Those now adapt these equations and algorithms to a range of business challenges. Here are “Rembrandts in the attic,” as Kevin G. some examples: Rivette and David Kline put it in their Date of Original 2000 book by that name, needed the Formula Development Original Use Current Business Application keen eye of an intellectual property cu- Perron-Frobenius 1800s Ranking nodes in a network Improving search engines; rator to appreciate their value. Simi- theorem analyzing and customizing larly, we now require quantitative en- communication on Web sites trepreneurs to seek out existing Monte Carlo random 1940s Testing scenarios for atomic Evaluating the riskiness of equations that meet today’s pressing number generators bomb explosions competing capital projects business needs. Technology continues Genetic algorithms 1970s Demonstrating Darwinian Developing products by computa- to make that quest faster, easier, and principles in mathematical tionally evolving the design in cheaper. problem solving response to constraints Simulated annealing 1980s Determining the cooling time From scheduling complicated Michael Schrage ([email protected]) is algorithms for tightly packed crystalliz- processes to optimizing product ing molecules placement on store shelves a codirector of the MIT Media Lab’s E-Markets Initiative in Cambridge, Massachusetts.

26 Harvard Business Review | February 2007 | hbr.org Most business leaders shy away from the notion of hope, perhaps because declaring that one’s organization needs hope feels defeatist.

| RESEARCH & DEVELOPMENT | | LEADERSHIP | cultivated in organizations: Hopeful work groups are most often composed The Leader of individuals whose worth to the orga- An Emerging nization has been affirmed, who per- from Hope ceive an openness on the part of man- Hotbed of agement, and who enjoy an authentic User-Centered What is hope? Something more sense of connection with their col- than wishful thinking but short leagues and with the organization’s mis- Innovation * of expectation. A rejection of sion. Even so briefly described, these 5 cynicism and dispiritedness. elements suggest why hope can be an A major auto company recently And a state, we believe, quite central to energetic force for positive change to a presented its “innovation road the work of a leader. degree that, say, optimism alone could map” for the next ten years to Most business leaders, we’ve discov- never be. 6 a group of journalists and car ered in our three years’ worth of inter- Our study of effective executives has enthusiasts. As the presentation pro- views on the subject, shy away from the uncovered many ways in which their gressed, it became increasingly clear word. Perhaps talk of hope comes un- decisions, words, and actions make the that some members of the audience comfortably close to faith and spiritual- people they lead more hopeful. Collec- were restless. Finally, one listener stood ity – or perhaps declaring that one’s or- tively, these practices are the basis of a up and said, “Many of us have already ganization needs hope feels defeatist. leadership tool kit for building and sus- built and installed every single one of “If I set out to instill hope,” one might taining hope. But the most important the innovations you say you are plan- wonder,“am I admitting that our situa- change comes when a leader is simply ning to develop in the next ten years. tion is next to hopeless?” more mindful of this vital part of her or Wake up and smell the coffee! Come Yet work connected to the positive- his mission. Much can be accomplished out to the parking lot and take a look at psychology movement has made hope in a reflective pause to ask,“Is what I am what we have developed and installed discussable in new ways. Hope has been about to do or say likely to be destruc- in our cars!” shown to be the key ingredient of resil- tive or accretive of hope?”It is useful to The company’s engineers and execu- ience in survivors of traumas ranging notice how people express a sense that tives weren’t sure how to respond. They from prison camps to natural disasters. things might change for the better: certainly couldn’t say what they felt: Many studies have shown that people They often say of some key actor, “He “Users should not act like that! They who score higher on measures of hope gives me hope” or “She gives me hope.” should wait for us to study their needs also cope better with injuries, diseases, If you are an executive trying to lead an and develop new products for them!” and physical pain; perform better in organization through change, know In an array of industries, producer- school; and prove more competitive that hope can be a potent force in your centered innovation is being eclipsed by in sports. Our contribution has been to favor. And it’s yours to give. user-centered innovation – the dream- outline the elements of hope – possibil- ing up, development, prototyping, and ity, agency, worth, openness, and con- Harry Hutson (harry@puttinghopetowork even production of new products by nection – in a way that guides efforts to .com), a business adviser and executive consumers. These users aren’t just voic- nurture it in the workplace. The first coach, and Barbara Perry (barbara@putting ing their needs to companies that are two are central to the definition of hopetowork.com), a cultural anthropologist willing to listen; they’re inventing and hope: People must see that change is and management consultant, are the authors often building what they want. possible and how they can engage per- of Putting Hope to Work: Five Principles to Breakthrough medical-equipment sonally in that change. The remaining Activate Your Organization’s Most Powerful innovations such as the heart-lung ma- elements have to do with how hope is Resource (Praeger, 2006). chine and the first automated drug

hbr.org | February 2007 | Harvard Business Review 27 The HBR List Breakthrough Ideas for 2007

1 pumps were developed by doctors at country with relatively few resources, it | PEOPLE MANAGEMENT | 2 the leading edge of practice, not by had also been resigned to not winning firms that manufacture medical equip- in the research-investment game. By 3 Living with ment. Novel food categories like sports championing a new innovation para- 4 energy drinks and gels were developed digm, the Danish government is en- Continuous Partial 5 by sports enthusiasts. This process of couraging numerous methodological 6 users’ coming up with products is in- flowers to bloom – from programs that Attention 7 creasingly well documented, and some improve manufacturers’ understanding companies, at least, are actively trying of users’ needs (through ethnographic We all know the phenomenon: 8 to take advantage of it. But what about research, for example) to techniques for You’re in a conference room, 9 governments? identifying user-developed innovations and all the people around the 10 Governments? What do they have to that manufacturers can produce. Suc- 7 table are glancing – frequently do with the development of something cessful approaches will be studied in and surreptitiously – at the cell phones 11 like a sports gel? Actually, governments Danish business schools and shared or BlackBerrys they’re holding just 12 have always attempted, in a variety of with interested Danish firms. below table level. They may be check- 13 ways, to affect how firms innovate. Most One such initiative is the Danish ing their e-mail, looking to see who is 14 countries, developing and developed User-Centered Innovation Lab, estab- trying to reach them on muted incom- alike, view innovation as vital to their lished in 2005. Hosted by Copenhagen ing calls, sending text messages, scan- 15 economic growth and well-being and Business School and staffed by profes- ning stock quotes, making dinner reser- 16 spend varying portions of their national sors from both CBS and the Aarhus vations – or, more likely, doing several 17 things at once. Such activities don’t only 18 draw participants’ attention away from the business being conducted at the 19 Today, customers aren’t just voicing their needs to companies table; they also compete with one an- 20 that are willing to listen; they’re inventing and often building other – sometimes even generating small alerts that suddenly appear and what they want. then dissolve on the screen, silently begging, “Look at me!” This constant checking of handheld electronic de- vices has become epidemic, and it illus- budgets to support it. That support has School of Business, the lab is following trates what I call “continuous partial typically come in the form of R&D an approach pioneered at the Massa- attention.” grants for scientific researchers and chusetts Institute of Technology a de- Although continuous partial atten- R&D tax credits for manufacturers. This cade ago. As a government-supported tion appears to mimic that much dis- focus on technology push has not at- partnership between faculty experts at cussed behavior, multitasking, it springs tracted much controversy.But recent re- Danish business schools and innovative from a different impulse. When we search shows that the 70% to 80% of firms such as Bang & Olufsen, LEGO, multitask, we are trying to be more new product development that fails and Novo Nordisk, it comes up with productive and more efficient, giving does so not for lack of advanced tech- new innovation methods that are then equal priority to all the things we do – nology but because of a failure to un- tested in partner companies. simultaneously filing or copying papers, derstand users’ needs. The emergence Denmark is the first country to bring talking on the phone, eating lunch, and of user-centered innovation clearly government innovation policies into so forth. Multitasking rarely requires shows that this near-exclusive focus on line with modern understandings of much cognitive processing, because the technological advance is misplaced. how innovation really works. If this par- tasks involved are fairly automatic. Denmark is taking this sea change adigm shift is successful, many other na- Continuous partial attention, by con- in the nature of innovation to heart. In tions will certainly follow. trast, involves constantly scanning for 2005, the Danish government became opportunities and staying on top of con- the first in the world to establish as a na- Eric von Hippel ([email protected]) is the tacts, events, and activities in an effort tional priority, in the words of a govern- T Wilson Professor of Innovation Manage- to miss nothing. It’s an adaptive behav- ment policy statement, “strengthening ment at MIT’s Sloan School of Management in ior that has emerged over the past two user-centered innovation.” Cambridge, Massachusetts, and the scientific decades, in stride with Web-based and Like other countries, Denmark had director of the Danish User-Centered Innova- mobile computing, and it connects us traditionally followed a strategy of tech- tion Lab in Copenhagen. He is the author of to a galaxy of possibilities all day every nology push. But, as a relatively small Democratizing Innovation (MIT Press, 2005). day. The assumption behind the be-

28 Harvard Business Review | February 2007 | hbr.org havior is that personal bandwidth can | MERGERS & ACQUISITIONS | investors, but it can make a company match the endless bandwidth technol- more attractive to PE firms. With those ogy offers. Borrowing from firms now able to complete transac- Continuous partial attention in itself tions of $50 billion or more, this applies is neither good nor bad. Like many the PE Playbook even to large corporations once consid- things, it’s fine up to a point – but in ex- ered immune to buyout. Industrial firms cess it can cause harm. In a study of the To survive the economic down- are the most susceptible, but no sector use of BlackBerrys, Gayle Porter, an as- turn at the start of the decade, is off limits, as the privatization of Sun- sociate professor at Rutgers University, corporations took dramatic Gard (software and IT services) and concluded that addiction to these de- 8 steps to reduce costs and im- HCA (health care) demonstrate. vices, in the form of constant checking prove productivity. As a result, their op- Giving the cash back to shareholders for messages, is deeply entrenched. TNS erating leverage skyrocketed, and when in the form of dividends isn’t a very at- Research, in a study commissioned by the economy rebounded, corporate tractive alternative: It effectively signals Hewlett-Packard, found that people profits quickly followed. Since the that management has run out of prom- who attempted to deal with a barrage amount of capital required to sustain ising new growth ideas, which will in- of messages while working experienced organic growth represents a small por- evitably affect the share price. Some a temporary ten-point drop in IQ over a tion of the cash now coming in, most of companies resort to share repurchases, day’s time. these profits are going straight to the but these create value only if the com- Furthermore, in this sleep-deprived, balance sheet. pany is undervalued by investors – interruption-driven, always-on world, A cash mountain used to be consid- which is the exception, not the rule. Of our ability to focus is compromised. In ered a good thing – savings for a rainy course, companies can always use the trying to process a never-ending and day or a war chest for future acquisi- cash to pay off debt. But since the after- ever-widening stream of incoming data, tions. Today, it’s a mixed blessing, and tax cost of debt is lower than the cost we can put off decisions indefinitely or the possibilities for spending the cash of equity, paying off debt increases even burn out. wisely are much reduced. For one thing, value only when a company is over- Not surprisingly, there are signs of a profitably emptying a war chest isn’t as leveraged–that is, has taken on so much backlash against the tyranny of tantaliz- easy as it once was. Private equity firms debt that it is at risk of going under. In ing choices. The yearning for a calmer are hunting for big corporate deals and today’s markets, most companies are existence has led people to adopt using their financial leverage to bid up underleveraged. tools – from iPods to TiVo to Google’s the prices of acquisition targets – effec- So what can companies do to prof- spare interface – that reduce informa- tively pricing “strategic buyers” out of itably rid themselves of this embarrass- tion overload and support discernment. the market. But keeping the cash in the ment of riches? Like it or not, acquisi- Instead of seeking out venues in which bank isn’t an option. Not only does it tion really is the only option, but to to make ever more connections with generate embarrassingly low returns for exercise that option effectively, would- others, to the point of overtaxation, people are seeking refuges, such as yoga and meditation classes or “quiet cars” What Does It Take to Create $1Billion in M&A Value? on trains, in which to make a few mean- ingful connections. Private equity firms create value in acquisitions by being very selective, and smart corpo- As businesses respond to this back- rate buyers would do well to imitate them. Small M&A deals tend to create the most value lash – as they consider management per dollar invested. But small deals involve a lot more work: Deal makers have to close 80 styles and marketing messages that ef- of them, as opposed to just seven very large deals, to make a billion dollars – which means fectively meet people’s needs for relief sifting through thousands of potential deals. from continuous partial attention and the sensory overload it creates – they Smaller deals create more value... can differentiate themselves by offering Average deal size $50M $100M $500M $1B $3B what their employees and customers in- Value creation (per $ invested) 25¢ 20¢ 15¢ 10¢ 05¢ creasingly crave: discriminating choices and quality of life. ...but take more work Number of deals 80 50 13 10 7 Formerly a senior executive at Apple and Active pursuits 160 100 26 20 14 Microsoft, Linda Stone (linda@lindastone Active appraisals 320 200 52 40 28 .net) is a writer, speaker, and consultant Starting pipeline 3,200 2,000 520 400 280 based in Seattle.

hbr.org | February 2007 | Harvard Business Review 29 The HBR List Breakthrough Ideas for 2007

1 be buyers are going to have to take a vestitures within their portfolios and | DECISION MAKING | 2 few leaves from the PE playbook. To those of their acquisitions to pay down begin with, they’re going to have to the debt quickly. In this regard, the ad- 3 When to Sleep spend a lot more time looking at poten- vent of PE firms is actually a blessing, 4 tial deals. PE firms create value in acqui- because they are prepared to acquire on It 5 sitions by being very selective. Research businesses that commercial buyers 6 shows that for every deal a PE firm com- won’t touch. As a result, the market for Have a difficult decision to pletes, it screens 40, appraises four, and companies is much more liquid than make? You should engage in 7 actively pursues two (see the exhibit before, making it easier to execute long and careful deliberation, 8 “What Does It Take to Create $1 Billion mega acquisitions that are contingent 9 right? Not necessarily. Psycho- 9 in M&A Value?”). Corporate buyers on subsequent smaller divestitures. logical research shows that conscious 10 cast smaller nets: Whereas PE firms re- Finding profitable outlets for excess deliberation, however long and careful, ject 39 deals for every one they com- cash can be challenging. Making acqui- can be a surprisingly crude and ineffec- 11 plete, most corporations would struggle sitions has always been tough, but in tive tool, because the conscious mind 12 to come up with more than four or five today’s market, as private equity players has a very limited processing capacity. 13 targets in the M&A pipeline. compete for many deals, success is even Most people cannot, for example, com- 14 In addition to strengthening their harder. The smartest companies will in- pare three organizations differing on M&A pipelines, companies experienced corporate the best practices of PE firms 14 dimensions. That is simply too much 15 in making smaller deals should be pre- in order to hunt more like them and information for the conscious mind to 16 pared to leverage their cash mountains will take advantage of the liquidity they take in and handle all at once. 17 in order to acquire companies of equal create in order to hunt with them. Of course, if this limited capacity led 18 or greater size. With their strong bal- executives to use only the best and most ance sheets, they should be able to bor- Michael C. Mankins (michael.mankins@bain relevant information, the situation 19 row heavily in advance of transactions; .com) is a partner in the San Francisco office would be fine. But it doesn’t. People 20 they can then use the proceeds from di- of Bain & Company. who mull over their decisions typically Conscious deliberation, however long and careful, can be a surprisingly crude and ineffective tool.

get the relative importance of the vari- deliberation leads to sound decisions The notion of trusting your intuition ous pros and cons very wrong. In one re- only when a very limited amount of in- is, of course, far from new; but what was cent experiment I helped conduct, we formation is involved. unexamined until now is whether ex- studied experts’ predictions for World Luckily,there is another way to make tensive unconscious thought can make Cup soccer matches. We found that the difficult choices: Don’t think hard intuition more reliable. Thus, my col- longer our participants thought about about the decision, and after a while leagues and I conducted experiments to their answers, the more likely they were your unconscious mind, which is known test the power of the unconscious mind to include irrelevant information to have a far greater processing capacity as a processor of information. We gave (which city will host the game) at the than your conscious mind, will tell you our subjects information pertaining to expense of relevant information (track what you should do. Such an uncon- a choice – for example, which of four records of the teams playing). And the sciously generated preference is usually apartments was the most attractive, or more information they factored in, the referred to as intuition or a gut feel- which of four cars was the best. They less accurate their predictions became. ing – a conviction that one alternative had three options: They could make a The logical conclusion from this and is better than another, even when we choice immediately; they could take similar experiments is that conscious can’t verbalize why. time for conscious deliberation; or they The HBR List Breakthrough Ideas for 2007

1 could figuratively sleep on it – that is, analyze the information. Instead, go on ing, the event hardly seemed like a land- 2 engage in unconscious thought. The holiday while your unconscious mind mark for companies. The advantage for subjects who chose the third option digests it for a day or two. Whatever investors – an enhanced ability to elec- 3 were first given information about the your intuition then tells you is almost tronically download, analyze, and com- 4 decision in question and then given certainly going to be the best choice. pare company information submitted 5 information about an unrelated task, to the SEC – got top billing. The SEC 6 to occupy their conscious minds while Ap Dijksterhuis ([email protected]) chairman, Christopher Cox, briefly their unconscious minds processed the is a professor of psychology at Radboud Uni- noted that adopting the new standard – 7 relevant information. versity Nijmegen in the Netherlands. In 2005, which is voluntary for SEC filings, at 8 When the unconscious thinkers were he won a Distinguished Scientific Award for least for now – would also make it eas- 9 asked to choose one of the alternatives, Early Career Contribution to Psychology from ier and less costly for companies to com- 10 they made better decisions, almost the American Psychological Association. ply with his agency’s requirements. But without exception, than the subjects that’s just the beginning. 11 who decided immediately or those who What has largely been overlooked is | | 12 consciously deliberated. Their decisions FINANCIAL REPORTING that XBRL (Extensible Business Report- 13 were better from a normative perspec- ing Language) will make it much easier 14 tive (more rationally justifiable), from Here Comes XBRL to generate, validate, aggregate, and an- a subjective perspective (more likely to alyze business and financial informa- 15 produce post-choice satisfaction), and When the U.S. Securities tion, which in turn will improve the 16 from an objective perspective (more ac- and Exchange Commis- quality, timeliness, completeness, and 17 curate, as in predictions of soccer-match sion last September an- comparability of the information that 18 outcomes). 10 nounced a $54 million companies use to make decisions. The The moral? Use your conscious mind project to accelerate the implementa- new language will allow them to 19 to acquire all the information you need tion of XBRL, a new information stan- strengthen and ensure the reliability of 20 for making a decision – but don’t try to dard for financial and business report- their internal controls, thereby lower- ing the cost of maintaining these perva- just a few. XBRL is an open-source stan- These attributes mean that processes sively manual compliance processes. It dard that was developed by an inter- that now have to be manual because of will make ERP (enterprise resource national public consortium of nearly the difficulty of getting different pro- planning) systems much more flexible 500 organizations from 27 countries, prietary applications to work together and easier to upgrade or change, dra- including companies, investors, ana- can be made more automated and matically cutting the investments lysts, auditors, regulators, and aggrega- streamlined. needed to maintain these beasts. And tors of financial data, such as Standard Another reason to treat XBRL seri- by significantly reducing the amount of & Poor’s. (For more background, see ously is that, although its taxonomies effort needed to change and integrate www.xbrl.org, the standard’s official are still not fully developed, it is already business reporting systems, XBRL will Web site.) advancing rapidly throughout the make digesting acquisitions, shedding In more technical terms, XBRL is the world. More than 8,200 financial insti- businesses, reorganizing, and adding application of XML (Extensible Markup tutions in the United States have had to new products and business units far less Language, on which the Internet is submit their quarterly call reports (risk- difficult. built) to business reporting. It uses an oriented filings) in this language to fed- All this undoubtedly sounds too electronic tag, very much like the bar eral banking regulators since the fall of good to be true to managers who are code on a physical product, to explicitly 2005; they are already reaping benefits rightfully jaded after decades of false define information so that it can be eas- in the form of lower compliance costs, promises that the next IT silver bullet is ily read by a variety of software applica- higher-quality data (for both regulatory (this time, really!) just around the cor- tions. XBRL also articulates the rela- and internal purposes), better analyti- ner. So what makes XBRL different? Un- tionships among different pieces of cal procedures, and more useful bench- like all past technological develop- information, offers formulas for calcu- marking data. Meanwhile, some two ments, it doesn’t come in a wide variety lating ratios, provides references to ac- dozen companies – including Bristol- of proprietary flavors, like ERP systems, counting standards and other relevant Myers Squib, Ford, General Electric, operating systems, and customer rela- sources, and can even translate informa- Microsoft, PepsiCo, and United Tech- tionship management systems, to name tion into different human languages. nologies – have been filing 10-Ks and The HBR List Breakthrough Ideas for 2007

1 10-Qs in XBRL as part of a voluntary | ORGANIZATIONS | mine how such characteristics change 2 SEC pilot program. The SEC’s project to with size. For example, metabolic rate 3 revamp its EDGAR (electronic data increases as the ⁄4 power of mass. Put 3 Innovation gathering, analysis, and retrieval) data- simply, the scaling law says that if an 4 base and to invest in the development and Growth: organism’s mass increases by a factor 5 of XBRL taxonomies for all industries of 10,000 (four orders of magnitude), 6 where they don’t exist promises to ac- Size Matters * its metabolic rate will increase by a fac- celerate adoption across the United tor of only 1,000 (three orders of mag- 7 States. Executives talk about nitude). This represents an enormous 8 Initiatives are also under way in Aus- their companies’ “DNA” economy of scale: the bigger the crea- 9 tralia, China, the European Union, and roles in “business ture, the less energy per pound it re- 10 India, Japan, Korea, Singapore, and 11 ecosystems,”but the anal- quires to stay alive. This increase of effi- 11 many other places. The European ogy to living organisms is more than ciency with size – manifested by the 3 Union’s central bank has developed an metaphorical. Like the mathematical scaling exponent ⁄4, which we say is 12 XBRL-based model for implementing laws governing how organisms’metabo- “sublinear” because it’s less than 13 the Basel II framework for risk manage- lism, growth, evolution, and mortality one – permeates biology. These ubiqui- 14 ment. Banco de España, Spain’s central depend on size, there are rules that ap- tous scaling laws have their origin in the bank and the leader of the EU effort, is pear to govern the growth, perfor- universal properties of the networks 15 already applying XBRL in a number of mance, and even decline of cities and that sustain life, such as the cardiovas- 16 ways, including efforts to fight money other social organizations. Although we cular and respiratory systems. 17 laundering. In order to attract more in- can’t yet predict how specific cities or Social organizations, like biological 18 ternational investors by increasing the companies will evolve, we’ve found gen- organisms, consume energy and re- transparency of reported information, eral mathematical relationships be- sources, depend on networks for the 19 the Korea Stock Exchange has worked tween population size, innovation, and flow of information and materials, and 20 with its 20 largest companies to file information in XBRL. Wacoal, a Kyoto- based maker of lingerie, has used XBRL to enhance its ability to aggregate oper- ating information from the 24 propri- etary IT systems used by its businesses By almost any measure, the larger in 23 countries. Wacoal needed six months and $50 million to implement a city’s population, the greater the system – a sixth of the time and a third of the money that would have the innovation and wealth creation been required for a traditional ERP so- per person. lution it had considered. The bottom line: XBRL’s benefits go far beyond faster and cheaper compli- ance. Late adopters beware.

Robert G. Eccles (reccles@perceptioncos .com) is a founder and managing director of wealth creation that may have impor- produce artifacts and waste. So it would Perception Partners, which is based in West tant implications for growth strategy in not be surprising if they obeyed scaling Palm Beach, Florida. Liv Watson (lwatson@ organizations. laws governing their growth and evolu- edgar-online.com) is the vice president of In biology, different species are in tion. Such laws would suggest that New global strategy at EDGAR Online in Norwalk, many ways scaled versions of one an- York, Santa Fe, New Delhi, and ancient Connecticut. Mike Willis (mike.willis@us other. Bacteria, mice, elephants, se- Rome are scaled versions of one an- .pwc.com), a partner of Pricewaterhouse- quoias, and blue whales may look dif- other in fundamental ways – as, poten- Coopers, is based in Tampa, Florida. Watson ferent, but most of their fundamental tially, are Microsoft, Caterpillar, Tesco, is the vice chairman of XBRL U.S., and Willis characteristics, including energy and re- and Pan Am. To discover these scaling was the founding chairman of XBRL Interna- source use, genome length, and life laws, Luís Bettencourt at Los Alamos tional; both organizations are not-for-profit span, follow simple mathematical rules. National Laboratory, José Lobo at Ari- consortia for building XBRL and promoting its These take the form of so-called power- zona State University, Dirk Helbing at adoption. law scaling relationships that deter- TU Dresden, and I gathered data across

34 Harvard Business Review | February 2007 | hbr.org ties between cities and firms suggest that our conclusions extend to compa- nies and industries. If so, the existence of superlinear scaling that links size and creative output has two important con- sequences: First, it challenges the con- ventional wisdom that smaller innova- tion functions are more inventive, and perhaps explains why few organizations have ever matched the creativity of a giant like Bell Labs in its heyday. Sec- ond, it shows that because organiza- tions and industries must apparently in- novate at a continually accelerating rate to avoid stagnation, economizing by re- flexively cutting R&D budgets and cre- ative staffs may be a dangerous strategy over the long term.

Geoffrey B. West ([email protected]) is the president of the Santa Fe Institute in Santa Fe, New Mexico.

| CUSTOMER RELATIONS | many urban systems in different coun- clustering around a common value of tries and at different times, addressing a 1.2. Thus, a doubling of population is ac- Conflicted wide range of characteristics including companied by more than a doubling of energy consumption, economic activity, creative and economic output. We call Consumers demographics, infrastructure, intellec- this phenomenon “superlinear”scaling: tual innovation, employment of “super- by almost any measure, the larger a Your data indicate strong creative”people, and patterns of human city’s population, the greater the inno- customer satisfaction: Re- behavior such as crime rates and rates vation and wealth creation per person. peat purchase levels are of disease spread. Organismic growth, constrained by 12 high, and many custom- We did indeed find that cities mani- sublinear power-law scaling derived ers have been with you for years. Good fest power-law scaling similar to the from the dynamics of biological net- news, right? Well, appearances can be economy-of-scale relationships ob- works, ultimately ceases, with the equa- deceptive. served in biology: a doubling of popula- tions predicting what size organisms There may well lie buried in these tion requires less than a doubling of will reach. In contrast, our equations data a “stealth” segment of apparently certain resources. The material infra- predict that growth associated with su- loyal customers who have ethical con- structure that is analogous to biologi- perlinear scaling processes observed in cerns about your company and are cal transport networks – gas stations, social organizations is theoretically un- poised to switch as soon as a viable al- lengths of electrical cable, miles of road bounded. This would seem to bode well ternative emerges. In other words, they surface–consistently exhibits sublinear for organizations. Unfortunately, how- buy your product but they’d rather not. scaling with population. ever, the equations also predict that in I call such customers “conflicted con- However, to our surprise, a new scal- the absence of continual major innova- sumers,” and my research shows that ing phenomenon appeared when we tions, organizations will stop growing more of them are out there than busi- examined quantities that are essentially and may even contract, leading to ei- ness leaders and their market research social in nature and have no simple ana- ther stagnation or ultimate collapse. teams may realize. logue in biology–those associated with Furthermore, to prevent this, the time In a survey of more than 1,300 con- innovation and wealth creation. They between innovations (the “innovation sumers in the United Kingdom, nearly include patent activity, number of su- cycle”) must decrease as the system one in four said they bought products percreative people, wages, and GDP.For grows. and services from companies whose such quantities the exponent (the ana- Though our research has focused on ethical reputation they deemed poor or 3 logue of ⁄4 in metabolic rate) exceeds 1, cities, the social and structural similari- very poor. Their concerns ranged from

hbr.org | February 2007 | Harvard Business Review 35 The HBR List Breakthrough Ideas for 2007

1 the exploitation of workers to corporate energy in the marketplace, which can | DEMOGRAPHICS | 2 environmental practices to the market- take the form of something more sub- ing of harmful products. Among the 40 tle, widespread, and damaging than an 3 What Sells When international companies that were in- old-fashioned product boycott. 4 cluded in the survey, McDonald’s had Conflicted consumers talk to others Father Knows Best 5 the highest proportion of conflicted about corporations’ track records. In 6 consumers: 8% of the company’s cus- fact, 44% of the consumers polled in the The comedian Dick tomers expressed dissatisfaction, pri- survey had spoken about corporate Cavett once quipped, “If 7 marily with the perceived effect of its ethics with friends, family,or colleagues your parents never had 8 products on children’s health. in the previous month. And though 13 children, chances are you 9 Conflicted consumers are an intrigu- companies increasingly look to word of won’t either.” It’s a funny thought, but 10 ing bunch. Although they worry that mouth as a way to bolster their brands, it gets at something real. they are making the world a worse more than 33% of such conversations People who are social, religious, or 11 place by buying a particular product, negatively portrayed the company or political conservatives tend to have 12 they are distinct from hard-core ethical brand discussed. Wireless access to the more children, and that fact has pro- 13 consumers, who either “go green” or Internet, which allows conflicted con- found implications for culture, for poli- 14 go without. Conflicted consumers are sumers to research opinions about tics, and for business. In the United simply ready to switch to a brand they products and services right up to the States, for example, fertility rates are 15 perceive as more ethical. Why wait? moment of purchase, will only amplify 12% higher in states that voted for 16 Usually because they don’t believe a their misgivings. George W.Bush in the most recent pres- 17 convenient alternative exists – yet. And Although some companies see little idential election than in the more lib- 18 they don’t believe that withholding need to pay attention to the preferences eral and secular states that supported their business would have any effect of “ethical types” who will never, they his opponent. Indeed, if the John Kerry 19 on how the company operates. Some- believe, buy their products, my research states seceded and formed a new na- 20 times consumers (typically parents indicates that the distinction between tion, its fertility rate would be just 1.8 looking for domestic peace) override ethical types and “our customers” is children per woman – 13% below the their own concerns and stick with a blurring, and that the majority of con- level needed to replace the population. company because their families like the sumers, in one way or another, need to This link between fertility and con- product. have their concerns addressed. servatism is found not only in the Though they are good customers for United States but in Europe, Israel, the the moment, their doubts may feed a Karen Fraser ([email protected]) rest of the Middle East, and elsewhere. powerful if latent resentment toward a is a research consultant and the founder of There is a strong correlation between brand. Their desire for an ethical choice the London-based Fraser Consultancy, which adherence to traditional Christian, Ju- represents a huge amount of potential publishes the Ethical Reputation Index. daic, or Islamic values and high fertility. continued on page 44

Holding Their Noses

Almost one in four consumers buy from These same consumers stay with those companies they see as unethical for: companies for one of several reasons:

exploiting workers no apparent not caring enough about ethical alternative the environment not enough information about producing harmful products how the company operates having too much power over family/children government policy like their products mistreating animals feel powerless to affect making products detrimental company behavior to children using misleading advertising Source: Fraser Ethical Index survey of 1,363 adults in the UK

36 Harvard Business Review | February 2007 | hbr.org Breakthrough Ideas for 2007 the HBR List in brief

Here’s a quick guide to the 20 challenging and provocative ideas to be found in this year’s List.

hbr.org | February 2007 | Harvard Business Review 37 Some think competition. We think partnership.

Since 1856, we have focused on bringing new perspectives to our clients. Understanding the past, but shaped by the future. Always looking at opportunities and challenges from a different point of view. Bringing together new partners to achieve results that can make the difference for our clients. Because our sole ambition is to turn your vision into a reality. www.credit-suisse.com

Thinking New Perspectives. Some think competition. We think partnership. filiates. All rights reserved. © 2006 CREDIT SUISSE GROUP and/or its af

Since 1856, we have focused on bringing new perspectives to our clients. Understanding the past, but shaped by the future. Always looking at opportunities and challenges from a different point of view. Bringing together new partners to achieve results that can make the difference for our clients. Because our sole ambition is to turn your vision into a reality. www.credit-suisse.com

Thinking New Perspectives. the HBR List Breakthrough Ideas for 2007 > In Brief

The Accidental Algorithms in the Attic Living with Continuous Influentials* Michael Schrage Partial Attention Duncan J. Watts For a powerful perspective on future Linda Stone In his best seller The Tipping Point, Mal- business, take a hard look at mathemat- “Continuous partial attention”–distinct colm Gladwell argues that “social epi- 4 ics past: the old equations collecting from multitasking–is an adaptive behav- 1demics” are driven in large part by the dust on academics’ shelves. Just as big firms 7 ior that presumably allows us to keep actions of a tiny minority of special individuals. need the keen eye of an intellectual property pace with the never-ending bandwidth tech- The idea seems intuitively right – we think we curator to appreciate the value of old patents nology offers. Now there are signs of a back- see it happening all the time. Nevertheless, and know-how, they will need savvy mathe- lash against the tyranny of tantalizing choices. this isn’t actually how ideas spread. It’s better maticians to resurrect long-forgotten equations to focus on getting enough plain, ordinary peo- that, because of advancing technology, can ple to sign on. finally be applied to business. Borrowing from the PE Playbook Entrepreneurial Japan The Leader from Hope Michael C. Mankins Company coffers are overflowing these Yoshito Hori Harry Hutson and Barbara Perry days, and inevitably executives are turn- Most business leaders shy away from Japan’s economic rebound is generally ing to the M&A markets in their quest the word “hope.” Yet hope has been 8 attributed to the turnaround of corporate to put the cash to good use. If they’re to avoid shown to be the key ingredient of re- 2 giants and to industry consolidation. But 5 repeating the disappointments of previous silience in survivors of traumas ranging from it is also fueled by the emergence of new com- M&A waves, they will have to take a few prison camps to natural disasters. So if you panies led by entrepreneurs in their twenties leaves from the acquisition playbook of pri- are an executive trying to lead an organization and thirties. An entrepreneurial Japan – no vate equity firms. longer an oxymoron – may ultimately over- through change, know that hope can be a po- shadow the much touted start-up cultures of tent force in your favor. And it’s yours to give. China and India. When to Sleep on It An Emerging Hotbed Ap Dijksterhuis Brand Magic: Harry of User-Centered Use your conscious mind to acquire all the information you need to arrive at a Potter Marketing Innovation * 9 difficult decision, but don’t try to analyze Frédéric Dalsace, Coralie Damay, Eric von Hippel it. Instead, go on holiday and let your uncon- and David Dubois Most countries, developing and devel- scious mind digest the information for a day or Most brands target a specific age group. oped alike, view innovation as a vital two. Whatever your intuition then tells you is The big problem with this approach is 6 input to their economic growth and spend almost certainly going to be the best choice. 3 that it positively discourages customer varying portions of their national budgets to loyalty–and, as we all know, it’s a lot cheaper support it in companies and research labs, for to keep customers than to find new ones. To the ultimate benefit of essentially passive con- get around this problem, companies should sumers. Denmark is taking a different tack: It’s consider creating brands that mature with their making “user-centered innovation” a national customers. priority.

40 Harvard Business Review | February 2007 | hbr.org What Sells When Father The Best Networks Are Knows Best Really Worknets * Phillip Longman Christopher Meyer The link between conservatism and The assumption is that if you build fertility is found throughout the a network platform, people will 13 world, and it portends a comeback 17 come. If you expect to get real value for patriarchy and other traditional values. from your initiative, though, you must think Business leaders must learn how to profit hard and in advance about exactly what func- from, or at least prepare for, this trend. tion you want the network to perform. That will help you choose the participants, the na- ture of their experiences, and the technology. Here Comes XBRL Business in the In other words, put the work in “network” first. Robert G. Eccles, Liv Watson, Nanocosm and Mike Willis Rashi Glazer Why U.S. Health Care A new software standard for finan- Though the scientific and technologi- cial and business reporting, soon cal revolution that may occur as a Costs Aren’t Too High 10 to be adopted by the U.S. Securities 14 result of nanotechnology has been Charles R. Morris and Exchange Commission, will make it dra- much discussed, the sociocultural and busi- Contrary to popular belief, health matically easier to generate, validate, aggre- ness implications are of potentially much care costs, broadly defined, are gate, and analyze business and financial infor- greater impact. Nanotechnology may change 18 quite probably falling. It is spending mation–which in turn will improve the quality society over the next few decades just as that is rising, which is not the same thing at of the information companies use to make much as information technology has over the all. The benefits of health care for individuals, decisions. previous few–and in ways that are still hard society, and the economy–such as getting to grasp. people back to work faster–more than out- weigh its direct costs. Innovation and Growth: Size Matters * Act Globally, Think Geoffrey B. West Locally * In Defense of “Ready, Newfound general mathematical re- Yoko Ishikura Fire, Aim” lationships between population size, Companies are usually told to “think Clay Shirky 11 innovation, and wealth creation chal- globally and act locally.” But thanks The bulk of open source projects lenge the conventional wisdom that smaller 15 to their own global information sys- fail, and most of the remaining suc- innovation functions are more inventive. They tems and the Internet, knowledge from far- 19 cesses are quite modest. Still, open may explain why few organizations today have away places can be acquired relatively easily systems are a profound threat to many busi- matched the creativity of a giant like Bell Labs and cheaply. This means that firms have to dis- nesses, not only because they outsucceed in its heyday. cover and quickly incorporate good ideas from commercial firms but, more important, be- these diverse sources before their rivals do. cause they outfail them. Conflicted Consumers Karen Fraser Seeing Is Treating The Folly of Your customer data indicate strong Klaus Kleinfeld and Erich Reinhardt Accountabalism consumer satisfaction: Repeat pur- When several technologies can be David Weinberger chase levels are high, and many cus- 12 leveraged simultaneously, the possi- Accountability has gone horribly tomers have been with you for years. Good 16 bilities for real breakthroughs in wrong. It has become “accountabal- news, right? Well, appearances can be decep- medical care multiply. That is occurring today 20ism,” a set of related beliefs and tive. Buried in the data may be a “stealth” seg- with the convergence of imaging technology practices that bureaucratize morality and make ment of apparently loyal customers whose eth- and biotechnology, which promises to radically us believe we can control our lives by adhering ical concerns make them ready to bolt as soon change the diagnosis and treatment of many to specific rules. But grown-ups prefer clarity as an alternative emerges. chronic diseases, greatly benefiting both pa- and realism to happy superstition. tients and the companies that serve them.

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hbr.org | February 2007 | Harvard Business Review 41 Some think competition. We think partnership. filiates. All rights reserved. © 2006 CREDIT SUISSE GROUP and/or its af

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Thinking New Perspectives. © 2006 CREDIT SUISSE GROUP and/or its affiliates. All rights reserved. The HBR List Breakthrough Ideas for 2007

1 And as an increasing share of all chil- which social conservatives and the reli- of the food, energy, and manufactured 2 dren is descended from people whose gious-minded play a far greater role products they currently acquire from conservative values have led them to than they did forty years ago. the global economy, thus restoring the 3 raise large families, we see the emer- How can business leaders profit traditional home-centered economic 4 gence of societies in which the patriar- from – or at least prepare for – this basis of the patriarchal family. 5 chal and highly pro-natal values of the trend? Businesses that have relied on 6 Abrahamic religions are dominant. sex to sell products, or whose products Phillip Longman (Longman@newamerica So what caused the rise of liberal sec- otherwise distract young people from .net) is a senior fellow at the New America 7 ularism in the first place? Patriarchy, as the straight and narrow, should perhaps Foundation, in Washington, DC, and the au- 8 it has traditionally manifested itself, re- think twice about brazenly touting, say, thor of The Empty Cradle (Basic Books, 9 quires a man to marry a “respectable” sexually explicit or violent films and 2004). 10 wife and to take responsibility for the video games, which could provoke boy- children she bears him. In part because cotts or outright bans. Rock and hip- 11 | TECHNOLOGICAL CHANGE | of these obligations, traditional patri- hop; licentious celebrities; rootless, 12 archy is unappealing to many men. childless urban professionals; and other Business in the 13 Similarly, many women take issue with such fixtures of today’s marketing cam- 14 the roles a patriarchal society pre- paigns could come to be seen as relics of Nanocosm a decadent past. 15 scribes for them. When broad swaths of the population come from something Meanwhile, as occurred in the nine- The scientific and tech- 16 other than a conservative upbringing – teenth century (a similarly conservative nological revolution that 17 as they did in the 1960s and 1970s – pa- period), the political left will probably may occur as a result 18 triarchy’s constraints on personal free- shed many of its current causes and 14 of nanotechnology has campaign for a “family wage” sufficient 19 dom can seem excessive to men and been much discussed. Generally unap- women alike. Then gender roles relax, to allow a man to support his children. preciated so far, but of potentially much 20 greater impact, are the sociocultural and business implications. Nanotech- nology may change society over the next few decades just as much as infor- Patriarchy always makes a comeback, because its adherents mation technology has over the previ- put more genes and ideas into the future than do their secular ous few – and in ways that are still hard for our minds to grasp. counterparts. This process is already well under way in the Nanotechnology is distinguished United States. from other forms of technology, past and present, by the infinitesimal size of the materials involved (less than 100 nanometers wide) and by its method of operation. Conventional manufactur- birthrates fall, and patriarchy goes into Employers will find it harder to lure ing carves or distills a purpose-suited retreat. women out of the home and into the device from a mass of raw materials. But patriarchy always makes a come- workplace, simply because so many of Nanotechnology,like nature, assembles back, because its adherents put more them, having absorbed the pervasive objects atom by atom, following a de- genes and ideas into the future than do cultural norm, will embrace mother- sign that calls for only what is needed: their secular counterparts. This process hood and home life. Already the per- a place for every atom and every atom is already well under way in the United centage of American women with small in its place. This method of construct- States. For example, among American children and jobs outside the home is ing objects (which themselves do not women just now passing beyond repro- declining. have to be small) will reshape the fu- ductive age, nearly 20% are childless The new patriarchal family will value ture not only of manufacturing but and almost as many have only one products and services that allow fa- also of distribution, retailing, and the child. Consequently, a relatively large thers to stay home as well. One exam- environment. share of the next generation is de- ple is eBay, which drastically lowers the Because conventional manufactur- scended from a comparatively narrow barriers to running a home business. A ing begins with large and unformed in- and socially conservative segment of so- combination of nanotechnology and puts, it needs scale, and economies of ciety that places a high value on repro- biotechnology may allow millions of scale push factories to become larger duction. Today we see a culture in households to produce large amounts and more centralized. If, however, man-

44 Harvard Business Review | February 2007 | hbr.org Nanotechnology, like nature, assembles objects atom by atom, following a design that calls for only what is needed.

ufacturing is “additive” (assembling sors to these machines – personal man- treme, in essence creating a Robinson products atom by atom) rather than ufacturing units, or PMUs – become Crusoe economy. “subtractive” (distilling them from a standard home appliances. Nanotechnology would thus hasten mass of materials), factories can be Consider this scenario: In preparing the trend away from manufacturing quite small – small enough to be no for a dinner party the following day, a prowess and physical assets (hardware) more than a set of tiny machines and couple decides to create a new set of as sources of competitive advantage. production blueprints – and can be op- dishes. They sit down at the console of Obviously, the vast number of compa- erated almost anywhere. The marginal the family PMU (essentially a keyboard, nies that offer durable or even dispos- production costs of these factories a display screen, and a manufacturing able items would be at risk – as, ulti- should approach zero, and their pro- chamber containing the atoms to be mately,would those handling inventory duction processes should create no pol- assembled). Working with design soft- and logistics or offering after-sale cus- lution or waste. ware (the manufacturing blueprints), tomer service, maintenance, and repair. These developments also challenge they input the instructions and watch In short, the ability of end users to per- accepted notions of the economic place as the atoms in the chamber are orga- form for themselves functions now per- of durables – products with a shelf life nized into plates, bowls, and cups. Since formed by other economic agents independent of their utilization. At pres- the number of atoms used to manufac- would wipe out large segments of the ent, much economic activity amounts ture the dishes is the same as the num- value chain. to providing “permanent” solutions to ber composing them, all the costly Competitive advantage would lie in ephemeral problems. Thus, the plastic steps—extraction or collection of raw knowing the customer and designing cover placed on a Starbucks cup solely materials, transportation, transforma- the manufacturing blueprint and soft- to prevent the purchaser from spilling tion, waste disposal—that currently ware. We might also anticipate the the scalding contents is of no use what- precede a product’s use or consumption emergence of a new entity, midway be- soever to a stationary consumer once are eliminated. tween the traditional make-and-sell, the brew cools off. Thanks to nanotech- Ever since Adam Smith laid out their command-and-control organization and nology, however, many products would essential characteristics, market econo- the more modern sense-and-respond, endure no longer than the need that mies have been understood to rest on adaptive organization. This new entity gave rise to them. specialization: Individuals are produc- would function as a systems integrator, Industrial or business-to-business ers of one thing and consumers of focusing on “menu design,”component markets are likely to embrace this tech- everything else. In what is sometimes acquisition and assembly, and efficient nology first, given their quest to reduce called the nanocosm, by contrast, con- coordination of the activities and inter- costs throughout the value chain, which sumers could become the sole produc- actions of the market-savvy designer, they could accomplish by eliminating ers of finished products of all kinds. the PMU maker, the PMU operator, and several of its links. Already what are Consequently, they would continually the provider of the atomic building called synthesizers, assemblers, or auto- evaluate whether to make or buy. We blocks. mated fabricators have been developed are all aware of the decentralizing and to create items, such as prosthetics, personally empowering effects of PCs Rashi Glazer is a professor of marketing at using nanotechnology’s additive ap- and the Internet. By making individuals Haas School of Business at the University of proach. In the next few decades, we may largely self-sufficient, the nanocosm California, Berkeley, and a codirector of the see the domestic, user-friendly succes- would push these effects to the ex- Center for Marketing and Technology.

hbr.org | February 2007 | Harvard Business Review 45 The HBR List Breakthrough Ideas for 2007

1 | KNOWLEDGE MANAGEMENT | halfway around the world. Thanks to physical proximity. Even in the digital 2 the Internet and companies’ global in- age, the many interactions that take formation systems, businesses can ac- place in the open and flexible networks 3 Act Globally, quire such ideas from out-of-the-way linking a company, its suppliers, and its 4 Think Locally * places relatively easily and cheaply. For professional-service providers are more 5 that reason, though, companies must effective and efficient within physically 6 Here’s a paradox of our discover and quickly incorporate good proximate regions. Think of the decen- age: The more global the ideas from these diverse sources before tralized social networks that fostered 7 economy and your busi- their rivals do. In fact, they have less both competition and cooperation in 8 15 ness, the more important time than ever before to take new ideas Silicon Valley, making it a fertile seed- 9 location and physical proximity be- to market. bed of innovation. At the very least, a 10 come. Yes, issues of location – the choice This trend reverses a familiar adage: personal encounter is usually required of a factory site, for example, or the tai- Whereas companies used to be told to to start a meaningful discussion that 11 loring of a marketing message to a re- “think globally and act locally,” adapt- will lead to clear decisions and useful 12 gion – have always been of strategic im- ing their global strategy to the needs of outputs. Once the physical meeting 13 portance. However, the conventional a particular locality, they must now “act takes place, meetings in virtual space 14 emphasis has been on how location af- globally and think locally,” harvesting can follow – but the reverse order often 15 fects a company’s costs and revenues. In knowledge from various localities and doesn’t deliver results. today’s knowledge-based economy, we using it to shape their global strategy. In the early 2000s, many Japanese 16 need to reevaluate the very concept of The importance of location in a manufacturing firms moved their pro- 17 location. knowledge-based economy isn’t only duction plants to China in order to take 18 Advances in communication technol- about far-flung places; it’s also about advantage of lower labor costs. Over ogy have enabled – indeed, require – those places right outside your door. time, they realized that some activities, 19 companies to tap into local information That’s because another way of tapping such as exchanges between the produc- 20 that they can use throughout their busi- diverse sources of knowledge is to draw tion-engineering and manufacturing nesses. Managers increasingly under- on people and organizations in your departments, weren’t proving effec- stand the importance of drawing on di- vicinity. Unlike the explicit knowledge tive – for example, the desired product verse sources of information, especially that can be gathered and transmitted specifications couldn’t be achieved – from outside the organization, to spur digitally from anywhere in the world, when the departments were physically innovation. For example, ideas that tacit knowledge – which is difficult to separated. There was just too much sub- used to emerge from a company’s cen- codify and, consequently, has great tle back-and-forth that needed to occur tral lab may now be offered up by re- value – can be shared only through re- in person. Partly because of this, some searchers far from the home office – or peated interactions, which are usually of the companies have moved some of by a lone inventor living in a village face-to-face. This, obviously, requires their manufacturing processes back to Japan. It isn’t always easy to know which ac- tivities have to be close together geo- graphically. Figuring it out can involve considerable trial and error, as well as constant review to determine when the scope of tacit knowledge–and therefore the necessity of interaction – changes. Companies today need both global reach, in order to spot useful local ideas and incorporate them into strategy,and physical proximity, in order to effec- tively tap sources of tacit knowledge and thus sustain competitive advan- tage. For both, location matters.

Yoko Ishikura ([email protected]) is a professor at Hitotsubashi University’s Gradu- ate School of International Corporate Strategy in Tokyo.

46 Harvard Business Review | February 2007 | hbr.org to switch off the tumor’s angiogenesis receptors, stopping growth in its tracks. In a similar way,radiation therapy could be carried directly to the tumor, mini- mizing damage to adjacent healthy tis- sue. Intelligent IT tools would help physicians compile and manage the data gathered through all these tests to improve patient care and safety. Such high-tech methods of diagnosis and treatment would not necessarily be simpler than current methods, but they would have a higher success rate and would certainly be easier on pa- tients. And because patients would be cured earlier, before they needed spe- cialized care, survival rates would im- prove and health care costs would be re- duced. In short, the convergence of imaging and biotechnology can im- | | EMERGING TECHNOLOGY today is to determine whether patients prove the quality of health care, the de- are at risk for cancer; to regularly screen livery of health care, and the opera- Seeing Is Treating them if so; and, if growths are discov- tional and financial performance of ered, to precisely determine which are both health care providers and medical Health care often ad- potentially cancerous and what type of technology companies. vances hand in hand with cancer they could become. technology. When sev- That’s where biotechnology comes Klaus Kleinfeld is the president and CEO of 16 eral technologies can be in: It allows us to go deeper into disease Siemens, a global technology and infrastruc- leveraged simultaneously, the possibili- discovery and faster into treatment. Tra- ture conglomerate based in Munich. Erich ties for real breakthroughs in care mul- ditionally, doctors determined a nod- Reinhardt is the president and CEO of tiply. That’s occurring today with the ule’s potential for malignancy from its Siemens Medical Solutions, based in Erlan- convergence of imaging technology shape and then performed an invasive gen, Germany, which provides solutions in and biotechnology – enabled by ad- and often painful biopsy – which some- medical imaging, health care information vanced health care information tech- times required hospitalization and cre- technology, and clinical diagnostics. nology – which promises to radically ated delays in treatment. Thanks to mo- change diagnosis and treatment for lecular diagnostics research, tests of a | ORGANIZATIONS | many chronic diseases. Like other tech- patient’s blood or tissues can reveal nological convergences in our digital risks for and perhaps determine the and granular world, this one will rede- presence of prostate and other cancers, The Best fine industry boundaries and inextrica- thus pointing the physician toward Networks Are bly link distinct businesses. monitoring, investigation, or treatment. Clearly, early detection of disease Researchers can also create molecules Really Worknets * saves lives by allowing for more treat- that will attach themselves only to spe- ment options. Imaging technology now cific tumors; when these molecules are An unruly nebula of con- enables a radiographer to see small combined with a marking agent, ad- cepts is floating around growths and nodules in, for instance, a vanced imaging technology can use the business world right patient’s liver or lungs. But imaging is them to discover which tumors are 17 now – social webs, open performed only if clinically indicated; growing, how large they are, and even innovation, customer-created content, no patient without symptoms would be their precise location. and more – all exploring one big ques- prescribed an exam. For this reason, the Biotechnology’s real promise lies in tion: Now that we see the power of full potential of early detection can be the increased potential for combining human networks, how can we use them realized only when in vivo imaging diagnosis and treatment. The biomark- to produce value? Applications ranging technologies are combined with in vitro ers just described could, for instance, from InnoCentive, Eli Lilly’s network laboratory diagnostics. The challenge have a serum attached, or could be used for solving scientific riddles, to Internet

hbr.org | February 2007 | Harvard Business Review 47 The HBR List Breakthrough Ideas for 2007

1 Based Moms, a Web site where work- needs to do its job. It will also guide you in constructing a sustainable network. 2 at-home moms can seek and share ad- in engineering the exchanges among This, too, can be guided by the net- vice on starting Internet businesses, the network’s members. No one will- work’s function. For example, will the 3 prove the point that many heads are ingly devotes time and energy to an work be best accomplished through 4 better than one. But up to now, net- endeavor without seeing benefits in re- physical interactions, virtual interac- 5 work-building efforts have been hit or turn; in a well-designed network, the tions, or a combination of the two? Net- 6 miss. Our desktops are littered with benefits being exchanged are not just works have a particular intensity and passwords to communities that no economic but also informational and rhythm; for any given network to per- 7 longer exist. emotional. These three forms of ex- sist, its sponsor must manage this heart- 8 It’s too early for a general theory of change need to be balanced so that both beat continuously. 9 human networks, but some practical the host and the member feel they have The right time to decide on and im- 10 guidelines have emerged from the first made a fair transaction. That balance plement the technology of the net- few years of experience. Fundamen- may vary greatly for members of dif- work – something often mistakenly 11 tally, the key to getting payback on in- ferent kinds or in different roles. The treated as the first step – is only after 12 vestment in a network is to think hard teenagers who were participating in the work has been defined, the right 13 about exactly what kind of value you the worknet of one consumer-products kinds of people identified, and the na- 14 want the network to create. In other company were there to gain insider sta- ture of the exchanges and experience words, you must put the work in “net- tus; the professional sociologists and carefully considered. After all that, it 15 work” first. anthropologists were there to learn; may be evident that the appropriate 16 Networks lend themselves to at least and the sponsors were looking for “technology” is not Internet-based; a 17 five basic tasks. They can scan the hori- more-effective selling messages. series of events or some other enabler 18 zon, as the Global Business Network Designing an appealing experience of ongoing communication might be does, for events and patterns with impli- for members is another important step better. 19 cations for corporate strategy. They can 20 help to solve problems: InnoCentive does this by posing problems to a far-flung Designing a Worknet population of scientists. A network can innovate for its own benefit. Members Both Facebook, a site for socializing students, and Procter & Gamble’s Vocalpoint, which of the Polycom User Group, for exam- promotes word-of-mouth marketing among moms, are successful, but their purposes are ple, seek new ideas for using Polycom’s served in very different ways. conferencing products by interacting with other users and by sharing best practices. Networks can be used to exert Define Identify Engineer the Design the Assemble the influence: It was only when researchers the Work the Talent Exchanges Experience Technology experiencing errors with the Pentium Decide on the Ensure the right Balance the Create an Exploit leading-edge purpose: scan, diversity of economic, environment – technology – but microprocessor banded together that solve, innovate, knowledge, informational, and physical and virtual not for its own sake Intel took the issue seriously. And a net- influence, disciplines, emotional rewards – that supports the allocate…other? cultures, demo- for all participants exchanges work can efficiently allocate resources. graphics, and The staffing company Aquent uses its personalities substantial network to match market- Enable students to Students only Economic: none Simple interface Web-based with no ing and communications professionals form relationships Informational: based on the “wall” new functionality and maintain circles “who’s who” and and the news feed required

with projects that need them. Facebook of friends “what’s happening” Because networks perform diverse awareness functions, they require diverse forms. Emotional: new and By first defining the most important deeper friendships work you want your network to per- Create consumer Women with kids Economic: Product Clean, bright design E-mail distribution form – scan, solve, innovate, influence, awareness of and samples and and chatty content Web-based surveys demand for new discounts and chat or allocate – you’ll be able to design products Vocalpoint Informational: your “worknet.” (See the exhibit “De- Live “Coffee Talk” Insight into new meetings signing a Worknet” for an analysis of products Emotional: how two networks were constructed to Pride of being “in the serve their purposes.) know,”respect from Defining the work first will help having one’s voice heard point you to the talent your network

48 Harvard Business Review | February 2007 | hbr.org Advertisement Having trouble finding your eureka moment?…

No one can predict the future with any real certainty. But we can develop strategies for alternative, but plausible future scenarios, and in doing so, can question, re-evaluate and adapt our current assumptions and behaviour to make ourselves better suited to dealing with whatever the future may throw at us. In a complex and interdependent world, the most successful responses to this are likely to be those that harness the energies and talents of diverse groups working in collaboration and with shared interests. But this collaborative process may be thwarted as - increasingly - people are working in new ways. According to Bill Gates, the 21st century is the Age of the Entrepreneur. Businesses need to be flexible in responding to changing market demands and small firms are better able to do this. The pace of technological change and Aggressive entrepreneurs are prepared that large companies inhibit personal the ever-changing demands of customers to treat these markets as great creativity and the ability to make mean there is a constant re-invention of opportunities whereas larger publicly a difference. Their membership of product and service portfolios. There is quoted large corporations can be more on-line communities such as Myspace no place for the rule-driven bureaucratic constrained because of shareholder and Youtube empowers them as both company with strict top-down decision- obligations. Entrepreneurs are also more producers and consumers: they feel making processes. Entrepreneurs, able to take the longer-term view rather they are personally in control. This is as risk-takers and opportunity seekers, than the shorter-term focus on financial now the expectation they have of their are usually better placed to mobilise returns imposed by the shareholder present or future employers. resources in the pursuit of these. performance measures of larger Entrepreneurial firms are seen by this quoted companies. Globalisation has created a world stage generation of talented young people for entrepreneurs. Emerging markets, At the same time, the ipod generation as an opportunity for them to develop in Asia, India, New Europe and - the growing mass of young people their personal capabilities. They want elsewhere, are generally more high-risk that in their dens at home create their to be inspired by entrepreneurial leaders locations in which to do business than own CDs and DVDs - is now inspired rather than being told what to do, the world’s more traditional markets. to work in small rather than larger firms. as within large organisational structures. The transparency of business practices, They often want to be their own bosses. regulatory regimes and the protection There is a growing perception among of intellectual property rights are often younger talented men and women less established.

Get inspired. Visit: www.ukinvest.gov.uk The HBR List Breakthrough Ideas for 2007

1 The steps in designing a valuable net- 2 work have a logical sequence, but note that a bad bet at any point in this five- 3 horse parlay can ruin the entire ven- 4 ture. The founders of Facebook, a net- 5 work to enable students to make and 6 manage their social contacts, learned this lesson in the summer of 2006, 7 when they moved to allow nonstudents 8 access to the network in order to create 9 the possibility of greater ad revenues. 10 Core members considered this an invi- tation to stalkers and staged a revolt. 11 Usually, network initiatives screw up 12 less spectacularly.In classic “build it and 13 they will come” fashion, networks are 14 launched as technology-led platforms and come to be populated by arbitrary 15 collections of people. Some members 16 linger and some leave, depending on that, for example, the cost of a gallblad- Besides, one person’s spending is al- 17 how they perceive the benefits. In rare der operation has dropped substan- ways someone else’s revenue. Explain to 18 cases, value emerges for the network’s tially,and the patient can usually return GE Healthcare ($15 billion in revenues, host. Even more rarely, it’s value of the 19 to work the next day instead of sitting at 45,000 employees, sales in 100 coun- kind that was sought. The odds of get- home for a week. But because many tries) why rising health care spending 20 ting that value from a network are ex- more people are now willing to un- is a bad thing. The profile of Medtron- ponentially higher when you put the dergo the surgery, total spending is up. ics–in the areas of growth, profitability, work first. It’s the same story with all kinds of med- and R&D spending – closely tracks that ical care, from hip replacement to the of Intel ten years ago. Modern operat- Christopher Meyer (chris_meyer@monitor treatment of depression. In other indus- ing rooms boast millions of dollars’ .com) is the chief executive of Monitor Net- tries, falling prices and added features worth of equipment, and the vendors works, a unit of the Monitor Group, based in have similarly led to big increases in include global corporate giants and tiny Cambridge, Massachusetts. spending – on PCs, cell phones, and start-ups. video games, for example – but we call Health care is now, by most mea-

| POLITICAL ECONOMY | that a productivity triumph, not a “cost” sures, America’s largest industry and problem. biggest private employer, as well as a Three-quarters of health care spend- major source of competitive advantage Why U.S. Health ing goes toward people who are very for the United States. Health care’s Care Costs Aren’t sick. Yes, interventions are sometimes growing share of GDP, moreover, is en- overdone, but doctors don’t know in ad- tirely in keeping with historical trends. Too High vance which of their patients are going A hundred and fifty years ago, agricul- to die, and the great majority of very ture accounted for about half of GDP; There is nearly a consen- sick patients recover. Over the past it accounts for only 3% now. Fifty years sus that American health thirty years, the death rate from heart ago, a third of the workforce was in care is careening toward attacks has plummeted, so millions of manufacturing, but only 10% is now, al- 18 fiscal catastrophe. Rea- heart attack survivors are now going though real American manufacturing sonable estimates of unfunded health to work or playing with their grand- output is currently far higher. Simple care liabilities are sky-high. But the be- children. And, of course, successful economics is driving health care’s ex- lief that health care costs threaten to health care always breeds more spend- pansion: As a society grows richer, the wreck the U.S. economy is misguided. ing: The people who used to die of marginal value of one more toy in- In the first place, procedure by proce- heart attacks now live on to consume evitably pales in comparison with an- dure, those costs are quite probably fall- expensive medications, visit specialists, other year of life in which to enjoy all ing. It is spending that is rising, which is and contract cancer or Alzheimer’s. one’s toys. not the same thing at all. The advent of Does that mean we should stop saving Without a truly radical adjustment in minimally invasive techniques means heart attack victims? health care spending patterns, which

50 Harvard Business Review | February 2007 | hbr.org Advertisement …sometimes, all it takes is a little inspiration.

This psychology of individualism Parallel changes are occurring in the is what large businesses will also field of science and innovation. A UK have to capture if they are to be Department of Trade & Industry study1 innovative and competitive in future shows that in terms of how science world markets. High performing large is organised, the success of many corporations are responding to these Open Source development projects changing expectations by re-designing demonstrates that talented people do their operating structures. They are not need traditional career structures transforming their cultures, built upon to be creative. And the process whereby new-style leadership patterns and North America and Europe sucked in abandoning outmoded, 20th century the world’s top talent via what has management practices with their stifling become known as “Brain Drain” is being emphasis on conformity and compliance. replaced with what could be called In short, large corporations are imitating “Brain Circulation”, whereby real or the practices of smaller entrepreneurial virtual teams are assembled in a range firms rather than vice versa. of countries. These include the UK, ranked in the top three locations globally It is in response to this that the world’s for eight scientific disciplines including Smaller global firms are now joining top business schools are re-defining their biological; business; environmental; their larger counterparts in taking executive programmes. Their priority clinical; pre-clinical and health; social advantage of the advice and services is now to leverage leadership potential; sciences; humanities; and mathematics2. of UK Trade & Investment, the UK a task that is far more demanding than Government’s international business merely developing management skills. It is unlikely that any of these changes development organisation which High performing leadership requires would have occurred so swiftly supports businesses seeking to self-understanding, empathy and without the dynamic growth of the establish in the UK and helps UK intuition. Only then is it possible to BRIC economies. These have created companies to grow internationally. act as coach, mentor and role model a remixed global environment. This With UK Trade & Investment’s help, to younger colleagues. offers unprecedented opportunities many are meeting the challenges for companies in the older developed This kind of leadership also assumes of the Age of the Entrepreneur. economies who are prepared to embrace self-confidence since without this, it 21st century business models and adopt For an insight into some of the is impossible to take risks, make tough multi-cultural in place of national, key corporate challenges and decisions and impose a sense of vision parochial mindsets. What is particularly priorities in 2007 and beyond, and upon a large company. These are the exciting about these developments is to access the Economist Intelligence qualities the ipod generation expects that the communication and technology Unit’s flagship business survey, from its bosses. It expects them to revolution offers just as many global CEO Briefing 2007, sponsored by behave as baseball or soccer team market opportunities for smaller UK Trade & Investment, simply click coaches; as leaders that will bring out firms as it does for the world’s great onto www.ukinvest.gov.uk/ceobriefing their individual talents to the full but multinational corporations. within teams that are committed to Professor Richard Scase is the author of Global achieving a common goal. Re-Mix; the fight for competitive advantage, Kogan Page, 2007.

1. DTI Sigmascan 288 available from www.sigmascan.org 2. Evidence Limited, 2006

Get going. Visit: www.ukinvest.gov.uk The HBR List Breakthrough Ideas for 2007

1 there is no reason to expect, demo- | INNOVATION | In open systems, by contrast, the cost 2 graphics alone will drive health care’s of failure is reduced, partly because less share of GDP – now 16% – to as high as coordination is required among the var- 3 In Defense of 25% to 30% over the next couple of de- ious players and partly because each 4 cades. In purely economic terms, that “Ready, Fire, Aim” player is willing to accept some of the 5 would not be a bad thing. Indeed, in risks of failure directly. This means that 6 terms of trade balances and interna- The open source software worrying about whether a new idea will tional competitiveness, it might be a movement has been one succeed is unnecessary; you simply try it 7 positive development. And even at very of the great successes of out. The institutional barrier between 8 modest levels of overall economic 19 the digital age. Open thought and action – the need to con- 9 growth, people could still increase their source projects such as the Linux oper- vince someone that your idea is worth 10 spending on cosmetics, video games, ating system and the Apache Web giving a whirl – doesn’t exist. The low and other fun things, although per- server – as we learn nearly every time cost of trying means that participants 11 haps a tad more slowly than they do we pick up a business publication – can fail like crazy as they continue to 12 now. In short, at least for the foresee- have turned the efforts of a widely dis- build on their successes. 13 able future, health care in the United tributed group of programmers, who In systems where anyone can try any- 14 States is an economic, a societal, and an contribute those efforts free, into thing, the good has to be filtered from affordable good. world-class products. the bad after the fact. The cost of trying 15 To be sure, there are serious prob- Yet when we look closely at the open to prevent bloggers from saying stupid 16 lems of waste in health care, just as source ecosystem, a very different pic- or silly things, for example, would be 17 there are in investment banking, the ture emerges. For example, the world’s high, whereas the cost of allowing any- 18 media, and most other industries. Bet- largest open source site, Sourceforge, one to publish anything is low. As a re- 19 ter oversight may be the answer, but it hosts more than 100,000 projects, and sult, filtering services like Technorati will be the work of decades. In the its most popular software is down- have been created to provide guides to 20 meantime, the challenge is one of fi- loaded tens of thousands of times daily. what’s worth reading; these work the nancing, not affordability. The current But most projects have never broken a way Google does, judging an individual primary financing mechanisms – em- hundred downloads, and more than blog post not according to the quality of ployer-based insurance and Medicare – half are simply inactive: A project was its content but according to how often are clearly breaking down. And privati- proposed, but nothing happened. other blogs link to it. If all blogging had zation is an unrealistic solution: While If the vast majority of open source to be filtered in advance, the practice it may, barely, be feasible to privatize projects are failures, has the press been would never get off the ground; unfil- old-age pensions (the savings shortfall is wrong to emphasize the movement’s tered, it would fall to earth. The middle far smaller in pensions than it is in few successes? The answer is–obviously way–publish and then filter–keeps the health care), privatizing both pensions and measurably–yes. So can businesses enterprise aloft. and health care is a pipe dream. that face seemingly formidable compe- This model is spreading outward Instead, in time-honored fashion, a tition from existing or future open sys- from software and media. Meetup.com succession of presidents and Congresses tems breathe easy? Absolutely not.Open is a site designed to help users find peo- will respond to the challenge with a mix systems are a profound threat not only ple with shared interests and arrange of cuts and patches. Spending will keep because they outsucceed commercial meetings in their communities. The on rising, and it will continue to shift to- firms but also because they outfail them. most active groups on Meetup right ward government accounts. Taxes will They grow not in spite of failure but be- now consist of stay-at-home moms, go up after a lag, and everyone will lie cause of it. known as SAHM. These groups are par- about it. Over time, some highly imper- In traditional business, trying any- ticularly popular in largely suburban fect but tolerable new accommodation thing is expensive, even if only in staff metro areas like Atlanta and Houston, will emerge. Elegant it won’t be. That’s time spent discussing the idea; so some where such moms, driving in isolation just the way we do things. advance attempt to distinguish the suc- from one destination to another, are un- cesses from the failures is required. likely to meet by accident. Meetup’s Charles R. Morris ([email protected]) Even at firms committed to experimen- founders are overeducated, undermar- is the author of a number of books, including tation, considerable effort has to go into ried urbanites. So how did they know The Tycoons: How Andrew Carnegie, John D. reducing the likelihood of failure. And that SAHM groups would be such a hit? Rockefeller, Jay Gould, and J.P. Morgan In- because green-lighting ideas that turn They didn’t. They simply let users pro- vented the American Supereconomy (Henry out to be failures will be noticed more pose potential Meetup groups. The ma- Holt, 2005). He is currently working on a book than killing radical but promising ones, jority of proposed groups in fact fail, about heart surgery. many people err on the side of caution. and most of the rest have moderate

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1 success only. A few, though, like SAHM, we can measure results exactly. It wrong–which seriously underestimates 2 are very popular – the same pattern spread to schools–where it is eating our the twistiness of human minds and mo- found among open source projects. young – as a result of our recent irra- tivations. We are capable of astounding 3 This presents a conundrum for busi- tional exuberance about testing, which degrees of self-delusion regarding the 4 ness. Clearly, firms can’t just start trying forces education to become something likelihood of our being caught. Further, 5 everything. Management overhead is that can be measured precisely. by overly formalizing processes, ac- 6 real, and the costs of failure can’t simply When such disincentives as the countabalism refuses to acknowledge be laid at employees’ feet. As a result, threat of having to wear an orange that people work and think differently. 7 open system–like innovation must nec- jumpsuit for eight to ten years didn’t It eliminates the human variations that 8 essarily continue independent of any stop the Enron nightmare and other move institutions forward and provide 9 firm’s ability to either direct or capture bad things from happening, accounta- a check on the monoculture that ac- 10 all of the value. Some companies’ prod- balism whispered two seductive lies to counts for most disastrous decisions. It uct lines or employee structures may us: Systems go wrong because of indi- also makes work no fun. 11 not allow radical experimentation, but viduals; and the right set of controls will Accountabalism bureaucratizes and 12 smart managers will look for ways to enable us to prevent individuals from atomizes responsibility. While claiming 13 take advantage of this sort of broadly creating disasters. Accountabalism is a to increase individual responsibility, it 14 distributed effort. In environments type of superstitious thinking that al- drives out human judgment. When a where organizations can reduce the lows us to live in a state of denial about sign-off is required for every step in the 15 cost of failure by farming out a problem just how little control we individuals work flow, those closest to a process 16 to individuals – who may be induced to have over our environment. lack the leeway to optimize or rectify it. 17 participate solely by the chance to learn Accountabalism manifests itself in a Similarly, by assuming that an individ- 18 new skills or to gain the respect of set of related beliefs and practices: ual’s laxness caused a given problem–if peers – we can expect open systems to It looks at complex systems that have so-and-so hadn’t been asleep at the 19 make increasing inroads into standard gone wrong for complex reasons and de- switch or hadn’t gotten greedy or hadn’t 20 commercial efforts. cides the problem can be solved at the assumed that somebody else would next level of detail. Another set of work clean up the mess, none of this would Clay Shirky ([email protected]) teaches in procedures is written, and yet more have happened – accountabalism can New York University’s graduate Interactive forms are printed up. But businesses are miss systemic causes of failure, even, Telecommunications Program and studies not mechanical, so we can’t fine-tune ironically, as it responds to the problem Internet-scale collaboration. them by making every process a well- by increasing the system’s reach. regulated routine. Accountabalism Accountabalism tries to squeeze cen- turns these complex systems into turies of thought about how to entice | GOVERNANCE | merely complicated systems, sacrificing people toward good behavior and dis- innovation and adaptability. How can a suade them from bad into simple rules The Folly of company be agile if every change or de- by which individuals can be measured viation requires a new set of forms? and disciplined. It would react to a car Accountabalism Accountabalism assumes perfection – crash by putting stop signs at every cor- if anything goes wrong, it’s a sign that ner. Bureaucratizing morality or mech- Accountability has gone the system is broken. That’s not true anizing a complex organization gives us horribly wrong. It has even of mechanical systems: Entropy, the sense that we can exert close con- become “accountabal- friction, and manufacturing tolerances trol. But grown-ups prefer clarity and 20 ism,”the practice of eat- ensure that no machine works per- realism to happy superstition. ing sacrificial victims in an attempt to fectly. Social systems are incapable of magically ward off evil. anything close to perfection, so if some- David Weinberger ([email protected]), a mar- The emphasis on accountability was thing goes wrong in one, that need not keting consultant and a coauthor of The Clue- an understandable response to some mean the system is broken. If an em- train Manifesto: The End of Business as Usual god-awful bookkeeping-based scandals. ployee cheats on expenses by filling in (Perseus, 2000), is also a research fellow at But the notion would never have taxi receipts for himself, the organiza- Harvard Law School’s Berkman Center for In- evolved from a buzzword into the focus tion doesn’t have to “fix” the expense- ternet & Society in Cambridge, Massachu- of voluminous legislation if we hadn’t reporting system by requiring that setts. His book Everything Is Miscellaneous also been lured by the myth of preci- everyone travel with a notary public. will be published in May by Times Books. sion: Because accountability suggests Accountabalism is blind to human na- that there is a right and a wrong answer ture. For example, it assumes that if we Reprint R0702A to every question, it flourishes where know we’re being watched, we won’t do To order, see page 158.

54 Harvard Business Review | February 2007 | hbr.org

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© Copyright 2006 Perot Systems Infrastructure HBR CASE STUDY

Off-Ramp–or Dead End? Another 60-hour workweek, another school play missed – and now, another delay in a long-awaited promotion. Is it time to chuck it all? by Sharman Esarey and Arno Haslberger

HERYL JAMIS LEANED BACK in her Italian leather chair and gazed out her corner office window, watching glints from the setting sun strike the Mersey River. In just a few Cmoments, she would meet with Marcus Addison, her boss, and she did not know what to do. Should she resign? Should she force the company’s hand by issuing some grand ultimatum? Or should she leave it all be for now and assume some opportunity might arise down the road that would let her spend more time with her daughter, Emma? After all, she still loved her job. At least she would finally get some clarity about the promo- tion Marcus had mentioned several times. Then she would know what her options were. Her stomach knotted as she thought about this past weekend, when she had narrowly averted another child care crisis. Frauke, Emma’s beloved German au pair, was called to Hamburg sud- denly because of an illness in the family. Fortunately, Cheryl hadn’t had any urgent work commitments over that weekend, and since her husband, John, was traveling, she and Emma had spent an enjoyable couple of “girls’days” together.

HBR’s cases, which are fictional, present common managerial dilemmas

Daniel Vasconcellos and offer concrete solutions from experts.

hbr.org | February 2007 | Harvard Business Review 57 HBR CASE STUDY | Off-Ramp – or Dead End?

“Mummy, I wish you didn’t work,” The marriage was a happy one. Six months later, she asked Marcus if Emma had sighed. “We could be to- Cheryl’s ambition, ideas, energy,and en- she could reduce her hours. gether all the time.” thusiasm were just what the market- “I’m sure you think it is rather late to Cheryl had stroked Emma’s soft hair ing department needed. After one of bring this up. Emma is already seven,” tenderly.“I need to work, darling. Some- her television spots – featuring a sexy Cheryl told Marcus. day you’ll understand.” young woman riding bareback in her Marcus nodded, his eyes gleaming The experience had made Cheryl re- new Smitty jeans – won a coveted Olie sympathetically.“I don’t how you man- alize how much she missed her little award, a beaming Marcus had presented age. I couldn’t work so hard without my girl. When Monday morning came, she her with a bottle of champagne from wife’s support.” Cheryl smiled ruefully. True, John hadn’t been much help at home, but Cheryl enjoyed her new responsibilities at Copro, but Frauke was a champ, and Emma got on magnificently with her.“It’s not that it had been horrible at times to cope with having a young I can’t manage, Marcus. And maybe I child when both she and John worked. should have gone part-time when she was smaller, but I wasn’t interested then. Now that she’s getting a little vaguely resented leaving Emma in the Derek Lee, the CEO.“Keep up the great older, she seems to need my help company of her grumbling Gran, who work, Cheryl!”the note had said. Cheryl more,”Cheryl said. had come up from London to take care kept the flattering message to herself Marcus tugged off his glasses and of her until Frauke returned. but made sure she shared the credit – wiped them with the end of his tie, a Cheryl sighed and swiveled the and the champagne – with her team. nervous gesture that did not bode well chair back and forth with her feet. Ah Cheryl had been promoted to mar- for Cheryl’s cause. “Cheryl, I’m not well, she thought, everything would keting director while pregnant with going to tell you no,”he said. “You can get back on track soon. Or not. A pity Emma. At the time, Marcus had told make up your own mind, of course. But that the child care panic hadn’t brought her that the company was counting on I’m advising you against it, not just as her any closer to a decision about her her to come back to work, so Cheryl your boss but as a friend.” future. made sure she never missed a beat. Marcus patted her hand earnestly. She started to think back to how she She returned full-time when her “You’ll just end up working the same had come to this pass after spending daughter was just three months old, hours for less pay, you know. Your job is the better part of a decade at a com- leaving Emma in the care of her first a big, responsible one. It just can’t be pany she was so passionate about. nanny – the one who later left Emma done in four days, let alone three.” sitting in the grocery cart while she “Some of the team might benefit packed the bags into the boot of the car, from additional challenges,” Cheryl The Juggler then almost drove off without her. started, but Marcus leaned forward and Cheryl was the top account manager Cheryl enjoyed her new responsibili- cut her off. in a boutique advertising agency when ties at Copro, and her already solid rep- “Cheryl, you’ve built a great team Copro courted and won her. A re- utation grew even stronger. But it had over the past few years. Now you’re spected casual-wear retailer and the been horrible at times to cope with hav- ready to focus on more strategic issues, sole marketer of the sought-after Smitty ing a young child when both she and which will be key for your next step up jeans brand, Copro hired Cheryl to run John worked. A year and a half ago, the ladder.” an in-house marketing team and help when John was on a long business trip, Cheryl blinked in surprise. She launch a new clothing line to appeal Emma picked up a cold at school that hadn’t considered a promotion. It was to younger, hipper customers. For her developed into virulent bronchitis–and flattering, of course, but it wasn’t on part, Cheryl was glad to get away from Frauke got sick, too. For ten days, her agenda right now – or was it? “No,” the dizziness of agency work, and she Cheryl fed them both chicken soup, she told herself firmly. She’d consider welcomed the status that came with cleaned the vaporizer, and tried to work it only when Emma went off to univer- heading up a group of talented design- despite their coughing fits. She wasn’t sity.But since Marcus was talking about ers, writers, and media specialists. terribly successful. a promotion, she might try another ap- proach and ask for flextime. Sharman Esarey ([email protected]) is the Vienna-based editor of a handbook on “In the past, the company has criminal justice for the United Nations Office on Drugs and Crime. Arno Haslberger (arno_ been…” she paused, searching for the [email protected]) teaches human resource management at Webster University Vienna right word, “reluctant to consider more in Austria and at Ashridge Business School in London. flexibility in my current hours. Marcus,

58 Harvard Business Review | February 2007 | hbr.org I wonder if that’s something we might them.” She made it a statement, not a on Wednesday afternoon either, but if revisit.” question. Derek or Marcus decided to stop in, Marcus raised his eyebrows and Marcus pursed his lips and tapped that was usually the time they picked. tipped back his chair. Cheryl thought his fingers on the desktop. “You spend She sighed. Perhaps it was best to drop some of the tension in the air seeped quite a bit of time guiding your team. that one. She lowered her eyes from the away. “What do you have in mind?” he Do you think a schedule like that is view over Marcus’s shoulder to catch asked. manageable?” his gaze.“Wednesdays are probably out, Marcus’s glasses reflected the sun- Cheryl mulled the question over. but I think I could arrange Thursdays. light off the river, and Cheryl couldn’t “Tuesdays should be OK. That’s the af- I’ve been holding group meetings then, see his eyes. She wondered how far to ternoon everyone else on the team but I could change them to Wednesday push. “Emma gets home from school meets with their counterparts in sales mornings; it’d be more midweek and by 3:00 on most days. I could come in and production.” She paused. She had might even give us an opportunity to earlier and leave earlier on a few of no regularly scheduled appointments take stock as well as to move forward.”

hbr.org | February 2007 | Harvard Business Review 59 HBR CASE STUDY | Off-Ramp – or Dead End?

“That’s probably doable,” Marcus even possible to be a topflight executive would have some thoughts for her. said, a smile growing. “I can see I’m and a good mother? She’d get right down there after speak- going to have to plan for some Tuesday Cheryl sighed. It wouldn’t help to be- ing to Marcus. and Thursday breakfast meetings.” rate herself further. She caught a few “Well done, Cheryl,” Marcus said, a He gave her a light clap on the shoul- strands of wayward hair and fastened big smile on his tanned face.“It was an der. Cheryl stood, nodded, and left the them back with a hairpin. Maybe she excellent presentation and a good cam- room. The plan wasn’t everything she was overreacting. She had a free week- paign proposal. It’s fresh and original. wanted, but it was a start. end coming up. She could take Emma I’m confident it’ll be taken up when the to Alton Towers Theme Park for a cou- board meets tomorrow.” ple of days. Yes, that was just the thing. “Thanks, Marcus,” she said. “I was No Time for Tears She’d call and book a hotel room after pleased with its reception.” It took only a few months to realize that the presentation. And perhaps HR “Derek was really impressed. It’s the small shift in hours wasn’t enough. would have some ideas about what she your ticket into the upper echelons.” Emma rang Cheryl on her mobile could do longer term. Cheryl sat up straighter; it was the minutes before a key executive meeting second time Marcus had mentioned where she was due to give an important a promotion in recent months. She marketing presentation. At the sound She stared at her reflection. grinned at him. “Do you have some- of Emma’s teary voice, Cheryl shoved thing particular up your sleeve?” Was it even possible to be down her own anxiety and tried to keep He waved a hand.“Nothing concrete, her voice steady. a topflight executive and a but there are some possibilities that “What is it, honey? What’s the might be in the frame.” good mother? matter?” Cheryl found herself sorting through “Mum, you promised you’d come.” the various VP functions that might be “Come?” Cheryl echoed, wracking within her reach. Such a position would her brains to remember what she must Feeling somewhat better, Cheryl be a real coup. She’d be one of a hand- have forgotten. returned to the conference room. The ful of women at that level. Despite Mar- “My play, at lunchtime. You told me assembled executives were seated. It cus’s airy dismissal, she knew him well you would be there.” was her turn to speak. She forced her- enough to believe there was something Cheryl’s stomach roiled. She cursed self to concentrate and strode to the in the works. silently. lectern. With a bit of surprise, Cheryl realized She scanned the conference room, The presentation passed in a blur. the prospect genuinely excited her. She which was rapidly filling. The execu- Applause followed her closing sum- shook her head ruefully. If she couldn’t tives were milling about, and there mary, and she looked up, relieved. She sort out her own values and objectives, were only a few minutes left before the unplugged her computer, tucked away she’d never make up her mind about meeting started. There was absolutely the laser pointer, and packed up the what to do. no way she could leave now. “Honey, rest of her belongings. She sucked in It was as if Marcus were reading her I’m so sorry. I forgot. I feel terrible, but her breath when she saw Derek ap- thoughts.“It’s a good thing you decided I don’t think I can make it there now.” proaching.“Good stuff, Cheryl,” he against the part-time option a couple “Never mind, Mum. You already said, smiling broadly. She thanked him months ago.” missed it.”Emma rang off. with a grin and thought, “Just call me Cheryl stiffened. “It is? Why do you “I’ll make it up to you,”Cheryl whis- Superwoman.” say that?” pered into the dead phone. If she had Back in her office, Cheryl booked He must have caught the flicker in a bit more courage, she would just stop the hotel for the Alton Towers week- her eye. “You know how things are, negotiating with Copro and take a end, which helped her stop chastising Cheryl. The company has been flexible stand. She thought about her old herself. She basked in Derek’s praise with your working hours. But look friend Nancy, who had quit the ad for a few moments before getting back around. There aren’t many part-timers agency and was working solo. Why not to work. at the top of this company or any do the same? The next day, Marcus called her in. other. If a promotion is important to She decided she could steal a mo- Cheryl felt good, still buoyed up by you, then that isn’t the road.” Marcus ment to recover unobserved. In the Derek’s comments and relieved that kicked back. “As it is, you’re very well washroom, she dragged in a deep Emma was happy, too. She had babbled positioned.” breath and stared at her reflection. She away over dinner about the ferocious Cheryl remembered Emma’s sobs didn’t look like she’d just stepped into Congo River Rapids ride at Alton Tow- over the phone yesterday and won- her own Bad Mother nightmare. Was it ers. And Cheryl was optimistic that HR dered how well positioned she could

60 Harvard Business Review | February 2007 | hbr.org

HBR CASE STUDY | Off-Ramp – or Dead End?

possibly be. HR, she repeated to herself, steep upward climb. The higher her po- they’re older now.” She sighed. “It’s would have some advice. sition, the more flexibility she might be more common than you think; I hear a Suddenly, Marcus whacked both able to give herself. lot of stories. I can give you a coach’s hands on his desk and stood. “Listen, name if you’d like.” I’ve got a great idea. I don’t know why I Cheryl took the number, but she didn’t think of it sooner – it’s just the A Middle Ground? didn’t dial it. thing to give you some exposure and a “Cheryl, from my perspective, a man- chance to develop. I was going to go my- ager at your level needs high visibility,” self, but, now that I think about it, it Deb Roth, the director of HR, said. She The Moment of Truth would be perfect for you.” shook her head. “That means being in Cheryl looked at the Mersey outside Smiling at the boyish grin on Mar- the office, not working part-time or her office window and realized the sun cus’s face, Cheryl asked, “Whatever are from home. Especially if you want a had set. The sky was streaked with pinks you talking about?” promotion, which you tell me might be and oranges. She shoved herself out “Why, it’s that trip to Boulder I was in the offing.” of her chair and strode to Marcus’s telling you about the other day. We “Deb, I don’t want a promotion to office. It was time to find out what high- need to develop our business in the the exclusion of all else. I’m trying powered job she was in line for. Then United States. Copro is setting up a task to find a way to bring greater balance to she could pin down her options – and force there next weekend. You can go my life and spend some more time with make a choice. and take my place.” my daughter. And now I’ve accepted a When Marcus opened the door, he Cheryl’s heart thudded painfully in trip to Boulder that wasn’t essential and was frowning.“I’m glad you’re here. We her chest. Next weekend was her date conflicts with plans I’d made with her.” need to talk.” with Emma at Alton Towers. “You know, it occurs to me that we Cheryl raised her brows at him as he “Is it a must?” do have several women who are doing waved her to a chair. “Do you have another commitment?” some unusual job shares,”Deb offered. “It seems there’s a board-level discus- sion about some of our positions, a strategy debate if you will.”He cleared Her capital with the company was on a steep upward his throat.“In any case, that promotion we expected to come through for you is climb.The higher her position, the more flexibility she off the table. Not permanently, mind might be able to give herself. you, but for the time being.” “What does the ‘time being’ mean, Marcus?” “Well, I did have some plans,”Cheryl “I don’t think they are on the same level “I’m not sure, Cheryl. Listen, I’m said. She cleared her throat to buy time. as you, but I could look into it–or, alter- really sorry about this. I know you’ve “I suppose I could rearrange things.” natively, I could talk to senior manage- been coping with a lot and considering “The exposure would be fantastic for ment on your behalf. Maybe there is your next moves. Please, just don’t do you.”Marcus fastened his gaze on hers. some middle ground that none of us anything rash.” “It’s a great opportunity – if you think have considered yet.” “Rash!” Cheryl thought, laughter you can manage it, of course. If not, I “Speaking to senior management burbling in her throat. She’d been any- can still go.” might put my promotion at risk.” thing but rash. An idea seized her and Cheryl forced a smile to her face. “Not necessarily. The senior team is she narrowed her eyes on her boss. Why could she never say no? The word committed to meeting the staff’s needs, “Marcus, are you sure this doesn’t have was just two letters long; it couldn’t where possible. They’ll listen, though of to do with my repeated requests for be that hard to push past her lips. course I can’t promise anything.” Deb part-time work or telecommuting?” “Well, if you think I’d get a lot out of tapped her pen on the table between “No, of course it doesn’t. I know it, I’ll do it.” them. “It would help if you could get a Derek thinks highly of you, and I’m sure Marcus smiled. “Great! That’s just better handle on what you want. I used it’s just a matter of time. We value you great. You won’t regret it.” an executive coach when I was debating too much to lose you.” Cheryl wasn’t so sure. She thought whether to leave the company some Cheryl frowned. She needed to make she might be regretting it already. She years ago.” a decision. Now. had no idea what she would say to Cheryl shot her a look. “You consid- Emma, and she would have to resched- ered leaving, too, did you?” Should Cheryl stick it out or leave? ule the Alton Towers weekend. At least Deb nodded. “Of course. It’s tough, I Four commentators offer expert advice her capital with the company was on a know. I have three kids of my own, but beginning on page 64.

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heryl Jamis’s frustration is understand- Cheryl should take a few days off and get C able. She’s running up against the reality a clear-eyed look at the situation. As a start, of the “second shift” issue identified by Arlie she should try to see things from her boss’s Russell Hochschild. Women still tend to shoul- perspective. Marcus may be caring and sym- der the majority of second-shift domestic pres- pathetic, but his focus is on what’s best for sures. Combine these with glass ceiling is- the business, not what’s best for Emma. He sues – broken career promises, entrenched has the support of a wife at home; he can’t stereotypes, and roadblocks to the top – and be expected to fully understand Cheryl’s situ- many female managers reach a tipping point. ation or make decisions for her. His job, as They start to consider just how high a price Cheryl’s boss, is to see that she manages Monica McGrath (monicam2@ they are paying for their ambitions. In their an- her team and contributes to the bottom line, wharton.upenn.edu) is an ad- noyance, they often just quit. period. junct assistant professor of That said, Cheryl is abysmally unprepared When she returns to work, Cheryl should management at the University for a spontaneous discussion with Marcus present Marcus with a firm business case for of Pennsylvania’s Wharton Addison. Instead of thinking strategically, she’s flexible hours. After reminding Marcus that she School in Philadelphia. being a victim and expecting her boss and her is a skilled, ambitious, competent, and proven company to solve her problems for her. This executive who happens to also be a mom, she is at best naive and at worst dangerous, for it should set the terms of the contract. For exam- makes Marcus wonder if she’s really as com- ple, she should say that she will leave early a petent as she appears. few days a week and telecommute on Fridays. Unfortunately, taking what I call a “step out,” She should concede that what she is asking for or what Sylvia Ann Hewlett calls a career “off- is different from the norm but that there’s no ramp,” would be a big mistake for Cheryl. Ten reason not to try. She should suggest keeping years from now, when Emma is off to college, to the flexible schedule for a set period of Cheryl would find it very difficult, if not impos- time – say, until her next performance re- sible, to regain her career traction. As Hewlett view – and then reevaluate it. noted in her March 2005 HBR article, only She also needs to give Marcus some confi- 40% of women who leave their careers are dence that the risk will pay off. She should

Combine second-shift domestic pressures with glass ceiling issues – broken career promises, entrenched stereotypes, and roadblocks to the top – and many female managers reach a tipping point.

able to return to full-time, professional jobs. present possible benefits for Marcus to con- And if Cheryl thinks the solution is to start her sider and hammer out specific goals and mile- own business, she should remember that al- stones that she will commit to reaching. Given most half of all new businesses fail within the her good relationship with Marcus and her first year. value to the company, the odds are that she Assuming Cheryl decides to stay on the job, will get what she’s asking for. she must handle her conflicting priorities in a The onus will then be on Cheryl to meet–or, way that works both for her and her company. better yet, exceed–her goals. By doing so, she If Cheryl is to be promoted, she must reject the will have convinced Marcus, HR, and the CEO ridiculous premise that “It’s so hard to say no.” that she is worthy of the promotion. She will After all, she’s already saying no to her prom- also have shown management that it’s pos- ise to herself about Emma. It’s time for her to sible for executives to run Copro and have stand up for herself and solve this problem healthy and whole personal lives. And she will with the same kind of energy and optimism prove that women like her are vital to the suc-

she would bring to any corporate roadblock. cess of the business. Wray Wendy

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powerful woman once told me that a If she wants her business to thrive, she should A smart, ambitious woman of childbearing be prepared to burn the midnight oil and pos- age has three choices. Choice number one is sibly work harder than she’s doing now. Start- to forgo motherhood, follow her dream, and at- ing her business will take time, and as it grows, tain a lofty position; in so doing, she will always so will the demands. She still won’t make wonder what life would have been like had she every school play, and she will have far less had children. Choice number two is to skip a time for herself. career, become a mother, and always wonder Whether or not she decides to strike out on what she might have attained in the business her own, I’d advise Cheryl to build more layers world. Choice number three is to do a half- of support into her life. In addition to the au baked job of both. pair, she should make sure that someone Rebecca Matthias (rebecca@ I think there’s a fourth choice, one to which (whether a relative or a backup babysitter) can motherswork.com) is a co- Cheryl has only given passing thought. If help with child care at a moment’s notice if founder and the president and Copro can’t give her what she wants, then she Frauke is unavailable. COO of Mothers Work, a can start her own firm. If Cheryl chooses to work for herself, then Philadelphia-based designer I was pregnant with my first child when I it’s particularly crucial for her to have the full and retailer of maternity wear. started my company back in 1982. I was also support of her husband, John. It sounds as if

Self-employment is Cheryl’s ticket. Because she is goal driven and disciplined, she meets two of the most critical criteria for entrepreneurial success.

pregnant with the idea of wanting to run a suc- John has left domestic operations to Cheryl cessful maternity wear business. I’d certainly while he goes about pursuing his own career. heard the dire statistics about start-up failures, He will have to be willing to eat more takeout but I also knew that running my own show was dinners. He will have to be understanding the only way to both feel wholly satisfied in my when Cheryl dedicates some of her nights work and achieve the flexibility I craved. and weekends to her business instead of to Cheryl has conflicting desires. She wants him. But, most important, he will need to be to be a top manager, but, even more, she Cheryl’s source of encouragement when her wants to spend time with her daughter. Self- business goes through its ups and downs. If employment is her ticket. Because she is goal he’s willing to do these things, terrific. If not, driven and disciplined, she also meets two of then she should not consider starting her own the most critical criteria for entrepreneurial business. success. Assuming that she and her husband Finally, Cheryl should understand that if she are willing to take a cut in her income, she can does leave Copro to be an entrepreneur, put her self-discipline to work growing her there’s no looking back. It’s very unlikely that own business. She can calibrate her success she will be able to get a strong foothold inside over time by working on a project-by-project a corporation again. And once she injects her basis – possibly for Copro, which will undoubt- money, energy, and pride into starting and run- edly be glad to retain her as a contractor–while ning her own business, she’ll have to go for Emma is young. Later on, when Emma is at broke. The wins and losses will be hers alone, university, she can up the ante, devote more and her life will be a roller-coaster ride. But if time and energy to her clients, and really grow her business does take off, she will feel more her firm. pride and satisfaction in her work than she Cheryl also needs to understand that flexi- could ever have imagined possible within the ble hours don’t necessarily mean fewer hours. walls of Copro.

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enior-level management positions are, by Marcus needs to have a heart-to-heart talk S their very nature, intensive, demanding, with Cheryl. He can remind her how valuable and full-time. Frankly, Cheryl isn’t yet displaying she is to the company and say he is willing to the most important qualities needed in a se- support her campaign for flextime if it can be a nior manager: decisiveness, a knack for proac- win-win strategy. At the same time, he should tively identifying and solving problems, an abil- candidly tell her that he’s troubled by her inde- ity to prioritize, and courage. While Marcus has cisiveness and lack of strategic thinking. Copro empathy for Cheryl’s situation, her actions are can certainly work out a halfway bargain, but inconsistent with what it takes to be a senior he should insist that she demonstrate her manager at a global company such as Copro. It value by taking full responsibility for figuring Robert J. Maricich (rjm@ is one thing to work out a flextime position out her situation. centuryfurniture.com) is the with Cheryl at her present level of responsibil- Assuming that Cheryl can come back with CEO of Century Furniture In- ity; it is quite another to seriously consider her a workable plan, she and Marcus should dustries, headquartered in as a candidate for senior management. These move forward and see how it goes. Cheryl Hickory, North Carolina. are two different playing fields, and only Cheryl has earned the opportunity to prove she can can decide which one she wants to be on. handle the assignment with less-demanding It bothers me that Cheryl doesn’t frame her time constraints. When she feels ready, she request in an assertive, confident way or offer can come back full-time. At that point, pro- Marcus a well thought-out, detailed plan ex- vided she begins to show better leadership, plaining how her flextime schedule will work they can choose to reevaluate her options.

Cheryl isn’t displaying the most important qualities needed in a senior manager: decisiveness, a knack for proactively identifying and solving problems, an ability to prioritize, and courage.

and how it will benefit the company. She’s al- Should she decide that she wants a higher ready had a year to come up with an alternative position, Cheryl will need to prove that she schedule and show Marcus that she could can do everything demanded of an executive. make it work, but instead of demonstrating Marcus will need to continue to coach her confidence, she waffles and fumbles. along, encouraging her to take responsibility Cheryl also seems to lack a sense of clear and demonstrate courage, and to meet with priorities. A capable executive with children the executive coach recommended by HR. can always figure out ways to work an impor- Perhaps he could also pair her with another tant personal event such as a school play into senior manager who has successfully navi- his or her schedule. And by failing to look Mar- gated a similar career crossroad. cus in the eye and say, “I’m sorry, but I have Sometimes, selling your boss on what you another commitment” when he offers her the want is a matter of framing. Cheryl’s formal, Boulder assignment, she is displaying a lack of written plan should detail how she will over- courage. come the problems – both real and per- Initially, Marcus handles the situation well ceived – that a flextime schedule can present. and deserves credit for being a good manager; Its overarching theme? “How My Plan Will in fact, he’s everything a mentor should be. Better Serve Copro.” Finally, she and Marcus He properly sees Cheryl as an investment, should work together to establish clear param- coaches her, and gives her all kinds of opportu- eters for what will constitute success. That nities to win. He recognizes Cheryl’s skills and way, both of them will know whether Cheryl’s makes it clear that he wants her to accom- new schedule is allowing her to meet com- plish her personal goals. He even lets her pany goals – or whether it’s time for her to showcase her talents in front of the CEO. move on.

68 Harvard Business Review | February 2007 | hbr.org heryl is very fortunate. She has a good ner after the birth of my third daughter, coinci- C job with a good company, a supportive dentally named Emma. boss, and a CEO who thinks highly of her. Her My experience taught me that while women biggest issue is not with her company but with should never feel guilty about asking for what her daughter. they want, it’s naive to think that employers Cheryl needs to stop feeling guilty about can or should bend the rules for them. More Emma and start helping her daughter under- and more companies are building flextime stand that the world of adult work is the world into their working arrangements, and this is of reality. Cheryl is clearly a well-educated to be commended; at the same time, global achiever who really enjoys the satisfaction of firms require that their senior women be able Evelyne Sevin (evelyne.sevin being in harness and thrives on making her to travel, to work in different time zones, and to @ezi.net) is a partner in the goals. She’s earned a place in the professional do what it takes to make the firm successful. Paris office of Egon Zehnder world. She should be proud of this. It’s nothing Women can bring their own style to work, but International, a global executive to apologize for to anyone–certainly not to her the commitment of time and energy remains search firm. She is in charge of daughter. In fact, her open display of ambiva- the same for every senior person, regardless women’s initiatives for the firm and is a member of the board lence could be sending Emma all the wrong of gender. of the Women’s Forum for the messages. Equally important for corporate evolution are Economy and Society, also in Certainly, Cheryl’s conundrum is under- two questions almost never asked: “What is Paris. standable. She’s worked her whole life to get a good father?” and “How is it possible to be a where she is. At the same time, she loves her good father and a topflight executive as well?” daughter and regrets the time that she can’t I find it fascinating that while 76% of male spend with her. As is still unfortunately the CEOs have a nonworking spouse, only 27% of case in most working families, Cheryl shoul- female CEOs do. ders more of the child care burden. Most com- Assuming Cheryl wants to keep her job and panies have not evolved to the point where get promoted, she should stop feeling guilty they can help their most talented women deal with the very visceral, difficult tension of trying Cheryl’s biggest issue is not with to balance work and family. I navigated this tension by going to work her company but with her daughter. part-time and putting my ambitions temporar- She needs to stop feeling guilty ily on hold. When I came to Egon Zehnder in 1991, I had two children – one a year-old baby. about Emma and start helping her At the time, there weren’t many women in the understand that the world of adult higher echelons, and they were thrilled to have me as a consultant. Like Cheryl, I asked to work is the world of reality. work part-time because I needed to care for my children, and the firm accommodated my about Emma and start managing her daugh- wishes. But there was no such thing as a part- ter’s expectations better. Difficult as it may be time partner. to be separate from her daughter now, Cheryl The chairman and the CEO, as well as my of- should take consolation from the thought that, fice leader, wanted very much to help me, but though she cannot “have it all” at the same the firm’s culture required that those in top po- time, she can “have it all in the end.” When sitions be fully committed. We made a deal: If she’s older, Emma will understand that being I came to work full-time, I would be made part- a good role model is a big part of being a ner. I continued to work part-time on impor- good mother. tant projects, including founding the largest women’s professional network in France, Reprint R0702B which helped me stay in touch, build my own Reprint Case only R0702X network, and keep my skills sharp. I came back Reprint Commentary only R0702Z to work full-time to be able to become a part- To order, see page 158.

hbr.org | February 2007 | Harvard Business Review 69 Listen closely: you can hear the sound of a A people-ready business runs on Microsoft software. What helps a people-ready business run like a well-oiled machine? Software that’s easy to learn and use, so people can get up and running quickly. Software that integrates seamlessly, so information and productivity don’t get stuck between departments. Specifically: software like Microsoft Dynamics,TM working in tandem with the 2007 Microsoft® Office system. Harmony. What a glorious thing. Microsoft. Software for the people-ready business.SM microsoft.com/peopleready

business humming. The cumulative impact of the allocation of resources by managers at any level has more real-world effect on strategy than any plans developed at headquarters.

How Managers’ Everyday Decisions Create or Destroy Your Company’s Strategy

by Joseph L. Bower and Clark G. Gilbert

UR FAVORITE STORY about how strategy really gets made comes from a visit one of us – the lead au- thor – made to a large company’s headquarters. The Ocompany controller was concerned and confused about a capital project proposal he’d recently received from one of the company’s most important divisions: a request for a large chimney. Just a chimney. Curious, the controller flew out to visit the division and discovered that division managers had built a whole plant (minus the chimney) using work orders that did not require corporate approval. The chimney was the only portion of the plant that could not be broken down into small enough chunks to escape corporate scrutiny. The division managers, it seemed, were eager to get on with

building a new business and had despaired of getting corporate Van Ryn Aude

72 Harvard Business Review | February 2007 | hbr.org

How Managers’ Everyday Decisions Create – or Destroy –Your Company’s Strategy

approval within a reasonable time frame. Convinced that the many’s state automotive directorate to lock up all of that new capacity was necessary, managers had found a way to country’s automotive manufacturing capacity and to intro- build the plant but still needed the chimney. In the end, the duce an East German car in 1994. division managers were proven right about the need for new A corporate view of strategy making in response to the tec- capacity and also about the need for speed. The chimney tonic crash of the Berlin Wall would have Hughes’s staff was, ultimately, approved. But who (the controller won- gather information to be relayed to corporate staff, who dered) was running the company? would then develop a plan that fit GM’s overseas strategy.(At We’ve spent many years, between us, trying to answer that the time, this strategy was to make cars in large, modern, fo- question. In this case, the divisional managers seemed to be cused factories in low-wage countries such as Spain). The calling the shots, at least for their own division. But in gen- plan would be debated and then possibly approved by the eral, the answer is more complicated: Senior executives, divi- board of directors. The process might take a year–especially sional managers, and operational managers all play a role in since very little concrete data was available on the East Ger- deciding which opportunities a company will pursue and man market, and East Germany was still a sovereign country which it will pass by (a reasonable definition of “strategy” in with its own laws and currency guarded by 400,000 Soviet the real world). So, for that matter, do customers and the cap- soldiers. ital markets. What we have found in one research study after Instead, Hughes did as an energetic, entreprenurial man- another is that how business really gets done has little con- ager running a large subsidiary in a foreign country would nection to the strategy developed at corporate headquarters. do: He worked vigorously to secure a place for Opel in the

At the same time that corporate staff is beginning to roll out initiatives, operating managers invariably are already acting in ways that either undercut or enhance them.

Rather, strategy is crafted, step by step, as managers at all lev- East German market, in ways that did not fit with corporate els of a company – be it a small firm or a large multina- strategy and would not have been approved by corporate tional – commit resources to policies, programs, people, and planners. Rather than waiting to gather data, he created new facilities. Because this is true, senior management might con- facts. Acting on an introduction from an Opel union member sider focusing less attention on thinking through the com- to the management team of one of the directorate’s factories, pany’s formal strategy and more attention on the processes Hughes negotiated the right to build new capacity in East by which the company allocates resources. Top executives Germany. He allowed the local factory leader to publicize will never be in a position to call all of the resource-allocation the deal, induced then-chancellor Helmut Kohl to subsi- shots – nor should they be. But they should learn to identify, dize the new plant, and drew on talents from other operat- and influence, the managers at all levels who can forever ing divisions of GM to ensure that the facility would be state alter a company’s future. of the art. GM Europe and corporate headquarters were kept informed, but local decisions drove a steady series of commitments. How Strategy Gets Made, and Why As was the case in the chimney story, corporate headquar- A somewhat longer case story will help illuminate the con- ters was effectively preempted by local management doing nection between resource allocation and corporate strategy. what it thought best for the corporation. Despite the appar- It involves Lou Hughes, who took over as chairman of the ex- ent contradiction between Opel’s plans and corporate strat- ecutive board of Opel, General Motors’ large European sub- egy, Hughes proposed the commitment of resources, and his sidiary, in April 1989. Just seven months later, in November proposal was approved first by the European Strategy Board 1989, the Berlin Wall came down, and shortly thereafter, and then by the corporation. Top management (over corpo- Volkswagen, Germany’s number one automobile producer rate staff’s objections) endorsed Lou Hughes’s bottom-up ac- to Opel’s number two, announced a deal with East Ger- tion–and his vision for the future–because he was the local

Joseph L. Bower ([email protected]) is the Donald K. David Professor of Business Administration at Harvard Business School in Boston. Clark G. Gilbert ([email protected]), a former Harvard Business School professor, is an administrator at Brigham Young University, Idaho, in Rexburg. This article is adapted from their 2006 book, From Resource Allocation to Strategy (Oxford University Press).

74 Harvard Business Review | February 2007 | hbr.org manager, because he had a good track record, and because he was thought to have good judgment. It was more an endorsement of Hughes than of his plan per se. Does the Opel case demonstrate how resource commitments shape strategy, or is it just an example of an organization out of control? Traditionally minded strategy plan- ners may assume the latter. In fact, the Opel story highlights what we have found to be near universal as- pects of the way strategic commit- ments get made. These fall into two categories. Organizational structure. The fact that, at any company, responsibility is divided up among various indi- viduals and units has vital conse- quences for how strategy gets made. Knowledge is dispersed. For any given strategic question (such as how Opel should enter the East German market), relevant expertise resides in scattered, sometimes un- expected parts of a corporation. When the wall tumbled, managers in the West understood almost nothing about the East German market. The first GM managers to develop any useful knowledge, not surprisingly, were the ones on the spot: Opel’s marketing staff. Mean- while, the GM employees with deep knowledge about lean manu- facturing techniques, which would be needed for the new venture, were in California and tral to how strategy gets made in practice. All the managers Canada. Those with the deepest knowledge of overseas strat- who would need to cooperate to make an East German ini- egy and profitability overall were in Detroit, Michigan – but tiative possible had different sets of responsibilities for re- European strategy was developed in Zurich, Switzerland. sources and outcomes (like specific levels of sales by model Power is dispersed. Lou Hughes’s formal authority was lim- and in total) that shaped their perspectives about what suc- ited. He could fund studies and negotiate with East German cess in a new, eastern European market would look like and counterparts, but he could not command his manufacturing what it would be possible to achieve. They all considered a director to work with California, nor insist that California different set of facts, usually those most pertinent to success work with Opel. The right to approve a plant in a new coun- in their individual operating roles. Hughes’s triumph was to try lay with the board of GM. For permission to present to convince a group of managers with limited authority that the board, Hughes would need to go through GM Europe; in they could deliver on a radical idea. addition, financial and other corporate staff could (and Decision-making processes. Just as important, the way de- would) provide evaluations of their own. Nonetheless, cisions are made throughout an organization has vital conse- Hughes’s negotiations with the local factory manager and quences for strategy. Helmut Kohl could virtually commit GM. Processes span multiple levels; activities proceed on paral- Roles determine perspectives. Miles’s Law – the notion lel, independent tracks. The notion of a top-down strategic that where you stand is a function of where you sit – is cen- process depends upon central control of all steps in that

hbr.org | February 2007 | Harvard Business Review 75 How Managers’ Everyday Decisions Create – or Destroy –Your Company’s Strategy

process. That level of control almost never exists in a large or- its total sales. Intel’s lower-level managers had already exited ganization – quite the reverse: At the same time that corpo- the business. What Intel hadn’t done was shut down the flow rate staff is beginning to plan for and roll out initiatives, op- of research funding into memory (which was still eating up erating managers invariably are already acting in ways that one-third of all research expenditures). Nor had the com- either undercut or enhance them. Hughes was developing pany announced its exit to the outside world. a strong relationship with Helmut Kohl and obtaining fund- Because knowledge and power span organizational levels, ing for a new East German plant even as GM’s corporate managers at each level are likely to have an impact on strat- staff was looking over sales forecasts and planning GM’s next egy. External forces can also have a strong effect on how re- moves in Europe: focused factories in countries that proba- sources are allocated, and, in turn, how strategy evolves. The bly would not include East Germany. most powerful of these forces are the company’s best cus- Processes are iterative. Crafting strategy is an iterative, tomers and the capital markets. real-time process; commitments must be made, then either General managers. Strategic decisions are critically af- revised or stepped up as new realities emerge. GM’s first fected not just by senior corporate managers, but also by commitment came when Hughes took part in a factory midlevel general managers, their teams, and the operating worker vote that committed the East German spin-out to managers who report to them. These intermediate-level gen- Opel; this public act made it hard for GM to back out, espe- eral managers run the fundamental processes that make cially as Hughes was already lobbying with Helmut Kohl multibusiness, multinational companies feasible. They are for subsidies. A second level of commitment was obtained general managers who report to other general managers. when GM funded a facility to assemble 10,000 cars, and Their jobs involve translating broad corporate objectives

Your managers’ judgment is more important than the actual numbers presented. This reality will kill your finance staff, because they are good at crunching numbers, not at gauging what managers understand.

those cars were presented to German consumers with mas- such as earnings and growth into specifics that operating sive publicity. Soon after, a third stage was reached when a managers can understand and execute on. They provide cor- major manufacturing facility was built. GM’s strategy for porate management with an integrated picture of what their East Germany was revised at each step along the way. How businesses can accomplish today and might achieve in the fu- the automaker’s European strategy developed after that ture by determining the package of plans, programs, and ac- would turn on events to come, particularly the movement of tivities that should drive the strategy for that business. currencies and labor costs and developments in GM leader- One of the most obvious ways that these managers in the ship assignments. middle affect strategy is through their decisions about which proposals to send upward for corporate review. One top ex- ecutive we interviewed communicated his surprised realiza- Who’s in Control? tion of this role: “One fascinating moment came as I met A leader can announce a strategy to become global, change with a key midlevel manager. I had mapped out on a piece of core technologies, or open new markets, but that strategy paper the resource allocation process and its effect on the in- will only be realized if it’s in line with the pattern of resource tended and emergent strategies. As we talked, this manager allocation decisions made at every level of the organization. proudly told me that he was the one who set the strategy, Another well-known business story – Intel’s exit from the not the CEO or board of directors. According to him, he memory business – illustrates this point. Legend has it that owned the resource allocation process because his boss, who Andy Grove and Gordon Moore were talking about what was president of the largest business unit, would not approve business Intel should be in. Grove asked Moore what they anything without his recommendation.” would do if Intel were a company that they had just acquired. Operational managers. Most strategy analysts ignore the When Moore answered, “Get out of memory,” Grove sug- role operating managers have on strategy outcomes, assum- gested that they do just that. It turned out, though, that ing that these managers are too tied to the operational re- Intel’s revenues from memory were by this time only 4% of quirements of the business to think strategically.Senior exec-

76 Harvard Business Review | February 2007 | hbr.org utives overlook the very real impact of operating managers toral students examined. BellSouth and U.S. West were two at their peril. For example, in 2000, Toyota launched the Baby Bells that formed when AT&T was broken up. Both Echo, a no-frills vehicle designed partly to protect Toyota were born with the same technology, patents, and planning from low-cost competition. But deep inside that organization models. Despite their similarities, the capital markets deter- sat salespeople in local retail operations. Because margins mined that U.S. West’s growth prospects were inferior to (and, more important, sales commissions) were higher on those of its sibling. In the face of the consequent pressure on other Toyota vehicles, customers were repeatedly steered to- earnings, U.S. West’s CEO chose to diversify by moving away ward higher-priced models. Even though the corporate office from regulated telephony and to set high earnings objec- placed a high priority on the new product, the day-to-day op- tives. To meet those objectives, the managers of the cellular erating decisions of the organization directed the realized business (the general managers in the middle) adopted a strategy of the firm elsewhere. strategy of skimming, that is, seeking high margins on the From the Toyota example, one might conclude that oper- low-volume top end of the market. ating managers (salespeople, in this case) constrain innova- Facing less-intense short-term pressure from the capital tion because they are not aligned with the strategy of the markets, BellSouth chose to treat cellular as an opportunity firm. However, operating managers can redirect and improve with earning potential equal to that of its wire line business strategy in very innovative ways. At Intel, the exit from mem- and with much better growth prospects. Managers pursued ory took place over time, because the managers in manufac- a strategy of broad market penetration. turing responded to a directive from finance: Allocate plant BellSouth’s and U.S. West’s strategic objectives were re- space so as to maximize gross margin per wafer square inch. flected in the performance measures that were set for the Memory and microprocessors used the same silicon wafers, two businesses. Despite similar early performance, the differ- so as competitive conditions worsened in memory, the rule ent measures led the two companies to reach very different took Intel right out of the business. conclusions about the cellular market. U.S. West was disap- Customers. Customer decisions can play a huge role in pointed by results that failed to reach the high financial tar- real strategy formation, particularly in businesses with a few gets it had set. BellSouth was pleased with the positive first very powerful customers. Companies that stay close to their steps and made further investments. U.S. West ultimately di- best customers give them a virtual veto on product develop- vested its business, while BellSouth became one of the lead- ment and distribution. By the mid-1990s, Tony Ridder at ing cellular providers. Knight Ridder recognized that the Internet was going to have a dramatic effect on his newspaper company.Accordingly,he redirected corporate strategy to focus on the Internet, pre- Manage It Anyway! sented annual reports that discussed plans for new media, If divisional, middle, and operating managers–as well as cus- and moved the headquarters from Miami to San Jose. De- tomers and capital markets–have such a powerful impact on spite these bold efforts to change the corporate strategy, the the resource allocation process and, in turn, on the realized realized strategy continued to be largely controlled by ex- strategy of the firm, what does that imply for the role of cor- isting advertising customers in the newspaper business. porate leaders? Is the process of strategy formation entirely Every day,sales reps had the choice of selling a $40,000 print out of their hands? Of course not. We believe that the com- display ad to their existing print customers or promoting plexity of the resource allocation process only increases the a $2,000 online ad that was unfamiliar, even uninteresting, need for leadership at the top. But senior leaders have to un- to these same advertisers. And every day, the sales reps made derstand what is happening and adjust their management the logical choice to sell traditional print ads. Despite the ex- styles accordingly.Here are six ways that senior managers can plosive growth in online advertising, Knight Ridder and direct the strategy of their firm by better understanding the other newspaper companies were largely unsuccessful at tap- resource allocation process. ping into this new and evolving revenue stream. Through Understand the people whose names are on the proposals their influence on the sales force, the print advertising cus- you read. When you read a proposal to commit scarce people tomers effectively captured the newspapers’ resource alloca- or capital, you should calibrate what you are reading against tion process and, in effect, its strategy. the track record of the executive who signed the document. Capital markets. Most observers understand that capital If the signing executive has a near-perfect record of propos- markets influence management performance. That they can als implemented, then you know that there is probably little dramatically reshape strategy is less well documented, but downside in what you are reading, but the upside may be equally true. Earnings pressure can cause a company to exit significantly underexploited. Requests for resources are a market too soon; a dip in stock price can cause a company based on stories about the future. Those stories may be to scramble to improve short-term performance. One of the summarized with numbers, but they represent judgments clearest cases of this phenomenon comes from a natural ex- about uncertain developments. Very often, your managers’ periment in the U.S. telephony market that one of our doc- judgment – and your capacity to judge their judgment! – is

hbr.org | February 2007 | Harvard Business Review 77 How Managers’ Everyday Decisions Create – or Destroy –Your Company’s Strategy

more important than the actual numbers presented. This reality will kill your finance staff, because they are good at crunching num- bers, not at gauging what managers understand and what they don’t. Recognize the strategic issue, and make sure it is addressed. Almost always, requests for re- sources require making two deci- sions: Should we support this busi- ness idea? and Is this proposal the right way to go about it? Most capital budgeting processes are set up to vet projects (in other words, they’re aimed at the second question, not the first). It is usually possible to carry out fairly rigorous quantita- tive analysis comparing the plan of action in a proposal with alterna- tives. It is important that this analy- sis be done–and it is often done ad nauseam. But our research shows that the first question, the business question, is more important and far more difficult to answer – and it is often ignored. It is easy to invest money in cost-saving projects that will earn precisely the returns fore- cast in businesses that are losing money overall. After the project, they just lose less. One of our stud- ies showed that companies and their industries poured new money into old technology at the same time that they were investing in fa- cilities based on new technology that made the first set of investments obsolete. Managing re- Opel plant in East Germany to trigger strategic discussions source allocation to build sound strategy requires that the that cross organizational perspectives. They bring together proposal evaluation process begin with the “should we?” managers with different kinds of knowledge to discuss the question. Should we put a plant in East Germany? In the end, evolution of strategy, not the details of a project proposal. you may decide to back managers rather than their logic, be- Andy Grove calls this “getting knowledge power and position cause you want to support them. But do it with your eyes power in the same room at the same time.” Top executives open and controls in place. will almost always have to convene that meeting and pay at- When a debate reflects fundamental differences about the tention to who is invited. They will also have to work hard to strategy, intervene. The “should we” question inevitably fo- create a collaborative environment. cuses on basic issues about how the company wants to com- Use operational managers to get work done across divi- pete. It almost always involves evaluating different views that sional lines. When top managers believe that the right way reflect the positions of the executives in question. Lou to serve a market will require two or more divisions to coop- Hughes thought that he could use a new East German facil- erate, they face an immediate problem. Divisional manag- ity to drive change at Opel’s main plant. Some at GM head- ers obsess about the prospects for their own businesses. A quarters thought it more important to continue expansion at bottom-up approach does not naturally foster cooperation low-cost sites in southern Europe and Latin America. Smart because these managers view the resource allocation pro- executives use resource allocation opportunities like a new cess as a way to protect their turf. (They also come at the

78 Harvard Business Review | February 2007 | hbr.org same strategy question from quite different perspectives – source allocation process. It is top management that has to Miles’s Law!) Because of this, executives need to reach down ask, “Is there a technology under development that looks to operational managers if they want divisions to cooperate. inferior or uncertain today but will undermine our business If freed from divisional measurement and compensation from beneath once it is properly developed?” Windows NT systems, operating talent can be engaged by the opportunity had this impact on UNIX applications, for example, as did to serve customers better. It won’t happen automatically, Internet applications on a host of industries. It takes a very but we have seen numerous cases in which cross-divisional well-informed paranoia to ask this question early enough teams that were assembled and supported by top leadership to keep a strong company in the lead. A decision to pursue have been able to work together, even when their divisional out-of-the-box ideas often requires a new box: a separate or- superiors resisted the project. For example, marketing ser- ganizational unit with a new location, milestone-type mea- vices giant WPP successfully created virtual companies, sures instead of annual budgets, and short reporting lines to made up of staff from various units, to focus on retail and the top. health care markets. While some division heads saw this as • • • an encroachment on their mandate in these areas, the op- The implication of these six recommendations is really erating managers reveled in their ability to collectively solve a meta-recommendation. Once you realize that resource al- client problems. Of course, the easiest way for a division head location decisions make your strategy, then you know you to undermine such a project is to deny it the right people. can’t rely on a system to manage the resource allocation

Division managers view the resource allocation process as a way to protect their turf. Executives need to reach down to operational managers if they want units to cooperate.

Top managers must make sure that the right questions are process. No planning or capital-budgeting procedure can asked and that the right people are made available to work substitute for the best leaders in the company making con- on those questions. sidered judgments about how to allocate resources. No sys- The leadership has to connect the dots. Understand that tem of incentives will align divisional objectives so that bottom-up resource allocation processes do not add up to a new opportunities will be studied with the corporate inter- corporate view. Top management may have to lay out the big est in mind. Because of its impact on strategy, the corpo- picture when more than one division is (or ought to be) in- rate senior management has to engage itself – selectively, volved in a strategy question. When bottom-up processes to be sure – in the debates that mark inflection points in the are at work, several problems can occur. Conflicting divi- process. sional perspectives tend to resolve themselves on the basis of This is where top-down process is vital. If you’re part of the which unit has the most power. Or, divisional managers leadership, you can’t delegate responsibility for your com- make compromises that share resources in ways that seem pany’s direction. At Intel and Opel, divisional managers fair on paper but are not the best approach strategically. took the right action. But that is often not the case. The Worse, a division may agree–explicitly or tacitly–not to chal- management of the mining or semiconductor divisions lenge another division’s proposals in return for the same at GE didn’t tell Jack Welch to divest. The management of treatment. In many companies, that is the norm. It will be the television set businesses did not tell Frank Dangeard sheer coincidence if the result of this system is what the com- to shift Thomson into digital postproduction. Quite the pany could achieve if the divisions were working together contrary, those divisional managers were generating pro- with a coherent plan. Top management needs to step in and posals to grow their businesses. The leadership challenge frame questions that reflect the corporate perspective, espe- is to give coherent direction to how resources are allocated cially when large sums of money are involved and conditions and, by doing so, align the bottom-up processes with top- are highly uncertain. They must get divisions to ask,“What’s down objectives. That’s how you drive strategy in a big best for the company?” organization. Create a new context that allows leadership to circumvent the regular resource allocation process. Most out-of-the-box Reprint R0702C; HBR OnPoint 1831 or disruptive ideas are badly handled by a bottom-up re- To order, see page 158.

hbr.org | February 2007 | Harvard Business Review 79 The liberalization of markets is forcing executives and social activists to work together. They are developing new business models that will transform organizations and the lives of poor people everywhere.

Cocreating Business’s New Social Compact

by Jeb Brugmann and C.K. Prahalad

N EARLY 2005, WE MET PRIVATELY WITH THE chairperson of one of the world’s biggest banks to discuss business opportunities in catering to poor people. The chairperson responded bluntly. “We don’t care about making profits [on such a business],”he said, with the bank’s CEO sitting beside him. “There’s something even distasteful about the idea of making money off people who earn less than $1 a day.”He raised a related issue that, unexpectedly, became the topic of our discussion that morning: how the bank could create, manage, and scale up a program to support elementary schools for poor children in a certain developing country. We were a little surprised that a banker was so preoccupied with a problem David Pohl David

80 Harvard Business Review | February 2007 | hbr.org

Cocreating Business’s New Social Compact

that usually keeps not-for-profit, nongovernmental organiza- they’re using to kick-start socioeconomic development in tions (NGOs), rather than large corporations, up at night. long-neglected communities. A week later, we spent a day with representatives of three Realizing that they each possess competencies, infrastruc- relatively small NGOs in India. One specializes in infrastruc- ture, and knowledge that the other needs to be able to oper- ture development and postdisaster reconstruction. Another ate in low-income markets, companies and NGOs are trying focuses on the cultivation and processing of herbal medicines. to learn from and work with each other. For example, Danone The third provides business support to rural enterprises. To- has set up a joint venture with Bangladesh’s Grameen Bank gether, the three organizations also manage several self-help to manufacture and sell bottom-of-the-pyramid dairy prod- savings and loan groups involving around 50,000 women. ucts. Microsoft has tied up with the NGO Pratham to deliver The NGOs and their business advisers, some of them execu- personal computers to Indian villagers, while Intel and two tives working for a large global company, wanted our help large Indian information technology firms, Wipro and HCL in deciding which businesses to set up. They had conducted Infosystems, have launched the Community PC in partner- research and market tests on opportunities in the financial ship with other NGOs to do the same. Nestlé has joined hands services and insurance, construction, consumer products, and with health professionals and NGOs in Colombia, Peru, and health services industries. By the end of the day, the NGOs the Philippines to deliver educational programs on nutrition decided to go ahead with three businesses: selling insurance and nutritionally fortified food products to the poor. products, retailing groceries, and providing sanitation facili- As their interests and capabilities converge, these corpo- ties to people whose income is around 50 cents a day. We rations and NGOs are together creating innovative business were impressed by the NGOs’ desire and readiness to orga- models that are helping to grow new markets at the bottom nize local communities so they could manufacture and sell of the pyramid and niche segments in mature markets. These products in the marketplace – just like good entrepreneurs. models, we believe, will lead to novel frameworks that can Those two meetings, we’re convinced, captured more than renew the corporation’s social legitimacy even as they allow a fleeting role reversal; they symbolize an enduring shift in for sustainable development and accelerate the eradication the practices of corporations and social groups and, perhaps, of poverty. This convergence is making it imperative that in their attitudes toward each other. That may sound like managers in both sectors understand the opportunities and a startling claim. Since the protests against globalization at risks in working together. Seattle and Davos in the late 1990s, people have assumed that the gulf between the private sector and the civil society, as the media call NGOs, has been growing. After all, despite Liberalization’s Unexpected Consequences social groups’ protests, more countries have opened up to Companies and NGOs have arrived at the same place by dif- foreign investment, and governments have continued to pri- ferent routes. Over the last two decades, as many countries vatize industries. Meanwhile, companies, especially Western opened their economies to foreign competition, often at the multinational corporations, have come under a dark cloud. behest of the International Monetary Fund and the World Their recent shenanigans – fraud at Enron, insider trading Bank, business and the civil society fought bitterly. At first, at WorldCom, and inept governance at Hewlett-Packard, both sides battled vociferously and publicly with govern- not to mention a rash of social, environmental, and health- ments over the need for, the nature of, and the pace of related controversies at blue-chip companies such as Nike, economic reforms. While companies, especially multinational Shell, and McDonald’s–have led to a near crisis of confidence corporations, wanted governments to reduce tariffs sharply in the role of the modern corporation in society. and allow foreign investment into every sector immediately, However, a countertrend has emerged. Over the last five the civil society argued that liberalization should take place years, some corporations have started to pay attention to slowly and only in some industries. Then, as governments customers at the bottom of the economic pyramid. As the softened labor, environmental, and investment regulations pioneers move into inner cities and villages, their middle to attract foreign investment, the two sectors waged a managers are spending more time than you might imagine shadow war over the reforms’future. Finally,as governments on acquiring local knowledge, value engineering, developing played less and less of a regulatory role, corporations and low-cost business models, and community-based marketing. NGOs fought each other directly, debating the boundaries Meanwhile, several NGOs have set up businesses to provide within which socially responsible corporations should oper- jobs and incomes in order to free people from the tyranny ate. Those battles led to three unanticipated consequences. of poverty. Product development, logistics, project manage- First, NGOs emerged as the corporate sector’s de facto ment, and scaling techniques are some of the mechanisms regulators, occupying the vacuum that governments were

Jeb Brugmann is a Toronto-based consultant who works with companies to develop business models for the underserved segments of emerg- ing markets. C.K. Prahalad is the Paul and Ruth McCracken Distinguished University Professor of Corporate Strategy at the University of Michi- gan’s Ross School of Business in Ann Arbor. This is his 14th article for HBR.

82 Harvard Business Review | February 2007 | hbr.org The Three Stages in the Convergence Between the Corporate Sector and the Civil Society

PRECONVERGENCE STAGE TWO Companies and NGOs adopt different Some companies get into bottom- attitudes toward liberalization and of-the-pyramid segments and niche globalization. They quarrel over the markets even as NGOs set up nature and speed of deregulation. businesses in those markets. They fight over companies’ conduct, Companies and NGOs try to learn especially in developing countries. from, and work with, each other.

STAGE ONE STAGE THREE Companies and NGOs realize they Companies and NGOs enter into have to coexist. They look for ways to cocreation business relationships. influence each other. Some corporations Cocreation entails the development of and NGOs execute joint social business models in which companies responsibility projects. become a key part of NGOs’ capacity to deliver value and vice versa.

leaving behind. They aren’t newcomers to the task; for many the apparel, pharmaceutical, and agribusiness industries years, NGOs have influenced markets in areas such as chem- to develop new strategies and rewrite their codes of conduct. ical regulation, oil spill liability, air emissions, liquid waste, Second, companies have invested heavily to develop ex- pharmaceutical and food standards, child labor, and em- pertise to cope with NGOs. They have spent time and money ployment discrimination. Their influence has created a reg- launching countercampaigns to protect their reputations. ulatory framework tougher than the legal requirements cor- At first, they did so defensively, using social marketing slo- porations face. NGOs may be small, but through the Internet, gans in advertisements and setting up nonprofit entities with even a single person or organization can coordinate “smart which they maintained arm’s-length relationships. Over time, mobs,”as Howard Rheingold calls them in his 2002 book of they developed more proactive strategies. Smart corpora- the same name, allowing NGOs to mount actions on several tions, for instance, have learned to take their case directly fronts simultaneously. For instance, local NGOs attacked the to consumers. They have developed corporate social respon- Coca-Cola Company over its use of water in the village of sibility (CSR) initiatives, voluntary self-regulation schemes, Plachimada in Kerala, India. As accounts have spread from and cause-based marketing programs. More recently, they Web site to Web site, the dispute has grown into a worldwide have launched public-interest-cum-advertising campaigns, battle over the brand’s presence in universities and schools. such as Chevron’s on global energy issues and Unilever’s on The escalation of the campaign from market to market and women’s beauty, self-esteem, and eating disorders. To run from issue to issue has, as the Wall Street Journal wrote, cost such programs, companies have hired people from the social Coca-Cola “millions of dollars in lost sales and legal fees in sector who can bring their networks, credibility, and under- India, and growing damage to its reputation elsewhere.” standing of NGOs into corporations. For instance, Microsoft’s By publicly inflicting harm to a market leader’s reputa- director of community affairs worked with NGOs, the tion, which eventually forces the entire industry to change its World Bank, and a social venture-capital fund for more than practices, the civil society is often successful in getting corpo- 20 years before joining the software giant. Some corpora- rations to conform to its norms. For instance, NGOs’ attacks tions are even competing with social groups. By launching on Nike for violating human rights, on Merck and Glaxo- coffee, tea, and confectionary products with a guarantee SmithKline for enforcing patents on AIDS medicines, and on that disadvantaged producers are getting a better deal, for Monsanto for introducing genetically modified seeds forced example, North American and European manufacturers and

hbr.org | February 2007 | Harvard Business Review 83 Cocreating Business’s New Social Compact

How Companies and NGOs Find Common Ground

CONVERGENCE AREA EXAMPLES CHALLENGES AND INNOVATIONS

CORPORATE NGO

The Challenge

Pooling knowledge, > The Apparel Industry To move from adhering to individual com- To move from spearheading antibusiness competencies, and Partnership pany standards to compliance with industry- campaigns to creating, promoting, and relationships to build wide standards. jointly administering standards. new operating stan- > The Forest Steward- Innovative responses dards and coregula- ship Council tory schemes. Companies are NGOs are > The Marine Steward- > Defining standards through negotiations > Defining standards through negotiation ship Council with NGOs. with companies. > Building the ability to participate in global > Learning to understand microlevel > The Kimberley and local NGO networks, forums, boards, industry operations in, for example, Process and so forth. forestry, fishing, and mining.

The Challenge

Leveraging each > Companies have set To redefine NGOs as consumer clusters that To professionalize brand other’s credibility up cause-related require special messages and management. management. and social networks marketing as a new to create access to area of specialization. Innovative responses markets and brand value. > In 2005, companies Companies are NGOs are spent $1 billion > Adopting NGOs’ marketing approaches, > Cobranding campaigns with companies. in North America such as viral marketing. > Marketing themselves to corporate on cause-related > Delivering on special brand promises. partners’ customers and employees, marketing. > Shifting from a reactive to a proactive instead of making appeals to the public. approach to social sector communications. > Facing stricter fiscal controls to sepa- rate economic decisions from policy decisions.

The Challenge

Creating professional > Rather than two dis- To integrate CSR into business decision To cooperate with companies in some development norms tinct camps and ca- making. forums and disagree in others. and management reer paths, compa- roles to facilitate nies and NGOs recruit Innovative responses coordination staff from each other. between the two Companies are NGOs are sectors. > The two sectors use > Aligning strategies for building material > Creating organizations that seek com- a common service assets and reputations. mon ground on policy issues, and facili- industry – the same > Integrating social and financial reporting. tate partnerships, with companies. marketing or law > Managing cooperation with NGOs in > Integrating activist and business firm, for instance. cause-related marketing and public- management mentalities into the policy forums. organization. > A plethora of bisector > Encouraging managers to sit on NGO > Establishing new professional norms training forums, boards and granting leaves of absence related to nondisclosure of sensitive including social sec- to managers doing social sector work. corporate information. tor MBA programs, are born.

84 Harvard Business Review | February 2007 | hbr.org retailers are competing with Fairtrade Labelling Organiza- Thus, while companies have discovered the importance of tions International, which enforces its standards on NGOs NGOs as paths to markets, social groups have realized that and member companies. carefully calibrated business models can unleash powerful Third, markets are emerging as an arena in which compa- forces for good. Their interactions have created new links nies and NGOs interact. Liberalization has provided corpora- between business innovation and social development. As we tions with access to new consumers, but reaching low-income shall see in the following pages, companies and NGOs are customers is difficult nonetheless. Executives have to invent increasingly going into business together, pursuing scale and new business models if they are to succeed in those markets, profits, social equity, and empowerment as part of an inte- and they often find that NGOs possess the knowledge, local grated value chain. infrastructure, and relationships necessary to make them work. There are NGOs that have created large distribution networks that can furnish food, medicine, and credit, espe- The Path to Convergence cially in remote areas. They have developed a deep under- Sometimes the best way to understand the future is to look standing of local cultures and consumption habits. And they back. When we do, we can see that the relationship between have established credibility and earned people’s trust by re- companies and NGOs is moving beyond an adversarial peatedly assisting disadvantaged communities in the face stance toward partnership through systematic, if uncharted, of poverty, natural disasters, and conflicts. Companies are be- steps. This journey has so far progressed through three ginning to work with such organizations to break into new phases, each of which has had its teething problems, naysay- markets. For instance, Telenor has teamed up with Grameen ers, tensions, and benefits.

While companies have discovered the importance of NGOs as paths to markets, social groups have realized that carefully calibrated business models can unleash powerful forces for good.

Bank to sell cellular telephones to rural consumers. Telenor The be-responsible stage. By the late 1980s, companies has taken advantage of the bank’s knowledge of rural micro- and NGOs realized that they couldn’t keep fighting; they had credit groups’collection and payment system to set up a joint to find ways of living with and influencing each other. Some venture, Grameen Phone, in which it has a 62% equity stake. felt they could take the risk of working with the other side Similarly, World Diagnostics found that, in Uganda, it could to meet specific, albeit limited, objectives. That was the most best sell its HIV, STD, and malaria test kits through NGO- difficult step; executives and activists had to reexamine per- operated health care networks. The NGOs are helping vil- ceptions and biases. They had to evaluate the risks to their lagers deal with AIDS, and they have trained medical person- identities, to their missions, and to their industry standing nel, set up clinics, and earned the trust of Ugandans along before they could collaborate with “the enemy.” the way. “Corporate social responsibility” has become a catchall At the same time, declines worldwide in public spending phrase for the ways by which businesses manage reputations on social programs have forced NGOs to review their tradi- and strike relationships with the social sector. Businesses use tional poverty reduction strategies. Where NGOs once saw their resources to work on socially relevant issues as they are government aid and private sector charity as the only ways defined by NGOs, but most CSR initiatives, such as Exxon out of poverty, they now see entrepreneurship, too, as a vi- Mobil’s involvement in the distribution of mosquito nets able approach. They’ve reframed the poor as “undercapital- in Tanzania or General Motors’ management of children’s ized, unappreciated, and undersupported entrepreneurs,” education programs in the United States, are unrelated to the and redefined poverty as a problem of “livelihoods develop- companies’core business activities. Some NGOs are willing to ment.”NGOs such as Care developed this livelihood-oriented work with companies to establish policy dialogues and social approach, providing poor people with training, credit, and programs, but they keep their corporate supporters at arm’s collective business infrastructure. Consequently,social groups length. The pros and cons of CSR have been explored else- have discovered business opportunities among their con- where (see, for instance, Allen L. White’s 2005 report, “Fade, stituents, and scores of social venture capital funds have Integrate or Transform: The Future of CSR”), but what is rel- emerged to support this strategy. evant to our story are three convergences that it created:

hbr.org | February 2007 | Harvard Business Review 85 Cocreating Business’s New Social Compact

The convergence of standards of practice and the emer- they need to pursue business opportunities in untapped mar- gence of joint regulatory frameworks. As companies built kets. For NGOs, CSR began as a means of persuading compa- relationships with NGOs, the two sides adopted joint regula- nies to change their ways, and it has become a means for tory schemes. The civil society and the corporate sector them to develop the competencies and confidence to go into together manage, for instance, the Apparel Industry Partner- business themselves. CSR therefore laid some of the founda- ship, the Forest Stewardship Council, the Marine Stewardship tions on which corporations and social groups each started Council, and the Kimberley Process (in the diamond busi- experimenting with new business models. ness), which stipulate social and environmental practices in The get-into-business stage. After more than 15 years of their respective industries. Through these mechanisms, com- globalization, transnational companies have made headway panies have gained access to NGOs’ knowledge about local in only the most affluent segments of the developing world. markets and social networks, while social groups have de- As a percentage of GDP, for example, flows of foreign direct veloped more expertise in marketing and specialized busi- investment to developing countries in Asia and Latin Amer- ness practices. ica were no greater in fiscal 2004 than they were in fiscal The convergence of brands, marketing, and communica- 1995. These miniscule inflows signal the failure of multina- tions, and the emergence of the first joint platforms for mar- tional corporations to change their business models to serve keting and customer management. Cause-related marketing the largest consumer segment in the world: the 4 billion to captures this trend best. That’s when a company markets 5 billion consumers at the bottom of the pyramid. Barring its products or services to an NGO’s loyalists, and the NGO a few exceptions in the telecommunications and fast-moving markets itself to the company’s customers and employees, consumer goods industries, Western companies have per- generating revenues for both the company and the NGO’s formed poorly in serving these customers. For instance, charitable activities. In 2005, cause-related marketing initia- multinational water companies, even in supportive environ- tives provided around $1 billion to social causes in North ments like South Africa, have all but given up trying to man- America alone. The approach has enabled the two sectors age urban water systems. The food-retailing industry oper- to learn each other’s marketing tactics. Now, for instance, ates approximately one store for every 3.4 million people in some companies use viral-marketing techniques, which low-income countries compared with one store per 5,800 NGOs pioneered, while several social groups commission people in high-income countries, according to CIES, a food professional advertising firms to design advocacy campaigns. industry trade association based in Paris. Foreign insurance Through such joint-marketing relationships, companies and giants have failed to create customer bases in low-income NGOs have shifted from constructing divergent messages markets. The list of failures and near failures is long. for polarized audiences to creating similar messages for a When companies have succeeded in bottom-of-the-pyramid common audience. markets, we found, they have most often done it by leverag- The convergence of professional cadres and career paths, ing the competencies, networks, and business models that and the emergence of management professionals dedicated were developed as part of their CSR initiatives or by NGOs. to working with companies on social causes and with NGOs ABN AMRO has entered the microfinance business in Latin on business endeavors. Today, the human rights manager America with some help from the NGO Accion International. (at Monsanto), the senior manager for corporate responsi- Barclays has built a successful microbanking operation in bility (at Nike), and the sustainable development manager Ghana in partnership with 4,000 indigenous moneylenders (at Marks and Spencer) work with counterparts at NGOs like and their national association. The Shell Foundation has the vice president for private sector partnerships at Conser- worked with environmental NGOs to test new designs and vation International. Once, activists would have labeled models for delivering clean and renewable energy to under- NGO professionals as sellouts if they went to work with com- served populations. It has created venture capital funds that panies, but NGO veterans now hold the communications, support local entrepreneurs and integrate them into Royal community relations, and market development portfolios Dutch Shell’s supply chains. at several companies. Executives who previously would have Pick ’n Pay, one of South Africa’s largest retailers, started signaled their early retirement if they took positions at a CSR initiative in the early 1990s to support struggling black NGOs find themselves among a cohort of social venture cap- farmers and their weak cooperatives, who were left on the italists. In fact, many managers are building their careers edge of financial viability by apartheid. The foundation by moving back and forth between the two sectors. (We de- helped strengthen the cooperatives by providing them with scribe the implications of these areas of convergence for the management and marketing skills. When apartheid ended in next phase of partnership in the exhibit “How Companies 1994, Pick ’n Pay immediately started exploring how it could and NGOs Find Common Ground.”) serve people in urban townships. The retailer found that Broadly speaking, CSR started as a way for companies to there was an opportunity in providing those consumers with gather intelligence about NGOs and manage their reputa- produce that came from their rural homelands. To meet that tions, and it has wound up providing them with the tools demand, Pick ’n Pay used the relationships its foundation

86 Harvard Business Review | February 2007 | hbr.org underserved markets and gained credibility with local communities. For instance, after the 2004 tsu- nami, NGOs in India built micro- credit operations as part of the relief effort. In Africa, international NGOs such as Africare and Direct Relief International, together with local groups, built infrastructure to deal with AIDS, famines, and refugee in- fluxes. Along with microcredit and mutual insurance operations, they developed informal networks of traders and state-owned organiza- tions into cooperatives, federations, and export-oriented enterprises. In India, NGOs like the Self Employed Women’s Association (SEWA) are working with Indian insurance com- panies (such as ICICI Prudential), savings and credit cooperatives, and mutual health associations to sell insurance products. In Africa, sup- ported by Western NGOs like Care and Finca International, local NGOs such as L’Association pour le Dével- oppement de la Région de Kaya (ADRK) in Burkina Faso, the Malawi Union of Savings and Credit Coop- eratives, MicroSave (in Kenya), and Faitière des Unités Coopératives d’Epargne et de Crédit du Togo are selling crop, rain, life, asset-loss, widowhood, health, personal acci- dent, and maternity insurance pro- ducts to low-income consumers. In had struck to develop reliable suppliers of traditional pro- Uganda, Microcare has completed a three-year pilot that duce. Later, Pick ’n Pay used the same approach to create an- caters to 3,000 people. The project is being commercialized other supply chain for organic produce. (For more examples, by a new for-profit company, Microcare Health, which has see C.K. Prahalad’s The Fortune at the Bottom of the Pyramid: been set up jointly by Microcare and the Chicago-based in- Eradicating Poverty Through Profits.) surer Aon. At the same time, social groups have also set up businesses, Some NGOs are positively thriving where state-owned usually entering market segments where corporations had or multinational companies have failed. Two years ago, when been unsuccessful. In 1992, the amount NGOs gave out in de- the Indian insurance giant, Life Insurance Corporation, velopment assistance was equal to about 11% of the funds found it difficult to collect premiums and pay claims in rural governments in developed countries donated; by 2003, that areas in the state of Andhra Pradesh, microcredit federations amount had risen to 16%. In that year, grants from NGOs rep- took over the business. Their extensive knowledge of cus- resented a remarkable 9.4% of public and private develop- tomers and their superior reach allowed the NGOs to grow ment assistance from OECD countries and multilateral agen- the market rapidly. They operate quite profitably, earning an cies, according to the OECD’s “Development Co-operation average gross margin of 27%. Report 2005.” NGOs have used their funds to develop the As the scale and sophistication of their businesses grow, infrastructure needed to supply people in remote areas with NGOs have become powerful national players. For instance, food, medicine, other supplies, and credit when disasters in 1986, a small group of street traders formed the African strike. Along the way, they acquired firsthand knowledge of Co-operative for Hawkers and Informal Businesses to fight

hbr.org | February 2007 | Harvard Business Review 87 Cocreating Business’s New Social Compact

a small group of business professionals who had worked with NGOs in Africa to provide people with safe medicines. It The New Rules of Company-NGO used a franchise model to create 68 owner-operated Child & Engagement Family Wellness Shops, which sell health services and medi- cine in small towns in three districts in Kenya. The outlets As companies and NGOs work together, they are jointly operate according to common performance standards, and defining the norms that will govern their future relations the HealthStore Foundation provides them with turnkey and behavior. management systems and support, training owners and helping them select locations that will allow them to serve at least 5,000 households. In 2005, the clinics treated > The private and civil society sectors will cocreate 404,000 patients; buoyed by their success, the NGO plans to markets, along with emerging customers and set up 30 more outlets in 2007. In addition to private dona- bottom-of-the-pyramid entrepreneurs, through tions, foundation grants, and social venture capital funds, innovative business models. HealthStore also accepts grants from companies. Some NGOs, like Accion, have succeeded in building > Task-oriented relationships, rather than ideology or multinational businesses. Acting as an agent for large micro- policy-driven dialogues, will emerge as the mode of finance NGOs, Accion has loaned $9.4 billion to 4 million collaboration between companies and NGOs. people in 22 countries, with a historical repayment rate greater than 97%. In 1992, Accion helped create the first > NGOs and companies will need to align global posi- bank in the world dedicated solely to microenterprise – tions and standards and be very local in their ability BancoSol in Bolivia. Several of Accion’s partners have made to serve customers and create value. the transition from being charity-dependent organizations to becoming banks or other regulated financial institutions. Accion has also helped commercial banks–such as Sogebank > Since both external governance processes and the in Haiti, Banco del Pichincha in Ecuador, and Banco ABN level of developmental benefits will be internal to the AMRO Real in Brazil–lend to the self-employed poor. In the new business models, neither companies nor NGOs United States, Accion has worked with Bank of America and can see one another as adversaries. Wachovia to identify potential clients who do not meet stan- dard lending requirements. > Companies and NGOs will gain legitimacy in society The growing strength of NGO-owned businesses in emerg- by creating bold value propositions that have credible ing markets is mirrored in developed countries. Nonprofits economic, social, and environmental dimensions. have been pioneers in trading carbon emissions, producing organic foods, manufacturing herbal supplements, provid- ing pay-as-you-go car-rental services, and many other busi- > Companies and NGOs will be under pressure to ad- nesses. For example, Local Sustainability is an Ontario-based vocate common policy positions and jointly develop NGO that provides engineering and energy management– coregulatory schemes. consulting services to municipalities. It has succeeded where the likes of GE Capital, Philips Utilities, and Ameresco have struggled, owing to the high costs involved in getting politi- cal, bureaucratic, and technical representatives of municipal- for their rights. ACHIB today counts 120,000 members in ities to invest in making facilities more energy efficient. South Africa. It advocates hawkers’ interests on policy mat- Through its expertise in generating political commitment for ters and provides them with support services, such as ware- energy and environmental measures, Local Sustainability has housing infrastructure, bulk procurement, product distribu- been able to land 36 municipalities in Canada and the United tion, microloans, and training. Recently, ACHIB launched a States as customers. In the process, it has generated $2.5 mil- soft drink brand called Hola, which it distributes through lion in revenues and earned a 50% gross margin. Rivals ini- a for-profit entity,Main Market Distribution. The cooperative tially criticized the NGO, claiming its not-for-profit status was has also entered the advertising business by launching a public subsidy,but consulting firms such as CH2M Hill now hawker stalls with spaces that big companies can rent, in work closely with Local Sustainability because of its skills its words,“to increase awareness for their brands in the infor- and reputation. mal market.” Before we describe the third stage of company-NGO rela- The Minneapolis-based HealthStore Foundation repre- tions, we must point out that the drive to set up businesses sents a new breed of nonprofit that is designed from its incep- has created tensions within the two sectors. First, both com- tion to operate as a business. The foundation was set up by panies and social groups are finding it difficult to manage

88 Harvard Business Review | February 2007 | hbr.org their new roles. What does a multinational corporation such ment” shows. Take the case of BP (formerly British Petro- as Royal Dutch Shell do with the Shell Foundation when it leum), which set out to develop a fuel-efficient stove for poor shifts to a “business investment strategy in order to achieve consumers in rural India. Market research showed that con- both social and investment goals?” Will an NGO like Local sumers wanted the option of switching fuels based on their Sustainability better achieve its objective of making facilities current income, the availability of fuels, and cooking styles. more energy efficient by spinning off its consultancy as Working with the Indian Institute of Science in Bangalore, a for-profit operation or by managing it as a project within its BP developed a portable stove that could use either liquefied nonprofit structure? The answers aren’t clear. petroleum gas (LPG) or biomass as fuel. To meet an addi- Second, NGOs are often unsure whether a company is a tional social objective, BP designed the stove to burn biomass potential collaborator or competitor, and vice versa. On the very efficiently,which would eliminate the smoke that causes one hand, nonprofit ventures such as Local Sustainability in respiratory illnesses in India. Canada and microinsurance networks in India are bagging One of BP’s major challenges is distribution and retailing, customers that corporations would dearly love to have. On since only small shops and informal traders cater to villagers the other hand, health food retailers such as Whole Foods in rural India. The company found that if it were to invest in Market have taken away customers who used to shop at building the distribution infrastructure from scratch, it NGO-owned cooperatives. Retailers like Starbucks and Tesco wouldn’t be able to sell the stove at a price that its target cus- sell products that compete with the NGOs’ Fairtrade line tomers could afford. BP realized that it would have to work of products. Since the companies buy fewer Fairtrade prod- with local people who knew rural consumers and had access ucts as result, the turn of events is worrying to the NGOs to distribution agents in the villages. Although the company that created the standard. could hire marketing experts or social workers as consul- Reactions to competition at the bottom of the pyramid tants, it wanted to develop relationships cheaply with scores can be complicated. ICICI became the biggest manager of of agents so that it could serve a linguistically disparate, microcredit operations in the south Indian state of Tamil culturally diverse, and physically dispersed customer base. Nadu by co-opting the women’s microcredit groups that While conducting preliminary market research, BP’s manag- NGOs developed. Many NGOs are resigned to this; ICICI ers met with three NGOs–Covenant Centre of Development, offers a larger range of banking services and provides greater IDPMS, and Swayam Shikshan Prayog–that operated micro- opportunities for entrepreneurs. However, other groups credit operations and other social enterprises in south India. are unhappy that ICICI has taken over their role and the BP and the NGOs conducted market research together in women’s self-help groups that they had designed for broader order to become acquainted with each other’s motivations, social development purposes. Some are reluctant to forge standards, and capabilities. After that, the two sides defined business relationships with the bank as a result. a shared strategic intent and developed a set of working prin- The cocreate-businesses stage. As more companies con- ciples. They built trust through relationships established duct business experiments in bottom-of-the-pyramid mar- between key individuals. Trust grew when BP made a long- kets and NGOs’ business acumen evolves, they are realizing term contractual commitment to the project. That trust each other’s limitations and strengths. This has laid the foun- proved to be pivotal, for instance, when the NGOs decided dation for long-term partnerships between the two sectors to consolidate distribution channels in five states to gener- based on “cocreation.”Cocreation involves the development ate economies of scale. Most companies prefer to work with of an integrated business model in which the company be- several distributors to spread their risks, but BP,understand- comes a key part of the NGO’s capacity to deliver value and ing the NGOs’ pressures, backed the consolidation. The vice versa. Such ventures offer three opportunities: NGOs established a new company that serves as a joint busi- • To deliver products at low prices to low-income consum- ness vehicle through which village agents can pool their in- ers or to provide niche products to consumers in mature vestments, licenses, and risk. That was new; the social groups markets. had never before set up a joint operation with one another • To create hybrid business models involving corporations, or with a corporation. NGOs, and entrepreneurs at the bottom of the economic The two sides worked with each other closely at every ladder. stage of the project. They refined the business model, devel- • To revive the corporation’s social legitimacy while expand- oped the rollout plans, and executed them through joint work- ing the NGO’s impact. ing groups. BP and the NGOs worked together to identify mar- When companies and NGOs innovate together, the com- kets and train the distribution agents. They jointly evaluated mercial nature of the relationship and their roles can vary, the stove’s design, costs, usability, and safety. They held dis- but the outcome is often a breakthrough. In fact, this quiet cussions about the economics of production, distribution, con- dialogue, away from public debates, has spawned key prin- sumer offers (including financing), capital investment, returns, ciples that will underlie governance structures in the future, and risks for everyone involved – not only BP and the NGOs as the exhibit “The New Rules of Company-NGO Engage- but also customers, distributors, and microcredit federations.

hbr.org | February 2007 | Harvard Business Review 89 Cocreating Business’s New Social Compact

BP and the NGOs also tackled the nonnegotiable issues The benefits of the cocreation approach will have to stand in tandem. BP, for instance, would not compromise on the test of the market, but some advantages are already evi- safety standards for the transportation, storage, and use of dent. First, involving credible NGOs that have extensive in- LPG or violate its own standards of business ethics. Health frastructure on the ground was tremendously valuable to and safety standards became a central part of the NGO BP, a foreign company with limited experience in India and training curriculum; the NGOs’ employees even had to no experience with any rural bottom-of-the-pyramid mar- learn to use seat belts while driving around. For their part, ket. Second, the NGOs participated in a complex product- the NGOs wanted to protect their credibility and goodwill design process and in developing a business model. Doing with villagers. BP therefore had to make some accommo- so benefited them in two ways: They shared in the credit dations, as well. The company had to ensure, for instance, for developing the stove, and they gained credibility as suc- that the women the NGO’s company recruited as local sales cessful collaborators with a global firm. Third, both the agents were the first to receive cash generated by the busi- company and the NGOs have brought unique balance-sheet ness, thus allowing the villagers to recover their working advantages to a new business. BP’s deep pockets and pa- capital. tience can withstand the trials of a start-up; the NGOs can

The manner in which BP and the NGOs struck a commercial agreement bears no resemblance to traditional supplier- channel deals.

The manner in which BP and the NGOs struck a commer- quickly access other assets, such as land, that the business cial agreement bears no resemblance to traditional supplier- needs. Finally, BP and the NGOs have together developed channel deals. One difference is the transparency about cost a business ecosystem that brings different economic enti- structures and margins. The NGOs, for instance, conducted ties – a global corporation, local social organizations, infor- an analysis of the distribution process, identifying every cost mal micro-entrepreneurs, and a research institute – into an element and breakeven scenario related to LPG cylinders, efficient value chain. This alliance offers the promise of more which are heavier, more regulated, and more dangerous than just access to better products at more affordable prices; than the products the NGOs usually handle. They conveyed it gives people at the bottom of the pyramid, who until the findings to BP. Suppliers often withhold information now were unable to enjoy the benefits of globalization, a from distributors to gain an upper hand during negotiations. chance to create new livelihoods and gain economic and so- In this instance, BP and the NGOs shared their internal eco- cial influence. nomics with each other so they could understand all the • • • choices they faced in terms of distribution costs, consumer The same pattern is visible in the cocreation partnerships service options, growth rates, and breakeven points. This un- between ABN AMRO and Accion; Telenor, Danone, and usual level of transparency helped overcome the traditional Grameen Bank; Microsoft and Pratham; ICICI Prudential mistrust between the two sectors. and SEWA; Local Sustainability and CH2M Hill; Microcare Finally, BP and the NGOs developed a financial model and Aon. In all these cases, neither company nor NGO can that would allow everyone in the value chain to make see the other as an adversary because of their interdepen- money. The NGOs had to assume a great deal of the credit dence; both apply assets and competencies to a business that risks and legal liabilities for the agents in the villages. They creates greater value for each than their independent efforts would not have done so unless they were confident that BP could generate. We can judge these partnerships’ perfor- was making a long-term investment in the project. The multi- mance by the level of value they deliver to customers and national had to reveal business data it would not normally communities: Companies and NGOs now both share the share with distributors. Drawing up the legal contracts that pressure to perform, cutting through the spin that has too captured the cocreation-based relationship was a huge learn- long dominated our understanding of globalization and its ing and confidence-building experience, according to man- opportunities. agers on both sides. The process engendered a culture of frankness, transparency, and joint problem solving that is Reprint R0702D; HBR OnPoint 1829 unique in the history of company-NGO relationships. To order, see page 158.

90 Harvard Business Review | February 2007 | hbr.org ADVANCED MANAGEMENT BEGINS MARCH 2007 PROGRAM GENERAL MANAGEMENT PROGRAM BEGINS JULY 2007 PROGRAM FOR LEADERSHIP BEGINS JULY 2007 DEVELOPMENT

Break free. Start thinking and acting differently. As a participant in the Comprehensive Leadership Programs at Harvard Business School Executive Education, you’ll gain new insights from our global curriculum, our renowned faculty, and your peers. You’ll also grapple with complex business issues that leaders must understand today. Ultimately, you’ll change and grow in ways that impact both your company and your career. You’ll return with a whole new perspective, reenergized, and equipped to lead. It’s your time. Invest it wisely. Learn more at www.exed.hbs.edu/pgm/clphbr/ No leader is perfect. The best ones don’t try to be – they concentrate on honing their strengths and find others who can make up for their limitations.

IN PRAISE OF THE INCOMPLETE L EAD ER

by Deborah Ancona, Thomas W. Malone, Wanda J. Orlikowski, and Peter M. Senge

WE’VE COME TO EXPECT A LOT OF OUR LEADERS. Top executives, the thinking goes, should have the intellectual capacity to make sense of unfathomably complex issues, the imaginative powers to paint a vision of the future that generates everyone’s enthusiasm, the Woperational know-how to translate strategy into concrete plans, and the interpersonal skills to foster commitment to undertak- ings that could cost people’s jobs should they fail. Unfortunately, no single person can possibly live up to those standards. It’s time to end the myth of the complete leader: the flawless person at the top who’s got it all figured out. In fact, the sooner leaders stop trying to be all things to all people, the better off

their organizations will be. In today’s world, the executive’s job is Luba Lukova

92 Harvard Business Review | February 2007 | hbr.org

In Praise of the Incomplete Leader

no longer to command and control but to cultivate and coor- years, our work at the MIT Leadership Center has included dinate the actions of others at all levels of the organization. studying leadership in many organizations and teaching the Only when leaders come to see themselves as incomplete–as topic to senior executives, middle managers, and MBA stu- having both strengths and weaknesses – will they be able to dents. In our practice-based programs, we have analyzed make up for their missing skills by relying on others. numerous accounts of organizational change and watched Corporations have been becoming less hierarchical and leaders struggle to meld top-down strategic initiatives with more collaborative for decades, of course, as globalization vibrant ideas from the rest of the organization. and the growing importance of knowledge work have re- All this work has led us to develop a model of distributed quired that responsibility and initiative be distributed more leadership. This framework, which synthesizes our own re- widely. Moreover, it is now possible for large groups of peo- search with ideas from other leadership scholars, views leader- ple to coordinate their actions, not just by bringing lots of ship as a set of four capabilities: sensemaking (understanding information to a few centralized places but also by bringing the context in which a company and its people operate), lots of information to lots of places through ever-growing relating (building relationships within and across organiza- networks within and beyond the firm. The sheer complexity tions), visioning (creating a compelling picture of the future), and ambiguity of problems is humbling. More and more and inventing (developing new ways to achieve the vision). decisions are made in the context of global markets and rapidly – sometimes radically – changing financial, social, political, techno- logical, and environmental forces. Stakeholders such as activists, reg- ulators, and employees all have claims on organizations. No one person could possibly stay on top of everything. But the myth of the complete leader (and the attendant fear of appearing incompetent) makes many execu- tives try to do just that, exhausting themselves and damaging their organizations in the process. The incomplete leader, by contrast, knows when to let go: when to let those who know the local market do the advertising plan or when to let the engineering team run with its idea of what the customer needs. The incomplete leader also knows that leadership exists throughout the organiza- tional hierarchy – wherever exper- tise, vision, new ideas, and commit- ment are found. We’ve worked with hundreds of people who have struggled under the weight of the myth of the complete leader. Over the past six

Deborah Ancona is the Seley Distinguished Professor of Management at the MIT Sloan School of Management and the faculty director of the MIT Leadership Center in Cambridge, Massachusetts. She is also the coauthor (with Henrik Bresman) of X-Teams: How to Build Teams that Lead, Innovate, and Succeed, forthcoming from Harvard Business School Press in June 2007. Thomas W. Malone is the Patrick J. McGovern Professor of Management at the MIT Sloan School and the director of the MIT Center for Collective Intelligence. Wanda J. Orlikowski is the Eaton-Peabody Professor of Communication Science and a professor of information technologies and organization studies at the MIT Sloan School. Peter M. Senge is the founding chairperson of the Society for Organizational Learning and a senior lecturer at the MIT Sloan School.

94 Harvard Business Review | February 2007 | hbr.org Even though managers pay lip service to the importance of mutual understanding, their real focus is on winning the argument.

While somewhat simplified, these capabilities span the that moment. Executives who are strong in this capability intellectual and interpersonal, the rational and intuitive, and know how to quickly capture the complexities of their envi- the conceptual and creative capacities required in today’s ronment and explain them to others in simple terms. This business environment. Rarely, if ever, will someone be helps ensure that everyone is working from the same map, equally skilled in all four domains. Thus, incomplete leaders which makes it far easier to discuss and plan for the journey differ from incompetent leaders in that they understand ahead. Leaders need to have the courage to present a map what they’re good at and what they’re not and have good that highlights features they believe to be critical, even if judgment about how they can work with others to build on their map doesn’t conform to the dominant perspective. their strengths and offset their limitations. When John Reed was CEO of Citibank, the company found Sometimes, leaders need to further develop the capabili- itself in a real estate crisis. At the time, common wisdom said ties they are weakest in. The exhibits throughout this article that Citibank would need to take a $2 billion write-off, but provide some suggestions for when and how to do that. Reed wasn’t sure. He wanted a better understanding of the Other times, however, it’s more important for leaders to find situation, so to map the problem, he met with federal regu- and work with others to compensate for their weaknesses. lators as well as his managers, the board, potential investors, Teams and organizations – not just individuals – can use this economists, and real estate experts. He kept asking, “What framework to diagnose their strengths and weaknesses and am I missing here?” After those meetings, he had a much find ways to balance their skill sets. stronger grasp of the problem, and he recalibrated the write- off to $5 billion–which turned out to be a far more accurate estimate. Later, three quarters into the bank’s eight-quarter Sensemaking program to deal with the crisis, Reed realized that progress The term “sensemaking” was coined by organizational psy- had stopped. He began talking to other CEOs known for their chologist Karl Weick, and it means just what it sounds like: change management skills. This informal benchmarking making sense of the world around us. process led him to devise an organiza- Leaders are constantly trying to un- tional redesign. derstand the contexts they are oper- Throughout the crisis, real estate ating in. How will new technologies ENGAGE IN SENSEMAKING valuations, investors’ requirements, reshape the industry? How will chang- board demands, and management ing cultural expectations shift the role 1. Get data from multiple sources: cus- team expectations were all changing of business in society? How does the tomers, suppliers, employees, compet- and constantly needed to be re- globalization of labor markets affect itors, other departments, and investors. assessed. Good leaders understand recruitment and expansion plans? 2. Involve others in your sensemaking. that sensemaking is a continuous pro- Weick likened the process of sense- Say what you think you are seeing, cess; they let the map emerge from a making to cartography. What we map and check with people who have dif- melding of observations, data, exper- depends on where we look, what fac- ferent perspectives from yours. iences, conversations, and analyses. tors we choose to focus on, and what In healthy organizations, this sort of 3. Use early observations to shape small aspects of the terrain we decide to rep- sensemaking goes on all the time. experiments in order to test your con- resent. Since these choices will shape People have ongoing dialogues about clusions. Look for new ways to articu- the kind of map we produce, there is their interpretations of markets and late alternatives and better ways to no perfect map of a terrain. Therefore, organizational realities. understand options. making sense is more than an act of At IDEO, a product design firm, analysis; it’s an act of creativity. (See 4. Do not simply apply existing frame- sensemaking is step one for all design the exhibit “Engage in Sensemaking.”) works but instead be open to new pos- teams. According to founder David The key for leaders is to determine sibilities. Try not to describe the world Kelley, team members must act as an- what would be a useful map given in stereotypical ways, such as good thropologists studying an alien culture their particular goals and then to draw guys and bad guys, victims and oppres- to understand the potential product one that adequately represents the sit- sors, or marketers and engineers. from all points of view. When brain- uation the organization is facing at storming a new design, IDEO’s teams

hbr.org | February 2007 | Harvard Business Review 95 In Praise of the Incomplete Leader

consider multiple perspectives – that is, they build multiple over inquiring. Even though managers pay lip service to the maps to inform their creative process. One IDEO team was importance of mutual understanding and shared commit- charged with creating a new design for an emergency room. ment to a course of action, often their real focus is on win- To better understand the experience of a key stakeholder– ning the argument rather than strengthening the connec- the patient–team members attached a camera to a patient’s tion. Worse, in many organizations, the imbalance goes so far head and captured his experience in the ER. The result: that having one’s point of view prevail is what is understood nearly ten full hours of film of the ceiling. The sensemaking as leadership. provoked by this perspective led to a redesign of the ceiling Effective relating does not mean avoiding interpersonal that made it more aesthetically pleasing and able to display conflict altogether. Argyris and Schon found that “maintain- important information for patients. ing a smooth surface” of conviviality and apparent agree- ment is one of the most common defensive routines that limits team effectiveness. Balancing inquiring and advocat- Relating ing is ultimately about showing respect, challenging opin- Many executives who attempt to foster trust, optimism, and ions, asking tough questions, and taking a stand. consensus often reap anger, cynicism, and conflict instead. Consider Twynstra Gudde (TG), one of the largest indepen- That’s because they have difficulty relating to others, espe- dent consulting companies in the Netherlands. A few years cially those who don’t make sense of the world the way they ago, it replaced the role of CEO with a team of four managing do. Traditional images of leadership didn’t assign much value directors who share leadership responsibilities. Given this to relating. Flawless leaders shouldn’t need to seek counsel unique structure, it’s vital that these directors effectively from anyone outside their tight inner circle, the thinking relate to one another. They’ve adopted simple rules, such as went, and they were expected to issue edicts rather than con- a requirement that each leader give his opinion on every nect on an emotional level. Times have changed, of course, issue, majority-rules voting, and veto power for each director. and in this era of networks, being able to build trusting rela- Clearly, for TG’s senior team model to work, members tionships is a requirement of effective leadership. must be skilled at engaging in dialogue together. They con- Three key ways to do this are inquiring, advocating, and tinually practice both inquiring and advocating, and be- connecting. The concepts of inquiring and advocating stem cause each director can veto a decision, each must thor- from the work of organizational development specialists oughly explain his reasoning to convince the others’ that his Chris Argyris and Don Schon. Inquiring means listening with perspective has merit. It’s not easy to reach this level of mu- the intention of genuinely understanding the thoughts and tual respect and trust, but over time, the team members’will- feelings of the speaker. Here, the lis- ingness to create honest connections tener suspends judgment and tries to with one another has paid off hand- comprehend how and why the speaker somely. Although they don’t always has moved from the data of his or her BUILD RELATIONSHIPS reach consensus, they are able to settle experiences to particular interpreta- on a course of action. Since this new tions and conclusions. 1. Spend time trying to understand oth- form of leadership was introduced, Advocating, as the term implies, ers’ perspectives, listening with an TG has thrived: The company’s profits means explaining one’s own point of open mind and without judgment. have doubled, and employee satisfac- view. It is the flip side of inquiring, and 2. Encourage others to voice their opin- tion levels have improved. What’s it’s how leaders make clear to others ions. What do they care about? How do more, TG’s leadership structure has how they reached their interpretations they interpret what’s going on? Why? served as a model for cooperation and conclusions. Good leaders distin- throughout the organization as well as 3. Before expressing your ideas, try to guish their observations from their in the firm’s relations with its clients. anticipate how others will react to them opinions and judgments and explain The third aspect of relating, con- and how you might best explain them. their reasoning without aggression or necting, involves cultivating a network defensiveness. People with strong re- 4. When expressing your ideas, don’t of confidants who can help a leader lating skills are typically those who’ve just give a bottom line; explain your accomplish a wide range of goals. Lead- found a healthy balance between in- reasoning process. ers who are strong in this capability quiring and advocating: They actively 5. Assess the strengths of your current have many people they can turn to try to understand others’views but are connections: How well do you relate who can help them think through dif- able to stand up for their own. (See the to others when receiving advice? ficult problems or support them in exhibit “Build Relationships.”) When giving advice? When thinking their initiatives. They understand that We’ve seen countless relationships through difficult problems? When the time spent building and maintain- undermined because people dispro- asking for help? ing these connections is time spent portionately emphasized advocating investing in their leadership skills. Be-

96 Harvard Business Review | February 2007 | hbr.org Leaders skilled in visioning use stories and metaphors to paint a vivid picture of what the vision will accomplish, even if they don’t have a comprehensive plan for getting there.

cause no one person can possibly have all the answers, or In South Africa in the early 1990s, a joke was making the indeed, know all the right questions to ask, it’s crucial that rounds: Given the country’s daunting challenges, people had leaders be able to tap into a network of people who can fill two options, one practical and the other miraculous. The in the gaps. practical option was for everyone to pray for a band of angels to come down from heaven and fix things. The miraculous option was for people to talk with one another until they Visioning could find a way forward. In F.W. de Klerk’s famous speech Sensemaking and relating can be called the enabling capabil- in 1990 – his first after assuming leadership – he called for ities of leadership. They help set the conditions that motivate a nonracist South Africa and suggested that negotiation was and sustain change. The next two leadership capabilities – the only way to achieve a peaceful transition. That speech what we call “visioning”and inventing – are creative and ac- sparked a set of changes that led to Nelson Mandela’s release tion oriented: They produce the focus and energy needed to from Robben Island prison and the return to the country of make change happen. previously banned political leaders. Visioning involves creating compelling images of the fu- Few of South Africa’s leaders agreed on much of any- ture. While sensemaking charts a map thing regarding the country’s future. of what is, visioning produces a map of It seemed like a long shot, at best, that what could be and, more important, a scenario-planning process convened what a leader wants the future to be. CREATE A VISION by a black professor from the Univer- It consists of far more than pinning a sity of the Western Cape and facili- vision statement to the wall. Indeed, 1. Practice creating a vision in many are- tated by a white Canadian from Royal a shared vision is not a static thing–it’s nas, including your work life, your home Dutch Shell would be able to bring an ongoing process. Like sensemaking, life, and in community groups. Ask about any sort of change. But they, visioning is dynamic and collabora- yourself, “What do I want to create?” together with members of the African tive, a process of articulating what the 2. Develop a vision about something that National Congress (ANC), the radical members of an organization want to inspires you. Your enthusiasm will mo- Pan Africanist Congress (PAC), and create together. tivate you and others. Listen to what the white business community, were Fundamentally, visioning gives peo- they find exciting and important. charged with forging a new path for ple a sense of meaning in their work. South Africa. 3. Expect that not all people will share Leaders who are skilled in this capabil- When the team members first met, your passion. Be prepared to explain ity are able to get people excited about they focused on collective sensemak- why people should care about your their view of the future while inviting ing. Their discussions then evolved vision and what can be achieved others to help crystallize that image. into a yearlong visioning process. through it. If people don’t get it, don’t (See the exhibit “Create a Vision.”) If In his book, Solving Tough Problems, just turn up the volume. Try to con- they realize other people aren’t joining Adam Kahane, the facilitator, says struct a shared vision. in or buying into the vision, they don’t the group started by telling stories of just turn up the volume; they engage 4. Don’t worry if you don’t know how “left-wing revolution, right-wing re- in a dialogue about the reality they to accomplish the vision. If it is com- volts, and free market utopias.”Eventu- hope to produce. They use stories and pelling and credible, other people ally, the leadership team drafted a set metaphors to paint a vivid picture of will discover all sorts of ways to make of scenarios that described the many what the vision will accomplish, even it real – ways you never could have paths toward disaster and the one to- if they don’t have a comprehensive imagined on your own. ward sustainable development. plan for getting there. They know that 5. Use images, metaphors, and stories They used metaphors and clear im- if the vision is credible and compelling to convey complex situations that will agery to convey the various paths in enough, others will generate ideas to enable others to act. language that was easy to understand. advance it. One negative scenario, for instance,

hbr.org | February 2007 | Harvard Business Review 97 In Praise of the Incomplete Leader

Most leaders experience a profound dichotomy every day, and it’s a heavy burden. They are trapped in the myth of the complete leader – the person at the top without flaws.

was dubbed “Ostrich”: A nonrepresentative white govern- the chemical composition and environmental effects of every ment sticks its head in the sand, trying to avoid a negotiated material and process Nike used. They visited factories in China settlement with the black majority. Another negative sce- and collected samples of rubber, leather, nylon, polyester, and nario was labeled “Icarus”: A constitutionally unconstrained foams to determine their chemical makeup. This led Winslow black government comes to power with noble intentions and and her team to develop a list of “positive” materials – those embarks on a huge, unsustainable public-spending spree that that weren’t harmful to the environment–that they hoped to crashes the economy. This scenario contradicted the popular use in more Nike products.“Environmental sustainability”was belief that the country was rich and could simply redistribute no longer just an abstract term on a vision statement; the team wealth from whites to blacks. The Icarus scenario set the now felt a mandate to realize the vision. stage for a fundamental (and controversial) shift in economic thinking in the ANC and other left-wing parties–a shift that led the ANC government to “strict and consistent fiscal disci- Inventing pline,”according to Kahane. Even the most compelling vision will lose its power if it floats, The group’s one positive scenario involved the govern- unconnected, above the everyday reality of organizational ment adopting a set of sustainable policies that would put life. To transform a vision of the future into a present-day re- the country on a path of inclusive growth to successfully re- ality,leaders need to devise processes that will give it life. This build the economy and establish democracy. This option was inventing is what moves a business from the abstract world called “Flamingo,”invoking the image of a flock of beautiful of ideas to the concrete world of implementation. In fact, birds all taking flight together. inventing is similar to execution, but the label “inventing” This process of visioning unearthed an extraordinary col- emphasizes that this process often requires creativity to help lective sense of possibility in South Africa. Instead of talking people figure out new ways of working together. about what other people should do to advance some agenda, To realize a new vision, people usually can’t keep doing the leaders spoke about what they could do to create a bet- the same things they’ve been doing. They need to conceive, ter future for everyone. They didn’t have an exact implemen- design, and put into practice new ways of interacting and tation plan at the ready, but by creating a credible vision, organizing. Some of the most famous examples of large-scale they paved the way for others to join in and help make their organizational innovation come from the automotive in- vision a reality. dustry: Henry Ford’s conception of Leaders who excel in visioning walk the assembly-line factory and Toyota’s the walk; they work to embody the core famed integrated production system. values and ideas contained in the vision. CULTIVATE INVENTIVENESS More recently, Pierre Omidyar, the Darcy Winslow, Nike’s global director founder of eBay, invented through his for women’s footwear, is a good exam- 1. Don’t assume that the way things company a new way of doing large- ple. A 14-year veteran at Nike, Winslow have always been done is the best scale retailing. His vision was of an on- previously held the position of general way to do them. line community where users would manager of sustainable business oppor- take responsibility for what happened. 2. When a new task or change effort tunities at the shoe and apparel giant. In a 2001 BusinessWeek Online inter- emerges, encourage creative ways Her work in that role reflected her own view, Omidyar explained, “I had the of getting it done. core values, including her passion for idea that I wanted to create an effi- the environment.“We had come to see 3. Experiment with different ways of or- cient market and a level playing field that our customers’health and our own ganizing work. Find alternative meth- where everyone had equal access to in- ability to compete were inseparable ods for grouping and linking people. formation. I wanted to give the power from the health of the environment,” 4. When working to understand your of the market back to individuals, not she says. So she initiated the concept of current environment, ask yourself, just large corporations. That was the ecologically intelligent product design. “What other options are possible?” driving motivation for creating eBay Winslow’s team worked at determining at the start.”

98 Harvard Business Review | February 2007 | hbr.org ple make their primary living from selling wares on eBay. If those individuals were all employees of eBay, it would be Examining Your Leadership the second largest private employer in the United States after Capabilities Wal-Mart. The people who work through eBay are essentially inde- Few people wake up in the morning and say, “I’m a poor pendent store owners, and, as such, they have a huge amount sensemaker” or “I just can’t relate to others.” They tend of autonomy in how they do their work. They decide what to to experience their own weaknesses more as chronic or sell, when to sell it, how to price, and how to advertise. Cou- inexplicable failures in the organization or in those around pled with this individual freedom is global scale. EBay’s infra- them. The following descriptions will help you recognize structure enables them to sell their goods all over the world. opportunities to develop your leadership capabilities and What makes eBay’s inventing so radical is that it represents identify openings for working with others. a new relationship between an organization and its parts. Unlike typical outsourcing, eBay doesn’t pay its retailers – SIGNS OF WEAK SENSEMAKING they pay the company. 1. You feel strongly that you are usually right and others Inventing doesn’t have to occur on such a grand scale. It are often wrong. happens every time a person creates a way of approaching 2. You feel your views describe reality correctly, a task or figures out how to overcome a previously insur- but others’ views do not. mountable obstacle. In their book Car Launch, George Roth 3. You find you are often blindsided by changes in your and Art Kleiner describe a highly successful product develop- organization or industry. ment team in the automobile industry that struggled with 4. When things change, you typically feel resentful. completing its designs on time. Much of the source of (That’s not the way it should be!) the problem, the team members concluded, came from the SIGNS OF WEAK RELATING stovepipe organizational structure found in the product 1. You blame others for failed projects. development division. Even though they were a “colocated” 2. You feel others are constantly letting you down or failing team dedicated to designing a common new car, members to live up to your expectations. were divided by their different technical expertise, experi- 3. You find that many of your interactions at work are ence, jargon, and norms of working. unpleasant, frustrating, or argumentative. When the team invented a mechanical prototyping device 4. You find many of the people you work with that complemented its computer-aided design tools, the untrustworthy. group members found that it facilitated a whole new way of collaborating. Multiple groups within the team could quickly SIGNS OF WEAK VISIONING create physical mock-ups of design ideas to be tested by the 1. You feel your work involves managing an endless series various engineers from different specialties in the team. The of crises. group called the device “the harmony buck,”because it helped 2. You feel like you’re bouncing from pillar to post with people break out of their comfortable engineering specialties no sense of larger purpose. and solve interdependent design problems together. Develop- 3. You often wonder, “Why are we doing this?” or “Does ment of a “full body”physical mock-up of the new car allowed it really matter?” engineers to hang around the prototype, providing a central 4. You can’t remember the last time you talked to your focal point for their interactions. It enabled them to more eas- family or a friend with excitement about your work. ily identify and raise cross-functional issues, and it facilitated mutual problem solving and coordination. SIGNS OF WEAK INVENTING In sum, leaders must be able to succeed at inventing, and 1. Your organization’s vision seems abstract to you. this requires both attention to detail and creativity. (See the 2. You have difficulty relating your company’s vision exhibit “Cultivate Inventiveness.”) to what you are doing today. 3. You notice dysfunctional gaps between your organiza- tion’s aspirations and the way work is organized. Balancing the Four Capabilities 4. You find that things tend to revert to business as usual. Sensemaking, relating, visioning, and inventing are interde- pendent. Without sensemaking, there’s no common view of reality from which to start. Without relating, people work Consequently, eBay outsources most of the functions of in isolation or, worse, strive toward different aims. Without traditional retailing – purchasing, order fulfillment, and cus- visioning, there’s no shared direction. And without inventing, tomer service, for example – to independent sellers world- a vision remains illusory. No one leader, however, will excel wide. The company estimates that more than 430,000 peo- at all four capabilities in equal measure.

hbr.org | February 2007 | Harvard Business Review 99 In Praise of the Incomplete Leader

Typically,leaders are strong in one or two capabilities. Intel • • • chairman Andy Grove is the quintessential sensemaker, for Years ago, one of us attended a three-day meeting on leader- instance, with a gift for recognizing strategic inflection points ship with 15 top managers from different companies. At the that can be exploited for competitive advantage. Herb Kelle- close of it, participants were asked to reflect on their experi- her, the former CEO of Southwest Airlines, excels at relating. ence as leaders. One executive, responsible for more than He remarked in the journal Leader to Leader that “We are not 50,000 people in his division of a manufacturing corpora- afraid to talk to our people with emotion. We’re not afraid to tion, drew two pictures on a flip chart. The image on the left tell them,‘We love you.’Because we do.”With this emotional was what he projected to the outside world: It was a large, in- connection comes equitable compensation and profit sharing. timidating face holding up a huge fist. The image on the right Apple CEO Steve Jobs is a visionary whose ambitious represented how he saw himself: a small face with wide eyes, dreams and persuasiveness have catalyzed remarkable suc- hair standing on end, and an expression of sheer terror. cesses for Apple, Next, and Pixar. Meg Whitman, the CEO of We believe that most leaders experience that profound di- eBay,helped bring Pierre Omidyar’s vision of online retailing chotomy every day, and it’s a heavy burden. How many times to life by inventing ways to deal with security, vendor relia- have you feigned confidence to superiors or reports when you bility, and product diversification. were really unsure? Have you ever felt comfortable conceding Once leaders diagnose their own capabilities, identifying that you were confused by the latest business results or caught their unique set of strengths and weaknesses, they must off guard by a competitor’s move? Would you ever admit to search for others who can provide the things they’re miss- feeling inadequate to cope with the complex issues your firm ing. (See the sidebar “Examining Your Leadership Capabili- was facing? Anyone who can identify with these situations ties.”) Leaders who choose only people who mirror them- knows firsthand what it’s like to be trapped in the myth of the selves are likely to find their organizations tilting in one complete leader–the person at the top without flaws. It’s time direction, missing one or more essential capabilities needed to put that myth to rest, not only for the sake of frustrated to survive in a changing, complex world. That’s why it’s im- leaders but also for the health of organizations. Even the most portant to examine the whole organization to make sure it is talented leaders require the input and leadership of others, appropriately balanced as well. It’s the leader’s responsibility constructively solicited and creatively applied. It’s time to to create an environment that lets people complement one celebrate the incomplete–that is, the human–leader. another’s strengths and offset one another’s weaknesses. In this way, leadership is distributed across multiple people Reprint R0702E throughout the organization. To order, see page 158.

“Finally, to help those of us counting carbs, we’ve moved to bar graphs instead of pie charts.” Mark Anderson

100 Harvard Business Review | February 2007 | hbr.org So the tunnel would link Scotland and Norway?

The five words that never fail to excite and motivate us: “It’s never been done before.” Global Banking Global Capital Markets Global Transaction Services

citigroupcib.com

© 2006 Citigroup Global Markets, Inc. Member SIPC. All rights reserved. CITIGROUP and the Umbrella Device are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. STRATEGIC HUMOR

Table Talk Dialogue is the basic unit of work in an organization. The quality of the dialogue determines how people gather and process information, how they make decisions, and how they feel about one another and about the outcome of these decisions.

Ram Charan “Conquering a Culture of Indecision” Harvard Business Review April 2001

“My lobbyist trumps your legal team.” e Lynch, and Scott Arthur Masear and Scott e Lynch,

“Personally, I was hoping for more from the intermediary process.” Pat Byrnes, Roy Delgado, Patrick Hardin, Mik Delgado, Patrick Byrnes, Roy Pat

102 Harvard Business Review | February 2007 | hbr.org “I’m uncertain about this, but I could be wrong.”

“Sometimes, I wonder if these endless meetings really accomplish anything.”

“Just once I’d like to see us pass something on a voice vote.”

hbr.org | February 2007 | Harvard Business Review 103 Identify, quantify, and manage the risks to your company’s reputation long before a problem or crisis strikes. REPUTATION and Its Risks by Robert G. Eccles, Scott C. Newquist, and Roland Schatz

EXECUTIVES KNOW THE IMPORTANCE of their companies’repu- tations. Firms with strong positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium. Their customers are Emore loyal and buy broader ranges of products and services. Because the market believes that such companies will deliver sustained earnings and future growth, they have higher price-earnings multiples and market values and lower costs of capital. Moreover, in an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, orga- nizations are especially vulnerable to anything that damages their reputations. Blair Kelly

104 Harvard Business Review | February 2007 | hbr.org

Reputation and Its Risks

Most companies, however, do an inadequate job of man- reputational risks. That’s mainly because of the difficulty of aging their reputations in general and the risks to their rep- factoring them into capital-adequacy requirements, most utations in particular. They tend to focus their energies on banking-risk professionals would say. handling the threats to their reputations that have already Given this lack of common standards, even sophisticated surfaced. This is not risk management; it is crisis manage- companies have only a fuzzy idea of how to manage reputa- ment – a reactive approach whose purpose is to limit the tional risk. A large U.S. pharmaceutical company reflects the damage. This article provides a framework for proactively current state of practice among well-run organizations. It has managing reputational risks. It explains the factors that af- an ERM system for managing operational and financial risks, fect the level of such risks and then explores how a company as well as hazards from external events such as natural disas- can sufficiently quantify and control them. Such a process ters, that is loosely based on the COSO framework. The firm’s will help managers do a better job of assessing existing and vice president of risk management oversees the system. How- potential threats to their companies’ reputations and decid- ever, the company manages reputational risks only infor- ing whether to accept a given risk or to take actions to avoid mally – and unevenly – at the local and product levels. Its or mitigate it. leaders consider reputational risk only when they make major decisions such as those involving acquisitions. (The company’s due-diligence process includes the evaluation of The Current State of Affairs problems that could affect reputation, including pending Regulators, industry groups, consultants, and individual com- lawsuits, weak product-testing procedures, product-liability panies have developed elaborate guidelines over the years concerns, and poor control systems for detecting management for assessing and managing risks in a wide range of areas, fraud.) The risk management VP says that reputational risk from commodity prices to control systems to supply chains is not included in the long list of risks for which he is respon- to political instability to natural disasters. However, in the sible. Then who is responsible? The CEO, the vice president

It takes many good deeds to build a good reputation, “and only one bad one to lose it. ” –Benjamin Franklin absence of agreement on how to define and measure reputa- surmises, since that is who oversees the firm’s elaborate crisis- tional risk, it has been ignored. response system and is ultimately responsible for dealing Consider the 135-page framework for enterprise risk man- with any events that could damage the company’s reputa- agement (ERM) proposed in 2004 by the Committee of tion. This pharmaceutical firm is not alone. Contingency Sponsoring Organizations of the Treadway Commission plans for crisis management are as close as most large and (COSO), a group of professional associations of U.S account- midsize companies come to reputational-risk management. ants and financial executives that issues guidelines for inter- While such plans are important, it is a mistake to confuse nal controls. Although the framework mentions virtually them with a capability for managing reputational risk. Know- every other imaginable risk, it does not contain a single ref- ing first aid is not the same as protecting your health. erence to reputational risk. Nor does the Basel II international accord for regulating capital requirements for large international banks. In de- Determinants of Reputational Risk fining operational risk as “the risk of loss resulting from Three things determine the extent to which a company is ex- inadequate or failed internal processes, people and systems posed to reputational risk. The first is whether its reputation or from external events,” the Basel II framework, issued in exceeds its true character. The second is how much external 2004 and updated in 2005, specifically excludes strategic and beliefs and expectations change, which can widen or (less

Robert G. Eccles ([email protected]) and Scott C. Newquist ([email protected]) are founders and managing directors of Perception Partners, a firm based in West Palm Beach, Florida, that advises companies on corporate governance, corporate reporting, and reputational risk. Roland Schatz ([email protected]) is the founder and CEO of the Media Tenor Institute for Media Analysis, a firm based in Lugano, Switzerland, that helps organizations manage their reputations through strategic media intelligence.

106 Harvard Business Review | February 2007 | hbr.org BP’s Sinking Image

Media coverage plays a large role in determining plosion at BP’s Texas City refinery, alleged tax evasion a company’s reputation. The changing mix of positive in Russia, and job cuts in Europe took their toll in and negative stories mentioning BP in the leading 2005, when positive and negative coverage were British, German, and U.S. media from January 2003 roughly equal. Events in 2006 – especially an oil leak through September 2006 shows how a series of at the Prudhoe Bay field in Alaska due to pipeline cor- events hurt the oil giant’s reputation. During 2003 rosion, and a subsequent cut in production – caused and 2004, the ratio of positive to negative stories the number of stories mentioning BP to soar and the was about two to one. However, stories about an ex- mix to become more negative than positive.

100% Job cuts in Europe POSITIVE 10/29/05 STORIES

Russian tax-evasion case settled 8/11/05 Prudhoe Bay 80% pipeline corrosion Investigators of Texas City refinery revealed, explosion release findings production cutback 8/18/05 8/7/06 Texas City refinery explosion Allegations of 60% 3/23/05 propane market manipulation NO CLEAR Allegations of tax evasion in Russia 6/29/06 RATING 11/12/04 Prudhoe 40% Bay leak 3/2/06

20% NEGATIVE STORIES

0 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S 2003 2004 2005 2006

Dates are when first reports of events appeared in leading media.

likely) narrow this gap. The third is the quality of internal co- Reputation is distinct from the actual character or behav- ordination, which also can affect the gap. ior of the company and may be better or worse. When the Reputation-reality gap. Effectively managing reputational reputation of a company is more positive than its underlying risk begins with recognizing that reputation is a matter of per- reality, this gap poses a substantial risk. Eventually, the fail- ception. A company’s overall reputation is a function of its ure of a firm to live up to its billing will be revealed, and its reputation among its various stakeholders (investors, cus- reputation will decline until it more closely matches the re- tomers, suppliers, employees, regulators, politicians, non- ality.BP appears to be learning this the hard way.The energy governmental organizations, the communities in which the giant has striven to portray itself as a responsible corporation firm operates) in specific categories (product quality, corpo- that cares about the environment. Its efforts have included rate governance, employee relations, customer service, intel- its extensive “Beyond Petroleum” advertising campaign and lectual capital, financial performance, handling of environ- a multibillion-dollar initiative to expand its alternative- mental and social issues). A strong positive reputation among energy business. But several major events in the past two stakeholders across multiple categories will result in a strong years are now causing the public to question whether BP is positive reputation for the company overall. truly so exceptional. (See the exhibit “BP’s Sinking Image.”)

hbr.org | February 2007 | Harvard Business Review 107 Reputation and Its Risks

One was the explosion and fire at its Texas City refinery in Changing beliefs and expectations. The changing beliefs March 2005 that killed 15 people and injured scores of oth- and expectations of stakeholders are another major deter- ers. Another was the leak in a corroded pipeline at its Prud- minant of reputational risk. When expectations are shifting hoe Bay oil field in Alaska that occurred a year later and and the company’s character stays the same, the reputation- forced the company to slash production in August 2006. BP reality gap widens and risks increase. has blamed the refinery disaster on lax operating practices, There are numerous examples of once-acceptable prac- but federal investigators have alleged that cost cutting con- tices that stakeholders no longer consider to be satisfactory tributed as well. Employee allegations and company reports or ethical. Until the 1990s, hostile takeovers in Japan were al- suggest that the root cause of the Prudhoe Bay problem may most unheard of–but that was partly due to the cross-holding have been inadequate maintenance and inspection practices of shares among the elite groups of companies known as kei- and management’s failure to heed warnings of potential cor- retsu, a practice that undermined the power of other share- rosion problems. As media coverage reflects, these events and holders. With the weakening of the keiretsu structure during others have damaged BP’s reputation. the past ten to 15 years, shareholder rights and takeovers To bridge reputation-reality gaps, a company must either have been on the rise. In the United States, once-acceptable improve its ability to meet expectations or reduce expecta- practices now considered improper include brokerage firms tions by promising less. The problem is, managers may resort using their research functions to sell investment-banking

Character is like a tree and reputation like its shadow. The shadow “is what we think of it; the tree is the real thing. ” –Abraham Lincoln

to short-term manipulations. For example, reputation-reality deals; insurance underwriters’ incentive payments to bro- gaps concerning financial performance often result in ac- kers, which caused brokers to price and structure coverage to counting fraud and (ultimately) restatements of results. Com- serve underwriters’ interests rather than customers’; the ap- puter Associates, Enron, Rite Aid, Tyco, WorldCom, and pointment of CEOs’ friends to boards as “independent direc- Xerox are some of the well-known companies that have tors”; earnings guidance; and smoothing of earnings. fallen into this trap in recent years. Sometimes norms evolve over time, as did the now wide- Of course, organizations that actually meet the expecta- spread expectation in most developed countries that com- tions of their various stakeholders may not get full credit for panies should pollute minimally (if at all). A change in the doing so. This often occurs when a company’s reputation has behavior or policies of a leading company can cause stake- been significantly damaged by unfair attacks from special in- holders’expectations to shift quite rapidly,which can imperil terest groups or inaccurate reporting by the media. It also the reputations of firms that adhere to old standards. For ex- can happen when a company has made genuine strides in ad- ample, the “ecomagination” initiative launched by General dressing a problem that has hurt its reputation but can’t con- Electric in 2005 has the potential to raise the bar for other vince stakeholders that its progress is real. For example, Chry- companies. It committed GE to doubling its R&D investment sler, Ford, and General Motors improved their cars so much in developing cleaner technologies, doubling the revenue that the quality gap between them and the vehicles made by from products and services that have significant and measur- Japanese companies had largely closed by 2001. Yet, much to able environmental benefits, and reducing GE’s own green- the frustration of the Big Three, consumers remain skeptical. house emissions. Undeserved poor or mediocre reputations can be mad- Of course, different stakeholders’expectations can diverge dening. The temptation is to respond to them with resigna- dramatically, which makes the task of determining accept- tion and conclude: “No matter what we do, people won’t like able norms especially difficult. When GlaxoSmithKline pio- us, so why bother?” The reason executives should bother – neered the development of anti-retroviral drugs to combat through redoubled efforts to improve reporting and com- AIDS, its reputation for conducting cutting-edge research munications – is that their fiduciary obligation to close such and product development was reinforced and shareholders reputation-reality gaps is as great as their obligation to im- were pleased. They were initially on board when GSK led prove real performance. Both things drive value creation for a group of pharmaceutical companies in suing the South shareholders. African government after it passed legislation in 1997 allow-

108 Harvard Business Review | February 2007 | hbr.org ing the country to import less expensive, generic versions of AIDS drugs covered by GSK patents. But in 2001, GSK share- holders did an about-face in reaction to an intensifying campaign waged by NGOs and to the trial proceedings, which made GSK and the other drug companies look greedy and immoral. With its reputation plunging, GSK relented and granted a South African company a free license to manufacture generic versions of its AIDS drugs–but the damage was already done. Sometimes, particular events can cause latent concerns to burst to the sur- face. One example would be all the ques- tions about whether Merck had fully disclosed the potential of its painkiller Vioxx to cause heart attacks and strokes. Merck is embroiled in thousands of law- suits over the arthritis drug, which it pulled from the market in 2004. The con- troversy has raised patients’ and doctors’ expectations that drug companies should disclose more detailed results and analy- ses of clinical trials, as well as experience in the market after drugs have received regulatory approval. When such crises strike, companies complain that they have been found guilty (in the courts or in the press) be- cause the rules have changed. But all too often, it’s their own tion bonuses for senior managers and a big payment to a fault: They either ignored signs that stakeholders’beliefs and trust fund designed to protect executive pensions in the expectations were changing or denied their validity. event of bankruptcy. However, the company didn’t tell the In addition, organizations sometimes underestimate how unions. Furious when they found out, the unions revisited much attitudes can vary by region or country. For example, the concessions package they had approved. The controversy Monsanto, a developer of genetically modified plants, was cost CEO Donald J. Carty his job. badly burned by its failure to anticipate Europeans’deep con- Poor internal coordination also inhibits a company’s abil- cerns about genetically modified foods. ity to identify changing beliefs and expectations. In virtually Weak internal coordination. Another major source of rep- all well-run organizations, individual functional groups not utational risk is poor coordination of the decisions made by only have their fingers on the pulses of various stakehold- different business units and functions. If one group creates ers but are also actively trying to manage their expectations. expectations that another group fails to meet, the company’s Investor Relations (with varying degrees of input from the reputation can suffer. A classic example is the marketing de- CFO and the CEO) attempts to ascertain and influence the ex- partment of a software company that launches a large adver- pectations of analysts and investors; Marketing surveys cus- tising campaign for a new product before developers have tomers; Advertising buys ads that shape expectations; HR identified and ironed out all the bugs: The company is forced surveys employees; Corporate Communications monitors to choose between selling a flawed product and introducing the media and conveys the company’s messages; Corporate it later than promised. Social Responsibility engages with NGOs; and Corporate Af- The timing of unrelated decisions also can put a com- fairs monitors new and pending laws and regulations. All of pany’s reputation at risk, especially if it causes a stakeholder these actions are important to understanding and managing group to jump to a negative conclusion. This happened to reputational risks. But more often than not, these groups do American Airlines in 2003, when it was trying to stave off a bad job of sharing information or coordinating their plans. bankruptcy.At the same time that it was negotiating a major Coordination is often poor because the CEO has not as- reduction in wages with its unions, its board approved reten- signed this responsibility to a specific person. When 269

hbr.org | February 2007 | Harvard Business Review 109 Reputation and Its Risks

executives were asked in 2005 by the Economist Intelligence ing volume and prominence of coverage, topics of interest, Unit who at their companies had “major responsibility” for and whether the view is positive or negative. managing reputational risk, 84% responded,“The CEO.”This Establishing a positive reputation through the media de- means that nobody is really overseeing the coordination pro- pends on several factors or practices, according to research cess. Yes, the CEO is the person ultimately responsible for by the Media Tenor Institute for Media Analysis (founded by reputational risk, since he or she is ultimately responsible coauthor Roland Schatz) in Lugano, Switzerland. for everything. But the fact of the matter is, the CEO does not First, the company has to land and remain on the public’s have the time to manage the ongoing process of coordinat- radar screen, which involves staying above what we call the ing all the activities that affect reputational risk. “awareness threshold”: a minimum number of stories men- tioning or featuring the company in the leading media. This volume, which must be continual, varies somewhat from Managing Reputational Risk company to company, depending on industry and country Effectively managing reputational risk involves five steps: as- but not on company size. sessing your company’s reputation among stakeholders, eval- Second, a positive reputation requires that at least 20% of uating your company’s real character, closing reputation- the stories in the leading media be positive, no more than reality gaps, monitoring changing beliefs and expectations, 10% negative, and the rest neutral. When coverage is above and putting a senior executive below the CEO in charge. the awareness threshold and is positive overall, the com- Assess reputation. Since reputation is perception, it is per- pany’s reputation benefits from individual positive stories ception that must be measured. This argues for the assess- and is less susceptible to being damaged when negative sto- ment of reputation in multiple areas, in ways that are contex- ries appear. If coverage is above the awareness threshold but tual, objective, and, if possible, quantitative. Three questions the majority of stories are negative, a company will not ben- need to be addressed: What is the company’s reputation in efit from individual positive stories, and bad news will rein- each area (product quality, financial performance, and so force its negative reputation. All companies–large or small– on)? Why? How do these reputations compare with those of should care about staying above their awareness threshold. the firm’s peers? Even if a small company has a very strong reputation among Various techniques exist for evaluating a company’s repu- a small group of core investors or customers, it runs a high risk tation. They include media analysis, surveys of stakeholders of suffering considerable damage to its reputation if its media (customers, employees, investors, NGOs) and industry exec- coverage is below the awareness threshold when a crisis hits. utives, focus groups, and public opinion polls. Although all A company’s reputation is also vulnerable if the media are are useful, a detailed and structured analysis of what the focused on just a few topics, such as earnings and the person- media are saying is especially important because the media ality of the CEO. Even if the coverage of these topics is ex- shape the perceptions and expectations of all stakeholders. tremely favorable, a negative event outside these areas will Today, many companies hire clipping services to gather have a much larger negative impact than it would have if the stories about them. Text- and speech-recognition technolo- firm had enjoyed broader positive coverage. gies enable these services to scan a wide range of outlets, in- Third, managers can influence the mix of positive, negative, cluding newspapers, magazines, TV, radio, and blogs. They and neutral stories by striving to optimize the company’s can provide information on such things as the total number “share of voice”: the percentage of leading-media stories of stories, the number per topic, and the source and author mentioning the firm that quote someone from the organiza- of each story. While useful in offering a real-time sample of tion or cite data it has provided. Media Tenor’s research sug- media coverage, these services are not always accurate in as- gests that a company needs to have at least a 35% share of sessing whether a story about a company is positive, nega- voice in order to keep the proportion of negative stories to a tive, or neutral, because of the limits of the computer algo- minimum in normal times. Strong relationships and credibil- rithms that they employ. They also tend to miss stories that ity with the press are crucial to attaining a large share of voice cite a company but do not mention it in the headline or first and are especially important during a crisis, when a company few sentences. really needs to communicate its point of view. In such times, Therefore, the old tool of clipping services needs to be management’s share of voice needs to be at least 50% to en- supplemented with strategic media intelligence. This new sure that critics of the company don’t prevail. Merck’s travails tool not only analyzes every line in a story but also places the after the problems with Vioxx illustrate the consequences of coverage of a company within the context of all the stories in a company inadequately managing its position in the media. the leading media (those that set the tone for the coverage of (See the exhibit “Merck: The Perils of a Low Profile.”) topics, companies, and people in individual countries). Since Evaluate reality. Next, the company must objectively eval- the reputation of a company is a function of others’ reputa- uate its ability to meet the performance expectations of tions in its industry and the relative reputation of the indus- stakeholders. Gauging the organization’s true character is try overall, having the complete context is essential for assess- difficult for three reasons: First, managers–business unit and

110 Harvard Business Review | February 2007 | hbr.org Merck: The Perils of a Low Profile

Merck was ill prepared to defend its reputation when the Vioxx cited data provided by it, meaning Merck didn’t have the “share crisis hit. In the 33 months prior to Merck’s withdrawal of the of voice” required to communicate its positions. After the an- pain medication on September 30, 2004, the company had a low nouncement of Vioxx’s withdrawal, the average number of sto- profile: There weren’t enough leading-media stories mentioning ries per month mentioning Merck more than tripled – but 60% of it to keep it above the public’s “awareness threshold.” Although the stories that appeared through September 2006 were nega- 27% of the stories were positive, they were neutralized by the tive and only 13% positive. It will be difficult for Merck to rebuild 28% that were negative. In addition, before the recall, a woefully its reputation – especially since its share of voice has decreased inadequate 7% of stories quoted someone from the company or to 5.5%.

140 Date of Vioxx announcement September 30, 2004

POSITIVE STORIES 120

NO CLEAR RATING 100

Number NEGATIVE of reports STORIES Average number of reports per month 80 after September 30, 2004: 77

60

AWARENESS THRESHOLD

40

Average number of reports per month before September 30, 2004: 21 20

0 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S 2002 2003 2004 2005 2006

functional heads as well as corporate executives–have a nat- they are set low in order to ensure that performance objec- ural tendency to overestimate their organizations’ and their tives will be achieved, and other times they are set optimisti- own capabilities. Second, executives tend to believe that cally high in an attempt to impress superiors or the market. their company has a good reputation if there is no indication As is the case in assessing reputation, the more contextual, that it is bad, when in fact the company has no reputation objective, and quantitative the approach to evaluating char- in that area. Finally, expectations get managed: Sometimes acter, the better. Just as the reputation of a company must

hbr.org | February 2007 | Harvard Business Review 111 Reputation and Its Risks

One Drug Company’s Dashboard for Spotting Potential Risks

A Europe-based pharmaceutical com- are ahead of plan, the Central Nervous the projected shortfall – such as special pany uses this dashboard to track vari- System & Pain division is projecting that incentive programs for the sales force ances in performance that can lead to its revenues for the full year will fall short, or prescribing physicians – would create risky behavior. (The names of divisions mainly because of the Ibellance brand’s unacceptable reputational risk for the and brands have been changed and the projected performance. At this point, cor- company. And if Ibellance’s performance data have been scaled to protect propri- porate executives should meet with the dramatically improves during the rest of etary information.) Although the reve- division’s managers to ensure that none the year, they would be wise to investi- nues of the company’s U.S. business of the unit’s planned actions to address gate again.

Variances from Budget on Revenue Projections, Year-to-Date

Total revenues of the U.S. business are ahead of budget by $350.1M

Digestive Allergy & Inflammation Central Nervous Oncology Other Other Division Respiratory Division System & Pain Division Pharmaceuticals Businesses $46.17M Division $50.67M Division $190.84M $20.34M −$3.78M $119.09M −$73.23M

Deipand brand Prelfin brand Elmaxol brand Thivas brand Gaprivert brand $50.40M −$32.58M $30.67M $7.90M $154.45M

Mangeium brand Transbis brand Osisequn brand Itrarig brand Lobane brand −$7.04M $93.38M −$5.43M −$15.09M $16.96M

All other marketed Ectosyceium brand Throac brand Hispecart brand Oprav products digestive products $0M $16.64M −$12.97M −$0.01M $2.81M

Prasess brand Aphervir brand Ibellance brand Smoodent brand $0M −$3.10M −$43.44M $13.92M

Ectonab brand Othuctage brand Othedicize brand Grispec brand $62.81M $15.19M −$3.74M $2.89M

Brevdorp brand Oloxic brand All other marketed All other oncology −$1.88M $0M CNS & Pain products products −$5.89M $2.63M

Analysis conducted with Empower visualization software, by Metapraxis.

All other marketed All other marketed Ahead of budget inflammation A&R products On or close to budget −$2.64M products (variance <5%) −$3.3M Below budget (variance >5%)

112 Harvard Business Review | February 2007 | hbr.org be assessed relative to competitors, so must its reality. For Company’s Dashboard for Spotting Potential Risks” for an example, performance-improvement targets based only on example of a simple but effective use of visualization soft- a company’s results for the previous year are meaningless if ware to highlight whether business units and products are on competitors are performing at a much higher level. The im- track to meet year-end goals.) portance of benchmarking financial and stock performance Close gaps. When a company’s character exceeds its repu- and processes against peers’ and those of companies re- tation, the gap can be closed with a more effective investor garded as “best in class” is hardly a revelation. However, the relations and corporate communications program that em- degree of sophistication and detail as well as the accuracy or ploys the principles of strategic media intelligence discussed reliability of benchmarking data can vary enormously. The above. If a reputation is unjustifiably positive, the company reasons include transcription errors (a big problem when a must either improve its capabilities, behavior, and perfor- large amount of data in paper documents has to be manually mance or moderate stakeholders’perceptions. Of course, few entered into electronic spreadsheets), for instance, and the companies would choose the latter if there were any way to inability to determine whether the way competitors report accomplish the former. If, however, the gap is large, the time information in an area is consistent. One company might in- required to close it is long, and the damage if stakeholders clude customers’ purchases of extended warranties in its rev- recognize the reality is likely to be great, then management enues, while another might not. should seriously consider lowering expectations – although Some new tools should help address these issues. One of this obviously needs to be done in careful, measured ways. the most noteworthy is Extensible Business Reporting Lan- Monitor changing beliefs and expectations. Understand- guage (XBRL). A version of the Internet standards technol- ing exactly how beliefs and expectations are evolving is not ogy Extensible Markup Language (XML), XBRL allows each easy, but there are ways to develop a picture over time. For piece of information in a financial statement to be electron- instance, regular surveys of employees, customers, and other ically tagged so that it can be quickly and cheaply pulled into stakeholders can reveal whether their priorities are chang- analytical software. These tags are contained in dictionaries, ing. While most well-run companies conduct such surveys, or “taxonomies,”based on sets of standards such as the U.S. few take the additional step of considering whether the data generally accepted accounting principles. XBRL-formatted fi- suggest that a gap between reputation and reality is materi- nancial statements are already available from companies alizing or widening. Similarly, periodic surveys of experts in such as EDGAR Online, but these early offerings have limi- different fields can identify political, demographic, and social tations. Taxonomies for specific industries must be devel- trends that could affect the reputation-reality gap.“Open re- oped; software for downloading and analyzing XBRL data is sponse” questions can be used to elicit new issues of impor- still at an early stage; and EDGAR Online’s offering includes tance–and thus new expectations–that other questions might European companies only if their shares are listed on a U.S. miss. It is generally useful to supplement these surveys with exchange (although an XBRL taxonomy does exist for inter- focus groups and in-depth interviews to develop a deeper un- national financial reporting standards, used by all members derstanding of the causes and possible consequences of trends. of the European Union and a number of other countries). Influential NGOs that could make the company a target Christopher Cox, the chairman of the Securities and Ex- are one group of stakeholders that should be monitored. change Commission, is determined to address such limita- These include environmental activists; groups concerned tions and accelerate the widespread adoption of XBRL. To- about wages, working conditions, and labor practices; con- ward that end, he announced in September 2006 that the sumers’ rights groups; globalization foes; and animals’ rights SEC will invest $54 million in an interactive data system groups. Many executives are skeptical about whether such based on XBRL, which “will represent a quantum leap over organizations are genuinely interested in working collabora- existing disclosure technologies.” (For more detail, see the tively with companies to achieve change for the public good. HBR List item “Here Comes XBRL”in this issue.) But NGOs are a fact of life and must be engaged. Interviews Another valuable new tool for managing reputational risk with them can also be a good way of identifying issues that is visualization software, which uses colors, shapes, and dia- may not yet have appeared on the company’s radar screen. grams to communicate the key points in financial and oper- Finally, companies need to understand how the media ating data. These displays are a big improvement over the shape the public’s beliefs and expectations. Dramatic changes spreadsheets now widely used, which often make it difficult in the amount of coverage influence how fast and to what ex- for even the most financially sophisticated executives to spot tent beliefs and expectations change. The large volume and important anomalies and trends. Because it takes so much prominent display of stories on the backdating of stock op- time to make sense of spreadsheets, executives tend to focus tions in recent months is one example of how the media can on the largest business units even though the greatest risks help set the agenda. The sharp drop in stories about insur- to reputation may reside in smaller ones–such as a struggling ance brokers’ getting incentive payments from underwriters foreign subsidiary that has begun to employ questionable illustrates how the media can help relegate a hot topic to the means to meet budget targets. (See the exhibit “One Drug back burner.

hbr.org | February 2007 | Harvard Business Review 113 Reputation and Its Risks

A Framework for Managing Reputational Risk

Understanding the factors that determine reputational risk enables a company to take actions to address them.

DETERMINANTS OF Reputation-reality gap Changing beliefs Weak internal REPUTATIONAL RISK and expectations coordination

WAYS TO MANAGE Objectively assess Assess and accept impact Explicitly focus on REPUTATIONAL RISK reputation versus reality of changing expectations reputational risk

Examine the gap between the Know that stakeholders’ changing Recognize that this is a distinct company’s reputation and actual expectations will affect reputa- kind of risk and manage it in a performance; make necessary tion even if they seem unreason- proactive and coordinated man- improvements. able at the time. ner. Assign one person the task of managing reputational risk.

Strong and sustainable reputation

Put one person in charge. Assessing reputation, evaluating most well-managed companies, many of the elements are al- reality, identifying and closing gaps, and monitoring chang- ready in place in disparate parts of the organization. The ad- ing beliefs and expectations will not happen automatically. ditional costs of installing and using the new tools described The CEO has to give one person responsibility for making above to identify risks and design responses are in the low to these things happen. Obvious candidates are the COO, the high six figures, depending on the size and complexity of the CFO, and the heads of risk management, strategic planning, company. This is a modest expense compared with the value and internal audit. They have the credibility and control at stake for many companies. some of the resources necessary to do the job. In general, So the primary challenge is focus: recognizing that repu- those whose existing responsibilities pose potential conflicts tational risk is a distinct category of risk and giving one per- probably shouldn’t be chosen. People holding top “spin”jobs, son unambiguous responsibility for managing it. This person such as the heads of marketing and corporate communica- can then identify all the parts of the organization whose ac- tions, fall into this category. So does the general counsel, tivities can affect or pose risks to its overall reputation and whose job of defending the company means his relationship enhance the coordination among its functions and units. The with stakeholders is often adversarial and whose typical re- improvements in decision making will undoubtedly result in sponse to media inquiries is “no comment.” a better-run company overall. The chosen executive should periodically report to top Senior executives tend to be optimists and cheerleaders. management and the board on what the key reputational Their natural inclination is to believe the praise heaped on risks are and how they are being managed. It is up to the their companies and to discount the criticism. But looking at CEO or the board to decide whether the risks are acceptable the world and one’s organization through rose-tinted glasses and, if not, what actions should be taken. In addition, top man- is an abdication of responsibility. Being tough-minded about agement and the board should periodically review the risk- both will enable a company to build a strong reputation that management process and make suggestions for improving it. it deserves. • • • Managing reputational risk isn’t an extraordinarily expen- Reprint R0702F sive undertaking that will require years to implement. At To order, see page 158.

114 Harvard Business Review | February 2007 | hbr.org

Companies that systematically monitor customer experience can take important steps to improve it – and their bottom line. UNDERSTANDING EXPERIENCECUSTOMER

by Christopher Meyer and Andre Schwager

ANYONE WHO HAS SIGNED UP RECENTLY for cell phone service has faced a stern test in trying to figure out the cost of carry- forward minutes versus free calls within a network and how it compares with the cost of such services as push-to- talk, roaming, and messaging. Many, too, have fallen for a rebate offer only to discover that the form they must fill out rivals a home mortgage application in its detail. And then there are automated telephone systems, in which harried consumers navigate a mazelike menu in search of a real-life

Laurent Cilluffo human being. So little confidence do consumers have in these

hbr.org | February 2007 | Harvard Business Review 117 Understanding Customer Experience

electronic surrogates that a few weeks after the Web site ple, integrated solutions to problems – not fragmented, bur- www.gethuman.com showed how to reach a live person densome ones – will win the allegiance of the time-pressed quickly at ten major consumer sites, instructions for more consumer. (For more on making the buying process simpler, than 400 additional companies had poured in. see James P. Womack and Daniel T. Jones, “Lean Consump- An excess of features, baited rebates, and a paucity of the tion,” HBR March 2005.) Moreover, in markets that are in- personal touch are all evidence of indifference to what creasingly global, it is dangerous to assume that a given offer- should be a company’s first concern: the quality of customers’ ing, communication, or other contact will affect faraway experiences. In the first example, the carrier offered a jumble consumers the same way it does those at home. of phone services in part to discourage comparison shopping Although few companies have zeroed in on customer ex- and thus price wars. In the second, the company offered a perience, many have been trying to measure customer satis- hard-to-obtain rebate to stimulate a purchase. And in the faction and have plenty of data as a result. The problem is third, the goal was to slash staffing costs, despite soothing that measuring customer satisfaction does not tell anyone claims of 24-hour self-service availability.Unfortunately,such how to achieve it. Customer satisfaction is essentially the cunning makes for customer experiences that engender re- culmination of a series of customer experiences or, one could gret and then the determination to do business elsewhere. say, the net result of the good ones minus the bad ones. It oc- Customer experience encompasses every aspect of a curs when the gap between customers’ expectations and company’s offering – the quality of customer care, of course, their subsequent experiences has been closed. To understand but also advertising, packaging, product and service features, how to achieve satisfaction, a company must deconstruct it ease of use, and reliability. Yet few of the people responsible into its component experiences. Because a great many cus- for those things have given sustained thought to how their tomer experiences aren’t the direct consequence of the separate decisions shape customer experience. To the extent brand’s messages or the company’s actual offerings, a com- they do think about it, they all have different ideas of what pany’s reexamination of its initiatives and choices will not customer experience means, and no one more senior over- suffice. The customers themselves–that is, the full range and sees everyone’s efforts. unvarnished reality of their prior experiences, and then the Within product businesses, for example, product develop- expectations, warm or harsh, those have conjured up – must ment defers to marketing when it comes to customer expe- be monitored and probed. rience issues, and both usually focus on features and specifi- Such attention to customers requires a closed-loop process cations. Operations concerns itself mainly with quality, in which every function worries about delivering a good timeliness, and cost. And customer service personnel tend experience, and senior management ensures that the offer- to concentrate on the unfolding transaction but not its con- ing keeps all those parochial conceptions in balance and thus nection to those preceding or following it. Even then, much linked to the bottom line. This article will describe how to service is rote: Otherwise, why would service reps ask, as create such a process, composed of three kinds of customer they so often do,“Is there anything else I can help you with?” monitoring: past patterns, present patterns, and potential when they haven’t even dealt with the original reason for patterns. (These patterns can also be referred to by the fre- the call or visit? quency with which they are measured: persistent, periodic, Some companies don’t understand why they should and pulsed.) By understanding the different purposes and worry about customer experience. Others collect and quan- different owners of these three techniques – and how they tify data on it but don’t circulate the findings. Still others work together (not contentiously)–a company can turn pipe do the measuring and distributing but fail to make anyone dreams of customer focus into a real business system. responsible for putting the information to use. The extent of the problem has been documented in Bain & Company’s recent survey of the customers of 362 companies. Only 8% What Customer Experience Is of them described their experience as “superior,”yet 80% of Customer experience is the internal and subjective response the companies surveyed believe that the experience they customers have to any direct or indirect contact with a com- have been providing is indeed superior. With such a dispar- pany. Direct contact generally occurs in the course of pur- ity, prospects for improvement are small. But the need is chase, use, and service and is usually initiated by the cus- urgent: Consumers have a greater number of choices today tomer. Indirect contact most often involves unplanned than ever before, more complex choices, and more channels encounters with representations of a company’s products, through which to pursue them. In such an environment, sim- services, or brands and takes the form of word-of-mouth rec-

Christopher Meyer ([email protected]) is the chairman of Strategic Alignment Group, a consultancy based in Portola Valley, California, that spe- cializes in innovation and time-based competition. He is the author of Fast Cycle Time (Free Press, 1993). Andre Schwager (aschwager@ customersenseconsulting.com) is a former president of Seagate Enterprise Management Software and a founder of Satmetrix Systems, a cus- tomer experience software company based in Foster City, California.

118 Harvard Business Review | February 2007 | hbr.org ommendations or criticisms, advertising, news reports, re- goal is to provide a positive experience to the end user. views, and so forth. Such an encounter could occur when The business partner or supplier of a B2B company helps Google’s whimsical holiday logos pop up on the site’s home the latter do that first by understanding where in its direct page at the inception of a search, or it could be the distinc- customers’ value chain the B2B can make a meaningful con- tive “potato, potato” sound of a Harley-Davidson motorcy- tribution, and then when and how. Those are different un- cle’s exhaust system. It might just be an e-mail from one cus- dertakings from capturing and parsing a given human tomer to another. being’s internal, ineffable experience. A business’s “experi- The secret to a good experience isn’t the multiplicity of ence,”one might say, is its manner of functioning, and a B2B features on offer. Microsoft Windows, which is rich in fea- company helps its business customers serve their custom- tures, may provide what a corporate IT director considers ers by solving their business problems, just as an effective

Corporate leaders who would never tolerate a large gap between forecasted and actual revenues prefer to look the other way when company and customer assessments diverge.

a positive experience, but many home users prefer Apple’s business-to-consumer company fulfills the personal needs of Macintosh operating system, which offers fewer features and its customers. In a B2B context, a good experience is not a configuration options. A customer’s experience with an thrilling one but one that is trouble-free and hence reassur- Apple device begins well before the purchaser turns it on – ing to those in charge. in the case of the iPod, perhaps with the dancing silhou- Thus, a supplier satisfies the purchasing department of ettes in the TV advertisements. The origami-like (and recy- its business customer by providing a balance of costs and clable) packaging enfolds the iPod as though it were a benefits; it satisfies operations by offering products or ser- Fabergé egg made for a czar. A small sticker, “Designed in vices that are easy to use; and it satisfies a customer’s execu- California, Made in China,”communicates the message that tives by expanding capacity at the same rate as the customer Apple is firmly in charge but also interested in keeping costs and in general evolving alongside it. Accordingly, sales and down. Even Windows users appreciate the device’s intuitive, marketing do not necessarily monopolize points of contact Mac-like feel and find that downloading tracks from iTunes with customers: Operations people at the first company deal is easier than buying a CD on Amazon. Every Apple prod- directly with their counterparts at the second, and so forth. uct is designed with the overarching purpose of making the The functional nature of the relationship – indeed, the fact time one spends with Apple an enjoyable experience. that it is a true relationship – creates a pervasive awareness A successful brand shapes customers’ experiences by em- of experience issues and priorities. bedding the fundamental value proposition in offerings’ Whether it is a business or a consumer being studied, data every feature. For BMW, “the Ultimate Driving Machine” about its experiences are collected at “touch points”: in- is much more than a slogan; it informs the company’s man- stances of direct contact either with the product or service it- ufacturing and design choices. In 2000, Mercedes-Benz intro- self or with representations of it by the company or some duced a system that automatically controls the distance be- third party. We use the term “customer corridor” to portray tween a Mercedes and the car in front. BMW would not the series of touch points that a customer experiences. What consider developing such a feature unless it amplified rather constitutes a meaningful touch point changes over the than diminished the driving experience. course of a customer’s life. For a young family with limited Service quality and scope matter, too, but mostly when time and resources, a brief encounter with an insurance bro- the core offering is itself a service. For example, the tracking ker or financial planner may be adequate. The same sort of and shipping support FedEx provides on the Internet and experience wouldn’t satisfy a senior with lots of time and by phone is as important to customers as its fundamental a substantial asset base. value proposition–on-time delivery. Not all touch points are of equivalent value. Service inter- In their concern with logistics – how something is pro- actions matter more when the core offering is a service. vided, not just what is provided – business-to-business com- Touch points that advance the customer to a subsequent and panies take after consumer-service companies. For both, the more valuable interaction, such as Amazon’s straightforward

hbr.org | February 2007 | Harvard Business Review 119 Understanding Customer Experience

1-Click ordering, matter even more. Companies need to map faction or wariness arises, artful control of consumer experi- the corridor of touch points and watch for snarls. At each ence can overcome it. touch point, the gap between customer expectations and In its development of a new AIDS drug, Gilead Sciences experience spells the difference between customer delight provides a good example of how a failure to understand the and something less. experience and expectation component of a consumer seg- People’s expectations are set in part by their previous ex- ment’s dissatisfaction can turn into a failure to reach that periences with a company’s offerings. Customers instinc- segment. Upon releasing the new medication, which had tively compare each new experience, positive or otherwise, demonstrated advantages over existing ones, Gilead noticed with their previous ones and judge it accordingly. Expecta- that while sales to patients new to therapy were robust, sales tions can also be shaped by market conditions, the compe- to patients already undergoing treatment were growing far tition, and the customer’s personal situation. Even when it is more slowly than expected. For HIV/AIDS patients, switching the company’s own brand that establishes expectations, the medications, Gilead discovered, is very different from choos- customer can be set up for disappointment. For example, ing an alternative cold remedy. Switching requires ending Dell transformed buying computers over the Internet from a trusted relationship in the hope of reaching an uncertain a risky to a reliable experience. When it extended that set improvement level. The company also learned that HIV- of procedures to the selection and purchase of expensive positive patients are far more interested in the potential ad- plasma HDTV sets, however, it disappointed. Dell did an ef- verse effects of a new drug than in its supposedly superior fective job of creating positive customer expectations, but efficacy. With this new understanding, Gilead decided to em- they turned out to be better fulfilled by the in-person sales phasize in its marketing the new drug’s lower incidence of se- force at Best Buy. rious side effects. It also segmented the patients’ physicians Ideally, good design makes both the most routine and by their willingness to prescribe a different medication from the weightiest customer experiences – checking a price, get- the ones they knew. Once Gilead made it easier for patients ting a question answered, or placing a multimillion-dollar to switch drugs, the market share of the company’s main order – pleasant and efficient. However, even when dissatis- competitor dropped 33%.

CEM Versus CRM

Customer experience management and customer relationship management differ in their subject matter, timing, monitoring, audience, and purpose.

What When How Monitored Who Uses Relevance to the Information Future Performance

Customer Captures and At points of Surveys, targeted Business or Leading: Locates Experience distributes what customer studies, observa- functional leaders, places to add Management a customer thinks interaction: tional studies, in order to create offerings in the (CEM) about a company “touch points” “voice of customer” fulfillable expecta- gaps between research tions and better expectations and experiences with experience products and services

Customer Captures and After there Point-of-sales data, Customer-facing Lagging: Drives Relationship distributes what is a record market research, groups such as cross selling by Management a company knows of a customer Web site click- sales, marketing, bundling products (CRM) about a customer interaction through, automated field service, and in demand with tracking of sales customer service, ones that aren’t in order to drive more efficient and effective execution

120 Harvard Business Review | February 2007 | hbr.org Why the Neglect? CEOs may not actively deny the significance of customer ex- perience or, for that matter, the tools used to collect, quantify, and analyze it, but many don’t adequately appreciate what those tools can reveal. Three forces in the main conspire to preserve this gap. Too much money already lavished on CRM. Having spent millions of dollars on customer relationship management software, many CEOs consider their problem to be not a lack of customer information but a superfluity of it. Before invest- ing more time and money, executives justifiably want to know how customer experience data are different and what their value is. To put it starkly, the difference is that CRM captures what a company knows about a particular customer – his or her history of service requests, product returns, and inquiries, among other things–whereas customer experience data cap- ture customers’ subjective thoughts about a particular com- pany. CRM tracks customer actions after the fact; CEM (cus- tomer experience management) captures the immediate response of the customer to its encounters with the com- pany. Employees accustomed to reading the marketing de- partment’s dry analyses of CRM point-of-sale data easily Executives also hesitate to act on findings because experi- grasp the distinction upon hearing a frustrated customer’s ence data are more ambiguous than customers’ actions – the very words. (For a detailed account of the difference between orders they place, for instance. However, statistical analysis the two approaches, see the exhibit “CEM Versus CRM.”) has developed to the point where it can dependably quantify Moreover, many CEOs don’t sufficiently appreciate the both the relative importance of each touch point and the ex- distinction between customer satisfaction, which they be- perience it provided. It can also isolate key transactions, ac- lieve they have heavily documented, and customer experi- counts, regions, customer segments, and so forth, and then ence, which always demands further investigation. parse the resulting data. About ten years ago, companies Lack of attunement to customers’ needs. Leaders who rose started collecting experience information electronically.Now through customer-facing functions, such as Cisco Systems they can instantly combine it with data collected from CRM CEO John Chambers, are more likely to act with reference to systems and other customer databases, conduct analyses of customer experience than those who have not. When com- both individual and aggregate responses in real time, and peting new technologies are difficult to choose among, Cisco then automatically route and track issues needing resolution. defers its choice until key customers have registered their Squishier are observation studies and verbatim com- reactions. Because the company knows there will be a mar- ments, which for that reason don’t get the attention they de- ket for the choice it finally makes, it can afford to commit serve. Approached, however, with the requisite empathy and itself later than its competitors. insight, they can be in their own way more revealing than In contrast, executives who rose through finance, engi- concrete findings. For one thing, even consumers sharply neering, or manufacturing often regard managing customer aware of a product’s or brand’s deficiencies can’t quite pic- experience as the responsibility of sales, marketing, or cus- ture what might replace it. That’s why Henry Ford said that tomer service. if he asked his customers before building his first car how he Fear of what the data may reveal. It’s easy to say one’s busi- could better meet their transportation needs, they would ness is customer-driven when there are no data to prove oth- have said simply, “Give us faster horses.” Properly under- erwise. Once data start flowing, the bogeymen come out of stood, the currents beneath the surface that direct the flow the closet. Can we afford to do what customers are asking of customer experience data will indicate the shape of the for? How do we choose between conflicting preferences? Can next major transformation. we accept what customers say they are experiencing with- out first telling them what they should be experiencing? Cor- porate leaders who would never tolerate a large gap between All Hands on Board forecasted and actual revenues prefer to look the other way Many organizations place responsibility for collecting and when company and customer assessments diverge, as they assessing customer experience data within a single, IT- do in the Bain survey. supported customer-facing group. Doing so accomplishes

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at least three things: It saves money; it protects customers often for gathering data on past patterns, customers are from redundant and annoying solicitations; and it permits sometimes approached through online forums and blogs. direct comparison of customers on the basis of their location, Companies are mostly guided by assertions that win custom- choice of product, or some other criterion. ers’ strong agreement, but sometimes customers’ failure to But it is a mistake to assign to customer-facing groups react strongly to some feature or service can be just as telling. overall accountability for the design, delivery,and creation of For this reason, the employees evaluating results must be at- a superior customer experience, thereby excusing those more tuned to areas of customer experience that a survey or other distant from the customer from understanding it. tool does not directly address. In contrast to this common pattern, Palm drew on cus- Analyses of present patterns are not simply evaluations of tomer experience to make the Treo one of its most success- the meaning and success of a recent encounter. They envi- ful products ever. A combination of cell phone and Palm sion a continuing relationship with the customer. Conse- Pilot, the original Treo used the same built-in rechargeable quently, questions may extend to the customer’s awareness battery as the Palm organizers. When used as a cell phone, of alternative suppliers, new features the customer might the device consumed far more power than it did when used desire, and what it sees as challenges to its competitiveness. as an organizer. So customers who were heavy users of the Given the broad scope of the inquiry, this type of monitor- cell phone feature found that their Treos were often losing ing shouldn’t be triggered solely by a customer-initiated power – and often at an inconvenient distance from their transaction. Instead, information on a company’s key prod- rechargers. Complaints about this problem began showing ucts and services should be gathered at scheduled intervals, up in Palm’s customer-service transaction surveys. But the or “periodically.” Hewlett-Packard and the consulting firm customer service department could offer the Treo’s unhappy BearingPoint, for example, approach every key customer an- owners only minor power-saving tips. nually. By initiating contact with different customers at dif- Dissatisfied with the status quo, customer service vice pres- ferent times throughout the year, BearingPoint has created ident Dan Gilbert, showing unusual initiative, distributed an almost persistent data flow that does not depend on the the experience data his department had collected to product completion of a given transaction, while permitting compar- development, which went to work on the problem. The next- isons among customers on a range of issues. BearingPoint generation Treo came with a battery that users replace. In learned in this fashion that the best practices it had estab- 2005, sales were 71% higher than the previous year. lished in one vertical-market group had not migrated to Typically, however, a vigorous reaction to intelligence other groups. gathered on customer experience requires general manage- Present patterns are collected through surveys or face-to- ment to orchestrate a response to customer problems. Intuit face interviews, studies tailored to the subject, or some com- learned that when it tried to address the trouble customers bination thereof. It helps to prepare customers for the in- were having installing a new release of TurboTax. The solu- quiry by telling them the purpose of the survey, how they tion turned out to be cross-functional, but no one who had will hear about the findings, and what role they might play been asked to deal with it was senior enough to “own” the in addressing them. Accordingly, Hewlett-Packard rewards entire installation process. its account managers on survey-participation rates as well as results. Potential patterns are uncovered by probing for opportu- Obtaining the Right Information nities, which often emerge from interpretation of customer There are three patterns of customer experience informa- data as well as observation of customer behavior. Like the tion, each with its own pace and level of data collection. (For study Gilead conducted, such probes are outgrowths of a detailed breakdown of the three patterns, see the exhibit strategies usually involving the targeting of particular cus- “Tracking Customer Experience: Persistent, Periodic, Pulsed.”) tomer segments and are therefore unscheduled, or “pulsed.” When companies monitor transactions occurring in large The findings are often used to inform the product develop- numbers and completed by individual customers, they are ment process. looking at past patterns. Enterprise Rent-A-Car is supposed Most companies apply a single summary metric to data on to ask every driver returning one of its vehicles,“Would you past and present patterns. The customer experience metric rent from Enterprise again?” Any new service a France Tele- Net Promoter, for example, registers customers’ experiences com customer receives is followed by a brief questionnaire in aggregate–that is, their positive ones minus their negative on the quality of his or her experience. As these two examples ones. Intuit’s founder, Scott Cook, uses Net Promoter scores demonstrate, each attempt to determine the quality of the for goal setting and engaging the organization’s attention, experience directly follows the experience itself. So compa- though he recognizes that a rising or falling score doesn’t nies receive by this method an uninterrupted, or “persistent,” begin to reveal what is driving the trend. flow of information, which they then analyze and communi- As relationships with customers deepen, companies tend cate internally. Although surveys are the tool used most to collect data with greater frequency. The patterns that

122 Harvard Business Review | February 2007 | hbr.org Tracking Customer Experience: Persistent, Periodic, Pulsed

Companies can monitor various patterns of interaction with customers to gain a better under- standing of the customer experience they are providing. Depending on the precise information a company is seeking, it may choose to analyze past patterns, present patterns, potential patterns, or a combination. Each pattern requires a distinct method of generating and analyzing data and will yield different types of insights.

Pattern and Purpose Owner Data Collection Collection and Discussion and Frequency and Scope Analysis Methodology Action Forums

Past Patterns: Captures Central group Persistent: > Web-based, in-person, > Analyzed within a recent experience. or functions > Electronic surveys or phone surveys functions, central > Intended to improve linked to high- > User forums and survey groups, or transactional experiences volume transactions blogs both > Tracks experience goals and or an ongoing feed- > Cross-functional trends back system issues directed to general managers > Assesses impact of new > Automatically trig- initiatives gered by the comple- > Strategic analysis tion of a transaction and actions directed > Identifies emerging issues > Focused, short-cycle, by general managers timed data collection Examples: Post-installation or > Feedback volun- customer service follow-up, teered by users in new-product-purchase follow-up online forums

Present Patterns: Tracks current Central Periodic: > Web-based surveys > Initial analysis by relationships and experience group, > Quarterly account preceded by sponsoring group issues with an eye toward business reviews preparation in > Broader trends and identifying future opportunities. units, or person > Relationship studies issues forwarded to > Keeps a consistent yet deeper functions > Direct contact in general managers’ watch on state of relationship > User experience person or by phone strategic and operat- studies and other factors > Moderated user ing forums > Looks forward as well as > User-group polling forums > Deeper analysis of backward > Focus groups and emerging issues at > Used with more critical other regularly the corporate, busi- populations and issues scheduled formats ness unit, or local level

Examples: Biannual account reviews, “follow them home” user studies

Potential Patterns: Targets General Pulsed: > Driven by specific > Centered within inquiries to unveil and test management > One-off, special- customers or unique sponsoring group, future opportunities. or functions purpose driven problems with coordination by > Very focused and support from > Interim readings of central group Examples: Ethnographic design trends > Incorporates existing studies, special-purpose market knowledge of cus- studies, focus groups tomer relationship

emerge suggest further areas of inquiry. For example, identify customers’ priorities among a range of service expe- present-relationship studies may indicate that on-site service rience factors. experience is wanting. After improvements are made, it’s Low cost and ease of modification make surveys the over- common to use a transaction survey following each service whelming favorite for measuring past and present patterns. call to assess progress. A subsequent, more comprehensive E-mail–based surveys are superior to paper-based ones be- survey may show good experience with service response cause they can be more easily shared; they allow rapid distri- time but low overall ratings, triggering a special study to bution; they give the surveyor the flexibility to extend or

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Rating Customers

The matrix to the right organizes the customers of HiTouch (a com- posite of actual companies) on the At-Risk Model basis of the level of attention they $25,000,000 require. The vertical axis shows billed revenues (products and ser- vices provided and paid for). The hor- $20,000,000 izontal axis shows an aggregate A score indicating level of customer satisfaction. Customers with low Customers $15,000,000 billings but high customer satisfac- with billed revenues tion, for example, represent growth above $10M opportunities for HiTouch. The bub- are considered bles on the matrix classify HiTouch’s $10,000,000 high-value customers according to a third di- mension: forecasted revenues (or- Billed revenues ders placed but not paid for as well $5,000,000 as potential orders), indicated by B bubble size. Letters inside the bub- bles serve strictly as identifiers. So, for example, customer A has 0 the second-highest billings and the Customer satisfaction second-highest forecasted reve- low high nues, but its business is “at risk” because its satisfaction scores are Dangling Growth low. Customer B’s low billings, high bubble size represents satisfaction, and high forecasted forecasted revenues revenues suggest unexploited po- tential business for HiTouch.

abbreviate the questioning according to the wishes of the discourage customers from responding by offering to fix any respondent or the substance of the response; they minimize problem on the spot. The individual customer may be pla- delays in analyzing the results; and they lead to quick action, cated, but widespread resort to this practice keeps general such as a referral to a general manager should scores fall management from obtaining a broad picture of systemic below a predetermined level. E-mail surveys can also be more problems. easily tailored. For example, the surveys Marvin Windows Surveys do have their limitations, and focus groups, user- and Doors sends to its distributors are different from those group forums, blogs, and marketing and observational sent to architects who buy its products. studies can yield insights that surveys cannot. (For more A well-designed survey is not simply one that elicits the de- on listening to users, see Dorothy Leonard and Jeffrey sired information. It must itself avoid becoming an unfortu- Rayport,“Spark Innovation Through Empathic Design,”HBR nate aspect of the customer experience. Hence, it shouldn’t November–December 1997.) Intuit, for example, is a leader be onerous for the taker or deny him the chance to commu- in “follow them home”studies. Company representatives visit nicate the special nature of his experience. One way of keep- customers where they live or work and observe how they use ing surveys mercifully brief is to avoid asking about matters Intuit products such as QuickBooks. It was from watching like recent purchases that the company already has a record the smallest businesses struggle with QuickBooks Pro that of. Nor should they be triggered by the transactions of regu- the company recognized a need for a product like Quick- lar customers such as purchasing agents. Such customers are, Books Simple Start. These tools lend themselves to the mea- after all, among those a business can least afford to annoy.By surement of present and potential patterns, for they entail the same token, corporate sanctions imposed on dealers who more time, preparation, and expense than transaction-based receive low scores shouldn’t be so harsh that retailers try to surveys.

124 Harvard Business Review | February 2007 | hbr.org Acting on Experience Information you believe HiTouch delivers the experience promised by its Let’s take a look at a company we’ll call HiTouch – which is marketing and sales force?”The pilot survey included a sum- actually a composite of companies – as it struggled to create mary metric that permitted HiTouch to compare responses a system for managing customer experience. HiTouch,a busi- by location, service platform, and vertical market. ness-to-business global financial services provider, received The sales executive noticed that meetings about the pilot a shocking wake-up call when a top customer shifted half survey, in which salespeople fed customer experience infor- its business to an archrival. HiTouch executives had just mation back to the customers themselves, differed from the completed a quarterly account review classifying the rela- typical sales call by shifting the dialogue away from the in- tionship with this account as “superior.”The stunned execu- dividual transaction and toward relationship development. tives wondered what they could have missed. They also provided an excellent opportunity to introduce to From their efforts to salvage the account, HiTouch execu- the customers HiTouch’s nonsales employees who were in tives learned enough to initiate a companywide effort to a position to fix customer problems as they arose. In this improve the experience of all other major accounts. After fashion, salespeople began to view their jobs less as a func- conducting a mini-audit of existing customer-experience pro- tional responsibility than as an organizational process. grams, responsible parties, and results, it discovered that its Data from the survey began to flow within 24 hours of vertical-market groups hardly went further than tracking distribution. Many of customers’ verbatim comments were

A well-designed survey is not simply one that elicits the desired information. It must itself avoid becoming an unfortunate aspect of the customer experience.

leads and analyzing buying patterns. Most employees as- blunt. Some executives became defensive and tried to ex- sumed customer experience was the job of marketing or plain away what the data were saying rather than under- sales. The company’s only CEM metric came from a mailed stand the concerns behind them. Some never quit demand- annual customer satisfaction survey whose wording hadn’t ing yet one more data point. Others strained to launch changed in three years. company responses before fully understanding what was HiTouch engaged consultants to help with the initiative. being said. Rather than spending a lot of time establishing formal cus- With 60% of the responses in, it became clear which expe- tomer experience goals or a detailed plan, the consultants riences were critical to overall satisfaction. However, they argued for a “fast prototype” relationship survey of top cus- were different in each vertical market, with few exceptions. tomers. HiTouch’s leaders identified the touch points they For each, summary scores were compared with customer knew had disappointed their most important customers. revenue. On that basis, finance placed every customer in one Preventing further customer defections, they realized, would of four quadrants (see the exhibit “Rating Customers”). require customer experience goals for every stage of the • Model customers: good summary scores; good revenue. value chain. These had to serve every vertical market’s finan- • Growth customers: good summary scores; higher poten- cial objectives while being compatible with the company’s tial revenue. Candidates for cross selling and upselling. branding. • At-Risk customers: low scores; good revenue. Demanding As the issues piled up, it became clear that the effort decisive intervention. needed an executive leader, a budget, and dedicated re- • Dangling customers: low scores; low revenue. To be res- sources. HiTouch’s top sales executive, having become a be- cued or abandoned. liever in the process, stepped up. To ensure a good response Auspiciously, the Growth segment had three times as rate, he asked sales account executives to prep customers re- many customers as any of the others. But on further exami- ceiving the survey. A few showed a predistribution draft to nation it emerged that some of those customers didn’t buy as customers so that they could help refine issue selection and much as those in other quadrants. In fact, one of the largest tone. Of the various questions settled on, two key ones were remaining customers was squarely in the At-Risk quadrant. “How important to your purchasing decision was HiTouch’s The results of the initial survey coincided with the start of brand and the service promise it seemed to make?” and “Do the strategic-planning cycle. By the following quarter, every

hbr.org | February 2007 | Harvard Business Review 125 Understanding Customer Experience

vertical-market team, having shown some customers the Service operations must ensure that processes, skills, and findings and described what the team planned to do about practices are attuned to every touch point. (Present-patterns them, was ready to send out transaction surveys of custom- surveys are good for tracking high-volume touch points such ers’ experiences with service installation and repair. Every as call centers.) team had also set experience goals for itself and scheduled Product development should do more than specify needed relationship surveys. features. It should also design experiences after observing A year later, current experience data had replaced ill- how customers use products and services, learning why they informed opinion at HiTouch. At monthly operations meet- use offerings as they do, and figuring out how existing prod- ings, vertical-market general managers reviewed key cus- ucts might be frustrating them. Ideally, product developers tomer experience issues, and actions taken, before reviewing will identify customer behavior that runs counter to a com- financials. A rolling summary of relationship issues un- pany’s expectations and uncover needs that haven’t been earthed by customer surveys kicked off quarterly executive identified. strategy discussions. Defections within each vertical-market Information technology that can collect, analyze, and dis- group dropped by an average of 16%. tribute CEM data, integrate the information with that gener- Not everything worked as hoped. The company set up ated by CRM, and monitor progress must be in place. As the an executive dashboard to keep track of installation experi- data flow stabilizes, the form of presentation and its degree ence issues, but the disclosure of high-volume transaction in- of detail should be keyed to whichever internal audience formation so upset the managers responsible that they the data are meant for. A level of detail that is appropriate for never got around to resolving the underlying issues. The an analyst, for example, can easily overwhelm a line man- dashboard was pulled in favor of automatic triggers that ager. CEM is a play within a play, so to speak; just as custom- channeled problems to specialists or general managers, who ers must have a good experience, employees need to have a began to make good progress in solving them. Increased an- good experience digesting information about themselves. alyst staffing and simplified reporting helped the general Human resources should put together a communications managers identify new opportunities, an area they had been and training strategy that conveys the economic rationale neglecting. for CEM and paints a picture of how it will alter work and decision-making processes. Since the front line determines the bulk of customer experience, it would be a good idea to The Employee Experience study those employees’ individual capabilities, work pro- Customer experience does not improve until it becomes a cesses, and attitudes. As for performance management, of top priority and a company’s work processes, systems, and course customer experience results should affect compensa- structure change to reflect that. When employees observe se- tion. But as we have learned in recent years, incentives that nior managers persistently demanding experience informa- are too powerful are more likely to distort behavior than tion and using it to make tough decisions, their own deci- channel it productively. sions are conditioned by that awareness. Account teams must progress from annual surveys to de- Not long after breaking every software-industry growth tailed touch-point analysis, then translate present patterns record, Siebel Systems (now part of Oracle) saw its satisfac- of customer experience and issues gleaned from recent trans- tion ratings begin to drop. An adopter of customer experi- actions into action plans that are shared with customers. Not ence management, the company had gathered data reveal- every significant implication is readily apparent. Leaders ing that customers found a large disparity between actual need to press the data to precipitate customers’ concealed and expected costs of ownership of Siebel 6, a sales-force longings. automation tool based on a client-server architecture. The • • • proposed solution, a shift to a Web-based architecture in Customer dissatisfaction is widespread and, because of cus- Siebel 7, would require forgoing the development of other tomers’ empowerment, increasingly dangerous. Although major features – and the revenues they generated – for two companies know a lot about customers’ buying habits, in- years. Yet Siebel’s leadership went ahead with the shift any- comes, and other characteristics used to classify them, they way. Satisfaction levels soon returned to their formerly lofty know little about the thoughts, emotions, and states of mind levels, and employees took heart as management placed ex- that customers’ interactions with products, services, and perience ahead of revenues. brands induce. Yet unless companies know about these sub- Once persuaded of the importance of experience, every jective experiences and the role every function plays in shap- function has a role to play. ing them, customer satisfaction is more a slogan than an at- Marketing has to capture the tastes and standards of every tainable goal. one of its targeted market segments, circulate that knowl- edge within the company, and then tailor all consumer com- Reprint R0702G munications accordingly. To order, see page 158.

126 Harvard Business Review | February 2007 | hbr.org Faculty Spotlight: PETER SENGE Executive Education Programs: Leading Change in Complex Organizations Business Dynamics

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Discovering Your Authentic Leadership We all have the capacity to inspire and empower others. But we must first be willing to devote ourselves to our personal growth and development as leaders. by Bill George, Peter Sims, Andrew N. McLean, and Diana Mayer

URING THE PAST 50 YEARS, leadership scholars have con- ducted more than 1,000 studies in an attempt to deter- mine the definitive styles, characteristics, or personality Dtraits of great leaders. None of these studies has produced a clear profile of the ideal leader. Thank goodness. If scholars had produced a cookie-cutter leadership style, individuals would be forever trying to imitate it. They would make themselves into personae, not people, and others would see through them immediately. No one can be authentic by trying to imitate someone else. You can learn from others’ experiences, but there is no way you can be successful when you are trying to be like them. People trust you when you are genuine and authentic, not a replica of someone else. Amgen CEO and president Kevin Sharer, who

Mick Wiggins Mick gained priceless experience working as Jack Welch’s assistant in

hbr.org | February 2007 | Harvard Business Review 129 MANAGING YOURSELF | Discovering Your Authentic Leadership

the 1980s, saw the downside of GE’s cult Many readers of Authentic Leader- ries to understand who they were at of personality in those days. “Everyone ship, including several CEOs, indicated their core. In doing so, they discovered wanted to be like Jack,” he explains. that they had a tremendous desire to the purpose of their leadership and “Leadership has many voices. You need become authentic leaders and wanted learned that being authentic made to be who you are, not try to emulate to know how. As a result, our research them more effective. somebody else.” team set out to answer the question, These findings are extremely encour- Over the past five years, people have “How can people become and remain aging: You do not have to be born with developed a deep distrust of leaders. authentic leaders?” We interviewed 125 specific characteristics or traits of a It is increasingly evident that we need leaders to learn how they developed leader. You do not have to wait for a tap a new kind of business leader in the twenty-first century. In 2003, Bill George’s book, Authentic Leadership: Analyzing 3,000 pages of transcripts, our team was Rediscovering the Secrets to Creating startled to see you do not have to be born with specific Lasting Value, challenged a new genera- characteristics or traits of a leader. Leadership emerges tion to lead authentically. Authentic from your life story. leaders demonstrate a passion for their purpose, practice their values consis- tently,and lead with their hearts as well their leadership abilities. These inter- on the shoulder. You do not have to be as their heads. They establish long-term, views constitute the largest in-depth at the top of your organization. Instead, meaningful relationships and have the study of leadership development ever you can discover your potential right self-discipline to get results. They know undertaken. Our interviewees discussed now. As one of our interviewees, Young who they are. openly and honestly how they realized & Rubicam chairman and CEO Ann their potential and candidly shared their Fudge, said,“All of us have the spark of Article at a Glance life stories, personal struggles, failures, leadership in us, whether it is in busi- and triumphs. ness, in government, or as a nonprofit The largest in-depth study ever under- The people we talked with ranged in volunteer. The challenge is to under- taken on how people can become and age from 23 to 93, with no fewer than 15 stand ourselves well enough to discover remain authentic leaders shows that an per decade. They were chosen based on where we can use our leadership gifts to individual does not have to be born their reputations for authenticity and serve others.” with any universal characteristics or effectiveness as leaders, as well as our Discovering your authentic leader- traits of a leader. personal knowledge of them. We also ship requires a commitment to develop- The journey to authentic leadership solicited recommendations from other ing yourself. Like musicians and ath- begins with understanding the story leaders and academics. The resulting letes, you must devote yourself to a of your life. Most authentic leaders group includes women and men from lifetime of realizing your potential. reported that their stories involved a diverse array of racial, religious, and Most people Kroger CEO David Dillon overcoming difficult experiences and socioeconomic backgrounds and na- has seen become good leaders were self- using these events to give meaning to tionalities. Half of them are CEOs, and taught. Dillon said,“The advice I give to their lives. the other half comprises a range of individuals in our company is not to ex- profit and nonprofit leaders, midcareer pect the company to hand you a devel- Authentic leaders work hard at under- standing and developing themselves. leaders, and young leaders just starting opment plan. You need to take respon- They use formal and informal support on their journeys. sibility for developing yourself.” networks to get honest feedback After interviewing these individuals, In the following pages, we draw upon and help ground themselves. They tem- we believe we understand why more lessons from our interviews to describe per their need for public acclaim and than 1,000 studies have not produced a how people become authentic leaders. financial reward with strong intrinsic profile of an ideal leader. Analyzing First and most important, they frame motivations. 3,000 pages of transcripts, our team was their life stories in ways that allow them startled to see that these people did not to see themselves not as passive ob- It may be possible to produce short- identify any universal characteristics, servers of their lives but rather as indi- term outcomes without being authen- tic, but authentic leadership drives traits, skills, or styles that led to their viduals who can develop self-awareness long-term results. The integrity of au- success. Rather, their leadership emerged from their experiences. Authentic lead- thentic leaders helps to sustain orga- from their life stories. Consciously and ers act on that awareness by practicing nizational results through good times subconsciously, they were constantly their values and principles, sometimes and bad. testing themselves through real-world at substantial risk to themselves. They experiences and reframing their life sto- are careful to balance their motivations

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cult experience in their lives. They de- scribed the transformative effects of the loss of a job; personal illness; the untimely death of a close friend or rel- ative; and feelings of being excluded, discriminated against, and rejected by peers. Rather than seeing themselves as victims, though, authentic leaders used these formative experiences to give meaning to their lives. They re- framed these events to rise above their challenges and to discover their passion to lead. Let’s focus now on one leader in par- ticular, Novartis chairman and CEO Daniel Vasella,whose life story was one of the most difficult of all the people we interviewed. He emerged from ex- treme challenges in his youth to reach the pinnacle of the global pharmaceuti- cal industry, a trajectory that illustrates the trials many leaders have to go through on their journeys to authentic leadership. Vasella was born in 1953 to a modest family in Fribourg, Switzerland. His early years were filled with medical problems that stoked his passion to be- come a physician. His first recollections were of a hospital where he was admit- ted at age four when he suffered from so that they are driven by these inner story of your life is not your life. It is food poisoning. Falling ill with asthma values as much as by a desire for exter- your story.” In other words, it is your at age five, he was sent alone to the nal rewards or recognition. Authentic personal narrative that matters, not the mountains of eastern Switzerland for leaders also keep a strong support team mere facts of your life. Your life narra- two summers. He found the four-month around them, ensuring that they live in- tive is like a permanent recording play- separations from his parents especially tegrated, grounded lives. ing in your head. Over and over, you difficult because his caretaker had an replay the events and personal interac- alcohol problem and was unresponsive tions that are important to your life, at- to his needs. Learning from Your Life Story tempting to make sense of them to find At age eight, Vasella had tuberculo- The journey to authentic leadership your place in the world. sis, followed by meningitis, and was sent begins with understanding the story While the life stories of authentic to a sanatorium for a year. Lonely and of your life. Your life story provides leaders cover the full spectrum of expe- homesick, he suffered a great deal that the context for your experiences, and riences – including the positive impact year, as his parents rarely visited him. through it, you can find the inspiration of parents, athletic coaches, teachers, He still remembers the pain and fear to make an impact in the world. As the and mentors – many leaders reported when the nurses held him down during novelist John Barth once wrote, “The that their motivation came from a diffi- the lumbar punctures so that he would not move. One day, a new physician ar- Bill George, the former chairman and CEO of Medtronic, is a professor of management prac- rived and took time to explain each step tice at Harvard Business School in Boston. Peter Sims established “Leadership Perspectives,” of the procedure. Vasella asked the a class on leadership development at the Stanford Graduate School of Business in California. doctor if he could hold a nurse’s hand Andrew N. McLean is a research associate at Harvard Business School. Diana Mayer is a for- rather than being held down. “The mer Citigroup executive in New York. This article was adapted from True North: Discover Your amazing thing is that this time the Authentic Leadership by Bill George with Peter Sims (Jossey-Bass, forthcoming in March 2007). procedure didn’t hurt,” Vasella recalls.

132 Harvard Business Review | February 2007 | hbr.org “Afterward, the doctor asked me, ‘How advanced rapidly through the Sandoz was that?’ I reached up and gave him a marketing organization. big hug. These human gestures of for- When Sandoz merged with Ciba- giveness, caring, and compassion made Geigy in 1996, Vasella was named CEO a deep impression on me and on the of the combined companies, now called kind of person I wanted to become.” Novartis, despite his young age and Throughout his early years, Vasella’s limited experience. Once in the CEO’s life continued to be unsettled. When he role, Vasella blossomed as a leader. He was ten, his 18-year-old sister passed envisioned the opportunity to build a away after suffering from cancer for great global health care company that two years. Three years later, his father could help people through lifesaving died in surgery. To support the family, new drugs, such as Gleevec, which has his mother went to work in a distant proved to be highly effective for pa- town and came home only once every tients with chronic myeloid leukemia. three weeks. Left to himself, he and his Drawing on the physician role models friends held beer parties and got into of his youth, he built an entirely new

When the 75 members of Stanford Graduate School of Business’s Advisory Council were asked to recommend the most important capability for leaders to develop, their answer was nearly unanimous: self-awareness.

frequent fights. This lasted for three Novartis culture centered on compas- years until he met his first girlfriend, sion, competence, and competition. whose affection changed his life. These moves established Novartis as a At 20, Vasella entered medical giant in the industry and Vasella as school, later graduating with honors. a compassionate leader. During medical school, he sought out Vasella’s experience is just one of psychotherapy so he could come to dozens provided by authentic leaders terms with his early experiences and who traced their inspiration directly not feel like a victim. Through analysis, from their life stories. Asked what em- he reframed his life story and realized powered them to lead, these leaders that he wanted to help a wider range of consistently replied that they found people than he could as an individual their strength through transformative practitioner. Upon completion of his experiences. Those experiences enabled residency, he applied to become chief them to understand the deeper purpose physician at the University of Zurich; of their leadership. however, the search committee consid- ered him too young for the position. Disappointed but not surprised, Knowing Your Authentic Self Vasella decided to use his abilities to in- When the 75 members of Stanford crease his impact on medicine. At that Graduate School of Business’s Advisory time, he had a growing fascination with Council were asked to recommend the finance and business. He talked with the most important capability for leaders to head of the pharmaceutical division of develop, their answer was nearly unan- Sandoz, who offered him the opportu- imous: self-awareness. Yet many lead- nity to join the company’s U.S. affiliate. ers, especially those early in their ca- In his five years in the United States, reers, are trying so hard to establish Vasella flourished in the stimulating themselves in the world that they leave environment, first as a sales representa- little time for self-exploration. They tive and later as a product manager, and strive to achieve success in tangible MANAGING YOURSELF | Discovering Your Authentic Leadership

ways that are recognized in the external and a stint with Citigroup, he joined resonated as true.” Pottruck realized world–money, fame, power, status, or a Charles Schwab as head of marketing, that he could not succeed unless he rising stock price. Often their drive en- moving from New York to San Francisco. identified and overcame his blind spots. ables them to be professionally success- An extremely hard worker, Pottruck Denial can be the greatest hurdle ful for a while, but they are unable to could not understand why his new col- that leaders face in becoming self- sustain that success. As they age, they leagues resented the long hours he put aware. They all have egos that need to may find something is missing in their in and his aggressiveness in pushing for be stroked, insecurities that need to be lives and realize they are holding back results.“I thought my accomplishments smoothed, fears that need to be allayed. from being the person they want to be. would speak for themselves,”he said.“It Authentic leaders realize that they have Knowing their authentic selves requires never occurred to me that my level of to be willing to listen to feedback–espe- the courage and honesty to open up energy would intimidate and offend cially the kind they don’t want to hear. and examine their experiences. As they other people, because in my mind I was It was only after his second divorce that do so, leaders become more humane trying to help the company.” Pottruck finally was able to acknowl- and willing to be vulnerable. Pottruck was shocked when his boss edge that he still had large blind spots: Of all the leaders we interviewed, told him,“Dave, your colleagues do not “After my second marriage fell apart, David Pottruck, former CEO of Charles trust you.” As he recalled, “That feed- I thought I had a wife-selection prob- Schwab, had one of the most persis- back was like a dagger to my heart. I was lem.”Then he worked with a counselor tent journeys to self-awareness. An all- in denial, as I didn’t see myself as others who delivered some hard truths: “The league football player in high school, saw me. I became a lightning rod for fric- good news is you do not have a wife- Pottruck became MVP of his college tion, but I had no idea how self-serving selection problem; the bad news is you team at the University of Pennsylvania. I looked to other people. Still, some- have a husband-behavior problem.” After completing his MBA at Wharton where in my inner core the feedback Pottruck then made a determined ef- fort to change. As he described it,“I was like a guy who has had three heart at- tacks and finally realizes he has to quit smoking and lose some weight.” YOUR DEVELOPMENT AS AN AUTHENTIC LEADER These days Pottruck is happily re- married and listens carefully when his As you read this article, think about the basis for your leadership development wife offers constructive feedback. He ac- and the path you need to follow to become an authentic leader. Then ask your- knowledges that he falls back on his old self these questions: habits at times, particularly in high stress 1. Which people and experiences in your early life had the greatest impact situations, but now he has developed on you? ways of coping with stress. “I have had enough success in life to have that foun- 2. What tools do you use to become self-aware? What is your authentic self? dation of self-respect, so I can take the What are the moments when you say to yourself, this is the real me? criticism and not deny it. I have finally 3. What are your most deeply held values? Where did they come from? Have learned to tolerate my failures and dis- your values changed significantly since your childhood? How do your values appointments and not beat myself up.” inform your actions? 4. What motivates you extrinsically? What are your intrinsic motivations? How do you balance extrinsic and intrinsic motivation in your life? Practicing Your Values and Principles 5. What kind of support team do you have? How can your support team make you a more authentic leader? How should you diversify your team to broaden The values that form the basis for au- your perspective? thentic leadership are derived from your beliefs and convictions, but you 6. Is your life integrated? Are you able to be the same person in all aspects of your will not know what your true values are life – personal, work, family, and community? If not, what is holding you back? until they are tested under pressure. It is 7. What does being authentic mean in your life? Are you more effective as a relatively easy to list your values and to leader when you behave authentically? Have you ever paid a price for your au- live by them when things are going thenticity as a leader? Was it worth it? well. When your success, your career, or 8. What steps can you take today, tomorrow, and over the next year to de- even your life hangs in the balance, velop your authentic leadership? you learn what is most important, what you are prepared to sacrifice, and what trade-offs you are willing to make.

134 Harvard Business Review | February 2007 | hbr.org Leadership principles are values what is right and wrong,”Huntsman re- translated into action. Having a solid called. “This was one of those times base of values and testing them under when I didn’t think it through. I knew fire enables you to develop the princi- instinctively it was wrong, but it took a ples you will use in leading. For exam- few minutes for the notion to percolate. ple, a value such as “concern for others” After 15 minutes, my inner moral com- pass made itself noticed and enabled me to recognize this wasn’t the right Denial can be the greatest thing to do. Values that had accompa- nied me since childhood kicked in. hurdle that leaders face in Halfway through my conversation with becoming self-aware. our plant manager, I said to him, ‘Let’s not do this. I don’t want to play this game. Forget that I called.’” might be translated into a leadership Huntsman told Haldeman that he principle such as “create a work envi- would not use his employees in this ronment where people are respected way.“Here I was saying no to the second for their contributions, provided job most powerful person in the country. security, and allowed to fulfill their He didn’t appreciate responses like potential.” that, as he viewed them as signs of dis- Consider Jon Huntsman, the founder loyalty.I might as well have been saying and chairman of Huntsman Corpora- farewell. So be it. I left within the next tion. His moral values were deeply chal- six months.” lenged when he worked for the Nixon administration in 1972, shortly before Watergate. After a brief stint in the U.S. Balancing Your Extrinsic and Department of Health, Education, and Intrinsic Motivations Welfare (HEW), he took a job under Because authentic leaders need to sus- H.R. Haldeman, President Nixon’s pow- tain high levels of motivation and keep erful chief of staff. Huntsman said he their lives in balance, it is critically im- found the experience of taking orders portant for them to understand what from Haldeman “very mixed. I wasn’t drives them. There are two types of mo- geared to take orders, irrespective of tivations – extrinsic and intrinsic. Al- whether they were ethically or morally though they are reluctant to admit it, right.” He explained, “We had a few many leaders are propelled to achieve clashes, as plenty of things that Halde- by measuring their success against the man wanted to do were questionable. outside world’s parameters. They enjoy An amoral atmosphere permeated the the recognition and status that come White House.” with promotions and financial rewards. One day, Haldeman directed Hunts- Intrinsic motivations, on the other hand, man to help him entrap a California are derived from their sense of the congressman who had been opposing meaning of their life. They are closely a White House initiative. The congress- linked to one’s life story and the way man was part owner of a plant that one frames it. Examples include per- reportedly employed undocumented sonal growth, helping other people de- workers. To gather information to em- velop, taking on social causes, and mak- barrass the congressman, Haldeman ing a difference in the world. The key is told Huntsman to get the plant man- to find a balance between your desires ager of a company Huntsman owned to for external validation and the intrinsic place some undocumented workers at motivations that provide fulfillment in the congressman’s plant in an under- your work. cover operation. Many interviewees advised aspiring “There are times when we react too leaders to be wary of getting caught up quickly and fail to realize immediately in social, peer, or parental expectations. MANAGING YOURSELF | Discovering Your Authentic Leadership

Debra Dunn, who has worked in Silicon Authentic leaders build extraordi- and a common purpose. Randy Komi- Valley for decades as a Hewlett-Packard nary support teams to help them stay sar of venture capital firm Kleiner executive, acknowledged the constant on course. Those teams counsel them in Perkins Caufield & Byers said his pressures from external sources: “The times of uncertainty,help them in times marriage to Hewlett-Packard’s Debra path of accumulating material posses- of difficulty, and celebrate with them in Dunn is lasting because it is rooted in sions is clearly laid out. You know how times of success. After their hardest similar values.“Debra and I are very in- to measure it. If you don’t pursue that days, leaders find comfort in being with dependent but extremely harmonious path, people wonder what is wrong people on whom they can rely so they in terms of our personal aspirations, val- with you. The only way to avoid getting can be open and vulnerable. During the ues, and principles. We have a strong caught up in materialism is to under- low points, they cherish the friends who resonance around questions like,‘What stand where you find happiness and appreciate them for who they are, not is your legacy in this world?’It is impor- fulfillment.” what they are. Authentic leaders find tant to be in sync about what we do Moving away from the external vali- that their support teams provide affir- with our lives.” dation of personal achievement is not mation, advice, perspective, and calls Many leaders have had a mentor always easy.Achievement-oriented lead- for course corrections when needed. who changed their lives. The best men- ers grow so accustomed to successive ac- How do you go about building your toring interactions spark mutual learn- complishments throughout their early support team? Most authentic leaders ing, exploration of similar values, and years that it takes courage to pursue have a multifaceted support structure shared enjoyment. If people are only their intrinsic motivations. But at some looking for a leg up from their mentors, point, most leaders recognize that they instead of being interested in their need to address more difficult ques- Think of your life as a house. mentors’ lives as well, the relation- tions in order to pursue truly meaning- Can you knock down the ships will not last for long. It is the two- ful success. McKinsey’s Alice Wood- way nature of the connection that sus- walls between the rooms wark, who at 29 has already achieved tains it. notable success, reflected: “My version and be the same person in Personal and professional support of achievement was pretty naive, born each of them? groups can take many forms. Piper Jaf- of things I learned early in life about fray’s Tad Piper is a member of an Alco- praise and being valued. But if you’re holics Anonymous group. He noted, just chasing the rabbit around the that includes their spouses or signifi- “These are not CEOs. They are just a course, you’re not running toward any- cant others, families, mentors, close group of nice, hard-working people who thing meaningful.” friends, and colleagues. They build their are trying to stay sober, lead good lives, Intrinsic motivations are congruent networks over time, as the experiences, and work with each other about being with your values and are more fulfilling shared histories, and openness with open, honest, and vulnerable. We rein- than extrinsic motivations. John Thain, people close to them create the trust force each other’s behavior by talking CEO of the New York Stock Exchange, and confidence they need in times of about our chemical dependency in a said, “I am motivated by doing a really trial and uncertainty. Leaders must give disciplined way as we go through the 12 good job at whatever I am doing, but I as much to their supporters as they get steps. I feel blessed to be surrounded by prefer to multiply my impact on society from them so that mutually beneficial people who are thinking about those through a group of people.” Or as Ann relationships can develop. kinds of issues and actually doing some- Moore, chairman and CEO of Time, put It starts with having at least one per- thing, not just talking about them.” it, “I came here 25 years ago solely be- son in your life with whom you can be Bill George’s experiences echo Piper’s: cause I loved magazines and the pub- completely yourself, warts and all, and In 1974, he joined a men’s group that lishing world.” Moore had a dozen job still be accepted unconditionally. Often formed after a weekend retreat. More offers after business school but took the that person is the only one who can tell than 30 years later, the group is still lowest-paying one with Time because of you the honest truth. Most leaders have meeting every Wednesday morning. her passion for publishing. their closest relationships with their After an opening period of catching up spouses, although some develop these on each other’s lives and dealing with bonds with another family member, a any particular difficulty someone may Building Your Support Team close friend, or a trusted mentor. When be facing, one of the group’s eight Leaders cannot succeed on their own; leaders can rely on unconditional sup- members leads a discussion on a topic even the most outwardly confident ex- port, they are more likely to accept he has selected. These discussions are ecutives need support and advice. With- themselves for who they really are. open, probing, and often profound. The out strong relationships to provide per- Many relationships grow over time key to their success is that people say spective, it is very easy to lose your way. through an expression of shared values what they really believe without fear

136 Harvard Business Review | February 2007 | hbr.org of judgment, criticism, or reprisal. All tive leader in the workplace. Having the members consider the group to be a strong personal life has made the one of the most important aspects of difference.” their lives, enabling them to clarify Leading is high-stress work. There is their beliefs, values, and understanding no way to avoid stress when you are re- of vital issues, as well as serving as a sponsible for people, organizations, out- source of honest feedback when they comes, and managing the constant un- need it most. certainties of the environment. The higher you go, the greater your freedom to control your destiny but also the Integrating Your Life by Staying higher the degree of stress. The ques- Grounded tion is not whether you can avoid stress Integrating their lives is one of the but how you can control it to maintain greatest challenges leaders face. To lead your own sense of equilibrium. a balanced life, you need to bring to- Authentic leaders are constantly gether all of its constituent elements – aware of the importance of staying work, family, community, and friends – grounded. Besides spending time with so that you can be the same person in their families and close friends, authen- each environment. Think of your life as tic leaders get physical exercise, engage a house, with a bedroom for your per- in spiritual practices, do community ser- sonal life, a study for your professional vice, and return to the places where life, a family room for your family, and they grew up. All are essential to their a living room to share with your friends. effectiveness as leaders, enabling them Can you knock down the walls between to sustain their authenticity. these rooms and be the same person in each of them? As John Donahoe, president of eBay Empowering People to Lead Marketplaces and former worldwide Now that we have discussed the process managing director of Bain, stressed, of discovering your authentic leader- being authentic means maintaining a ship, let’s look at how authentic leaders sense of self no matter where you are. empower people in their organizations He warned,“The world can shape you if to achieve superior long-term results, you let it. To have a sense of yourself which is the bottom line for all leaders. as you live, you must make conscious Authentic leaders recognize that choices. Sometimes the choices are leadership is not about their success or really hard, and you make a lot of about getting loyal subordinates to fol- mistakes.” low them. They know the key to a suc- Authentic leaders have a steady and cessful organization is having empow- confident presence. They do not show ered leaders at all levels, including those up as one person one day and another who have no direct reports. They not person the next. Integration takes disci- only inspire those around them, they pline, particularly during stressful times empower those individuals to step up when it is easy to become reactive and and lead. slip back into bad habits. Donahoe feels A reputation for building relation- strongly that integrating his life has ships and empowering people was in- enabled him to become a more effec- strumental in chairman and CEO Anne tive leader. “There is no nirvana,” he Mulcahy’s stunning turnaround of said. “The struggle is constant, as the Xerox. When Mulcahy was asked to take trade-offs don’t get any easier as you the company’s reins from her failed get older.” But for authentic leaders, predecessor, Xerox had $18 billion in personal and professional lives are not debt, and all credit lines were exhausted. a zero-sum game. As Donahoe said, With the share price in free fall, morale “I have no doubt today that my chil- was at an all-time low. To make mat- dren have made me a far more effec- ters worse, the SEC was investigating MANAGING YOURSELF | Discovering Your Authentic Leadership

the company’s revenue recognition units, decided to leave, but the remain- results through good times and bad. practices. ing 98 committed to stay. Their success enables them to attract Mulcahy’s appointment came as Throughout the crisis, people in talented people and align employees’ a surprise to everyone – including Xerox were empowered by Mulcahy to activities with shared goals, as they em- Mulcahy herself. A Xerox veteran, she step up and lead in order to restore the power others on their team to lead by had worked in field sales and on the company to its former greatness. In taking on greater challenges. Indeed, su- corporate staff for 25 years, but not in the end, her leadership enabled Xerox perior results over a sustained period of finance, R&D, or manufacturing. How to avoid bankruptcy as she paid back time is the ultimate mark of an authen- could Mulcahy cope with this crisis $10 billion in debt and restored revenue tic leader. It may be possible to drive when she had had no financial experi- short-term outcomes without being au- ence? She brought to the CEO role thentic, but authentic leadership is the the relationships she had built over Superior results over a only way we know to create sustainable 25 years, an impeccable understanding sustained period of time is long-term results. of the organization, and, above all, her For authentic leaders, there are spe- credibility as an authentic leader. She the ultimate mark of an cial rewards. No individual achieve- bled for Xerox, and everyone knew it. authentic leader. ment can equal the pleasure of leading Because of that, they were willing to go a group of people to achieve a worthy the extra mile for her. goal. When you cross the finish line to- After her appointment, Mulcahy met growth and profitability with a combi- gether, all the pain and suffering you personally with the company’s top 100 nation of cost savings and innovative may have experienced quickly vanishes. executives to ask them if they would new products. The stock price tripled as It is replaced by a deep inner satisfac- stay with the company despite the chal- a result. tion that you have empowered others lenges ahead. “I knew there were peo- • • • and thus made the world a better place. ple who weren’t supportive of me,”she Like Mulcahy,all leaders have to deliver That’s the challenge and the fulfillment said.“So I confronted a couple of them bottom-line results. By creating a virtu- of authentic leadership. and said, ‘This is about the company.’” ous circle in which the results reinforce The first two people Mulcahy talked the effectiveness of their leadership, au- Reprint R0702H with, both of whom ran big operating thentic leaders are able to sustain those To order, see page 158.

“And you wanted to hibernate!” Schwadron Harley

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Raising Haier Twenty-two years ago, the Qingdao Refrigerator Factory was a dump, its workers were unpaid, and its products were shoddy. Today it’s called Haier. The home-appliance giant is China’s best-known global company – and its CEO has proved that he is one of the world’s experts in leading and surviving change. by Zhang Ruimin

EOPLE RESPECT THE LEADERSHIP of an organization for different reasons in different periods. When you start a business, your employees are willing to follow you if you Pset a good example and bear more hardships than they do. In my early days at Haier, when I went on a business trip, I often had to set out right away. If there was no seat available on the train, I would spend two yuan to rent a small camp stool and sit in the aisle. That was seen and heeded by employees. Later, it’s conviction that appeals to people. When we started building Haier Industrial Park in the 1990s, people held back,

Sally Comport Wern expecting problems to arise. But as it became clear to them that

hbr.org | February 2007 | Harvard Business Review 141 FIRST PERSON | Raising Haier

I’d spare no effort to make it a reality, in arrears. Not surprisingly, the em- I established. Then I set forth my new everyone got on board. ployee turnover rate was high. An addi- rules, beginning with “Urinating or Today, I believe, what Haier’s em- tional 51 workers applied for a transfer defecating in workshops is prohibited” ployees need is to be allowed to make to a different company when my ap- and “Stealing company property is decisions for themselves and not to feel pointment was announced. prohibited.” These were actual habits that they are following me in their There was no time for idle talk. The to be combated. work. The philosopher Lao-tzu said,“In first thing I focused on was the em- The government at that time did not the highest antiquity,the people did not ployees’ salaries. When I think back to allow companies to fire workers. Those know that there were rulers.”I take his the first half year of my tenure, that who violated factory rules could be meaning to be that a leader whose exis- is the challenge I vividly remember, given demerits or, much more seriously, tence is unknown to his subordinates is because I had to face it every month. be deprived of factory membership really the most brilliant one. We were not a state-owned enterprise, (that is, no longer part of the com- and given our debt load, the banks were pany’s collective ownership) and placed not willing to lend money to us. But on probation. Once, when we were Five Catties of Fish luckily, another option materialized. cleaning a warehouse, some workers When I took the job of director of China’s policy of reform and opening were seen carrying away materials. We the Qingdao Refrigerator Factory in to the outside world meant that wealth caught one of them and within an hour December 1984, the existence of the was accumulating beyond the cities, in posted the consequences on the fac- company was at stake. Indeed, most the urban-rural junctional areas. I was tory bulletin board: That worker was people thought its situation was hope- able to borrow money from the nearby deprived of factory membership and less. The factory’s net debt stood at production brigade. placed on probation. This punishment RMB1.47 million, and I was the fourth Certainly,employees were very happy came as a huge shock to people. director appointed in that single year. simply to get their pay, but I wanted My main purpose, however, in The previous three had either left on to go further. Soon after my arrival, establishing strict discipline was not their own or been kicked out – no one when the Chinese Lunar New Year to punish those who made mistakes. was able to shoulder the responsibility. came around, I borrowed again to buy I knew that the great majority of More than 800 workers were anxiously each worker a New Year’s gift of five employees wanted from the bottom awaiting pay that was several months catties of fish. It may seem laughable of their hearts to be good employees. now, but that gesture had an immediate The problem was that the atmosphere and positive effect. It put hope into was too bad for them to work well in. Article at a Glance employees’ hearts that our factory had Far from frightening employees, stron- People respect the leadership of an a chance. I then borrowed tens of thou- ger discipline in the factory endowed organization for different reasons in sands more yuan to replace the truck them with confidence and hope. The different periods. First, for the example that was many employees’ transporta- change in morale was obvious within the leader sets. Then, for the leader’s tion to and from work. The truck made six months. conviction in decision making. Finally, for a terrible ride, especially for those for the leader’s ability to honor employ- who carried children in their arms, so ees’ capabilities and initiative. I went to the added expense of buying Everything Turns for the Better a bus. Again, it was a small change If you want to build confidence in oth- Zhang Ruimin’s leadership of Haier by today’s standards, but it had a real Group initially consisted of improving ers, you yourself must be confident. morale and establishing discipline – impact on morale. How could a factory Why did I have faith that the factory an appropriate focus for a small busi- that was obviously getting better and would prosper? The straightforward ness in severe disarray. better be about to fail? answer is that I knew it was just about Once I had won some goodwill, I to install a new production line that As the company grew, Zhang’s leader- started demanding good work. There would improve quality and efficiency. ship style evolved to feature more was very little discipline in the factory I knew this because it was I who had consensus building and competitive up to that point; people tended to do pushed for the new line as a manager strategy development. things as they saw fit. Rules and regula- at the factory’s governing body, the Zhang’s hope for Haier is that the tions existed in writing but had never Qingdao Home Appliance Company. leader at the top of the organization been seriously upheld. I spelled out the For the same reason, when the third will become less and less important terms for people: I would guarantee factory director of the year announced as managerial processes make the com- payment of their salaries every month, his departure, I felt I must take respon- pany’s market successes self-sustaining. but only on the condition that they sibility for the change. I had also spent strictly obeyed the working disciplines several months studying the national

142 Harvard Business Review | February 2007 | hbr.org consumer market. I knew that if we could motivate our employees to work more efficiently and improve manu- facturing quality, our products would surely find buyers. But my confidence also had a deeper basis than the data at hand. I think it is a common phenomenon among the generation that lived through the Cultural Revolution (I was still a high school student when it began) that we learned not to recoil at the sight of difficulties. It isn’t that we became arrogant – or, much less, that we were blinded by optimism. Rather, we gained a different perspective on life and the prospect of failure. The things that happened during that period made us reflect more deeply on human nature and society. We learned that everything advantages of a change I want to bring the change showed up in the next half can turn for the better and all kinds of about, and ensure that the new prac- year’s time as our sales fell. challenges can be overcome. There is tice is accepted. A perfect example was By then I was on a serious campaign no crisis that cannot be resolved. when Haier embarked on a major to communicate the message, talking Confidence alone does not make business process-reengineering effort with senior executives again and again, for leadership, but in those early days, in 1998 and some senior executives outlining the advantages of integrating it was the closest thing I had to a “lead- openly objected to it. By then, Haier the processes. I explained, for example, ership style.” Unlike many young peo- had grown from a small factory into that when each division did procure- ple today, I didn’t have a formal MBA a big company consisting of many ment for itself, our procurement power education. But because of the small plants and business units, and each was dispersed and it was almost im- size of our company, I did know most had its own suppliers, manufacturing possible to get the best supplier or of the employees by name. I could assets, sales organization, human re- the most favorable price. And that make a decision in the morning and sources processes, and so forth. I was when marketers from our refrigerator, approach the workers at noon to learn in favor of standardizing and consoli- air conditioner, and washing machine their reaction and check the results. dating much of this in such a way divisions all showed up separately at My leadership then was task centered that the various functions, from pro- the same store to negotiate promotions, and authoritative–I made the decisions curement to marketing, would be inte- the store’s management was being and expected the rank and file to carry grated and driven by order informa- pestered beyond endurance – and we them out strictly. Today, this would not tion. I knew that would not be easily were doing nothing to convey a uni- be considered a proper way of manag- accomplished; in fact, we set a time- form corporate image. Gradually,every- ing. But at the time, we were a small line of ten years for completing the one saw the power we would all gain enterprise in disorder, and there was work. But to me, the logic was clear. through process integration. a very important role for it. Even the I thought of the advice of Sun Tzu in workers wanted me to lead in that way. The Art of War: One must first “exhibit Now that the company is much the coyness of a maiden” and “after- Dumplings on a Construction Site larger–we have more than 50,000 full- wards emulate the rapidity of a run- I have never considered myself an out- time employees – that old way of lead- ning hare.”At the outset, I tried to think standing leader, but I think I’m a person ing would never work. I’ve had to learn over every possible circumstance and who has an indomitable will. Once I set over the years how to articulate the result. Once I decided to start consoli- a definite goal, I must succeed. Many dating, I made a commitment to carry other enterprises have pursued the same Zhang Ruimin is the chief executive officer of it through to the end. business as Haier over the years in the Haier Group, headquartered in Qingdao, China. What I didn’t anticipate was the de- same economic environment. The diffi- This article is adapted from the interview with gree to which some executives would culties they met with were our difficul- Mr. Zhang that appeared in the January 2007 resent what they saw as a loss of power. ties as well. The difference is that many issue of Harvard Business Review China. Their very negative attitudes toward of them were too willing to give up.

hbr.org | February 2007 | Harvard Business Review 143 FIRST PERSON | Raising Haier

In 1991, for example, I decided to ex- employees instead? Why not give them brated the New Year and talked about pand the capacity of our factory and higher salaries? Having studied the the project, and the confidence of the build the Haier Industrial Park. We national economic situation, I was construction company grew. took a large piece of land, laid the foun- convinced that building the industrial dations, built the underground utility park made sense. Even despite China’s infrastructure–and in the process, spent policy, I felt certain the economy would The Smallest Company all the money our company had. At that grow at a fast rate so that our capacity in the World time China was employing a macro- would be severely inadequate before People often speak of Haier with ref- control policy, and the money market long. And in fact, in 1993 China en- erence to General Electric, and that was so tight that we couldn’t get loans. tered a period of overheated economic great company is certainly one of our The total budget was RMB1.5 billion, growth. Many companies in our in- benchmarks. To me, the essence of Jack but the company had accumulated only dustry didn’t start their projects until Welch’s accomplishment at GE was that RMB80 million, and all of it had already then – at which point they had missed he simultaneously turned his company been plowed into the project. the best opportunity for development. into the largest one in the world and Many people in our company, from As I tell the story today, I sound into the smallest–by making each em- management to assembly-line workers, assured, but at the time I feared that ployee full of vigor. were questioning the necessity of build- I wouldn’t ride out the crisis. I wasn’t I want each employee coming to ing such a facility. To them, having alone. The construction company also work for Haier to have the sense that he a product supply that fell short of de- suspected I’d be unable to make the or she can find a place in the company mand was not such a bad thing; fast remaining payments on the project. to realize his or her own values as sales and high margins brought us In that moment of doubt, I drew on well as creating value for the enterprise. a pretty good life. So why throw the my past experience. On the Lunar New I have no desire to oversupervise em- money we earned into this industrial Year’s Eve of 1992, I came to the con- ployees. Nor is my goal to grow the park, which wouldn’t produce returns struction site and enjoyed dumplings company to a certain size. The list of the for years? Why not build housing for with the workers. Together we cele- world’s largest 500 companies changes dramatically every decade. Size is no profit margin of a certain product from protection against failure if you are not 8% to 10%, it might go about that in any able to fill each employee with vitality. number of ways. It might change the Instead, I want Haier to get to the point product design, improve the manufac- where all employees create their own turing processes, figure out a way to pay value on a globalized platform. If we are less for raw materials, or make other able to accomplish this, we can make changes. Regardless of whether the Haier a very competitive enterprise. group does this in the way I or some Toward that end, there are three other member of management would, areas that I must think about carefully if the task is accomplished, every mem- every day. First, have we provided em- ber of the team gets a bonus in line ployees with sufficient room to create with his or her respective contributions. value and to achieve self-realization? In fact, Haier does not have a position- related compensation system at all. Instead of being paid according to their Size is no protection titles, employees are paid solely for re- against failure if you are sults. It’s no surprise that people who leave the company are often heard not able to fill each complaining about the low salary they employee with vitality. received from Haier! The third thing I think about every day is that fundamental strategic ques- Do people just passively come to work tion, how on earth are we different every day as requested? Or do they from the competition? If a company actively come here to fulfill their am- has no points of differentiation, it rap- bitions? Part of making sure it’s the lat- idly devolves into a commodity player ter is having the right organizational with no chance for long-term success. structure – one that is as boundaryless Most obviously, differentiation comes and flat as possible. Many big compa- from product innovation, which we nies organize themselves around divi- engage in on multiple levels. What sions and have very linear, functional we call “three-season product innova- structures. But Haier will do better if tion” serves the current market with it has project teams being formed ac- fast-cycle product improvements. Over cording to market demands, made up a longer horizon, we work on technol- of members from multiple divisions. ogy developments that will fuel new In that kind of setup, the emphasis stays products three years out. And we are on what will serve the market, not what always engaged in basic research that will please someone further up in the may yield breakthroughs in the long company hierarchy. Employees feel term: a refrigerator, for example, that they have a customer to answer to, needs no compressor, or a washing ma- more so than a superior. chine that operates without detergent That is not an easy orientation to or even without water. Meanwhile, I am bring about. One important reason that trying to build our marketing capability people tend to focus so much on their into a point of differentiation. In par- bosses is that their pay is determined by ticular, our recent forays into direct those bosses. So the second thing that marketing and delivery and our ability I am currently very focused on is en- to generate positive cash flows are im- suring that compensation provides an portant go-to-market innovations that incentive for employees to behave in have eluded many Chinese companies– a market-driven way. We’ve changed because they are very hard to achieve. things such that Haier employees are But it’s another kind of differenti- rewarded in large part according to the ation that I am most adamant about performance of their teams. If a project achieving. Today, there is a wide gap group is asked to increase the gross between Chinese enterprises and major FIRST PERSON | Raising Haier

foreign companies – but it isn’t mainly focused on enhancing the competi- CEO of Haier will then be able to focus a technology gap. The key difference tiveness of Haier. My larger hope is that wholly on strategic issues and make is in management talent. Therefore, we the question of who sits in the CEO’s decisions from a global point of view. are making tremendous efforts to im- chair is of less and less importance. If that sounds like the chief execu- prove the quality of human resources. Haier should not be a company ruled tive will be aloof or disconnected from the rank and file, then I have created the wrong impression. Quite the contrary, it There is a wide gap between Chinese enterprises and major worries me that so many young people join the managerial ranks of companies foreign companies – but it isn’t mainly a technology gap. immediately after graduating university, The key difference is in management talent. never having been managed by others. Coming of age in the Cultural Revolu- tion, I of course missed the opportunity It’s working, I believe, thanks to a dif- by one man or woman but, rather, to attend university and was thrown ference that already exists at Haier: a a self-sustaining system of excellent abruptly to the bottom of working soci- corporate culture that embraces con- managerial processes. I have always ety. There is no question in my mind stant progress and the belief that vic- liked what Peter Drucker said about that those years exerted a significant in- tory comes through change. leadership’s having little to do with fluence on how I now go about leading charisma and other qualities. As he others. When I dine with Haier workers, put it, “Leadership is a means that is as I do nearly every day, or when I drop My Successor’s Brilliance mundane, unromantic, and boring. Its in unannounced at a workplace, I am When you have been at the helm of essence is performance.” always looking to renew my understand- a company for more than 20 years and Today, the biggest problem at Haier ing of their perspective. Perhaps I have seen it grow from a single dilapidated lies in the fact that its leaders are still not achieved what Lao-tzu described – and debt-ridden factory to a global embroiled in operational execution is- a populace unaware of the presence of competitor with annual sales in excess sues. The enterprise will become great their ruler. But that brilliance may be of RMB100 billion, questions about suc- when it is able to operate by itself, with within my successor’s reach. cession naturally begin to arise. I tend employees acting as their own leaders, to deflect those questions, and not only understanding what to do to satisfy mar- Reprint R0702J because I personally want to remain ket and customer demand. The future To order, see page 158.

“Our chairman should be here any minute – I hear the opening strains of his theme music.” Eli Stein

146 Harvard Business Review | February 2007 | hbr.org

Letters to the Editor

Ten Ways to Create Shareholder Value

Alfred Rappaport’s article “Ten Ways to • The stock market (the totality of Create Shareholder Value” (September investors) can accurately value compa- 2006) is clear as an update of the “share- nies, even including cash flow from proj- holder value” approach, but that very ects to be introduced in the future. clarity reveals some problems with the • It is best for the long-term health of theory. a company that management make I agree that companies should be decisions with the intention of contin- managed so as to improve their long- ually increasing the share price. term health and not just to accept or • The CEO and executives can hon- estly and exactly estimate future earn- ings and cash flow. • Paying CEOs and executives on the basis of shares or share options will induce management to find ways to increase its company’s value and share price simultaneously. Rappaport writes, “Do not manage earnings or provide earnings guidance.” I absolutely agree. In fact, I think the SEC should prohibit the reporting of quarterly earnings. If executives might do something wrong in order to im- prove the share price, we cannot trust them to correctly report present earn- ings, much less to correctly estimate and improve the current year’s earnings. But publish future earnings and cash flow. I feel strongly that pursuing shareholder So why should we suppose that market value is not a good way to manage a capitalization – which moves in accor- company. It is based on the following dance with expectations for the future– axioms, which have no strong theoreti- will give us a company’s real value? And cal or practical basis and take an all too why should we forget that these execu- optimistic view of human nature: tives have stock options that improve • A company has “real value,”and this when the share price goes up? In other lies in its market capitalization (num- words, why should we give human na- ber of shares multiplied by share price), ture too much of a chance? which in turn equals the present dis- As for “focusing on earnings,”it is true counted value of future cash flows from that accounting data don’t show a com- the company’s operations. pany’s increase in real value during the

We welcome letters from all readers wishing to comment on articles in this issue. Early re- sponses have the best chance of being published. Please be concise and include your title, com- pany affiliation, location, and phone number. E-mail us at [email protected]; send faxes to 617-783-7493; or write to The Editor, Harvard Business Review, 60 Harvard Way, Boston, MA 02163. HBR reserves the right to solicit and edit letters and to republish letters as reprints.

148 Harvard Business Review | February 2007 | hbr.org reporting period. This would be feasi- not “meet investor expectations.” Very ble only if the balance sheet showed simply, they were showing accounting the real value of the company on the losses, had a negative cash flow, and reporting date, which it obviously can- could not meet contractual payments. not. Apart from the possibility that man- Curiously,the “infallible”market did not agement might “improve” financial understand until the last moment that statements, the balance sheets of U.S. these companies were in great difficul- companies have a number of problems: ties. Possibly many people thought, • Expected shortfalls from pension “Since Enron is valued by the market funds and future health costs of at least at $80 billion, there can’t be anything $300 billion are not included in compa- wrong with it.”Everyone believed every- nies’ financial statements. one else! • In many companies, the assets side Peter Van der Heyden includes considerable amounts of good- Consultant will, which supports from 50% to 100% of Asesoría Más + stockholders’ equity. Goodwill breaks Puebla, Mexico two basic accounting conventions: that earnings from periods after the report- Rappaport responds: Peter Van der Hey- ing date should not be included, and den introduces a curious contradiction that earnings should not be included if when he asserts that companies should there is no evidence as to their amount. be managed to improve their long-term In a number of cases, goodwill has been health and then goes on to claim that written off when it becomes clear that shareholder value is not a good way to the projected earnings will not be real- manage. After all, a company’s value de- ized (which is what happened with AOL pends on its long-term ability to gener- Time Warner, for instance). ate cash to fund value-creating growth • Intangibles arising out of real costs, and pay dividends to its shareholders. such as software, which amount to an What could be better for a company’s investment of $1 trillion per year, are long-term health than a management not shown as an asset reflecting the that embraces shareholder value as its economic reality but are expensed in governing principle? If companies are each year. not in the business of creating value for It is, however, important to note a their shareholders, where will the capi- company’s yearly earnings figure, be- tal needed to grow the economy come cause if the company has not shown a from? sufficient margin, cash flow, or ROI in Equally puzzling is Van der Heyden’s the present year, doubt is cast on its rejection of shareholder value manage- plans for improving value in future ment on the grounds that CEOs cannot years. Also, accounting data do help to exactly estimate future earnings and show where the company has been ef- cash flow, and the stock market cannot ficient, or could be more efficient, in its accurately value companies. In a sea of current operations. uncertainty, there is no “right” forecast It is not true that WorldCom, Enron, of future cash flows or “true” value of and Nortel Networks destroyed a large a company’s shares. Indeed, pay for part of their value because they did performance is all about rewarding LETTERS TO THE EDITOR management for how well it performs move, store, access, and use informa- lights them. For example, e-mail, an ERP in the face of uncertainty.And equity in- tion? How can technology create more system, and a wiki all facilitate informa- vestors recognize that they may not robust, useful, and creative links be- tion flow. That does not mean they’re in- earn a premium over the risk-free rate to tween organizations’ two greatest terchangeable. Benefits will not neces- compensate them for the additional resources: people and information? sarily triple if all three are deployed. risk they assume. In brief, uncertainty is McAfee may be on the right track, but And there is no guarantee that users will not an impediment to the use of share- his analysis does not break out of the embrace them all equally. holder value; rather, it’s what makes restrictive bounds of a now-outdated The executives I’ve taught, and the the implementation of sound share- focus on IT. companies I’ve studied and worked with, holder value practices absolutely crucial Bruce W. Dearstyne spend a great deal of time and energy to an organization’s success. Professor of Information Studies, Retired on IT decisions and efforts. They’d be Finally, each of the financial report- University of Maryland very surprised to hear that their focus is ing shortcomings Van der Heyden pre- Albany, New York “now outdated.” And they’d be non- sents is addressed by the proposed cor- plussed at the suggestion that they can porate performance statement, which McAfee responds: Bruce Dearstyne’s or should think about information with- provides investors with substantially comments illustrate the belief, common out explicitly thinking about informa- greater value-relevant and transparent in some academic circles, that it’s vital to tion technologies. information than traditional financial study the effects of information tech- statements do. nology yet somehow inappropriate to study the technologies themselves. In- Can Science Be a Business? stead, we should concentrate on “enter- I read Gary P. Pisano’s article,“Can Sci- Mastering the Three Worlds of prise information management” and ence Be a Business: Lessons from Bio- Information Technology ignore the actual tools used to do the tech” (October 2006), with interest. Andrew McAfee’s article,“Mastering the managing. Given the economic performance of Three Worlds of Information Technol- I find this akin to advising the mayor the biotechnology industry as a whole ogy” (November 2006), demonstrates of a city that she should concentrate on over the past 30 years, why do the pub- the need for fresh ideas to help us break municipal transporta- out of an intellectual rut. The funda- tion management mental problem is that his perspective is while at the same too technologycentric. IT is simply too time discouraging narrow and confining as a concept; the her from thinking conversation should be about enter- about the important prise information management. differences among High-performance organizations rec- subways, light-rail, ognize IT as a tool that can help connect buses, taxis, and pri- people, information, and enterprise vate cars. To achieve objectives. In the workplace, people in- her goals, the mayor tegrate information tools and technolo- will have to select gies. Over the course of an hour, a knowl- from transport tech- edge worker may write an e-mail, read nologies that offer (or write) a blog, check a spreadsheet, divergent capabili- use computer-aided design, and employ ties and are per- supply-chain management to check or ceived very differently by their users. lic markets continue to invest in non- calibrate production sequences. A team The same holds true for business lead- revenue-producing companies? Simply might use a wiki and software for en- ers trying to achieve their goals with stated, the hope that biotechnology terprise resource planning. Yet McAfee IT. In both cases, decision makers must can create a dramatically better tomor- separates IT into three discrete catego- understand what the different tech- row for patients helps make the indus- ries – functional, network, and enter- nologies will do for them and what try great for stock pickers. The outcomes prise–rather than integrating it. they need to do to ensure that their for small companies tend to be binary Several questions demand new an- choices are successfully adopted and and driven by a visible event (usually a swers: How can information be man- fully exploited. My article presents a clinical trial), and the payoffs are large. aged strategically to benefit the organi- model to help IT decision makers with The few successful companies have zation? What information is needed, this work. created enormous returns for their in- when, in which form, and accessible to Focusing on information blurs im- vestors. Stock analysts invest a great whom? How do people actually create, portant distinctions rather than high- deal of energy in collecting information,

150 Harvard Business Review | February 2007 | hbr.org conducting surveys, and reading the Whether biotechnology’s anatomy In addition to its core business devel- medical literature to gain an edge. will undergo an evolution or a revolu- opment activities of licensing and ac- There is a well-developed marketplace tion remains to be seen. Ultimately, in- quisitions, Lilly established a corporate for intellectual property and know- vestment in the science of biotechnol- venture-capital group – Lilly Ventures – how, and therefore it is possible to ogy is dependent on the political and to provide a window on early-stage in- create hundreds of millions or even social debate around the business of novation and to create a vehicle to as- billions of dollars of market value in biotechnology. sist in the capitalization of early-stage a company that lacks revenue. All of James C. Mullen biotechnology companies. Lilly founded this behavior is predicated on the as- President and CEO Innocentive as an Internet-based net- sumption that the margins on patent- Biogen Idec work to support the global solving of protected products will continue to be Cambridge, Massachusetts specific product development problems. robust. In addition to its internal and external Macroeconomic pressures on health research and development, Lilly creates care costs and political activism to rein Gary Pisano does a good job of de- “spinouts” of technologies that can be in health care expenditures are lead- scribing various challenges and risks better funded in the venture-capital en- ing many countries to install price and inherent in the pharmaceutical and vironment, including companies such use controls on pharmaceuticals. De- biotechnology industries, but the inte- as CoLucid and Targanta. We call this pending on the pace and severity of gration he prescribes is already occur- “outpartnering.” these political fixes, margins on phar- ring. For example, Lilly–a leader in both As a company with diverse classes maceutical products could undergo sig- small-molecule pharmaceuticals and of therapeutic agents, Lilly believes nificant pressure – and the anatomy of biotech products–realized early on that that a flexible but integrated R&D the biotechnology industry would re- partnerships are vital to its strategy of architecture is critical to achieving spond accordingly. This response could growth through innovation. Our most and sustaining an innovation-based have a negative impact on innovation recent success is Byetta – a new treat- strategy. That said, as Pisano points and the industry’s ability to advance ment for people with Type 2 diabetes – out, we as an industry have much to health and patient care. with our partner Amylin. learn, and Lilly values its partners as essential contributors to success in this learn from them. Even when I was at journey. school, I observed that minority groups Sidney Taurel were asked to take the first step in pro- Chairman of the Board and CEO viding feedback, only to be asked subse- Eli Lilly and Company quently to offer specific examples and Indianapolis hard proof to counter any defensive re- actions. That sort of experience makes Pisano responds: Jim Mullen, like many people cynical and resigned to the status others, believes that strong intellectual quo. If leaders display their own need property and high prices are needed to for further development in this area, maintain investment and stimulate in- then they establish good intentions and novation in the biotech sector. To date, set a constructive example for their the sector has had both, and yet its employees to follow. financial performance has not been Livia Oh strong – suggesting that more intense London price pressures and less favorable IP will just weaken it further. But one need only look at the electronics industry to The Tools of Cooperation recognize that intense competition (and and Change resulting price pressures) does not spell I was surprised to learn in the sidebar doom for innovation. In general, IP pro- analysis provided by Clayton M. Chris- tection in electronics is relatively weak tensen, Matthew Marx, and Howard H. (it is easy to invent around patents), and Stevenson in “The Tools of Cooperation competition is intense. Prices fall ex- and Change”(October 2006) that Japan tremely quickly. And yet we see lots of and Western Europe – which I assume innovation. Why? In electronics, com- includes Germany – are societies in panies must innovate to thrive because which the populations share values in the prices of old products erode so rap- the upper-right quadrant of the agree- idly. The complexities of the regulatory ment matrix. While that may be true environment and of issues surrounding today, that was certainly not the case access to health care make analogies in 1939. perilous. However, in general, every- These paragons of agreement were thing possible from both a regulatory only brought to that happy state by the and a general policy perspective (includ- imposition of democracy on former fas- ing pricing) should be done to stimu- cist dictatorships. Perhaps the authors late competition based on innovation – have forgotten that America and its al- the route by which biotechnology’s lies were forced to “impose democracy” promise will be realized. on its former foes during the Second I thank Sidney Taurel for his letter. World War. This is in direct contradic- tion to the conclusion that when Amer- ica has ordered countries to establish Rethinking Political Correctness democracies, chaos has ensued. Obvi- Thank you for publishing Robin J. Ely, ously, that was not the case in Japan or Debra E. Meyerson, and Martin N. Germany. The conclusion that democ- Davidson’s article,“Rethinking Political racy will not work in Iraq because the Correctness” (September 2006). I was enabling conditions do not preexist is particularly struck by its guidelines for contradicted by the very examples the leaders, which says that they must be authors have chosen. able to create a safe environment for It is also inaccurate to use Russia as an open dialogue and should personally example of America “snap[ping] its fin- and openly display vulnerability and hu- gers.” The continuing evolution of the mility when addressing these topics. political situation in the former USSR, This certainly runs counter to the ideal while welcomed by all democracies, was of the strong, infallible leader who has not imposed by the United States. Quite more to teach his employees than to the contrary: The overthrow of the Communist regime was the sponta- Christensen, Marx, and Stevenson re- neous result of a deeply shared shift in spond: Like companies, as countries culture from the lower-left toward the succeed, they move to the upper right upper-right quadrant of the agreement of the matrix. For example, the econo- matrix. In any event, it is too early to mies of Korea, Chile, Singapore, and Tai- predict with certainty that the new wan were governed through the 1970s democracies have failed. and into the 1980s by strong and rela- Finally, the article itself holds up tively honest rulers. As those societies Jamie Dimon as an example of a man- prospered, consensus emerged within ager who used “power tools” to elicit each nation regarding what its people cooperation in the absence of agree- wanted and how to get it, and they each ment. Once consensus began to grow, moved toward the upper right of the these tools were put aside. Of course, matrix, where democracy becomes pos- the ultimate power tool is military force sible and desirable. Similarly, the en- and occupation. Our declared objective abling preconditions for democracy ex- in Iraq is to use our troops to create a isted in pre- and postwar Germany,even stable environment in which democracy though Hitler temporarily seized power. (“consensus”) can grow. Why does HBR Eventually, the same shift will occur in recommend that strategy for businesses Russia and, we hope, China. But the but discourage it for countries? model implies that, for the time being, Erick Holt we should recognize the value of rela- Attorney tively honest rulers who are able and Munich, Germany willing to wield the tools of power temporarily until consensus builds on In the article “The Tools of Change,” both axes. I object to the authors’ use of the Mladen Bandic’s observation supports “Balkan Peninsula” as an example of our point completely,though he doesn’t “no consensus” in the exhibit “The realize it. Once the tool of disaggrega- Agreement Matrix.” When Yugoslavia tion was used in the Balkans, each of (only half of the Balkans) was a federa- the countries found itself in the upper- tion under Marshal Josip Broz Tito, or right quadrant, where democracy could after Tito’s death, when the lack of ade- thrive. If some entity tried to group all quate reforms and changes led to of those nations together into a single bloody wars among the Yugoslav (not state again, the region would plunge into Balkan Peninsula) republics, their as- the lower left – and the model asserts sessment would have been accurate. that a democratic state would struggle However, since the end of the wars to govern in peace. in the 1990s, the newly independent Our article maintains that there is no republics of Slovenia, Croatia, Bosnia “best”place to be. It is simply important and Herzegovina, Macedonia, Serbia, to recognize where one is and what will and Montenegro occupy the upper- work in each situation. The model, right quadrant of the matrix. Citizens therefore, predicts that when the antag- now enjoy broad consensus on what onistic regions of Iraq are herded into they want and how to achieve it. With- one artificial nation, power tools will be out resorting to coercive “power tools,” required to create the changes needed these nations have changed their polit- for peace–and democracy will not work. ical systems to multiparty democracies, We might wish that it would, but while improved their economies through sig- Iraq is still in the lower-left quadrant, it nificant private initiative, and sought won’t. However, if the tool of disaggre- integration into the European Union gation was used in Iraq, as it was in the and NATO. Balkans, then each of the resulting na- Mladen Bandic tions – within itself – could find it has Director stronger levels of agreement on both Transeuropean Motorway axes, and the tool of democracy could be Zagreb, Croatia effective within each. STRATEGY & COMPETITION

COVER STORY 72 | How Managers’ Everyday Decisions Create – or Destroy – Your Company’s Strategy Joseph L. Bower and Clark G. Gilbert Executive Senior executives have long been frustrated by the disconnection between the plans and strategies Summaries they devise and the actual behavior of the managers throughout the company. This article approaches FEBRUARY 2007 the problem from the ground up, recognizing that every time a manager allocates resources, that decision moves the company either into or out of alignment with its announced strategy.

SPECIAL: BREAKTHROUGH IDEAS FOR 2007 A well-known story – Intel’s exit from the mem- ory business – illustrates this point. When discussing what businesses Intel should be in, Andy Grove www.hbr.org February 2007 asked Gordon Moore what they would do if Intel were a company that they had just acquired. When

72 How Managers’ Everyday Decisions Create–or Destroy– Moore answered, “Get out of memory,” they de- Your Company’s Strategy Joseph L. Bower and Clark G. Gilbert cided to do just that. It turned out, though, that 80 Cocreating Business’s New Social Compact Jeb Brugmann and C.K. Prahalad Intel’s revenues from memory were by this time 92 In Praise of the Incomplete Leader Deborah Ancona et al. only 4% of total sales. Intel’s lower-level managers 104 Reputation and Its Risks Robert G. Eccles, Scott C. Newquist, and Roland Schatz had already exited the business. What Intel hadn’t 116 Understanding Customer Experience Christopher Meyer and Andre Schwager done was to shut down the flow of research fund- 20 THE HBR LIST Breakthrough Ideas for 2007 ing into memory (which was still eating up one-third 57 HBR CASE STUDY Off-Ramp–or Dead End? Sharman Esarey and Arno Haslberger of all research expenditures); nor had the company

129 MANAGING YOURSELF Discovering Your Authentic Leadership Bill George et al. announced its exit to the outside world.

141 FIRST PERSON …page 72 Raising Haier Because divisional and operating managers – as Zhang Ruimin

154 EXECUTIVE SUMMARIES well as customers and capital markets – have such a

159 PANEL DISCUSSION powerful impact on the realized strategy of the firm, senior management might consider focusing less on the company’s formal strategy and more on the processes by which the company allocates re- sources. Top managers must know the track record of the people who are making resource allocation proposals; recognize the strategic issues at stake; reach down to operational managers to work across Crafting strategy is an division lines; frame resource questions to reflect iterative, real-time process; the corporate perspective, especially when large sums of money are involved and conditions are commitments must be highly uncertain; and create a new context that made, then either revised or allows top executives to circumvent the regular resource allocation process when necessary. stepped up as new realities Reprint R0702C; HBR OnPoint 1831 emerge. – page 72

154 Harvard Business Review | February 2007 | hbr.org GENERAL MANAGEMENT MANAGING PEOPLE

THE HBR LIST HBR CASE STUDY 20 | Breakthrough Ideas for 2007 57 | Off-Ramp – or Dead End? Our annual survey of ideas and trends Sharman Esarey and Arno Haslberger that will make an impact on business: Cheryl Jamis, the high-powered marketing Duncan J. Watts contends that ordi- director for a large UK-based clothing re- nary people, not “influentials,” drive social tailer, seems to have it all – corner office in- epidemics. Yoshito Hori predicts that cluded. What’s more, she loves her job. Japan’s young entrepreneurs could out- But her professional dedication is begin- shine those in China and India. Frédéric ning to jeopardize another job she is pas- Dalsace, Coralie Damay, and David sionate about: being a mom. Dubois propose brands that – like Harry As Cheryl’s career has grown, so has Potter – mature with their customers. her daughter, Emma. And while juggling Michael Schrage reveals the hidden value the two has never been easy, it’s been in long-forgotten equations. Harry Hutson manageable. Emma has ended up taking and Barbara Perry put hope back in the a backseat to whatever work crisis loomed executive repertoire. Eric von Hippel at the moment, but now that she is seven, spotlights Denmark, where “user-centered it is becoming harder to put her on hold. innovation” is a national priority. Linda Marcus Addison, Cheryl’s boss, seems Stone detects a backlash against cell- sympathetic to her efforts to succeed as phone and BlackBerry addiction. Michael C. a professional and a mother. So when she Mankins suggests where to put all that ex- suggests reducing her hours, she is taken cess cash. Ap Dijksterhuis reaffirms the aback by his response: “You’ll just end up value of sleeping on a decision. Robert G. working the same hours for less pay, you Eccles, Liv Watson, and Mike Willis re- know. Your job is a big, responsible one. port on a new software standard that will It just can’t be done in four days, let alone make business and financial information three.” Then he implies – albeit vaguely – dramatically easier to generate, aggre- that she could soon be on the next step gate, and analyze. Geoffrey B. West chal- up the ladder. lenges the conventional wisdom that Before Cheryl has time to digest that smaller innovation functions are more in- possibility, however, Marcus tosses her ventive. Karen Fraser warns of apparently yet another curveball: a chance to take loyal customers who are poised to bolt for his place on a business trip to the United ethical reasons. Phillip Longman predicts States – a great opportunity. Though it the return of large patriarchal families and means canceling a long-overdue weekend their effects on marketing strategy. Rashi away with her daughter, Cheryl accepts – Glazer illustrates the sociocultural and then almost immediately regrets it. When business implications of nanotechnology. she goes to Marcus’s office to hash things Yoko Ishikura urges global firms to out, he preempts her speech with one of “think locally.” Klaus Kleinfeld and Erich his own: The promotion he’d expected for Reinhardt explore the convergence of her is off the table, at least for the time imaging technology and biotech and its being. Now Cheryl has to make a decision: enormous benefits for medical care. Should she stick it out or chuck it all? Christopher Meyer advises focusing on Commenting on this fictional case study what you want from your network before are Monica McGrath, an adjunct assistant you build the platform. Charles R. Morris professor of management at the University asserts that health care costs are falling; of Pennsylvania’s Wharton School; Rebecca it’s spending that’s on the rise. Clay Shirky Matthias, a cofounder and the president shows why open source projects succeed and COO of Mothers Work; Robert J. by failing. David Weinberger claims that Maricich, the CEO of Century Furniture; accountability has morphed into supersti- and Evelyne Sevin, a Paris-based partner tious “accountabalism.” at Egon Zehnder International. Reprint R0702A Reprint R0702B Reprint Case only R0702X Reprint Commentary only R0702Z GLOBALIZATION LEADERSHIP RISK MANAGEMENT 80 | Cocreating Business’s New 92 | In Praise of the Incomplete 104 | Reputation and Its Risks Social Compact Leader Robert G. Eccles, Scott C. Newquist, and Jeb Brugmann and C.K. Prahalad Deborah Ancona, Thomas W. Malone, Roland Schatz Wanda J. Orlikowski, and Peter M. Senge Moving beyond decades of mutual dis- Regulators, industry groups, consultants, trust and animosity, corporations and Today’s top executives are expected to and individual companies have developed nongovernmental organizations (NGOs) do everything right, from coming up with elaborate guidelines over the years for as- are learning to cooperate with each other. solutions to unfathomably complex prob- sessing and managing risks in a wide range Realizing that their interests are converg- lems to having the charisma and prescience of areas, from commodity prices to natural ing, the two sides are working together to rally stakeholders around a perfect vision disasters. Yet they have all but ignored rep- to create innovative business models that of the future. But no one leader can be all utational risk, mostly because they aren’t are helping to grow new markets and ac- things to all people. sure how to define or measure it. celerate the eradication of poverty. It’s time to end the myth of the com- That’s a big problem, say the authors. The path to convergence has pro- plete leader, say the authors. Those at the Because so much market value comes ceeded in three stages. In the initial be- top must come to understand their weak- from hard-to-assess intangible assets responsible stage, companies and NGOs, nesses as well as their strengths. Only like brand equity and intellectual capital, realizing that they had to coexist, started by embracing the ways in which they are organizations are especially vulnerable to to look for ways to influence each other incomplete can leaders fill in the gaps in anything that damages their reputations. through joint social responsibility projects. their knowledge with others’ skills. The Moreover, companies with strong positive This experience paved the way for the get- incomplete leader has the confidence and reputations attract better talent and are into-business stage, in which NGOs and humility to recognize unique talents and perceived as providing more value in their companies sought to serve the poor by perspectives throughout the organization – products and services, which often allows setting up successful businesses. In the and to let those qualities shine. them to charge a premium. Their custom- process, NGOs learned business disci- The authors’ work studying leadership ers are more loyal and buy broader ranges pline from the private sector, while corpo- over the past six years has led them to de- of products and services. Since the mar- rations gained an appreciation for the local velop a framework of distributed leader- ket believes that such companies will knowledge, low-cost business models, ship. Within that model, leadership con- deliver sustained earnings and future and community-based marketing tech- sists of four capabilities: sensemaking, growth, they have higher price-earnings niques that the NGOs have mastered. relating, “visioning,” and inventing. Sense- multiples and market values and lower Increased success on both sides has making involves understanding and map- costs of capital. laid the foundation for the cocreate- ping the context in which a company and Most companies, however, do an inad- business stage, in which companies and its people operate. A leader skilled in this equate job of managing their reputations NGOs become key parts of each other’s area can quickly identify the complexities in general and the risks to their reputa- capacity to deliver value. When BP sought of a given situation and explain them to tions in particular. They tend to focus their to market a duel-fuel portable stove in others. The second capability, relating, energies on handling the threats to their India, it set up one such cocreation sys- means being able to build trusting rela- reputations that have already surfaced. tem with three Indian NGOs. The system tionships with others through inquiring That is not risk management; it is crisis allowed BP to bring the innovative stove (listening with intention), advocating (ex- management – a reactive approach aimed to a geographically dispersed market plaining one’s own point of view), and con- at limiting the damage. The authors provide through myriad local distributors without necting (establishing a network of allies a framework for actively managing reputa- incurring distribution costs so high that who can help a leader accomplish his or tional risk. They introduce three factors (the the product would become unaffordable. her goals). Visioning, the third capability, reputation-reality gap, changing beliefs and The company sold its stoves profitably, means coming up with a compelling image expectations, and weak internal coordina- the NGOs gained access to a lucrative of the future. It is a collaborative process tion) that affect the level of such risks and revenue stream that could fund other that articulates what the members of an then explore several ways to sufficiently projects, and consumers got more than organization want to create. Finally, invent- quantify and control those factors. The the ability to sit down to a hot meal – they ing involves developing new ways to bring process outlined in this article will help got the opportunity to earn incomes as that vision to life. managers do a better job of assessing the local distributors and thus to gain Rarely will a single person be skilled in existing and potential threats to their com- economic and social influence. all four areas. That’s why it’s critical that panies’ reputations and deciding whether Reprint R0702D; HBR OnPoint 1829 leaders find others who can offset their to accept a particular risk or take actions limitations and complement their strengths. to avoid or mitigate it. Those who don’t will not only bear the bur- Reprint R0702F den of leadership alone but will find them- selves at the helm of an unbalanced ship. Reprint R0702E

156 Harvard Business Review | February 2007 | hbr.org CUSTOMER RELATIONS LEADERSHIP LEADERSHIP 116 | Understanding Customer 129 | Discovering Your Authentic 141 | Raising Haier Experience Leadership Zhang Ruimin Christopher Meyer and Andre Schwager Bill George, Peter Sims, Andrew N. McLean, Zhang Ruimin’s leadership of the renowned Anyone who has signed up for cell phone and Diana Mayer Haier Group began before the Chinese service, attempted to claim a rebate, or The ongoing problems in business leader- company even carried that name. More navigated a call center has probably suf- ship over the past five years have under- than 20 years ago, Zhang was appointed fered from a company’s apparent indiffer- scored the need for a new kind of leader director of the Qingdao Refrigerator Fac- ence to what should be its first concern: in the twenty-first century: the authentic tory, which faced enormous debt and didn’t the customer experiences that culminate leader. Author Bill George, a Harvard Busi- seem likely to survive, let alone prosper. in either satisfaction or disappointment ness School professor and the former The main challenge in those early days was and defection. chairman and CEO of Medtronic, and his boosting the morale of his workers, who Customer experience is the subjective colleagues, conducted the largest leader- had gone unpaid for months and grown response customers have to direct or ship development study ever undertaken. deeply dispirited. Zhang borrowed money indirect contact with a company. It en- They interviewed 125 business leaders so he could catch up on payroll and make compasses every aspect of an offering: from different racial, religious, national, other improvements – and his employees customer care, advertising, packaging, and socioeconomic backgrounds to under- took heart. features, ease of use, reliability. Cus- stand how leaders become and remain Once he had won their goodwill, Zhang tomer experience is shaped by custom- authentic. Their interviews showed that explains in this first-person account, he ers’ expectations, which largely reflect you do not have to be born with any par- started demanding good work. There was previous experiences. Few CEOs would ticular characteristics or traits to lead. You very little discipline in the factory up to argue against the significance of customer also do not have to be at the top of your that point. Rules and regulations existed experience or against measuring and ana- organization. Anyone can learn to be an in writing but had never been seriously lyzing it. But many don’t appreciate how authentic leader. upheld. Zhang guaranteed the payment those activities differ from CRM or just The journey begins with leaders under- of salaries, but only on the condition that how illuminating the data can be. For in- standing their life stories. Authentic lead- people obeyed the policies he established – stance, the majority of the companies in ers frame their stories in ways that allow some as simple as “Stealing company a recent survey believed they have been them to see themselves not as passive property is prohibited.” Those who vio- providing “superior” experiences to cus- observers but as individuals who learn lated factory rules could be given demer- tomers, but most customers disagreed. from their experiences. These leaders its or even deprived of factory member- The authors describe a customer expe- make time to examine their experiences ship (that is, no longer allowed to be part rience management (CEM) process that and to reflect on them, and in doing so of the company’s collective ownership). involves three kinds of monitoring: past they grow as individuals and as leaders. Far from intimidating employees, this patterns (evaluating completed transac- Authentic leaders also work hard at devel- boost in discipline gave people a sense tions), present patterns (tracking current oping self-awareness through persistent of security and hope. relationships), and potential patterns (con- and often courageous self-exploration. Now that Haier is a world-class opera- ducting inquiries in the hope of unveiling Denial can be the greatest hurdle that tion competing in global markets, Zhang’s future opportunities). Data are collected at leaders face in becoming self-aware, focus as chief executive has shifted from or about touch points through such meth- but authentic leaders ask for, and listen setting a strong example to giving employ- ods as surveys, interviews, focus groups, to, honest feedback. They also use ees room to make their own decisions and and online forums. Companies need to in- formal and informal support networks realize their goals. To that end, he is striv- volve every function in the effort, not just to help them stay grounded and lead inte- ing to create an organizational structure a single customer-facing group. grated lives. that is as flat and has as few boundaries The authors go on to illustrate how a The authors argue that achieving busi- as possible. He is also emphasizing what cross-functional CEM system is created. ness results over a sustained period of will serve the market, not what will please With such a system, companies can dis- time is the ultimate mark of authentic someone further up in the company hierar- cover which customers are prospects for leadership. It may be possible to drive chy. Employees, he believes, should feel growth and which require immediate short-term outcomes without being au- that they have a customer to answer to, intervention. thentic, but authentic leadership is the more so than a superior. Reprint R0702G only way to create long-term results. Reprint R0702J Reprint R0702H

hbr.org | February 2007 | Harvard Business Review 157 Reprints and Subscriptions

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158 Harvard Business Review | February 2007 | hbr.org by Don Moyer | PANEL DISCUSSION

annibalism represents – as a consultant might say to a tribe considering such a Let’s Eat practice – a waste of human resources. Corporate cannibalization – creating new products or services that eat into your existing business – can represent a waste Cof company resources. John A. Quelch and David Kenny warn in “Extend Profits, Not Product Lines” (HBR September–October 1994) that introducing brand and product extensions can cause trouble when it doesn’t lead to more consumption, confuses the customer, weakens the brand, and carries hidden costs that nibble away at profits. Consequently, firms are justifiably reluctant to cook up new products or services that may compete with what they are already doing. But as Matthew Bishop points out in Essential Economics, “Eating people is wrong. Eating your own business may not be.” He reminds us that some markets are ripe for innovation and what economist Joseph Schum- peter called creative destruction, in which a new product destroys the market for an exist- ing product. “In this environment,” Bishop writes, “the best course of action for success- ful firms that want to avoid losing their market to a rival with an innovation may be to carry out the creative destruction themselves.” Eat or be eaten.

Don Moyer can be reached at [email protected].

hbr.org | February 2007 | Harvard Business Review 159 There are 193 countries in the world. None of them are energy independent.

So who’s holding whom over a barrel? The fact is, the vast majority of countries rely on the few energy-producing nations that won the geological lottery, blessing them with abundant hydrocarbons. And yet, even regions with plenty of raw resources import some form of energy. Saudi Arabia, for example, the world’s largest oil exporter, imports refined petroleum products like gasoline.

So if energy independence is an unrealistic goal, how does everyone get the fuel they need, especially in a world of rising demand, supply disruptions, natural disasters, and unstable regimes?

True global energy security will be a result of cooperation and engagement, not isolationism. When investment and expertise are allowed to flow freely across borders, the engine of innovation is ignited, prosperity is fueled and the energy available to everyone increases. At the same balancing the needs of producers and consumerstime, is as crucial as increasing supply and curbing demand. Only then will the world enjoy energy peace-of-mind.

Succeeding in securing energy for everyone doesn’t have to come at the expense of anyone. Once we all start to think differently about energy, then we can Chevron Steps Taken: truly make this promise a reality.

• Investingto over market. $15 billion a year to bring energy

• Developing energy through partnerships in 26 countries. ernative and renewable • Committing hundreds of millions y annually to alt energies to diversify supply.

• Since 1992, have made our own energy go further by increasing our efficienc by 24%.

CHEVRON is a registered trademark of Chevron Corporation. The CHEVRON HALLMARK and HUMAN ENERGY are trademarks of Chevron Corporation. ©2006 Chevron Corporation. All rights reserved.