Harvard Business Review - June 2010

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HBR .ORG

JUNE 2010

~ 40 The Big Idea Start an Entrepreneurial Revolut ion

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Daniel J . Isenberg 94 Sust ainability

Strategies for Gree n Product Development Gregory Unruh a nd Richard Etten son

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114 Managing Yourself

Turn the Job You Have Into t he Job You Want Amy Wrzesniewski, Ju stin M. Berg, a nd Jane E. Dutton

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ANAGING CHANGE HOW TO DO IT WHEN TO DO IT PAGE 53

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WE MERELY HAD TO IMPROVE A FOOD THE WHOLE COUNTRY GREW UP LOVING. NO PRESSURE.

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Next to the revered hamburger, nothing is more classic to fast food than the frenc h fry. So when a major restaurant chain wanted to create french fries with zero grams

I

trans fat per serving , they knew they couldn't change t he taste consumers loved .

They ca lled on Ca rgi ll , w ho worked wit h t hem t o develop a speci al fryi ng oil. Extensive canota seed research, new processing techno logies and an identity preserved

supply ch ain resulted in a cooking oil that performed well for fries , ch icken and fish . Consu mer tests proved ou r approa ch was successful in providing the same great

taste . Now our custo mer serves fries consumers can fee l good about , wh ile s till enjoying that class ic f lavo r. This is how Cargill works w it h customers .

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June 2010

hbr.org Harvard E-

Business ~~;;. Review ~,-o~ MANAGING CHANGE

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IlUW IU L1U"

W>+EN TO 00 IT

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Aboutthe spotl1lht Artkt Over the past 25years. Antony Gormley has revitalized the human image in sculptu re through a radical investigation of the body asa place of memory and transformation, using his OWll body as subject.

tool. and material. Since 1990 he has expan ded his concern with the human condition to explore the collective body a nd t he relationship between self

and other in large-scale installations. His work has been exh ibited throughout the UKand internationally. Gormley was awarded t he Turner Prize in 1994 and the South Bank Prize for Visual Art in 1999. .~~

Antony Gormle y.

Doma in 'I~l d, 4.76 mm square st ainlO'SS steel bars

I

Varioos siles' 287 eleme nts, derived from molds of loca l inhabitants of Newcas tle · Gatl/'Sr>ead. ux. aged 2.5-84 years Installation vjew-. BALTIC centre for Contemporary Art, Gateshead Commio;sion for BALTIC centre for Contemporary An, Gateshead

54 The Decision-Driven Organization Most CEOs t hink fi nancial performance is tied to company structure, so ifyou want to increase value, you have to reorganize, But in t rut h, most reorgs fall flat , The ones that work best a re built around decisions: Firms that make them faster and better than riva ls get ahead. Marcia W. Blenko, Michael C. Mankins, and Paul Rogers

64 The productivity Paradox: How sony pictures Gets More Out of people by Demanding Less Companies often burn employees out by expect ing them to run like machines- always on and at full t hrottle. Sony Pictures , however, has found that allowing staffers to take t ime out to renew th eir energy boosts t heir perfor mance-and generates impressive fi nancial resu lts. Tony Schwartz 70 Change for Change's Sake Just as seemingly fit people can have high choleste rol, well-pe rforming companies can suffer from a buildup of inflexible networks, unquestioned routines, and overly powe rful units. A corporate "cholesterol test " can reveal how much and what kind of cha nge to consider. Freek Vermeulen, Phanish Puranam, and Ranjay Gulati

HBR.ORG Ma RE aN STRATEGIES FOR A CHANGI NG WORLO

Practical advice to hel p you energize your company, your team. and yourself. hbr.

org/strategies· cha nging·world

June 2010 Harvard Business Review 7 www.WorldMags.net & www.Journal-Plaza.net

HBR.ORG

Feat ures June 2010 THE BIG IDEA

How to Start an Entrepreneurial Revolution As the leaders of Rwanda, Israel, and Chile have seen, entrepreneurship can transform an economy. But creating a breeding -. ground for new ventures isn't simple; you need to get many elements right. Here's what we know works. Daniel J. Isenberg

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Are You a High Potential?

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High-pot ent ia l managers have distinguishing characteristics and behaviors that companies rout ine ly recognize. l earn what those qualities are- and what you can do to exhibit them-so that you make the list. Douglas A. Ready, Jay A. Conger, and

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Linda A. Hill

86

The Coherence Premium Rarely is a com pany disci plined enough to focus on "what we do better t han anyone" in making every decision across all its businesses. Rarer still is the company that has aligned its different iating inte rnal capabilities with the right external market posit ion . The firms that do are "coherent," and they reap a reward . Paul Leinwand and Cesare Mainardi

'-..//4

ey respondents top teams ss than 10% of me developing -potent ial leaders.

Growing Green: Three

Smart Paths to Developing Sustainable Products Most executives believe that sustainability is a revenue driver, but t hey're not sure how to make it work for the m. Here are three broad strategies for aligning companies' gree n prod uct goals with thei r capabilities. Gregol}' Unruh and Richard Ettenson

VINEET NAYAR

On inverting the leadership pyramid blogs. hbr.org/nayar

103 THE GLOBE

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The China Rules A practical guide t o leadi ng a company in the world's t hird-largest economy. Lynn S. Paine 110 HOW I DID IT

A Maverick CED Explains How He Persuaded His Team

to Leap into the Future The CEO of HCl recnnctcgree wanted to tu rn the organizat ion ups ide down -so he put his employees before his customers. Vineet Nay ar

June 2010 www.WorldMags.net & www.Journal-Plaza.net

Most of what expat CEDs learn inChina hasn't made its way into management books or classrooms.

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Reacting to the stock market is just investing. Taking stock in the long term is Vanquardinq.

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Vanguard provides services to the Vanguard funds at-cost. For more information about Vanguard funds, including at-cost services, visit www.vanguard.com/different. or call BOO-505-7182, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. All investments are subject to risk. 2010 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, DIstributor. www.WorldMags.net & www.Journal-Plaza.net

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HB R.ORG

Departments June 2010 IMAGINING THI FUTURI OF LIADIRSHIP

14 18

From the Ed it or Int eracti on

People may want you, but that doesn't mean they like you.

Idea Watch

page 32

FUIANCEI THI WAY FORWARD

23 FIRST

34 VISION STATEMENT

Why Dinosaurs Will Keep Ruling the Auto Industry

Six Ways to Find Value in Twitter's Noise

Incumbents are best equipped to handle cars' design complexity. PLUS piggybacked IT service, silent employees, social investors, off-ramping women, and more

Ma rket ers, take note. COLUMNS 36 C.K. PRAHALAD

When success factors t urn into orthodoxies 32 DEFEND YOUR RESEARCH

The More People Want Something. the Less They'll Like It Why marketing strategies based on product scarcity often backfire

Craft your job to s uit you page "4

38 DAN ARIELY

The unint ended consequences of measuring performance

Tackling the obvious page]6

Mi ne a stream of co nsum er data in nea r-real ti me page 34

ll4 ~:E.~Y:'~~Fnce Turn the Job You Have into the Job You Want

Feeling stuck in your job? 'Job crafting" can help you redefine and reenergize your work life by organizing tas ks in ways tha t play to your passions and strengt hs. Amy Wrz esniewski, J ustin M. Berg, and Jane E. Dutton

leadership as we know it is over. So. what's next? blogs.hbr. org/ imaginingt he-fut ure-ofleadership

118 CASE STUDY

When the CEO's Personal Crusa de Drives Decisions Should th e HR director step in? Randle D. Raggio 126 RECOMMENDED Review s 128 LIFE'S WORK

Joe Girardi The manager of the New York Yankees on using information to im prove instincts

12 Harllard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

Can we reinvt! nt the financial system? Should we? Join the debate. blogs. hbr.org/ fmancet he-wa.y-forward BEST PRACTICES

HOW to have a disagreement with a coworker blogs.hbr.org/ best-practices .IDI GIRARDI

An extended interlliew with the Yankees' manager on mentoring his successor, confronting his boss. and never missing date night hbr.org/ girardi

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From the Editor "Modesty, Humility, and Humanity" he world ofstrategy t hinking has lost a giant. On April 16, C.K. Prahalad died in San Diego after a sho rt illness, He had just turned in his column for this issue, proud that he was apparently the fi rst aut hor in our history to write a piece from t he lCU. We fully expected him to recover and were shoc ked-as were his ma ny friends and admirers- that he passed away at age 68, still in his prime and full of plans for big new projects, I first met C.K. in July 2008 in New York, where, as the deputy man aging editor of Time, I had organized a debate on "creative capitalism"- BillGates's idea for sp reading the benefits ofcapitalism to the billions who have been left out. It's litt le wonder that C.K. was

T C.K. Prah alad 1941-2010

Illustrating this mon th's Spotlight package is Antony Gormley, the British artist whose powerful installations and rooftop sculptures have been t he talk of Manhat tan this spring.

the fi rst person Gates named when I asked him who should be on the panel. C.K. had created a remarkable body of work that included his celeb rated 1990 HBRarticle (with Gary Hamel), which coined the term "core competence;' and his groundbreaking 2004 boo k,

ABOVE Event Horizon, 20 07 27 fiberglass and 4 cast-iron figures 1S9 x53 x 29cm A Hayward Gallery commission, presented by Mad ison Square Park COnservancy, New vcrk, 2010

The Fortune at the Bottom of the Pyramid, which explained how the world's poor could be a valuable market, He could be counted on in any discussion to provide wise, assured, and often blunt insight. During the creative capitalism debate he said, "This movement will not go forward if the media...does not play its part.... The stories from the poor countries need not be only stories ofpoverty and corruption:' We took this as a worthy challenge,

14 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

Several months later, when I was interviewing for t he posit ion ofHBR editor in chief, C.K. was one of the fi rst people I called . He was generous wit h his time and straigh tfo rward with his views, praising t he magazine where praise was due and pointing out what he saw as its shortcomings, He urged me to compete for the job, adding that he would be a willing sounding board if I landed it. I'm sorry that l-- Hke so many others- have lost the benefit of his wisdom. We chose C,K, as our inaugu ral columnist for the relaunched HBR this past January. No one, we thought, better combined gravi tas with a willingness to pursu e new ideas. His debut column, outlining the duties ofthe "responsible manager," was drawn from a lect ure he first delivered to his students in 1977, It becam e his concluding lecture in every academic year since. "Leadership," he wrote, "is about sel f- awareness, recognizing your failings, and developing modesty, humility, and humanity." These were t he values th at C.K, Prahalad lived by. We at HBR feel very lucky t hat we crossed paths with him so many times during his ext raordi nary journey.

Adi Ignatius, Editor in Chief

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Business Review EDITOR IN CHIEF Adi Ignatius EDITOR, HBR Karen Oilton

ARE YOU HAPPY AT WORK? When almost everyone reports being stressed and overworked. turn to the Summer 2010 issue o f Harvard Business Review OnPoim t o gu ide you and your employees toward higher job sat isfaction and higher productiv ity. Our expert authors advise strong leadersh ip to mot ivate people. a focus on building trust, face -to-face communication, and se lf-reflection. What

EDITOR, HBR.ORG Eric Hellweg

EXECUTIVE EDITORS sarah Cliffe paul Michelman (special projects)

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ART DI RECTOR, HBR Karen Player

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dennes your ideal workplace?

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Articles include:

EDITORIAL COORDINATORS Meghan Ennes, COurtneySChinke

• "HBR Case Study: Why Are We Losing AU Our Good People?" by Edward E. Lawler III • "Management by Whose Objectives?" by Harry Levinson • "The Human Moment at Work" by Edward M. Hallowe ll • "Reawakening Your Passion for Work" by Richard

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Plus, from HBR.org. "Top Ten Ways to Find JOy at Work" by Rosabeth Moss Kanter and more ...

SUMMER ISSUE

A NOTE TO READERS The views expresse d in articles are t he authors' and not necessa rily t hose of Harvord Business Review. Harvard Business SChool, or Harvard University. Aut hors may have consulting or other business relationship s with the companies they discuss.

ON NEWSSTANDS

NOW Harvard Bus;ness Review OnPa im (available quarterly on newsstands and at hbr.org) focuses on a single theme each issue, It includes expert·authored art icles from HBIl's rich archives. helpful article summaries. company examples. and suggest ions for further reading,

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Interaction • " Turnmg

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Doctors mto Leaders HBR article by Thomas H. l ee, April2010

"The problem with health care is people like me;' wrote Thomas Lee, of Harvard Medical School, "who learned medicine when it was more art and less finance:' Costs are rising because of medical progress, and the system is too fragmented and disorganized to absorb the complexity of modern care. "Health care today needs a fundamentally different approachand a new breed of leaders:' Lee makes interesting and cogent points about the state of th e health care system, teamwork, and communication. However, George EngeL (creator of the biopsychosocial model) pointed out a

number of years ago that heating comes fro m pat ient s' being heard and understood.

Teams and systems cannot accomplish t his t ask. Bad doct ors don't listen; good

doctors do. The health care debate would be moot if Dr. Engel's principle had been followed over the past few decades.

Listening to a patient makes much of t he expense associated with medicine

unnecessary. For high-tech procedures.

tech nicians do a great job. But t he art of medicine and t he listening ear have no pa rallel st ructure. We're not heroes, we're doctors; a nd 90% of medici ne is pract iced elsewhere than in t he hightec h world. That is why alternative medical practitioners and nontrad it io nal pract itione rs are so popular. people just want to be heard a nd unde rstood. Joseph A. t roneare, MD, FASAM, Staff Physician, Lancaster General Health I appreciate Lee's ca ndor regarding the role that people "like him" play in t he problem of healt h care today, and Iagree

that medicine is satisfied to practice in a monolithic, independent manner. I also agree t hat t he t ime has come to innovate with new delivery models a nd create "a new breed of leaders." But I was disappointed t hat the article missed t he ma rk by supporting the common belief that "ma nage ment" is "leadership," Over the years, I have queried a large number of physicians as to their definition of leadership. Most of t hem, unfortunately, describe it in management te rms: strategic planning, fi nancial controls, huma n reso urces, ma rketing, a nd so forth. We must , howeve r, acknowledge t hat manage ment is not leade rship. Leadership is about taking people to a place that t hey would not go on t heir own. It is about disrupting the core and upsetti ng the status quo. It is about possessing and utilizing t he proper skills to envision a prefe rred future; having t he ability and comm itment to persistently scan t he horizon for trends that would either negatively or positively impact that future; backcasting by creating strategies t hat lead towa rd and enforce the preferred fut ure; designi ng a nd promoting an environme nt of creativity in order to develop strategies to avoid obstacles to t he preferred future; supporti ng and encouraging the development of disru ptive innovations that foste r, rather tha n impede, the future; leadi ng t he diffusion of those innovations into the general population;

HBR column by Dan Ariely, April 2010

Why Businesses Don't Experiment

~ ~

"Int uit ion is a remarkably bad th ing to rely on," Ariely argued . "Only an experimen t gives you th e evidence you need: ' But companies cont inue to pay overly confi dent consultant s big money t o s upply answers rat her t han gat he r evidence in experiments t o hel p them ma ke their own decisions.

::Cirj

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Harvard Business Review June 2.010 www.WorldMags.net & www.Journal-Plaza.net

I would agree t hat experimentation doesn't get q uite t he attention it deserves in t he postmode rn orga nizational setting. However,l a m of t he opinion t hat Ariely did not give t he credit d ue to t he not-sa-scientific "gut,' He paraphrases what Intuit's founde r, Scott Cook, tells his staff; "whatever happe ns, you' re doing right beca use you've created evidence, which is bette r t ha n anyone's intuition." I say, not so fast when it co mes to discounting the value

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integrating change-t heory strategies that move people forward in a unified manner; and mentoring ma nagers and followers along the way to keep them focused on the ends. In the late 1970S and ea rly 19Bos physicians abdicated their responsibility to protect the sacred physician-patie nt relationship. a nd as t he res ult of a lac k of true leade rship from within. the vac uum was fi tted by attorneys, insurance executives . politicians, and ot hers who have "managed " med icine into its present convoluted and deficient condition . Instead of leading med icine into the future. physicians became passive followers who were willing to allow others to determine how they would deliver care to thei r patients. Where within t he present medical ed ucation continuu m do we trai n physicians in the finer points of leade rsh ip studies: strategic foresight . thinking. a nd design; visionee ring; change; global integration; creativity; innovation; and huma n capital developments Ifwe want to c ha nge medicine for the bette r, we need to go beyond management and truly commit to training strategic Leaders from within. Barry A. Oouble stein, MD, Chairman, The Institute fO!' Leadership in Med icine

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Interaction with endless betas. We don't nee d to worry a bout mod eLnumbe rs a nd versions. No company has exe mpLified "w hat you see is what you get" better t han Apple. Posted by Vijay Kumar, Vice President of Finance, Southwest Kidney Institute

EnteriPad

HBR blogs, April 2010

HBR .org covered the laun ch of Apple's much-hyped iPad from the st rategic, innovative. and marketing perspectives, and our online community buzzed with commenta ry a nd complaint s. "Apple's Strategic lsaradox" by Umair Haque. "The iPad is a revolution waiting to happen. But the revolution's biggest roadblock is Apple itself." Ifeveryone had a n iPad and then so meone ca me out with the iphone, it would be regarded a s a n "ipad killer" - 98% of the same funct ionality but porta ble a nd a phone, too. So when t he chronology is reversed. why does iPad win big? Who is th e core customer? And why? Posted by Rodrigo Plantagenet Apple has always bee n fundamentally product-Led; t hat's how it ge nerates rea L value . It succeeds in a service-driven world beca use services do n't produce q uite th e same tangible va lue t hat fantastic products d o- a nd Apple p rodu ce s fantastic products better t han a nyone else . Posted by Aditya Anup kumar, Partner-Strategic Planning and Rediffusion, Young & Rubicam

Somehow consultants have concluded that the U.S. would be better off com moditizing CONTI'lUEO fRO'"

~EVIOUS

PAGE

so me focus o n t he a pplication of testing and on honing t he skill of learning how to liste n to your gut. A combination of expe riment and intuitio n may p rove to be more valuable t ha n e xpected. Stuart M. Jackson, CEO, Jackson & Associates

hardware an d focusing on services. But as t he hardware moves offshore, so does the competitive advantage, a nd eve ntually services will be commoditized . It's easy to discount a service unt il it's essentially free ; then it's nearly impossible to raise t he p rice. ccogte d id t his with office software , although it charges b usine sses for ac cess to its office suite. Face boo k is struggling with a business mod eLthat has no subscript ion revenue, a nd it's seeing a revolt from subscribers who refuse to pay for a social netwo rking se rvice . Posted by Ste van Eidson, President, Eizon "Apple's iPad: What Every Business Can Learn" by Peter Merholz. ''Apple is surprisingly cavalier about supplanting an existing cash cow with a next-generation product that responds to how the market is moving.~ Most compa nies are just not co nfident , disciplined, or financia lly stable enough to ta ke t he kinds of risks AppLe ca n and does. Better to innovate yourselves into a new market than to miss one while a nim ble r competitor discovers the next PC. Posted by And rew McFarland, Vice President,

ca.mc. What also distinguishes Apple from other tech nology co mpa nies is strict quality co nt rol. It does n't waste its t ime or ours 20

Harva rd Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

"Waiting for the jPad's Twist" by Scott Anthony, "If there isn't any twist, I expect the iPad to.. .[ol/ short of the transformational impact of the iPod and iPhone platforms." It's not the lsad, it's t he category t hat will fail s hould the killer a pp not show up. Where t he KindLe a nd the Nook took the one-trick-pony approac h, Apple has put aLL the ca pa bilit ies in t he iPad that developers an d users now have to fi gure out how to put into action. Alt hough the Kind le solved a problem, it did so without any open expansion ca pabilities. Posted byJohn McElhenney, Digital Produ cer, ClarusAge ncy "Where Most New Product Launches (But Not AppLe's) Go wrong" by JuLia Kirby, "Apple's success isn't a ll a story of building a better mousetrap. It's also about being really good at making the world beat a path to your door." Acom pa ny that is plan ning a product launch sho uld as k not only "How can we ca pture customers' attentio n and whet thei r appetites so as to maximize product sales?" but aLso " How can we genuinely improve things for t he customer t hrough a better-pla nned launc h?" The answer to the first question is to generate mystiq ue. The a nswer to t he second is to reach as man y customers as poss ible at launch an d ensure sufficient suppLy so that t he re are no stockouts and customers ca n get the prod uct without hardship. Focusing exclusively on the first is Li kely to resu lt in a manipulative lau nch rat he r t han one that ge nuinely meets custome rs' nee ds. Apple's magic perhaps lies in its impeccable focus on both . Posted byV.P. Kochikar. Associate Vice President, Infosys recbnotogres

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CLOUD COMPUTING 24

MANAGING PEOPLE 26

DEFEND YOUR RESEARCH 32

DAN ARIELY 38

A revolutionary IT tool, or a bunch of hype?

Why your employees aren't being frank with you

The more customers want it, the less they'Ulike it.

How to get CEOs to care about more than stock price

New Thinking, Research in Progress hbr.org

FIRST

Why Dinosaurs will Keep Ruling the Auto Industry

complexity. Toyota's highly publicized recalls earlier this year were not outliers but, rather, emblematic ofan industry challenge that will only intensify as vehicles integrate ever-more-elaborate hardware, software, Get ready for the complexity revolution. byJohn Paul safety equipment, and creature comforts. Meeting both regulatory and consumer MacDuffie and Takahiro Fujimoto deman ds involves managing inte rdepen de ncies among subsystems. (This is, in a he automobile is a paradox. When will win: the rapidl y increasing complex- way, like operating within the auto world ity of vehicle design in advanced-economy itself, wh ich Peter Drucker famously called you ge t down to basics, it's t he same as it was a hundred years ago: markets. The typical car contains about "an industry of industries.") But companies a metal box on four wheels connected by 2,000 funct ional components, 30,000 parts, and their designers can't do that using current best practices. a suspension and powered by an internal and 10 million lines of software code. combustio n engine, which runs on a petroWhy all the intricacy? Automobiles are che mical fuel. Yet the Tin Lizzie and the heavy, fast-moving objects operating in New solutions Beget Prius are worlds apart in every other way. public space. Making them safe and reduc- New Problems Many companies have long be lieved ing their environmen tal impact are impor- Many product engineers like the simplicity they could emerge as industry leaders by tant concerns mand ated by regulation . At and fl exibility of a modular approach. But placing the right bets on markets to en ter, the same time, their high cost raises con- that works best for products such as con car types to make, and technologies to pur- sumer expectat ions for styling, power, sumer electronics, which are small and un sue. But now there's a trend that eclipses handling, reliability, and am en ities. Satis- obtrusive, operated mostly in private space, those factors in determining which players fyingboth these masters results in massive and relatively cheap, with few negative

T

June 2 010 Harvard Business Review 2 3 www.WorldMags.net & www.Journal-Plaza.net

IDEA W ATCH

What We're Watching in...

cloud Computin Cloud compu t ing is eit her a revolut ionary IT management t ool or a nebulous puff of marketing hype, dependi ng on whom you ask. For now, we're thinking it's puffery- but int riguing developm ents are under way.

A Cloudy Concept costs and reduce energy consu mption. But it t urns out t hat much of the appeat is based on a murky understanding of t he concept. According to research by Gart ner group vice president Mar k McDonald, the percentage of CIOs interested in cloud computing has grown consider-

Rat her than house your own IT servers or rent the maximum processing and storage capacity you'LL ever need, why not pay only for what you use, when you use it? That's the basic idea behind cloud computing-and it's an alluring possibility for many reasons. not least the des ire to contain

abLy, from 5% in 2009 to 37"10 earLier this year. And the bigger the company, the more likely management is to say tha t cloud computing is a top-five IT priority. But three out of fou r respondents who profess interest in cloud computing report littLe to none in three of the

CONTINUED FROM PAGE 23

The typical car contains about 2,000 components, 30,000 parts, and 10 million lines of software code. consequences of ma lfunc tion other than ann oying owners. By contrast, auto design requires intensive coordinat ion to keep track of all its various aspects, and its engineering culture prefers unique (non modular) solutions. Compared with car design's advanced calculus of millions of simultaneous complex equations, the iPad's design is basic arithmetic. Automa kers' efforts to deal with desig n complexity so far have hinged on building capabilities for front-loaded problem solving. They've been aided by d igital design tools and simulations for testing how any of those 2,00 0 compon ents per form u nder stress and for evaluating interactions among them. In addition, companies have been leaning on su ppliers to take on important design and testing work; they 're relying on their partners' deep knowledge about the components they build. All t his h as help ed u ntangle th ings somewhat. Manu facturers have reduced the comp lexity of how t hey design and make cars but no t of the cars themselves (at leas t in develop ed mar kets). The shift to digital design and testing tools has facilitated shor ter product life cycles, bu t this leaves less time up front for problem solv ing and funct ional test ing. Suppliers' increased involvement takes aspects of design out ofthe au tomaker's direct con trol, yet the manufacturer remains accountable 24

wh en safety or ot her issues arise. Witness the steadily growing number of recalls in developed cou ntries. Recalls reflect failures to meet ever-tougher regulatory requ irements, as well as greate r consu me r (and produ cer) sensitivity to de fects. They will continue to increase right along with complexity-not necessarily bad news if that improves quality and safety, but surely evidence ofthe burdens of complexity. No case illustrates the cha llenge ofintegrating many parts, systems, and processes bett er than the recall of Toyota's Prius for a problem caused by interactions among the three eleme nts of its braking sys tem. As part of an effort to improve fuel efficiency, the softwa re that controlled this syste m was tu ned to d raw mo re heavily on the BACK TO THE MANUFACTURER

With more computers controlling functions like braking, annual vehicle recalls related to electrical syste ms have quadrupled in the u.s . since th e ' 970S.

II

regenerative b rakes. The pro blem occu rs when the car hits rough pavement or something slippery. The software automatically switches to anttlock braking (ABS), which gives t he se nsation of a sudden drop in braking power. If the driver quickly hits the pedal, the hyd raulic brakes imm ediat ely kick in; if n ot, th e ABS " takeover" interrupts th e driver's antici pated deceleration, creating a feeling ofspeed increase but not actual accele ration. The real safety risk is zero (the brakes continue to wor k and will stop the car if pressed more fully), but the unease felt by drivers was enough to prompt the recall. Not all automotive recalls have such a complex genesis. Toyota's accele rato r pedal recall, which affected a vast nu mber of vehicles, came down to design flaws in a single, relatively simp le part used on man y models and so urce d from a non Japanese supplier in order to diversify the supply chain and reduce costs. Yet thi s is consistent with the overall product's trend toward higher complexity: Defects appear in u npredictable places, whether in simple hardware parts like the accelerator pedal or in complex software control systems.

Incumbents Have an Edge

.. 5DUR<:E5 BLOOMBERG, NHTSA

Harva rd Business Review June 201 0 www.WorldMags.net & www.Journal-Plaza.net

If complexity tripp ed up Toyota, how will the growing nu mber of challengers fare? Their odds of success are even lower than

HBR.ORG

16% SERVER VIRTUAUZATION

OF CIOS REPORT INTEREST IN CLOUD COMPlITING•••

... BUT FEW CIOS SAY THEY'RE INTERESTEDIN lll E CLOUD A N D ITS KEY TECH NOLOGIES:

g%

SERVICE·ORIE NTED ARCHITECTURE

8% SOFTWARE AS A SERVICE

incu mbents'. Tata's Nano has a com paratively simple design tailored to developingeconomy consumers. It meets India's somewhat relaxed regulatory standards, but it would need to be substantially redesigned to be sold in the U.S. or Europe. Chinese autos will need tremendous improvements in drivability, ride smoothness, cabin comfort and quiet, and body "fit and finish" to fulfill the high quality expectations in developed countries. Electric car start-ups must gain the design and testing capabilities to satisfy regulations and to provide the flawless integration of veh icle functions that drivers expect. Being masters of the new drive-train technology won't be enough. Which com panies are best equi pped to design the cars of the future? Those that have amass ed the systemic knowledge to coordinate all the work and the many partners involved. Few d eveloping-cou nt ry auto makers an d green vehicle start-u ps possess that yet. This doesn't limit the field to incumbents, nor does it guarante e that they will be around in 20 to 30 years. But it does mean that new rivals will have to slog through the long, slow process of catching up with the veterans. Othe rwise, no newcomer can expect anything more tha n niche status in th is industry. What 's more, com panies will have to battle the demon s o f co m plexity for an ete rni ty-or at least as long as consumers demand that cars keep them safe, run relatively clean, perform well, an d are attractive and comfortable. The long-term lesson of Toyota's recalls is that automakers will have to bu ild a m uch better institutional capability for reading faint signals amid

key te chnologies it entails: server virtualization, service-oriented architecture, and software as a service. Further, near ly half t he respondents equate cloud computing with virtuaLization alone, which shows that many executives have an incomplete view of it.

Cloud computing has rapidly risen to what McDonald calls "t he pea k of inflated expectations." And where is it headed next? The "trough of disillusionment," he says. That's because few peo ple can even seem to agree on what cloud computing is, never mind how on earth it should work.

The National Institute of Standa rds and Technology (N IST) IT laboratory's definition, version 15, is more t han 760 words long and includes fi ve characteristics, three service models, four deployment models, and a disclaimer saying, in essence, t hat the defi nition will change again soon.

MORE COMPLEX THAN A FIGHTER JET

Safety regulat ions and consumer demand for perform ance and convenience have led t o an exponent ial spike in cars' software complexity.

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LUXURYAUTO AVERAGE

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the "noise" of cons umer experience da ta. As overall vehicle reliability increases, the failures that come will be harde r to forecast and much tougher to trace to root causes, since diagnoses will be made on the basis of rare occu rrences. Given the wide variation in govern ment regulation and consumer demand around the world, automakers targeting advanced markets must do two baste things to survive. First, they'll have to reduce complexity by striving for modularity in whatever limited ways they can and decreasing product line ups, model varieties, and option variants. Second, they must improve their handling of the comp lexity that remains. Fur ther more, a global automaker will want to pursue simple designs for developing markets an d complex ones for the developed wo rld. The trick is to avoid homogeneous designs overengineered for the former and underengineered for the latte r.

SOURC EI IEE, : A<JTOHOTIV' P'SIGNUN'

Consensus on one new domina nt design (say, all-electric vehicles) would mean a simpler world for automakers, yet this is far offat best, and it might never happen given consumer prefe re nces for variety. Most likely, fi rms will need to con tinue producing both simpl e and complex products. Many strategists think that new en tran ts are ready to reinvent the industry. They see the automakers that dominated the twentieth century as dinosaurs: large, slow, and facing extinction. But this is one indust ry in which the dinosaurs-at least those that can successfully wage war on complexityare positioned to beat new challengers for at least the next few decades. " HBR Re p ri nt FlOO6A

John Paul MaeDuffie is a codirector of MIT's International Motor Vehicle Program and an associate professor at the Wharton School. Takahiro Fujimoto is a professor at the University of Tokyo and the executiv e director of its Manufact uring Management Research Center. June 2010 Harvard Business Review 25

www.WorldMags.net & www.Journal-Plaza.net

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-

Is the Cloud Greener?

Despite aLL the confusion about cloud computing, the IT laboratory at NIST lays out some ligures that make a compelling environmental case for it . According to one NIST presentation, the number of se rvers in tradit ional data centers in the U.S. doub led from :2 0 01 to :2 0 0 6 . Power consumption per server

MANAGING PEOPLE by

quadrupled in the same time period, even though serve rs typically operate at only 15% of capacity. Yet t hose data centers, according to EPAfi gures cited by NIST, consume 1.5% of all electricity generated in the United States (compared with 0 .6% worldwide in :20 0 0) . Globally, IT produces 2% of C0 2 emissions.

Businesses that go with cloud computing could improve sustainability in two ways. First, companies maximize servers by sharing them, so fewer machines are chugging away. Second, on-demand usage means that firms needn't consume way above their needs during sLow times in order to be ready for busy times.

James R. Detert, Ethan R. Burris , and David A. Harrison

Debunking Four Myths About Employee Silence fyo u're like a lotofmanagers, you pride yourselfon your ope n door and all the other waysyou signal to employees that you welcome their input. And you probably believe that you're actually hearing what's on most people's minds- after all, workers speak up in meetings, chat wit h you in the hall, and copy you on e-mails. Well, you're not hearing as mu ch as you think or as much as you need to. In the latest phaseofour decade's wort h of research on organizational silence, we piggybacked six questions onto the ann ual Corne ll National Social Survey to explore how and when employees hold back. As you'd expect, they dam u p when they're afraid that speaking could get them into t rouble. But surprisingly, the most common reason forwithholding input isa sense of futility rather than fear of ret ributio n. In part because employees do sometimes speak up, bosses are often unaware of t heir workers' self-censorshi p. They imagine they're hearing what's important when in fact they're being met with silence th ey're si mply unaware of. Think of the times you've kept your own mouth shut. There have p roba bly been n umerous instances, even if you're generally candid ("I speak up a lot, but not about that issue, or in that setting, or to that manager"). The combination oftight-lipped employees and oblivious bosses buries constructive criticism, not to mention the unvarnished truth.

I

Most important, it prevents good ideas from bubbling up through the organization. Data from the 439 respondents who work full time and aren 't self-employed allow us to debunk four common myths managers believe abou t the flow of ideas and information from the rank and file.

,..,.............. 1001 ,. . . ,...

MYTH 1 Women and nonprofessional employees wit hhoLd more information than men and .... profess ional staffers because they are more conce rned about consequences or more likely to see s peaking up as futile. There are no statistically significa nt d ifferences between workers of different genders, education levels, or income levels in the likelihood of holding back because of fear or assumptions offutility.

'"

I

.

,

MYTH2 1f my employees are talking openLy t o me, t hey're not holding back. Fully 42% of res pondents report periodically speaking up but also withholding in for mation when t hey feel they have no thing to gai n -or something to loseby sha ring what's on their minds.

26 Harvard Business Review June 20 10 www.WorldMags.net & www.Journal-Plaza.net

Most servers in traditional data centers operate at only 15% of capacity-yet those data centers consume 1.5% of all electricity generated in the United States.

MYTH 3 If employees are n't speaking up, it's because they don't feel safe doing so, despite all my efforts, More than asse say they withhold feedbac k on routine problems and opportunities for improvement to avoid was ting their ti me, not because they fear consequences. MYTH 4 The only issues employees are sca red to raise involve serious allegat ions about illegal or unethical activit ies. About 20% say a fear of consequences has led them to wit hhold suggestions for addressing ordinary problems and maki ng improvements. Such silence on day-to-day issues keeps managers fro m gett ing the information they need to prevent bigger problems- performance and otherwisedown the road. A blog series at blogs.hbr.org/research this month will look at each of these four myt hs in greater detail, using cases an d analysis to explore ways of unleashing good ideas. '::' HBR Repr int Fl006B

J am" A. Detert is an assistant professor of management at Cornell's Johnson School. Eth an R. Burris is an assistant professo r of management at the University of Texas at Austin's MCCombs School of Business. David A. Harri son is the Smeal Professor at Penn State's Smeal College of Business.

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-

Hidden Fees in the Cloud?

So the energy benefits are real, but what about costs? Gett ing rid of all those inhouse servers is supposed to save scads of money. Then again, maybe not. Amy speUmann of Optimal Innovations, Richard Gimarc of Hyperformix, and Mark Preston of RS Performance conceived of a hypotheticat retail website

faced with a choice between managing servers in house and signing up for Amazon's cloud-computing service. They projected costs and energy consumption two years out for each option. The verdict: Acloud-based website is less expensive than in-house servers at fi rst but may cost more over time, even after you account

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for energy savings. That's because data transfer charges increase as cloud service grows and requires more processing power. Though on a much larger scale, t his seems a Lot like cell phone service, which is reasonably priced until you start incurring all those charges for extra minutes and texting.

A CLOUD· BASED WEBSITE STARTS OFF CHEAPER THAN IN· HOUSE SERVERS BUT QUICKLY BECOMES MORE EXPENSIVE AS DATA-TRANSfER CHARGES ARE PILED ON.

1 2 MONTHS

by David Teten and Chris Farmer

Time for Investors to Get Social enture capital and private equity investors are always hu nting for "tells" -signs that com panies are good prospects . Trad itionally, they've believed that pro prie ta ry knowledge about th ose tells is essential to success. Thei r logic: The more widely disseminated the information, the lower the value for inve tors- because a greater number of bidder will be in play, jacking up prices. So, you would think that open, public forums like social media would be bad tools for investors searching for deals. However, our first-ever study of deal-origination best practices at more than 150 VCand PE firms, along with other research, shows that some of t he top-performing investors increasingly use such technologies to discuss the very information they once held close to the vest. How can that be? The key is deal flow, a critical factor in the highly competitive invest ing realm. An investor in private companies must review 80 opportun ities, on ave rage. to close one deal. In order to make several deals, investors need to examine hundreds of prospects. Sharing details about thei r investment strategy gives them access to opportunities that they otherwise would have missed . Our research indicates that they more than make up for whatever compe titive edge they lose by giving out siders a peek at what they're up to. As a case st udy. we looked at investors in priva te late -stage tech nology companies. Some are agg ressively reaching be-

V

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OPPORTUNITIES

REVIEW ED

You need to see a lot of deals to

close one.

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RE VIEWS

HADE SOURCES _ 'HAll' OATA. E. AlUESERIIE. VW'N CIfUNG. NEHA KuHAR

yond the traditional tech centers of Silicon Valley, New York, and Boston to improve performance. A recent paper by Henry Chen. An na xovner, and HBS professors Paul compere and Josh Lerner shows that although VC funds located in these three centers outperform others, that's primarily beca use they do well with deals in pertpherallocattons - whtch they discove red by casting a wide, public net. We've found that late-stage tech investors with geographically diverse portfolios are consistently among the best performers

28 Harvard Business Review June 20 10 www.WorldMags.net & www.Journal-Plaza.net

and have continued to attract large limited partner commitments, even d uring the challenging period since 2007. Almost all such players have been able to raise at least as much cash as they could previously. By contrast, the funds with traditional origination programs, focused on local networks, have had difficu lty; most haven't raised new capital since late 2005. For all the funds out the re with prcacive origination program s. the most effeclve tactics and too ls include social media, gated web communities. expe rt net works, entrepreneurs or execu tives in residence , travel, trad itio naL face-to-face networks. and dedicated cold-callin g teams. Some 10% to 15% of the 1,00 0 or so active U.S. venture capitalists are blogging and tweeting, according to Flybridge Capital Part ners. Among private equity investors, the Riverside Company is noteworthy for its use of a za-person team of sen ior deal originators to help produ ce to p-qu artile res ults for eight of its last nine funds . Because of how essentia l new relationships a re in investing, firms have been forced to be much mo re transparen t than those in almost any othe r industry. The venture cap ital and private equity kimono is open - quite possibly for good.. " HBR Reprint fl OOGC David Teten is the CEO or rete n Advisors, an Investment bam specializing in sourcing

new investme nts. Chris Farm e r is a manag ing partner at Ignition Search Partners, a hybrid venture search firm. Fo r more research res ults, go to www.teten.com jde als .

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Here to help your world .

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• Zu,,,,h f'.... n{~ 1 $eM<e' G'oop. In the Unotod Slate' . ,,,,",,' ago, a'o undo rwfl1ton bv membe' ''''''l'"n"" of Zu'ich in North Ame'ica. ,nelud'ng Zuri< h Ame' ",an In",'anee Company. Co"aon ,,",,,'a9'" not a.a ll_ ,n a ll , tal"'. Some "",.,a9'" may bo wr ilton "" a non·adm,tted l hfOU9h licensed ""pi", 10"", brd. " . In l h. UMed Stat.... n,k on9,"""n"'l """''''... a", provided bv Zu,,,, h $eM<'" Corp"'alion. • For ,nformaboo.>bout the ,abng; of Zurich A.,...'ican In'u'an,. Company. a,ec"" lh. ,a tong; ""boo oIl """"'.l"'och.....com. For more ,omplel. f,....,...,,;.. informatoon aboul1tle Zu'OCh Finane..1 $ervi<:e< Group an
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IDEA WATCH

-

HBR.ORG

Data in 3-D

Compa nies th at move to a cloud computing model may encounter uni ntended positive consequences ifusers take to the CLoud Mouse. This peripheral device- stitt in development-Looks like an egg, works something like a joystick, and aUows you to navigate the data generated by the massive numbe r of users in t he cloud through a dynamic three -dimensional interface (think Th e Matrix minus t he martial arts).

The Cloud Mouse is a project of Microsoft researcher Richard Harpe r and his collaborato rs at Microsoft Resea rch Asia . On th e one hand, t his see ms ki nd of silly- isn't everythi ng going the way of the touch screen anyhow? But on the ot her, imagine a new class of skilled technicians who could move through and whip around 3-D computing data with the ease of an ult rasound s pecialist or a wn player.

MICROSOFT RESEARCH'S CLOUD MOUSE PROTOTYPE

GENDER by Sylvia Ann Hewlett , Laura Sherbin, and Diana Forster

Off-Ramps and On-Ramps Revisited WOMEN \~E WORKFORCE

...and become selfemployed

Women who off-ramp (average time 2.7 years) ow much has the recession shaped women's choice to take more circu itous career pat hs t han men? Not a lot, it tu rns out. Our sur veys from 2004 and 2009 yield surprisingly similar results. More than five years ago, in a ro bust economy, 37% of highly qua lified women told us they were "o ff-ramping"- t hat is, voluntarily leaving the ir jobs for extended time periods. Nearly three-quarte rs were on no nlinear career trajectories, to the detriment oft heir earning potentialand career advancemen t. (See "Off-Ramps and OnRamps: Keeping Talented Women on the Rood to Success;' HBR March 2005.)

H

Off-rampe rs who don't return Last fall, us ing the 2004 qu estionnaire and a co mparable sample of women, we discovered that off-ra m ps and on-ramps are here to stay, though a few things have changed. For ins tance, the pe rcen tage of off-rampers has dropped six points. Howeve r, women who do off-ramp are staying out ofwork longer now, by abou t haifa yea r. Of course, the unemployment rate-which has doubled over the past five years- may ha ve some bearing on that. Women wit h jobs may be more relucta nt to leave, and those wit ho ut are finding it hard to return to work (20% ofwomen currently trying to on- ramp say they're having difficulty because of the economy).

30 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

Perhaps the most striking change from 20 04 to 2009 is a 28% increase in professional women with nonworking husbands. Are social mores abou t breadwinners changing? Probably not. l.l.S. Bureau of Labor Statistics data ind icate that nonwo rking people can't find jobs. The ave rage nu mber o f weeks u n employed jumped fro m 19 to 27 between surveys; the num be r of ind ividuals u nemployed for more than 27 weeks ballooned from 1.7 million to 5.4 million; and the number of"discour aged" people who've stopped looking for jobs recently exceeded 1 million for the fi rst lime in a decade. Sowomen's earnings ha ve become more impo rta nt to fa mily budgets. The small dip in women who are off-ramping most likely reflects, at least in part, the fact that they can't afford to take time away. Eve n so, the data sets are unca nn ily a ligned overall. A six-point drop in offtampers see ms small given the severity of the economic crisis and th e surge in househo lds with nonworking men . It suggests th at the nonlinear path is no t a luxur y for boom ti m es but t he way many women want to structure their careers regardless HBRReprint F1006D of the economy. 0 Sylvia Ann Hewlett directs the gender and policy program at Columbia University's School of International and Public Affairs. She is the president ofthe Center for Work-life f'olicy and chairs the Hidden Brain Drain taskforce . lau ra Sherbin isthe director of research and Diana Forster isan assistant vice president at the Center for Work-life Policy,

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Human Energy-

IDEA W ATCH

Defend Your Research HBR puts some surprising findings to the test

The More People Want Something, the Less The 'll Like It The finding: Denying peo ple access to a prod uct will make th em desire it more a nd work hard er to get it-but will also make t he m less likely to keep it. The study: Uzma Khan a nd he r colleagues Ab Litt a nd s aba Shiv awa rded a gift card t o a n electro nics store to people who completed a word puzzle, Half t he recipients earned th e prize on their fi rst t ry; half had tried to win it before but failed. Before receiving a ca rd, all we re asked how much they'd pay to obtain it. People who'd previo usly been denied the prize were willi ng to pay much more but th en we re more likely to trade their ca rd away when offe red th e chance to exchange it for a diffe rent card. The challenge: 15 the assum pt ion that we wa nt what we like and we like what we want flawed? Wh en a product is hard to obtain, do we lust afte r it more but like it less once we get it? Professor Khan, defend your research. Khan: This jllting effect is big. People who initially failed to win a gift card said they'd pay 43% more to get one than people who hadn't, but only 22% of the initially "jilted" group decided to keep the card instead of trading it. In the group that wasn't previously de nied access, 57%of the people nearly th ree times as many-kept the card. And in a follow-up experiment, the effect transferred to the company's ot he r products. We told halfthe subjects that they could win Guess sunglasses, conti ngent on supplies. They were later told we had ru n out ofglasses. In a product evaluation, those people then rated Guess watches lower and Calvin Klein watches higher than the other halfof the subjects, who hadn't expected to win glasses and didn't

experience the stock-out. Oddly,when we aske d the people who'd been denied the glasses which watch they'd like to rece ive, they chose the Guess watches more often than the Calvin Klei n ones. HBR: They bad -mouthed a product because it was th e same brand as t he glasses th ey didn't get , but th en they wanted it more? That does n't make se nse. It doesn't ma ke sense if you assume that people want and like the same things. That's why we did the study-to challenge this deep-seate d assumption that these two emotions are inextricably linked. They're not. Desire and liking are independent from each other and also inte ract in strange ways . The more we want

32 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

something, the less we'll actually like it. It's a lusting/loathing thing. Like when a big sports event turns out to be just anot her ga me an d leaves you feeling unsatisfied? Abig sports event is about hype. In our case the desire is increased not through hype but through being denied access. It's more like not getting into an exclusive nightclub . Whe n people can't get access, it becomes especially attractive. They'll work hard to get past the velvet rope. But once they're in, they often say, "This is it?" Maybe t hese effects are short-lived, a nd if I have to wait a few months for a hot video ga me, well, Iget over it after a day? I think it's the op posite. Weactually found it hard to create strong desire in a short experiment. I'd suspect that the longer you desire something and are denied it, the stronger the effect will be. Think about products like the iPad, which you may wait months for and then still face an empty shelfin the store. But the longerterm effect needs to be studied. Whe n the iPad Launched, it wasn't painLess to get your hands on one yet I don't see people revolting against AppLe. But who have we heard from? Reviews are often from people who have n't been jilted. If anything, they make the jilting worse, with the reviewer telling those

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HBR .ORG

HARVARD BUS I N E S S SCHOOL EXE C UT I VE E D U C AT I O N

who can't ge t the product, "I have it a nd

you don't and it's great."On the other hand, App le may be an outl ier. The effect m ay not be as bad with products that are exceptionally good or hard to replace.Sunglasses a nd video games can be replaced with

other brands that perform about the same. With iPads, substitu tion may not be as easy. Marketers use scarcity as a way t o create b uzz a nd d emand. Is t hat a bad idea? Our results make it clear that marketers

should be cautious about using a strategicshortage to generate demand. It will increase demand right now but can have other costs. It will have implications for other products in your brand, repeat purchases, and loyalty. It comes down to what the goal ofthe company is. Ifit's to make quarterly numbers, denyingaccess may be a useful tool. It could be that marketers know what they're doing and want those short-term gains. But most companies, I think, would rather have a healthy longterm strategy. But what if a compa ny has a real s hortage? What can it do to mitigate the fallout?

Itprobably should focus a little more on customer satisfaction. Itshould increase customer serviceand make public announcements about the situation. This isn't as simple as it sounds. It's easy to get carried awaywhen your product's in high

demand. You feel pretty good and stop worryingabout satisfaction. You assume demand means people must really like you. In fact. they may want you. but that doesn't mean they like you. Where, in a physiological se nse , does t his lust/ loat hing thi ng come fro m?

We've started to look at that. Ab Litt, my research partner, is examining the neurological aspects. Are desire and satisfaction governed differently in the brain? We found, for example. an odd correlation:The lusting/loathing effects were more intense with people who were less emotional, as measured on standard scales. "Emotional" people did not show the effect as strongly. Where eLse are you t a king the researc h?

We're looking at what happens with substitute purchases after stock-cuts. For example. when people can't get the model of camera they want, are they more likely to trade up and buy a camera from the same brand, or to go for an equal-value substitute? It's early, but so fa r we see similar perverse effects . The people who trade up are least satisfied. Maybe this effect explains the co mplexit ies of dat ing, too?

Yes! Your friends always want to go back to the wrong person, the one who dumped them. And how often does that HBR Rep rint Fl 006E work out? I::'

,

People will work hard to get past a nightclub's velvet rope. But once they're in, they often say, "This is it?" www.WorldMags.net & www.Journal-Plaza.net

Learn more at

www.exed.hbs.edu /pgm/hbr/

IDEA WATCH

Vision Statement Six Ways to Find Value in Twitter's Noise Text by Scott Berinato; data and visualization by Jeff Clark

I

learn about the competitive landscape. Tweets about your product th at include the names of rival brands can reveal a lot about market positioning. Most of the KINDLE tweets didn't focus on t he iPad's bei ng a Kindle killer (or, for that matter, a laptop killer). Instead , they hailed the a rrival ofthe Kindle a pp for t he iPad -alerting Apple that its own book s app will fa ce se rious com petition.

It's easy to dismiss Twitter as jabber, but smart marketers will recognize it as a stream of free consumer data to be mined in near-real time. Online visualizat ion tools can help pinpoint what consumers are reading and sharing, elucidate memes in the chatter. and unearth trends, To show marketers how they can gain insight from Twitter, we captured more than a half million tweets containing the word "iPad" that were broadcast during th e product's launch weekend in April. We then mapped key word s that appeared in th ose tweets on the gra ph below, HBR Reprint f1006Z

The iPad Launch by the Numbers

4 TOTAL TWEETS USING

I:l'!{' TWEETS FLAGG ED AS SPAM (CONTAINING "WI N" OR " FREE;

"I PAD"~I NG

PRODUCT'S LAUNCH WEEKEND

18%

8%

PREDO MINANTLY POSITIVE TWEETS

PR EDOMINANTLY NEGATIVE TWEETS

SATURDAY 12 A.M. PROOUClLAUNCH

34 Harvard Business Review June 2.010 www.WorldMags.net & www.Journal-Plaza.net

@j" sfo nl in: 11IeKlndle app makesthe .iPad a lot mo re Interesting to me. @Tom]i,hman: RT @<:herwenka:11Ie IPad Kindle app drl ~ , to Amazon, , kin, Apple" 30% <:llt. No· body" happy except the co n,,,me r. ( Not e: Theoe are a ll act" al t weets.)

2 look for une~pected th~mes. Pe:slsten.t word s pomt to persrstent Ideas . The word CASE became fa r more common right after people started buying iPads. The sources? Offers an d ads for fre e cases, and custome rs trad ing tips abo ut protecting t he ir expensive new gadgets. @o,iod mal<: FYI,some lOW Netbook

, leevea

will work as a perfect .. iPad carrying case.

HBR.ORG Scott Berinato is an editor at HBR. Jeff Clar k is a developer and information visualizer based in Toronto. This stream graph shows tw eet vol ume over t ime. Each rivulet illustrates th e prop ortion of iPad tweets cont aining a given word, such as HELP. COlor is used only to disti nguish rivulets.

2

'E l s p.eedy

Dip deeper into the stream. While stre am graphs give an overall impression of what people are tweeting about.ft's important to know what other words are being used in relation to those in t he stream. A t hin ribbon of tweets containing the word EVIL came not from Apple hat ers but from garners tweeting about t he arriva l of Resident Evi/ 4 for t he iPad. In our chart, it might look as th ough a lot of tweeters were calling t he iPad AMAZING , but in fact . most of this traffic came from users retweeting a joke from comedian Conan O'Brien. @lldmitcheU: LolI RT @Conan OB.ien : Just got t he neWlpad. Thi. amuingdeviCCl has elready revolutionized t ile way I use a calculator.

fa~,! ~ ' ~.trange

TYPING~~per easy

Look for user experiences. Product testing and reviews can't replace user reactions. l ooking at iPad tweets wit h t he words TYPING and KEYBOARD, and then singling out t he most common words in t hose twee ts (see above), gives you feedback fro m t housands of users. The negat ive words could help prioritize marketing messages and prod uct development .

5

Learn why negative words are coming up. Finding negative words is a good way to locate consumers' pain points. Though not frequently. DISAPPOINTED and PROBLEM appeared in tweets t hat focused on product functionality. Customer service could be adjusted to address the most common complaints.

@Jga met: I' m having problem. moving a ppt bet¥oeen SC....en. on my iPad . Anyone el",? @darrmurr:V ery disappointed that the iBook a pp for lpad II not a Uowed for iPhone!iPod. Apple i. trying t o forc e the upgrade.

6

Learn about conversation dominators. Words that suddenly dominate the twee t stream mean something has happened that 's worth learning about. The term JAILBR EAK refers to hackers' use of iPad sourc e code t o run software not authori zed by Appl e. Tweeters were sharing lin ks t o stories, code. and video t utorials on how to hack the device. @oncee: RT @iiarmoc, Hacke... Gained Full

@S;ngha, Methink. .ipad will be ....ally good for re ading stuff- PDFI , NYTimel , so on. Landscape typing was awl<wa . d.

Root Code Ex.e cution

of iPad , Jailb....ak i, Around Comer1

MONOAY 12 A.M.

June 2010 Harvard Business Review 35 www.WorldMags.net & www.Journal-Plaza.net

HBR.ORG

COLUMN

Prahalad

C.K. Prah alad, who died on April 16, was the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Mich igan's Ross School of Business.

Why Is It So Hard to Tackle the Obvious?

h e mo re successful companies become, the more difficult it is for them to recognize whe n they must change. We all know tha t many industries, such as entertainment, educat ion, publishing, and financial services, are going to look very different tomorrow -yet today's market leaders will probably be th e las t ones to transform themselves, even if they realize they must in order to survive. Why do companies find it so toug h to tackle the obvious? One reason could be t hat over time success ful ente rprises create distinct business ideologies -such as the Toyota Way and the Xerox Way. These doctrines contain specific ideas about how to com pete, perform an ce measures, organizat ional structures, and whom to reward. The beliefs and practices constitute a com pany's dominant logic. The logic may not always be articulated, but every employee knows: That's the way we do things here. But these

T

During a corporate transformation, the forgetting curve is sometimes

more important than the learning curve. success factors often tum into orthodoxies, and no one challenges the m. Ad hering to o ne best way o f d oing things worked well d uri ng the industrial era, but the forces of globalization, digitization, mobile comm unications, and sustainability pose a d ifferent set of challenges today. However, many executives remain in denial , claiming that consumers don' t change quickly, that existing products are su perior, that peo ple won't give up on familiar experiences, and so on. They don' t accept in time the need for change. Companies should stop look ing at threats and opportunities through the lens

36 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

of the domina nt logic. Instead , the moment they spot signs of change, executives must decide what they can preserve- and what they must discard - in the dominant logic as they prepare to transform the organization. CEOs can identify sacred cows by asking senior managers: • What do we consider good performance? • Whom do we promote: executives who can extract profits from the current business model or those who can lead the company into new businesses? • Do middle managers focus on change or the status quo? • What is the top management team's experience base? Is there diversity at the top? • What skills do we value in the organization? What skill gaps are emerging? • How rapidly do we impose planning and budget ing systems on new businesses? Tales about unknow n rivals eme rging from the woodwork to tu rn indust ries on their heads are often hyperbole. Competitors usually emerge slowly because of the tim e taken by tec hnology development , bus iness model crea tion, and consumer adoption. However, incumbents acknow ledge rivals only after they have become potent t hreats-cNapster preceded iTunes, if you reme mber-and lose the time needed to bring about transformations in an orderly fashion. To change systems faster than their rivals can create new modes of competition, enterprises must: • Articulate the emerging competitive reality and its implications for the bottom line. • Identify gaps in skillsand fill them quickly. • Change ITsystems because they usually represent old business models. Executives must also remember to focus the organization on t he "forgetting curve," They must identify the behaviors, practices, and beliefs that are increasingly becom ing dysfu nctional or cou nte rproductive and put in place ways of discarding them, Indeed , during a corporate transformation, the forgett ing curve is some times more important than the learning curve. " HBR Reprint Fl006F

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When we built our financial centre, we started with the rules.

Fact : the Gu lf's best regulated finan cial centre is in Bah ra in. Ask any of the 400 Hncncic l institutions

that have made a home the re. Yes, it is a lso the Gu lf's biggest fina ncial centre. And all becau se 40 yea rs ago we la id down the rules. To ~ nd out more, vis it ba hrain.com

businessfr~ www.WorldMags.net & www.Journal-Plaza.net

COLUMN

Ariel

Dan Ariely ([email protected]) is the James B. Duke Professor ofBehavioral Economics at Duke University and the author of Predictably Irrational (narpercctuns. 200B).

You Are What You Measure loose con se nsu s has forme d around the idea that basing CEO pay on, say, five years of stock returns would eliminate some ofthe reckless decision making that led to the Great Recession. But Isus pect that even if you could build a compensation plan that focuses on long-term shareholder value, you'd solve only part of the problem. That's because such a scheme still ties CEOs' motivation to one fickle num bercompany share price-and ass umes that pay alone motivates ch ief executives to perform. Any number of th ings ca n mo tivate CEOs-peer recognition, for exa mple, and even a desire to change the world. In fact, CEOs us ually have all t he mon ey they need. Why then does it seem that they care more about stock value and the compensation it produces than those other forms of motivation? The answer is almost uncomfortably simple: CEOs care about stock value because that's howwe measure them. Ifwe want to change what they care about, we should cha nge what we measure.

A

It can't be that simple, you might argue -

but psychologists and economists will tell you it is. Human beings adjust behav ior based on the metrics they're held against. Anything you measure will impel a person to optimize his score on that metric. What you meas ure is what you'll get. Period. This phenomenon plays out time and again in research studies. Give someone frequent flyer miles, and he'll fly in absurd ways to optimize his miles. When I was at MIT, I was measured on my ab ility to handle my yea rly teaching load, usinga complex equation ofteaching points. The rat ing, devised to track performance on a variety of dimensions, quickly beca me an end in itself. Even though I enjoyed teaching, I foun d myself spending less ti me with students because I coul d earn more points doing other things. I began to scrutinize opportu nities according to how many points were at stake. In optimiz-

If we want to change what CEOs care about. we should change what we measure.

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6 38 Harvard Business Review June 2 0 10 www.WorldMags.net & www.Journal-Plaza.net

ing this measure, I was not striving to gain more wealth or happ iness. Nor did l believe that earning the mos t poi nts would result in more effective learning. It was merely the standard of measure ment given to me, so I tried to do well against it (and I ad mit that I was rather good at it). This phenomenon happens at an orgamzational level, too. States that use standardized education assessment tests prod uce kids who indeed perform we ll on these tests but falter when asked to demonstrate their knowledge of the same material in a different way. Does that make teachers bad at their jobs? No. They're simply behaving the way people do when they 're judged on the basisofa metric. So every mo rning, a CEO arrives in his office and chec ks the number he's judged on: the stoc k price. He'll meet wit h people who have ideas about how to make it higher. Nowand again. he'll buy or sell something, or hire or fire some people, to move the number. All the while, analysts will keep watch, p raising him when t he number goes up and criticizing when it goes down. If you were subjected to such unrele nting sc ruti ny, would n't you do as much as you could to get the number up? Even if you knew your actions would probably come back to bite you in the long run? To change CEOs' behavior, we need to change th e num bers we measure. Stock value metrics that focus on the long term are a start, but even more important are new numbers that direct leade rs' attention to the real drive rs of sustainable success. What are those numbers? Ideally, they'd vary by industry, situation, an d mission, but here are a few obvious choices: How ma ny new jobs have bee n created at your firm? How strong is your pipeline of new patents? Howsatisfied are your customers? Your employees? What's the level oftrust in your company and brand? How much carbon dioxide do you emit? None of these memes is as easy to measure as shareholder val ue. That's part of why we're so fixated on it. But if we measure just what's easy, we'll maximize ju st HBR Reprint F1006G what's easy. 0

i !

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Introducing the new members of the Palladium Balanced Scorecard Hall of Fame for Executing strategy: Each of these organizations linked strategy and operations to achieve an

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. !ffJ ...... .. ••

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www.WorldMags.net & www.Journal-Plaza.net

Daniel J.lsenbeI'B (djsen@ babson.edu) is a"professor

ofmanagement practice at Babson College and executive director of the Babson Ent repreneurship Ecosystem Project . His most recent HBR article

'=l;;l:;;=:;=:was -ree Global Entrepreneur"/December 2008).

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(J n the latest Ease of boing Business ranking from the World B nk, one country made a spectacular leapfrom 143rd on the list to 67th. It was Rwanda, whose population and institutions had been decimated by genocide in the 19905. On the World Bank list. Rwanda catapulted out of the neighborhood ofHaiti, Liberia , and the West Bank and Gaza, and sailed past Italy, the Czech Republic, Turkey, and Poland. On one subindex in the study, the ease of opening a new business, Rwanda ranked 11th worldwide.

...

You can see and even smell the signs of Rwanda's business revolution at costco, one of the retail world's most demanding trade customers, where pungent coffee grown by the nation's small farmer-entrepreneurs is stocked on the shelves. And in Rwanda itself the evidence is dramaticper capita GDP has almost quadrupled since 1995. .. This is the kind of cliange entrepreneurship can bring to a country. As Rwanda's president, Paul Kagame, put it recently, "Entrepreneurship is the most sure way of development." He is not a lone voice:

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THE BIG IDE A HOW TO STA RT A N ENTREPREN EURIAL REVOLUTION

Economic st udies from around the globe consistently link entrepreneurship, particularly the fastgrowth variety, with rapid job creation, GDP growth, and long-term productivity increases. You'll see more palpable evidence of surprising entrepreneurialsuccess stories on the Costcoshelves. Afew steps away from the Rwandan coffee, you can find fresh fish from Chile, which now ranks second only to Norwayas a supplier of salmon. The Chilean fish in America's su permarkets were supplied by hundreds of new fishing-related ventures spawned in the isaos and 1990s. Afew aislesover are memory USBs invented and manufactured in Israel, a country whose irrepressible en trepreneurs have been supplying innovative technologies to the world since the 1970s. And jus t around the corner, the Costco pharmacy sells generic drugs made by Iceland's Actavis, whose meteoric rise landed it, in just 10 years, among the top fiveglobal generics leaders.

As Rwanda's president, Paul Kagame, has put it, "Entrepreneurship is the most sure way of development." He is not a lone voice: Studies consistently link entrepreneurship with job creation and GDP growth.

Rwanda, Chile, Israel, and Iceland all are fertile ground for entrepreneurship -thanks in no small pa rt to the efforts of their governments. Thou gh the companies beh ind the products on Costco's shelves were launc hed by innovative entrepreneurs, those businesses we re all aided, either d irectly or indirectly, by government leaders who helped build environments that nu rture and sustain entrepre neurship. These entre preneurship ecosystems have become a kind of holy grail for governments around the world- in both emerging and developed countries. Unfort unately, many governments ta ke a misguided approach to building entrepreneurship ecosystems. They pursue some unattainable idea l of an ecosystem and look to econom ies that are completely unlike thei rs for best practices. But increasingly, the most effective practices come from remote corners of the ea rth, where resources-as well as lega l frameworks, transparent governance, and democratic values- may be scarce. In these places entrepreneurship has a completely new face. The new practices are emerging murkily an d by trial and erro r. This messiness should not deter leaders-there's too muc h at stake. Governments need to exploit all available experience and commit to ongoing experimentation. They must follow an incomplete and ever-changing set of prescriptions and relentlessly review and refine them. The alternatives-taking decades to devise a model set of gu idelines, act ing randomly, or doing nothi ngall are unacceptable. But the governme nt canno t do everything on its own; the private and nonprofit sectors too must shoulder so me responsibility. In nu mero us instances corporate executives, family-business owners, universities, professional organizations, foundations, labor organizations, financiers, and, ofcourse, entrepreneurs themselves have initiated and even financed entrepreneurship education, conferences, research, and policy advocacy. As we sha ll show later in this article, sometimes pr ivate initiative makes it easier for governments to act more quickly and effectively, and all stakeholders-government and otherwise-should take every chance to show real leadership. To make progress, leaders need practical ifimperfect maps and naviga tional guidelines. From wha t we know from both researc h and practice, here's what seems to actually work in sti mulating thriving entrepreneursh ip ecosystems.

42 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

HBR.ORG

Idea in Brief The big idea: Governments around the world are recognizing t hat entre preneurship can transform t heir economies. But most of their efforts to spar k venture creation are wasted on trying to achieve the impossible- creating another Silicon valley.

Nine Prescriptions for creating an Entrepreneurship Ecosystem The entrepreneurship ecosystem consists of a set of individual elements-such as leadership, culture, cap ital markets, and open-minded customers-that combine in complex ways. (See the exhibit "Do You Have a Strong Entrep reneurship Ecosystem?") In isolation, each is conducive to entrepreneurship but insufficient to sustain it. That's where many governmental efforts go wrong-they address only one or two elements. Together, however, these elements turbocharge venture creation and growth. When integrating them into one holistic system, government leaders should focus on these nine key principles. St op Emulating sftlccn va ttey, The nearly u niversal amb ition o f becoming another Silicon Valley sets governmen ts up for frustration and failure. There is little argument that Silicon Valley is the "gold standard" entrepreneurship ecosystem, home to game-changing giants such as Intel, Oracle, Google, eBay, and Apple. The Valley has it all: tech nology, money, talent, a critical mass of ventures, and a culture that encourages collaborative in novation and tole rates failure. So it is understandable when public leaders throughout the world point to California and say, "I want that." Yet, Valley envy is a poor guide for three reasons. One is that, ironically, even Silicon Valley could not become itself today ifit tried. Its ecosystem evolved u nder a u nique set of circumstances: a strong local aerospace indust ry, the open California culture, Stanford University'S supportive relationships wit h ind ustry, a mot her lode of inve ntion from Fairchild Semiconductor, a liberal immigration policy toward doctoral students, and pure luck, among other things. All those factors set offa chaotic evolution that defies defi nitive determination ofcause and effect. Fu rth er, Silicon Valley is fed by an overabu nda nce of technology and tec hnical expertise. Devel-

What recen t resea rch a nd experience show: The face of entrepreneurship is cha nging aLL around the world- and best practices are emerging from surprising pLaces. valuable lessons ca n be Learned from what is working.

A better approac h: There's no exact formula for creating an ent repreneurial economy; there are onLy pract ical, jf imperfect , road maps. To jump-start the growth of an entrepreneurial ecosyste m, leade rs should foLLow nine key principles- some counteri ntuitive-that will help build a vi brant business sector.

oping "knowledge-based industry"-cthe ma ntra of governments everywhere -is an admirable aspi ration, but achieving it requires a mass ive, generationlong investment in education as well as the ability to develop world-class intellect ual property. On top of that, a knowledge industry de ma nds an enormous technology pipeline and scrap pile. Consi der that top vent ure capitalists invest in at best 1% of the technology-based businesses they look at, and a significant proportion of that select group fails. Athird limit is that although SiliconValley sounds as if it's a place that breeds local ventures, in reality it's as much a powerful magnet for ready' made entrep reneurs, who flock there from around the globe, often forming their own ethnic subcultures and organizations in what Gordon Moore, one of the Valley's graybeards, calls an "industry of transplants." And difficul t as it is to foster an ecosystem that encourages cu rrent inhabitants to make the ent repreneurial choice and then succeed at it, it is even harder to create an entrepreneur's "Mecca:' Shape th e Ecosystem Around l ocal Conditi ons. If not Silicon Valley, then what entrepreneurial visio n should government leaders aspire to? The most difficult, yet crucial, thing for a gove rnment is to tailor the suit to fit its own local entrepreneurship dimensions, style, and climate. The striking d issimilarities of Rwanda, Chile, Israel, and Iceland illustrate the principle that leaders ca n and m ust foster homegrow n solutions-ones based on the realities oftheir own circumsta nces, be they natural resources, geographic location, or culture. Rwanda's government took a strongly interventionist strategy in the postgenocide years, identifying three local industries (coffee, tea, and to urism) that had proven potential for development. It actively organized the institutions that would support those industries by, for example, training farmers to grow June 2.010 Harvard Business Review 43

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THE BIG IDEA HOW TO STA RT A N ENTR EPREN EURIAL REVOLUTIO N

The most difficult, yet crucial, th ing for a govern me nt is to t ailor the su it to fit th e loca l entrepreneu rial dime nsio ns, style, and climate.

and package coffee to international standards and connecting the m to ove rseas distribution cha nne ls. Rwanda's immediate priority was to provide gainful employment to millions of people. Its efforts led to about 72,000 new ventures, almost entirely consisting of two- and three- person ope rations, which in a decade tripled exports and reduced poverty by 25%. Chile also focu sed on indu stries where it had copious na tural resources- su ch as fishing. As in Rwanda, the government took a powerfully interventionist app roach to its entrepreneurship ecosystem in Augusto Pinochet's early years, and the dictator's free-market ideology made it easier for Chile's middle class to obtain financing and licenses for fishing operations. The governme nt also weakene d labor (sometimes brutally) to reduce new ventures' input costs and kept Chile's currency inexpensive to maintain competitiveness in export markets. Natural resources often are not a key component ofan ecosystem, however. Frequently, entrepreneurship is stimula ted when such resources are scarce, requiring people to be more inventive. Taiwan, Iceland, Ireland, and New Zealand, resource-poor "islands" far from major markets, all develo ped ecosystems based primarily on huma n capital. So did Israel. In the 1970s and 1980s, its unique ecosystem evolved haphazardly out of a combinatio n of factors, including spillover from large military R&Defforts, strong diaspora con nect ions to capital and customers, and a culture that prized frugality, education, and unconventional wisdom. Engage th e Private Sector from the Start . Government can not bu ild ecosystems alone. Only the private sector has the motivation and perspective to develop selfsustaining, profit-driven markets. For this reason, gove rnment must involve the private sector early and let it keep or acq uire a significant stake in the ecosystem's success. St art wit h a candid conversatio n. One way to involve the private sector is to reach out to its representatives for early, frank advice in reducing st ructural barriers and formulating entrepreneur-friendly policies and progra ms. If the necessary expertise doesn't exis t domestically, it can often be found overseas among expatr iates. In the 1980s the Taiwa nese government engaged with the Taiwanese diaspora, consulting prominent execu tives in lead ing U.S. technology compa nies and establishing ongoing forums to collect their input. The government

actually built progra ms based on the suggestions of these expats, who liked how their ideas were implemented so much that they returned home in droves in the 1990 s, many of them to occ upy prominent policy positions or run the new plants that were establish ed . For example, Morris Chang, the former gro up vice president of Texas Ins truments, came home and eventually set up and ran T5MC, Taiwan's second semiconductor·fabricating plant. Design in self-liq uidat ion. In 1993 the Israeli government created Yozma, a $100 million fun d of funds that in three years spawned 10 venture capital funds. In each one, Yozma, an Israeli private partner, and a foreign private partner with proven fund ma nagement expertise all invested app roximately equal amounts. From the start, the Israe li govern men t gave the private sector partners an option to buyout its interest in the funds at attractive terms-sa fact often overlooked by other governments tha t copy the Yozma model. That option was exercised by eight of the 10 funds, profitably for the government, I might add. Five years after the founding of Yozma, its remaining assets were liquidated by auction. The government's exit served as market proofthat real value had been generated and is oneofthe reasons that the Israeliventure cap ital industry not only became selfsustaining but simultaneously achieved a quant um leap in growth . Favor the High Poten ti als. Many programs in emerging eco nomies spread scarce resources among quanti ties of bottom-of-the-pyramid ventures. And indeed, some of them, such as the Carvajal Foundation in Cali, Colombia, have dramatically increased income for segments of the population. But focusing resources there to the exclusion of high-poten tial ventures is a cru cial mistake. In an era when microfinance for small-scale entrepre neurs has become ma instream, the reallocation orresources to su pport high-potential entrepreneurs may seem elitist and inequitable. But es pecially if resources are limited , programs should try to focus first on ambitious, growth-oriented entrepreneurs who address large poten tial markets. The social economics of high-potential ventures and sma ll-scale employment alternatives are significantly different. Whe reas 500 microfina nced sole proprietorsh ips and one rap idly globalizing goo-person operation create the sa me number of jobs, many experts argue that the wealth creation,

44 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

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Rwanda: Fro~Genocide to costco'is e es Considering that less th an two decades ago, almost one millio n people were slaug htered in Rwanda in 10 0 days, t he country's current standing in global busi ness circles is stun ning. Promot ing entrepreneurs hip has been a key plank of President PauLKagame's agenda for the nation. In 2001 he launched the Rwanda NationaL Innovation and Competitiveness initiative, which, among other efforts,

developed a "nat ional coffee strategy" focused on building a Rwandan Bourbon Spec ialty Coffee brand. With help from OTF Group consuLtants, it also identified over $100 million worth of investments to

power to inspire other start-ups, labo r force enrichment, and reputational value are m uch greater with the latter. One organization that recognizes this is Enterp rise Irela nd, an agency responsible for su pporting the growth ofworld-class Irish companies. It has created a program speci fically to provide mentoring and fi na ncial assistance to high-potential start-ups, which it defi nes as ventu res that are export-oriented, are based on in novative technology, and ca n generate at least €I million in sales and 10 jobs in three years. The global nonprofit Endeavor, which focuses on entrepreneurship development in 10 emerging econom ies, has to date "adopted" some 440 "highimpact entrepreneurs:' who, with Endeavor's rnentoring, are turn ing their successes into role models for their countrymen. Not all h igh-potent ial ve ntures are tec hnology based; in fact, I'd argue that the majority are not. SABIS is a perfect example. An educational manageme nt orga nization founded in Lebanon many years ago as one school, SABIS now is one of the world's largest EMOs, teaching more than 65,000 students in 15 countries, wit h the goal of reaching 5 million students by 2020. Get a Big Win on the Board , It has become dear in rece nt years that even one success ca n have a surprisingly stimulating effect on an entrepreneurs hip ecosystem-by igniting the imagination of the public and inspiring imitators. I call this effect the "law ofsmall numbers:' Skype's adoption by m illions and eventual $2.6 billion sale to eBay reverberated throughout the small nation of Estonia, encouraging highly trained tech nical people to sta rt their own companies. In China, Baid u's market share and worldwide recognition have inspi red an entire generation of new entrepreneurs. Celtel's amazing success as sub-Saharan Africa's leading regional mobile provide r and acquisition

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improve coffee washing, production, ca pac ity, and marketing. A partnership among agricultural institutes in Rwanda , Mich igan State University, and Texas A&M worked to connect local growers to u.s. and European specialty coffee buyers. Two notab le events happened in 2006: Starbucks gave Rwanda's Blue Bourbon brand

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of coffee beans its BLack Apron award and introduced it in its stores, and on a visit to the u.s. Kagame met with c ostco's CEO, Jim Sinegal. to promote Rwandan coffee. costco would later become one of the two biggest buyers of Rwandan coffee, purchasing an estimated 2.,5% of the country's premium crop.

by Zain for more tha n $3 billion stirred the region's pride an d helped African govern ments fight "Africa fright" among investors. In Irela nd it was Elan Corporation and lona Technologies , listed on Nasdaq in 1984 and 1997, respectively, th at served as guiding lights to a generation ofbudding entrepreneurs. Early, visible successes help reduce the perception of entrepreneurial barriers and risks, and high -

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Even one success can have a surprisingly stimulating effect on an entrepreneurship ecosystem-by igniting the imagination of the public and inspiring imitators. I call this effect the "law of small numbers." June 2010 Harvard Business Review 45

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THE BIG IDEA

HOW TO STARTANENTREPRENEURIALREVOLUTION

. . Taiwan: Sri

/ \ gmg Expat Entrepreneurs Home

Taiwan is an examp le of how determined governme nt leaders can transform a brain drai n into a brain gain,

As University of California professor AnnaLee Saxenian has reported, that story begins in the 1960s, when engineers left Taiwan in droves to study and work in the United States. puring that decade Taiwan's government leaders rec-


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ognized the country's need for entrepreneurship and began sending delegations to Silicon valley to learn about how it had blossomed t here . By the 1970S many Taiwanese engineers had become te chnology executives in the U.S. They

light the ta ngible rewards . Even modest successes can have an impact. Saudi Arabia, a nation with a dear th of entrepreneurial ventures (aside from the powerful family business groups), is fighting hard to tear down the numerous structural and cultural obstacles en trepreneurs face. One young Saud i, Abdullah AI-Munif, left his salaried job, tightened his belt, fought the bureaucracy, and started a business making chocolate-covered dates. He ultimat ely grew the business, Anoosh, into a national chain of 10high street sto res and turned an eye to overseas markets. Now when AI-Munif appea rs as a panelist at entrepreneurship seminars, he is swamped by aspiring Saudi entrepreneurs who ta ke insp iration from his bravery, realizing that neither ca pital, nor technol ogy, nor connections are essential to success. o ve rcel e bra t e t he successes . Governmen ts should be bold about celebrating thriving entrepreneurial ventures. Media events, highly pu blicized awards, and touts in govern ment literature, speeches, and interviews all have an impact . This is not as straightforward as it may see m, because many cultures discourage any public display of success as boastful or an invitation to either bad luck or the tax collector. Whereas in Hong Kong even small-scale entrepreneurs d rive black Mercedes to project their status, in the Middle East flaunting one's success publicly can att ract the envy of neighbors or, worse, the evil eye. Kenya's first int ernational call center, KenCall, fou nded by Nicholas Nesbitt and two pa rtners in 2004, built an international presence by overcoming many bureaucratic and st ructural ba rriers, includ ing the lack of a high-speed optical fiber hookup to the international communications grid. The Kenyan government didn't wait until Ke nCall became big to sing its praises; eve n when it was a fledgling operation, the govern ment brought in foreign delegations for visits, promoted the company in official publica-

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joined expat indust ry as sociations and met on an ongoing basis wit h policy makers in Taiwan to discuss technical and, tater, policy developments. In the 1980s Premier V.S. Sun established the Science and Technology Advisory Group (STAG),

nons and press releases, and hoste d an international outsourcing conference. Government officials also used KenCall's example to push for reforms, which exped ited the construction of East Africa's fi rst unde rsea optical fiber link- an example of how ent repreneurial success can facilitate structural change, not just the ot her way around. Tackle Cultural Change Head- On. Changing a deepl y ingrai ned culture is eno rmo usly di fficult, but bot h Ireland an d Chile demonstrate that it is possible to alte r sccial norms about entrepreneurship in less than a generation. Until the 1980s employment in govern ment, financialservices, or agriculture was the main aspiration of Ireland's young people. There was zero tolerance for loan defaults, and bankru ptcy was stigma tized . Parents discou raged their children fro m setting out on their own, so few nurtured dreams of starting their own business. But by the 1990s, after successful pioneers paved the way, hundreds ofnew software co mpa nies had been launched in Ireland. Some exported products; some went public. Many achieved healthy sales reven ues. Just as important, entrepreneurs learned that it was possible to fail and regroup to try again. "If you wanted to be respected and take n seriously,you needed to be a founder with a stake in a com pany trying to do something," recalls Barry Murphy, who was national software director at Enterprise Ireland 's predecessor in the 1990S. In her research, University of Minnesota professor Rachel Schurman has described how Chile ans' negative image of entrep reneurs as greedy exploiters was transformed in just one decade, as a direct result of the Chilean government'S concerted effort to liberalize Chile's economy. Until the 1980s, Chile's well-educated middle class was n't ent repreneurial, avoide d opportu nity- driven investment, and p re ferred to consume rathe r than save and invest. But

46 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

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~ which included 15 prominent Taiwanese expats (as well as some non-Taiwanese technology executives), to help t he government build t he scientific and educational infrastructure for an entire generat ion of tech nology ent repreneurs.

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STAGand other consultations wit h U.S.based expats were so successfuL in helping the government st rengt hen Taiwan's entrepreneurship ecosystem that the brain drain began to reverse. Between 1988 and

by the 1990s, Chile's new middle-class entrepreneurs were telling Schurman: "Today the youth, everybody, wants to be an entrepreneur. Ifa successful empresario is interviewed in the newspaper, everybody reads it. Why was he successful? How did hedo it? It's a model that never existed before...." The media can play an important role not just in celebrati ng wins but in changing attitudes. In Puerto Rico, El Nuevo Dia, the largest daily newspaper, supported local entrepreneurship by running a weekly page of start-up success stories. On the small island, these stories have quickly become part of the social dialogue and have raise d awareness about the opportun ities entrepreneurship presents, as well as the tools it requires. St res s th e Roots. It's a mistake to flood even high- poten tial entrepreneurs with easy money: More is not necessa rily merrier. New ventures must be exposed early to the rigors of the market. Just as grape growers wit hhold water from their vines to extend their root systems and make their grapes produce moreconcentrated flavor, governments should "st ress the roots" of new ventures by meting out money carefully, to ensure that entreprene urs develop toughness and resourcefulness. Such measures also help weed out opportunists. In 2006 Malaysia's Ministry of Entrepreneur and Cooperative Development awarded 90% of some 21,000 applicants about $5,000 each in business support, strong evidence of the govern ment's commitment to entrepreneurship. The program was part of an affirmative action program largely aimed at indigenous Malays, who were less entrepreneurial than the country's business-minded Chinese imm igrants. Yet Malay entrepreneurs themselves att ribute the disappointing results partly to the fact that fund ing was too loose and eve n stigmatized the Malay

1998, 40,00 0 Taiwanese engineers returned home to pursue- and create-opportunities. Many became senior executives in new companies, heads of government research and t raining institutes, ent repreneurs, or venture

capitalists, forming t he human capital backbone ofTaiwan's burgeoning IT components industry.

recipients as less capable. More broad ly, Malaysian entre preneurship-development programs, considered by many, includ ing myself, to be amo ng the most comprehensive programs in the world, have been criticized for act ually inhibiting entrepreneursh ip among the Malays by u nwittingly reinforcing thei r lack of risk taking. Similarly, recent reports on Sout h Africa's Black Economic Empowerment program have reached the conclusion that BEE has discouraged entrepreneurship among the bul k of black South Africans and has benefited primarily the elite and well-connected. In fact, the hardships of resource-scarce, even hosti le, e nvironments ofte n promote en trep reneurial resourcefulness. New Zealanders call Kiwi ingenu ity "number a wire": In the country's colonial days, the only plentiful resource was a-gauge fencing wire, and New zeala nders learned to fi x and make anything with it. Iceland ic entrepreneurship is built upo n a legacy of "fishing when the fish are there, not when the weather is good." For years incubators or entrepreneurship centers that provide financial help, mentori ng, and often space to start-ups have bee n popular with gove rnments. But I have seen scant rigorous evidence that these expensive programs contribute commensurately to entrepreneurship. One municipality in Latin America established 30 small incubators, but afte r several years only one venture out ofmore than 500 assisted by them had reached annual sales Of$1million. Though Israel's renow ned incubator program has helped lau nch more than 1,300 new ventures, relatively few ofthe m have been big entrepreneurial successes. On the basis ofm y discussions with Israeli officials, I estimate that, among the hundreds of Israeli ventures that have been acquired at hefty valuations or taken public, at bes t 5% were hatched in incubators. And incubators definitely are not a quick fi x. When well conceived and well managed, they

Hardships and hostile environments ofte n promote resourcefulness. Icelandi c ent repreneurship is built upon a legacy of "fishing when th e fish are th ere. not when th e weat her is good."

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THE BIG IDEA

HOW TO STARTAN ENTREPRENEURIALREVOLUTION

Perhap s no city has worked hard er to t urn itself a round t han Med ellin, Colombia. which for two decad es was blighted by d rugs a nd homicide. When sergio Fajardo became Medellin's mayor. in 2003, he brought about a revolutionary cultural change, creating a legitimate entrepreneurial business environment. With a coalition of universities. new private equity funds, large

companies such as the Local power utility (EPM). private entrepreneurs. the nonprofit proantioquia Foundation, t he social cooperative Comfama, and some diaspora Medellinians. his administration forged a strategy of inclusive

prosperity. One of Fajardo's focuses was building beautifully designed, technologically advanced public libraries and community centers in the rankest barrios, and setting up microfinance programs to help the poor. Fajardo's other strategies included establishing innovation centers and earmarking a whopping 40% of his

can take 20 years or longer to generate a measurable impact on en trepreneurship. Poorly conce ived and managed. they can be white elephants.

Incubators can take 20 years or longer to generate a measurable impact on entrepreneurship. They can also be white elephants.

Don't o verengineer Clusters; Help Them Grow Organically, No governme nt official ever go t fire d for promoting clus te rsthose concent rations of interconnected compan ies, specialized suppliers. se rvice provid ers, training institutions, and support organizations formed arou nd a technology or end product w ithin one area or region. Popularized by Harvard Business School's Michael Porter, cluster strategies have been promo ted by governments th roughout the worl d, w hich to ut clusters' key role in fostering entrepreneurship and economic competitiveness. Though entrepreneurial clusters do exist na turally and can be important elements ofan ecosystem, there is only questionable anecdotal evidence that governments ca n play a major role in breeding them. In a rare critique ofthe cluster mantra, the Economist reported: "Typically governments pick a promisi ng part of their country, ideally one that has a big university near by, and provide a pot of money that is mea nt to kick-start entrepre neurship und er the guiding hand of benevolent bureaucrats.... 1t ha s been an abysmal failure....Experts at Insead looked at efforts by the German govern ment to create biotechnology clusters on a par wit h those found in California and concluded th at 'Ge rma ny has essentially was te d $20 billion- and now Singapore is well on its way to doing the same.' An assessment by the World Bank of Singapore's multibillion dollar efforts to create a 'biopolis' reckoned that it had only a 50-50 chance of success. Some would put it less than that." The problem is that ove r the yea rs people have mistaken Porter's desc ription of the benefits of clusters for a prescription to go out and bu ild them from scratch. In fact, in a 1998 article in this magazine

budget for education and $17 million a year to stimulate entrepreneurship. They seemed to succeed by driving out drugs, creating opti mism, and reducing vioLence to t he point where Medellin is now statistically safer t han washington, DC, and many other u .s. cities.

("Clusters and the New Economics ofCompetition") Porter himselfan ticipated that the dynamics ofclusters wou ld be misunderstood by governments: "Govern ment...should reinfor ce an d build on existing and emerging clusters rathe r than attempt to create entirely new ones....ln fact, most clusters fo rm independently of governme nt action -and sometimes in spite of it. They form where a foundation oflocational advantages exists. Tojustify cluster development efforts, some seeds ofa cluster should have already passed a market test...." Governments would be better advised to remain sector neutral and to u nleash rather than harness people's entrep reneurial energies. They should observe which di rection entrepreneurs take and "pave the footpath" by ge ntly encouraging supportive economic activity to form around already successful ventures, rather than plann ing new sidewalks, pouring the concrete, and keeping the ent repreneurs off the grass. Yet this unglamorous but practical insight is often lost as cluste r theory gets translate d into government policies that are suspiciously akin to debunked centralized industrial plan ning. Reform Legal. Bureaucratic. and Regulat ory Frameworks. The right legal and regulatory frameworks are critical to thriving entrepreneurship. I have saved the discussion of them for last, however. because they are ofte n the first and exclusive focus ofgovernments, and I've been trying to show that governme nt has a more co mp rehe nsive, holistic role to play. Furthermore, legal and regulatory reforms often take man y years to push th rough, and entrepreneurs hip frequently occurs in their absence. In fact, numerous entrepreneurs have succeeded des pite inhibiting legislation and bureaucracy, and have gone on to use their wealth and status to push for reform. Finally, reform won't be truly effective in the absence of all the

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Do You Have a Strong Entrepreneurship Ecosystem?

"softer" approaches government can take to building ecosystems, such as breaking down cultural barrie rs, ed uca ting entrepreneurs, and promoting success stories. Extensive resea rch points to a num ber of reforms that have a positive impact on venture creation : decriminalizing bankruptcy, shielding s hare holders from creditors, a nd all owing e ntre pre ne urs to quickly start over. Anothe r helpfu l reform is to shift workers' u ne mp loym ent protection from making te rmination difficult to providing support for the unemployed . Creating a nd libe ralizing capital ma rkets, such as the UK's Alterna tive Investment Ma rket, ca n have a sti mulating effect as well. Sim plified ta x regimes and strong a udi ting a nd collection also facilitate e ntrepre neurship. In Pue rto Rico, for example, an ineffective tax regime act ually encourages many e ntrep reneurs to stay small and unde r the radar so tha t they can kee p trea ting many personal e xpenses as business investments; in this, Puerto Rico is far from uniq ue. All else being equal, re moving administra tive a nd legal barriers to ve nture formation is a better way to go than creating incentives to ove rcome barriers. In 20 08 the French govern ment, long frustrated by its business sector's lac k of e ntreprene urial spi rit, implemented the Auto-entre preneur program. It simplified the legal process for creating a small business, allowed entrepreneurs to avoid onerous ta x prepayme nts, a nd eliminated other disincentives. Over 300,000 new businesses have been started in France under the progra m more than 10,000 ne w starts a month. Ad mittedly, the overwhelming majority a re essentially sole pro prie torships, and it remai ns to be seen how many, if a ny, will e volve into true growth compa nies. But as one observer noted, "Perhaps the biggest impact will be to re ve rse long- held negative attitudes in France about starting a small business." And France's bold ex perime nt will be an unmitiga ted success if even one out ofa tho usand auto-e ntrepreneurs launches a growth company.

Experiment Relentlessly Yet Holistically Crea ting a n e ntire ecosyst em is a da unting challenge , but yo u have to jump in an d cover all the bases. Taiwan, for example, strengthened several ele ments of its ecosyste m more or less s imulraneously. 1tencouraged resea rch in integrated-circuit

How do you know if you have the essential ele ments of a n e ntreprene urship ecosystem in place? To help gove rnme nts add ress that questio n, Babson College has launched a gLo bal action-research project , the Ba bson Entrepreneurship Ecosyste m Project. Below is a summa ry of the fra mework BE EP use s to assess the cruciaL eLe ments in a n environme nt , so that gove rnments know whe re to focus their efforts. Each category represe nts a key compone nt of a heaLthy ecosystem. Though not exha ustive, the sample questi ons tisted below wiLL help you gauge where you are. DO PUBLIC LEADERSI

Act as strong, public advocates of entrepreneurs and entreprene urship? Open their doors to e ntrepreneurs and those promoting e ntrepreneurship? DO GOVERNMENTSI

Create effective institutions directly associated with ent repreneurship (research institutes. overseas liaisons. forums for public-private dialogue)? Remove structural barriers to entrepreneurs hip. such as onerous bankruptcy legislation and poor contract enforcement? DOES THE CULTURE AT LARGEI

Tolerate honest mistakes, honorable failure, risk taking, and contrarian thinking? Respect entrepreneurship as a worthy occupation? ARE THERE VISIBLE SUCCESS STORIES THAT:

Inspire youth and would-be entrepreneurs? Show ordinary people that they too can become entrepreneurs? ARE THERE ENOUGH KNOWLEDGEABLE PEOPlE WHO:

Have experience in creating organizations, hiring, and building structures, systems, and controls? Have experience as professional board members and advisers? ARETHERE CA~TAL SOURCESTHAT:

Provide equity capital for companies at a pre-sales stage? Add nonmonetary value, such as mentorship and contacts? ARE THERE NONPRDFITS AND INDUSTRY ASSOCIATIONS THAT:

Help investors and entrepreneurs network and learn from one anothe r?

Promote and ally themselves with entre preneurship (such as software and biotechnology associations)? ARE THERE EDUCATIONAL INSTITUTIONS THAT:

Teach financial literacy and ent repreneurship to high school a nd college stud ents? Allow faculty to take sabbaticals to join start-ups? DOES THE PUBLIC INFRASTRUCTURE PROVIDE SUFFICIENT:

Transportation (roads, airports, railways, container shipping)? Communication (digital, broadband, mobile)? ARI! THERE GEOGRAPHIC LOCATIONS THAT HAVEl

Concentrations of high-potent ial and high-growth ventures? Proximity to universities, sta ndards age ncies, think tanks, vocat ional training, suppliers, consulting firms, and professional associations? ARE THERE FORMAL OR INFORMAL GROUPS THAT LINKI

Entrepreneurs in the country or region and diaspora networks- in particular, high-achieving expatriates? New ven tures a nd local offi ces of multinationals? ARE THERE VENTURE-ORIENTED PROFESSIONALS, SUCH ASI

l awyers, accountants, and market and technical consultants who will work on a contingency basis, or fo r stock? ARE THERE LOCAL POTENTIAL CUSTOMERS WHO ARE:

Willing to give advice, particularly on new products or services? Willing to be flexible with payment terms to accommodate the cash flow needs of young, rapidly growing suppliers? Ju ne 2010 Harvard Business Review 49

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THE BIG IDE A HOW TO STA RT AN ENTR EPREN EURIAL REVOLUTIO N

The story of Mo Ibrah im illust rates how brute-force entrepreneurial success can have a potentiaUy large impact on an ecosystem.

Ibrahim fou nded a mobile operator, cettet. in su b-Sahara n Africa, which succeeded in buiLding tremendous shareholder vatue in the face of violent conflict, corrupt governments, and the worst global telecommunicat ions invest-

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ment market in decades. CelteL's shareholders made a kiLling when the owners of Zain acq uired the company in 20 05. Ibrahim used his newfound wealt h to create t he Ibrahim Index to monitor governance in Africa and the $5 million Ibrahim Prize

design and manufactur ing, es tab lished Hsinch u Science Park nea r Taipei, began running integratedcircuit trai ning programs, engaged with U.S.-based Taiwanese technology executives. and passed laws to encourage the development of an indigenous venture capital industry. Israel's Yozma succeeded because it wasembedded in an emerging ecosystem that already induded some two dozen Israeli public technology ventures, two operating venture capital funds. eager ange ls and institutional investors, U.S. investment bankers with local operations, professional su pport services catering to entrepreneurs, and a rich deal flow. In fact, ignoring the interconnected nat ure ofthe ecosystem elements can lead to perverse outcomes. Encouraging young people to have entrepreneurial aspirations, for example, can have a boomerang effect and cause brain drain if those aspirations are foiled by a hostile environment. As Harvard Business School professor Josh Lerner has reported, creating venture capital funds that lack a deal flow and an appropriate incentive structure, like the ones se t up by Canada's Labor Fund Progra m, can actually retard the formation of a private equ ity sector. Easy gove rnment money, ha nded ou t indiscriminately. will flood the market with overvalued, poor-quality deals, making it difficult for private equity investors to make money. Of course. it is neither realistic no r practical to change everything at once. Having a dear map of what an enti re ecosystem looks like will help governments take the fi rst steps without losing sight of what comes next. Effecting such fundamental change in the mids t of so much uncertainty requires endless experimentation and learning, and it is important for governments around the world to learn from one another as well, something tha t does n't happen often enough. And everyone trying to build an ecosystem should

to reward democratic leadership. Already bestowed twice, the prize is sending a loud and positive signal to government Leaders to enact courageous reform.

keep in mind that the work is never reallydone. Two things recently brought this home to me. The fi rst was the lau nch. by the Commonwealth of Massa chusetts and the Cityof Boston, ofa global businessidea competition, MassChallenge. The second was a remark made by an old friend, a prominent Israeli econo mist and one of the pio neering advocates of technological entrepre neurship: "We don 't do enough to promote entrepreneurial growt h in Israel, and if we don't start soon, we will lose our edge:' Now, Massachu setts and Israel are two of the most entrepreneurial places in the world. If they're not satisfied and resting on their laurels. it is a sign that the ho rizon is always receding- that you can never have "enough" entrepreneurship. there are no right answers, and there is no choice but for policy make rs and leaders to continue to experime nt and learn how to enhance their ecosystems. Although the story never ends, the action principles I have listed will help governments move the need le of entrepreneurship in the right direct ion. Engagi ng t he private sector, modifying cultural norms, removing regulatory barriers, encouraging and celebrating successes, passing conducive legislation, being judicious in emphasizing clusters and incubators, subjecting financi ng programs to market rigors, and , above all, approaching the entrepreneurship ecosystem as a whole will allow governments to create economic growth by stimulating self-sustaining venture creation. Ireland's president. Mary McAleese, recognized the ext raordinary effect that cou ld have on a society. In 2003 she said: "Today an educated. self-confident. and achieving generation can see the power of its own genius at work in its own land as a cu lt ure of entrepreneurship transfo rms Ireland's fortunes, creating a new futu re for our children and an eco nomic success story of remarkable proportions." l:'

50 Harvard Business Review June 20 10 www.WorldMags.net & www.Journal-Plaza.net

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Spotlight

The Decision-Driven organization 54

by Marcia w: Blenko, Michael C. Mankins, and Paul Rogers

Strategies for a • an ....In

The Productivity Paradox 64 by Tony Schwartz

Change for Change's Sake 70 by Freek Vermeulen. Phanish Pura nam , and Ranj ay Gulati

The new normal means constant change. Companies must reinvent themselves if they want to survive.

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ARTWORK Antony Gormley. Feeling Material XXXVIf/. :2008, 5 mm square section mild steel bar :200 x aas x 184 em Jun e 2010 Harvard Business Review 53 www.WorldMags.net & www.Journal-Plaza.net

The DecisionDriven Organization Forget the org chart-the secret is to focus on decisions, not structure. by Marcia W. Blenko, Michael C. Mankins, and Paul Rogers

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SPOTLIGHT ON STRATEGIES FOR A CHANGI NG WORLD

Many CEOs assume that organizational structure-the boxes and lines on a company's org chart-is a key determinant of financial performance. Like generals, they see their job as putting the right collection of troops in the right places. If the battle is about innovation, for example, then the CEO's duty is to create the best possible structure for channeling resources towards innovation. This belief helps explain why reorganizations are so popular with chiefexecutives. In fact, nearly half ofall CEOs launch a reorg duringtheir fi rst two years on the job. Some preside over repeated restructurings. The immediate motives vary. Some are about cu tt ing costs; others are about promoting growth. Some are about sha king up a culture; ot hers are about shifting strategic focus. Whatever the specifics, though, reorgs almost always involve making major structural changes in pursuit of better performance. Despite the fanfare that usually greets them , however, most reorga nizations fall flat. A rece nt Bain & Compa ny study of 57 reorgs between 2000 and 2006 found that fewer tha n one-th ird produced any meaningful improvement in performance. Most had no effect, and some act ually destroyed value. Chrysler, for instance, reorganized its operations three times in the three years preceding its bankruptcy and eventual combination wit h Fiat. Each time, executives proclaimed that the company was on a new pa th to profitability. Each ti me, pe rfor mance didn't improve. Webelieve that this failure is rooted in a profound misu nderstanding about the link between structure and performance. Contrary to popular belief, performance is not determined solely by the nature, scale, and disposition of resources, important t hough they may be. An army's success depends at least as much on the quality of the decisions its officers and soldiers make and execute on the ground as it does on actua l fighting power. Acorporation's st ructure, simila rly, will produce better per formance if and only if it improves the organization's ability to make and execute key decisions better and faster than competitors. It may be that the strategic priority for your compa ny is to become more innovative. In that case, the reorganization challenge is to structure the compa ny so that its leaders can make decisions that prod uce more and better innovation over time. For most companies, this req uires a fun damental rethinking of their approach to reorganization.

Instead of begi nning with an analysis of st rengths, weaknesses, opportunities, and threats, structural changes need to start with what we call a decision audit. The goals of the audit are to un derstand the set of decisions that are critical to the success ofyour compa ny's strategy and to determine the organizationallevel at which those decisions should be made and executed to create the most value. If you can align your organization's st ructure with its decisions, then the structure will work better, and your company's performance will improve. In this article we set out the basic principles for reorganizing around decisions. Let's begi n by taking a closer look at the link between decisions and performance.

What Drives Your Performance? Organizational st ructure is not the only determinant of performance. In some cases, it is not even particularly important. That's why changing a compa ny's structure to meet a particular strategic goal can actually exacerbate proble ms rat her than help solve them. For example, an organization struggling to innovate may try to gat her mo re and mo re creative input- and end up getting too many peopleinvolved, thereby slowing the pace of decis ion making and stifling innovation. Take the case of Yahoo. In December 2006, thenCEO Terry Semel annou nced a sweeping reorga nizat ion of the company, replacing Yahoo's produ ctaligned structure with one focu sed on users and advertiser customers. Seven product units were merged into a grou p called Audience and ano ther seven moved into a grou p called Advertisers and Publishers. A unit dubbed Technology would pro vide infrast ructure for the two new ope rating groups. The idea was to accelerate growth by exploiting economies ofscope across Yahoo's rich collection of audience and adve rtiser products. Semel's tea m had thought they'd carefully defined roles and responsibilities under the newst ructure, but decision making

56 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

.

THE

DECISION-DRIVEN ORGAN IZATION HBR.ORG

I dea in Brief

Reorganizations are popular with chief executives, who believe that making big structural changes will lead to better performance. But a Bain & Company study of 57 reorganizations found t hat most rec rgs had no effect-and so me actually destroyed value.

In reality, a company's structure results in better performance only if it improves the organization's ability to make and execute key decisions better and faster than competito rs. Ifyou can sync your organization's structure wit h its decisions, then the structure will work better and performance will improve.

and execution quickly became bogged down. Audience demanded tailored solutions that Technology could not provide at a reasonable cost. Advertisers and Publishers needed its own se t of uniqu e products and so was constantly competing with Audience for scarce developer time. In response, Yahoo executives created new roles and management levels to coordinate the un its. The organization ballooned to 12 layers, product development slowed as decisions stalled, and overhead costs increased. Yahoo's experience shows how a lack of attention to the decision-making process can thwart the best-intentioned reorganization and undermine performance. Ultimately, a com pany's value is no more (and no less) than the sum of the decisions it makes and executes. Its assets, capabilities, and structure are useless unless executives and managers throughout the organization make the essential decisions and get those decisions right more often than not. Our resea rch and experience confirm the tight link between performance and decisions. In 2008, we and ou r colleagues at Bain & Company surveyed executives worldw ide from 760 co mpa nies, most with revenues exceeding $1 billion, to understand how effective th ose co mpanies were at making and exec uting their critical decisions . We used the respon ses to assess decision quality (whe the r decisions proved to be right more often than not), speed (whether decisions were made faster or slower than competitors), yield (how well decisions were translated into act ion), and effort (the time, trouble, and expense req uired for each key decision). Then we calculated a composite score for each company and compared that score w ith eac h fi rm's financial performance. (See the exhibit "Rate Your Decision Effectiveness" to learn how your company com pares with our sample.) We found that decision effectiveness and financial results co rrela ted at a 95% confidence level or

To reorganize around decisions, focus on six steps. First , be clear about which decisions are most important. Second, figure out where in t he organization those decisions need to be made. Third, organize your structure around sources of value. Fourth, figure out the level of authority your decision makers need, and give it to them. Fifth, adjust ot her parts

of your organizational system to support decision making and execution. And sixth, eq uip your managers to make decisions quickly and well.

higher for every co untry, indu stry, and co mpany size in our sa m ple . Indeed, the companies in our sample that were most effective at dec ision making and execution generated average tot al shareholder re turns nearly six percentage points h igher tha n those of ot her firms. We also found that ma ny companies have enormous scope to improve their performance. Top-quintile companies score an average of 71out of100 in decision effectiveness, while companies in the other four quintiles score, on average, 30 and below. This means that the typical organization has the potential to more than double its decision effectiveness. What's more. the research revealed no strong statistical relationship between structure and performance. Survey respondents ' views about the structure oftheir company were not an accurate predictor ofeither decision effectiveness or financial results. The conclusion we draw is simple: In a reorganization, decisions rather than st ructure should be the primary focus. Let's see what that invo lves.

Conducting a Decision Audit Many reorganizations begin wit h a SWOT analysis: What are our organization's strengths, wea knesses. opportunities, and th reats? What are our resources and capabilities? What risks do we face? The idea is to determine if the company has everyt hing it needs to support its st rategy. All this sounds sensible, and in many ways it is. But the risk is that you'll end u p w ith an organization that's misaligned with your strategy, allbecause you have ignored decisions. The proper place for this type of SWOT analysis is not, in fact, as a prelude to organizationalchange but earlier, when you are de te rmining your company's strategy. A better way to begin a reo rganization is with a dec ision audit. The first step in conducti ng one is to iden tify the key dec isions you need to make and execute, given your strategy to create maximum value June 2010 Harvard Business Review 57

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SPOTLIG HT ON STRATEGIES FOR A CHANGI NG WORLD

Quick Test Rate Your Decision Effectiveness

How do your organizat ion's decision abilities stack up against t he competition? While hardly a f ull-scale survey, this short test can give you a quick-and -dirty assessment of decision strengths and weaknesses.

I" Qua Ity

d ' Id Spee Vie

When looking back on critical decisions, we find that we chose the right course of actio n

We ma ke critical decisions

4 Most of the time 3 Some of the time 2 Infrequently 1 Never

QSCORE

4 Much faster than competitors

w e execute critical decisions as intended 4 Most of the time

3 Somewhat faste r than competitors

3 Some of the time

2 Somewhat slower than competitors

1 Never

2 Infrequently

1 Much slower tha n competitors

__

for your shareholders. The set of key decisions for a growth strategy, for instance, will be different from the set for a return-focused strategy. Of course, this exercise does not presuppose a change in strategy. It may be that the reorganization is an attempt to improvean existing strategy,in which case you'll end up with a comparison between the decisions you ought to be concentrating on and the ones you are actually making. The bigger the difference -and the greater the obstacle presented by your organizational structure-the more aggressive your reorg will need to be. The ongoing turnaround at Ford illustrates the power of explicitly delineating a company's crit ical decisions. When Alan Mulally became CEO at the automaker in 2006, the company was in d ire need of change. Ford had been losing a poi nt or more of market sha re every year since 2000 and was on the verge of collapse. But rather than change the company's structure fi rst and then worry about decisions, Mulallytook the opposite approach. He and his team outlined the decisions that we re critical to a turnaround. Only then did they begin to build the new organization around those decisions. Fixing the company's operations and restoring profitability centered on a schematic depicting Ford's critical dec isions. It spelled out the key decisions that needed to be made at each stage in Ford's value chai n, along with the infrastructure required to execute them effectively. Every week, Mulally and his team tracked their progress in ma king an d execu ting these decisions. They divested noncore brands such as Aston Martin, Jaguar, Land Rover, and Volvo; reduced the number of production platforms; began consolidating bot h suppliers and dealers; and so on. They also reorganized the company, moving from a structure based on regional business units to a global matrix offunctionsand geographies. This new structure enabled Mulally's team to make its most important decisions bett er and faster- creating global car

SSCORE

__

YSCORE

__

platforms, for instance, which had been painfully difficult under the old structure. Set in this context, the reorg made perfect sense and helped restore the company to profitability in early 2010. As you conduct your ow n decision audit, you need to consider two types ofcritical decisions: • Big, one-off decisions that individually have a significant impact . Petrochemical companies, for example, must ma ke periodic mu ltibillion -d ollar investment decision s, such as if, when, or where to build a new ethylene cracker, which is critical to production. If a compa ny builds at the wrong time, in the wrong place, or with the wro ng technology, it will have to live with the consequences for many decades. • Small, routine decisions that cumulatively have a significant impact. Amazon's continuing success can be attributed partly to a host of savvy merchan dis ing decisions, including those related to special prices and shipping disco unts, suggestions for complementary purchases, and targeted e-mail notices about new offerings. None of these dec isions carries much value in anyone instance. Cumulatively, howeve r, they can mean the difference between success and failure. Once you have identified which decisions are critical and categorized t hem, you can figure out where in the organization those decisions should be made. This requires an unbiased assessment of the benefits of scale an d coordination versus the benefits of tailoring to local needs and staying close to the customer. In which decis ions is sca le a critical factor? Which dec isions are bett er made by business units or functions? Which need coordi nat ion across many businesses? Some decisions a re fairly easy to place. Big capital-allocation decisions, for ins tance, are typically best made by the corporate center so that senior leaders can design and execute a coordinated

58 Harvard Business Review Jun e 2 010 www.WorldMags.net & www.Journal-Plaza.net

THE DECIS ION -D RIV EN ORGANIZATI ON HBR.ORG

Effort In making and executing critical decisions

4 We put in exactly the right amount of effo rt

3 We put in somewhat too much/too little effort 2 We put in way too much/ nowhere near enough

effort

TO tally your overall score, multiply your scores for quality (Q), speed (S), and yield (Y) to get your QSY. Next , divide your effort (E) score by 4, and multiply t he result by the QSY. If you're putting in exactly the right amount of effort, your QSV wouldn't change. But if you scored effort as a 3, then your score would be 3/4, or 75%. of t he Q5V.

Using our database, you can compare your decisio n score with the performance ranges for each benchmark qu artile. If you score over 25, for example, you are perlorm ing at the level of t he top -quart ile compan ies in our survey. Relative to our sample, your organization would appear to decide and deliver.

More than 25 · You're doing great; keep it up. 21-2 5 . Pretty good. but could be great .

16-20 · Worse than 50% of companies. Time to act. 15 or less . Major decision reboot required.

1 We're off the charts

ESCORE

__

TOTAL SC ORE [Q.

s. Y. (E f411

__

When reorganizing a company, decisions rather than structure should be the focus. portfolio strategy across the company. IT investme nts can usually be left to functions or business units. Decision placement is more of a challenge for product, customer, and channel decisions, wh ich typically involve complex trade-offs. Pricing decisions, for exa mple, need to be coordinated across customer segments and channels. Product decisions must be considered from both an internal and an external perspective. In companies wit h many different products or services, both the critical decisio ns themselves and where they should be made may vary widely across the organization. The Xerox turnaround lau nched in 2001 un der Anne Mulcahy offers a powe rful contrast to the Yahoo story. Unlike Semel at Yahoo, Mulcahy's leadership team took a decision-driven approach to the company's reorganizat ion. Team members went through every set of critical decisions Xerox needed to make and execute to fend off ba nkruptcy, and they made explicit choices about where to locate those decisions. Clarity and simplicity were the guiding principles. In the sales organization, for example, Xerox moved from a global customer structure, in wh ich sales and p ricing decisions were made by global teams organized around industry verticals, to a simpler country structure, where those decisio ns rested with local sales teams. The new structure enabled Xerox to eliminate several layers of middle management, increase local accountability, and take nearly $1 billion out ofthe company's cost structure in just two years. The simpler structure also concentra ted decisions related to the shift from analog to digital technology-critical to Xerox's success in

office products at the time-within the senior lead ership of the Product organization, whic h helped accelerate the pace of new-product introductions in this vital segme nt. The explicit focus on where decisions should be made was critical to the successful turnaround at Xerox. At the end of your audit, you may find that making and executing decisions better and faste r than competitors does n't req uire reorganization and that you can avoid the costly business of structural change altogether. If you find that you are already focused on the right set of critical decisions and you find tha t they are placed where they should be within the organization, then the source of performance problems is unlikely to be structural. Problems may stem instead from other organizational issues. Perhaps there is an incentive problem wit h the sales force. Maybeleaders place too much value on building consensus, at the expense of dec isive action. Whatever the issues, they can probably be fixed without a wholesale structural redes ign, which will take peop le's minds off the competition and may actually add toyour problems. (Seethe exhibit "Do You Really Need to Reorganize?") But for now, we'll assume that your audit does reveal that your st ruct ure needs to change. Let's look at how to go about doing that.

Building the

peeielen-cnven Structure All complex organizations must be broken down into manageable pieces to ensure that roles and responsibilities for making and executing critical decisions June 2010 Harvard Business Review 59

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SPOTLIGHT ON STRATEGIES FOR A CHAN GIN G W ORLD

-

0~:l! Do You Really Need to Reorganize? Aco mprehensive su rvey of your orga nization can help you understand what's undermining or supporting effective decisions-and whether structure or something else is likely to be the most important issue. But this quick test can serve as an ea rty warning device.

STRUCT1.JRE

Our str ucture helps- rather than hinders-the decisions most critical to our success. 2 3 4 1 St rongty Disagree Agree more St rongly disagree more th an th an agree agree disagree

To get your total score, add up your individual scores. More t ha n 35 . You're doing g reat; keep it up. 31-35 . Good. but

room for improvement.

ROLES

Individuals understand their roles and accountability in our most critical decisions. 1 2 3 4

26- 30 ·

10 -25 . Major org

PROCESSES

transformation required .

Our processes are designed to produce effective, timely decisions and action. 1 2 3 4 I N FORMATION

The people in critical decision roles have t he information they need when and how they need it. 1 2 3 4 MEASURES& I NCENTIVES

Our measures and incentives focus people on making and executing effective decisions. 1 2 3 4 PRIORITIES

People understand their priorities clearly enough to be able to make and execute t he decisions t hey face. 1 2 3 4 DECISION STYLE

We make decisions in a style that is effective (for example. that appropriately balances inclusiveness with momentum). 1 2 3 4 PEOPLE

We put our best people in the jobs where they can have the biggest decision impact. 1 2 3 4 BEHAVIORS

Our leaders at all levels consistently demonstrate effective decision behaviors. 1 2 3 4 CULTURE

Our culture reinforces prompt. effective decisions and action t hroughout the organization. 1 2 3 4 60

Org is serious barrier to decisions.

Compare d with com panies in our data base , a score a bove 35 puts you in the top quartile-mea ning t hat your organization is pretty healthy. A score of 31 to 35 indicates room for improvement. but no immediate signs of organizational breakdown, A score of 30 or below lncrea tes that you defi nitely have some organizational challenges to add ress. If you perform at 2 or less on anyone issue, that pa rticular ailment likely needs atte ntion.

are clea r, A good way to determine what the importa nt decisions are in your com pany is to look at the sources of value in your business and then organize the mac rost ructure around them. Take the case of British Gas. a division ofthe multinational energy and utility com pany Centr ica. In 2006, faced wit h a serious pe rformance crisis, the company's new leade rship team starte d looking at the sources of val ue in its business. Managers began by examining differences in profitability by service, by geographic area, and by customer segment. They discovered that profitability and growth varied much more by customer segment than by any other variable. One segment used large amounts of gas or electricity and paid regularly through gua ranteed di rect debits. Decisions that helped the company retain these customers, such as how to handle home moves and how best to offer additional services, were most important for this segment. Asecond customer segme nt used less energy and paid regularly through a system ofprepayment cards. Here the key decisions related to controlling costs. particularly those associated with processing additional payments and with meter reading. A third segment was n't as consistent in keepi ng u p payments. For that group, the critical decisions related to managing receivables. Recognizing those di fferent so urces of value. managing director Phil Bentley decided th at the best way to structure the company was by customer segment. He established three separate businesses: Premie r Ene rgy. Energy First, and Pay-AS-YOU-Go Energy. This new structure allowed him to place accountability for decisions that directly affected customers. such as service levels, positioning, and product bund ling, in the busi ness un its. Corporate headquarters could focus on noncustomer-facing matters such as IT and finance. The alignment of structure and decisions helped British Gas improve its performance significa ntly. It redu ced custo mer attrition from abou t 20% to less than 10%. Its bad debt fell,and the business began growing for the first time in years. Ifdecision-driven reorganization were just about an audit an d, if necessary, aligning the macrostructure with the sources of value, it would be relatively easy to get your next reorg right. But the messy reality ofbusiness is that big changes need to be followed up wit h a whole host of smaller changes. In most reorgs, this stage of the process usually concentrates on assigning turfand setting out a hier-

Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

THE DECISION-DRIVEN ORGANIZATION HBR.ORG

archy with defined repo rting lines. Once again. this approach is misguided, because it does not use decisions as the unit of analysis. Indeed. a focus on turf often devolves into horse trading: Powerful managers grab decision rights they shouldn't rea lly own while weak ones surrender rights they really should own. People end up with responsibilities that are defined either too broadly or too narrowly, given the decisions they need to make. Responsibilities that are too broad result in insufficient su pervision and limited accountability. Those that are too narrow can create needless hierarchy-too many watche rs an d too few doers-and can encourage rntcroman agement. Without a focus on decisions, these power struggles too often lead to creeping complexity in an organization's infrastructure. The energy giant BP provides an excellent example of the consequences of an overly complex microstructure. Back in 1994, BP had just a handful of geographic and customer units, wh ich were supported by a few central functions. After a period of significant merger and acquisition activity, however, the company added new geographic areas and created new functions. Spans of control narrowed, and the nu mbe r of managem ent layers increased. All of these changes increased the number of "decision nodes"- the interfaces between regions, funct ions, and layers required to make and execute important decisions-from about 500 in 1994 to roughly 10,000 in 2007. Each decision node at the company introduced a different se t of hurdles for new products. business development deals, and even options for reducing costs. The effects were predictable: Decision making and execut ion slowed, and costs mounted . In decision-driven reorganization. the challenge is to determine exactly what authority decision makers need, regardless of their organizational status, if they are to make good decisions and execute them effectively. BPsaw that the people who were best equipped to make decisions had to get too many approvals from higher-ups or from regional heads, which delayed execution. So its new chiefexecutive, Tony Hayward , launched a comprehensive simpli fication progra m designed to return decision rights to the appropriate people. The initiative elimina ted layers of middle management. centralized some operations, and reduced overhead expenses by one-third. It moved the number of decision nodes back toward a target of5.000. Both the company's decision effectiveness and its performance improved. By late 2009,

The Six Steps to Decislon-Drlven Reorganization Identify your organization's key decisions. Determine where in the organization those decisions should happen . Organize the macrostructure around sources of value. Figure out what Level of authority decision makers need. Align other eLements of the organizational system, such as incentives, information flow, and processes, with those reLated to decision making. Help managers deveLop the skills and behaviors necessary to make and execute decisions quickLy and weLL.

BP had eliminated $3 billion in costs and was turning in a profit that beat analysts' expectations by 50%. Anychange in structure may necessitate changes in decis ion roles, incentives, information flow. performance metrics, and processes. AtUD Trucks- formerly Nissan Diesel-a new strategy designed to expand UD's penetration of national accounts requ ired a reorganizat ion of the company. Local bran ch offices were combined into regions, and national accou nt teams were established. To get the most out ofthe new structure, the team at un Trucks clarified dec ision roles between the national accou nt teams and the company's Truck and Serv ice units . Measures and incentives were reset to encourage collabora tion across units and focus the sales force on key accounts. The reorga nization at un Trucks was critical. of course-the new strategy could not have been imple mented without it. But goals, processes, information, measures. and incentives also needed to be aligned to make the new structure work. Finally, you need to help managers develop the skills they need to make decisions quickly and tra nslate them into action consistently. Smart companies mesh individuals' capabilities with the organization's decision-making demands. They invest as needed to ensure that people have the skills required to be better decision makers over time. Agood example of this took place at Hospira, the $3.9 billion pharmaceutical company spun out from Abbott Laboratories in 2004. In 2008, Hospira embarked on a major change program. The program included an effort to build new dec ision capabilities across the company. The top 80 executives att e nded in novative tra ini ng workshops that showed them how to identify an organization's critical decisions and outlined Hospna's new approach to effective. efficient dec ision making and execution. Executives learned to use tools that would help them get the who, what, when. where, and how of each decision right. The workshops also helped leaders learn and adopt the specific behaviors that would be required to make the changes stick. Hospira's senior leaders began to track the company's changes in decision effectiveness at their bimonthly tea m meetings. They also began to gather survey data that could help them assess progress in building and sustain ing decision capabilities. Since 2008, CEO Chris Begley and his team have seen significant improvements in Hospira's financial and stock price performance, which they attrib ute largely to improved decision making. June 2010 Harvard Business Review 61

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SPOTLIGHT ONSTRATEGIES FOR ACHANGI NG WORLD

HBR.ORG

Ultimately, a company's value is just the sum of the decisions it makes and executes. Adjusting to New Structures

connected arc hitecture, emerging countries, and connected business ope rations. These interlocking councils and boards have enabled Cisco to maintain its leadership position in the complex, fast-moving telecommun ications space and build on the strength of its global functional st ructure. Creating parallel decision-making authorities may appear to be in conflict with our general principles ofsimplicity and clear accountability, but we believe this approach leads to a mo re st reamlined process. Organization overlays suc h as Cisco's cou ncils and boards introduce valuable expertise tha t formal structures cannot easily accommodate. They allow fewer people to be involved in making and executing critical decisions - in effect, reducing the num ber of decision nodes.

A new strategy-or new execution of an existing strategy-can require both macrochanges and microchanges to a compa ny's structure. But any new structure will create new boundaries that people may fi nd hard to cope wit h and that may ma ke effective decision making more difficult. To get around this problem, it may be necessary to overlay your new structure with some connections that help people reach beyond those boundaries. In 2001, faced with the bursting of the dot-co m bubble, Cisco reo rganized. It moved away from the structure that had been in place for much of the company's rise to prominence- a line-of-bu siness structure based on customer segments-and pu t in place a global func tional organization. The logic was simple: Reorganizing around central funct ions would dramatically reduce the company's costs. IT'S EASYto see why so many CEOs are enticed by While the pros of this move outweighed the cons, the temptation ofreorganization. Today's corporate the company's leaders acknowledged that organiz- structures can be inordinately complex. Some date ing around centralized functions could cause Cisco from a day when the demands ofthe business world were quite different than they are today. Simplificato lose customer focus and intimacy. To prevent that, the leadership team has created tion, alignment, modernization, a new vision ofwhat over the past several years a series of corporate coun- the organization should look like- and all of it accils and boards directly under the company's ope rat- complished with the stroke ofa pen. But to focus exing committee, Cisco'smost senior decision-making clusively on structure is to confuse means with ends body. These cross-functional groups formulate and and to assume a connection that may not exist. The evaluate alternatives for each of the company's ma- reo rgs that work best, such as those at Ford, Xerox, jor strategic initiat ives and then make recom menda- and Cisco, focus first on the organization's critical tio ns to senior managemen t. We find that the pro- decisions. Then they build an organization that can cess accelerates decision making without sacrificing make and execute those decisions better and faster decision quality. The structural overlay of cou ncils than the competition. The result is what executives and boards also seems to help funct ional leaders col- always seek from reorgs yet so seldom accomplish: laborate and make effective decisions about budgets improved performance. " HBR Reprint Rl006B and resources. Today, those teams are operati ng at full steam. Marc ia W. SIen ko ([email protected]) Five "segment councils," for instance, support deci- " ..., leads Bain & Company 's Global Organization Practice sion ma king and execution for the company's enter- and is a pa rtne r in th e firm's Boston office. Michael C. prise, commercial, service provider, small business, Ma nkins (michael.man kinS@bai n.com) leadsBain's and consumer segments. Boards organized around Organization Practice in the Americas and is a partner in San Francisco . paul Rogers {[email protected])isa specific market opportu nities, such as collaboration pa rtner who lead s Bain's London office; he formerly led and virtualization within the enterpr ise segment, Bain's Global Organization Practice . They are coauthors of develop tailored strategies and oversee execution. the fort hcoming book Deci de and Deliver: Five Steps to Breakthrough Performance in Your Organization (Harvard Finally, fou r cross-segme nt councils focus on the Business Press, 1010) . Portions of this article are adapted arca ne but cri tica l topics of e merging solutions, from the book. 62. Harvard Business Review June 2.010 www.WorldMags.net & www.Journal-Plaza.net

Our t hree tiers of com prehensive leaders hip programs cu ltivate success at all leve ls. Eac h offering bri ngs together globa l b usiness leaders to turn visionary ideas into best manag ement p ractices that deli ver results. Email ctpehbs.edu to receive deta iled information . Global Perspect ives. Tangible Business Results. www.WorldMags.net & www.Journal-Plaza.net

HAR VARD

BUS I N E S S SCHOOL EX E C UT I VE EDU C AT I O N

SPOTLIGHT ON STRATEGIES FOR A CHANGI NG WORLD

Spotlight

, AI\TWORK Antony Gormley, Capacitor, 2 1. Mild steel tubes: 12 mm (old), 5.5 mm (il ). Mild steel rod: 5 mm x various lengths.

Body form : 190 x 48 x 35 cm. Fully extended work : 271 x 242 x 229cm.

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64 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

HBR.ORG

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_

Ton y sehwartl: (tony@ theene rgyprojec t.com)

is the president and CEO of the Energy Project and the author of The Way We're Working Isn't Working: The Four Forgotten Needs That Energize Great Performa nce (The Free Press, 2010). written with Jean Gomes and Cathe rine McCart hy.

The Productivity Paradox How Sony Pictures Gets More Out of People by Demanding Less by Tony Schwartz

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THE WAY most of us work isn't working. Study after study has shown that companies are experiencing a crisis in employee engagement. A2007Towers Perrin survey of nearly 90,000 employees worldwide, for instance, found that only21% felt fully engaged at work and nearly 40% were disenchanted or dise ngaged. That negativity has a direct impact on the bottom line. Towers Perrin found that compa nies with low levels of employee engagement had a 33% ann ual decline in operating income and an 11% annual decli ne in earnings growth. Those wit h high engagement, on the other hand, reported a 19% increase in operating income and 28%growth in earnings per share. Nearly a decade ago, the Energy Project, the compa ny I head , began to address wo rk per forma nce and the problem of employee disengagement. We believed that burnout was one of its leading causes, and we focu sed al mos t exclus ively on helping in dividuals avoid it by managing their energy, as opposed to their time. (See "Manage Your Energy, Not Your Time," HBR October 2007.) Time, after all, is finite. By contrast, you can expan d your personal energy and also regularly renew it. Once people understand how their supply of available ene rgy is influenced by the choices they make, they can lea rn new strategies that inc rease

the fuel in their tanks and boost their productivity. If people define precise times at which to do highly speci fic activities, these new behaviors eve nt u ally become automatic and no longer require conscious will and discipline. We refer to them as rituals. They're simple but powerful. They include practices such as shutti ng down your e-mail for a cou ple of hours duri ng the day, so you can tackle important or complex tasks without d istracti ng interruptions, or taking a daily 3 PMwalk to get an emotional and me ntal breat her. What we failed to fully ap preciate in our early work was that once we finished our sessions with employees and sent them back into the work place, they often ran into powerful organizational resistance to the very principles and practices we'd taught the m. Westill believe that enduring organizational change is possible only ifindividuals alter their attitudes and behaviors fi rst . But we've come to understand that it's not possible to generate lasting cult ural change wit hout deeply involving an organization's senior leadership. In this art icle, we'll describe the trans formation we helped initiate at Sony Pictures Enter tainment, a company th at has embraced e nergy-building and -renewing rituals at all levels. Based in Culver J une 2010 Harvard Business Review 65

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SPOTLIGHT ON STRATEGIES FOR A CHANGI NG WORLD

City, California, Sony Pictures produces, markets, and distributes movies and TVshows. So far, more than 3,000 of the company's 6,300 employees worldwide have gone th rough our energy-management program. This sum mer we'll reach another 1,700 in Europe, Singapore, and Latin America. To date, the reaction to the program has been overwhelmingly positive. Eighty-eight percent of participants say it has made them more focused and productive. More than 90% say it has helped them br ing more energy to work every day. Eighty-four percent say they feel better able to manage their jobs' dema nds and are more engaged at work. Sony's leaders believe that these changes have helped boost the compa ny's performance. Despite the recession, Sony Pictures had its most profitable year ever in 2008 and one of its highest reve nue years in 2009 (though an industrywide collapse in DVD sales forced the company to do a round oflayoffs early in 2010). Aswe have done at many other organiza tions, we encouraged Sony to make two fundamental shifts in the way it manages employees. The first was to stop expecti ng people to operate like computers-at high speeds, continuously, runn ing multiple programs at the same time-and to recognize that human beings perform bes t and are most prod uctive when they alternate between pe riods of intense focus and intermittent renewal. The second was to move from trying to get more out ofemployees and instead to invest in systematically meeting their four core needs, so they're fueled and inspired to bring more of themselves to work every day. These four core needs are physical healfh (achieved through nu trition, sleep, daytime renewal, and exercise), emotional well-being (which grows out offeeling apprecia ted and valued), mental clarity (the ability to focus intensely, prioritize, and think creatively), and spiritual significance (which comes from the feeling of serv ing a mission beyond generating a profit).

Changing Attitudes at the Top The cochairs of Sony Pictures, Michael Lynton an d AmyPascal, were the catalysts for change. Their goal was to create a highly engaged, employee-friendly, h igh-performan ce culture, and they we re willing to beg in the process by looki ng at how their own leadership behaviors affected their staff's energy. The two leaders authorized me to interview their direc t reports and dose colleagues in the industry. I also spoke wit h their friends and eve n their family members. Afterward, I sat down wit h each of

them, shared the feedback, and discussed how they wanted to respond. Through this process, Lynton , who is by nature introverted and private, discovered that his people we ren't sure what he was feeling. To show that he appreciated their good wor k, he instituted a new ritual of calling and writing notes to employees to recognize them for their accomplishments, which boosted their emotional energy. The feedback that most moved Pascal focused on her reluctance to engage in conflicts both inside and outside the organization. It turned out that her failure to be direct made her team members feel uncertain, whic h drai ned their energy. Pascal decided to create a ritual to help herself be more direct: Wheneve r she found herselfin an uncomfortablesituation, she would ask herself a simple question: What is the right thing to do here? She de fi ned "the right thing" as wha tever would se rve Sony Pictures bes t, even if it made her un easy in the shor t term. Often, that meant she had to say no to someone she liked and respected and didn't want to offend . Difficult as this was, Pascal discovered that people appreciated her new directness, eve n when she did n't provide the response they sought, and that she herself felt bette r afte rward. She made a particularly wrenching decision, for example, to pull the plug on Moneyba/l, a film to be based on the Michael Lewis book, even though she had enormous respect for its director, Steven Soderbe rgh. "I'd still work with Steven in a minute," she said at the time, "but in te rms of th is project, he wanted to do the fi lm in a different way than we did." leaders can easily underestimate how their attitudes and behaviors affect the energy levels ot thelr teams. Because energy is contagious, both the quality and quantity of a leader's energy can drain or galvanize a team. In addition, the leader sets the tone for the organization. If people see their company president making it a practice to ta ke a walk every afternoon, t hey feel safer ta king time out for t heir own efforts. To measure your own energymanagement effectiveness as a leade r and get more tips on how to increase it, go to th eene rgyproject, com/ hbr.

Getting Buy-In at the Divisional Level The next step was to get Sony's div ision heads on board. Lynton, Pascal, an d their top 15 executives went through our training, which focused on how specific energy-manage ment practices could improve bo th their personal effectiveness and their leadership. They identified where they were n't fully meeting their energy needs and then created a series of pe rsonal rituals to address problem areas. For example, Jeff Blake, Sony's head of marketing and d istribution, wanted to be more awa re of his emotions . After going through oUT program, he realized that anger and frustration often sapped his energy and had a negative impact on his colleagues. To manage his feelings better, he made it a practice to step away and take walks around the studio lot whenever he felt his frustrat ion begin to mount.

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THE PRO DUCTIVITY PARAD OX HBR.ORG

Idea in Brief Hu ma n beings don't work li ke compute rs; t hey ca n't o pe rate at high speeds cont inuously, running mult iple progra ms at once.

People pe rform at their peak whe n th ey alternat e between pe riods of intense focus a nd int ermittent renewal.

Employees ca n in crease t heir effectiveness by practicing simple rituals that refuel th eir en ergy, such as t aking a daily walk t o get an e mot iona l breat her or tu rning off e -mail at prescribed times so t hey can concent rat e.

If companies a llow a nd encou rage employees to create and st ick to such rit ua ls, th ey will be rewa rded with a more engaged, prod uct ive, and focused workforce.

Gumpert set aside an uninterrupted 60 to 90 minutes each morning to focus on his top two or three priorities. This ritual helped him relax and get grounded and the n think through more dearly how he wanted to respond. Keith LeGoy. who heads international television dis tribution. had a similar goal. He made it a ritual to take a deep breath rathe r than react immediately when someone said something that irritated him . Once he felt calmer, he made a point of asking himself. How can 1approach this person more collaboratively to get what I want? To improve his ability to focus single-mindedly on d ifficult tasks, Gary Martin, who head s studio operations, established a ritual of turning off his e-mail al together at certain points duri ng the day. David Bishop, who head s home en tertainment, made a commitment to ignore e-ma il while talking to people on the phone and instead devote his full attention to whatever he was doing at any given time. And rew Gumpert, who heads business affairs and administration for Columb ia Pictures, created a new eve ning ritual to ma ke sure he prioritized his work effectively: For five minutes or so after he got home from wor k, he reflected on the two or three most important tasks for the next day. When he arrived at the office the next morning, he set aside an uninterrupted 60 to 90 minutes to focus on those priorities, rather than simply respondi ng to e-mails or putting out whatever fi res had flared up the night before. My colleagues and 1also worked with the senior team to create rituals to promote better collabo ration. The atmosphere at their weekly meetings had always bee n superficially collegial and cordial, bu t

most of the division heads were fiercely protective of information and reluctant to share much with one ano ther. They resisted input from any execut ive outside their areas of expertise. The friction that resulted was counterproductive. Prodded by Pascal and Lynton, the team members institu ted a ritual aimed at pro moting more open dialogue and a greater sense of trust. They agreed to set a dear agenda in advance ofeach week's meeting and to focus only on key strategic issues. All agreed to participate actively in discussions, offer suggestions, and close ranks aroun d decisions made at the meeting. Team members also committed to making decisions based on what best served the company as a whole rather than their personal agendas. To encourage honesty. the group members also came u p with a ritual they named "Code." Saying that single word became a way to surface unspoken feelings and concerns without attack or disparagement. As Pascal explains it, "code" came to serve as shorthand for "I really want to know what you're feeling, so be straight with me." Pascal and Lynton fou nd this ritual par ticularly useful in their relationship. Pascal gives this exam ple: Say that she'd asked Lynton to attend a marketing meeting that she was run ning, and at the last minute he canceled because something else came up. Because both of them were eager to accommodate the ot her, he might say to he r, "Just go ahead without me," and she might say, "OK, fine." Later. Pascal would find he rself won deri ng if Lynton was June 2010 Harvard Business Review 67

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SPOTLIGHT ON STRATEGIES FOR A CH ANG ING W ORLD

How the To Sets the Tone As a leader, you have myriad opportunities to set the right context for your employees to replenish their energy. It's all about providing examples for others and creating a safe environment. A few dos and don'ts: Take back your lunch.

Cultivate • • creattvrty,

Share your • passion.

Feeling valued is our core emotional need. Write a note of app reciation to someone who works for you once a week. Be very specific about what it is th at you value,

Set aside an informal, relaxing space at work t hat is devoted to creative thinki ng and brainstorming, Schedule a regular t ime- at least once every two weeks-when colleagues gather to brainstorm new ideas, discuss Longerterm projects, or set strategy.

communicate what you stand for and what your larger mission is, beyond profit. Ift hat isn't clear to you, set aside time to reflect on it. What is it that gets you up in the morning? What's the value you're trying to add in the world? Why should others feeLpassionate about doing it , too?

Avoid conflict.

Try to do multiple things at the same time.

Be self-absorbed.

Communicate

your values.

Get away from your desk, and preferably out of the office altogether, so that you come back to work more focused and fueted to face the rest of t he day. It will enco urage your employees to do t he same.

Ignoring a difficult situation typically does more harm than communicat ing directly and honestly about it, The keyto a successfu l conversation is not to assume you're right but to enter into it in a spirit of open ness and curiosity.

Make an effort to give people your fuLL focus and try to listen wit hout inte rrupting. You know you've succeeded if you're capable of repeating back what you just heard.

truly OK about missing the meeting. He might wonde r if Pascal was really fine with his not attending her meeting. Both of them disliked conflict; neither wou ld be inclined to mention an y concerns, "Code" gave th em a simple way toaddress th e issue direc tly. "It's about telling the truth, even when it's hard," Pascal explains, "That's how yo u build a culture of tru st. Today we do n't need to say 'code' m uch anymore:' The ne xt step was to take these ideas and practices to th e 1250r so direct reports ofthesenior team. We also con tinued to meet with the senior leaders for one day every three months to help deepen and ex tend their leadership an d team rituals. At one of

It's easy to make it aLL about you. Try to step beyond your own immediate needs to better serve the needs of those you lead.

those meetings, e-mail became a focus ofdiscussion. The team had already agreed to a ritua l that banned the check ing or sending ofe-mail durin g meetings. A remaining issue was the expectation that team memo bets would reply to e-mail in the evenings and all through the weekends. The result was that they felt perpetually on calL Their inability to let go of wor k was a source of resen tment and an ene rgy d rain for many ofthe leaders. Event ually, th e team agreed on an 8 AM to 8 PM weekday limit on the hours dur ing wh ich they were expected to respond to e-mails from one another. Outside those hours, th ey were free not to respond. The agreement was that ifanyone had an urgen t rea-

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THE PRODUCTIVITY PARADOX HBR.ORG

son to reach a colleague, he or she would pick up the phone and call the person. "The expectations have really changed;' says David Hendler, Sony Pictures' CFO. "I'm no longer on my BlackBerrywhen I'm with my wife and kids, and they appreciate that . It also drives more energy at work because I'm not drained or distracted by thinking, 'Oh, I shou ld be spending time with my family.'"

Spreading Energy Management Through the Ranks Once we'd taken the most se nio r leaders through our program, Pascal and Lynton deci ded to cascade it down through the company. Sony co nverted a soundstage into a space where we taught the staffin groups of25 or so, and offered fitness and nutrition consultations, yoga classes, and massage sessions, all as part ofour energy-renewal training. Several co mpanywide initiatives now help employees boost their energy in the four core areas. Sony Pictures has begun subsidizing healthy meals and a salad bar at a new on-stte restaurant that's open to all employees. A dietician is on staffand available to everyone for consultat ions. Sony has also bu ilt a new, fully eq uipped gym and created a large grassy

You build a culture of trust by telling the truth, even when it's hard. place. At all levels ofthe company, employees feel more comfortable taking breaks, turni ng offe-mail at certai n times, and going to the gym during the day. "This has been about believing that the culture of the company is as important as the product;' Pascal explains. "We're not fully there, but we now have a common lang uage and shared principles, and this experience has been enormously bond ing. The culture we' re creating is the adhesive. It's what holds the co mpany together and ma kes you nimble and flexible enough that you're ready for whatever hits you, no matter what's happening in the marketplace. There's no question that this investment we've made in our employees has energized and mot ivated them and helped us stay strong in the midst of very tough HBR Reprint Rl006C times." 0 r-'

commons area where people can hang out and relax. To help employees recharge themselves on a spintual level, the company now offers its employees paid time off each month to volunteer their services to nonprofits and orga nizes specific volunteer opportunities for them. For Pascal and many other leaders, one of the most powerful shifts has been the adoption of a common language around energy and people's core needs. Words and phrases such as "renewal break," "rituals;' "triggers," and "Is that a fact or a story you're telling me?" have become part ofeveryday dialogue. "That triggered me" essentially means "What you said really pushed my emotional buttons." At the same time it's a way for people to acknowledge their own responsibility for their reactions. "Is that a fact or a story?" is a way to remind peo ple that they have a choice about how to interpret a given set offacts, and that it often pays to try to view those facts through a more positive and forgivi ng lens. Employees are also much more attuned to how their energy states are influencing their performance. To help colleagues realize how they're co ming across under stress, they'll as k, "What energy zone are you in?" Simply raising people's awareness can allow them to take back control oftheir emotions and move into a more positive

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"atec kaerry fight!" June 2010 Harvard Business Review 69

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Tusciaelecta: Arte Conrempora n San Casciano Water Tower, Italy, ~oo2/wo3

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HBR.ORG

Freek Vermeulen ([email protected]) is an associate professor at t endon eusness SChool.

,,

Phanish Puranam ([email protected]) is a professor at London Business School, where he codireets th e Aditya Birla India centre.

Ranjay Gulati (rgulati@ hbs.edu) is the Jaime and Josefina Chua Tiampo Professor at Harvard Business School.

Even successful corporations have to shake things up to stay ahead of the competition. by Freek Vermeulen , Phanish Puranam, and Ranjay Gulati

Change for Change's Sake

disputes that firms have to make organizatio nal changes wh en the business environment de mands them. But the idea that a firm might want cha nge for its own sake ofte n provokes skepticis m. Why inflict all that pain if you don't have to? That is a dangerous attitude. Acompany periodically needs to shake itself up, regardless of the competitive landscape. Even ifthe external enviro nment is not changing in ways that demand a response , the internal environment probably is. The human dynamics within an organ iza tion are constantly shifting-and require the organization to change along with them. Over time, informal networks mirror the formal st ructure, which is how silos develop. Restructuring gets people to start forming new netNO ONE

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SPOTLIGHT ON STRATEGIES FOR A CHAN GIN G WO RLD

works, making the organ ization as a whole more creative. It also disrupts all the routines in an organization tha t collectively stifle innova tion and adaptability. Finally, restructuring breaks up the outdated power structures that may be quietly misdirecting a company's resource allocation. All these processes-silo formation, the accretion ofdeadening routines, and the emergence of corporate baronies- take place all the time. But whe n everything is going well, you tend not to notice them, just as many seemingly fi t people don't realize that their arteries are dangerously dogged . We present here a simple questionnaire that can se rve as a kind of cholesterol test for your company, enabling you to see if your regimen needs minor or major adjust-

When and How to Change

Fostering Communication SOLUTION

Use informal networks to compensate for th e limits of th e formal struct ure Be prepared to repeat t he process again and again

Building Agility SOLUTION

Expose peopte t o new aspects of t heir tasks and opportunities for collaboration Be prepared to accept a constant state of mild disruption

Breaking Up Entrenched Interests SOLUTION

Some groups doing critical work have trouble getting the resources they need; resources are concentrated in a few powerfuL groups

Change t he dimension along which resources are allocated Be pre pared to disenfranc hise and even lose ce rtain people

ments. We begi n, thou gh, by looking at the ways that unhealthy structures and patterns can build up, threatening your fi nn's healt h.

The Formation of Silos Most com panies and business units are organized aro und a single criterion-be it function , product, geography, or market. The problem with this is tha t communication and collaboration tend to become trap ped in functional, product, geographic, or othe r silos. As a result, a fu nctionally organized fi rm, for instance, may be slow to recognize product opportunities, while a product-oriented finn may find itself du plicating work. In theory, the solution is to organize as a matrix in order to force interaction across dimensions. But matrix orga nizations are n otoriou sly difficu lt to manage because they blur accounta bility and slow down decision making. Abetter solution, we submit, is to periodically reorient the organization around a different criterion. When a firm reorga nizes in this way, the old networks and culture do not suddenly vanish; employees often maintain their old patterns of interaction for quite a wh ile, as first observed by professors Jackson Nickerson and Todd Zenger of Washington University. So, at least for the near term, employees cooperate along both informal and formal networks. As a consequence, the fi rm gets the best of bot h worlds. Cisco Syste ms is a case in point. From 1997 to 2001, Cisco was organized into three units, representing three lines of business, each focused on a disti nct customer type. Each u nit had its ow n marketing, sales, and R&D orga niza tions. Employees typically worked and had most of their interactions within th eir units. In a major reshuffle following the company's first eve r loss, in 2001, Cisco was reorganized by function. This included the creation ofa centralized R&Dgroup and 11 subgroups to promote more rapid and costeffective technical innovation. In this new structure, engineers who had worked in one of the three units could exchange ideas and collaborate on product develo pment wit h their peers across the com pany. Cisco undertook these changes to foster economies of scale and to st reamli ne an increasingly overla pping prod uct offering. Many feared , however, that the centralized R&D group would lose touch with customers. The fear proved un fou nded - in large part, we believe, because of the strength ofthe old networks and of Cisco's customer-oriented culture.

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CHANGE FOR CH ANGE'S SAKE

_ _-l_

AseemingLy healt hy, wellperforming company can be more vuLnerabLe than you might think because of a buildup of corporate cholesterol: natural human dynamics that Limit communication, creat ivity, and efficient resource allocation.

When it came to develop ing se rvices and products for customers, it seemed that people still picked up the phone or met with former colleagues to develop optimal, cross-tech nology solutions. Of course, forma l structure and informal networks and culture eventually realign. Over ti me, people have fewer inte ractions wit h their old contacts, and once again their p rimary interactions occur in a silo. The fi rm's management may decide to revisit its organizat ional structure again. That is precisely what Cisco seemed to be doing in 2004, wit h the crea tion of three Business Councils: crossfunctional and cross-technology senior management groups that were meant to be, as one ofthe chairs put it, "the voice of the customer," providing feedback on Cisco's strategy, products, and services. They also represented a part ial revers ion to the old structureeach cou ncil focused on a particular customer type.

The Deadening Impact of Routine Communicat ion and collaboration are not the only victims oforganizational stability.The longer things are done a particu lar way, the harder it is to ada pt when markets sh ift. Worse, the less people in organizations explore and search for new opportunities, the less capable they are ofdoing so. AsJames March of Stanford University famously explained: Exploitation (doing what works today)drives out exploration (seeking out risky but potentially valuable new ways of doing things). Clearly, breaking up silos in the ways we've just described will help an organization avoid getting trapped in its routines. But there's a danger to relying on just one kind of cha nge-which itself can become rout ine. For years Hewlett -Packard oscillated between the centralization of functions, such as sales and marketing and product development, and their subsequen t decentralization into prod uct groups. These periodic alterations initially yielded

Rather than wait for the heart attack to strike, executives should consider changing their fi rm's st ructures, rewards, and processes whiLe performance is still good.

HBR.ORG

Surveying the workforce can help executives determine how urgent t he need is for change and what ki nd of changes to conte mplate. Companies that ta ke charge of change in this way are high performers and popular places to work.

benefits but eventually became a familiar process; exec ut ives got used to simply switching from one set of routines (what they were just doing) to another (what they had been doi ng five yea rs ago). They ended up exchanging one set of deficiencies for ano ther. Ultimately, the company's performance suffered. For that reason, we advise companies to vary the types of change th ey make and the details of their change efforts, as summarized in the exhibit "A Regimen for Change." One year, for exam ple, you might wa nt to emphasize individual rather than group performance in the compensation system. Another year you might rearrange office space so that people in a business uni t are grouped by function instead of customer segment, an d then change back a few years later. Jeffrey Immelt an d his successor, Joe Hogan , took just such an approach to change duri ng thei r respect ive spells as CEO of GE Healthcare (formerly

There's a danger to relying on just one kind of change-which itself can become routine. GE Medical Systems). Following Jack Welch's decision to increase the company's focus on services and customers, Immelt embarked on a series ofchanges aimed at furt hering those goals. In 1997, Immelt restr uc tured GE Healthca re arou nd three geographic centers, a move that combined equipment and service. When Hogan took over, he restructured GEHagain almost immediately, moving service to a new global organizat ion, GE Healthcare Services. Subsequently, the president of June 2010 Harvard Business Review 73

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SPOTLIGHT ON STRATEGIES FOR A CHA NGI NG WORLD

Healthcare Services, Paul Mirabella, initiated several other changes to reconnect equipment and se rvice. This included the creation of two positions: Enterprise General Managers (EGMs), who looked after major accounts, and Enter prise Development Executives (EDEs), who were tasked with building customer partnerships. Mirabella also altered reporting Jines and shifted the incentive system from a focus on past performance toward a forward -looking mix of indicators. You might think that all this turmoil and variation would cause problems. In fact, the changes enabled GEH to develo p its se rvice business with great success. In 200 4, the new sales organization secured en terprise con tracts with a total val ue of$ l.l billion. In the following year, the new EDEs wo n partnership opport unities wit h a total contract value of $t.2billion.

A REGIMEN FOR CHANGE Companies that change before they have to don't undergo the painful, wholesa le reorganization and restr uctu ring that characterize many large fi rms. In undertaking periodic change initiatives. it's importan t to vary the focus by choosing a different categorystructure. rewards. or processes-and zeroing in on a different aspect for eac h round of change.

STRUCTURE

The Emergence of Entrenched Interests If you avoid making changes for too long, a third problem emerges: Companies gradually become seriously inefficient at allocating resources. The more resources a particular unit acquires, the mo re it can acquire. At first, a unit's power may accurately reflect its importance, bu t over time that power may no longer be justified. The company may be better off assigning a larger proportion of its resources elsewhere. Most com panies faced wit h that problem tinker at the edges, perhaps establishing cross-unit teams, initiating a centralized corporate "fund" to subsidize cross-unit collaborative projects, or creating specific integrator functions (which invariably tum out to be very frustrating jobs). But executives at a powerful business unit who are judged primarily by that unit's performance may not tu rn u p for meetings wit h other u nits and may be late providing information and ot her resources to them. By the time they do anything, the opportunity to strengthen the weaker uni t might well have passed. And as long as the powerful executives deliver on their primary obligations, it's unlikely anyone assessing them will really care. If gro ups have become this strong, you are going to have to initiate fairly dramatic organizational changes to improve matters. You may even need to disband the groups entirely. As long as they exist, eve n if they have been stripped of some authority, their influe nce will hamper progress and renewal. Given the magnitude of change required, the firm

How is your business organized? • Funct ion • Geogra phy • Custo mer type • Produ ct

should be prepared for the possibility that some individuals will leave. Yet this may be necessary- or even des irable -to enable the creation of a new balance within the firm. Consider Jones Lang LaSalle, a globa l commercial real estate mana gement company. JLL was organized into three divisions: the Tenant Representation Group, Corporate Property Services, and Project and Development Services , aimed respectively at leasing, commercial property management, and the provision of se rvices related to the development of new buildings. Theentirecompany revolved arou nd the three divisions, employees generally spent their entire careers withi n one of them, and all company metrics focused on unit measures. The most influential individuals in the compa ny were the three unit heads, who made important decisions on their own. The trouble was tha t the uni ts were not equally strong in specific geographic markets. When one unit was weak in a particular ma rket, the other two sometimes had trouble se rv ing corporate clients who wanted all three se rvices within it. Top man agement had long recognized the shortcomings of the entrenched power structure, but the autonomy of the units was so firmly established that each had limited success in persuading the others to invest in certain geographies. It was difficult to get them to collaborate to develop the fast-growing and profi table market for the provision of integrated se rvices to large mu ltinational firms. Each unit viewed the others as an intrusion and typically collaborated only when it was in the un it's own best interest. The scale of the missed opportun ities became apparent in 2002, when top management created a local organization, se parate from the units, aimed solely at New York City. Withi n a year, the com mercial real estate managed by JLL in New York City had grown nearly 25%, to more than 30 million square feet, ma king it the third-largest commercial property manager in the metropolitan area. In response to the success of this experiment and to the gaps in local expertise elsewhere, the company's incom ing CEOin 2005, ColinDyer, decided to replace the three units with a new st ructure organized around clients and markets: The former handled relationships with large clients, and the latter handled one-off' transactions in large metropolitan areas. In the su bsequent two years, JLL's share price tripled. The structural changes were n't costless. Some senior executives left when their authori ty, budgets, and number ofdirect reports declined sharply. More-

74 Harvard austness Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

CHANGE FOR CH A NGE'S SAKE HBR.ORG

ASSESSMENT

A Corporate Cholesterol Test Distribute th is questio nnaire to aU your co mpany's ma nagers from t ime t o time. Res pondents s hould a nswer with a simple yes or no. To ensu re honest a nswers, t ake steps to p reserve responden ts' anonymity.

""'AL SCOIII 0-1 VIIANIWIIII There's flO need for change just yet.

1-' VIIANIWIIII II's the perfect time for a change. 1 -11.VUANSWIIll

You're late already: your company needs substantial change.

The quality of communication and collaboration Do em ployees interact only wit h people from th eir own group? VIN Are there strong s ubcult ures th at a lign with business groups or divisions? YIN Are there breakdowns in co mmun ication caused by th e formation of silos? YIN Has co llaborat ion between groups decreased over th e past fi ve years? VIN

II!i!i!D

The capacity to adapt Are ma ny people unco mfortable with change? VIN Do people and groups operate according to well-established rout ines? VIN Has it been a long time since your fi rm developed a significant new reve nue st ream? YIN Has th e perce ntage of reve nue from new streams decreased over th e past five yea rs? VIN

II!i!i!D

The balance of power among groups Do influential groups or ind ividuals use most of the co mpany's resources? VIN Is it difficu lt for people outside th e com pany's central group to obtai n resources? VIN Do influen t ial groups or ind ividuals imp ed e decision making? VIN Have t he groups or individ uals th at were influe ntial fi ve years ago extended their influence? YIN

II!i!i!D

over, the transition, like most changes, was time consuming and took the best part ofa year of top management attention. Yet, as onesenlor executive, who saw his number ofdirect reports reduced from 1,800 to two, commented at the time, "What's really good is, we operate better as a division. There is more ofa sense of team. There were always bottlen ecks, and now there are fewer. The restructuring never would have hap pened in the past because I wouldn't have let it. Everybody was preserving the silos, right?" He remains with l LL and ha s watched the com pany's performance soar.

Knowing When to Change Let's suppose that your company is performing well; there's nothing obviously wrong with your bu siness mode l, and Wall Street seems to be happy. Should you continue with your existing diet and exercise regime n, or do you need to contemplate some lifestyle changes? To help you make that determination, we've developed a simple questionnaire, intended for all

senior managers, that can help you get a handle on whether your company's ne tworks have become too stable, whether your employees are falling into unquestioned routines, or,worse, whether powerful executives are chan neling investme nt resources into yesterday's busi ness activities. The questionnaire, whic h we present in the exhibit "A Corporate Choleste rol Test," helps you decide whether it is time to redesign the organization, what kind ofchange to make, and what the scale of that change should be. Each "yes" answer is wor th one point. If you score less than th ree poi nts, your organization doesn't need to change right now. If you score from three to seven, you need to contemplate at least one change soon. And ifyou score more than seven, your need is urgent and probably large scale. To determine what kind of changes you need to make, look at your total in each category. If your highest score is in the first section, then you need to contemplate changing the basis on which the company is organized (suc h as product or function). If you June 2010 Harvard Business Review 75

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SPOTLIGHT ON T$TRATEGIES FOR A CHANGING W ORLD

HBR .ORG

Periodic changes help companies avoid coronary-inducing reorganization. score most in the second section, you need to make Companies that take the initiative with change in sure that your next change is different from your last the ways we've described will, on the whole, avoid one. If you score high in the final section, then you the coronary-inducing bursts o f massive reo rganeed to make multiple cha nges all at once in order niza tion and restructuring that characterize many large fi rms. Even if they do have to undergo radical to shake up the organizat ion. You can refine this questionnaire by, for example, change, they will be better prepared to survive it. translating the questions into a set of propositions, As Alfred West, foun der and chief executive of the to which respondents indicate their level of agree- asset ma nagement company SEI, puts it: "Change me nt on a scale of, say, one to five. The broad er is not easy, [but] you can't dodge it. It is with you. poin t is that your employees' pe rceptions and ob - And YOU'd better embrace it." West is a serialchanger, servations are generally a good lead ing indicator of constantly tweaking SEI 's structure, rewards, and whether corporate cholesterol is building up in the business processes. Yet despite the organizational organization. Complaints about lack of coope ration uncertainty and disruption this entails, SEI has conand powerful exec utives and units are staple wa- sistently posted earnings growth of 40% per year tercooler topics. There isn't a company in existence and an an nual average return of28%, while featur whose employees aren't quick to complain when tug repeatedly on Fortune's list ofBest Companies to st ructures, rewards, and processes start getting in Work for in America. '" the way of doing a good job. HBR Reprint Rl006D

7

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..........- .

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"I'm struggling to find that ideal work-work balance." 76 Harvard Business Rev iew June 2010 www.WorldMags.net & www.Journal-Plaza.net

AVAILABLE AT BOOKSELLERS ACROSS INDIA

YOUR GU DE TO BUS N ESS STRAT EGY AND EXE CUT ON N EMERG NG MARK ETS Interested in emerging markets. but not sure where t o focus your efforts?

, www.hbr.org/books

The n Winning in Emerging Markets is a must read fo r you-and a critical tool fo r your business.

-HARVARD

In t he book , rerun Khanna and Kri shna G. satepu outline a practical framework for

developing emerging market strategies based not on broad catego rical defin itions

like geography, but on a structural understan d ing of how these markets really work. Actionable, fiel d-tested, and full of com pany examples, Winning in Emerging Markers is your guide to t ailo ring and executing your company's strategy in market s

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AreVoua • • • Leaders at your company are constantly wondering that about you, whether they own up to it or not. Here's how to get them to answer yes. by Douglas A. Ready, Jay A. Conger, and Linda A. Hill

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HBR.ORG

Douglas A. Ready (dready @icedr.org) is a visiting professor of organizational behaviorat London Business SChool and the founder and president of ICEDR. a global talentmanagement research center in Lexington. Massachusetts.

Jay A. Conger is the Henry R. Kravis Research Professor in Leadership Studies at Claremont McKenna COllege and a visiting professor of organizational behavior at London Business School.

o rne employees are m o r e tale nted t ha n ot hers. That's a fact of organizational life that few executives and HR managers would dis pu te. The more debatable point is how to treat t he people who appear to have the highest potential. Opponents of specia l treatment argue that all employees are talented in some way and, therefore, all should receive equal opportunities for growt h. Devoting a disproportionate amount of energy and resources to a select few, their thinking goes, might cause you to overlook the potential contributions of the many. But the disagreemen t doesn't stop there. Some executives say that a company's list of high potent ials- and the process for creating it - sh ould be a closely

Linda A. Hill is the wallace Brett Donham Professor of Business Administration at Harvard Business School.

guarded secret. After all, why dampen motivation among the roughly 95%of employees who aren't on the list? For the past 15 to 20 years, we've been st udying programs for high potential leaders. Most recently we surveyed 45 companies worldwide about how they ident ify and develop these people. We then interviewed HR executives at a dozen of those companies to gain insights about the experiences they provide for high potentials and about the criteria for gett ing and staying on the list. Then, guided by inpu t from HRleaders, we met with and interviewed managers they'd designated as rising stars. Our research makes clear that highpotential talent lists exist, whether or not companies acknowledge them and whe the r the process for developing them is formal or informal. Of the compan ies we studied, 98% repor ted that they pur pose fully identify high potentials. Especially when resources are constrained, companies do place disproportionate atten tion on developing the people they thin k will lead their organizations into the future.

June 2010 Harvard Business Review 79 www.WorldMags.net & www.Journal-Plaza.net

ARE YOU A HIGH POTENTIAL?

So you might be asking yourself, "How do I getand stay-on my company's high-poten tial list?" This article can help you begin to answer that question. Think of it as a letter to the millions of smart, competent , hardworking, tru stworthy employees who are progressing through their careerswith some degree of satisfaction bu t are still wondering how to get where th ey really want to go. We'll look at the speci fic qualities of managers whose fi rms identified them as having made the grade.

The Anatomy of a High Potential Let's begin with our definition of a high-poten tial employee. Your company may have a different defi n ition or might not even officially distinguish high potentials from other employees. However, our research has shown that compa nies tend to think of the top 3% to 5%of their talent in these terms: "High potentials consistently and significa nt ly outpe rform their peer group s in a variety of settings and circumstances. While achiev ing these superior levels of performance, they exhibit behaviors that reflect their compan ies' culture and values in an exemplary manner. Moreover, they show a strong capacity to grow and succeed throughout their careers within an organization-more quickly and effectively than their peer groups do." That's the basic anatomy ofa high potential. Gaining mem bership in this elite group starts with three essential elements. Deliver strong results-credibly. Making your numbers is important, but it isn't enough. You'll never get on a high-poten tial list if you don 't pe rform with distinction or if your results com e at the expe nse of someone else. Competence is th e baseline quality for high performance. But you also need to prove your credibility. That means building trust and confidence among your colleagues and , thereby, influencing a wide array ofstakeholders. Look at Jackie Goodwin, a bank execut ive cited by her HR department as a high potential. Jackie started out in the insurance division but wanted to switch to banking, wh ich she perceived as a career path with more room for growth. Her general ma nagement skills were highly regarded, and she had a proven track record in fina ncial services wit hin insura nce. The banking side's desi re for new blood and a lack of succession planning in the region positioned her well as an outsider. Indeed, her record was as stro ng - if n ot st ronger-than that of t he insiders.

Anatomy ofa Hi~h Potential High potentials always deliver strong results, master new types of expertise, and recognize that behavior counts. But it's their intangible x factors that truly distinguish them from the pac k.

THE FOUR X FACTORS OF HIGH POTENTIALS

1

2 3

4

Drive to excel Catalytic learning capability Enterprising spirit Dynamic sensors

When Jackie was offered a stretch ass ignment in the banking division - a promotion to vice president and regional operating officer in Germany, the bank's second largest European operation -she accepted it, even though the odds were agai nst her. Nobody there had heard of her, and she knew little about banking. What's mo re, she'd been forced on the regional president, who wanted someone with experience. Her biggest challenge was to gain cred o ibility. The German staff was accustomed to ru n ning its own show, so Jackie fi gured she'd fail if she couldn't get the team on her side. Jackie resolved to make helpin g her new colleagues a priority. In her first three weeks, she met with dozens of managers and openly acknowledged that she faced a stee p learning curve. She also focused on achieving sma ll wins on issues that had lon g been tho rns in their sides. For example, she went ou t of her way to streamline the process for opening new accounts. As for her skeptical boss, she aimed to take as much off his plate as possible. She would ask, "What time-consuming tasks would you liketo see addressed within 90days?"Then she'd get right to work. Forinstance, he disliked confrontation, so Jackie tackled issues with potential for conflict, such as redesigning plan ning processes and resolvingdecision rights. She gained a reputation as a problem solver, and her influence grew steadily. Today, Jackie is the head of all com mercial lending for the bank and is st illconsidered a rising star. Master new types of e xpertise. Early in your career, gett ing noticed is all abo ut mastering the technical expertise that the job requires. As you progress, you need to broaden that expertise. You start by managing an employee or a small group, and then mo ve on to larger teams and posit ions (for instance, at corporate headquarters) that require you to exercise influence despite having limited formal au thority. For examp le, in se nior roles technical excellence might fade in value relative to strategicthinking and motivational skills. At a cer tain point , you will face the challenge of letting go as much as the challenge of adding on. Don't aspire, forexample, to be the best engineer and the bes t design team leade r at the same time. Fo r some, such lessons a re learned the hard way. One exceptionally talented software engineer, whom we'll call Luke, had won many accolades duro ing a relat ively short career. Confident in his poten tial, Luke's managers put him in charge ofa team that was creati nga product extension expected to att ract

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HBR.ORG

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Nearly all companies identify their high-pote ntial managers. Processes fo r developing lists of high potentials vary, but t he rising sta rs who make the grade are remar kably similar in their core characteristics and behaviors. In a sense, they share a basic anatomy.

a whole new category of users. Luke was well liked and happily took on the challenge, but he failed to recognize that technical skill alone wouldn't suffice. After several missed deadlines, company executives created a face-saving, se nior-level "expert" post for him. Meanwhile, they put another technicallyskilled employee, whoalso had project-management expertise, in charge. Luke, no longer a high potential, went on to have a fairly distinguished career as a tech nical expert, but not in an enterprise leadership role. Recognize that behavior counts, Although your perform ance gets you noticed and promoted early in your career, you r be havio r is what keeps you on the radar as a high potential. Ou tstanding skills never really diminish in importa nce, but they become a given as you are expected to excel in roles with broader reach. Prospective candidates for that coveted high-potential label must demonstrate a behavioral shift from "fi t and affiliation" to "role model and teacher." The rise of general manager Phil Nolan to the executive ranks of h is company, a market leader in laund ry products, was due in large part to his role- model qualities. Phil was placed in charge of the firm's troubled core product, a liqu id detergent whose sales were in a mu ltiyear downward slid e. Two high-vis ibility ma rketing managers had eac h been given a chance to rei nvigorate prod uct sales . Both had tried price-reduction tactics, to no ava iL Then it was Phil's tu rn. But, with a backgrou nd in product development rathe r than marketing, he was the dark horse candidate. Fort unately, corporate executives saw more in Phil, who had engineered a turnaround at a troubled produ ct-development group by fosteri ng cooperative relationships and teamwork. Highly trustworthy, he could engage people in very candid conversations about business challenges . As a result, he was able to get to the core of a pro blem quickly and find vi-

The constitution of a high potentiaLincludes four intangible factors: a drive to excel, a catalytic learni ng capability, an enterprising spirit, and dynamic sen sors that detect opportunities and obstacles. The best exemplars of the high· potential profile exhibit all four in spades.

Getting onto a high potent ial list is extremely desirable, but it can demand great sacrifice. And t he consequences of falli ng off the rolls after having been given the honor can be substantial and permanent.

able solutions. Phil not only was superb at motivating people, but also had a keen eye for patterns and an imp ressive strategic vision. He applied all those skills to the new assignment. Within the first year in h is new role, Phil led his team to grow product sales by 30%. In our interview wit h the company's HR executive, she emphasized Phil's ability to win people ove r: "There is hu mility to him despite the fact that he is now the public face of the bra nd. Phil helps his peers succeed rathe r than threatening them. He is a role model for the organization."

How High Potentials Are Hardwired You' re doing everyt hing right. You're delivering value and early results. You're mastering new areas of expertise as you face increasingly complex challenges. You embrace your organization's culture and values. You exude con fidence and have earned the respect ofothers. Maybe you're regularly putt ing in a 50-hour week and gett ing excellen t rev iews. Nevertheless, high-potential status remains elusive. This can be infuria ting because the real differentlators-cwhat we call the "X factors"-are somewhat intangible and usually don't show up on lists ofIea dersh ip competencies or on pe rformance review forms. Here are those factors, which can tip the scales and help you achieve and maintain that coveted high-potential rating. Half of survey respondent s said t heir t op t eams spend less th an

of the ir time developing high-pot ent ial leaders.

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ARE YOU A HIGH POTENTIAL?

You're doing everything right. You're delivering value and early results. But highpotential status remains elusive. Developing your X factors puts it in reach .

XFACTOR #1 A drive to e xcel. High potentials aren' t just high ach ie ve rs. They a re driven to succeed. Good, even very good, isn 't good enough. Not by any stretch. They are more tha n w illing to go that ex tra m ile a nd realize they may have to make sacrifices in their personal lives in order to adva nce. That does n't m ea n they a ren' t true to their values, but sheer ambi tion may lead them to make some pretty hard choices. x FACTOR #2 A c a talytic learning capability. We often think of high pote ntials as relentless learne rs, but a lot ofpeople out the re lea rn continually yet lack an action or results orienta tion. The high potentials we have come across possess what we call a "catalytic learn ing capability." They have the capacity to scan for new ideas, t he cognitive capability to absorb the m, and the common sense to translate that new lea rn ing into prod uctive actio n for their c ustomers a nd their orga nizations. x FACTOR #3 An enterprising spirit. High potentials are always searching for prod uctive ways to blaze new paths. They are ex plorers and, as such, take on the challenges ofleavingtheir ca reer comfort zones periodically in ordertoadvance.1t might mean a risky move-a tricky international assignment, for insta nce, or a cross-unit s hift tha t demands an entirely new set of skills . Given high potentia ls' drive to succeed, you m ight think they'd be reluctant to take such a chance. But most seem to fi nd that the adva ntages-the excitement a nd opportunity -outweigh the risks. x FACTOR #4 Dynamic sensors. Being driven to excel and having an e nterprising spirit, combined wit h the urge to fi nd new approac hes, could actually

become a recipe for career disaster. High pote nt ials ca n get derailed for a numbe r of reasons. They may, for instance, be tempted to impulsively accept what seems like a hot o pportunity, only to find that it's a break (not a stretch) assignment or tha t the re's no long-term ca reer payoff. Ano ther possibilit y of derailment comes from a desire to please. High potentials may avoid o pen disagree ment with the boss or resist giving honest, potentially disappointing feed ba ck to a peer. Successful high pote ntials have wellt uned radar tha t puts a highe r premiu m on qualit y results. Beyond judgment, high potentials possess what we ca ll "dynamic sensors," which e na ble the m to skirt these risks, even if just barely. They have a feel for timing, a n ability to quickly read situations, a nd a nose for opportunity. Their e nterprising spirit might otherwise lead them to make foolish decisions, but these sensors help them decide, for example, when to pursue something and whe n to pull back. High potentials have a knack for being in the right place at the righ t time.

Anatomy of an X Factor Exemplar One of the many high potentials we met was Vineet Kapoo r, described as a ris ing star by his bosses at Swiss medical device company Synthes. This more than $3 billion business manufactures and ma rkets impla nts and blomatertals used in surgery and regeneration ofthe skeleton and soft tissues. In school, long before ending u p at Synthes, vtneet inte nded to pursue scie nce a nd had a pa ssio n for im proving the lives of people in emerging economies such as India. That basic vision remained

Should You Tell Her She's a High Potential? Whether or not a company should ma ke its list of high potentials trans parent is a n evergree n question. In our surveys of 45 company policies and in our work with fi rms during the past 15 to 20 yea rs, we have found a growing tre nd toward transparency. The percentage of compa nies that inform high potentials of t heir status has risen from 70%

about a decade ago to 85% today. Employers, we believe, are coming to see talent as a strategic resource t hat, like other types of ca pital, ca n move a round. Executives are tired of exit inte rviews in which promis ing employees say, "If I had known you had plans for me and were serious a bout following through, I would have stayed."

Nevertheless. making your list of high potentials transparent increases the pressure to do something with the peo ple who are on it . If you tell someone you view her as a future leader, you need to back that up with ta ngible progress in her professional develop ment. Otherwise, she may feel man ipulated a nd even lose motivation. In one case,

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we witnessed a near riot at a company offs ite, where a group of high pote ntials said th ey felt "played" -e-that their status was just a retention tactic, with no real plans to promote t he m. Either approach has risks: Ifyou don't make the list public, you might lose your best performers; if you opt for transpa rency. you'll heighte n t he expectation of action.

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with him, but his career took an u nexpected path. After college, to the surprise of his peers, he c hos~~ accounti ng in orde r to gain financial ex pertise that of survey respondents wo uld serve him we ll in any business career. He ac- said t hat high potentials cep ted a position with Ind ian professional services get promoted faster t han fi rm A.F. Ferguson, which had a leadi ng portfolio of other employ ees do. Self-fulfill ing prophecy or audit clients (it was eventually acqu ired by Deloitte great selection? in 2004). He then moved to Arthur Andersen (which merged wit h Ern st & Young)and eventually to KPMG in Gurgaon, India, where his then-boss was charged wit h leading the India prac tice. This move initially meant a pay cut for Vineet, but also another chance to learn about building a busi ness. Vineet recounted other intriguing opportunities that had opened up d uri ng his cons ulting career, when the Sarbanes-Oxley Act became law in the U.S. in 2002. Clients were banging down his door. Although compliance work promised han dsome compensation , it didn't match his priorities ofl earning and effecting large-scale positive change in emerging economies. So Vineet moved to Synthes, where his X factors were evident in spades. A drive to excel. A drive to succeed can, well, dr ive some people to the brink. The key is to channel the instinct. So, for instance, Vineet decided he should always think like people one level above him. That meant asking m any questions- som etimes to the co ns ternation of his peers and bosses -but he balanced his incessant questioning with an insatiable desire to deliver. Nobod y could doubt his commitment to the work and the com pany, and Vineet's ambition was not a matter of personal triumph. In fact, as country ma nager for India he crea ted a rso-pege book celebrating the cont ributions of his colleagues and h ighlighting their common values. It becam e something of a textbook for the Indian operation at Synthes, and employees found it illumina ting. In deed, it generated so much buzz that some employees who had left the company act ually ret urned because th e organ ization had bee n energized by it. Vineet was not driven primarily by a wish to get ahea d. His original aspiration was what fueled him. To th at end he wrote an Sy-page business plan that included a vision for bringing world-class ed ucat ion to all Ind ian surgeons, includ ing th ose in rem ot e areas. Synthes's CEO has said that the plan changed how the company looked at India. A catalytic learning capability. When vt nee t traveled to the United Sta tes for a Synthes strategy meeting, he stayed on longer to be a "fly on the wall" with the U.S. salespeople. During his stay, vr neet

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went with them on dozens of sales calls. Having go tten the CEO's attention with his growt h strategy, Vineet th ought the company would be able to execute it only wit h the help of more and di fferent emp loyees. He took what he'd learned from the U.S. sales sta ff to create a ne w salesperson competency profile for India- one that highlighted entrepreneurship, an att ribute he thought would be crucial for delivering on the prom ise of the Indian market. An e nt e r p r isin g spirit. For vtneet, one o f the toughest aspects of career growth was leaving his comfort zone, both professionally and personally. He tu rned down several opportunities, including one that would have required reloca ting to the United States. But he eventually took a post as directo r ofstrategic initiatives for the Asia Pacific region, a move that forced him to leave India for Singapore. To prepare him self, Vineet agreed to a year of global rotation, spending part ofhis time in the U.S.corporate office and the rest in the European head quart ers in Switzerland. He had to adapt his pe rsonal style and develop new st rategies. He knew how to lead a team as a count ry manager, but supporting other country managers in achievi ng their visions was daunting. v tneet loved running his own business an d having P&L responsibility; th e new job meant playing a support role and getting things done through influence instead of direct control. Dynamic sensors. High potentials may be resented and envied as well as admired-all of which can be a source ofstress. A true high potential understands this and st rives to reduce ani mosi ty. v tneet certainly cared about how he was perceived. When he was first offered the country manager lead for India, at age 29, he considered turning it dow n because he thought others might see him as too young or inexperienced. Tha t awareness of others' perceptions is a de fi ning attribute of a high potential.

Developing Your X Factors The X factors of high potentials not only don't show up in leadership competency models, but also are difficult to teach and learn, particularly in a classroom setting. Nevert heless, you can boost your odds of developi ng your X facto rs. Becoming aware of where you're falli ng short is the first step. For ins tance, if you find yourself repeatedly ge tting blindsided by events, chances are your dynamic sensors aren't ve ry strong. Some people are more attuned to their environ men t than others, bu t you can learn to improve your rada r by June 2010 Harvard Business Review 83

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ARE YOU A HIGH POTENTIAL?

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As you cultivate your pipeline of high pote ntials, follow these principles :

BeClear Be COOIllO.'!I-IIIO.'!teot with your peop le about the skills and behaviors that your organ ization needs for th e future - and about why these characteristics will matter.

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in how you develop ta lent. Avoid adopting a "development for all" mentality when times are good but then making deep cuts when times are tight .

What companies look for is a manager who can move from being an acknowledged value creator to being a game changer.

about the next generation. That marketing manager from Shanghai who doesn't quite fit your mold might be just the talent you need to win in t he fut ure.

Marta was an extreme ly bright h igh -potential taking simple measures such as listening to others more carefully, observing their reactions to what you manager with superb technical skills. But she let her say, and refreshing your network of relationshi ps so smarts get in the way. She d idn't want to "waste her that it bette r attunes you to the new businesses and time" talking with ot her senior stakeholders whose markets your company is pursuing. clients needed new tech nology applicat ions. She Catalytic learning requi res an interest in acting, "knew the right answer" regardless of whether it met not just learning. Learning without actually chang. clients' needs and expectations. Her dynamic sening your behavior is an opportunity wasted. It may sors and catalytic learning capability were nowhere be difficult to develo p more drive or an enterprising to be fou nd. She was intelligent but not wise, and spirit, but with reflection you can begin to be more every effort at coaching her failed. Marta was too proactive or take a few more risks. This all speaks to valuable to be fi red, but she was removed from the the importance of investing time and energy in self- succession track, which in the end cost her a possible reflection. You must also recognize the value of seek- multimillion-dollar payout. She directed the project ing advice from a coach or mentor- and of figuring from a techn ical sta nd point, but her career essenout where an adviser's help ends and your indepen - tially stalled. Being singled out for extra developmental att en dence begins. tio n also can entail sacrifices in your personal life. High-pctential Status Some people love to change jobs often, but for others that creates an enormous amount of stress, not Has Its Downsides It's great to be recogn ized for what you can do and to mention tough family-re lated and other choices. how you might con tribute to your company's future, Peop le 's expecta tions of you are hig h, and colbut high-potential sta tus comes at a price. For start- leagues who aren't on the list may secretly, perhaps ers, there's no tenure . People can -and do -fall off unconsciously, want you to falter, or even resent you the list, and some remove themselves volunta rily or enough to hope you fall from grace. by default because they do n't have the time or the passion for the journey. Virtually all compa nies we GETTING ONa high-potential Jist can be a significant surveyed indicated that remaining a high potential growth opportunity, so it's not our intention to disis not guaranteed, and we found that anywhere from courage grea t managers fro m aiming for it. How5% to 20% drop off the rolls each year, whether by ever, you need to figure ou t not just how to get on the list , but why you want to in the fi rst place. And choice or not. Among the reasons for losing a spot on the high - that mea ns soul-searching. Are you ready for h igh potential list are ma king a poor transition into a new po tential status? Is it what you rea lly want? If so, role, dimi nished performance two years in a row, be- the rewards ofobtaining it can be huge; if'not, then focus on your passions in other ways . Whatever havior that's out of line with the company's culture and values, and a significant visible failure. A dra- your answer, don't forget : Performance always matic fall from grace that sta nds out in our research counts; you r behavior matters more and more involved an executive, whom we' ll call Marta, who as you grow; and those X factors are your secret was in line for the position of chieftechnology officer weapons. I::' HBR Reprint R1006E at a leading fi nancial services firm.

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------- ~----,-,---,----------,----",-------Paul Leinwand (paul.

Cesare Mainardi (cesare.

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[email protected]) is managing director of aoce & Company's North American business and is a member of the firm's executive

partner at aooz & Company in Chicago.

committee.

Is your company disciplined enough to focus intensely on what it does best? by Paul Leinwand and Cesare Mainardi ustainable, superior re t urns accrue to co mpanies that focus on what t hey do best. The t rut h is that simple, and yet it's incredi bly hard to internalize. It is the Tare com pany indeed that focuses

on "what we do better tha n anyone" in making every operating decision across every business unit and product line. Rarer still is the company that has aligned its differe ntia ting inte rnal capabilities wit h the right external market position. Wecall such companies "coherent." Most companies don't pass the coherence test because they pay too m uch attention to external positioning and not enough to internal capabilities. They succumb to intense pressure for to p-line growth and chase business in markets where they don't have the capa bilities to sustain success. Their growth emanates not fro m the core but fro m the

acquisition ofapparent "adjacencies" that are often anything but and the exploration of "blue oceans" that turn out to be unswimmab le. Even in co ntraction mode, when companies hunker down and try to wring more ou t of execu tio n, most st rategies fail to pay sufficient attention to capabilities. Costcutting, for example, is usually an ac ross-the-board exercise, rather than a considered reallocation of resources. In fact, few st rategies explicitly men tion capabilities at all. Instead, strategy development follows the well-wo rn path from the market back to the boardroom. We're not suggesting that companies disrega rd market signals; all strategy is set within that vital context. We are suggesting, however, that com panies start from the opposite direction, figuring out what they' re really good at and then developing those capabilities (three to six at most) until they're best-in-class and interlocking. From there, strategy becomes a ma tter of aligning that distinctive capabilities system wit h the right marketplace opportunities- and the market rewa rds them wit h outsize June 2010 Harvard BusinessReview 87

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THE COHERENCE PREMIUM

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Acoherent company focuses on what it does best in making every returns. Wecall this the "coherence premium," and decision across every business. It derives its we've measured it. Let's look at Wal-Mart to see how a capabilities- "right to win" by aligning: driven strategy works. Most attribute the chain's success to its impressive logistics operations or its ability to get vendors to fall in line. But havi ng one or two WAY TO PLAY superior capabilities is not enough. What really un - EXECUTIVES. MANAGERS. AND EMPLoYEES AT EVERY LEVEL derliesWal-Mart's competitive advantage is a system UN DERSTAN D THE WAY THE COMPANY CREATES VALUE FOR of mutually reinforcing capabilities that lowers total CUSTOMERS valu e chain cost in a differentiated way. The giant discou nt retailer achieves maximum efficiency by integrating four capabilities: aggressive vendor management, expert poin t-of-sale data analytics, su perior logistics, and rigorous working-capital management. Every one of these capab ilities reinforces the others and supports the compa ny's stra tegic purpose to deliver "everyday low prices" to consumers. It's a capabilities system rooted in superior information. Because of its world-class poi nt-of-sale analytics, Wal-Mart can continually tailor its product assortment to local consumption trends and feed vendors bett er information than the y have themselves. That, in turn, increases the compa ny's leverage wit h suppliers and allows it to move inventory and ma nage CAPABILITIES working capital with extraordinary efficiency. Every SYSTEM THE ENGINE OF VALUE product and service it sells fits with its "way to play;' CREATION IS THE SYSTE M OF THREE TO or market ap proach, and capabilities system. Wal- SIX CAPAIlI UTIES THAT Al lOW COMPANIES TO Mart does not sell big-ticket items like furniture or DELIVER THEIR VALUE PROPOSITION large appliances, for which its capabilities would not create a cost advantage. And you won't fi nd a WalMart on Fifth Avenue or the Champs -Elysees. PRODUCT & It's textbook capabilities coherence. SERVICE FIT ALL PRODUCTS AND SE RVICES LEVERAGE Tli E SAME CAPAIlILITIES SYSTEM

The Power of Coherence Acapability issomething you do wellthat customers value and competitors can't beat. It's more tha n an activity or a fun ction: It's the interconnection ofpeople, knowledge, IT, tools, and processes that enable a company to outexecut e rivals on some important measure. It might be the ability to secure shelfspace in particular types ofstores, or to use customer-data mining to develop new products, or to bundle products and services to meet customers' shifting needs over time. We are ha rdly the fi rst to write about the importance of capabilities to strategy. C.K. Prahalad and Gary Hamel's seminal article, "The Core Competence of the Corporation" (HBR May 1990), was the fi rst in a long line of articles and books to explore this idea. But a capability in isolation is not enough to produce the coherence premium. We believe that

a capabilities system creates value in a differentiated way. A company becomes cohe rent only wh en its capab ilities system is consciously chosen and implemented to su pport a focused strategic purpose, or way to play, and is aligned with the right product and service portfolio. It can provide clear answers to these questions: How are we going to face the market? Successful companies have a clea r understanding of how they create value for customers. Ways to play are broad eno ugh to allow flexibility and growth and narrow enough to focus strategy and decisio n ma king. They include being the innovator, the low-cost provider, the value chain op timizer, th e customer service king, and so forth. What capabilities do we need? The engine of value creation is a system of three to six capabilities that together allow a company to deliver its value proposition effectively. When firms cultivate a system of mutually reinforcing capabilities, their competitive advan tage becom es that much more powerful. What are we going to sell, and to whom? Coherent companies bu ild their product and service portfolios so that every offering is aligned with the capabilities system and the way to p lay. Prod ucts that require different capabilities are surgi cally removed from the mix. The external market lscontlnu ally scanned for new opportu nities that leverage the capabilities system. Coherent companies build deep, scalable expertise injust a fewareas and align their strategy and dayto-da y decision making to take advantage ofthem .

pfizer: A Case Study The consumer health care business ofPfizer isa good example of capabilities coherence. After its bac kto- back acquisitions ofWamer-Lambert and Pharmacia in the early 2000s, the pharmaceutical giant owned several leading consumer products: Listerine, Benadryl, Sudafed , Nicorette, and Rogaine. In 2002, pfizer set the goal of becoming the leader in global consumer health care and applied a capabilities lens to the business. Choosing the way to play. First Pfi zer's lead ers examined the market dynamics to determine how the company would compete. The market was highly fragmented (no player enjoyed more than a 5%share globally) and plagued by low overallgrowth. The so-called Rx-OTCswitch- whereby prescription

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Idea in Brief The pressure to grow the top line is so inte nse that most companies pay too much attention to expansion and not enough to building differentiated capabilit ies .

Afew companies start from the opposite direction: They figure out what they're really good at, then develop those capabilit ies (three to six at most) until they're best-inclass and interlocking.

For t hem, strategy becomes a matter of aligning what they do well with the right marketplace opportunitiesand the market rewards them with susta ined superior returns.

The engine of value creation is a system of three to six capabilities that together allow a company to compete in a differentiated way. drugs become candidates for over-the-counter salewas one key avenue of growt h, but it was severely constrained by tight cou nt ry -by-country regulation and mass retailers that had begun introducing private-label alte rnat ives to brand-name drugs. Still, the market was expected to grow as a result of global demographic fac to rs-aging population s, rising incom e levels, and faster-paced lifestyles- that increased consumers' tendency to self-medicate. The breakthrough in determining the way to play was Pfizer's realization that demonstrable he alth benefits mattered more than category strength in driving sales. If you could make a de fensible marketing claim tha t your product was better-o'Benad ryl is 54% more effective than the leadi ng prescription allergy medicine" or "Listerine reduces plaque significantly more th an brus hing or flossing alone "-you had a lice nse to thrive worldwide. In ot her words, consumer health care was more of a health care business than a consumer products busin ess, makingit a natural fit for Pfizer. Evaluat ing the capabilitie s system. On the basis of this ins ight , Pfizer chose a distinctive approach: to focus on innovat ion that wo uld lead to defensible therapeutic claims and the ability to scale up a few brands worldwide. To achieve success, pfizer identifi ed a core system of six interlocking capabilities: • Science-based innovation around formulations • Ability to influence regulatory ma nagement and government policy • New-product development through the Rx-OTC switch as well as through licensing and acquisition

• Claims-based marke ting featuring a demonstrable health benefit • Chan nel management in both gen eral trade stores and pharm acies (parti cularly produ ct positioning, pricing, and promotion) • Focused portfolio management ofaggressive and moderate growth brands and geographies Each of these capabilities was important to carrying out Pfizer 's strategy, but it was the way they worked togeth er that was com petitively differentiating. If PFIzer was going to bu ild an unbeatable franchise in claims-based mar keting, it needed sciencebased innovation and robust Rx·OTC switching capabilities to ensure a supply of formulat ions about which to make those claims. It needed the ability to get the claims approved by regulators and translated into term s consumers around th e world could u nderstand when they made the ir purchase decisions. And it needed focused portfolio manage ment of those few brands that prom ised blockbust er results.

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THE COHERENCE PREMIUM

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How do you ca pt ure the coherence premium? The first st ep is to determine just how in coherent you are. You may be sitting in a company th at holds a range of market positions a nd main tains disparate ca pa bilities syst ems, wond ering where t o begin. This simple diagn osti c will help you d eterm ine t he areas where cohe rence is embedde d in your o rganizat ion-and whe re you may be going off th e rails.

'-- - - - - - - - - - - - - - - - - Assessing product fit . Having made considered choices about how pfizer would compete and with what capabil ities, execut ives recognized that some products no longer fit the strategy. Thanks largely to the Warne r-Lam bert acquisition, the consumer health care portfolio had migrated away from OTCdrugs and into personal care (Schick razors and shaving cream) and confectionary (Chiclets, Trident, and Bubblicious gums)-categories that leveraged distinctly different capability sets. Personal care requ ires specific innovation in skin tech nologies, keeping up with fashion trends, and the ability to design attractive packaging. Confectionery requires rapid cycle flavor innovation and the ability to comma nd space at the front of the store near the cash register. If pfizer no longer was going to invest in those capabilit ies, it needed to divest those products, or risk strategic incoherence. In 2003, Pfi zer sold the confectionary products business to Cadbury Schweppes and t he SchickWilkinson Sword we t-shave business to Energizer Hold ings. These divestitures enab led Pfizer to focus even more attention and resources on growing its global health care brands (Listerine, Zyrtec, and Niccre tte) at above-market rates and acqu iring new bran ds that could be differentiated based on claims, such as Purell ("Purell kills 99.99%of diseasecausing germs within seconds"). By 20 06, Pfizer Consu mer Health care h ad grown its bus iness to nearly $4 billion in an nual sales and was a pre mier company in its category, delivering a rate of grow th double the industry average. That year pfizer redeemed the value built by PCH by selling the business to Johnson & Johnson for an u nprecedented $16.6 billion, or 20 .6 times EBITDA(com pared with average mul tiples of IS at the time).

The Payoff So, do coherent companies have superior financial performance? We examined a nu mber of industries and mapped the level of capabilities cohe rence of the majo r players against their operating ma rgins over the past five years. (See the exhibit "Coherence and Profi tability in the Consumer Packaged Goods Industry"). The dat a show that coherence in capabilities correlates strongly with greater profitability (as measured by EBIT ma rgin, or earn ings before interest and taxes d ivided by net revenue, over a five-year period). This is particularly true in mature, post-consolidation markets . go Harvard Business Rev iew June 2010 www.WorldMags.net & www.Journal-Plaza.net

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The winners. In the consumer packaged goods industry, Coca-Cola-the most profitable companystands out because of its focus on beverage creation, brand proposition, and global consumer insight . This very simple but powerful capabilities system enables it to exert tremendous strength in beverage segments around the world . With the exception of ce rtain ill-fat ed forays (Colu mbia Pictures, for instance), Coke has been ru thless in its focu s on beverages that benefit from this capabilities system. Its ability to tap into co ns umer preferences allows it to create an unr ivaled emotional brand con nection with customers everywhere. Wrigley, now part ofMars, Is also highly profitable relative to the industry. It, too, hews to what it does best-constan t flavor innovation and securing shelf space at the checkout counter. In fact, Mars'sacquisition ofWrigleyis an exampleofhow, when managed well, capabilit ies not only drive value for a po rtfolio but also defi ne its com position . Mars's decision to leave Wrigley intact as a bus iness indicates that this acquisition was not motivated by scale alone-in fact. Mars has transferred its nonchocolate brands, Starburs t and Skittles, to Wrigley's portfolio to further co nsoli date and leverage these differentiating capabilities. Mars knows chocolate. Wrigley knows gums and candy. The losers. ConAgra Foods, at the other end of the spectru m, created incoherence through an un focused acquisition binge in the 1990s. In the mid2000s, its po rt folio spanned three segments that drew on distinctly different capability sets: Prepared foods, which required superior me rcha ndisi ng and supply chain ca pabilities; snacks, which re lied on st rong product innovation; and staples such as flour and processed meat, whic h depended on efficient sourcing and production. Not surprisingly, ConAgra struggled with subpar performance in the years we studied: 2002 to 2007. It has since shed some noncore brands in a move towa rd coherence and has been rewarded with more robust financial performance in the past year. Sara Lee's operations we re similarly u nfocused. Its diverse product po rtfolio as recently as five years ago encompassed produc ts ranging from bakery goods to Hanes underwear to Kiwi shoe polis h. As the exh ibit shows, its fi nancial performance was at the bottom of the pack. Sara Lee has u nde rtake n three major restruc tu rtngs in the past 10 years and has be gun to tap into the coherence premium, having divested many noncore bra nds.

The co he rence we've measured creates value in four ways. First, it strengthens a company's competitive advantage. Companies that focus on their capabilities, day in and day out, con tin ually improve them. Employees become more skilled and systems grow m ore adept, enabling companies to consisten tly outexecute th eir riva ls and capture the topline growth in the ir industries. Second, coherence focuses strategic investment on what matt ers. Companies make better organic growth decisions and pursue acquisitions that are in keeping with their capabilit ies. It also reduces waste. Coherent companies direc t capital, time, and talent

Coherence and Profitability in the Consumer Packaged Goods Industry companies that align a way to play, an integrated capabilities syste m, and the right prod ucts and services create superior value, and we've measured th is "coherence premium" in a range of industries. EalT Margin 2 0 0 3-20 07

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Our approach to sco ring coherence is similar across indust ries and can be distilled into three essent ial steps. First, we de fine t he seg ments each company serves. Next , we ident ify t he capabilities t hat drive value for the compa ny in each seg ment . Finally, we determi ne the numbe r of common ca pabilit ies across all the segments t he company serves . This sco re is mapped against EBIT margin to determine the cohere nce premium. June 2.010 Harvard Business Review 9'

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THE COHERENCE PREMIUM

Case St udy When Expansion Is the Enemy of Coherence

When companies focus on g rowth to t he exclusion of everythi ng else, t hey unavoidably end up competing in territo ry where they do n't have t he capabilit ies to wi n, Consider th is cautionary tale of a company lured by th e siren song of adjacency. Back in 1979, executives at AnheuserBusch reasoned t hat beer and sa lty snacks go togetherthey're purchased and consumed at the same time, they both use yeast, and t hey both rely on strong marketing and distri bution. The company launched Eagle Snacks that year. Then, in the late 1980s, execut ives decided to expand beyond pretzels and pea nuts

in planes and bars and started selling chips as well to grocery and convenience stores. Snack foods were an attractive adjacent market valued at $11 billion, and Anheuser-Busch was roILing in cash . But although the categories of beer and snac k foods appeared to draw on similar ca pabilit ies, there were important differences t hat Anheuser did not anticipate. In particular, t he cate gories required very different distri-

burien capabilities. Alcohol is heavily regulated; snack foods are not . Snacks and bee r are stocked in different parts of t he store, they enter the store t hrough different doors, and t hey're orde red by diffe rent buyers. Anheuser was not used to buying shelf or display space for beer, but it had to for snacks. Further increasing complexity, snacks and beer have fun damentally differe nt weight and volume characte ristics. For these reasons , snack distri bution proved far more complicated and cost ly t han executives had imagined. Making matters worse, the bee r maker had picked the

to those activities, products, and businesses th at will ex tend their lead. They don't invest in making accounts payable world- class. They don't fund R&D projects that won't enhance their posit ion. And they don't overspend on marketing campaigns that won 't move the needle on sales. Third, cohe rence prod uces efficiencies of scale. Companies can spend more wisely and grow more easily when they deploy the same capabilities across a larger array ofproducts and services-in fact, these com panies ca n apply the capabilities to businesses that would not normally be able to afford them. Finally, cohere nce crea tes alignme nt between strategic intent an d day-to-da y decision making. In a m essy, confusing world, cohere nt companies exec ute better and faster because eve ryone in th e organization understands wha t 's important.

The Journey to Coherence Give n th e na tural tenden cy of organi zations to devolve into incoherence, it takes extraordinary leadership to pursue a capabilities-driven strategy. Focusing on one way to compete and a system of differentiating, mutually reinforcing capabilities often requires hard choices, includ ing divesting busi nesses, streamlining n onessential fu nctions, and paring product and service lines. It means resisting the temptation to leap into a hot new market where your capabilities system can't help you or to pursue (especially in boom times) easy profits at the expense of strategic focus. 92

wrong market to play in as an amateur. It was going up against the formidab le Fritol ay, the King Kong of snack foods. When Eagle Snacks started making incursions into FritO-lay's stro nghold in stores, t he hammer came down. Frito -lay mobilized its world-class capabilities system in flavor innovation, reta il coverage, and IT-enhanced merchandising, launching an array of new prod ucts and slashing prices. Eagle Snacks could not compete. Its share of market never topped 6% , whereas Frito -lay's increased fro m 4 0% to 50%.

We've seen su ch leadership in many com pany sit uations. After P&G stumbled badly in th e late 199 0S, for example, the board gave A.G. Latley license to tra nsform the sp rawling consumer goods giant. He accomplished that largely by recasting the company's way to play around open innovation and by di vesting assets that did not draw on P&G's distinctive capabilities system. When th e bottom dro pped out of the tobacco business in the wake of the U.S. gove rnment's 1998 Tobacco Master Settlement Agreement , R.J. Reynolds's leadership team responded by appl yinga capabilities-driven focus to the company's retail merchandising' removing $1 billion from its operat ing costs. Most frequently, co mpa nies establish pocke ts of coherence, as Pfizer did. A division can often be sheltered from external pressures and scrutiny; a divisional leader may fi nd it easier to stay focuse d on a single way to com pete. Cohe rence around capabilities not only sha pes the lead ership agenda;it enables leadership. It aligns the organization at every level and gives employees the tools to make the right decisions every day. The dean and unclutt ered ideal we describe- th e company with an aligned strategy, ca pabilities sys tem, and product and ser vice portfolio-may seem like an impossibly remote destinat ion. But there is value in the jou rney. Eve ry tra nsaction, every R&D decision, every management choice is an opportunity to take a ste p forward rath er than a step back. I::' HBR Reprint R1006F

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------ .J~L-,-,_____--__=c___,_,,_____,_____,_____------------Gregory Unruh (gregory

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bird School of Global Management and the author of Earth, Inc. (Harvard Business Press , 2010 ).

Richard Ettenson (richard.

ettenson@thunderbird.

edu) is an associate professor and a Thelma H. Kieckhefer research fellow in global brand marketiog at Thunderbird.

Three smart paths to developing sustainable products by Gregory Unruh and Richard Ettenson

in 1987, Clorox's Brita water filter seized a leadership position among pitcher filtration systems, and by 2002 it controlled 70% of the market. But over the next SOON AFTER ITS LAUN CH,

five years, as th e market contracted , Brita's share declined . Management's patience with t he brand soon wore thin , and in May 200 7 Clorox CEO Don Knauss told shareho lders that Brita had two years to improve or it wo u ld be sold off. "When I got on boar d ," Knauss reme mb e rs, " t he question was, How qu icklycan we sell this thing?" Then came a remarkable turn: Brita recovered its momentum within months, achieving dou ble-digit 94 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

growth and lead ing the brand back with a vengeance. How did its managers do it? By going green, as we'll detail below. That strategy would n't have been obv ious 10 years ago. Bu t tha nks to aggressive leadership by some of the world's biggest compantes-wat-Mart, GE, and DuPont among them-green growth has risen to t he top o f the agenda for many businesses . From 2007 to 2009 eco-friendly product lau n ch es incre ased by more th an 500%. Arecent IBMsurvey found that two-thirds of executives see sustainability as a revenue driver, and half of them expect green initiatives to confer

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GROWING GREEN: THREE SMA RT PATHS TO DEVELOPING SUSTA I N A BLE PRODU CTS

competitive advantage. This dramatic shift in corporate mind-set and practices over the past decade reflects a growing awareness that environmental respo nsibility can be a platform for both growth and differentiation . Nonetheless, the best approach to achieving green growth isn't always clear. This article is for executives who believe that developing green products makes sense for their organization and need to determine the best pat h forward. We willintroduce and desc ribe th ree broad strategies-accentuate, acquire, and architect-that companies can use to align their green goals with their capabil ities. These strategies emerged from 10 in-de pth case st udies of consumer prod uct and industrial companies tha t were moving into the green space; we validated the stud ies in discussions with doze ns ofsenior and midlevel sustainability executives. The framework now plays a central role in the core execu tive MBAcourse offerings in sustainable business strategy and in the executive education programs at Thunderbird SchoolofGlobal Management. As we'll see, green product development brings with it unique cult ural, operational, and execution challenges. BEST PRACTICES

Who accentuates well? SUPPLY CHAIN Nike requires that its leather supplie" not source from clear-cut Amazon forests. MANUFACTURING Frito -Lay installed solar panels on its SunChips factory. PRODUCT csx markets rail as the most environmentally friendly option for moving freight. PACKAGING Sara Le e's modified packaging for Hillshire Farm has resulted in goo fewer truck trips a year. MARKETING COMMUNICATIONS Stihl points out that its trimmers and blowers have emission levels lower than those required by the EPA.

PATH # 1

Accentuate An accentuate strategy involves playing up existing or latent green att ributes in your current portfolio. Of the th ree strategies, it's the most straightforward to craft and implement and thus is a good place to start. Some companies find it easy to accentuate. For example, Church & Dwight's Arm & Hammer baking soda has att ributes that were just waiting to be leveraged. As green com petitors emerged, and as customers demanded more environmentally friendly choices, Arm & Hammer's managers emphasized its green credentials, positioning the brand as "the #1environmentally sensible alternative for cleaning and deodorizing" and "committed to the environment since 1846." Other com panies may have to work harder than Church & Dwight d id, but they can still harvest lowhanging green fruit. Consider how Brita repositioned its water fi lters. A decade ago Brita's sales were siphoned off by the rising popularity of bottled water, wh ich exploded into a billion-dollar busin ess. But water bottlers attracted loud critics such as the World Wide Fund for Nature and Corporate Accountability International, which condemned them for clogging

landfills with plastic and deceptively advertising their product as better tas ting and healt hier than tap wate r. Brita's ma nagers were quick to see a n opportunity. Company research showed that replaci ng bottled wa ter with Brita systems could potentially keep million s of bottles a year out of landfills. To capitalize on this benefit, the managers pursued an integrated cross-media com munications strategy to tout Brita's green attributes, educate consumers about bottle waste, and encourage a swi tch to greener alternatives. As part of this strategy, the compa ny lau nched FilterForGood, a website tha t invites visitors to pledge that they will reduce plastic waste by SWitching to reusable bottles. Adevice on the site graphically updates the tally of bo ttles saved. Brita's ma nagers ensured that the media picked u p on FilterForGood - for example. by arranging a partnersh ip with NBC's television show The Biggest Loser. Within a year the company's water pitcher sales jumped a robust 23%, com pared with just 2% for the category overall. Brita's impressive success came in part becau se it did not overreach in its susta inability claims. Compa nies that decide to pursue an accentuate strategy would be wise to follow its lead. Activists and environmental experts will not hesitate to point out gree nwash ing or other undesirable corporate behavior when they see it. Consider the experience of Arm & Hammer. Promoting the environmentally friendly attributes ofthe product was easy, but the company overlooked a major liability: It used ani mal testing. Activists took to the blogosphere and called on customers to switch to the cruelty-free and equally green Bob's Red Mill baking soda. Although such complaints won't necessarily reach or resonate with all your customers, anticipating and heading off criticism will strengthen your overall greening efforts. Transparency in claims and aut henticity in execution are important elements in the long-term success ofany green strategy. The broader your brand portfolio. of course, the more exposed you may be to activist and consumer backlash. Most compan ies lack a green heritage ; their products were developed before sustai nability was a concern. So they must carefully gauge how the res t of their portfolio will look by comparison with the accent uated product. Touting the green attributes of some products inevitably prompts the response "Great! But what about the res t of your offerings?" Abig gulf between your green and non-

96 Hafllard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

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Idea in Brief Gree n growt h is at t he top of many leaders' agendas, but th e way forward is rarely clear. Here are th ree broad product st rat egies t hat ca n align your gree n goals wit h your capabilit ies,

An occentuote strategy involves highlighting existing green attributes in your company's portfolio. An alternative is to acquire a green brand . Ifyou have substantial productdevelopment skills and assets . you can architect new offerings- build t hem from scratch. wh ich strategy is best depends on how "greenabte" your portfolio

is and how advanc ed your green prod uct development capabilities are . For any of these paths, unde rstand ing customers' expectations and competitors' capabilities, and aligning offe rings an d messaging to prevent charges of g reen washing, are essential to success.

ANY OF THE THRE E

HIGH GREEN DEVElOPM ENT CAPABILITIES

Beware: Activists will not hesitate to point out greenwashing when they see it. green products can u ndermine your legitimate sustainability claims. Consider BP's troubled "Beyond Petroleum" rebranding effort. The company's Helios logo and the prominent solar panels on its service stations could not hide the fact that more than 90% of its revenues came from oil. Fortune hig hlighted the disparity when it wrote, "Here's a novel advertising strategypitch your least impor tan t product and ignore your most important one." To avoid negative comme ntary like this, make sure your strategy aligns wit h customers' perceptions. Brita did that well. Its managers were carefu l in their initial communications not to claim that their brand was a "green product " made by a "green com pany." They recognized that Brita filter cartridges had to be replaced every few mo nths and were not being recycled. Because the FilterForGood campaign was predicated on eliminating that kind of was te, the managers realized that they needed a recycling solution for the cartridges. They forged an app roach in collaboration with Preserve, whic h manufactures products using recycled plastic, and with Whole Foods Market to provide a solution that was simple for customers and highly visible. "The fi lter recycling p rogram builds on the success of Brita's FilterForGood campaign," the company an nou nced -and went o n to sha re credi t with its customers: "Now Brita users are making another positive imp act by recycling Brita pitche r fi lters." By accentuating the product's green attributes and eliminating or mitigating its nongree n ele me nts , Brita enhanced the credibility of its sustainabilit y efforts.

PATH # 2

Acquire

Ifyour portfolio has no obvious candidates for accen.f tuation, a good alternative is to buy someone else's gree n brand. Many high-pro file green acquisitio ns have been made since 2000, including The Body Shop by L'Oreal, Ben & Jerry's by Unilever, and Tom's of Maine by Colgate-Palmolive. In such deals the buyer's channel and distribution capabilities are often expected to substantially broaden the green brand's customer base. Within a year after Unileveracquired Be n & Jerr y's, for example, sales ha d increased by 70% an d Ben & Jerry's had d isplaced Haagen Dazs as the leading premium ice cream brand. The prospect of such robust growth is of course appealing, but managers who seek another company's green assets should be mindful of two considerations: Culture clash and strategic fit. Any merger OT acquisition can stumble when company cultures collide. In green acquisitions that have idealistic, iconoclasticfounders and countercultural workforces, the problem is exacerbated. Consider Groupe Danone's takeover of Stonyfield Farm. When shareholders forced Stonyfield's founder, Gary Hirshberg, to sell, he spent two years compiling a list of conditions including rules abo ut worker pro tec tion and environmental restrictions on business operations-to ensure that the company's social mission would be preserved . It took another two years to close the deal. By con trast, Unilever got around some but not all of the "fo under challenges" at Ben & Jerry's by com pleting what was in effect a hostile buyout of the brand . This app roach caused many activists to cry foul and deprived Unilever ofthe whole hearted

BEST PRACTIC~ES ~l

WHo acquires well? NEGOTIATIONS Colgate approached Tom's of Maine with trust and respect, viewing the deal as a partnership rather than a takeover. COMPANY INDEPENDENCE Unilever agreed to keep Ben & J e rry's separate from its U.S. ice crea m business, wit h a n independent board of directors. INTERNAL COMMUNICATIONS Tom's of Maine a ssured employees that the acquisition would help Colgate innovate around sustainability principles. EXTERNAL COMMUNICATIONS Ajoint press release from Oanone a nd Stonyfleld highlighted the benefits to bath com pa nies aftwoway knowtedge and tatent transfer.

J une 2010 Harvard Business Review 97 www.WorldMags.net & www.Journal-Plaza.net

GROWING GREEN: THREE SMA RT PATHS TO DEVELOPING SUSTA I N A BLE PRODUCTS

support of the ice cream ma ker's foun ders. Ben Cohen said, "Most of what had been the soul of Ben & Jerry 's is not gonna be around an ymore." All acquisitio ns present myriad management challenges, so the prob lems of integrati ng an idiosy ncratic green business may not seem like a b ig deal. But sc ruti ny by the green community may undermine the otherwise solid business benefits of the acquisition . Even if product sales go well, sharp questions w ill most likely arise about the new parent's green credentials. If the acqu isition goes badly and sales tum ble, not only is the value of the new asset diminished but-potentially even more damaging-the acquirer risks be ing acc used of deliberately destroying a green competitor. Coke faced such criticism after it bought Planet Java coffee drinks and Mad River Traders teas and juices and then phased them out two years later. An acquiring company's actions may have an adverse effect on the carefully crafted brand image of the acquisition. For example, when Danone's agreement wit h Sto nyfield abo ut employee protection ended, Danone sent out pink slips and met with hostile reactions in the press. Such crit icism may have limited impact on the bottom line, but it can dim inish the credibility of a company's green efforts. Successful green brands are att ractive targets because they have loyal customer bases and becau se they come with specialized knowledge about ecofriendly innovation and manu facturing, sustainable supply chain management, and green market development. Bill Morrissey, the vice preside nt ofenvironmental sustainabihty for Clorox, told us that Clorox had not only growth bu t also knowledge tra nsfer in mind when it acquired Burt's Bees, which had two decades ofleadership in the green product space. PATH #3

Architect For companies with a h istory of innovation and substa ntial new-product-development assets, arch itecting green offerin gs - building them fro m scratch- becomes a possibility. Although arch itecting can be slower and more costly than accentuating or acq ui ring, it may be the best strategy for some companies, because it forces them to build valuable competencies. Toyota took this route when it developed the Prius. Although the co mpany is cu rrently add ressing a raft of quality problems, the lessons of its architect st rategy stillstand. The Prius was not the first hybrid introduced in the u .s. market (the Honda

Insight was), but it now dominates the fast-growing market for more-fuel-efficient cars. Toyota's bold move to create a gree n brand has paid hand some d ividends. The Prius to wers over the Insight, its closest competitor, in market share. Its dominance has so distracted cons umers from rival bran ds that so me Honda de alers complain of customers who walk into their showrooms and request a test-drive in the "Honda Prius:' Toyota has also successfully transferred its hybrid expertise and green know-how to other bran ds in its portfolio. In 2005 the company beca me the fi rst to establish green credentials in the luxury-car space when it produced a hybrid version ofthe Lexus. Over time, Toyota's luxury competitors were forced to follow suit. Mercedes- Benz and BMW recently introduced hybrid models to meet growing consumer demand and to establish their green crede ntials and capabilities, and Aud i and Porsche w ill soon do the same. Clorox, too, in developing its Green Works cleaning products, shows how companies with limited gr een ex perti se bu t substantial product development capabilities can architect a gree n brand . Green Works has received a lot of press, but the de tails of Clorox's strategy-which we studied from inside the company- are less well known. The line of household cleaners emerged from a small skun kworks in the Clorox Technical Center led by a handful of independent and dedicated scient ists. In less than a year company researche rs es tablis hed the benchmark defi nition and best practices for a "natural" cleaning product and proceeded to design a line of offerings that would deliver the efficacy customers deman d. The big surprise came when the marketing team BEST PRACTI CES shopped the origi nal five Green Works produc ts Who architects (glass, surface, all-pu rpose, bathroom, and toilet well? " ' - - ibQwl cleaners) to major distributors, including WalNEW-PRODUCT Mart and Safeway. According to a Green Works manDEVELOPMENT ager, "The realistic part ofour expectations was 'Hey, Toyota directed its if we get three or four SKUs, we' ll be pretty happy:" engineers to develop To the team's delight, Wal-Mart wanted all five. Disa new fue l-efficient and environmentally friendly tributors across the boa rd asked for the en tire Green veh icle withi n three years. Works line and requested that the brand be exte nded NEW PRODUCTION into other categories. METHODS The develop ment of Green Works induced CloPa tagonia created a line of rox to accumulate a range of new competencies, inproducts us ing a closedloop production system it eluding specialized knowledge about eco-conscious calls EcoCircle. consumers' preferences and expertise in the supply SKUNKWORKS chain for natural-product sourcing and procurement. CloroJl. provided t he Through its deepened relationships with Wal-Mart resources for a separate Green works business unit . and other distributors, Clorox quickly dou bled the

98 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

HBR.ORG

Analyzing Growth Options To evaluate the fit of a given green product strategy. ask the following questions:

What's our strategic goal? • To leverage latent assets? • Revitalize existing brands? • Broade n appeal to green customers? • Gain green credibility? Are there potential green brands in our portfolio?

How will t his init iative affect the posit ioning of and resources for our e xisting brands? Should our greened brand be a stand -a lone or a strategic brand that puts a green halo on the business asa whole?

YOUR CUSTOMERS

YOUR COMPETITORS

RED FLAGS

Which consu mers in the category a re looking for greener products?

Are our competitors gree ning their existing products?

Does our candidate brand have "permission" to enter the green space?

Can we d iffe rentiate our brand?

we have environmental skeletons in our current portfolio or business model?

Can we enhance the value of green in the category?

Whic h companies would ma ke attractive green acquisitions? 00 we have the resources and capab ilities needed for this initiative?

What's our strategic goal? • To create new green solutions? • Develop unique competencies? • Respond to new market needs? • Gain green credibility? Will an independent business unit be required? 0 0 we have the resources and capab ilities needed for this initiative?

will our green claims be cred ible- or a re we vulnerable t o a ccusat ions of "gree nwas hing"?

How can we capture a "sha re cr vcice" in the cat egory?

00 we have t he resources and ca pabilities needed for this initiative?

What's our strategic goal? • To capture custcmerst • Bring in new green capab ilities? • Broaden access to mainst ream customers> • Gain green credibility?

How can we exploit our competitors' green weaknesses?

Do

How will t his initiative affect the positioning of and resources for our e xisting bra nds?

Can we sell the green brand t o our curre nt customers? Will acquired customers view us as a credible steward of the brand?

Will the initiative provide new abilities that can be applied to othe r brands? Should our acquired brand be a stand-alone or a strategic brand that puts a green halo on the business asa whole?

How will t his init iative affect the pos itioning of and resources for our e xisting brands?

Does our parent brand have "permission" to enter the green spac e?

What will be the relationship betw een the paren t and the new line?

How can we exploit our competitors' green weaknesses? How can we prevent competitcrs from poac hing our newly acquired cuseomersz Can we add green attributes to the new brand or emphas ize existing attributes to increase competitiveness?

What innovations are consumers looking for in a greener a lte rnat ive?

will the initiative provide new abilities that can be applied to othe r brands?

Is this t he proto typical brand in the green niche?

Will this initiative require us to develop a new brand? Will we need to educate and develop t he market and bring new customers into the category?

Are we creat ing a new gree n category? Can we differentiate our brand? How can we exploit our competitors' g reen weaknesses? Does th e cat egory already have e nt renched competitors?

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GROWING GREEN: THREE SMA RT PATHS TO DEVELOPING SUSTAINABLE PRODUCTS

size of the "green clean" market . Even nic he bra nds such as Seventh Gene ration and Met hod benefited from its market develop ment.

Making Green Growth Happen With an understanding of the three paths to gree n growth. managers can begin to craft a strategy that suits their objectives and their business context. They should begin by evaluating each option: Is it feasible? Is it desirable? How would it be implemented? Feasibility, In this step companies take stock of their asse ts along two dimensions: greenable att ributes of their existing products and brands. and organizational green prod uct and brand d evelopme nt capabilities. Th e first requires a careful review of opportunities to promote brands' green benefi ts. Ofcourse, each product will have its ow n category-s pecific attributes, ranging from recyclabili ty to energy efficiency to reduced toxicity. The Global Reporti ng Initiative's list of more than 70 sustainability performance indicators, at www.grt.corn, is an excellent resource for ma nagers. It can help them to identify less obvious gree n features and benefits tha t are suited to an accentuate approach or to frame st rategies and gauge capabilities required for an architect approac h. The second dimension involves appraising the company's green resources and capabilities. This may include a broad review of the processes and priorities for innovation and new-product development, sup ply chain management, the coordination of and collaboration among distributors, and even partnerships with environmental organizations. n eslrabltlty. In this step, managers assess the strategic fit of each option with the company's objectives and the resources they can bring to bear on the gree n initiative. They need to consider speed to market and the investments, reputation, and competencies that the initiative will require. Ferexample, an acquire strategy will deliver high speed to market for a compa ny setting out with low green crede ntials and low to medium green capabi lities-but it involves significant investment. A company choosing an architect st rategy must have high green capabilities and medium to high green credentials-and

Clorox had not only growth but also knowledge transfer in mind when it acquired Burt's Bees. be prepared for a low speed to market. Companies unwilling or u nable to allocate major resources for green initiatives will find accen tuation the most att ractive way to enter gree n markets. For others, gree n growt h may be part of an enterprisewide sustainability initiative to retool operations, shi ft the culture, and, ult imately, reposition the organization. Implementation. This third step involvesacting on all the factors that affect successful execut ion. As outlined in the exhibit "Analyzing Growth Options," companies must align their green st rategy with their existing product portfolio and devote or develop the resources and capabilities needed to achieve their strategic goals. They must ensure that the strategy satisfies cus tomers' expec tations and . when possible, takes advan tage of competitors' green weak nesses. Finally, they must address "red flag" issues that could undermine implementation. you choose-accent uate, acquire, or archi tect-activists, custome rs, and th e public wo n't see your green initiatives as independent of your other act ivities and offerings. Rather, they will view your efforts as part oftheorganization's overall approach.That means the companies that ultimately succeed in growing green will be d istingu ished by their commitment to corporatewide sustainability as well as the performance of their green prod ucts. I::' W H ATEV ER PATH

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HBR Rep ri nt R1006G

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The Globe

Lynn S, Paine is a John G. McLean Professor of Business Administration and senior associate dean for faculty development at Harvard Business School.

A practical guide for eEOs managing multin ati onal corporat ions in th e People's Repub lic by Lynn S, Pain e

"A

!

I

n army of a thousand is easy to fi nd, but, ah, how difficult to fi nd a general," So TU ns a Yuan Dynasty Chinese proverb that has, tellingly, fou nd its way into the parlance ofCEOs and hu man resour ce managers eager to grow their China bus inesses today. Achieving growth and profitability in the world's third -largest economy depends on leadership, but China is tough on top executives. The red -hot economy, pulsating with opportu nity, attracts foreigners-both eth nic Chinese and non-Chinese-but HR professionals continue to rank China as one of the mos t challe nging destinations for expatr iates. Hard numbers are lacking, but anecdotal ev idence suggests that u nderperformance and early departures add up

to a failure rate there that is twice that for expats in other countries. The d ifficulties expatriates face are attributed to a lack of cu ltural fit; familial issues; and inadequate su pport from headquarters, in that order, according to conventional wisdom. Although these are contributing factors, there's also a deeper explanation: Many executives sent to lead China operations, I fear, are ill equipped to tackle the country's unique challenges. Moreover, it's hard to overcome tha t handicap, because leading in China calls for a repertoire of skills that goes beyon d and in some cases conflicts with standard business teachingand practice. As a result, foreign executives must be adept at reworking management orthodoxJune 2 010 Harvard Business Review

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THE GLOBE

More than half the CEOs interviewed spend 20% to 50% of their time dealing with policy issues and the authorities. ies in real time if they're to dowell in China, Tha t needs to cha nge if they want to sucas I discovered when I interviewed the ceed in the marketplace. Despite the openChina business heads of around two dozen ing of th e economy to foreign companies large American, European, and Asian (non- over the past three decades, more than half mainland) companies over the past three the CEOs I spoke with spend 20% to 50% years. All of my interviewees we re mal e. of their time coping with policy issues and Halfw ere from North America and Europe; dealing with the authorities in China. the other half, from Asia. Of the two mainFew execut ives have had formal trainland Chinese, one had worked overseas for ing in dealing with government, and apmore than a decade before moving back proaches picked up in the U.S . or Europe home. My st udy con fi rms that success in don't translate well to China. Many CEOs China demands cultural understanding and cha fe at stalled negotiations and bureauadaptability, market knowledge, the ability cratic interference when they should be to sense and respond to rapid change, and figuring out how to wor k with Chi nese support from headquarters. authorities. That's critical; in most indusAll that isn't enough, however. Th e tries, it's impossible to do well in Chin a most effective leaders have also picked up without the government's backing. Sucthe cru cial abi lity to play roles th at West- cessful CEOs ensure alignme nt between erners often view as contradictory: They their strategies and the Ch inese gove rnare strategic yet hands-on; disciplined yet ment's goals by decipheri ng t he state's entrepreneurial; process orien ted yet sen- priorities and gaining insight into how the sitive to people; authoritative yet n urtur- bureaucratic machinery works. ing; firm yet flexible; and action driven yet Executives often believe tha t obtaining circumspect. Above all, they must ha ve government sup port for big bu siness deals the intellectual dexterit y to develop new is just a matter of forging high-levelconnecfram eworks an d capab ilities to meet Ch i- tions or lin ing the right pockets. Connecna's particular circumstances. tions are no doubt useful, but experienced In the following pages, I illustrate how leaders know that they must also demonCEOs have modified accepted wisdom to strat e their project's con tribu tion to Ch itackle the biggest challenges they face in na's development. The efforts of American Ch ina. Though some of the five lessons com panies to open China to diesel-based here may seem like common sense to ex- tech nologies, for example, didn't work unperienced China ha nds, they're anyth ing til the argument shifted from "You've got to but to a fresh man expat. As several CEOs help me because I'm investing $5billion" to told me, most of what they learn in China "Here's how diesel can help China address is neither writt en in books nor taught in its energy efficiency, national security, and classrooms. environme nt al issues." Lining pockets, moreover, can be perilous, as recent settleUnde rstand the Market, ments ofbribery charges by companies like Lucent, Siemens, and Daimler underscore. but Work with the State Working with government isn't a matter Many executives, particularly expat riates, approach th eir Chin a assign ment with a of periodically wining and dining th e right narrow focus on d riving sales. Imbued officials or reacting when policies change; with an ideology of limited government, it must be a central part of th e strategicthey (and their bosses back home) u nder- planning process. Every year, HSBCChina esti mate the sta te's rol e in the economy. CEO Richard Yorke or his deputies visit the 104 Harvard Business Review June :1010 www.WorldMags.net & www.Journal-Plaza.net

mai n authorities in each city whe re the bank has or would like to have a bra nch. They ask for feedback on its performa nce and plans, and learn abou t impending policy directives. HSBC gains valuable data, provides regulators with information , and bu ilds a common unde rstanding of its priorities. This helps the ba nk gain support for its stra tegy execu tion; unsurprisingly, HSBC has opened more branches in China than has any other foreign bank. Accustomed to strategy fram eworks that rega rd shareholder value maxi mization as the main ob jective an d ass u me the noninvolve ment of governme nt , executives don't naturally consider society's needs while formulating strategy. Yet in China, people and the govern ment expect multi national companies to be good corporate citizens to a greater degree than in Europe or the United States. Companies can demonstrate their com mitment by in-

READY TO LEAD IN CHINA?

Dealing with Government How well is your business strategy aligned with the government's plans for China's development?

Do you have an effective syst em for ongoing dialogue with relevant authorities at all levels?

What are you doing to demonstrate that your company IS a good corporate citizen?

HOw much are you prepared to g ive up-in terms of your intellectual property, business principles, time, and resources-to gain the government's approval?

Do you understand the ways China's government interfaces with your business?

What is your plan for dealing with govern ment pressure to do th ings you don't want to do?

HBR.ORG

built pedestrian walkways. and installed new equipment to meet safety standards. Others have invested in equipment and technologies to control emissions levels or adhere to other environ mental guidelines. And some have reintroduced processes long discarded in developed markets, such as loggingall faxes to reinforce the diligent use of company assets. Education, formal and informal, is cru Adapt to Local Conditions, but cial for success. Management may think that "Cross the road safely" implies that Implement Global Standards Primed by news report s about China's employees should use the new pedestrian problems with pollutio n, corruption, un- crosswalks, but people may take it to mean safe products. an d intellectual-property that they need to look both ways when theft, many executives assum e that busi- darting through traffic. Clear com mun ications about no nneness ethics can ta ke a back seat to ot her concerns. They don't realize that the Chi- gotiable sta nda rds -those that emp loyees nese are more critical of foreign companies will lose their jobs for violating-are an estha n of local ones and expec t more from sential part of hiring and orientation. Eduthem. WhileBschools mayteach that firms cational materialsand real-time instruction should adapt to their surroundings, execu- should provide employees with practical tives who take a "when in China" approach guidance on dealing with difficult situaset themselves up for accusations of do u- tions. It isn't helpful, for example, to know ble standards from tfie Chinese people and that your employer won't tolerate bribery if you don't know what to do when someone governme nt. ..._ Meeting global standards of business asks for a bribe. Some companies run semiconduct can be challenging, however. Well nars to discuss such sticky issues not only over hal f the executives I talked to sa id with their workers but also with sup pliers compliance was a top concern. Employees and distributors. may not understand the pract ical implicaMany CEOs appoin t business practices tions oftheir company's conduct guidelines. officers to manage co mpliance efforts and some international tenets do n't mesh and se t up cor porate in tegrity commitwith long-standing practices in China. For te es to make policy decisions and overexample, Chinese attitudes toward work- see investigations of miscond uct. Some place safety tend to reflect the Communist also add extra layers of monitoring. One Era belief that dying on the job is a heroic company requ ires special committee apsacrifice that brings honor to the victim's provals for certain kinds of sales and marfamily. Strict limits on gifts and entertain- keting expenses to ensure that they do n't ment run u p against ingrained traditions run afoul of the organization's limits on for building relationships and showing re- gifts and ent ertainmen t. Other corporaspec t. Although the Chinese populace in- tions have increased the proportion of creasingly observes norms against bribe ry, business practices officers. internal audiself-dealing, and undisclosed conflicts of tors, or hea lth, safety, and environmental interest, these rules do compete with the personnel. Some leaders have included personal loyalties that bind people to fami- values-related measures in pe rformanceappraisal systems. Many make a point of lies and social networks. Executives also have no choice but to investigating even small infractions and invest heavily in physical infrastructure taking qu ick, decisive actio n to terminate to ensure compliance with global norms. employees who have knowingly violated Many compan ies have reconfigured roads, core standards. vesting in China's development. Ericsson's effo rts to install mob ile telecommunications technology in rural China; Samsung's program to build long·term ties between its operating companies and remote farming villages that need a helping hand; and GE'sinvolvement in training China's senior leaders are all integral to the businesses' st rategic positioning, not optional extras.

READY TO LEAD IN CHINA?

Managing Business Conduct Have you esta blished and communic ate d clear standa rds of conduct for your business? Do your e mployees and pa rtners acce pt these sta ndards and unde rstand thei r dayto-day implicat ions? Does your physical plant reinforce the m? Do you have effective syst ems for monitoring compliance and hand ling alleged violations?

Do you g ive e mployees practical guid· ance on dealing with pressures to compromise in are as known to be p roblematic. such as health, the environment, conflicts of inte rest, a nd bribery? What is your process for dealing with legal and ethical dilemmas? DO you and your management tea m live by your standa rds and set a positive example for others?

To maintain high standards in the difficult Chinese environment, leaders must embed values in orga niza tions not just th rough words and processe s bu t also through deeds. When em ployees of one then-u nprofitable multinational learned that the CEO had approved a do na tion to the local hospital, they balked, asking how the company could "feed others if it couldn't feed itself." The leade r walked these workers through his logic, pointing out th at cont ributing to the comm un ity was as important as paying them and serving customers. The gesture made a lasting impression on emp loyees, who today regard the company's societal commitments as a hallmark of its culture.

Pay for Performance, but Build a seepte-cenerte Workplace China's talen t supply is limited, as every CEO knows, and its quality vari es dramatically across regions. sectors. and age grou ps. These demographic realities explain why my interviewees credited China with giving them a newfound appreciation J une 2010 Harvard Business Review 10S

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THE GLOBE

for the importance of people-compared with technology, capital, or raw materialsfor success. Nearly halfsaid that the loss of talent is a major worry, despite the recent recession, and a quarter felt that personnel decisions were their most difficult. Attracting and retaining people in China isn't just about payor providing opportunities for advancement; it's also about creating a workplace that engages the whole person . For many Chinese, the company is as much a social community as a place of work, and they want their boss to be more than a taskmaster or a distant professional. To reach people on a more personal level, smart executives make themselves more respo nsive and their companies more caring. Forinstance, they increasethesponsorship of wo rker-o rganized event s and expand employee involvement in community and civic-responsibility programs. They also make themselves more available, hosting frequent lunches and town hall meetings, socializing with groups of employees after hours, and officiating at weddings on occasion. Taking an interest in workers' families

READYTO LEAD IN CHINA?

Developing the Workforce What is your strategy for rel:ruit ing and developing t he tale nt you need to grow your business?

Are your leadership programs tailored to t he needs of your high-potential Chinese empl oyees?

What is your pr ocess for ensuring a good fit between Chinese empl oyees and their jobs?

What are you doing to show empl oyees that you and your company care about them?

Do your pay and advancement systems appeal to t he employees you want t o attract and ret ain?

Are you sufficiently involved in guiding and directing your employees' work?

Do you provide employees with t he training and guidance t hey need to succeed?. .

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and personal lives may feel like an invasion of privacy to foreigners, but to most Chinese, it's just part of show ing respect and being a good boss. For many Western executives, time spent on soft issues like these is time lost on hard ones such as achieving performa nce targets and improving productivity, However, contrary to popular belief, si ncere conce rn for employees' we lfare can be a key factor in driving performance improvement in China. In 2005, for example, when Cyrille Ragoucy arrived to run a newly formed cement-ma king venture be tween La farge an d Shu i On in sout hweste rn Ch ina, he found that some wo rkers were unw illing to boost prod uctivity to the levels expected by Lafarge. Veterans of state-owned enterprises, ma ny had never been challenged, and a few had made a habit of literally sleeping on the job. After the management team showed its commitment to workplace safety- by inves ting in new equipment, roads, and walkways; introducing new work processes; provid ing training; and demonstrating its willingness to shut down the plant for safety reasonsemp loyees became more e ngaged in efforts to improve performance. "With safety, you're talking abou t people, you're talking about families ," explained Ragoucy. "If you're strict and focused on safety, it's a big step toward performance." At t he same t ime , CEOs in Chi na strengthen HR systems to make organizations attrac tive to employees. They create tale nt management programs, accelerate pro motions processes, and modify compensation practices to fit local needs, Japanese companies in particular have had to abandon t raditional sen ior ity-based pay systems in favo r of the ma rket- an d performa nce-based approaches that Ch inese employees prefer.Some multinational comp anies have increased learn ing opportunities and appointed local Chinese to top managem ent positions. Hitachi, for instance, turned standard policy on its head by letting managers know three years in advance that they'd been designated to head some of the company's China businesses.

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READY TO LEAD IN CHINA?

Competing for Customers and Markets How well do you understand your Chinese customers' needs and ways of thin king? What processes ensure that your mar keti ng efforts are culturally appropriat e? How closely do your offerings meet Chinese expectations for low cost and high q uality?

What is your strat egy for developing and protecting your int ellec tu al property? In w hat ways is your strategy informed by an understanding of loca l and m ult inational rivals? How well suited is your organizat ion to China's fastpaced, cost- d riven comp etitive environment?

American B schools teach that people are most motivated when ma nagers set clear goals and allow employees to decide how to achieve them. Getting too involved in su bord inates' wor k is derided in the West as micromanagemen t. In China, because of inexperien ce, employees usually want more guidance on how to reach their goals and are more likely to look to the boss for detailed instructions. That's why effective leaders there closely oversee subordinates' work, taking the opportunity to lead by example or intervene when teachable moments arise. One interviewee pointed out: "Youcan't be a hands-off manager in China. You can but you won't last long."

Drive Costs Down. but Maintain Quality Even after d ecades of expe rience, many multinatio nal companies str ug gle to_ , fi nd business models that work in China. Intellectual-p.rop.erty theft and purveyo~,~,_.. of fake products continue to be concerns, and executives worry about inadvertently o ffendi ng customers t hrough cu lt ural missteps.

HBR_ORG

To develop offerings for China's vast middle market, CEOs are reengineering their firms' first-world infrastructure. Having reached the limi ts of se lling their home-country products to high -end Chinese buyers, foreign companies are going head-to-head with low-cost,fast-paced, and sop histicated local rivals. Smart ones have modified stra tegies to take on these competitors. Otis Elevator, for instance, cond ucted an analysis of othe r industries' evolution in China and discarded its customary one-brand strategy. It created four bra nds and. th rough part nerships with local compa nies, four operating entities to serve different segments. From 2000 to 2009, Otis boosted its revenues in China sixfold,and its market share grew from less than 10% to more than 20%.

To develop offerings for China's vas t middle market, CEOs are rethinking their organizations. Some are accelerating decision making by se tt ing limits on turn arou nd times and red ucing the number of participants who must have a say. Others are building local research capabilities and revamping prod uct development processes. The most ambitious are conducting comp rehensive rev iews of their firstworld infrastructure and reengineering it to reduce costs, save time, and improve respons iveness. Shifting from eliminating features to make a product that 's 20% cheaper to designing a new product that is a third of the

cost raises vexing quality issues -a major concern for nearly half my interviewees. Having learned in Bschool that companies must choose be tween low cost and high quality, some CEOs say that loss of quality is inevitable when going down market and fret about the long- term consequences. Effective leaders, though, are looking for ways to crack the conund rum. They realize that developed-co untry biases often cons train innova tion. Honeywell's China preside nt Shane Tedjarati says that once his R&D teams stopped equating quali ty with technological sop histication and focused instead on fi tness for purpose, new possibilities emerged. Honeywell China

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"You can't be a hands-off manager in China. You can-but you won't last long." was the n able to develop a low-cost turbocharger that met Chinese customers' needs, and by 2008 it had captured a significant share ofthe local ma rket.

Recognize Comp lexity, but Define Clear Priorities Everyone knows that China is a land of tensions that can't be easily reconciled. Longterm plans for the country'S development vie wit h short-termism t hat puts quick money before health and safety. Fealty to commu nism coexists with ex treme disparities of wealth, and the count ry's socialist ma rket economy at times seems more akin to cowboy capitalism. While some argue that China will evolve into a "normal" (read: " marke t") economy, others see it as creating a new form of state capitalism. In this environment, flexibility is critical for success-but th ere's such a th ing as going overboard. Executives who are too responsive to the moment's pressures, too willing to modify critical policies for temporary advantage, and too open to the vast array of opportunities in China run the risk of jeopardizing their ability to accom plish any thing of significance. The abilityto turn down opportunities that don't make strategic sense requ ires an understanding of the company's business as well as courage and se lf-d iscipline. Many interviewees cautioned me about the temptat ions and dangersof rolling with the system. In a world of so much gray, effective executives adopt a more black-and-white approach. They keep on track by defi ning clear priorities- strategic,ethical,ope rational, and personal-and sticking to them. Leading a business in China is as much a personal challe nge as a professional one. Even fo r CEOs wit h experience in other cult ures, China is u niquely demanding of their energies. u ntlever's Frank Braeken, for example, likens his experience to walking on ice: "All your muscles say, 'Be care-

ful: you will fall,''' he says. "You are always tense:' Some anxiety comes from not fully u nderstanding the surroundings. Expat riates face cultural and linguistic barriers that cloud perceptions and block access to informa tion. Chinese managers' seemi ngly roundabout ways of communicating, sudden changes of plan , unexplained lack of follow-through, and "yeses" that act ually mean "no" frustrate Western exec utives, while Japanese managers are unable to understand the Chinese desire for guidance on what's tacitly well understood. The all-consu ming nature of lead ing in China takes an emotional and physical toll on most executives. " Here you have three months to accomplish what would take two years in most ot her places," said one leader, ec hoing a co mmon t heme in my interviews. The Chinese cu lture 's fus ion of personal an d professional life

READY TO LEAD IN CHINA?

Coping with Complexity Are you energized by the challenge of immersing yourself in another culture and way of life?

00 your family members have the support they need to thrive in the China environment?

How clearly have you spelled out your strategic, ethical. organizational. and personal priorities?

What is your approach to educating your bossesand colleagues at home abou t your business?

Where do you tu rn for information and guidance when you don't understand what's going on locally?

coes your personal network include Chinese friends and colleagu es with whom you can relax? What are your sources of energy and renewal for when the going gets tough?

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means that CEOs have litt le time for family or for personal pursuits, let alone for rest and renewal. Events routinely thwart plans and schedules, and th e relentless need for decisions crowds out thoug ht and reflection. "If you stop to think, decis ions will pile up behind you," explained one harried CEO. Support systems are crucial for warding off burnout. Executives need to be skilled at forging relationsh ips with bosses and colleagues in the global organization and in China. They must have the self-discipline to respect their ow n needs and those of their families, who may be struggling in an unfamiliar enviro nment. Above all, managers must find sources of energy and selfrenewal to sustain their capacity to lead: time wit h friends and family, com munity involvement, learning about China's h istory and culture, exploring its natural wonders, and so on. Several respondents cited the opportun ity to contribute to China's development as an energizing factor. Executives who thrive in China t reat their stints in the country as opportunities for learning and growth instead of resisting the unfamiliar. Accordi ng to former BHP Billiton China head Clinton Dines, the key to a positive experience is to "shift the prism a little so you see things differently." By doi ng that, expatriate executives can work more effectively and enjoyably with their Chinese colleagues. success rate for expats is less about finding rare individuals wit h the distinctive profile to succeed in China than about developing a larger pool ofqualified ca ndidates and increasing the business world's knowledge about the cou ntry. Despite all the lip se rvice paid to these goals, the level of practical u nderstanding about China remains shockingly low in executive suites, and the China-related content in most Bschool curricula is limited. Perhaps more important, t he theories and frameworks that dominate business have not yet been examined for their validity in China. Until lessons from China are written into ma nagement books, the success rate for executives there is likely to remain disapHBR Rep ri nt R1006H pointing. 0 IMPROVIN G THE

More phones th at work in more count ries, like China.

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How I Did It. ..

Vineet Nayar is t he CEO of HCl Technologies and the aut hor of Employees First. Cus tomers Second: Turning Conventional Management Upside Down (Harva rd Business Press. 2010).

A Maverick CEO Explains How He Persuaded His Team to Leap into the Future

by Vineet Nayar

magine wak ing up to find yourself perched on a window ledge outside your corner office. The building is on fire. The windows won' t open. The ledge narrows to noth ing on both sides . You could stay put and pray that someone will rescue you. Or you could leap- you hopeto safety. That's the metaphorical choice I faced five years ago, when I was appointed president orthe Delhi-based ITservices provider HCL Tech nologies. Although the company's reve nues were growing by abo ut 30% a year, it was losing market share and mindshare . Our competitors were growing at the rate of 40% or 50% a year, and the IT services industry was changing rapidly. Cus tomers d id n' t want to wor k with an

I THE IOEA

To transform HCl, CEO Vineet Nayar got employees to acknowledge the crisis, pioneered a unique "employees fi rst" cult ure, kindled people's passions-and danced . 110 Harvard Business Review June 2010

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undifferentiated service provider that offered discrete services; they wanted longterm partners th at would provide end to-end services. Could HCL become such a company? History will tell you it did. By 2009 HCL had changed its business model, nearly tripled its an nual revenues, do ubled its market capitalization, been ranked India's best employer by Hewitt- and pioneered a u nique management culture that I call Employees First, Customers Second (EFCS). How did Ido this? Ididn't. One hundred senior managers and 55,00 0 employees, the people of our company, accomplished the transformation. How did I persuade them to do it? I spoke the truth as I saw it , offered ideas, told stories, asked questions,

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HCL's growth since 2005

USSMIUlONS 2.S00

and even danced. Most important, I made the leap myself.

Acknowledge Point A and Identify Point B I realized th at no one wo uld jum p into the future until the organization acknowledged that we needed to do so. So I spent the first few wee ks of my tenure visiti ng HCL's officesaround the world, meeting senior managers in small groups and at larger gatherings. I discussed the company's current situa tion -Point A, I call it. Some people sensed no da nger; they could see only our track record , the boomi ng IT services market, and our past successes. Many had no opinion; they wanted to wait and see. A few believed that the situation was dire and HCLshould have changed a long time ago. These meetings had a disruptive effectnot beca use I'm a great orator who oozes charisma but because I presented facts and articulated opinions that had not been aired before. Although we didn't give a name to these conversations then, we codi fied the process and came to call it Mirror Mirror. I had held up a mirror to the com pany in a new way, forcing people tosee the reality of our situat ion. Gradually, it became impossible for anyone to argue that eve rything

However, we we ren't organized as if that was the case. HCL was a traditional pyramid, in which frontline people were accountable to a hierarchy of managers. The hierarchy usually made it more difficult for employees to add value. I began to wonder if we could tu rn the organization u pside down , so th at senior man agement - the heads of enabling functions such as human resources and finance and even the CEOcould become accountable to employees. This concept gradually grew in clarity and strength, and blossomed into the EFCS approach that underlies almost everything HCL now does.

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Collaboratively Develop a Strategy I had told eve ryone th at we wo uld set a strategy collaborattvely -cand I meant it. In July 2005 I convened a meeting of our top 100 managers and proposed that HCL transform itself from an ITservices vendor into an end-to-end global IT ser vices partner that could compete against the likes of IBM, Accenture, and EDS. I d idn't care if we adopted this exact strategy; I reasoned that if these sma rt and experienced people rejected my proposal, they wou ld come up with anothe r

Customers didn't talk much about our products, services, or technologies; they spoke about our employees. was fine. Now, whenever the environment changes, we use the Mirror Mirror exercise to rethink HCL's position. I also met many customers during my travels, and it was fro m them that a potential Point B- where we should land began to take shape. What struck me was that customers didn't talk much about our produ cts, services, or technologies; they spoke mostly about HCL's employees. The value t he company offered lay in the interface between customers and frontline employees-that was our value zone.

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approach as good as or better than mine. I asked th e mana gers for t he ir views in order to identify the "Yes, buts...." These are the caveats an d conce rns that arise when any initiative-but especiallyone that entails change-is proposed. "Yes, buts..:' are at the very heart of collaboration; if you don't respond to them, you'll never get the people who have questions or doubts to play with the team . Th e "Yes, but s..." took three for ms. Some managers feared that by taking on the major global players, we would forsake

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the position we had built ove r the past decade and would lose everything. Others raised issues I hadn't thought of, aski ng, for example, "The IT analysts favor the established players- how can we get them to recommend HCL?" A third group supported the proposed strategy an d was exasperated with the status quo. These manage rs wanted us to act boldly, and often to ignore others' objections. I said ve ry little during these discussions. I did not want to provide answers, offerjustifications, or make new suggestions; I wanted alignment to emerge on its own. Three da ys of debate later, we agreed to adopt the strategy I had proposed. Everyone was on board-at least in theory.

Bridge the Gulf Dur ing this period I also held informal meetings with fron tline employees, engaging them in discussions about the kind of company they wanted to work for and how they saw thei r jobs. These meetings became more formal in 2006, with a series of companywide meetings we called Directions. (We still hold the m.) They involve Jun e 2010 Harvard Business Review 111

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HOW I DID IT

tho usands of employees and take place in large venues around the wor ld. I us ually make some provocative remarks about the company's future and then open up the meeting to questions, conversation, and discussion. But I felt that at the very first meeting it would be counterproductive iff marched up to the podium in a su it and tie and ex· pected people to open up to me. Only the boldest or the craziest would speak. I had to remove the gulf between employees and executives. So I wa lked to the center of the stage and looked out at some 4,000 faces. Isaid nothing. Apopular Bollywood number suddenly blare d from the speakers. I started to dance. I wiggled. I danced into the aisles. I pulled people up fro m their chairs and danced with them. HCLites, as we call ourselves, still chuckle about my performance. After a few minutes the music ended, and I went back onstage to make my remarks. Those words sounded very different coming from a sweaty man who had just proved in public that he couldn't dance than they would have coming from the emperor at the podium. Two hours of purposeful and animated discussions followed. I went on to repeat that performance about 25 times that year, dancing my way around the world . I don't know whether people thought my da ncing showed I was crazy enough to believe in EFCS or whether it disarmed them enough to accept change. Ido know that by the year's end the change initiative had gathered momentum.

Use BODs for Change Transformation requires action, not just words, but I do n' t believe in large-scale technology initiatives or massive reo rganizations. We triggered cha nge at HCL

through small-scale catalysts that I call blue ocean droplets (BODs)-a phrase borrowed from the ideas in W. Chan Kim and Renee Mauborgn e's Blue Ocean Strategy. I used four BODs at HCL: Sharing financial data. At the time. employees had access to the financial information that pertained to their projects bu t did n't know how either their business un it or t he organization was doing. Nor could they com pare the performance of their team to that ofothers. Wedecided to share financial data extensively, within and across groups. The goal was to help people better see where we stood and to increase trust by greatly increasing transparency. Once people saw that I was willing to show them how the company was performing, they began to shed their mistrust of top management. The smart service desk . I set up an online system that allows anyone in the organization to lodge a complaint or make a suggestion by opening a ticket. We have a defined process for handling tickets (for instance, a manager has to respond to every ticket), and the employee who opened the ticket determines whether its resolu tion is satisfactory. Not only does the system help resolve issues, but it effectively puts man agers in the service of frontline employees. The comprehensive 36o-degree. Although HCL had a 360-degree performance review system in place, employees rarely reviewed ma nagers because they didn't know what they stood to gain by doing so. I decided to allow anyone who had provided feedback to a manager to see the results. Employees would be more likelyto participate, Ithought, and managers would celebrate positive results with their teams. I knew I couldn't force managers to make their reviews public; I could only encour-

age them to do so. The best way to do that was to lead by example. In 2006 I posted the results of my 360-degree appraisal on the intranet for all the company to see. Most managers followed suit. Ifthey didn't, it suggested they had something to hide. The online planning process. Rather than reviewing the business plans of my 100 manage rs, as had been the case earlier, I asked the managers to make video recordingssummarizingtheir plans and post them on an online portal, where other managers could review them, share feedback, and discuss changes. This made a difference in how managers formulated and communicated ideas. Conseq uently, plans became more specific and executable.

Calculate the Passion As we improved the working environment for employees, it became clear that middlelevelmanagers had lost some oftheir power. I thought about conducting an employeesatisfaction survey to see how to improve their lot, but I wo rried that satisfaction is a passive state, unlikely to lead to change. Engagement isn't mu ch better; it does n't necessarily lead to change either. I wanted passion. We developed a new survey, the Employee Passion Indicative Count, to identify the drivers of passion in the workplace. This led to the crea tion of Employees First Councils, groups that focus on specific passions, from art and music to philanthropy and social responsibility. The councils help employees break dow n the ba rriers between their personal and professional lives and bring more meaning to their wo rk. These groups had one unexpected benefi t: Some sprang up around business issues. such as cloud computing, which channeled pe rsonal passion into company innovation.

I posted the results of my 36o-degree appraisal on the intranet for all the company to see. Most managers followed suit. '12 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

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The Four Keys to HCL's Transformation Mirror Mirror. Talk honestly. Create trust through ace t he t ruth. Enable peopLe transparency. Find ways to to see that a change has to be build a culture of t rust so made. , - .that people will entertain the plan for change. Share fi nancial data, good and bad, within and across groups. Use L.o". transparency as the basis for a new approach to perfo rmance reviews and strategic planning.

Because of these changes, I was able to t ransform managers in t he e nabling func tio ns from petits [cnctionnaires into con tr ibutors to the business and the organizational culture. It's rare for these HCL employees to leave t he company tod ay, even thou gh they are in great demand, because t heir work has become more meaningful and exciting.

Provide Transparency for the Board When I arrived at HCL, in 2005, the cha irman, Shiv Nadar, and the board already sensed that the company was heading for trouble. Shiv, HCL's fou nder and a legendary figure in Indian business, did n't have to be convinced that cha nge was essential. I told him I needed a free hand. "Of course," he said. Shiv never once asked me what my approach might be. That was a good thing, because I didn't know at that stage. Shiv and the board thought ca refully abo ut their role during the change process. They wanted the opportunity to discuss issues with me before we made major decisions, but they didn't want to get involved in d ay-to-d ay operations. I wanted their support an d to tap into their collective experience. The best way to achieve bot h objectives, I found, was to be transparent. Iconstantly sent the board progress reports, held extra meetings, and e ns ured t hat more people than usual participated in the p rocess. Senior executives and directors toge ther came up wit h several new ideas and approaches, and over the next five years the board voted in favor of every proposal I brought before it-unanimously.

Invert the organizational pyramid. Make support fu nctions and executives accountable to fro ntline workers, rather than t he other way around. Not onLy does this increase value, but it brings clarity and meaning to the structure.

I didn't wo rry much abo ut the stoc k ma rket in the early stages of my transforma tion efforts. Wha t's the po int of making promises to analysts and shareholders who have heard it all before? I wanted first to show results and then to explain how we had achieved them . Near the end of the year HCLstarted to win contracts that would have been out of reach for the company a year before. The first was from Autodes k, in November 2005. In January 2006 we won a large fiveyear contract wit h the consumer electronics chain DSG International -the largest IT services deal that any Indian company had ever secured.

Recast the CEO's role, Transfer the ownership of change from the office of the CEO to employees. Allow t he CEO to ask as many questions as he answers.

Whe n the globa l downt urn began, we sta rted disc ussions again about Poin t A. Rather than engage in layoffsor restructuring, I asked employees for ways to help us get th rough the bad times. They offered many suggestions . Some of them related to cost cu tt ing, but most of them focused on how to increase revenues. Most important, HCL's employees felt that we had included them in determi ning how to weather the storm- unlike ot her IT companies, where, because management didn't take an inclusive approach, employees felt uncertain about their future and that ofthe organ ization. It's not accide ntal that while those com panies' revenues fell, HCL grew

In 2006 we closed five outsourcing deals worth a total of $700 million. That's when the buzz began. That same yea r HCL closed five out sourcing deals worth a total of$700 million while competing with the world's biggest IT service providers. That's when the buzz began. The Economist wrote: " IBM an d the other mult ina ti onals are becoming increasingly nervous about the fi fth biggest Indian outsourcer, HCLTechnologies." THE MOST DIFFICULT decision to make about transformation is when to start. We began when HCLwas stillgrowing at a healthy clip. We may appear to have been early, bu t I'm convinced that ifwe hadn't made our move then, HCLwouldn't be so successful today.

by abou t 20% in the worst year of t he recession. In 2008 we closed orders worth twice as much as those of the previous year and hired hundreds of employees globally, includ ing in the U.s. and the UK. I believe that many CEOs today are standi ng on a ledge, so to speak, unaware or unwilling to admit that the ed ifice behind them is on fire, Some are banging at windows, trying to summon help. Others have frozen in place. Only a few are thinking about boldly moving toward the edge. Having been in that position, Ibelieve there is only one thing to do. Leap. " HBR Reprint Rl006J Jun e 2010 Harvard Business Review 113

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CASE STUDY 118

RECOMMENDED 126

LIFE'S WORK 128

Has a CEO's fundraising effort gone too far?

Touring the industry behind America's foreclosure crisis•

The Yankees' Joe Girardi on managing a team of stars.

• Managing Your Professional Growt h hbr.org

MANAGING YOURSELF

Turn the Job You Have into the Job You Want /..

by Amy Wrzesniewski, Justin M. Berg, and Ja ne E. Dutton so-vear-otd midlevel managerlet's call her Fatima- is struggling at work, but you would n't know it from outward appea rances. A star member ofher team in the marketing division ofa large multinat ional foods company, Fatima consistently hits he r benchmarks and goals. She invests long hours and has built relationships with colleagues that she deeply values. And he r senior m anagers think of he r as one of the company's high potentials.

A

But outside the office, Fatima (who asked not to be identi fied by her real name) would admit that she feels stagna nt in her job, tra pped by the tension betwee n day-to-day demands and what she really wa nts to be doing: exploring how the company can use social media in its marketing efforts. Twitter, her cause-marketing blog, and mobile gadgets are her main passions. She'd like to look for another job, but given the slow recovery from the recession, sticking it out seems like her best (and

' 14 Harvard Business Review June 2010 www.WorldMags.net & www.Journal-Plaza.net

perhaps only) option. "I'm st ill working ha rd," she tells a friend. "But I'm stuck. Every week, I feel less and less motivated. I'm beginning to wonder why I wanted this position in the first place:' Sound familiar? Over the past several years, we've spoken with hundreds of people, in a variety ofindustries and occupations, who, like Fatima, are feeling st uck-that dreaded word again. According to a recent survey ofS,OOO U.S. ho useholds by The Conference Board, only 45% of those polled say they are satisfied with their jobs- down from about 60% in 1987, the fi rst year the survey was cond ucted. If you're in this situatio n, and changi ng roles or com panies is unrealistic given the tough economy, what can you do? A growing body of research suggests that an exercise we call "job crafting" can be a powerful tool for reenergizing and reimagining your work life. It involves redefi ning your job to incorporate your motives, strengths, and passions. The exercise prompts you to visualize the job, map its elements, and reorganize them to better suit you. In this way, you can put personal touches on how you see and do your job, and you'll gain a greater sense ofcontrol at work-which is especially critical at a time when you're probably working longer and harder and expecting to retire later. Perhaps job crafting's best feature is that it's driven by you, not your supervisor. This exercise involves assessing and then altering one or more ofthe following core aspects of work. Tasks. You can change the boundaries ofyour job by taking on more or

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fewer tasks, expanding or diminishing their scope, or changing how they are perform ed. A sales manager, for instance, might take on additional event planning because he likes the challenge of organizing people and logistics. Relationships. You can change the nature or extent ofyour interactions with other people. A managing director, for example, might crea te mentoring relationships with young associates as a way to connect wit h and teach those who represent the future ofthe firm. perceptions. Youcan change how you thi nk about the purpose ofcertain aspects ofyour job; or you can refra me the job as a whole. The director ofa no nprofit institution, for instance, might choose to think ofhis job as two separate parts, one not pa rticularly enjoyable (the pursuit of cont ributions and grants) and one very meaningful (creating opportunities for emerging artists). Or the leader of an R&D unit might come to see her work as a way ofadvancing the science in her field rather than simply ma naging projects. Our research wit h a range oforganizations-from Fortune 500 companies to small no npronts- tndlcates that employees (at all levels, in all kinds ofoccupations) who try job crafting often end up more engaged and satisfied with their wo rk lives, ach ieve higher levels of performa nce in their organizations, and report greater personal resilience. For their part, organizations have a lot to gain by enabling job crafting. Most jobredesign models put the onus on managers to help employees find satisfaction in their work; in reality, leaders rarely have su fficient time to devote to this process. Job crafting lets managers turn the reins over to employees, empowering them to become "job entreprene urs ." And when pay resources are constrained or promotions impossible, job crafting may give companies a different way to motivate and retain thei r most talented employees. It can even help transform poor performers. Despite these benefits, however, job crafting can be easy to overlook: Time

Once she has created her before diagram, th is midlevel marketing manager immediately sees that she's spending lots of time on tasks that don't engage her passions-for lnstance, monitoring her tea m's performance, answering questions, and directing market research-and much less on tas ks that are mean ingful to her. SPENDS MOST TIME

ANSWERING TEAM 'S QUESTIONS AND ASSISTING W ITH PROBLEMS

PROFESSIONA L DEVELOPMENT

DESIGNING MARKETING STRATEGIES

SPENDS LEAST TIME

Fatima's After Diagram In Fatima's after diagram, it's easier to see how she can connect her tasks to her motives, strengths, and passions. For insta nce, one of her motives is to cultivate meaningful relationships and achieve personal growth. Her strengths include her one-on-one communication skills and technical savvy. And among her passions are teaching others and using and learning about new technology.

ROLE: EMPOWERI NG M Y TEAM TO DO ITS BEST

WRI TING QUARTERLY REPORTS

RUN NING WEEKLY MEETINGS (MORE ON E·ON ·O NE)

ROLE: BU ILDING AN D USI NG SOCIAL MEDIA EXPE RTISE PROFESSIONAL DEVElOPMENT (I MPROVE PUBLIC SPEAKING SKILLS)

TEACHING COLLEAGUES TO USE SOCIA L MEDIA

In this after diagram, the sizes of the blocks represent a better allocation of Fatima's time, energy, and attention. The borde rs around groups of tasks suggest the common purpose they serve. By rearranging the shapes on the page, Fatima gains a greater app reciation ..... for how the different elements of her job come tog"et"hOe"'. June 2010 Harvard Business Review " 5 www.WorldMags.net & www.Journal-Plaza.net

EXPERIEN CE

Your job comprises a set of building blocks that you can reconfigure to create more engaging and fulfilling experiences at work.

-T pressures and other constraints may compel you to see you r job as a fixed list ofduties. Or you may be afraid ofgetting mired in office politics, stepping on other people's toes simply because you 're unhappy at work. lob crafting requires -and ult imately engenders-a different mindset, however: Yourjob comprises a set of building blocks that you can reconfigure to create more engaging an d fulfilling experiences at work.

Diagramming Your Job Backat the multinational foods company, Fatima is st ill frustrated. What would happen if she engaged in job crafting? She's already been reflecting on her dissatisfaction, albeit in no systematic way. lob crafting would give her the means to diagram a more ideal-but still realistic-version of her job, one bett er aligned with her motives, strengths, and passions. First, she looks at the present makeup of her job. In he r "before diagram," Fatima uses a series of squares to represent the tasks that her job comprises, with larger squares representing time-intensive tasks, an d smaller squares tasks to which she devotes less time. (See the exhibit "Fat ima's Before Diagram.") She notices that she's spending lots of time monitoring her team's performance, answering questions, and directing market research . She's spending a fair number of hours setting budgets, writing reports, and running meetings. And she's spending very little time on critical tas ks such as professional development and designing marketing strategies. These tasks are in

the smallest squares. Lookingat the full sweep of her job in this way gives Fatima a clear se nse -truly at a glance-ofexactly where she is devoting her time and energy. Next, she concentrates on changes that wou ld increase her engagement at work. This "after diagram" will serve as the visual plan for her future. (See the exh ibit "Fatima's After Diagram.") She begins by identifying her motives, st rengths, and pass ions -three important considerations in de termining which aspects of her job will keep he r engaged and inspi re higher performance. Each will be represented by a different color. Her main motives, for instance, are cultivating meaningful relationshi ps and achiev ing personal growt h. She plugs these into green ovals. Fatima takes stock of her core strengths: one-on-one communica· tion an d technical savvy.These appear in the blue ovals. And she highlights her passions: teaching others and using and learni ng new technology-entered in orange ovals. Then, using her before diagram as a frame ofreference, Fatima creates a new set of task blocks whose size represents a better allocation of her time, energy, and attention. To take advantage of how well "designing marketing strategies" suits her motives, strengths, and passions, she not only moves it from a small to a med ium block but also add "use social media" to this newly expanded task. To incor porate even more social media into her job, she adds a small task block to represen t "teaching colleagues to use social med ia." And for those tasks that do not fit her as well, she makes a note to adapt them (for instance, using "professional deve lopment" to "improve public speaking skills"). She draws rectangles around groups of tasks that she thinks serve a com mon purpose or role. For exa mple, she identifies "building and using socia l media expertise" as one role. Framing her roles

" 6 Harvard Business Review June 2.010 www.WorldMags.net & www.Journal-Plaza.net

in this way is meaningful to her because it taps into her key strengths and passions. Byrea rranging the sha pes, Fatima gains a greater appreciation for how the elements of her job come together.

A New Outlook Fatima then moves to the final step of the exercise, in which she considers the challenges she will probably face in making her new job configuration a reality. She would like to use her technical savvy to help other marketing teams and departments take advantage of social media, but she is concerned about encroaching on their work or insulting the m by offering her expertise. With her after diagram in han d , Fatima takes anot he r look at the list of projects sitting in her in-box and begins to consider how to incorporate social media into them. Tasks. She identifies two possibilities: a new snack food aimed at teens an d a cross-company initiative to improve commu nication between Marketing and Sales. Fatima thinks a campaign involving Facebook and Twitter could help build buzz around the snack food - and reveal to the organization the benefi ts and limitations ofreaching out to a new demographic. And by launching a blog, Fatima and her colleagues in Marketing could track initiatives and com munications from members of the Sales division. Relationships. Fatima recognizes, ofcourse, that she'll need support to establis h the technological presence she envisions for these two projects. She must build or refocus her ties to ot he rs in the company in order to learn about the best ways to move forward. She recalls that Steve Porter is constantly fiddling with the latest gadgets in weekly interdepartmental meetings an d that he is known for the clever ways he uses social media to keep salespeople in the loop. She decides to approach him for help. Within a month,

HBR.ORG

Steve's and her own employees' su pport has unleashed a wave of interest in and knowledge abo ut how to put technology closer to the hea rt ofthe division's wor k. Her initiatives have become testing grounds for using social media to accomplish ot her important goals. Fatima has been recognized as the driver ofthese programs and finds that managers from ot her divisions are coming to her to learn more about how they might use her ideas in their own projects - all ofwhich is encouraging her to be bolder in introducing new ideas and tec hnology. Perceptions. Rather than thinking of he r work as a daily slog, she begins to see herself as an innovator at the intersection of marketing and tech nology. And she views herselfas an entrepreneurial pioneer unafraid ofexperiments that could bridge those worlds. She also, to her pleasure, recog nizes that rather than taking her away from he r prescribed goals, her passion for deploying technology in pursuit ofthese objectives gives her a more fulfilling way to approach the m.

to explore what interests her most abo ut the role ofthe operat ions group in that region. She sees the gro up as becoming more critical for cost savings as economic recovery drags on- a ma jor focus for the CEO, as well. Ivan spots an opportunity. He can build on what is already a good relationship by directing more of his efforts to special projects that will save money in that region . Sensing a chance to craft his job, Ivan focuses more and more ofhis time and energy on this aspect of his work, which wins him exposure and credit as the projects he takes on crea te sign ificant savings for the company. As a bonu s, he

To win support for your job crafting, focus on creating value for others, building trust, and identifying the people who will accommodate you.

Ivan's Story In anothe r company, in another pa rt of the world. Ivan Carter is caught betw een a rock and a hard place. But the source of angst for this 45-year-old operatio ns manager at a global office products com pany is qu ite di fferent from Fatima's. He's a solid Bplayer w ith a dedicated and successful team. Ivan leads a gro up that serves Latin America. and he reports to both the head ofglobal opera tions and the head of the Latin America gro up. His relationship with the latter is great, but the operations head is often no nresponsive or even hostile when Ivan needs information or support. All his efforts to strengt he n the relatio nship have been met with silence. He likes his job, but he often leaves the office with his stomach in knots. Ivan knows he ca n either accept the reality ofhis toxic relationshi p with the head of operations or change his situation. So, during his nex t phone meeting with the head of Latin America, he pushes a bit

spends more time interacting with the Latin Ame rica head while meeting his responsibilities to the opera tions head without having to interact wit h him as much . After several months, Ivan learns that the Latin Americ a head has recommended him highly to others in the C-suite. Fatima focused first on tasks and then on relationships. Bycentering his job crafting primarily on relationships (the ones that energized rather the n depleted him), Ivan was able to figure out how to change his job for the better.

dis tribu ting tasks in complementary ways. After all, one person's dreaded assignment may be anot he r's favorite. To win others' support for your job crafting, do these three things: o Focus on deploying an individual or organizational strengt h that will create value for others. For instance, Fatima position ed her work to enhance what other teams were doing. while Ivan found a way to help meet the objectives of the Latin America group. o Build trust with ot hers (typically your supervisor). Fatima assured her supervisor that she would n't let tasks slide and that some ofher newer tasks could become central to the orga nization. Ivan was careful to align his efforts wit h his role, building trust with the head of the Latin America group. o Direct your job-crafting efforts toward the people who are most likely to accommodate you. Fatima reached out to Steve Porter because he was interested in her pla ns to bring technology into the heart of her job tasks. Ivan realized that his time wo uld be wasted pursuing a toxic relationship and instead focused on a more prorrustng one. JOB CRAFTING is a simple visual framework

that ca n he lp you make meaningful and lasting changes in your job-in good economies and bad. But it all has to start with taking a step back from the daily grind and realizing that you actually have the ability to reconfigure the elements of your work. The bottom line? Make su re that you are shaping your job, not letting your job shape you. 0 HBR Re pri nt Rl006K

The Limits of Job Crafting Not all job crafting is bene ficial. It can be stressful ifas a result you take on too much or alter tasks without understanding your ma nager's goals. Since job crafting is something you can do on your own, it's important to be open about the process. Your manager may even be able to help you identify opportunities for re-

"

Amy Wrzesniewskl (amy.wrzesniews ki@ ~ yale.edu) is an associate professor of organizational behavior at the Yale School of Ma nagement. Justin M. Be rg (bergj@wharton. upenn.edu) is a doctoral student at the university of Pennsylvan ia'S Wharton School. Jane E. Dutton ([email protected])istlieRobert l. Kahn Distinguished Un iversity Professor of Business Administration and Psychology at the University of Michigan's Ross School of Business. For more on job crafting, visit www.jobcrafting.org. June 2010 Harvard Business Review 117

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EXPERIENCE Randle D. Raggio ([email protected])isanassistan t professor of marketing at l ouis ia na State university's Ourso College of Business.

Case Stud

The CEO wants to focus his CSR efforts on finding a cure for his daughter's disease. Is he acting in the company's best interests? by Randle D. Raggio

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-"" -,::.. .=.~rt~V~i~or (bart .victor@ owen.vanderbilt.edu) is the Cal Turner Professor of Moral l eadership Across the Professions at Va nderbilt University.

hen the CEO's Personal Crusade Drives Decisions ing," sh e said. Carolyn had ridden the he senior leaders ofDM Bicycle Greenway many times since she joined Company filed into the conference the company, but she could n't remember room, their hands full of colfee ever seeing so much traffic. containers, BlackBerrys, and the agenda "Bingo!" Gino sa id. "More and more for that morn ing's meeting. With the end people are biking to work, and that's good of the fiscal year in sight. the CEO. Gino news for us." Duncan, wa nted to discuss sales projec Gino had created DMBC, now a public tions for FYn. compa ny, out of his passion for the "Good morn ing, eve ryone," he said. outdoors and his eye for unique bicycle "Thanks for coming in ea rly. I know y'all designs. The company's 1,500 employees can't wa it to break down the budget, but all worked at its headqua rters and factory be fore we get started, do you notice anything un usual outside?" He ges tured at the in Greensboro. The bikes were called window be hind him. "Cree ntes," as a tribute to their hometown. Carolyn Bridges, DMBC's HR director. Everyone in the room knew that orders peered down on what looked from the were coming in at a record rate. Carolyn 10th floor like a procession of shiny beetles relished the thought offinally being able scuttling down the Bicentennial Greenway. to staffup for increased production. She They were act ually bikers wearing helmets hoped that the strong sales growth meant the company could reinstate the bonus that reflected the bright North Carolina sunlight. "Lots ofcyclists out this mornpool that had been discontinued when the

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Charmian love (charmian@volans .com) is the chief executive of votans, a think tan k and consultancy focused on social innovation.

HBR's fictiona l cases present dilemmas faced by real leaders and offer solutions from experts. "B Harvard Bus iness Review June 2010

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Secure. global IT and Comm unications solutions for anyti me, anywhere p roductivit y. Work i5n't limited to cubicles. ncorescent light, or business hours anymore.The world moves much too fast for that. Which is why we have solutions that can he lp your enterprise keep up. Solutions that let you securely access applications from almost anywhere, he lp you communicate and collaborate more efficiently, and empower you and your employees to make faster, more informed decisions. Verizon: con nect ing systems, machines, ideas, and people wor ldwide for altogether better outcomes. venzon.com/ better

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altogetherbette r

EXPERIEN CE

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financial crisis struc k. But her excitement was short-lived . Gino's face grew serious. "As most of you know," he said , his emo tion nea rly ove rcomi ng him, "about eight months ago my nine-year-old daughter, Nicole, was diagnosed wit h Batten disease:' His listeners nodded sympathetically. Most ofthe m could remember Nicole and her brothers riding the ir bikes around the office on training wheels. Gino had taken

Join the conversatio n about what Carolyn should do at hbr.org/boomerang·employee.

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for his daughter's life. She respected his fat herly feelings, but was this really a corporate responsibility?

Make It Happen After the meeting, Gino pulled Carolyn and Dottie Thompson, the marketing VP, aside. "So, what do you think?" he asked. DMBC's current CSR efforts focused on combating childhood obesity through its Ride for Life program, which sponsored

"Lots of companies can do a phys-ed program," Gino said. "We're the only one with a welt-known spokesperson who has the disease." Nicole's diagnosis very hard and had spent several months working from Rochester, New York. while she was u ndergoing experimental treatment. "It's an inherited neurological disorder that affects two to four children out of every 100,000 born in the U.S. each year:' Gino con tinued. "They start exhibiting symp toms between the ages of fi ve and 10, and don't make it past their ea rly twenties. They go blind, become mentally impaired, and are afflicted with seizures..:' His voice began to crack. After a mo ment. he said , "As you can see from our projections, we're about to have the best year in our zj-year history. I'd like to divide the windfall between a new CSR program focused on Batten disease and employee bonuses." The room was silent. The n on e of the executives asked the question that was on everyone's mind: "Just for clarificationby 'divide between' do you mean split equally?" Gino's eyes fl icked toward the speaker. "To be blu nt, which do you think is more important? Finding a cure for a devastating disease, or putting a little extra padding in someone's wallet?" Carolyn was shocked. The company had not given raises in three years and in some cases had been forced to cut salaries, yet Gino seemed to want to direct the bul k ofthe expected profits towa rd fighti ng 120 Harvard Business Review June

races and all-dey biking excursions for the city's schoolchildren. The program had been so successful-both in raising employee morale and in creating positive public relations- that Dottie had been wor king for nearly a year to take the program national. Now she said, wit h clear hesitation in he r voice. "I think it's great. Of course we should support finding a cure for Batten disease. But does this mean the end of Ride for Life?" Gino seemed puzzled that Dott ie didn't get it. "This company's CSR efforts have always been directed toward keeping kids healthy," he said. "There's no thing healthy about little kids going blind and dy ing. Ride for Life can be put on hold." "Nicole's picture has been on eve ry girl's bike we've eve r sold," he con tin ued. "Lots ofcompanies can doa phys-e d program. We're the only one with a well-known spokesperson who has the disease. I want you two to work toget her to ma ke this happen." Gino looked at Carolyn. "I'd like you to announce this at the prod uct ion kickoff meeting" - which was to be held at Gino's farm in early July. With that. he turned and left them standi ng in the doorway of the now-empty conference room . Carolyn could feel a pit forming in her stomach.

2010

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The Chief Evangelist Over the nex t two days Carolyn spoke informally with employees at different levels of the company. Everyone felt for Gino, but they were already burned out. The upcoming production schedule was aggressive, and, as one employee said, "Putting the whole company th rough Gino's personal struggle is not going to make him. his daughter. or the company any better:' Gino was known as someone who invested considerable persona l and fi nancial resources in a variety of social and environme ntal causes; he acted as "chiefevangelis t" for each new one that caught his fancy. Some employees found him inspiring and relied on him for information about the next "hot" issue. Others played along, having foun d that the easiest way to get face time with him for business purposes was to feign interest in his cause du jour. Whatever their motivations, many employees had contributed time and money to Gino's crusades. When Carolyn joined the company. four years earlier, Jim Miniter, the CFO. had told her, "Gino is more 'intuitive' than 'structu red,' and he tend s to shoot from the hip. He expects the analytical types around him to worry about the details. But DMBC is a fam ily-if you take care of business, Gino will take care of you." He and Gino were old high school buddies, and he had left his job as a Wall Street fi nancial analyst to join his frien d's venture. Carolyn hoped that even though the two we re d ose. Jim wo uld be willing to liste n to her concerns about this shift in dir ection.

Family or Big Brother? She caught up wit h Jim as he was heading back to his office and followed him in. Surp risingly, he seemed to know exactly what was on her mind. "I'm wo rried. too," he began. "We're going to have to present this cha nge in the annual report and at the shareho lder

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meeting- but Iguess Gino can finesse those things." DMBC allowed employees up to 20 hours ofpaid work time each year to volunteer with a program associated with its CSR efforts, and it matched all employee financial contributions to those causes. It also highlighted corporate social responsib ility in its ann ual report. These policies had kept DMBC in the ranks of "most admired" companies, which made the shareholders happy. "What worries me more," Jim said, "is that Gino has started to cancel or walk out of meetings to talk on the phone with families ofother children wit h Batten disease, or anyone who might have some information relating to the disease or a treatment . Wecan't get anything done." "So you'll talk to him?" Carolyn asked, reliefwashing over her. "I ca n't," said Jim. "I was at his wedding in Trinidad. Iwas there when Nicole and the boys were born. It wo uld be like betraying a brothe r." Carolyn could understand loyalty, but this was ridicu lous. "You're the only one he'll listen to," she said, "and you're a major s hareholder. Don't you have an obligation to the company? The folks on the line are already feeling pressure with the ramp-up. Some ofthem have asked if it's appropriate for Gino to force the whole company to go on this painful journey with him. A couple of hourl y employees even called him selfish for putt ing his family ahead of the irs." Jim anticipated Gino's reply in a mock mo notone: "The employees will get paid for the wo rk they did to generate the profits, and I would have paid the m the same amo unt eve n if their efforts were not as successful. In this case they get a bonus and we can give more to CSR." He conti nued, speaking in his own voice, "Also, companies like Starbucks and Sun Mtcrosystems and lots of ot hers support vast efforts aimed at water conservation, recycling, education, wildlife preservation, and so on. They get aw ards and recog nition for their CSR efforts, not

all ofwhich are directly related to their businesses. And I can tell you that universities regu larly report-and some accrediting age ncies count- the number of faculty and staff members who give money to the university. So this isn't way out ofthe mainstream." "But you know how it is aro und here; ' Caro lyn retorted. "Employees expect that Gino will track who complies-er, partic· ipa tes- for the annual report, and they're afraid ofthe possi ble effect on evaluations and promotions. The company cou ld start to feel like Big Brother rather than fam ily. Bottom line, they think Gino is going to req uire everyone to contribute money or time to fight Batten disease, and that doesn' t seem right. You need to speak to him." "I'm sorry, Carolyn, I just ca n't do it:' Jim replied.

As Carolyn walked slowly out ofhis office, she thought back on the past four years. She was an experienced HR manager, havi ng joined DMBC from a Fortune 50 ma nufacturer. But because of Jim and Gino's long history, she had been kept on the fringes ofthe inner circle. Without stronger alliances, she wasn't willing to rock the boat. But she was wo rried that Gino's griefand concern for his daugh ter ha d overshadowed his concern for the company.

Has Gino gone too far, and should Carolyn try to stop him? see commenta ries on he next page.

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The Experts Respond What Gino has labeled CSR is simply an increase in his personal • compensation. Bart Victor. the Cal Turner Professor at Vanderbilt

Ii' - i

ClearLy, Gino is deeply ~~ concern ed about his ~ ..:.:.. !JJ daughter's co ndit ion. He ~ -- _ probably expects t hat his employees, management, and share holders will want to suppo rt him a nd his famiLy. In th e past , many in t he company have been inspired by his causes. Still others have induLged his passions or even turn ed them t o t heir own adva ntage. So what makes this situat ion diffe rent? Nothing is inherently wrong wit h a corporation's ge nerously cont ribut ing to efforts to fi nd a cure for a rare d isease- particularly when, as is th e case here, t he stockholders support corporate charit able donations and ac tivit ies. Nor is it inap propriate for a leader to couch his or her decisions in moraLterms. But Gino has wra pped his decision in moralizing language not to insp ire or to educate but to intimidate. Also, his personaLpride seems t o have left little

room for recognizing th e co nt ributions of ot hers. In a banner year he viewed DMBC's record profits as a " windfall" rat her than as t he fruits of his employees' hard work and com mitment . Even before th is personal tragedy, he showed more ent husiasm for his social causes th an for his employees. By undervalu ing their co ntributio ns, he has put himself on a pedestal. Critics of exec utive co mpensat ion and corporate excess oft en decry a preponderance of greed in the mot ives of business leaders. While greed is certainly common, perhaps more prevale nt and pernicious is a sense of entitlement. Ent itlement justifi es itself through moral rationalization. A leader like Gino looks in the mirror and sees someone who deserves everything he has- a nd so much more. What Gino has labeled CSR is simply an increase in his personal co mpensat ion. Should Carolyn t ry to stop him? From the facts in t he case, I see little prom ise in such an effort. She is neith er a trusted adviser nor a welL-positioned leader. Gino's decision is co nsistent wit h th e way he works and is powerfully bolstered

WHAT WOULO YOU DO? ...

.....

Some advice from our readers: un les s Carolyn herself is a member of t he board, or a s ignificant shareholde r, he r optio ns are (and should be) limited . Whet her b o nus es a re paid a nd w hat warrants a pprop riate use of s hareholder fu nds is not an employee decision . But the re should b e governance mechanisms in p la ce to p revent the CEO fro m using these resources as a personal money box.

Michael Wildenauer, chief information officer, Roy Morgan Research Carolyn s ho uld firs t investigate the situatio n in more detail and collect evidence to predict possib le o utcomes. As Jim is clearly not w illing to take the init iat ive , s he s hould inform Gino of her fi ndings. so t hat he can appreciate t he full scale of h is decision. If Gino d oe s n't change h is mind. Carolyn ne e d s t o decide w hether to wholehearted ly s uppo rt his decision or ha nd over her curren t responsibilities to someone who will .

John Tilsner, student, University of Abertay Dundee HBR's case studies appear at hbr.o rg prior to publication here. 12 2

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by his personal fears. J im. th e CFO and a longtime friend of Gino's, knows th at this is not th e tim e to cross him. It seems quixotic for carolyn to even raise an object ion. The real question for her may be, Can she accept t he price of " loyalty " and keep her job?

Carolyn needs support for the inevitable, deeply emotional confrontation with Gino. Charmian love, the chief executive of votans Businesses have gotten better at understanding the need to give employees space for family. but there is a profound difference between personal commitment to a philanthropic cause and the larger duty to ward a companywide CSR program. A key part of Carolyn's job as HR directo r is to ensu re that employees are treated fairly. In t his case, unfortunately, that role puts her at odds wit h the CEO. Gino's decision is wrong for the company for three clear. fundamental reasons. First and foremost is fai rness to its employees. Under Gino's new policy. they won't receive the fu tt compensation they deserve for their hard work over the past three years. Aserious backlash could ensue, affecting employee morale, loyalty, and retent ion. What's more, most DMBC employees probably have their own family issues and priorities for which they'd like to use the bonus pool, such as care for elderly parents or funds for t heir children's education. The seco nd reason is t hat such a pronounced redirection of the CSR policy could erode much of the public-relations value built up by the existing Ride for Life program. And third. investing in a program driven by the CEO's perso nal priorities could put t he company's rankings in

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jeopardy- an issue of fidu ciary care, given t he value some wall Street analysts place on such rankings. carolyn needs to find a way to present t he situation tactfu lly from the perspective of employees and investors. She might consider developing an anony mous companywide survey about CSR, asking employees what t hey would like to invest in and including options s uch as the wider roLLout of Ride for Life and support for orphan diseases Like the one in question. The survey might also explore what percentage of the compa ny's profits should be invested in CSR programs-perhaps using the suggested guidelines of the One Percent Club (whose members contr ibute 1% of their net wort h annu ally to charitable causes). ULtimately, the employees need to be on board with any program for it to be successful and valuable-to t he company as well as to society. Whatever route carolyn decides to take, she needs sup port from other managers for the inevitable, deeply emotional confrontatio n with Gino. She should try again to pers uade Jim to talk to Gino- their t rust-based friendship makes him the ideal candidate. She should atso try to marshal wider support for Gino, who is dearly going t hrough a terrible time and, as a res ult , is making decisions that he may late r regret. Dottie is another potential atty, given t hat this decision couLd negat ively impact DM BC's brand. For the sake of the company and its employees, Carolyn must take professional respo nsibility for th is critical confrontatio n. If, after being presented wit h employee feedback, Gino remains rigidly com mitted to redirecting the company's CSR program, Carolyn needs somehow to engage the board in what co uld well become a strategic issue . She might even propose a board-level discussion of a formaL leave of absence for Gino, so that he can fully dedicate himself to his role as a fath er. I::'

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Unlocking the Value Organizations have the strategy. They have the data. But can they close those critical gaps to thrive and survive in the information economy? "This is the challenge: to help business overcome those barriers and help leaders to get connected to how they can use information to drive their business." -David Thompson, CIO, Symantec

Companies are preparing for growth as the recessio nary clouds th at bl anket ed th e g lobe in 2008 and 2009 slow ly begin to di sperse. Customers-a nd th e ability to gen erate real value from custo mer info nn atio n-are key to orga nizations ' growt h plans. Yet few exec utives beli eve th eir co mpanies are well positioned to use their informati on for growth and th ey are w orried that c ritica l g aps exist, accord ing to a new survey of Harvard Business Review subscribers . Almost half-45 percent-of th e 1,375 executives in the recent survey by Harvard Bu siness Revi ew An alytic Serv ices strongly ag reed th at info rmation is a key strategic asset to th eir companies. They id entified th e needs to leverage custo mer informatio n to improve service as w ell as to increase loyalty and t o grow sa les with ex isting c ustomers as th e most important strateg ies for growth. But only 7 percent of those leaders sai d their organizations are ve ry well positioned to ex ploit infonnation to help grow th eir business. And despite the high v alue that exec utives place on information from their custo mers, f ew er than half of th e respondents--44 percent-said th eir organizations are managing information security threats, s uc h as c ustomer and company data th eft, well . What is causing the disc onnect? What should co mpanies do to align their information technology systems and process with th eir strategi es f or growt h? David Thompson , CIO of Symantec, and Brad Wyckoff, CIO of the publishing powerhouse Meredith Corporation, recently discu ssed th e s urvey and th e strategies th at companies are using to manage and sec ure th eir most important asset-their data.

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What is behind this dramatic gap between the importance of information strategies and performance in leveraging data, particularly customer data? Wyck off: Sometimes I've compared my job to juggling chain saws . And this gap is one of those chainsaws . Data is crilical to our bus iness: not only do we create valuable content , but we also manage our consumer database of more than 85 million names. II's one of the largest domestic databases among media companies. We deal with the same basic data management issues as everyo ne else , except on a much larger scale. We certainly have the capability to generate and collect large volumes of data . We continuously assess tools and practices to more effectively manage , store , protect, retrieve, and transport that data . More important, we work to do something intelligent with the data , allowing us to deliver measurable benefits for our customers and, ultimately, for Meredi th, The perception of some executives is that we don't have the right tools and database structure, that we simply don't have the ability to provide them with an "intelligible view" of the data . As an IT leader, it's my responsibility to initiate a dialogue with them : What is it they really want to do with the data? What value does that data have toward growing the business and delivering services to our customers? Once we answer these questions, then we can work to meet their business requirements with the appropriate technology solutions. Thompson: There are many barriers to using information to drive business growth. They could be organizational silos, the lack of data integration, complex technology systems, or even a lack of analytical

skills among business leaders. Over the years, executives have spent millions on tools and technology and many. in the end, didn't see the business value from it or didn't achieve the synergy expected. Among my peers, this is the challenge: to help business overcome those barriers and help leaders to get connected to how they can use information to drive their business. The survey suggests CIOs are in a difficult spot. Companies want to get more value from information assets and keep costs down, yet data pours in from many more devices and sources. Thompso n: Company data is doubling every year, but not all data adds value. In many cases, the new data can create risk for the organization because it is unmanaged or is not being maximized for the corporation. Video or music files are good examples. So you need to understand what types of data you have, where it is, how it is being used, and what is-and is notof value to your business. Then you can more effectively manage it, archive what you don't need, secure the right data, and make it more readily available to the right people. How do you balance the competing imperatives of increased openness and accessibility on the one hand and greater security on the other? Wyckoff: Meredith was established over 100 years ago, and our brands

have a very loyal readership. Our relationships with our customers are very important to us, and thus protecting our creative content and customer data is a critical priority for me. But it's more than protecting data. Our brands are constantly evolving, seeking to deliver personalized value to custome rs by leveraging the data and providing it to them in the medium of their choosing . My team recognizes this paradigm and works to address both sides of the equation . Efficiently managing growing data volumes , extending the reach to customers , and mitigating the associated risk will continue to be critical success measurements for us. Thompson : Data is moving out to employees and partners who need information to serve customers more effectively. That's where it adds value. but also where it increases risk. Information systems were once centralized and data couldn'tleave the data center easily. Now data leaves the enterprise traveling on laptops and mobile devices, So, you must have protections and riskmitigation strategies in place to prevent misuse, theft, or loss of data. For example , our data loss prevention toolset examines confidential data across the entire infrastructure and identifies if data is moving, how it is moving-whether it leaves the enterprise or moves to desktops or to different servers. With it you can classify information and assign rules for the movement and access to that information.

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Recommended HOREONTHE CREDIT CRISIS

TOPSHELF

Poverty, Inc.

" Focus on Home Equity LoansPredatory Lending" by Richard W. Stevenson (New York r imes, March 22, 1998) Writte n a full decade before the foreclosure tsunami, t his article describes a Senate hearing during which a former employee of several big subprime lenders test ifi ed on the shady means t hey used to kee p customers refinancing.

Maxed Out

/ Broke, USA by Gary Rivlin (Harper Business, 2010) To get a sense of the scarred landsca pe left by the financial strip-mining ofAmerica, take a drive through Santa Clara, a neighborhood of Dayton, Ohio, where 15 properties out ot as on a single block we re sold at auction in a rece nt three-year period . The auctions were part ofAmerica's foreclosure crisis, whose roots in the strategies and tactics of subprime-rnortgage brokers, check cashers. payd ay lenders, and such are painstakingly uncovered by Rivlin, a former reporter. Though big companies have not traditionally targeted the lowest economic st rata, the lenders he profiles have now figu red out how to dig pennies out of even the most marginal communit ies. "One perspective;' he says, trying to sound balanced as he explores this bleak world, "holds that corporate America has so thoroughly

chewed up the na tion's once-solid middle class that the country's poor and working poor were pretty much the last consumer segment left to exploit." Poverty, Inc., as he refers to the industry, is constantly evolving new ways to make a profit. He cites companies that offer help to people who are in arrears on subpnme loans; others that promise to boost customers' credit ratings; and still others that buy large legal settlements and pay off the recipients wit h lump sums-all for just a "small" considera tion, of course. And then there are the purveyors of subprime st udent loa ns, wit h origination fees and hig h interest rates. Rivlin points out that the industry also knows a thing or two about political lobbying, so don't be surprised if President Obama's promised fi nancial-reform measures keep getting put off, and off, and off...

BROKE US

126 Harvard Business

Re~;ew

Andrew O'Connell

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(Trueworks, 2006) This documentary film by James D. Scurlock takes an indepth look at de bt in America. Scurlock also produced an accompanying book, Maxed Out: Hard r imes, Easy Credit, and the Era of Predatory Lenders

(Scribner, 20 07).

Busted by Edmund L. Andrews (w.w. Norton, 2(09) Andrews, a former economics re porter, describes the foreclosure mess from the viewpoint of the foreclosed , including himself. A sectio n of the book was excerpted in the May '4, 20 09, edition of the New York rimes Magazine as "My Personal Credit Crisis."

HBR.ORG For more recommendations from HBR contributors and editors, go to blogs .hbr.orgl reeom mended . Plus, as a matter of polic y, we don't rev iew our own boo ks, but we hope yo u will . Check out the " New Books fro m t he Press" blog post each month.

BOOK

Good Value by Stephen Green (Allen Lane, :2009) This book is an invitation to journey through history. Guiding us along the way, the aut ho r shows us how religion, philosophy, the migration ofcivilizations, demographics, politics, literature, and technological innovation have shaped global econom ic development and influenced who we are as a people, as citizens, and - for some-as lost souls and terrorists. Green, the chairman of HSBC, is by any measure a titan ofcommerce. Yet his book shows that he is also a deeply spiritua l and intellectual ma n, with the capacity to think in patterns so broad, yet soclear, as to challenge readers to reflect on their aspirations in a changing world. Doug Ready, coauthor (wit h Jay Conger and Linda Hill) of "Are You a Hig h Potential?" page 78

WEBSITE

Global Voices globalvoicesonline.org Myoft-stated opinion is that nothing would do more for the United States than a two-year mandatory national service requirement that would include spending one year outside the countryno exceptions. Because everyone wo uld have a passport , see a world larger than his or he r hometown, and experience im mersion in a different culture, the national capacity for empathy would grow. But the ne xt best thing is Global Voices. Acollection ofeconomic, political, and social stories written by professio nal and citizen journalists ha iling from Afghanistan to Zimbabwe, this site is ded icated to giving Americans access to news that is

.... -

..

SHAllOWS

u nd erreported by the ma ins tream media not because it's radi cal, but just because it's far away, whether geographically or economically. Recently I was asked, "Which five events would you go to in a year to stay abreast ofopinions around the world?" Myanswer was Global Voices. Chris Meyer, H8R bl ogger and a cofo und er of Mo nit or Tale nt

out to explain why. Her expositio n offers a wonderfully lucid tour ofthe thinki ng on markets over the years by economists and philosophers, from Adam Smith thro ugh Ronald Dworkin . Her main focus is markets that almost all fi nd offensive: child labor, sex, kidneys. But the lessons she draws from them raise ha rd questions abo ut the markets for health ca re, education, and maybe even credit derivatives. Justin Fox

BOOK

The Shallows

WEBSITE

by Nicholas Car r (yoJ.w. Norton, 201 0) Is the internet rotting our brains? Not exactly, but Carr makes a persuasive case that it is eroding the deep, linear thought that's necessary for reading or writing a serious book. According to the author, hyperte xt means hyperdistraction and ineffective mental multitasking. The Shallows is well researched and well argued, drawi ng on examples ranging from Socrates to Google. The very fact that Carr, an admitted internet addict, is able to write such a stimulating book is evidence that brains can deep dive when necessary. But his difficulty in ret raining his own-and the weight ofmuch evidence from neurosciencesuggests that we should stop our constant clicking and start reading seriously again.

Football Outsiders

Thomas H. Davenport, HBR blogger and Presi d ent 's Dist inguished Professor of Informat ion Technology and Managem ent at Babson College

footballoutslders.com Statistician Aaron Schatz started this website to bring statistical rigor to gridiron performa nce in much the same way that Bill James and other sabermetncians have done for baseball. But Schatz has a more complex task: Baseball is a series of individual performances, while football involves complex interactions with cascading effects. To assess the sport's many moving pa rts, Schatz uses his own proprietary memes: defense-adjusted value over average (DVOA). Most notably, DVOA distributes credit for scoring and winning beyond the s kill-positio n players, who tend to get all the attention, and in so doing creates a more comprehensive view ofsuccess. Businesses obsessed wit h bette r performance evaluation could learn a lot from Scha tz, who-despite the site's name-is now definitely a football insider. Scott Beri nato

BOOK

Why Some Things Should Not Be for Sale

by Debra satz (Oxford universityPress, 2010) Econom ists judge markets by how efficient they are -whether they allocate resources in a way that leaves G oo d all ofus, or at least most of us, Va l u"e better off. But that's not the only standard that ma tters. Here, Stanford philosophy professor S t e p h en Satz observes that markets in some things strike us as ina pproGree n priate or noxiou s, and she sets

POSTMASTER Senddomestic address ebeoges, ordel'5,and inquirie5 to: Horvard Business Review, Subscription Service, P.O. Bo ~ 62270. Tampa, FL 33662. GST Registration No. 124738434S. Periodical postage paid at Boston, Massachusens. and additional mailing offices. Printed in the U.S.A. Harvard Business Review (ISSN 0017·8012: USPS 0236·S20). published monthly (which may include double iSSUe5 in January-February and July-August) for professional managers. is an education program of Harvard BusinessSchool, Harvard University; Jay O. Light, dean. Published by Harvard eustness sencct Publishing COrporation, 60 Harvard way, Boston, MA 02163. Copyright '< 2010 Harvard Business SChool Publishing Corporation. All rights r eserved. Vol ume B8., Number 6 June 2010 Harvard Business Review 127

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To read the extended interview, go to hbr.org /girardi.

When you we re catching and you saw a pitcher Losing focus, how did you get him back on track? I would walk out there and say, "Try to change the rhythm a bit. Try to kee p it simple." Usually there's one pitch that gets a pitcher back to his mechanics, and you've got to know what it is. When a guy gets traded to the team, you've got to figu re out that pitch as quickly as you can. How did you change your approach from managing a team of rookies to managing one full of stars? To me, the principles are the same. Vou have to show faith in your players and lead by example. Vou ask your players to be prepared mentally and physically, so you have to be prepared. Beyond that, you've got to adapt to the type of players you have. If you've got a home-run -hitt ing tea m, you can't make the m all base stealers, and vice versa. When you replaced Joe Torre, how did you go about setting your own direction for the Yankees? Most people, including Joe, advised me, "Be yourself. Don't try to be somebody else." I had to earn the players' tru st. I knew it would take time and I'd have to work very hard at it, because they had been with Joe a long time. I would flat out ask players, "Do you trust me?" One was a little hes itant. I said, "You know what? I'm going to prove you can trust me:' And so I had to go out and prove it to him.

HBR: You're famous for being information-dri ven and analyt icaLin your approach to managing. Joe Girardi: I love numbers. You can never give me too many numbe rs. Ibelieve they tell a story, if you have a large enough sample. I have an industrial engineering degree-a degree in proble m solving, basically. But my whole fam ily is math-oriented, and tha t's always been how I see things. How do you coach players on when t o abandon the plan and Listen to their guts? If you think too much, you fail. because the game happens too quickly. The key is preparation . Vou tell the player, "Here's the information- now go play:' The data has to become instinctual. Voucan't think about it in the middle ofa pitch. Some players have a hard time using information to improve their instincts, and they usually weed themselves out. 12 8

What challenges come wit h being the most s uccessful s po rts franchise in American histo ry? The ex pectation that it's going to be done eve ry year is the biggest challe nge. I like that expectation, because it pushes people to a higher level. But it can be hard on players. Everything we do is under a microscope. Every player who goes out there this year is going to have a bad day or a bad week or even a bad month. But it's the ove rall picture that matters, and that's why the togetherness we have as a team is so important. Vou can' t get caught up in what you hear and what you read. Your value can't come from ot hers. It can't, or you'll be torn up. Do you ever get bored? Do games get long? Does the job sometimes become a grind from a physical standpoint? Yeah . But I don't get bored. I love what I do. I love com petition and strategy. I love seeing people succeed-you can be losing a game 19-2 and you can st ill see that. " HBR Reprint R1006 M

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