Harvard Business Review Magazine (Social Media and the New rules of Branding, December 2010)

DECEMBER 2010

50 Governance

The Case for Professional Boards Robert C. Pozen

86 Management

Robert McNamara’s Business Legacy Phil Rosenzweig

94 Global Economy

China’s New Bid for Technology Dominance Thomas M. Hout and Pankaj Ghemawat

a i d f e o s M e l l u R a i w c e N o e SAnd th G I L OT

H

SP

Why You Need a New-Media “Ringmaster” page 78

61 E G A P T

How to Fight Reputation Snipers page 70

You’re Spending Your Money In All the Wrong Places page 62

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December 2010

hbr.org DECEMBER 2010

HARVARD BUSINESS REVIEW

The Case for Professional Boards

88

China’s New Bid for Technology Dominance

50 Governance

Robert C. Pozen

86 Management

Robert McNamara’s Business Legacy Phil Rosenzweig

94 Global Economy

12 DECEMBER 2010 | BRANDING AND SOCIAL MEDIA | PROFESSIONAL BOARDS | ROI ON EMPLOYEE WELLNESS | BEST BUY’S CEO ON TWITTER |

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Thomas M. Hout and Pankaj Ghemawat

ediaof ial MRules SAondcthe New HT

TLIG SPO Why You Need a New-Media “Ringmaster” page 78

E PAG

61 How to Fight Reputation Snipers page 70

You’re Spending Your Money In All the Wrong Places page 62

About the Spotlight Artist Alex MacLean earned an MA in architecture in 1973 from Harvard’s Graduate School of Design and a pilot’s license in 1975. During the past three decades, he has flown over much of the United States, documenting the evolution of the landscape. From vast agricultural patterns to city grids, his images explore the relationship between natural and constructed environments. MacLean’s awards include the 2009 Corine International Book Award and the Rome Prize in Landscape Architecture for 2003–2004 from the American Academy in Rome. His most recent book is Over: The American Landscape at the Tipping Point (Abrams, 2008). He lives and maintains a studio in Lincoln, Massachusetts.

Contents

61

SPOTLIGHT ON SOCIAL MEDIA AND THE NEW RULES OF BRANDING

62 Branding in the Digital Age: You’re Spending Your Money in All the Wrong Places Driving online advocacy may be the most effective way to strengthen your brand. David C. Edelman

70 Reputation Warfare Six strategies every company should use to defend itself against small—but fierce—attackers. Leslie Gaines-Ross 78 Why You Need a New-Media “Ringmaster” Forging relationships with consumers in a hyperconnected world demands a new kind of executive—a skilled collaborator who combines tech savvy with solid marketing chops. Patrick Spenner 80 The One Thing You Must Get Right When Building a Brand Don’t throw out your marketing playbook—use social media strategically to enhance it. Patrick Barwise and Seán Meehan

ABOVE Alex MacLean Twists and Turns of a Waterslide Park, 1996 photograph Wildwood, New Jersey

HBR.ORG CLASSIC BRANDING Read “Three Questions You Need to Ask About Your Brand” at hbr. org/spotlight/ branding.

December 2010 Harvard Business Review 5

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HBR.ORG

Features December 2010

50

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86 94 104

THE BIG IDEA

The Case for Professional Boards

Sarbanes-Oxley did little to improve corporate oversight. What’s needed now is not another layer of legal procedures but a new culture of governance in which board service would be the primary occupation of independent directors. Robert C. Pozen

50

Robert S. McNamara and The Evolution of Modern Management

Revered and then reviled, the onetime defense secretary may be posthumously redeemed as an icon of management. Phil Rosenzweig BEST PRACTICES What to do if you’re an underperformer: blogs.hbr.org/ best-practices.

China vs the World: Whose Technology Is It?

China has quietly opened a new front in its battle to lead the world’s economies, forcing multinational companies to part with their latest technologies. What does this mean for China’s relations with the West? Thomas M. Hout and Pankaj Ghemawat

What’s the Hard Return On Employee Wellness Programs?

86 43

Those that pay off are built upon six pillars. Leonard L. Berry, Ann M. Mirabito, and William B. Baun

43 HOW I DID IT

Best Buy’s CEO on Learning To Love Social Media Social media are where the national conversation is taking place today. Are you in or out? Brian J. Dunn 115 THE GLOBE

Let Emerging Market Customers Be Your Teachers

104

To compete in the developing world, tap into the wisdom of local market leaders. Guillermo D’Andrea, David Marcotte, and Gwen Dixon Morrison

6 Harvard Business Review December 2010

94

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From the mind to the marketplace. Intel is helping university students worldwide turn their thinking into the businesses of the future. Because encouraging new ideas fuels innovation. Learn more at intel.com/inside.

HBR.ORG

Departments December 2010 14 20

From the Editor Interaction

25 Idea Watch 25 FIRST

Why You Aren’t Buying Venezuelan Chocolate

Battling perceptions that premium products come from certain places—watches from Switzerland, wine from France—is the marketing challenge for emerging giants. PLUS Why introverts may be the better leaders, and the upside of overqualified job seekers

COLUMNS 38 Rosabeth Moss Kanter We’re far from solving questions of work-life balance. 40 Dan Ariely Companies should evaluate managers on the soundness of their decisions, not on outcomes.

GE

C

AL

E

SU

TH

SKILL S RE LAT P R E- M E E T I N ED G PR TO EP S

G IN

INT

RIS

S

ER

ES

M TO

CC

US

TO

A study of brain activity shows that a good communicator can literally change our minds

LEN

Do You Really Know Who Your Best Salespeople Are? 36 STRATEGIC HUMOR

I Can Make Your Brain Look Like Mine

AL

34 VISION STATEMENT

How the eight common types perform

32 DEFEND YOUR RESEARCH

H EC

Greece would have sole claim over ‘feta’ cheese.” page 25

S ERA

2

4

3

5

6

7

9 10

8

COMPAN Y

S T O RY T E L L I N G

CTION

142

Experts, closers, consultants, storytellers, focusers, narrators, aggressors, socializers page 34

EN

ION TAT

TH

ES A

SP

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H TC

ES

S

PR

SA

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123 MANAGING YOURSELF

& R A P P O RT

DT O

What Brain Science Tells Us About How to Excel

How did Greer go from millionaire to bankrupt in two years? page 130

ON

E CC

S

123 Experience

PRE

Blahnik still designs every shoe page 144

1

EN TA TI

SKILLS NO T RE

LAT

E

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133 CASE STUDY

Should the C-Suite Have a “Green” Seat? A CEO struggles to decide whether

Recent research shows that we do our best work when we are at play, imaginatively engaging with others to achieve a challenging goal. Edward M. Hallowell

to hire a chief sustainability officer. Eric J. McNulty and Rupert Davis

130 CRUCIBLE

140 EXECUTIVE SUMMARIES

metal entrepreneur Stephen Greer rebuilt his company after theft and fraud threatened to destroy it. Daniel McGinn

144 LIFE’S WORK Manolo Blahnik The celebrated shoe designer on balancing art and commerce.

Battling Back from Betrayal How scrap

8 Harvard Business Review December 2010

138 SYNTHESIS Reviews

THE CONVERSATION The smartest minds in management share ideas and experience at blogs.hbr.org/ conversation. MANOLO BLAHNIK Read the extended interview at blogs.hbr.org/ blahnik.

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You finally have a new reason to invest globally. International

freight traffic last month jumped 27% year-on-year, down from 34% last August, but 6% above the pre-recession peak in 2008. Demand continues to follow economic recovery and trade patterns, with the Asia-Pacific region, the Middle East, Latin America and Africa growing quickest, while North America found some more strength in the middle ground. In a reflection of trends in passenger traffic, Europe is growing at half the rate of the fastest-grow the regions isn’t all the information you need. The weaker value of the euro will help the European exporters eventually to increase cargo volumes. International air-passenger traffic in June soared 12% from the same month a year ago as the aviation industry continued to recover much faster than expected . Confidence remains high and there is no indication that the recovery will stall any time soon. With government stimulus packages tailing off and restocking largely completed, But can you trust it? The CEO of the company, which represents some 230 airlines world-wide, comprising 93% of scheduled international air traffic, said that sharp regional differences were evident in the recovery.

©2010 Dow Jones & Company, Inc. All rights reserved.

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hbr.org December 2010

HBR Digital Edition

From the Experts

Did you miss an HBR webinar? Access up to six months’ worth, including John Kotter on winning buy-in and Matthew Kahn on cities and the smart grid at blogs.hbr.org/ events.

Read the entire magazine—enhanced with audio, video, interactive graphics, and links to more online content—on your tablet computer. In this issue, see sketches by legendary shoe designer Manolo Blahnik as he talks about building a busiWHAT’S YOUR ness around creative STYLE? inspiration. And watch Introverts Make HBS professor Rohit Good Bosses Deshpandé discuss Francesca Gino discusses research the next great globalsuggesting that marketing challenge. extroverts aren’t Download it now at the only ones who can be successful digitaledition.hbr.org. leaders at blogs. hbr.org/ideacast.

Are You In? Join the official Harvard Business Review group on LinkedIn and network with fellow readers.

THE ATION ERS D AT CONSVSTARTE HA

RG O . R HB

12 Harvard Business Review December 2010

LEADING VOICES

Tony Schwartz is the president and CEO of The Energy Project. Read why he thinks companies should insist that employees take naps at blogs.hbr. org/schwartz.

Anthony Tjan, CEO, managing partner, and founder of the venture capital firm Cue Ball, on how entrepreneurs balance luck and strategy at blogs. hbr.org/tjan.

HBR in Your In-Box

Sign up for any of our 16 e-mail newsletters, ranging from the Daily Stat to monthly updates on core topics such as technology and marketing, at enewsletters.hbr.org.

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Want instant access to blogs, interviews, and articles about the latest management thinking? Download the iPhone app HBR Today.

HBR IdeaCast

Use your workout or commuting time to follow our weekly IdeaCast—one of iTunes’ top five business podcasts. Find it (along with Harvard Business Review Press audiobooks) at iTunes.

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At the HBR Answer Exchange, you can pose questions about workplace challenges, find solutions, and offer others your advice. Register at answers.hbr.org.

IPAD IMAGE COURTESY OF INFORMATION ARCHITECTS, ILLUSTRATION COURTESY OF MANOLO BLAHNIK

This Month at hbr.org

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hbr.org

From the Editor Adventures in Social Media

I

t’s safe to say that most of us who have tweeted have made mistakes along the way. My earliest experi-

ments with Twitter included a note that I’d meant to send just to my wife

This month’s Spotlight artist, photographer Alex MacLean, captures bird’s-eye views of the changing landscape.

Shandwick shows how companies can most effectively fight back against “reputation snipers”; Patrick Spenner

(“I love you more”), an inexplicable

of the Corporate Executive Board

single-word missive (“Up”), and a

argues that companies need to add

trivial bon mot (“The scariest two-

social media “ringmasters” to their

word phrase in the English language:

leadership teams; and Patrick Barwise

hazelnut decaf”). Unimpressive, sure,

of London Business School and Seán

and they all now live in perpetuity in

Meehan of IMD stress the need to stick

my public Twitter record.

to the branding basics even as market-

While I may still be finding my Twitter voice, I use the service fruit-

ers learn the new-media playbook. This month’s How I Did It feature,

fully in following many others who are

on page 43, addresses the challenges

more savvy and informative, who offer

of new media as well. Brian Dunn, the

insights and links to articles in the

CEO of Best Buy, writes openly about

areas I’m most interested in. I’ve also

how someone hacked his Twitter

watched companies around the world

account and sent his 5,000 followers

grasp tools like Twitter in building

this tweet under his name: “I’ve been

up—and defending—their reputations.

having a lot of great sex lately, and

That’s the focus of this month’s Spot-

here’s why.”

light: “Social Media and the New Rules of Branding,” which starts on page 61.

ABOVE Alex MacLean, Lakeshore Drive Penthouse Pool 1990, photograph, Chicago

A trio of strong pieces flesh out the topic: Leslie Gaines-Ross of Weber

Awkward. Yet despite that experience, Dunn believes the upside of

In the lead piece in the package,

companies’ engaging in social media

David Edelman, a McKinsey principal,

far outweighs the downside. “Social

notes that quick, easy access to data

media are where the national conver-

and opinions has upended the very

sation is taking place today,” he writes,

system through which consumers make their choices. Companies have traditionally spent up to 90% of their

“and either you’re part of that conversation or you’re not.” Up!

marketing budget on advertising and retail promotions. Yet the biggest influence in purchasing decisions is often other people’s recommendations. And the internet makes them ever more accessible.

14 Harvard Business Review December 2010

Adi Ignatius, Editor in Chief

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Smarter business for a Smarter Planet:

What 3 million lines of code means to a piece of luggage. It means Amsterdam Airport Schiphol will be able to accurately and efficiently move 70 million pieces of luggage per year—20 million more bags per year than they used to. The airport’s automated baggage solution will allow them to increase their baggage handling capacity by 40%, so they can meet the growing demand placed on them as one of Europe’s largest transport hubs. This system is built on IBM Rational® and Tivoli® software and runs on Power Systems™. A smarter business is built on smarter software, systems and services. Let’s build a smarter planet. ibm.com/luggage

A data visualization of the flow of baggage traffic at Amsterdam Airport Schiphol. IBM, the IBM logo, ibm.com, Power Systems, Rational, Tivoli, Smarter Planet and the planet icon are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might be trademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. © International Business Machines Corporation 2010.

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Smarter business for a Smarter Planet:

What 99.9% system uptime means to a kilo of gold. It means that the futures contract for that gold can trade instantly and more securely. The Dubai Gold & Commodities Exchange (DGCX) has maintained their complex network of worldwide members for four years without a single security breach due to malware, and without any unplanned downtime. The DGCX worked with IBM Security Solutions to help implement an intrusion prevention system that builds security into every aspect of their online trading services and proactively adapts to ever-evolving threats. A smarter business is built on smarter software, systems and services. Let’s build a smarter planet. ibm.com/exchange

A data visualization of the settlement prices for gold, silver and other commodities from March 1 to September 1, 2010. IBM, the IBM logo, ibm.com, Smarter Planet and the planet icon are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might be trademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. © International Business Machines Corporation 2010.

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Interaction

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When Emotional Reasoning Trumps IQ HBR article by Roderick Gilkey, Ricardo Caceda, and Clinton Kilts, September 2010

Although strategic thinking is often associated with the brain’s more-rational prefrontal cortex, the authors’ research shows that “strategic thought entails at least as much emotional intelligence as it does IQ.” They used functional magnetic resonance imaging to measure brain activity in study participants—managers in a Wharton executive MBA program—as they reacted to strategic and tactical tasks. They found that the best strategic performers showed “less neural activity in the prefrontal cortex than in the areas associated with ‘gut’ responses, empathy, and emotional intelligence.” How did you determine which were the most adept strategic thinkers? Posted by Rick Drain, Founder, Longsplice Investments

The authors respond: We scored our subjects on a number of criteria, including how they considered a range of strategic options, the quality of the strategic options they suggested, the degree of depth and detail they provided, and their strategies’

rational thinking was closing my mind. Posted by Esther Matte, Consultant in cocreation meeting design and facilitation

The authors respond: Using intuitive and creative parts of your neuroanatomy involves suspending other parts (“rational thinking,” as you put it). Sixty percent of brain activity has been described as inhibitory—shutting down certain capacities or processes in order to activate others. Your underlying assumption seems to be that brain function is fixed—a rejection of neuro plasticity. But suppose the inverse is true, that good managers “adapt all those unused emotion-linked parts of their brains” toward logical actions? Posted by Mark Vange, Founder and Executive Vice President, Mobile Post Production

fit with the dilemma they were asked to address. From looking at participants’ fMRI scans, we learned that there were two distinctly different neural activation patterns that correlated at statistically significant levels with the subjects who had either high or low levels of strategic reasoning.

The authors respond: Different kinds of functionality may develop as managers learn to use their cognitive and affective capacities adeptly, but the underlying structures are pretty stable.

I consciously started using intuition and creativity in decision making because

This article helps to debunk the notion largely espoused by for-profit enterprises

HBR blog post by Craig Parks, September 2010

Your Most Helpful Colleague (Don’t You Hate Him?)

Psychology research from Washington State University suggests that generous workers who ask for little in return are resented by colleagues almost as much as their selfish and lazy counterparts. Employees want coworkers with pre­ dictable and manageable behaviors. Managers want the same thing. When employees give too freely, they destroy

20 Harvard Business Review December 2010

predictability by acting outside normal motivations. It makes managing and collaborating harder because the usual levers of influence are no longer effec-

tive. One can’t offer a bonus for harder work, because money doesn’t seem to matter. One can’t punish with extra or unpleasant tasks, because this person takes these on willingly. Chaos ensues, with this person being considered complicated—or complicating—at best. Employees most resent having to come up with new ways of influencing these workers because the traditional ones don’t work. All managers need

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that executives should remain emotionally detached while discharging their duties. Posted by Tobechi Okwuonu, Founder, Empathy— Seeing Through My Lens

The authors respond: Empathy is an important component of strategic thinking. As far as the brain is concerned, strategic, tactical, and moral reasoning require similar patterns of thought and activate similar neural regions of the brain. A great strategy remains the same under conditions that require a change in tactical capabilities. If it has to be changed frequently, it’s not a strategy. Posted by Max J. Pucher, Chief Architect, ISIS Papyrus Software

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Since strategy, tactics, and operations are typically handled by different teams, seamless execution becomes a challenge. Posted by NRKS Chakravarthy, General Manager, Customer Service and Experience, Uninor

models are taking shape, and those companies who respond effectively will come out stronger than ever. At the MIT Sloan School of Management, we provide organizations and individuals with the latest insights, strategies, and tools to launch disruptive ideas, reach emerging markets, and develop new sources of revenue. From product development to technology strategy to

The authors respond: Businesses should not create structures and processes that impede healthy brain function. There is a saying that every organization is perfectly designed to get the results it gets; the strategy-tactics split is a good case in point.

to tweak their methods based on employees’ core motivations—some want money, some feel rewarded with more-challenging work. But those whose motivations are unclear create the unsettling feeling of having a loose cannon: highly valuable but dangerously unpredictable.

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Interaction Brazil’s Whopper Deal

It’s Time to Take Full Responsibility

HBR Blog post by Fernando Luzio, September 2010

The academic evidence of the past 50 years shows that the shareholders of acquiring companies do not gain anything, on average, from acquisitions. For an acquirer to be better than average, it has to do something special. Posted by Costas Markides, Robert P. Bauman Professor of Strategic Leadership, London Business School

Luzio responds: If the new CEO continues business as usual at BK, the acquisition will probably not be effective. It’s not all about catching McDonald’s. The Brazilian buyers are not focused on being first, but on generating value. These guys established a corporate culture during their years at Garantia Bank that is centered on results. The fact that BK has management and strategy problems is more of an opportunity than a challenge for them. Posted by Renato Mendes, CEO, Contraste Solutions

Luzio responds: In finance, we learn that “Cash is King,” but for 3G, “Value is God.”

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22 Harvard Business Review December 2010

HBR article by Rosabeth Moss Kanter, October 2010

We will see if BK competes with McDonald’s head-on, playing their game (for example, adding healthier menu items) with ruthless and ever-increasing efficiency, or if it differentiates its offerings and business model— setting it apart from its largest competitor not in sheer size, but perhaps in customer loyalty and profitability. Posted by Andre Matsushima Teixeira, Managing Director, Merit KPO

McDonald’s is diverting from its own core business by selling smoothies. Posted by Eduardo Gartenkraut, Partner, Gartenkraut Consulting

Luzio responds: Recently, we have seen McDonald’s reinvent itself while preserving the DNA of its core fast-food strategy, adapting its business model to the increasingly health-conscious market. Why couldn’t BK do the same? The most important aspect of the takeover is how the new shareholders will handle the company’s communication system. Few companies use these powerful tools effectively. Posted by Maira Costa, Director of Integrated Communications, FSB Comunicações

Luzio responds: My experience corroborates what Steve Zaffron and Dave Logan call the First Law of Performance: “How people perform correlates to how situations occur to them.” The 3G executives must carefully manage people’s perceptions about any changes in BK’s business model to ensure strategic alignment, focus, and maximum performance.

Supply chain transparency cultivates responsible business, but it also complicates strategy. Kanter says, “It’s no longer good enough to do your job well, satisfy customers, and generate financial returns.” Instead, “companies and leaders will be assessed not only on immediate results but also on longer-term impact—the ultimate effects their actions have on societal well-being.”

This is only a problem if your business strategy is brand recognition. If you’re pushing for a cost-leader strategy this doesn’t matter. Posted by Anonymous

The cost-leader strategy will not suffice when consumers are more concerned about the supply chain than they are about the price of the product. Even Wal-Mart, with its cost-leader strategy, will not be able to hide behind lower prices. Posted by Anthony G. Smith II, Quality Assurance Officer, Wyndham Vacation Resorts

Cost-leader strategy in its purest form is trying to meet a broad market with the lowest cost, without regard to customer retention. Wal-Mart’s business model attempts to get customers to come back with a no-questions-asked return policy. When your strategy is truly cost-leader, customer satisfaction is not a concern; you are simply providing the best price for a product. Posted by Anonymous

Correction: In “Growing Green” (HBR June 2010) the wrong web address appears for the Global Reporting Initiative. The correct address is www.globalreporting.org. We regret the error.

Illustration: matt dorfman

3G Capital, a private equity firm backed by Brazilian investors, purchased American fast-food giant Burger King in September. The takeover is due to finalize in December. For Fernando Luzio, CEO of Luzio Holistic Strategic Vision, “the $3.26 billion involved in the Burger King buyout symbolizes the power that Brazilian banks have accumulated.” In this post, he explores what 3G Capital should do to remake Burger King if it wants to catch up to McDonald’s: redefine BK’s target markets, rethink its offerings, cut excess costs, and re-engage the chain’s employees.

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Leadership 28 Why introverts make good leaders

defend Your research 32 How good communicators change people’s brain waves

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column 40 Dan Ariely on rewarding decisions, not outcomes

New Thinking, Research in Progress hbr.org

First

Why You Aren’t Buying Venezuelan Chocolate

Call it the “provenance paradox.” It’s the big marketing challenge for emerging markets in the next decade. by Rohit Deshpandé

Illustrations: harry campbell

C worldmags

hocolates El Rey is a proud, old company that processes some of the best cacao beans in the world. El Rey commands a 30% price premium for its cacao—the key raw ingredient in chocolate—which is bought by the great chocolate houses in Switzerland and Belgium for use in products that are sometimes more expensive than caviar. El Rey also makes its own brand of excellent chocolate, which it’s trying to sell glob-

ally. But so far, El Rey chocolate is relatively hard to find outside its home market, and people aren’t willing to pay a price comparable with that of, say, Godiva or Lindt. That’s because El Rey is from Venezuela, not Belgium or Switzerland, and consumers have been conditioned to believe that great chocolate comes from Europe, not South America. This is the provenance paradox. A product’s country of origin establishes its au

thenticity. Consumers associate certain geographies with the best products: French wine, Italian sports cars, Swiss watches. Competing products from other countries— especially developing markets—are perceived as less authentic. Even when their quality is on par with that of established players, the developing-market firms can’t command a fair price. The lower price, in turn, reinforces the idea that the offering isn’t as good and that the region doesn’t make premium products. It’s a catch-22 that leaves companies like El Rey—and winemaker Concha y Toro in Chile, IT consultancy Infosys in India, refrigerator maker Arcelik in Turkey, and dozens of others—unable to price products in a way that generates the revenue needed to fuel global growth. Brand building in emerging markets is a long-standing problem—and one that’s been a particular focus of Chinese and Indian companies over the past decade. But as developing countries gain global economic power, the provenance paradox is becoming the marketing and branding challenge for the next decade. It’s the management problem I hear about most from the hundreds of companies in emerging markets that I visit, consult with, and study. These proud companies are determined to move beyond their countries’ colonial heritage of being the world’s supplier of raw materials and become formidable global competitors. For the companies facing the provenance paradox, there is good news and bad news. The good news is that there are specific strategies to deal with this challenge that companies, and even countries, have December 2010 Harvard Business Review 25

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employed successfully. (See “Five Strategies for Combating the Provenance Paradox.”) In many ways, the problems facing Chinese and Indian firms in 2010 are similar to those faced by Japanese firms as they expanded into the U.S. in the 1950s and 1960s, and by Korean companies when they moved into global markets in the 1980s. These case studies can offer valuable lessons to companies from today’s emerging economies.

The bad news: Even when companies are successful, it can be a very slow process. That’s partly because emerging markets are developing faster than the stereotypes are eroding. Even today, most of the goods from emergent economies that are considered “high quality”—and can command a price premium—are raw materials or at the low end of the value chain in categories that these countries became famous for during colonial times.

REGULATING PROVENANCE: THE CHAMPAGNE EFFECT Even casual wine drinkers know that only sparkling wine from a specific region in France is entitled to the label Champagne, just as only the hard cheese from five provinces in Italy can bear the name Parmigiano-Reggiano. These labeling restrictions are part of the Protected Geographical Status framework enforced by the European Union—a set of rules that some countries are trying to expand. Under one proposal, for instance, Greece would have sole claim over “feta” cheese. Protected Geographical Status is an extreme manifestation of the provenance paradox. Proponents of Europe’s approach argue that it prevents inauthentic, cheaper products from dragging down superior ones. Critics, however, see it as a tool to insulate brands from quality competition by reinforcing stereotypes about provenance—and by limiting opportunities for new players from new markets. Historically, Protected Geographical Status has applied mostly to food and drink. But some countries are trying to apply the concept to a wider range of products. A proposed

Geography differentiates authentic Champagne (left) from less pricey sparkling wine. 26 Harvard Business Review December 2010

law backed by Versace, for instance, would allow companies to stitch “Made in Italy” into suits, even if only a small percentage of materials comes from Italy and little of the manufacturing is done there. This would allow Versace to command higher prices for clothes “Made in Italy” while enjoying lower costs from using overseas materials and labor. The effect would be to hurt both high-end clothiers whose suits are entirely made in Italy (and whose costs are therefore higher) and new entrants that can’t afford to use even a limited amount of Italian materials or labor. The law would also reinforce the consumer perception that good suits come from Italy, even when the vast majority of what goes into those suits comes from countries such as India. Emerging economies may be able to turn this regulatory scheme to their advantage: For instance, in 2007, Colombia became the first non-EU country to win designation for a product—in this case, its coffee. But mostly, Protected Geographical Status serves as one more hurdle for emergingmarket companies en route to full acceptance and fair prices.

“Made in Brazil” implies high-quality coffee but not high-quality aircraft—so what does this mean for Embraer? “Made in China” implies high-quality silk but not high-quality financial services—so what does that mean for China International Capital Corporation? And what does it mean for Chocolates El Rey that although Venezuela produces the world’s best cacao, it’s not considered a legitimate source of great chocolate? I’ve worked with IT consulting companies from India that can’t command a premium for their services in Europe simply because of where they’re based. Indian companies are presumed to be good for outsourcing IT grunt work, but not for highlevel strategic consulting. Some of these companies have gone so far as to consider setting up fronts in Europe that conceal (or at least downplay) the fact that they are Indian companies. Mahindra, the Indian multinational, is currently working on a small diesel pickup truck for the Western market. Most of its branding efforts will be centered on overcoming the perception that only cheap cars (such as the much publicized $2,000 Tata Nano) come from India—the same perception that dogged Japanese carmakers for decades as they attempted to penetrate the U.S. market. Apple, the company with the brand position that many of the new entrants would love to attain, provides the clearest example of the bias against emerging markets. On the back of every iPhone is the slogan: “Designed by Apple in California. Assembled in China.” The message couldn’t be clearer: We are the brains behind the brand. They are the labor.

Overcoming the Provenance Paradox

For firms facing a similar kind of discrimination today, it can be encouraging and instructive to see how some now-established companies overcame this hurdle. When the Korean manufacturer Lucky Goldstar wanted to sell its electronics in the U.S. in the 1980s, Best Buy and Home Depot

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Five Strategies for combating the Provenance Paradox

1Stick to Colonial

2 Build a Brand

Examples Turkish rugs, Indian spices, Egyptian cotton, Brazilian iron ore The strategy Focus on the pure-play commodities that made your country’s economy successful in the colonial era. Continue to be a low-cost supplier by achieving scale. Hope you can compete with low wages elsewhere. The threat Competing on price is increasingly difficult in a global economy.

Examples Nissan (née Datsun), Honda, Toyota The strategy Follow Japanese companies that, over decades, created brand-building strategies to overcome stereotypes and misperceptions. Eventually, move upmarket to create luxury brands like Infiniti, Acura, and Lexus. The threat This patient approach requires strategic and financial commitment that many aren’t willing to make.

History

For the Long Haul

3Flaunt Your

Country of Origin

4 Downplay Your

Country of Origin

Example Colombian coffee Example Corona beer The strategy Take an The strategy Focus aggressive approach to branding on aspects of change cultural perceptions. the product unrelated Colombian coffee built to provenance, or invent two brands—“100% a new position in the Colombian Coffee” and category. Corona positions “Juan Valdez”—to transform itself as lifestyle beer the country’s image from and underemphasizes its negative (source of illegal Mexican roots. It focuses on drugs) to positive (robust “fun, sun, beach”—whether coffee). the beach is in Bali, on the French Riviera, or in Cancun The threat This isn’t part of the brand story. risky strategy requires deeply engaged brand The threat This strategy management. carries risk of appearing inauthentic.

Even when brands like Corona do gain acceptance from consumers, it’s a slow process, because emerging markets are developing faster than the stereotypes are eroding. initially refused. They assumed the products were low quality—after all, they were Korean, and they were priced relatively cheaply. So the company entered the U.S. market through second-tier, regional retailers (such as HHGregg and P.C. Richard) and began to slowly transform its brand. In 1995, the company renamed its brand LG. Today it uses the tagline “Life’s good,” and its washers, dryers, and cell phones can be found at all the top big-box stores. Fellow Korean manufacturer Samsung’s story follows a similar arc. When Corona beer entered developed markets, it was disparaged by many in Europe as more fattening than European beer. Some derided it as “Mexican lemonade.” And in 1987 Corona filed a lawsuit against a U.S. Heineken distributor for spreading rumors that Mexican brewery employees regularly urinated into the product during the brewing process. Grupo Modelo, Corona’s

maker, worked painstakingly to counter such claims and educate consumers, while also aggressively branding the product as a lifestyle beer and downplaying hecho en Mexico. Today Corona is the world’s 10th best-selling beer and the number one imported beer in the United States. That success should be an inspiration to Concha y Toro, the Chilean winemaker. It faces an uphill battle in pricing its product competitively with French Bordeaux wines—even though its top end offering, Don Melchor cabernet, receives equally high ratings from Wine Spectator magazine. There is growing awareness among oenophiles that Chile produces some great varietals, and Concha y Toro may take lessons from the California wine industry, which also fought a protracted provenance battle against European wines, but after 20 years gained equal footing. 

5 Hide Behind

A Front Country Example None that wants to talk about it. The strategy Create a separate, local brand to avoid the market’s biases against the country of origin. The threat Exposure could reinforce negative stereotypes about your brand’s home country.

Japan is the best example of how countries can succeed in this slow progression to upmarket positioning. Its auto companies traveled an arduous path from Datsun to Infiniti, Honda to Acura, and Toyota to Lexus; in electronics, Sony now commands steep premiums. But these brands have taken 20 to 50 years to achieve that upscale position. Korean companies accomplished it more quickly with LG, Samsung, and Hyundai, but the process still took decades. One tool that may help new brands overcome the provenance paradox is social media. Emerging-market companies should be using these inexpensive channels to tout positive consumer reviews and get their brand message out. Viral campaigns can help level the playing field with top brands, which are already taking advantage of those channels. Godiva Chocolatier, for example, already has 91,486 Facebook fans. Chocolates El Rey has five— which illustrates the long way Venezuelan chocolate has to go to achieve the premium status it deserves.   HBR Reprint F1012A Rohit Deshpandé is the Sebastian S. Kresge Professor of Marketing at Harvard Business School. December 2010 Harvard Business Review 27

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Stat Watch

500 Billion

That’s the number of impressions that consumers share with others online about products and services annually, say Josh Bernoff and Ted Schadler, Forrester Research analysts and the authors of Empowered. More than 60% of those impressions are shared on Facebook, and 16% of users generate 80% of messages and posts about products and services.

DAILY STAT To receive HBR’s Daily Stat by e-mail, sign up at www.hbr.org/ dailystat.

THE DAILY STAT

Facts and figures to stimulate thought—and actio

Big sale at Macy’s today—20% off everything in the store!

DON’T EAT AT JOE’S

The Fighter is the best movie I’ve seen this year.

TM

LEADERSHIP by Adam M. Grant, Francesca Gino, and David A. Hofmann

The Hidden Advantages of Quiet Bosses

28 Harvard Business Review December 2010

where employees weren’t very proactive, extroverted leadership was associated with 16% higher profits than average—but in franchises where workers offered ideas, extroverted leadership was associated with 14% lower profits. We also conducted a lab experiment in which we asked 163 college students to work in groups to see how many T-shirts they could fold in 10 minutes. Each group had a leader and four followers, two of whom were research assistants posing as followers. To manipulate the behavior of the leaders, we had each read a statement before the activity began: Some read a statement extolling extroverted leaders (like JFK and Martin Luther King, Jr.); oth-

EXTROVERTS RISE TO THE TOP

Whereas just 50% of the general population is extroverted, 96% of managers and executives display extroverted personalities. And the higher you go in a corporate hierarchy, the more likely you are to find highly extroverted individuals. The chart below, based on a 2009 study of 4,000 managers across U.S. industries, shows the percentage 60% of managers at each level who display high levels of 52% extroversion.

TOP-LEVEL EXECUTIVES

EXECUTIVES

41%

MIDLEVEL MANAGERS

36% FIRST-LINE MANAGERS

30% SUPERVISORS

I

t’s conventional wisdom that’s supported by a decade of academic research: Extroverts make the best leaders. These people—dominant and outgoing—are favored in hiring and promotion decisions, and they’re perceived to be more effective by supervisors and subordinates alike. But our research suggests that in certain situations, an introvert may make the better boss. To be sure, extroverted leaders have important strengths. However, they also tend to command the center of attention and take over discussions. In a dynamic, unpredictable environment, introverts are often more effective leaders—particularly when workers are proactive, offering ideas for improving the business. Such behavior can make extroverted leaders feel threatened. In contrast, introverted leaders tend to listen more carefully and show greater receptivity to suggestions, making them more effective leaders of vocal teams. To test this idea, we conducted a field study, in which we sent questionnaires to managers and employees at 130 franchises of a U.S. pizza delivery company. We asked bosses to rate how extroverted they considered themselves, and asked employees to estimate how often they and their colleagues “try to bring about improved procedures,” among other proactive behaviors. We collected data on each store’s profitability, controlling for variables such as whether the franchise was in a high-volume college town. The results showed that in stores

SOURCE DENIZ ONES AND STEPHAN DILCHERT, “HOW SPECIAL ARE EXECUTIVES?” INDUSTRIAL AND ORGANIZATIONAL PSYCHOLOGY, 2009

ers read a statement praising reserved leaders (like Gandhi and Abraham Lincoln). We also predisposed some followers toward proactive behavior. For instance, some of the researcher-followers stopped their groups after 90 seconds and suggested a better way to do the task. The groups with proactive followers performed better under an introverted leader—folding, on average, 28% more T-shirts. The extroverted leaders appeared threatened by and unreceptive to proactive employees. The introverted leaders listened carefully and made employees feel valued, motivating them to work hard. To succeed as leaders, introverts may have to overcome a strong cultural bias. In a 2006 survey, 65% of senior corporate executives viewed introversion as a barrier to leadership, and other studies have shown that highly extroverted U.S. presidents are perceived as more effective. But it’s worth reexamining that stereotype. While it’s often true that extroverts make the best bosses and proactive employees make the best workers, combining the two can be a recipe for failure. Softspoken leaders may get the most out of proactive employees—so save the outgoing, talkative managers for teams that function best when they’re told what to do. HBR Reprint F1012B Adam M. Grant is an associate professor at the University of Pennsylvania’s Wharton School. Francesca Gino is an associate professor at Harvard Business School. David A. Hofmann is a professor at the University of North Carolina’s Kenan-Flagler Business School.

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Research Watch

RESEARCH Follow HBR’s coverage of the latest academic research. http://blogs.hbr.org/research/

What Does Your Logo Really Tell Consumers?

Gap, Inc. learned recently just how powerful logos are when the public panned the redesign of its iconic symbol. Small design elements make a difference. Niels van Quaquebeke and Steffen Giessner of the Rotterdam School of Management showed logos of 100 Global 500 companies to two groups of participants. One group rated them on attractiveness and symmetry; the other judged whether the logo suggested that the company behaved ethically. The finding: Rationally or not, people associate symmetrical logos with more ethical, socially responsible behavior.

Symmetrical = perceived as Ethical

Asymmetrical = perceived as Unethical

hiring by Andrew O’Connell

The Myth of the Overqualified Worker

I

f your recruiting efforts attract job ap- on age or gender, declining to hire overqualplicants with too much experience— ified workers is perfectly legal, as shown by U.S. federal court rulings upholding the a near certainty in this weak labor New London, Connecticut, police departmarket—you should consider a response that runs counter to most hiring manag- ment’s rejection of a high-IQ candidate on the grounds that he’d probably become disers’ MO: Don’t reject those applicants out of satisfied and quit. hand. Instead, take a closer look. This kind of thinking has New research shows that A SURPLUS tossed untold numbers of exoverqualified workers tend to OF TALENT perienced, highly skilled peoperform better than other em- In 2006 the International ple into the ranks of the longployees, and they don’t quit Trade Union Confederation term unemployed, a group any sooner. Furthermore, a conducted a global survey to estimate the percentthat now constitutes nearly simple managerial tactic—em- age of workers in various half of all U.S. jobless. powerment—can mitigate any countries who considered themselves overqualified But even before the ecodissatisfaction they may feel. for the job they hold. The nomic downturn, a surplus The prejudice against too- results: of overqualified candidates good employees is pervasive. Finland 31% was a global problem, particuCompanies tend to prefer an Spain 31 Belarus 30 larly in developing economies, applicant who is a “perfect Russia 30 where rising education levels fit” over someone who brings Argentina 29 are giving workers more skills more intelligence, education, Paraguay 27 Hungary 25 than are needed to supply the or experience than needed. Mexico 25 growing service sectors. In On the surface, this bias makes UK 25 China, where the number of sense: Studies have consisBrazil 24 Denmark 24 college graduates has tripled tently shown that employees South Africa 24 since 1998, more than onewho consider themselves overU.S. 23 fourth of this year’s 6.3 milqualified exhibit higher levels Chile 22 Czech Republic 22 lion college grads are out of of discontent. For example, Colombia 21 work, according to Bloomberg overqualification correlated Netherlands 21 Businessweek. well with job dissatisfaction in Sweden 21 France 19 If managers can get beyond a 2008 study of 156 call-center Belgium 17 the conventional wisdom, the reps by Israeli researchers Saul Guatemala 16 growing pool of too-good apFine and Baruch Nevo. And India 14 plicants is a great opportunity. unlike discrimination based 30 Harvard Business Review December 2010

Two recent studies—one analyzing data on more than 5,000 Americans, the other examining 244 employees of a Turkish apparel chain—show that overqualified employees outperform their colleagues. In the former study, Greg Reilly of the University of Connecticut, Anthony Nyberg of the University of South Carolina, and Mark Maltarich of St. Ambrose University looked at employees with above-average intelligence working in jobs such as car washing and garbage collecting. In addition to achieving higher performance, these cognitively overqualified employees were less likely than others to quit. The researchers point out that many overqualified workers stay put for lifestyle reasons, such as the hours or the company’s values. The Turkish study provides an additional insight: It shows how companies can manage around the “I’m too good for this job” problem. Berrin Erdogan and Talya N. Bauer of Portland State University in Oregon found that overqualified workers’ feelings of dissatisfaction can be dissipated by giving them autonomy in decision making. At stores where employees didn’t feel empowered, “overeducated” workers expressed greater dissatisfaction than their colleagues did and were more likely to state an intention to quit. But that difference vanished where self-reported autonomy was high. “There are distinct advantages to hiring employees who perceive that they are overqualified,” Erdogan and Bauer write. As hiring managers scan résumés, it’s an insight worth considering.   HBR Reprint F1012C Andrew O’Connell is an associate editor at Harvard Business Review.

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Defend Your Research

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HBR puts some surprising findings to the test

Uri Hasson is an assistant professor of psychology at Princeton University.

I Can Make Your Brain Look Like Mine The finding: In good communication, a listener’s brain activity actually begins to mirror the speaker’s brain activity. The study: Uri Hasson and his colleagues Greg J. Stephens and Lauren J. Silbert recorded the brain responses of a woman who was telling a story about her prom and those of people who were listening to her. Afterward, the researchers asked questions to gauge the listeners’ comprehension of the story. The recordings showed that the listeners’ brains started to resemble the speaker’s brain, or “couple” with it. The stronger the resemblance was, the higher the listener’s comprehension of the story. The challenge: Is communication a single cognitive process shared by two brains? Can people who are great at it literally change our minds? Professor Hasson, defend your research. Hasson: It’s a clear and dramatic correla­ tion. The more listeners understand what a speaker is saying, the more closely their brain responses mirror the speaker’s brain responses. What’s more, while normally there was a slight delay in a listener’s response matching up with the speaker’s, in cases of extremely high comprehension, the delay nearly disappeared. In listeners who scored highest on comprehension, brain responses sometimes preceded the speaker’s. HBR: They understood what the speaker was going to say before she said it?

We believe that our recordings showed that good, active listeners were anticipat­ ing what the speaker would say. That was exciting to see. 32 Harvard Business Review December 2010

Or creepy.

No, it’s just two tightly coupled brains communicating well. It’s that feeling you get that you just click with someone. It’s almost visceral. You can finish their sentences. You just know you’re on the same wave. By the way, you get similarly strong feelings when you’re not in sync with someone. Sometimes you can just feel it when someone’s talking and you’re not getting it. Your brains aren’t coupling.

But why does it matter that the brain responses become similar? What does that explain?

Speech production and speech compre­ hension have been studied as separate processes that occur within the bound­

aries of a single brain. I speak and my brain is doing one thing. You listen and your brain is doing another. This is one of the first studies to look at interactions across two brains as a single shared process. Coupling is not a result of understanding. It is the neural basis on which we under­ stand one another. We’re suggesting that communication is a single act performed by two brains.

Subjects listened to a recording of the speaker while inside an MRI machine. Can this really translate to complex, real-world communication?

We suspect the coupling effect would be even stronger in face-to-face communica­ tion, which is enhanced by expressions and gestures. Moreover, you wouldn’t have the unnatural noise distractions that you have in the MRI scanner. We did use spe­ cial recording and listening equipment to eliminate some of those. And even though listeners didn’t have any nonverbal cues, the coupling was widespread across all dif­ ferent levels of the brain’s network, from low-level processing of auditory informa­ tion to higher functions. Unfortunately, the state of technology doesn’t allow brain responses to be measured in real-world settings yet. Someday!

So, here’s the million-dollar question: Why do some people’s brains couple more easily?

We don’t know yet. That’s what we’re looking at next. Are some leaders, for example, better at coupling their brains with others’? I think of how mesmer­ ized and engaged people are by good communicators. I saw Obama speak at

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Meeting of the Minds When brains couple, listeners’ brain activity becomes similar to speakers’. The less lag, the higher the listener’s comprehension of what the speaker is saying. In cases where comprehension is highest, the listener’s brain activity actually precedes the speaker’s. These are cases where you might say that two people “just click.”

SPEAKER

SPEAKER PRECEDES LISTENER

ZERO LAG

LISTENER LISTENER PRECEDES SPEAKER

a rally once, and people in the audience were captivated. Is he somehow more capable of inducing similar brain responses across all listeners? What are the mechanisms that allow a listener’s brain to couple or not? If you disagree with Obama’s views, do you actively prevent your brain from coupling? Can I interfere with the signal? Why does miscommunication, or a lack of coupling, happen? How do children acquire the ability to couple brains? These are all questions we want to look at.

Do you think some people are born with the ability to couple their brains with others’? There’s probably a spectrum of abilities. On one end you have an autistic person who can’t seem to transmit or pick up the

autistic person click? What if we could test people’s ability to transmit and receive these signals? Can we help people learn to lead better? Can we reduce miscommunication by increasing coupling?

You use terms related to wireless communications—“coupling,” “wave,” “signal.” Do you see the brain as a kind of wireless transmitter? That’s precisely it. I’m generating a brain wave that generates a sound wave that generates a brain wave in you. There’s nothing mystical about this. It’s not a Jedi mind trick. This is what communication is. It is what humans do best, and it’s unique and amazing.

How?

right information to have successful brain coupling. He can’t click with others. On the other end you have people who almost seem to transmit a common signal and are very easy to connect with.

I don’t want to get too philosophical, but basically, all brains are coupled to the external world. If I sat next to you in a movie theater and someone measured our brain responses, they’d see extremely similar patterns. We couple to external stimuli in the same way because as a species, humans have similar perceptions of the external world. All monkeys’ brains respond to a banana in pretty much the same way. But humans can couple brains directly, without external stimuli. I can say “elephant” and you’ll comprehend what I’m saying even if there’s no elephant in the room. My brain conveyed the idea of an elephant directly to your brain. Not all animals can do that. But humans can.

Could understanding the mechanisms help us move along that continuum?

Honestly, this is all giving me a headache.

Absolutely. That’s an important way ahead for us. What if we could help the

Our brains must be out of sync. HBR Reprint F1012D

There’s nothing mystical about this. It’s not a Jedi mind trick. This is what communication is. It is what humans do best, and it’s unique.

Changing the Game: Negotiation and Competitive Decision Making March 27–April 1, 2011 Building Businesses in Emerging Markets April 11–15, 2011 Taking Marketing Digital April 26–30, 2011 Driving Performance Through Talent Management May 8–13, 2011 The Corporate Leader June 5–10, 2011 The Global Economy June 15–18, 2011 Driving Corporate Performance July 17–22, 2011 Delivering Information Services July 24–30, 2011

Learn more at www.exed.hbs.edu/pgm/hbr/

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IDEA WATCH

Vision Statement TO

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34 Harvard Business Review December 2010

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  Need mentoring to integrate more dimensions into their approach and enrich customer interactions. Have the potential to become experts.

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could boost sales.

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RISING TO THE CHALLENGE

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SKILL S RE LAT MEETING ED PRE TO P

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OF PROFIT PER SALE IS NEEDED JUST TO COVER THE COST OF FAILED SALES MEETINGS, ASSUMING THAT THE MEETINGS COST, ON AVERAGE, $160.

CUSTOMER INTERACTION

HA

Consultants

listen well and are good Expert Product Closerproblem solvers; they Consultant Storyteller develop solutions that meet Product/Service their customers’ needs. Focused But they tend to be oneNarrator Deal-Maker dimensional and to forgo Socialiser valuable case examples that

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SALESPEOPLE EXCEED THEIR TARGETS.

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RISING TO THE CHALLENGE

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of the salespeople in our

sample were in this group. CEOs are investing more than ever in their sales forces, but results aren’t improving. To understand this disconnect, we observed 800 sales professionals in live sales meetings. We discovered eight sales types. The bad news is that only three of them—accounting for a Closers mere 37% of salespeople—were conpull off some very big deals sistently effective. What’s more, someExpert Product Closer(typically in product sales rather than in service sales) of the behaviors of the remaining 63%Consultant Storyteller can effectively counter Product/Service actually drove down performance. ButFocused and customer objections. But Narrator there’s good news, too: The eight types Deal-Maker their smooth-talking style represent behavioral tendencies, not Socialiser puts some customers off. set-in-stone personalities. Managers   Need light-touch mencan effect changes in their current toring to improve selling of services. A strong salespeople and recruit better team motivation and reward members in the future if they undersystem must be in place to retain them. stand the eight types. % RISING TO THE CHALLENGE

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Data by Lynette Ryals and Iain Davies; CUSTOMER visualization by Open

sales staff, and spread best practices throughout the company.

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make selling seem effortExpert Product Closerless, keep cust0mers happy, Consultant Storyteller and consistently outperform Product/Service their peers. Focused Narrator Deal-Maker   Should mentor up-andSocialiser comers, help less effective

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Experts

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Do You Really Know Who Your Best Salespeople Are?

THE BEST

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PRESENTATION & RAPPORT

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How to Read the Performance Charts How the Eight Types Perform After categorizing the eight types of salespeople, we measured their performance in three important sales activities: securing next steps from customers, closing to the next stage of a deal, and closing the deal.

HIGH

THE BEST SECURE NEXT STEPS

Each circle has seven components of a sales meeting around its circumference. We rated salespeople on 23 selling skills related to these components and plotted their scores inside the circles, with 1 (worst) being closest to the center and 10 (best) the farthest out. (As it happened, not all of the skills affected success.) The larger the polygon connecting the scores, the more skilled the salesperson. The gray dotted polygon in each circle represents the average performance scores of all the salespeople in our sample.

THE REST

CLOSE TO THE NEXT STAGE CLOSE THE DEAL

LOW

THE REST PRESENTATION & RAPPORT

Storytellers PREMEETING

are customer focused and love to provide case studies, but they often “talk through the sale” and waste time in long meetings that don’t yield results. THE SALES PITCH

COMPANY PRESENTATION

PRESENTATION & RAPPORT

Aggressors PREMEETING

approach sales meetings purely as price negotiations. They can score big wins, and they rarely concede too much; however, some customers dislike their combative approach. THE SALES PITCH

COMPANY PRESENTATION

CUSTOMER INTERACTION

CUSTOMER INTERACTION

  Need training to focus meetings (for example, setting clear agendas and targets), to “read” meetings, and to become more aware of their behavior. RISING TO THE CHALLENGE

STORY TELLING

7% PRESENTATION & RAPPORT

Focusers PREMEETING

know their products cold and believe deeply in them, but they lack confidence. They often insist on detailing every product feature and may not hear customers’ needs. THE SALES PITCH

COMPANY PRESENTATION

CUSTOMER INTERACTION

  Need training in listening skills and must learn to use their technical savvy to meet customers’ needs. RISING TO THE CHALLENGE

19% STORY TELLING

  Need a broader repertoire of skills; should improve their market knowledge. May benefit from self-awareness training. RISING TO THE CHALLENGE

STORY TELLING

7%

PRESENTATION & RAPPORT

Socializers PREMEETING

may initially impress customers with their friendly chat about such things as children and cars. But they usually don’t get past this, and close few deals. THE SALES PITCH

COMPANY PRESENTATION

CUSTOMER INTERACTION

  Need training in transitioning to selling mode sooner; should have clear short-term targets. Must be closely managed. RISING TO THE CHALLENGE

15% STORY TELLING

PRESENTATION & RAPPORT

Narrators PREMEETING

know their offerings and the market but are overly dependent on scripts. They cling desperately to marketing materials and fail to respond adequately to challenging questions. THE SALES PITCH

COMPANY PRESENTATION

CUSTOMER INTERACTION

  Need basic instruction in questioning techniques and improvisation. Should shift their focus from PowerPoint and brochures to customers themselves. RISING TO THE CHALLENGE

STORY TELLING

15%

Lynette Ryals is a professor at the UK’s Cranfield School of Management; Iain Davies is a lecturer at the University of Bath; Open is a design studio in New York. HBR Reprint F1012Z December 2010 Harvard Business Review 35

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Idea watch

HBR.ORG

Strategic Humor Ah, just the person I want to keep out of the loop.

“CEOs are narcissistic— if they weren’t, they wouldn’t be leaders.” Tragic, isn’t it?

Kerry J. Sulkowicz, “Worse Than Enemies: The CEO’s Destructive Confidant,” Harvard Business Review, February 2004

cartoons: P.C. VEY, teresa burns, Paul Kales

Where do you see yourself stuck five years from now?

36 Harvard Business Review December 2010

©2010 General Motors. Cadillac® CTS®

©2010 General Motors. Cadillac® CTS®

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The door handles are invisible. and ThaT’s abouT iT. When You build a CouPe so Pure oF ForM ThaT The ManuFaCTurinG ProCess had To be reinvenTed, even The door handles shouldn’T GeT in The WaY.

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THE NEW STANDARD OF THE WORLD

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COLUMN

HBR.ORG

Kanter

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Work Pray Love

W

ork-life balance has become a hot topic in recent years, especially for companies that want to attract, motivate, and retain top talent. Yet, as workplaces morph to reflect the realities of people’s lives beyond work, unresolved issues remain. Overload. The movie title I parody, from Elizabeth Gilbert’s book, is EAT Pray Love. But who has time to eat? Quick bites replace leisurely meals, as work threatens to overwhelm everything else. Productivity is measured; well-being is not. Workplace stress has health consequences, draining the economy in other ways even when companies show high profits. For working parents, primarily women, it can appear easier to opt out than to ease up. In addition to being flexible, companies could define work in modules, rather than as “full time” or not, and create metrics for life satisfaction, not just work engagement. Stay home and work. Remote work has underutilized potential. It should be a nobrainer enshrined in public policy. It would cut traffic congestion and air pollution,

38 Harvard Business Review December 2010

Remote work has underutilized potential. It should be a no-brainer enshrined in public policy. save energy, make it easier to drop kids at school or care for them at home. About 40% of IBM employees don’t sit in an IBM office on any given day; IBMers in developing countries can get allowances for broadband connections at home. The work of family. A recent conference was titled “What Men Can Do to Advance Women’s Leadership.” For starters, the laundry. The division of labor at home has barely budged in recent decades (although high-tech strollers suitable for jogging attract young fathers, giving young mothers a short break). As long as women shoulder a disproportionate share of family responsibilities, they risk exhaustion and limits to the extras that build leadership capabilities, such as special projects, travel, professional associations, and civic involvement.

Pay equity. Complete this sentence: “If women ran the world….” Some people answer, “More butter, fewer guns.” But I say, using U.S. statistics, that if women ran the world, running the world would pay 83 cents on the dollar. The gender gap is hard to close, even with reductions in blatant discrimination and occupational sex segregation. Interrupted careers might explain lower lifetime wages and subtle bias. When providing opportunities, do decision makers place bets on who will stay, who will rise? Beware of self-fulfilling prophecies. “Pray” between work and love. Values are in vogue. Many companies seek universal values to unite diverse people behind a common purpose, matching the newer generations’ desire for meaningful, values-based work. At the same time, religion, long a personal matter left to family time, is creeping into the workplace and proving difficult to deal with. Some companies try to ban discussion of religion (and politics) at work. Others wonder where to draw the line: prayer breakfasts, spiritual study groups, religious garb, holiday decorations? Workplace etiquette. Structural solutions—such as flexible hours, remote work, family-friendly benefits programs, drycleaning services, and on-site chapels— haven’t always changed interaction norms. The Good Workplace in theory can be undermined by retro managers who begrudge people their personal lives. Yet sometimes the managers have arguments on their side. Working parents or religious devotees may take their privileges as license to provide too much personal information. If they miss a meeting, so be it. But flaunting their “more important” responsibilities or appearing to put the rest of life ahead of work can demoralize hardworking colleagues who feel they must take up the slack. With benefits come responsibilities. Clearly, the connections among working, praying, and loving are ripe for reinvention. So smile like Julia Roberts in the movie, and put these issues on top of the management agenda. HBR Reprint F1012E

ILLUSTRATION: ROBERT CARTER

Rosabeth Moss Kanter holds Harvard Business School’s Arbuckle Professorship and specializes in strategy, innovation, and leadership. Her latest book is SuperCorp (Crown, 2009).

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Ariely

Dan Ariely ([email protected]) is the James B. Duke Professor of Behavioral Economics at Duke University and the author of Predictably Irrational (HarperCollins, 2008).

Good Decisions. Bad Outcomes.

40 Harvard Business Review December 2010

things rather than one big thing. But the effect is the same. Rewarding and penalizing leaders based on outcomes overestimates how much variance people actually control. (This works both ways: Just as good managers can suffer from bad outcomes not of their own making, bad managers can be rewarded for good outcomes that occur in spite of their ineptitude.) In fact, the more unpredictable an environ-

2. Document crucial assumptions.

Analyze a manager’s assumptions at the time when the decision takes place. If they are valid but circumstances change, don’t punish her, but don’t reward her, either.

3. Create a standard for good decision making. Making sound assump-

tions and being explicit about them should be the basic condition for getting a reward. Good decisions are forward-looking, take available information into account, consider all available options, and do not create conflicts of interests.

Board members estimate that you’ll get only about 10% more stock value from a good CEO than from a mediocre one. ment becomes, the more an outcomesbased approach ends up rewarding or penalizing noise. In the last year I’ve asked many board members how much of a company’s stock value they think should be attributed to the CEO’s strength, and the answer is surprising.

4. Reward good decisions at the time they’re

made. Reinforce smart habits by breaking the link between rewards and outcomes. Our focus on outcomes is understandable. When a company loses money, people demand that heads roll, even if the changes are more about assuaging shareholders than sound management. Moreover, measuring outcomes is relatively easy to do; decision-making–based reward systems will be more complex. But as I’ve I said before, “It’s hard” is a terrible reason not to do something. Especially when that something can help reward and retain the people best able to help you grow your business. HBR Reprint F1012F

ILLUSTRATION: AARON LEIGHTON

I

f you practice kicking a soccer ball with your eyes closed, it takes only a few tries to become quite good at predicting where the ball will end up. But when “random noise” is added to the situation—a dog chases the ball, a stiff breeze blows through, a neighbor passes by and kicks the ball—the results become quite unpredictable. If you had to evaluate the kicker’s performance, would you punish him for not predicting that Fluffy would run off with the ball? Would you switch kickers in an attempt to find someone better able to predict Fluffy’s involvement? That would be absurd. And yet it’s exactly how we reward and punish managers. Managers attempt to make sense of the environment and predict what will result from their decisions. The problem is that there’s plenty of random noise in competitive strategic decisions. Predicting where the ball will go is equivalent to deciding whether to open a chain of seafood restaurants on the Gulf Coast. The dog running off with the ball is the BP oil spill. When the board reviews the manager’s performance, they’ll focus on the failed restaurants. The stock is down. The chain lost money. Since the manager’s compensation is tied to results, he’ll incur financial penalties. To save face and appear to be taking action, the board may even fire him—thus giving up on someone who may be a good manager but had bad luck. The oil spill example is an extreme case. In the real world, the random noise is often more subtle and various—a hundred little

They estimate that you’ll get about 10% more stock value, on average, from a good CEO than from a mediocre one. Implicit in that estimate is the understanding that many outcomes are outside a leader’s control. We can’t entirely avoid outcome-based decisions. Still, we can reduce our reliance on stochastic outcomes. Here are four ways companies can create more-sound reward systems. 1. Change the mind-set. Publicly recognize that rewarding outcomes is a bad idea, particularly for companies that deal in complex and unpredictable environments.

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The World Innovation Summit for Education is unique in its global and multi-disciplinary approach. The 2010 Summit will bring together 1,000 renowned education experts and decision makers from all continents and all sectors of society. The goal? To shape innovative education models for the 21st century. Expanding its platform for dialogue and action, the World Innovation Summit for Education will explore crucial questions and exciting trends, tackling major education challenges and encouraging the development of effective tools, practices and sustainable solutions.

World Innovation Summit for Education Building the future of education www.wise-qatar.org

United Nations Educational, Scientific and Cultural Organization

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We focus on customizing Target’s direct mail program. So they don’t have to. Xerox software allows Target to deliver specially personalized offers to each and every mailbox. Which in turn allows Target to focus on delighting all their guests, each and every time they visit. RealBusiness.com

©2010 XEROX CORPORATION. All rights reserved. XEROX,® XEROX and Design,® and Ready For Real Business are trademarks of Xerox Corporation in the United States and/or other countries. The Bullseye Design and Bullseye Dog are trademarks of Target Brands Inc. All rights reserved.

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How I Did It…

Best Buy’s CEO on Learning to Love Social Media THE IDEA

Despite the headaches they can cause, sites like Twitter, Facebook, and YouTube are powerful tools for spotting trends and communicating with employees and customers. That’s why Brian Dunn intends to keep posting.

by Brian J. Dunn

I

was on an overseas business trip early this year when my phone began ringing at 4 AM. The first person to reach me was Best Buy’s VP of operations, but she wasn’t the last—I received a quick series of panicked calls. The “crisis” we needed to manage involved my Twitter account. Ordinarily, I tweet on a variety of subjects— my experiences in Best Buy stores, my kids, even my thoughts on the Minnesota Twins. But this morning my coworkers back in the U.S.—and my 5,000 or so Twitter followers—had read a rather unusual tweet from me: “I’VE BEEN HAVING A LOT OF GREAT SEX LATELY, AND HERE’S WHY.” It was followed by a link to a website, presumably one offering male enhancement pills. Obviously, I’d been hacked. It was embarrassing and irritating. I felt violated. Like many people, I’d been using a password that was easy to remember because it was based on something in my life. We never figured out who got into my account, but it shouldn’t happen again: Having received help from my IT team, I now use well-constructed, tortured passwords, December 2010 Harvard Business Review 43

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How I Did It Follow To read the latest thoughts from Brian Dunn on Twitter, go to twitter.com/bbyceo.

and I change them every three weeks. Nobody likes being this security-minded, but it allows me to stay out there online. Getting hacked wasn’t the only negative experience I’ve had with social media, but I’ve never considered pulling back from using them. That’s the key point: You can’t just dabble in social media. You can’t use them only when things are good. You have to deal with rain as well as sunshine. And I’m convinced that the upside outweighs the downside. I’m a heavy user of Twitter and Facebook, and I learn a lot from the

BEST BUY vital statistics Founded: 1966 retail locations: 4,027 CURRENT Employees: 180,000 Headquarters: richfield, minnesota FISCAL 2010* Revenue: $49.7 billion FISCAL 2010 Net EARNINGS: $1.3 BILLION *ended 2/27/10

revenue and net earnings 2006 to 2010

NET EARNINGS REVENUE 1.3

US$B 50

1 1.4 1.4

40 1.1 30

49.7

45

40

35.9

30.8

20

FY2010

FY2009

FY2008

FY2007

FY2006

10

Source best buy

44 Harvard Business Review December 2010

time I spend on those platforms. I interact directly with customers and employees. I watch trends and see news I’d miss otherwise. Ultimately, I believe that Best Buy’s message has to be where people are. Today, that means being on social networks. Many CEOs disagree. You’d be amazed at the number of people I talk to—people who run big businesses around the world— who think social networking is just a fad, or that what you see on Twitter and Facebook is simply clutter. It’s not. If a company, or even its chief executive, doesn’t have a presence on social networks today, that company risks not being in the conversation at all. Over time, I believe, that can be fatal to a business.

Late-Night Tutorials

Social networking is merely the latest technology trend that I’ve seen take hold during my time at Best Buy. I started working at the company in 1985, when it had only nine stores. Back then, the business was all about console televisions, VCRs, and CD players. Camcorders were just beginning to come on the scene. The business had nothing to do with computers—Best Buy didn’t start selling PCs until the early 1990s. By the middle of that decade, however, we could see that the internet was gaining traction, and we began to think about e-commerce. At the time, I’d recently been promoted to regional manager. I’d relocated to Columbus, Ohio, and I was running our stores in the Rust Belt—Indiana, Ohio, Pennsylvania. That was the era in which I became utterly fascinated with the internet. We now had access to all these data—even if they weren’t yet packaged in a readily usable

form. I spent a lot of time cruising Prodigy. Best Buy sold a service called Onramp that provided access to the internet, and I used that, too. I’m an autodidactic internet guy— I taught myself a lot about it, surfing at night. The next thing I’d know, it would be two or three o’clock in the morning. Time would fly by, because I had all this new stuff at my fingertips. Some pundits were saying that the internet would kill off brick-and-mortar retailers like Best Buy, but our thinking early on was that e-commerce would complement stores and shopping would become a multichannel process, because the products we sell really need to be experienced. That turned out to be correct: Today our website influences more than 50% of our in-store sales, and about 30% of customers who order online opt to pick up their purchases in a store. It’s striking how central the internet has become in our lives since those days. People want the information; they want the services; they want the entertainment and the connection. Even during the worst part of the recession, customers were buying digital devices at Best Buy—that business continued to grow at a double-digit rate. Since 1995 the internet has become a utility, much like electricity. People no longer view it as a discretionary expense, even in tough times: It’s essential. I became interested in social networking four or five years ago. Back then it was a personal interest, not a strategy. I joined Facebook and found it interesting on a number of levels. One of the things that grabbed my attention when I joined was how quickly many of our employees “friended” me. Facebook turns out to be a very relevant

photography: ap/Mark Lenihan

You’d be amazed at the number of people I talk to who think that what you see on Twitter and Facebook is simply clutter. It’s not.

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“I Need an iPhone 4.” way of connecting with our employees, given the company’s demographics. Today I’m maxed out at 5,000 Facebook friends, most of whom I’ve never met. And I’m still astonished at the things that people reveal about themselves. A couple of days ago, one of these friends posted a status update that he couldn’t believe how much he’d had to drink the previous night and he hoped not to do it again—at least not until the coming weekend. This is what you want to say about yourself in public? Still, it’s fascinating. Twitter took longer to get used to. In the beginning I was terribly self-conscious about tweeting. I’d read so many banal tweets about everyday activities—“I’m having a taco”—that no one cares about. I had to get comfortable with the idea that Twitter is a way to let people know what’s on my mind and that tweets could be genuine extensions of my thinking. When I tweet, I know I’m communicating with my employees. I pass along the good things that I see in a store or hear about a customer’s experience, and people are thrilled to know that I’m hearing good things about them. I like the immediacy of talking to folks. I like that it’s sometimes mundane— not everything I do is necessarily deep or earth-shattering. I’m interested in baseball and basketball and my kids. I like how posting about these things allows us all to be humanized a little bit. Sometimes people ask me if I have an intern or a staff member handling my Twitter account. I don’t. I do get help in writing posts for my Best Buy blog, but on Facebook and Twitter, it’s all me.

Moments of Serendipity

These sites have changed the way I consume media. On Sunday mornings at home, my wife reads the newspaper, but I open up my iGoogle page, which has RSS feeds of everything I’m interested in. My news is totally customized. I check Twitter trends every day to see what people are talking about. And I routinely click on links posted by people I follow. Twitter takes me to new places and to publications I’d normally miss or not read because there are only so

Last summer a Best Buy employee posted a wickedly satirical animation on YouTube.

In it, a customer at “Phone Mart” insists that he wants an iPhone 4, even as a sales associate lists attributes that might make the rival HTC EVO phone a better choice—such as its bigger screen, faster internet speeds, superior camera, and replaceable battery. “I don’t care,” the customer says to every feature. Eventually the salesperson shifts to fantastical claims:

many hours in the day. Newspapers are still good partners for Best Buy, but I don’t have to read them anymore. These platforms also let people get in touch with me directly, which can provide moments of serendipity. Here’s one example: On Memorial Day, I tweeted a simple thank-you to U.S. service members for all they do, and particularly thanked Best Buy employees who are making sacrifices to serve in the military reserves. A few minutes later I received a note from Jen Whitacre, a product specialist in one of our stores in Missouri. Over the next hour we e-mailed back and forth through Twitter. She told me that her fellow employees in the store had put together a technology system—using a laptop, a webcam, and Skype—that lets her and her three young children talk with their father, a soldier in Iraq, every night. 

“It f-----g prints money.” “I don’t care,” the customer repeats. “It can grant up to three wishes—even if one of those wishes is for an iPhone.” “I don’t care.” The profanity-laced video, which had been viewed more than 9 million times by early October, never mentions Best Buy. But the same employee had posted other videos that did—and they portrayed the company’s customers unflatteringly, posing a challenge for CEO Brian Dunn. Watch Link to the video at http://s.hbr.org/aflQlj.

It’s a vivid example of how the connectivity that Best Buy employees help facilitate really can improve people’s lives. I ended up sending our film crew down to Missouri to capture Jen’s magnificent story, to illustrate to our employees the importance of their work. Without Twitter, I never would have connected with Jen. A very different sort of connection occurred last summer, when one of my Twitter followers sent me a link to a YouTube video that featured animated characters talking in funny voices. One character was a salesperson at “Phone Mart,” and the other was a customer who absolutely had to have an iPhone. The video made the customer look stupid. I thought it was very amusing satire. It was edgy, and I can see why the language might have offended people, but it tapped into the fact that we’re December 2010 Harvard Business Review 45

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“Be Smart. Be Respectful. Be Human.” Edited excerpts from Best Buy’s social media policy. all very aware of what badge we’re displaying when we carry our smartphones. The brands really matter to people. By the time I saw it, the video had been viewed 1.5 million times. Today it’s been viewed more than 9 million times.

Blogosphere Drama

That Twitter link to YouTube indirectly alerted me to a problem. The video didn’t mention Best Buy, but it was created by a Best Buy associate. I soon learned that he had posted several other videos in which Best Buy was specifically mentioned—in ways that weren’t flattering to our customers. Those videos were taken down, but the issue quickly became a big blogosphere drama about whether Best Buy was going to terminate the employee who created them. We did suspend him for several days while we looked into the details. Ultimately, we invited him back to work, but in the meantime he’d decided to pursue a career in filmmaking. The whole experience was awkward. A lot of people said negative things about a company I love, and I wish it hadn’t played out on such a public stage. My reaction to the incident was similar to how I felt when I got hacked: You don’t enjoy it, but you have to be out there online, and there’s no way to put this genie back in the bottle. What you can do is try to educate employees about what’s appropriate to post and what’s not, what’s intellectual property and what’s not. Last year we put out a social media policy that applies to all employees. It requires them to disclose that they’re Best Buy employees if they’re discussing the company online. It requires them to keep nonpublic financial or operational data private. “Basically,” it says, “if you find yourself wondering if you can talk about something you learned at work—don’t.” Really, a lot of the guidelines are just common sense. For instance, manufacturers like Hewlett-Packard and Samsung regularly show our employees prototype devices that aren’t public yet, and it’s wrong to post pictures of them—it violates the 48 Harvard Business Review December 2010

Guidelines for functioning in an electronic world are the same as the values, ethics, and confidentiality policies employees are expected to live every day, whether you’re Twittering, talking with customers, or chatting over the neighbor’s fence. Remember, your responsibility to Best Buy doesn’t end when you are off the clock. Disclose your affiliation: If you talk about work-related matters that are within your area of job responsibility, you must disclose your affiliation with Best Buy. Honor 0ur differences: Live the values. Best Buy will not tolerate discrimination. Never disclose nonpublic financial or operational information, internal communication regarding promotional activities or inventory, or personal information about customers. Basically, if you find yourself wondering if you can talk about something you learned at work—don’t. Just in case you are forgetful, here’s what could happen. You could get fired, get Best Buy in legal trouble with customers or investors, or cost us customers. Remember: Protect the brand, protect yourself.

arrangements we make with our suppliers. When I post things, I always remember that I have a responsibility to 180,000 folks who work in our stores. I don’t say or do anything that I wouldn’t want to see published in a newspaper.

A Virtuous Circle

Mostly, though, I tend to focus on the positive aspects of social networking. I get asked all the time, “How are you going to monetize this?” I think that’s the wrong question. The right question is “How am I going to deepen my relationship with customers and employees and deepen the conversation that goes on where they are?” Right now social networks are an important part of the answer. Today when people buy

a new device, they often “crowdsource” advice by asking for recommendations on Twitter or Facebook. That practice will become more and more influential over time. As an electronics retailer, we know that there’s a virtuous circle here: The more people become involved in social media, the greater the demand for connectivity and the PCs and mobile devices that deliver it. So social media are absolutely core to our strategy. I believe that our company is best positioned to give consumers these latest and greatest technologies, and our Geek Squad and our men and women in blue shirts are there to put solutions together for people. In fact, we’re even using social media to help provide those solutions. On Twitter we have a feed called Twelpforce. Customers can post about their tech problems, and Best Buy associates—or other Twitter users—can post solutions. By monitoring the feed, we’re able to learn a lot about what our customers are doing and to help them with problems in real time. We’re providing advice to the public at no charge, and some people think that’s a mistake, since we also operate Geek Squad for a fee. But I reject that notion: Twelpforce makes us more valuable and connected to our customers, and that’s the only sustainable way of building customer loyalty over time. People are going to shop with companies they think really care about what it is they’re trying to do. Twitter lets us demonstrate that we’re one of those companies. So as the holiday season approaches, I’ll be tweeting frequently. I’ll be talking about how pleased I am with the job our folks are doing. I’ll be talking about the hot products I’m most excited about. I’ll be sharing my impressions as I visit stores. And I’ll probably wax poetic about family and friends and other things I care about. The reality is that social media are where the national conversation is taking place today—and either you’re part of that conversation or you’re not.   HBR Reprint R1012A Brian J. Dunn has been Best Buy’s CEO since June 2009.

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The Big Idea

50 Harvard Business Review December 2010

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r o f e s l a a C n o e i Th ofess r P ards o B nt ozen e m ge t C. P a g en ober e r mo s. by R t e g tor o t c e e r i m i It’s t your d from

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THE BIG IDEA THE CASE FOR PROFESSIONAL BOARDS

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hen the world’s largest financial institutions had to be rescued from insolvency in 2008 by massive injections of governmental assistance, many blamed corporate boards for a lack of oversight. This was a problem we had supposedly solved nearly a decade ago, when blatant failures of corporate governance (remember Enron?) prompted Congress to pass the Sarbanes-Oxley Act. The new rules had seemed promising. The majority of a board’s directors had to be independent, which would, in theory, better protect shareholders. Senior executives were required to conduct annual assessments of their internal controls for review by external auditors, whose work would be further reviewed by a quasigovernmental oversight board. The recent financial meltdown, however, has made it clear that the new rules were insufficient. Most major financial institutions in 2008 were more than compliant with SOX. Indeed, at the banks that collapsed, 80% of the board members were indepen-

dent, as were all members of their audit, compensation, and nominating committees. All the firms had evaluated their internal controls yearly, and the 2007 reports from their external auditors showed no material weaknesses in those controls. But that didn’t stop the failures. Why were the SOX reforms so ineffective? In my view, they merely added a new layer of legal obligations to the job of governance without improving the quality of people serving on the boards or changing their behavioral dynamics (with one exception, see “Executive Sessions: A Reform That Works”). I’ve been the president or chairman of two global financial firms, an independent director of several large industrial companies, and a longtime scholar of corporate governance. During my career, I’ve seen several chronic deficiencies in corporate boards: Boards are often too large to operate effectively as decision-making groups. Members frequently lack sufficient expertise in the relevant industry. And most important, few members devote the time needed to fully understand the complexities of the company’s global operations. In the following pages I present a new model for corporate governance.

I

Introducing the Professional Board

propose a model of professional directorship that directly responds to the three main factors behind ineffective decision making. In this model, all boards would be limited in size to seven people. Management would be represented by the CEO, and the other six directors would be independent. Most of the independent directors would be required to have extensive expertise in the company’s lines of business, and they would spend at least two days a month on company business beyond the regular board meetings. Smaller size. Many of the financial institutions that failed in 2008 had very large boards, and all had a substantial majority of independent directors. Citigroup, for example, had 18 directors, of whom 16 were independent. Boards as large as this are common in the financial sector. Industrial companies tend to

The Citigroup board was filled with luminaries from many walks of life. Yet in early 2008 only one of the independent directors had ever worked at a financial services firm. 52 Harvard Business Review December 2010

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Idea in Brief The model for corporate governance is broken. Despite having boards crammed with eminent independent directors following detailed procedures, many of the world’s largest financial institutions had to be rescued from insolvency in 2008.

Insufficient board oversight is a problem that was supposedly solved in 2002, with the passage of the famous Sarbanes-Oxley Act. Yet all the firms that failed in 2008 were SOX compliant. The reforms did little to improve the quality of people serving on boards or change their behavioral dynamics.

To improve governance, companies need to move to a model of professional directorship: Board service would be the primary occupation of independent directors, and not an ancillary avocation. The new model would address chronic deficiencies of corporate governance by taking the following measures:

• Reduce board size to seven members to improve decisionmaking effectiveness; • Require that most directors have industry expertise to allow them to better guide today’s complex businesses; • Require directors to devote sufficient time to properly understand and monitor the company’s operations.

Lack of expertise among directors is a perennial have somewhat smaller boards—the average size for problem. Most directors of large companies struggle S&P 500 companies was almost 11 in 2009, according to properly understand the business. Today’s compato recruitment consultants Spencer Stuart. nies are engaged in wide-ranging operations, do busiBut even 11 directors are too many for effective decision making. In groups this large, members en- ness in far-flung locations with global partners, and gage in what psychologists call “social loafing”: They operate within complex political and economic environments. Some businesses, retailing, for one, are cease to take personal responsibility for the group’s relatively easy to fathom, but others—aircraft manuactions and rely on others to take the lead. Large facture, drug discovery, financial services, and telegroups also inhibit consensus building, which is the communications, for instance—are technically very way boards typically operate: The more members challenging. I remember catching up with a friend there are, the harder it is to reach agreement, and so who had served for many years as an independent fewer decisive actions are taken. Research on group dynamics suggests that groups of six or seven are the most effective at decision making. They’re small enough for all members to take personal responsibility for the group’s actions, and they can usually reach a consensus in a reasonably short time. In my opinion, these advantages of small size outweigh the potential benefits of having extra generalists on a large corporate board. director of a technology company. The CEO had sudThe six independent directors called for in the new model are sufficient to populate the three key denly resigned, and my friend was asked to step in. committees: audit, compensation, and nominating. “I thought I knew a lot about the company, but boy, was I wrong,” he told me. “The knowledge gaps beThree different directors would serve solely as chairs of each of those committees, and the other three di- tween the directors and the executives are huge.” To close those gaps, large companies need inderectors would each serve on two of them. Greater expertise. The Citigroup board was pendent directors who have the expertise to propfilled with luminaries from many walks of life—it erly evaluate the information they get from manboasted directors from a chemical company, a tele- agers. Perhaps more important, the directors must com giant, and a liberal arts university, for example. know what questions to ask about information they Yet in early 2008 only one of the independent direc- are not getting. Consider Medco, a pharmaceutical tors had ever worked at a financial services firm— benefit manager (PBM). When it was owned by drug giant Merck, Medco recognized as revenue the drug and that person was concurrently the CEO of a large copayments made by patients, although the comentertainment firm. Of course, every board needs pany never owned those payments but merely proa generalist to provide a broad perspective on the cessed them and passed them through to the health company’s strategy, and also an accounting expert to head the audit committee. The other members, insurer. The distinguished directors on Merck’s audit committee were generally unaware of this however, should be experts in the company’s main practice until Merck tried to sell some shares to the line of business.

“I thought I knew a lot about the company,” said one director, “but boy, was I wrong.”

December 2010 Harvard Business Review 53

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The Big Idea The Case for Professional Boards

Executive Sessions

A Reform That Works In 2003, the SEC approved some additional governance standards for public U.S. companies. One of them—the requirement that the independent directors of all listed companies meet regularly in executive session without management present—represents a significant improvement in board oversight.

At these sessions, independent directors are able to candidly discuss controversial issues facing the company. Some issues involve the CEO personally—his or her compensation, leadership strengths and weak­nesses, or succession strategy. Others are broader, such as legal allegations against the company, potential changes in control,

or dissatisfaction among mem­bers with how the board operates. When the CEO is present, many independent directors are reluctant to raise concerns about his or her competence or tenure. They may also refrain from complaining strenuously about the company’s handling of important issues. The unwritten rules in many

material issues came before the audit committee. For public. If any of the independent directors had been the first time, the audit committee members began experts in the field, they would have known that some PBMs recognize revenue this way and could “to know what we didn’t know,” to paraphrase former U.S. Defense Secretary Donald Rumsfeld. have evaluated the appropriateness—and potential Independent directors of large companies somepitfalls—of the practice for Merck. times assert that they have particular insight into the Indeed, a firm’s audit committee should insist that the external auditors identify any significant ac- firms’ operations because the board holds one meetcounting policies that depart from standard indus- ing each year at one of the company’s major facilities, rather than at headquarters. As a former comtry practice or for which the accounting literature allows alternative treatments. In either case, the ex- pany president who has hosted these field trips, I am skeptical. The employees interviewed by the indeternal auditors should provide the committee with a pendent directors on site are usually well rehearsed. careful analysis of the risks and benefits of available If trips go as planned, the directors hear and see what alternatives. Increased time commitment. In the years be- management wants them to hear and see. There’s no way around it: Directors must invest fore the financial crisis, the Citigroup board generally significantly more time than they currently do learnmet in person seven times a year, for a full day each time. They also had a number of telephone meetings, ing the business and monitoring internal developments and external circumstances that affect the each lasting a few hours. Factoring in some time for company. Of course, more time spent on one comreading materials in advance of these meetings, let’s pany’s business means less time available to devote estimate roughly that the independent director of to other boards. Independent directors, who are now Citigroup might have spent, on average, 200 hours allowed to serve on the boards of four or five public a year on board business, excluding travel time. Was companies, should be restricted to just two. (This this enough time to understand the operations of a should not prevent them from serving on nonprofit complex global firm like Citigroup? The answer is boards.) obviously no. What this all adds up to is a new class of profesEven a director with banking experience would sional directors with the industry expertise and the need to spend at least two days a month, in addition time commitment necessary to understand and to regular Citigroup board meetings, keeping abreast of company business if he were to contribute mean- monitor large public companies effectively. Board ingfully to the board. And two days per month was, service would not be a sideshow in their professional lives; it would be the main event. in fact, precisely the time commitment made by the head of the audit committee for one of Canada’s largest companies, on whose board I also served. A The Likely Hurdles Facing retired accountant, this board colleague visited the Professional Directors company’s offices relatively frequently. While he professional-director model is a gave management advance notice of his visits, he significant departure from current talked informally with people at different levels in board process under SOX and from the finance function. He soon had a firm grasp of the the relevant sections of the Financompany’s financial operation and made sure that all cial Reform Act, which generally 54 Harvard Business Review December 2010

A

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boardrooms call for a polite tone, understated language, and indirect criticism. All this reluctance goes out the window in executive sessions. Without the social constraint of management’s presence, independent directors can express strong opinions in blunt language. They can engage in honest debate about the company’s

reinforce the SOX approach (see the sidebar “The New U.S. Reforms Won’t Change Much”). As a consequence, it is likely to elicit practical and legal objections. Let’s look at the four most significant ones.

Professional directors would be hard to find.

Finding independent directors with relevant professional expertise will not be easy; the most-qualified people will be working for the company’s competitors, making them unsuitable despite their expertise. Moreover, any executive running a large company will not have enough time to serve as a professional director. As a result, most independent directors will be retired executives (but not former executives of the company in question). This pool of candidates is reasonably large: Male and female executives often retire around age 60 in good health but want to continue to work, preferably on a part-time basis. For them, the role of professional independent director is a perfect fit. After all, who really wants to play golf every day for 25 or 30 years? Recruiting professional directors primarily from the ranks of retired executives should go hand in hand with an end to mandatory retirement at age 70 or 72. Mandatory retirement is simply a device that lets boards avoid the difficult process of evaluating directors; instead, they are automatically kicked out at a specified age. This is a terrible waste of talent— some directors do a great job at 75, and others sleep through meetings at 65. If we want directors who truly understand the company’s business, they should be allowed to serve as long as they pull their weight. Rather than enforce blanket retirements, boards must undertake the hard work of evaluating directors’ performance on an individual basis. To help structure the process of evaluation, the board could require all directors to submit their resignation yearly, starting at age 72. If they wish to continue, they would also submit

deficiencies and explore a broad range of potential solutions, even drastic ones. I would propose that the rule be taken even further: Independent directors should meet in executive session before every board meeting to discuss the issues at hand and meet again, if necessary, at the end of the board meeting to agree on next

steps. The lead director or nonexecutive chair should communicate to the CEO the key takeaways from the executive session.

a letter explaining why they believe they could contribute significantly in the coming year. They would be too expensive. Professional directors would be working a lot harder than directors do today—putting in roughly twice the hours. In addition, they’d be limited to serving on two forprofit boards. It is only reasonable, therefore, to accord professional directors a total compensation of approximately $400,000 a year—nearly double the current average annual compensation of $213,000 for directors of S&P 500 companies. Expensive as it sounds, this would not increase the company’s total board compensation outlays by much, since there would be only six independent directors to pay, not 10, 12, or even 16.

For executive retirees, the role of professional director is a perfect fit. After all, who really wants to play golf every day for 25 years? The more challenging issue is determining the composition of that $400,000. Directors of S&P 500 companies receive, on average, 58% of their compensation in restricted shares and stock options and the remainder in cash or benefits. I agree that professional directors should be paid more in shares than in cash to better align their interests with those of long-term shareholders; in fact, I recommend increasing the stock-based proportion to 75%. Many former executives are already wealthy; their motivation to be an independent director is often personal and professional satisfaction rather than monetary rewards. That mind-set naturally orients directors toward taking a long-term perspective. December 2010 Harvard Business Review 55

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THE BIG IDEA THE CASE FOR PROFESSIONAL BOARDS

The New U.S. Reforms Won’t Change Much Tucked into the 2,400 pages of the recent U.S. financial-reform legislation known as the DoddFrank Law are a few sections on governance procedures, which apply to all publicly held companies and not just financial institutions. These sections address three areas of governance: board functions, enhanced disclosure, and shareholder rights. But apart from some new requirements for nonbinding shareholder votes, they are mainly elaborations or confirmations of existing rules.

Board Functions All public companies must provide for clawbacks of compensation paid to current or former executives if the amounts were based on erroneous company financials. This mandate expands the clawback provisions of SOX, which apply only to the top five executive officers of public companies, and eliminates SOX’s condition of executive miscon-

Nevertheless, I would reinforce that viewpoint by making any grants of restricted shares and stock options subject to two conditions. First, they would vest in equal parts over four years. Second, at least half of all shares granted (including any shares acquired through exercising options) would have to be held until the director’s retirement from the board. (Directors should be able to sell the other half to pay the taxes due on shares as they vest and on options as they are exercised.) Since the passage of SOX, companies have increasingly granted restricted shares rather than stock options. Stock options incent directors to boost the stock price for short time periods, the argument goes, so that they can exercise their options and immediately sell the shares acquired. But this shortterm approach would be severely limited by the two

Far from telling employees what to do, the role of professional director is to identify material issues that should be considered by the board. conditions above. Moreover, I believe that stock options do a much better job than restricted shares of aligning the interests of directors and shareholders. If a company’s share price falls by 10%, the restricted shares lose only 10% of their worth and directors still retain considerable economic value. Restricted shares are effectively a form of deferred cash payment, with a modest equity kicker. By contrast, if the share price falls by 10%, stock options are worthless.

They would not want a role that increased their legal exposure. One could argue that be-

56 Harvard Business Review December 2010

duct for clawbacks. Moreover, all members of a board’s compensation committee must be independent, as defined by the SEC. Independence from a separate compensation committee is already required per the listing standards of the U.S. stock markets. Compensation committees may select a compensation consultant or other adviser only

cause professional directors will actively supervise the company’s operations, they will be subject to increased legal liabilities if something goes wrong. For example, if the head of the audit committee takes the lead in monitoring a company’s financial function, will he or she be more liable than other directors if the financial statements contain material misrepresentations? The answer is definitely no, unless, of course, it can be shown that the audit head knew of the misrepresentations. When courts review the actions or inactions of corporate boards, the threshold test for personal liability is whether the directors were independent. Under the new model, this will unquestionably be the case. And in instances where directors are truly independent, American courts defer heavily to boards’ business judgment about what is in the best interest of their companies. In other words, courts tend not to hold independent directors liable for a wrong decision, even if the company lost billions of dollars as a result. The courts absolved even the independent directors of Citigroup from personal liability, despite the firm’s huge losses during the financial crisis. In general, courts penalize independent directors only if they are deemed not to have acted in good faith: They did not carefully consider all the factual and legal issues; they neglected to obtain advice from independent experts if needed; or they deliberated for insufficient time to make a reasoned decision. Because professional directors will spend more time on due diligence than today’s norm, they will actually be in a stronger position to show that they acted in good faith. Finally, it bears emphasis that independent directors, even if professional, would be held liable only for a material misrepresentation (or omission) that they knew about or recklessly disregarded. Directors are not held liable in class action suits if

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after they have considered certain factors, including the independence of the adviser.

Enhanced Disclosures Compensation committees must publicly disclose any conflicts of interest involving a compensation consultant advising the board. The company must also publicly explain why the board is chaired by the

CEO, if that is the case. Both disclosure rules follow existing SEC requirements. All public companies must, for the first time, disclose the ratio between the CEO’s compensation and the median compensation of the company’s other employees.

Shareholder Rights At least once every three years,

they could have or should have known about the misrepresentation. They would meddle in operations. Probably the most serious objection to my model is that it might blur the distinction between the roles of the board and management—or in the European context, the roles of the supervisory and management boards. A board of directors is supposed to set strategic goals for the company and monitor its progress against those goals. It has relatively well-defined duties in specified areas such as CEO succession, appointing the external auditor, and responding to takeover bids—but it is not supposed to get involved in dayto-day management. Although the new model would entail some reallocation of power from senior executives to professional directors, it would not require directors to oversee day-to-day operations. Imagine an audit committee under the new arrangement. Like most audit committees today, it would meet quarterly to review financial filings and press releases. The committee would also meet to review the annual evaluation of internal controls. It would hold private discussions with the external and internal auditors, the chief financial officer, and the chief compliance officer. But under the new model, professional directors would also spend a significant amount of time gathering information throughout the year, engaging with company staff and others between board meetings. Through these discussions, professional directors would understand the company’s financial issues much better than they could by sitting through a three-hour audit committee meeting each quarter. Far from telling employees what to do or not do, professional directors would simply be trying to identify material financial issues that should be brought before the committee for review and decision. Consider also the role of the compensation committee under the new model. As they do presently,

shareholders must vote on the compensation of a public company’s top executive officers. The vote is advisory—it is not legally binding on the board or the company. If shareholders must vote to approve a merger or acquisition, they must also vote on any “golden parachute” or termination payments related to the transaction—unless such

payments were subject to a previous advisory vote. This is a nonbinding, advisory vote. Finally, the legislation confirms the SEC’s authority to adopt rules on proxy access—allowing shareholder nominees for directors to be included on the company’s proxy card along with management’s slate of nominees.

the directors would set the CEO’s compensation and review the compensation plans of senior officers. The directors would also approve a report explaining the rationale of the company’s compensation plans, for inclusion in the annual proxy statement. In addition, professional directors would spend more time with experts so as to educate themselves on how the company’s compensation plans stack up against those of other firms in the same industry or of comparable size. Between board meetings they would talk with managers and HR officers to get a better grasp of employee reactions to the company’s compensation policies. In these sessions, however, the professional directors would not get involved in the evaluation of the performance or pay of any individual employee or specific group of employees— these subjects would be strictly out of bounds. Instead, the sessions would be aimed at putting the professional directors in a better position to help design and assess the compensation plans of the company. Of course, each company would be free to craft the exact nature of the professional directors’ role in accordance with the size and scope of the business. In fact, almost any allocation of roles between directors and management is permissible in the United States under the current legal framework—the same is true in most free-market countries.

T

Getting Started

hose who agree that the new model is superior might be wondering how public companies could be persuaded to adopt it. Few CEOs would voluntarily embrace any scenario that shifts a significant degree of power from management to the board. When I was the head of an investment management firm, I was certainly not interested in cultivating a more activist board with directors who December 2010 Harvard Business Review 57

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The Big Idea The Case for Professional Boards

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To improve corporate oversight we need not more legal procedures but a new culture of governance in which directors commit to the role as their primary occupation. to pressure a company into adopting the new model. Under the recently enacted SEC rules, large shareholders now have the right to have their director nominees included on management’s proxy cards, and these shareholders could nominate directors who support the new model. Large companies with records of chronic underperformance could benefit most from an influx of professional directors and would be a good place for shareholder campaigns to focus. Finally, a few brave and confident CEOs of sound companies might actually be willing to try out the new model. We’ve seen important changes from the corner office before: The practice of majority voting started from the initiatives of a few enlightened CEOs. If experiments with the new model were to generate higher earnings or stock prices for the companies involved, then I would expect the new model to spread. SOX and the recent financial reform legislation were largely written by lawyers who tried to solve the perceived problems by creating more detailed procedures for boards to follow. To be sure, some of the rules are reasonable, but they do not address the key challenges in improving corporate boards: recruiting very intelligent people with deep industry experience and getting them to commit the time needed to truly understand and effectively monitor the complex activities of a large public company. To accomplish those goals, we need not another layer of legal procedures but a new culture of governance, one in which professional directors view their role as their primary occupation. In this culture, they will gather enough information to ask all the questions that should be asked and not rest until they have received satisfactory answers.   HBR Reprint R1012B

“I think we’re in good enough shape to start making the same mistakes again.” 58 Harvard Business Review December 2010

Robert C. Pozen (www.bobpozen.com) is a senior lecturer of business administration at Harvard Business School and the chairman emeritus of MFS Investment Management, an investment company in Boston.

cartoon: Teresa Burns Parkhurst

would regularly identify thorny issues for the board to consider. One of three things, therefore, will have to happen if we are to get companies to adopt the new model. First, government regulators could require large banks to adopt it as a matter of safety and soundness under banking laws. If bank directors are to constrain management from taking excessive risks, they must have extensive financial experience and spend considerable time between board meetings on bank business. To some extent we are already seeing a change in this direction in the financial sector. U.S. regulators leaned heavily on Citigroup and other large banks to replace generalist directors with retired banking executives in the wake of the financial crisis. Second, shareholders could join together

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Branding in the Digital Age: You’re Spending Your Money in All the Wrong Places by David C. Edelman

Why You Need a NewMedia “Ringmaster” by Patrick Spenner

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Reputation Warfare by Leslie Gaines-Ross

The One Thing You Must Get Right When Building a Brand by Patrick Barwise and Seán Meehan

Social Media and the New Rules of Branding

ARTWORK Alex MacLean Home Run Hotel I 1999, photograph Orlando, Florida

Facebook, Twitter, and their cousins can help build—or destroy—your brand. December 2010 Harvard Business Review 61

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Spotlight on Social Media and the New Rules of Branding

Spotlight

ARTWORK Alex MacLean, Untitled, 2010 photograph, Atlantic City, New Jersey

Branding in The Digital Age

You’re Spending Your Money In All the Wrong Places

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by David C. Edelman

62 Harvard Business Review December 2010

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David C. Edelman (david_ [email protected]) is a coleader of McKinsey & Company’s Global Digital Marketing Strategy practice.

December 2010 Harvard Business Review 63

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Spotlight on Social Media and the New Rules of Branding

The internet has upended how consumers engage with brands. It is transforming the economics of marketing and making obsolete many of the function’s traditional strategies and structures. For marketers, the old way of doing business is unsustainable. Consider this: Not long ago, a car buyer would methodically pare down the available choices until he arrived at the one that best met his criteria. A dealer would reel him in and make the sale. The buyer’s relationship with both the dealer and the manufacturer would typically dissipate after the purchase. But today, consumers are promiscuous in their brand relationships: They connect with myriad brands—through new media channels beyond the manufacturer’s and the retailer’s control or even knowledge—and evaluate a shifting array of them, often expanding the pool before narrowing it. After a purchase these consumers may remain aggressively engaged, publicly promoting or assailing the products they’ve bought, collaborating in the brands’ development, and challenging and shaping their meaning. Consumers still want a clear brand promise and offerings they value. What has changed is when—at what touch points—they are most open to influence, and how you can interact with them at those points. In the past, marketing strategies that put the lion’s share of resources into building brand awareness and then opening wallets at the point of purchase worked pretty well. But touch points have changed in both number and nature, requiring a major adjustment to realign marketers’ strategy and budgets with where consumers are actually spending their time.

then the funnel metaphor

For years, marketers assumed that consumers started with a large number of potential brands in mind and methodically winnowed their choices until they’d decided which one to buy. After purchase, their relationship with the brand typically focused on the use of the product or service itself.

many brands

fewer brands

final choice

buy buy

now the consumer decision journey New research shows that rather than systematically narrowing their choices, consumers add and subtract brands from a group under consideration during an extended evaluation phase. After purchase, they often enter into an open-ended relationship with the brand, sharing their experience with it online. consider evaluate

Block That Metaphor

The Loyalty Loop Marketers have long used the famous funnel metaphor to think about touch points: Consumers would bond start at the wide end of the funnel with many brands advocate enjoy in mind and narrow them down to a final choice. buy Companies have traditionally used paid-media push marketing at a few well-defined points along Evaluate & Advocate the funnel to build awareness, drive consideration, Consider & Buy Marketers often overemNew media make the and ultimately inspire purchase. But the metaphor phasize the “consider” and “evaluate” and “advocate” fails to capture the shifting nature of consumer “buy” stages of the journey, stages increasingly relevant. allocating more resources Marketing investments that engagement. than they should to buildhelp consumers navigate In the June 2009 issue of McKinsey Quarterly, my ing awareness through the evaluation process colleague David Court and three coauthors intro- advertising and encouragand then spread positive word of mouth about the duced a more nuanced view of how consumers en- ing purchase with retail brands they choose can be gage with brands: the “consumer decision journey” promotions. as important as building (CDJ). They developed their model from a study of awareness and driving purchase. the purchase decisions of nearly 20,000 consumers 64 Harvard Business Review December 2010

Bond

If consumers’ bond with a brand is strong enough, they repurchase it without cycling through the earlier decision-journey stages.

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Branding in the Digital Age HBR.org

Idea in Brief Consumers today connect with brands in fundamentally new ways, often through media channels that are beyond manufacturers’ and retailers’ control. That means traditional marketing strategies must be redesigned to accord with how brand relationships have changed.

Once, a shopper would systematically winnow his brand choices to arrive at a final selection and complete his engagement by making a purchase. Now, relying heavily on digital interactions, he evaluates a shifting array of options and remains engaged with the brand through social media after a purchase.

across five industries—automobiles, skin care, insurance, consumer electronics, and mobile telecom— and three continents. Their research revealed that far from systematically narrowing their choices, today’s consumers take a much more iterative and less reductive journey of four stages: consider, evaluate, buy, and enjoy, advocate, bond. Consider. The journey begins with the consumer’s top-of-mind consideration set: products or brands assembled from exposure to ads or store displays, an encounter at a friend’s house, or other stimuli. In the funnel model, the consider stage contains the largest number of brands; but today’s consumers, assaulted by media and awash in choices, often reduce the number of products they consider at the outset. Evaluate. The initial consideration set frequently expands as consumers seek input from peers, reviewers, retailers, and the brand and its competitors. Typically, they’ll add new brands to the set and discard some of the originals as they learn more and their selection criteria shift. Their outreach to marketers and other sources of information is much more likely to shape their ensuing choices than marketers’ push to persuade them. Buy. Increasingly, consumers put off a purchase decision until they’re actually in a store—and, as we’ll see, they may be easily dissuaded at that point. Thus point of purchase—which exploits placement, packaging, availability, pricing, and sales interactions—is an ever more powerful touch point. Enjoy, advocate, bond. After purchase, a deeper connection begins as the consumer interacts with the product and with new online touch points. More than 60% of consumers of facial skin care products, my McKinsey colleagues found, conduct online research about the products after purchase— a touch point entirely missing from the funnel. When consumers are pleased with a purchase, they’ll ad-

Smart marketers will study this “consumer decision journey” for their products and use the insights they gain to revise strategy, media spend, and organizational roles.

vocate for it by word of mouth, creating fodder for the evaluations of others and invigorating a brand’s potential. Of course, if a consumer is disappointed by the brand, she may sever ties with it—or worse. But if the bond becomes strong enough, she’ll enter an enjoy-advocate-buy loop that skips the consider and evaluate stages entirely.

The Journey in Practice

Although the basic premise of the consumer decision journey may not seem radical, its implications for marketing are profound. Two in particular stand out. First, instead of focusing on how to allocate spending across media—television, radio, online, and so forth—marketers should target stages in the decision journey. The research my colleagues and I have done shows a mismatch between most marketing allocations and the touch points at which consumers are best influenced. Our analysis of dozens of marketing budgets reveals that 70% to 90% of spend goes to advertising and retail promotions that hit consumers at the consider and buy stages. Yet consumers are often influenced more during the evaluate and enjoy-advocate-bond stages. In many categories the single most powerful impetus to buy is someone else’s advocacy. Yet many marketers focus on media spend (principally advertising) rather than on driving advocacy. The coolest banner ads, best search buys, and hottest viral videos may win consideration for a brand, but if the product gets weak reviews—or, worse, isn’t even discussed online—it’s unlikely to survive the winnowing process. The second implication is that marketers’ budgets are constructed to meet the needs of a strategy that is outdated. When the funnel metaphor reigned, communication was one-way, and every interaction with consumers had a variable media cost that typically outweighed creative’s fixed costs. Management focused on “working media spend”—the portion of

About the Spotlight Artist Each month we illustrate our Spotlight package with a series of works from an accomplished artist. Because the articles are often complex and abstract, we hope that the lively and cerebral works of these photographers, painters, and installation artists will infuse the pages with energy and intelligence and amplify the concepts. This month our Spotlight artist is Alex MacLean, a U.S. photographer whose aerial pictures (he also flies the planes) offer a whimsical look at the effect of humans on their environment. We think the photos also hint at the essential challenge of branding today: What does your product look like from a whole new angle? View the artist’s complete body of work at alexmaclean.com.

December 2010 Harvard Business Review 65

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Spotlight on Social Media and the New Rules of Branding

a marketing budget devoted to what are today known as paid media. This no longer makes sense. Now marketers must also consider owned media (that is, the channels a brand controls, such as websites) and earned media (customer-created channels, such as communities of brand enthusiasts). And an increasing portion of the budget must go to “nonworking” spend—the people and technology required to create and manage content for a profusion of channels and to monitor or participate in them.

Launching a Pilot

The shift to a CDJ-driven strategy has three parts: understanding your consumers’ decision journey; determining which touch points are priorities and how to leverage them; and allocating resources accordingly—an undertaking that may require redefining organizational relationships and roles. One of McKinsey’s clients, a global consumer electronics company, embarked on a CDJ analysis after research revealed that although consumers were highly familiar with the brand, they tended to drop it from their consideration set as they got closer to purchase. It wasn’t clear exactly where the company

instead of focusing on how to

tion, including marketing, market research, IT, and, crucially, finance. The team began with an intensive three-month market research project to develop a detailed picture of how TV consumers navigate the decision journey: what they do, what they see, and what they say. What they do. Partnering with a supplier of online-consumer-panel data, the company identified a set of TV shoppers and drilled down into their behavior: How did they search? Did they show a preference for manufacturers’ or retailers’ sites? How did they participate in online communities? Next the team selected a sample of the shoppers for in-depth, one-on-one discussions: How would they describe the stages of their journey, online and off? Which resources were most valuable to them, and which were disappointing? How did brands enter and leave their decision sets, and what drove their purchases in the end? The research confirmed some conventional wisdom about how consumers shop, but it also overturned some of the company’s long-standing assumptions. It revealed that off-line channels such as television advertising, in-store browsing, and direct word of mouth were influential only during the consider stage. Consumers might have a handful of products and brands in mind at this stage, with opinions about them shaped by previous experience, but their attitudes and consideration sets were extremely malleable. At the evaluate stage, consumers didn’t start with search engines; rather, they went directly to Amazon.com and other retail sites that, with their rich and expanding array of product-comparison information, consumer and expert ratings, and visuals, were becoming the most important influencers. Meanwhile, fewer than one in 10 shoppers visited manufacturers’ sites, where most companies were still putting the bulk of their digital spend. Display ads, which the team had assumed were important at the consider stage, were clicked on only if they contained a discount offer, and then only when the consumer was close to the buy stage. And although most consumers were still making their purchases in stores, a growing number were buying through retail sites and choosing either direct shipping or instore pickup. The research also illuminated consumers’ lively relationships with many brands after purchase—the

allocate spending across media, marketers should target stages in the decision journey. was losing consumers or what should be done. What was clear was that the media-mix models the company had been using to allocate marketing spend at a gross level (like the vast majority of all such models) could not take the distinct goals of different touch points into account and strategically direct marketing investments to them. The company decided to pilot a CDJ-based approach in one business unit in a single market, to launch a major new TV model. The chief marketing officer drove the effort, engaging senior managers at the start to facilitate coordination and ensure buyin. The corporate VP for digital marketing shifted most of his time to the pilot, assembling a team with representatives from functions across the organiza66 Harvard Business Review December 2010

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Branding in the Digital Age HBR.org

More than 60% of consumers of facial skin care products do online research about them after purchase—a touch point entirely missing from the funnel model. enjoy-and-advocate stage so conspicuously absent from the funnel. These consumers often talked about their purchases in social networks and posted reviews online, particularly when they were stimulated by retailers’ postpurchase e-mails. And they tended to turn to review sites for troubleshooting advice. What they see. To better understand consumers’ experience, the team unleashed a battery of hired shoppers who were given individual assignments, such as to look for a TV for a new home; replace a small TV in a bedroom; or, after seeing a TV at a friend’s house, go online to learn more about it. The shoppers reported what their experience was like and how the company’s brand stacked up against competitors’. How did its TVs appear on search engines? How visible were they on retail sites? What did consumer reviews reveal about them? How thorough and accurate was the available information about them? The results were alarming but not unexpected. Shoppers trying to engage with any of the brands— whether the company’s or its competitors’—had a highly fractured experience. Links constantly failed, because page designs and model numbers had changed but the references to them had not. Product reviews, though they were often positive, were scarce on retail sites. And the company’s TVs rarely turned up on the first page of a search within the category, in part because of the profusion of broken links. The same story had emerged during the one-on-one surveys. Consumers reported that every brand’s model numbers, product descriptions, promotion availability, and even pictures seemed to change as they moved across sites and into stores. About a third of the shoppers who had considered a specific TV brand online during the evaluate stage walked out of a store during the buy stage, confused and frustrated by inconsistencies. This costly disruption of the journey across the category made clear that the company’s new marketing strategy had to deliver an integrated experience from consider to buy and beyond. In fact, because

the problem was common to the entire category, addressing it might create competitive advantage. At any rate, there was little point in winning on the other touch-point battlegrounds if this problem was left unaddressed. What they say. Finally, the team focused on what people were saying online about the brand. With social media monitoring tools, it uncovered the key words consumers used to discuss the company’s products—and found deep confusion. Discussiongroup participants frequently gave wrong answers because they misunderstood TV terminology. Product ratings and consumer recommendations sometimes triggered useful and extensive discussions, but when the ratings were negative, the conversation would often enter a self-reinforcing spiral. The company’s promotions got some positive response, but people mostly said little about the brand. This was a serious problem, because online advocacy is potent in the evaluate stage.

Taking Action

The company’s analysis made clear where its marketing emphasis needed to be. For the pilot launch, spending was significantly shifted away from paid media. Marketing inserted links from its own site to retail sites that carried the brand, working with the retailers to make sure the links connected seamlessly. Most important, click-stream analysis revealed that of all the online retailers, Amazon was probably the most influential touch point for the company’s products during the evaluate stage. In collaboration with sales, which managed the relationship with Amazon, marketing created content and links to engage traffic there. To encourage buzz, it aggressively distributed positive third-party reviews online and had its traditional media direct consumers to online environments that included promotions and social experiences. To build ongoing postpurchase relationships and encourage advocacy, it developed programs that included online community initiatives, contests, and e-mail promotions. Finally, to address the inconsistent descriptions and other messaging that was December 2010 Harvard Business Review 67

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Spotlight on Social Media and the New Rules of Branding

dissuading potential customers at the point of purchase, the team built a new content-development and -management system to ensure rigorous consistency across all platforms. How did the CDJ strategy work? The new TV became the top seller on Amazon.com and the company’s best performer in retail stores, far exceeding the marketers’ expectations.

cording to their category, brand position, and channel relationships. Apple has not yet done much mining of its customer data to offer more-personalized messaging. Nike’s presence on search engines shows little distinctiveness. McDonald’s hasn’t focused on leveraging a core company website. But their decisions are deliberate, grounded in a clear sense of priorities.

A Customer Experience Plan

New Roles for Marketing

As our case company found, a deep investigation of the decision journey often reveals the need for a plan that will make the customer’s experience coherent— and may extend the boundaries of the brand itself. The details of a customer experience plan will vary according to the company’s products, target segments, campaign strategy, and media mix. But when the plan is well executed, consumers’ perception of the brand will include everything from discussions in social media to the in-store shopping experience to continued interactions with the company and the retailer. For instance, Apple has eliminated jargon, aligned product descriptions, created a rich library of explanatory videos, and instituted off-line Genius Bars,

Developing and executing a CDJ-centric strategy that drives an integrated customer experience requires marketing to take on new or expanded roles. Though we know of no company that has fully developed them, many, including the consumer electronics firm we advised, have begun to do so. Here are three roles that we believe will become increasingly important: Orchestrator. Many consumer touch points are owned-media channels, such as the company’s website, product packaging, and customer service and sales functions. Usually they are run by parts of the organization other than marketing. Recognizing the need to coordinate these channels, one of our clients, a consumer durables company, has moved

Up to 90% of spend goes to advertising and retail promotions. Yet the single most powerful impetus to buy is often someone else’s advocacy. all of which ensure absolute consistency, accuracy, and integration across touch points. Similarly, Nike has moved from exhorting consumers to “Just Do It” to actually helping them act on its motto—with Nike+ gear that records and transmits their workout data; global fund-raising races; and customized online training programs. Thus its customers’ engagement with the brand doesn’t necessarily begin or end with a purchase. And millions of consumers in Japan have signed up to receive mobile alerts from McDonald’s, which provide tailored messages that include discount coupons, contest opportunities, specialevent invitations, and other unique, brand-specific content. These companies are not indiscriminate in their use of the tactics available for connecting with customers. Instead they customize their approaches ac68 Harvard Business Review December 2010

its owned-media functions into the sphere of the chief marketing officer, giving him responsibility for orchestrating them. Along with traditional and digital marketing communications, he now manages customer service and market research, product literature design, and the product registration and warranty program.

Publisher and “content supply chain” manager. Marketers are generating ever-escalating

amounts of content, often becoming publishers— sometimes real-time multimedia publishers—on a global scale. They create videos for marketing, selling, and servicing every product; coupons and other promotions delivered through social media; applications and decision support such as tools to help customers “build” and price a car online. One of our clients, a consumer marketer, realized that ev-

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Branding in the Digital Age HBR.org

ery new product release required it to create more than 160 pieces of content involving more than 20 different parties and reaching 30 different touch points. Without careful coordination, producing this volume of material was guaranteed to be inefficient and invited inconsistent messaging that would undermine the brand. As we sought best practices, we discovered that few companies have created the roles and systems needed to manage their content supply chain and create a coherent consumer experience. Uncoordinated publishing can stall the decision journey, as the consumer electronics firm found. Our research shows that in companies where the marketing function takes on the role of publisher in chief—rationalizing the creation and flow of productrelated content—consumers develop a clearer sense of the brand and are better able to articulate the attributes of specific products. These marketers also become more agile with their content, readily adapting it to sales training videos and other new uses that ultimately enhance consumers’ decision journey. Marketplace intelligence leader. As more touch points become digital, opportunities to collect and use customer information to understand the consumer decision journey and knit together the customer experience are increasing. But in many companies IT controls the collection and management of data and the relevant budgets; and with its traditional focus on driving operational efficiency, it often lacks the strategic or financial perspective that would incline it to steer resources toward marketing goals. More than ever, marketing data should be under marketing’s control. One global bank offers a model: It created a Digital Governance Council with representatives from all customer-facing functions. The council is led by the CMO, who articulates the strategy, and attended by the CIO, who lays out options for executing it and receives direction and funding from the council. We believe that marketing will increasingly take a lead role in distributing customer insights across the organization. For example, discoveries about “what the customer says” as she navigates the CDJ may be highly relevant to product development or service programs. Marketing should convene the right people in the organization to act on its consumer insights and should manage the follow-up to ensure that the enterprise takes action.

Starting the Journey

The firms we advise that are taking this path tend to begin with a narrow line of business or geography (or both) where they can develop a clear understanding of one consumer decision journey and then adjust strategy and resources accordingly. As their pilots get under way, companies inevitably encounter challenges they can’t fully address at the local level— such as a need for new enterprisewide infrastructure to support a content management system. Or they may have to adapt the design of a social media program to better suit the narrow initiative. In the more successful initiatives we’ve seen, the CMO has championed the pilot before the executive leadership team. The best results come when a bottom-up pilot is paralleled by a top-down CMO initiative to address cross-functional, infrastructure, and organizational challenges. Finally, a company must capture processes, successes, and failures when it launches a pilot so that the pilot can be effectively adapted and scaled. A key consideration is that although the basic architecture of a CDJ strategy may remain intact as it is expanded, specific tactics will probably vary from one market and product to another. When the consumer electronics firm discussed here took its CDJ strategy to East Asia, for example, its touch-point analysis revealed that consumers in that part of the world put more stock in blogs and third-party review sites than Western consumers do, and less in manufacturers’ or retailers’ sites, which they didn’t fully trust. They were also less likely to buy online. However, they relied more on mobile apps such as bar-code readers to pull up detailed product information at the point of purchase. The changes buffeting marketers in the digital era are not incremental—they are fundamental. Consumers’ perception of a brand during the decision journey has always been important, but the phenomenal reach, speed, and interactivity of digital touch points makes close attention to the brand experience essential—and requires an executive-level steward. At many start-ups the founder brings to this role the needed vision and the power to enforce it. Established enterprises should have a steward as well. Now is the time for CMOs to seize this opportunity to take on a leadership role, establishing a stronger position in the executive suite and making consumers’ brand experience central to enterprise strategy.   HBR Reprint R1012C December 2010 Harvard Business Review 69

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SPOTLIGHT ON SOCIAL MEDIA AND THE NEW RULES OF BRANDING

Spotlight Leslie Gaines-Ross is the chief reputation strategist at Weber Shandwick, a global public relations consultancy. Her most recent book is Corporate Reputation: 12 Steps to Safeguarding and Recovering Reputation (Wiley, 2008).

Reputation Warfare

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Odds are that a small-scale antagonist will target your business and pose a serious threat. Here’s how to fight back. by Leslie Gaines-Ross

orporations now operate in a landscape rife with new threats to their reputations. Equipped to do battle with large competitors, they may be caught unawares by small-scale adversaries in command of a surprisingly potent new-media and social network arsenal: blogs, tweets, text messages, online petitions, Facebook protest sites, and digital videos. Some companies have already experienced the damage that can be done by a single highly motivated critic lashing out from a personal computer. No one has failed to hear the stories. After the explosion of BP’s Deepwater Horizon drilling platform, for example, Leroy Stick (an alias) began publishing the tweets of a totally made-up representative of a similarly bogus BP global public relations division. While crude oil spilled into the Gulf of Mexico, devastating the regional ecology and economy, the satirical Twitterer (@BPGlobalPR) tweeted about the division’s lunch menu and other inane matters. Tens of thousands followed his updates—far more than the number who followed the real BP Twitter account. Through this low-cost effort, Stick helped keep Americans’ rage boiling as BP scrambled to plug the well and restore faith in its brand.

70 Harvard Business Review December 2010

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HBR.org ARTWORK Alex MacLean Fleet of B-52 Bombers at the “Boneyard” 1995, photograph, Tucson area, Arizona

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Spotlight on Social Media and the New Rules of Branding

As this incident demonstrates, the rules of enIt’s not that the established ways of safeguarding gagement have changed. Critics no longer need the your company’s reputation are irrelevant. People resources of an institution. The internet has leveled will still be influenced by traditional media; they the playing field between large corporations and will still read and listen to the news; most imporindividual activists. Although some antagonists are tant, they will still talk to others about products truthful, not all of them are. Often their diatribes are they’ve bought. But the established playbooks are only partly true; sometimes they are entirely, demon- not enough. To protect your company from the new strably false. Attackers are probably not levelheaded. reputation snipers, you’ll need to master and deploy Those who take on large companies single-handedly the following strategies as well. are almost always highly emotional, if not irrational. And business leaders have no advance notice or time to Avoid any show of force reflect. When traditional battles are brewing, compa- that could be perceived as grossly nies have at least a flicker of warning and a modicum disproportionate. of control over how events will unfold. When a new- The battle over reputation does not always favor the style sniper attacks, they don’t. parties with the deepest resources. On the contrary, To learn how to respond effectively to these as- it tends to saddle them with greater obligations. The saults, corporate leaders might borrow a page from world’s Goliaths are generally viewed as being in on the attack an institution that has dealt with analogous threats: a better position than its Davids to behave reason“Leroy Stick” the military. After the 2006 Israel-Hezbollah War, the ably, justly, and humanely, even when acting in As the events of the BP U.S. Army War College’s Center for Strategic Leaderself-defense. Deepwater Horizon oil ship and Canada’s SecDev Group conducted a review Consider the corporate response to an incident spill unfolded, a Twitter account holder posing as an of what they recognized as a new form of conflict: that occurred on July 11, 1994. Three Greenpeace acemployee in the oil giant’s “informational warfare.” They found that although tivists climbed partway up the Time-Life building in PR group parodied BP’s Israel and Hezbollah were wildly mismatched in Manhattan to protest the company’s use of chlorine corporate response, creating a darkly comic image of terms of their resources and training—in military in its paper. Perched on the skyscraper, they unfurled venality and incompetence. parlance, the two sides were “asymmetric”—the a huge mockup of a Time cover bearing the headline More people chose to follow outcome had not hinged on those factors. The deter- “Chlorine Kills.” Photographers snapped one shot after the spurious tweeter—since identified as an aspiring minative weapons were not those that hit physical another. Eventually, the police broke a 15th-story comedian named Josh targets. Hezbollah, the weaker side in conventional office window and hauled the activists in. The office Simpson—than the actual military terms, had used new media to win hearts happened to be mine. For weeks afterward I found BP Twitter account, and media coverage of the spoof and minds around the world, discrediting Israel’s po- shards of glass in my folders and desk drawers. further amplified his impact. sition and sapping its political will. Although the police arrested the three for crimi@BPGlobalPR As two SecDev scholars, Deirdre Collings and nal trespassing, Time Inc. did not allow litigation Attn Scientists: If Rafal Rohozinski, later wrote in a special report titled to dominate its response. It did not issue any stateyour gulf water Bullets and Blogs, “Today anyone armed with a hunments condemning the activists or, say, dismissing samples explode, dred dollar digital camera and a connection to the it’s only fair to them as misguided. But it did not simply brush off deem your research Internet is a potential Spielberg or Riefenstahl.” The the protest, either. On the day of the incident, a inconclusive. report laid out several principles of effective counter company spokesperson told the media that it had attack—principles that also apply to corporate repu- already assembled a task force to study the envitation warfare. ronmental and health risks of chlorine—in effect,

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As two military scholars wrote in Bullets and Blogs, “Today anyone armed with a hundred dollar digital camera and a connection to the Internet is a potential Spielberg or Riefenstahl.” 72 Harvard Business Review December 2010

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reputation Warfare HBR.org

Idea in Brief Companies trying to protect their good names are increasingly coming under assault from small-scale antagonists: dissatisfied customers, disgruntled employees—virtually anyone with a personal computer and an ax to grind. Just as the military learned new strategies to deal with information-based attacks, managers of other organizations can fight back against new-media snipers by applying these important lessons:

Avoid disproportionate shows of force. Don’t let bureaucracy get in the way. Respond at high speed. Empower your team to help tell your organization’s side of the story. Go rogue: New media can be your friend. Find sympathetic third parties to serve as “force multipliers.” Stockpile credentials now for use in battles ahead.

signaling that it was listening. Because it refrained from a heavy-handed response, it denied Greenpeace much of the sympathy that would normally have gone to the underdog. The actions of Horizon Group Management, a Chicago apartment leasing and management company, stand in sharp contrast. In July 2009 it sued Amanda Bonnen, a former tenant, for $50,000 because of the following rather modest tweet to her 20 or so followers: “Who said sleeping in a moldy apartment was bad for you? Horizon realty thinks it’s okay.” As the Chicago Tribune reported, the tweet came to light only after Bonnen’s lawyers filed a class action suit against the firm for allegedly violating Chicago housing ordinances. Horizon, no doubt believing that turnabout was fair play, claimed that Bonnen had “maliciously and wrongfully published the false and defamatory tweet, thereby allowing the tweet to be spread throughout the world.” To most minds, a $50,000 suit over a message read by two dozen people was an overwhelmingly disproportionate response. It instantly made headlines and soared to the top of news aggregator sites such as Google News, Digg, and Techmeme. The judge threw out Horizon’s claim; the only thing the company had accomplished was to create a public relations disaster.

Photography: kirk condyles/Greenpeace

Respond at high speed with instincts honed by advance training.

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Most companies are slow moving and consensus driven. While they look for a convenient time to get together and come up with a defense that everyone agrees on, damage from the attack continues to spread. I know of one Fortune 200 company whose executives spent nearly a week crafting a response to a tweeted attack that would fit within Twitter’s famous character limit. By the time its 140 carefully chosen keystrokes were published, the window for an effective response had long since closed.

The U.S. Census Bureau recently proved much more nimble: Last February, when it came under fire for an ad it had scheduled to run during Super Bowl XLIV, it shot back without delay. The ad was meant to remind people to send in their census forms. Because Super Bowl airtime is highly expensive, some questioned the choice. One of the first was Senator John McCain, who tweeted this to his more than 1.7 million followers: “While the census is very important to AZ, we shouldn’t be wasting $2.5 million taxpayer dollars to compete with ads for Doritos!” The conservative blogger Michelle Malkin fanned the flame by referring to the ad’s “pimping.” The nonpartisan watchdog group MyTwoCensus quickly reposted Malkin’s comments; the criticism had gone viral. Fortunately for the bureau, it had a media-monitoring system already in place. It also had an established census director’s blog, a Twitter account, and a Facebook page. All of these tools, originally designed to encourage people to return their census forms, were quickly repurposed for reputation defense. The bureau’s first response appeared the day after McCain’s tweet, as a post on MyTwoCensus.com. In it Steven Jost, the associate director of communications, described how the ad would actually save taxpayer money. Each 1% increase in mailed-in returns, he explained, would save taxpayers $80 million to $90 million. The day after that, the census director, Robert Groves, posted on his blog, underscoring Jost’s point. The day after that was Super Bowl Sunday—and even as the ad was airing, the bureau was tweeting about its value and reiterating on its Facebook page that the “ad saves millions that would otherwise be spent visiting households.” Through its quick, coordinated use of multiple channels, the Census Bureau neutralized criticism of the ad. A few weeks later, when MyTwoCensus again blogged about the bureau, it was simply to urge people to mail in their forms.

on the attack Nadine Bloch, Kathy O’Keefe, and John Mallett

Intrepid climbers and committed environmental activists, these Greenpeace members scaled Time magazine’s Rockefeller Plaza headquarters. Protesting that “our health and the health of our planet can’t wait,” they urged the publication to stop using the chemical chlorine. To drive the point home, they unfurled a 30-foot-by-50foot mockup of a Time cover reading

“Chlorine Kills. Take the Poison Out of Paper.”

December 2010 Harvard Business Review 73

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Spotlight on Social Media and the New Rules of Branding

The blogger Michelle Malkin asked readers, “Who’s foolish enough to pay for Super Bowl gold-plated airtime?” Then she told them: “The U.S. Census Bureau will squander $2.5 million on a half-minute Super Bowl ad starring D-list celebrity Ed Begley, Jr., plus two pregame blurbs and 12-second ‘vignettes’ featuring Super Bowl anchor James Brown.” In a period of heightened sensitivity to federal government spending, her complaint fell on many sympathetic ears and had to be countered.

Empower frontline teams to meet message with counter message.

An oft-quoted political axiom is that voters prefer the candidate with whom they personally feel most comfortable—or, to use the vernacular, the one they’d most like to have a beer with. Similarly, the public is more likely to relate to workers on the front lines than to those in the highest ranks. For this reason the U.S. Army created a social media program (ArmyStrongStories.com) that lets soldiers blog about their experiences, subject to minimal review (security-sensitive information, for example, would be deleted). The Army Strong Stories community provides access to hundreds of videos gathered from soldiers, veterans, and others and to more than 1,400 unfiltered blog posts. Army Strong comes with a story-sharing capability, video integration, and links to other social media, such as GoArmy.com, Facebook, instant messaging, and iPhone apps. Any rank-and-file soldier may post a blog. As Lieutenant General Benjamin Freakley, the head of the U.S. Army Accessions Command, said in a podcast, “We trust these men and women to put a gun in their hands, have them deploy overseas, and ask them to make life-and-death decisions for their teammates, the population, and the enemy they face. Why can’t we trust them to do the right thing with social media?” Bruce Jasurda, the Accessions Command’s chief marketing officer, explained, “Our intent is to make this as realistic as possible and let people ask those questions directly to soldiers, people who have been through that same experience, people who

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have had perhaps that same angst or uncertainty, and hear it through a soldier’s words, as opposed to a corporate voice.” Employees who share their company’s vision and values are its natural allies and most believable voices. When Frank Eliason was Comcast’s director of digital care, he started a Twitter account named @ComcastCares—putting, in one deft swoop, a human face on a company that had been disparaged for poor customer service. American Airlines credibly countered a customer’s tweeted complaint about a $50 fee for an oversized bag when a flight attendant, Tim Schwartz, explained on Facebook that the airline had no choice because of the limited space on the aircraft. Although freedom of expression needs to be encouraged if this sort of strategy is to succeed, there must, of course, be limits. The Department of Defense has issued social media guidelines that army personnel must adhere to; similarly, companies need to make clear rules—ones that forbid, for example, the dissemination of client information and discussions of products under development.

Go rogue in your own tactics.

As Bullets and Blogs noted, new media are “often treated as a threat, rather than an asset.” But they can just as easily serve on your side, provided you use them in an ethical way. You might recall a story from 2009, when a Domino’s Pizza employee named Kristy made some short movies of a colleague doing unappetizing things to food he was preparing for delivery, and posted the movies on YouTube. The videos spread like wildfire, with significant consequences. Domino’s said that the incident cut into its nationwide profits. And it shuttered the North Carolina store in which the events occurred. But things could have been even worse had Domino’s not been quick on its feet. As soon as the chain became aware of the videos, it responded with the same tactics its rogue employees had used. Its U.S. president, Patrick Doyle, chose YouTube rather than a formal press release to issue his apology for the workers’ stomach-turning behavior, posting his video within two days of Kristy’s. The logic of his approach is clear; YouTube had the best chance of reaching the audience that had seen the original videos. And it had another benefit: The unorthodox use of YouTube by a corporate executive became a story in its own right, and the incident’s focus shifted from

Photography, left: AP Images

on the attack Michelle Malkin

The real lesson in this story is the importance of preparation. Companies need to be trained in their new-media tool kits so that they can use them quickly and without friction. As my colleagues and I try to help our clients gain that facility, we urge them to engage in lifelike simulations, much as other emergency response teams do. (Our approach, called Firebell, replicates the experience of being attacked by a reputation sniper who is posting to Facebook, blogs, Twitter, and YouTube in real time.) A newmedia drill might put a company through its paces in a variety of mock crises, including a class action lawsuit, a case of executive misconduct, the release of a damaging video, a product recall, a safety lapse, and a leaked document. While engaging in these exercises, companies often discover internal communication gaps—places where better bridges between colleagues are needed.

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reputation Warfare HBR.org

One Comcast executive started a Twitter account named @ComcastCares—putting, in one deft swoop, a human face on a company that had been disparaged for poor service. what the employees had done wrong to what the company had done right. In another incident from 2009, the oil giant Chevron took action that would be considered rogue by almost any standard. Aware that 60 Minutes was working on a segment about a $27 billion lawsuit brought against the company in Ecuador—at issue was whether Chevron had contaminated large swaths of rain forest—executives decided to get their side of the story out first. They hired a former CNN correspondent, Gene Randall, to make a documentary casting Chevron in a better light, and posted his film on the company website and on YouTube three weeks before the 60 Minutes story aired. The documentary had all the appearance of a conventional broadcast and included no mention that Chevron had footed the bill. Although it was criticized as deceptive, the film nonetheless took Chevron’s critics by surprise and made the public aware of Chevron’s viewpoint.

Recruit and deploy “force multipliers” who will echo your message.

In the military anything that amplifies soldiers’ strength—whether it’s a sophisticated technology like a GPS-enabled drone or a social advantage like a sympathetic local population—is referred to as a “force multiplier.” At a time when reputation losses can snowball rapidly, even the best-resourced companies need force multipliers. Ideally, these should include a network of independent third parties willing to take your side. Royal Caribbean International, the global cruise vacation company, discovered the value of force multipliers when it was stung by scathing press coverage in January 2010. Just after the Haitian earthquake, the company’s ship Independence of the Seas dropped anchor in Labadee, Haiti. The Guardian of London fired an early salvo, reporting that “sixty miles from Haiti’s devastated earthquake zone,

luxury liners dock at private beaches where passengers enjoy jetski rides, parasailing and rum cocktails delivered to their hammocks.” A blogger wrote on CNN.com, “Royal Caribbean is performing a sickening act to me by taking tourists to Haiti.” The New York Post, displaying all the subtlety its headline writers are known for, titled its story “Ship of Ghouls.” It seemed that everyone was blasting Royal Caribbean’s management and customers alike. Unmentioned in any of these accounts were Royal Caribbean’s long-standing investments in Haiti, its use of its cruise liners to deliver nearly $1 million in humanitarian aid to the country, and the stellar reputation of Adam Goldstein, its CEO. For these reasons, among others, a number of independent advocates came to the company’s defense. Goldstein’s blog, which he had established months before the earthquake, quickly became a rostrum for these advocates. In addition to blogging his own explanation that the continuing cruises had been requested by Haitian officials and were helping to boost the local economy and hasten the delivery of relief supplies, Goldstein posted letters from figures such as the founding director of the Burn Advocates Network, who applauded the cruise company’s efforts to help the earthquake victims. Third-party support appeared in other forums as well. Senior representatives of Sustainable Travel International, the United Nations World Tourism Organization, and Duke University’s Kenan Institute for Ethics, to name just a few, were quoted in the media about ways in which tourism could accelerate the reconstruction process. As a result of this outside advocacy, Royal Caribbean’s decision not to halt cruises in the area soon began to be seen less as a callous action and more as a brave, well-considered attempt to help. Later in January a website called Cruise Critic conducted an online survey and found that 67% of respondents thought that Royal Caribbean should continue cruising and delivering relief supplies. One person posting

on the attack Kristy Hammonds and Michael Setzer “In about five minutes these will be sent out and somebody will be eating these—yes, eating these—and little do they know that the cheese was in his nose.” Thus went the voice-over to a truly amateurish video posted on YouTube by two Domino’s employees. Although they surely did not set out to turn America against their employer (and lose their jobs in the process), the damage was done. The mini film festival garnered more than a million views, and a drop in the chain’s revenues followed.

December 2010 Harvard Business Review 75

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Managers may hesitate to engage with media that any middle-school student can access. But if you fail to adapt to and use your adversaries’ best tactics, you cede the field of battle.

Go into battle with credentials in place.

on the attack Joe Solmonese

When it came to light that the Minnesota-based retailer Target had made a contribution to a political organization endorsing an anti-gay-marriage candidate, the backlash was severe. Joe Solmonese, the president of Human Rights Campaign, demanded that Target correct its misstep by donating to gay rights organizations. When that didn’t happen, he went public with his anger.

“If their initial contribution was a slap in the face, their refusal to make it right is a punch in the gut and that’s not something that we will soon forget.”

A powerful adjunct to the use of force multipliers is the stockpiling of credentials that speak to your company’s good work. Positive recognition by third parties in the recent past can help a company gain the benefit of the doubt in a situation where the facts are in dispute. Target, America’s second-largest retailer, has long championed GLBT (Gay Lesbian Bisexual Transgender) rights, supporting gay pride and AIDS marches and offering generous domestic partner benefits. But last July it caused an uproar by contributing $150,000 to the conservative political action group MN Forward, which was supporting the gubernatorial candidacy of the Minnesota state representative Tom Emmer—an outspoken opponent of same-sex marriage. Condemnation came in the form of boycotts, in-person protests, online petitions, and a YouTube video showing a woman shopping at the store for the last time and then returning the items, explaining, on the verge of tears, that her son was gay. The video garnered nearly 270,000 views and 5,000 comments in just a few weeks. Target’s response is highly instructive. Its CEO, Gregg Steinhafel, e-mailed employees to underscore the chain’s commitment to diversity. “Let me be very clear, Target’s support of the GLBT community is unwavering, and inclusiveness remains a core value of our company,” he wrote. He later sent a message explaining that the contribution had been meant to “support economic growth and job creation” and acknowledging the unintended effect: The donation, he said, “affected many of you in a way I did not anticipate, and for that I am genuinely sorry.” Then Target pointed to its past credentials. It had been recognized for its inclusiveness 35 times in 2009 and 2010 alone: For example, DiversityInc had named

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it one of the “Top 50 Companies for Diversity,” and Corporate Women Directors International had listed it among the “Top 10 Companies with the Highest Percentage of Women Directors.” The Ethisphere Institute had named it one of the “World’s Most Ethical Companies,” and Human Rights Campaign had declared it a “Best Place to Work” for GLBT equality and given it a perfect score on its Corporate Equality Index. Steinhafel noted the HRC accolades prominently in his e-mail to employees. Although the story is ongoing and the reputational damage has yet to be fully quantified, Target would surely be in a far worse position without these credentials to draw on. Companies are working harder with each passing year to attain those sorts of credentials. Fortune, Ethisphere, and DiversityInc have all seen surges in applications. And as the demand for credentials rises, so will the number of awards—increasing the weapons in a company’s reputation-defending arsenal. Managers accustomed to using tools that only wellfunded corporate communications organizations can afford may hesitate to engage with media that any middle-school student can access. But to disdain new media is to hobble yourself. If you fail to adapt to and make use of your adversaries’ best tactics, you cede the field of battle. This appears to be a common mistake: Our research shows that in 2009 the “stumble rate”—the incidence of reputation loss—of the world’s most admired companies was nearly 50%. If you want to protect your company’s image, you need to rethink your reputation management and acknowledge that you have considerably less control over your corporate messages than you had just a few years ago. You may have to deal with unknowns that can turn your company’s name to mud overnight. Perhaps no corporation will ever decisively “win” its reputation war; the battle is ongoing. But by changing your mind-set, adopting new tools, and taking the principles of reputation warfare to heart, you can protect your business from the worst of the snipers’ attacks.   HBR Reprint R1012D

Photography: Courtesy of the Human Rights Campaign

on the site noted that he had personally seen fleet captains handing out supplies and commented, “It’s a win-win situation for everyone involved.”

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Spotlight on Social Media and the New Rules of Branding

Spotlight

ARTWORK Alex MacLean, Universal Studios Pedestrian Paths and Walkways II, 1999, photograph, Orlando, Florida

Why You Need a New-Media “Ringmaster”

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ocial technologies are helping—if not forcing—brands to form new kinds of relationships with customers. The problem is, traditional brand-management models aren’t up to the task, for two reasons: They’re designed for an outdated organizational structure and depend on people with the wrong skill sets. Most companies separate the essential activities of communicating and fulfilling a brand promise into different functions, each of which has its own channels. Marketing communication articulates the promise. Corporate communications manages the brand’s reputation. Customer service handles inquiries and customer problems. Other functions, from product development to frontline retail operations, play important roles in delivering on the offer. But this fragmented approach can’t begin to pre­sent a coherent voice for the brand or support the relationship building that customers have come to expect in a hyperconnected world. Neither can

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by Patrick Spenner

the conventional brand manager, who typically is hired for skill at strategy and planning, talent at turning insight into innovation, and the ability to manage people and large budgets against business objectives. Though necessary general-management skills, these are not sufficient for the online age’s branding tasks. Brand marketers today need an updated model that features a new type of executive who has digital savvy and is skilled at coordinating a variety of marketing and customer-facing activities—someone who functions like a circus ringmaster, expertly choreographing talent in real time to engage the audience in a seamless, interactive experience.

What Makes a Ringmaster?

Although the role of this new executive is not yet fully formed, my colleagues and I have developed a composite picture based on a study of more than 40 midsize and large companies that are leading the charge in social media marketing. Ringmasters have

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three capabilities in particular that distinguish them from classic brand managers. Integrative thinking. Ringmasters obviously are at home with social technologies but also have a strong understanding of brand mechanics and communications. They know how to combine the old with the new and harness the latest technologies to achieve brand objectives. And they can envision how those technologies can create fundamentally new types of value. Consider how automobile brands such as Mini and Ford Fiesta are creating communities of enthusiasts who derive emotional value from connecting with one another. Social media are dramatically expanding the perimeter of these communities. Fiestamovement.com, for instance, has facilitated a “content creation factory” in the words of Jim Farley, Ford’s CMO. The site encourages enthusiasts to create and share video, blogs, and other original material that attract new members to the community. An investment of less than $5 million in Fiestamovement has achieved the same level of awareness that would be generated by a traditional media strategy for an auto launch, which typically costs tens of millions of dollars. Ringmasters like Scott Monty, Ford’s head of social media, are crucial in positioning organizations to capitalize on these sorts of value-creating opportunities. Lean collaboration skills. Ringmasters start with far fewer resources than brand managers do. They must therefore rely on persuasiveness and charm to beg, borrow, or otherwise co-opt people from across the organization and get them to work together on initiatives. This requires unusually high emotional intelligence, among other attributes. At H&R Block, Zena Weist, the company’s newly hired social media director, sits inside the communications function, yet spends half of her time promoting cross-enterprise collaboration. Her brand experience (acquired in a previous job at Sprint) and strong people skills enable her to lead a virtual team composed of employees from customer service, marketing, and corporate communications. When Weist landed at H&R Block, she quickly saw the need to enhance the company’s presence and responsiveness on social platforms. Recognizing that her small team wasn’t equipped to close the gap on its own, she collaborated with her peer in Client Service. Together, they built the case to “carve out” five personnel from the service organization to be a virtual extension of Weist’s team, with a set of mutually

agreed-upon behaviors and metrics. Ultimately, the combined team cut across multiple functions, closed the responsiveness gap, and established a very positive social media presence for H&R Block. High speed. Classic brand managers operate on medium to long decision cycles, crafting strategies to guide activities and investments over years. Ringmasters, by contrast, work with short time frames, sometimes with daily cycles. They excel at using social technologies to detect emerging opportunities or threats and respond rapidly to them. Jeanette Gibson, Cisco’s social media marketing director, set up her team to scan and react daily. In one recent product launch, the team identified key online gathering places for target customers, spotted and engaged with the discussion leaders there, and helped Cisco’s own subject-matter experts establish a presence in the dialogue, nudging the conversation toward the problems that the new product could address. The team closely monitored these exchanges, looking for keywords and rapidly cycling them into Cisco’s search-marketing efforts. Ultimately, the social team positioned the new product for one of the most successful launches in the company’s history. Given these three required capabilities, what kind of background must ringmasters have? Beyond a clear passion for and knowledge of social technologies, they need an ear for stories that will play well, an instinct for developing external relationships, and a holistic sense of the enterprise’s communication priorities. Previous experience in corporate communications or marketing is a must; it gives ringmasters an appreciation for speaking with one brand voice, an understanding of how to best allocate marketing investments across touch points, and knowledge of techniques for measuring marketing effectiveness. A background in customer service, new product development, and even frontline operations can also be valuable, providing a broadened perspective that’s useful in understanding customers and promoting internal collaboration. In a ringmaster, ultimately you are looking for an enterprise player, a catalyst for change, and an orchestrator who, by championing social technologies, will help you deliver the greatest show on earth—or whatever may be your own brand promise.   HBR Reprint R1012E Patrick Spenner ([email protected]) is the managing director of the Corporate Executive Board’s Marketing Leadership Council. 

December 2010 Harvard Business Review 79

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The One Thing You Must Get Right When Building a Brand

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Yes, new media give us powerful tools and speed—but that’s not enough. by Patrick Barwise and Seán Meehan s usual, marketers are turning hype into hyperventilation. This time, it’s about the supposed end of marketing as we know it, thanks to the rise of social media and the shift of power to consumers. But it’s wrong to think we’re entering a world in which traditional marketing activities, and brands themselves, will become irrelevant. In fact, the opposite is true. Social media make it more urgent than ever that companies get the basics right, developing and reliably delivering on a compelling brand promise. It has always been risky for companies to disappoint customers, at least over the long term. But today the scale and speed of social media can make falling short instantly painful. Consider the internetfueled backlash against Kryptonite’s expensive but easily picked lock and Dell’s flammable laptops. By the same token, companies that consistently deliver what they promise benefit mightily when social media amplify their reputation. The obvious danger is failing to keep pace with social media developments. But an equal, less obvious danger is getting distracted by them and losing sight of the fundamentals. We’ve long worked on marketing strategy with companies across industries; over the past 15 years we’ve focused on new media, and recently on social media marketing. And we’ve been directly involved 80 Harvard Business Review December 2010

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HBR.org ARTWORK Alex MacLean, Untitled 2010, photograph, Italy

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Spotlight on Social Media and the New Rules of Branding

in successful new-media start-ups, including one specializing in customer advisory panels and online brand communities. Our conclusion? The companies that will succeed in this environment are exploiting the many opportunities presented by social media while keeping an unwavering eye on their brand promise, and they are judiciously revising the marketing playbook rather than trying to rewrite it.

Leverage Social Media

Most companies have cottoned on to social media as tools for engagement and collaboration. Marketers at leading companies have created lively exchanges with and among customers on sites such as OPEN Forum (American Express), Beinggirl.com (Procter & Gamble), myPlanNet (Cisco), and Fiesta Movement (Ford), tapping into participants’ expertise and creativity for product development. Of course, social media can also boost brand awareness, trial, and ultimately sales, especially when a campaign goes viral. More important for most companies, however, is that through social media they can gain rich, unmediated customer insights, faster than ever before. This represents a profound shift. Historically, market research was product- rather than customercentric: Marketers asked questions about attitudes and behaviors relevant to their brands. More recently we have seen the rise of ethnographic research to help them understand how both a brand and its wider product category fit into people’s lives. Social networks take this a step further by providing powerful new ways to explore consumers’ lives and opinions. Procter & Gamble was an early adopter of social media; now all its businesses have sites aimed at specific markets and communities. Its feminine care group, appreciating the need to listen to rather than talk at customers, made sure that Beinggirl was less about its products than about the tribulations of 11-to14-year-old girls—embarrassing moments, hygiene concerns, boy trouble. The site’s main value to P&G is not that it drives product sales but that it illuminates the target consumers’ world. Similarly, Amex uses OPEN Forum to learn about small-business owners, and Cisco uses myPlanNet to better understand

FoR Procter & Gamble, the main value

of Beinggirl.com is not that it drives product sales but that it illuminates the target consumers’ world. 82 Harvard Business Review December 2010

the new generation of developers. These sites work because participants are engaged with the brands, find the platforms authentic, and trust one another. The companies create active communities by ceding some control—in our experience, often the hardest adjustment for marketers. P&G recently encountered firsthand the dark side of social media—the speed with which they can spread damaging messages. After the company introduced Dry Max technology into its Pampers product line last year, promising extra protection and a less bulky diaper, Rosana Shah, an angry customer whose child had developed diaper rash, created a Facebook page dedicated to putting pressure on the firm to withdraw the product. Other reports of rashes and blisters followed, and by May 7,000 parents had joined Shah’s campaign. Confident in its product’s performance, P&G stood firm. Its long experience in the category had taught it that some proportion of babies will always suffer from rashes, and the frequency of such problems hadn’t changed after the introduction of Dry Max. Aided by its well-established social media network, Pampers Village, and its Pampers Facebook page, the company made its case sympathetically but clearly. It responded to all complaints, offered advice to parents, and explained why the product wouldn’t be withdrawn. In September the U.S. Consumer Product Safety Commission reported that it could find no link between Dry Max and the occurrence of diaper rash. Far from curbing P&G’s enthusiasm for social media, this incident helped the company hone its approach. It plans to use greater prelaunch engagement through these channels in future to clarify expectations and enable an even faster and more effective response to any unexpected backlash. Toyota, too, deftly used social media as part of its crisis management during the sudden-acceleration recall. It set up a team to monitor and respond with facts to rumors on Facebook and elsewhere, and created a Twitter presence for COO Jim Lentz. The team identified online fans and sought permission to distribute their statements through Toyota channels. Drawing on the company’s brand reputation—the reservoir of goodwill earned over decades of delivering on its promise of quality, reliability, and durability—it used social and other new media effectively to neutralize much of the hostility. By March 2010, when the recall was in full swing, Toyota sales were rebounding, with Camry and Corolla topping the list of all passenger-car sales.

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The One Thing You Must Get Right When Building a Brand HBR.org

Idea in Brief The rise of social media makes it more important than ever to get the branding fundamentals right.

Enhance the Playbook

Companies that succeed in this environment judiciously revise the marketing playbook rather than rewriting it, and exploit social media opportunities while keeping an unwavering focus on meeting customers’ needs.

Brands should use new media to deliver on four basics: offering and communicating a clear customer promise; building trust by delivering on it; continually improving the promise; and innovating beyond the familiar.

As they experiment with social media, companies should use them to gain customer insights rather than to sell; capitalize on the media’s speed and reach while protecting the brand’s reputation; and carefully follow the unwritten rules of customer engagement online.

The most-read section of Virgin Atlantic’s Facebook page includes travel tips from crew members— communication that comes across as honest, informal, and caring.

Although any company’s decision about whether and how to use a new tool is situation-specific, all companies should incorporate social media into their marketing playbooks. But what’s the best approach? Our analysis of the strategies and performance of a diverse range of companies suggests that great brands share four fundamental qualities: • They offer and communicate a clear, relevant cusTrust. Obviously, trust is mainly about operatomer promise. tional execution—service delivery. But keeping cus• They build trust by delivering on that promise. tomers informed when things go wrong can prevent • They drive the market by continually improving a slipup from becoming a trust-eroding PR disaster. the promise. Customers expect airline websites to be accurate and • They seek further advantage by innovating be- up-to-date. But during the volcanic-ash crisis last yond the familiar. spring, VAA’s website couldn’t keep pace with the rapThese basics don’t sound like rocket science, but idly changing situation, so it used Facebook and Twitwe’ve been surprised by how many companies still ter to communicate with customers. This was well fail to get them right. Social media can be used to re- received by some, but VAA learned from irate callers inforce all four, even as they make them more urgent. and site visitors that it needed to do an even better Look at how Virgin Atlantic Airways has used social job of providing information in a crisis. The company media to buttress the branding basics. is modifying its site to include a “rapid response” link The customer promise. Customers expect inno- to real-time VAA updates on Twitter and Facebook. It sees the various social media as complementary: Fervation, fun, informality, honesty, value, and a caring attitude from VAA. This promise is reinforced at ev- gus Boyd, Virgin Atlantic’s head of e-business, told us, ery customer touch point, from marketing materials “Twitter is no more than a sound bite. Facebook can and the call center to travel agents and, increasingly, be an article. The website is for in-depth detail. They all need to signpost each other.” travel websites. VAA scans these sites (along with less obvious ones such as Camping.com and Mumsnet. Continual improvement. For VAA—and for com) to learn what people are saying. Where there is most companies—the biggest social media opportumisinformation, the company rarely has to provide a nity lies in gathering insights to drive continual increcorrection, because site visitors usually do so them- mental improvements. selves. Like other companies, VAA uses social media For instance, since its founding, in 1984, VAA has to check that the brand promise is both understood built its brand on the customer’s total experience, and relevant. It also works to keep all its social media from her initial search for a flight to her safe return activities true to and in support of the brand values. home. The proliferation of travel blogs has reinforced For instance, the most-read section of its Facebook this emphasis. When the company learned that its page includes travel tips from crew members—com- loyalty-scheme members were complaining online munication that comes across as honest, informal, about tedious, redundant requests for security inforand caring. mation, it created a secure opt-in service to eliminate

December 2010 Harvard Business Review 83

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hbr.org watch Link to the video at s.hbr.org/cHTWsV.

the problem. In response to online-community suggestions, it launched a system to arrange taxi sharing on arrival with passengers from the same flight. None of this represents a shift in strategy: The brand promise hasn’t changed, but social media dialogue has enabled VAA to keep improving its offer. Innovation beyond the familiar. VAA frequently wins awards for innovation—such as its in-flight entertainment systems and “premium economy” class. Fresh insights from social media reinforce this aspect of the brand. For instance, Facebook interactions helped the company appreciate an important but largely unrecognized segment: consumers planning a big trip. Their planning starts well in advance and involves extensive discussions with other travelers, so VAA launched Vtravelled, a site dedicated to inspirational journeys. Customers moderate the conversation and exchange information, stories, and advice. They can create a Trip Pod, a personal scrapbook of ideas for a dream trip. VAA enters the discussion using a traveler’s tone of voice, not pushing a product but offering advice. The site leads to some sales, but its main benefit to VAA comes from brand reinforcement and novel customer insights. In an open innovation initiative, VAA in 2008 partnered with the UK’s National Endowment for Science Technology and the Arts to launch VJAM. In a daylong workshop it presented a diverse group of VAA customers, IT developers, and social digerati with this agenda: “Social networking meets travel—magic happens.” Many ideas bubbled up at the workshop, and many others were submitted privately. Nine of them were short-listed, six received funding for proof of concept, and three have become products: the Flying Club and Facebook Flight Status app, a first for any airline; Taxi2, the aforementioned cab-sharing service; and VAA’s first iPhone app, called Flight Tracker, which includes real-time aircraft positions— also a first for any airline.

Keep Your Eye on the Ball

VAA would not claim mastery of social media in brand building—no firm yet can. But here’s our advice, based on the dozens of early successes and failures we’ve studied: Don’t throw out your playbook. Start with your brand promise and let it guide all your actions in social media. Don’t get distracted by the abundance of options. Use social media primarily for insight. Companies can and do sell things via social media, of 84 Harvard Business Review December 2010

Anything Goes Blendtec’s founder, Tom Dickson, purees a rake handle, demonstrating the power of both the company’s products and viral marketing. Videos of Blendtec blenders blending Silly Putty and a vuvuzela, among other things, have been viewed more than 100 million times on the company’s YouTube channel.

course, but their real value at this stage lies in learning about customers. Facebook in particular has such tremendous reach that it can provide detailed quantitative analyses of communication flows between consumers. Increasingly smart natural-languageprocessing technology will, over time, help marketers extract further insights from the content of those discussions. At the other extreme, companysponsored online brand communities can generate immediately applicable insights from direct, smallerscale interactions. Strive to go viral, but protect the brand. The few brands that have substantially improved sales by using social media have done so with communications that convey authenticity and relevance— and are so entertaining that they go viral. Consider Blendtec’s inspired “Will it blend?” YouTube clips, in which Tom Dickson, the company’s founder, demonstrates its blender’s power and robustness by pulverizing everything from golf balls to an iPad. Since the campaign launched, four years ago, the videos have been viewed more than 100 million times, and sales have increased by 700%. Sony, on the other hand, stumbled badly when it paid an agency to create a supposedly authentic blog and YouTube video hyping the latest gaming PSP for Christmas 2006. Hit by a storm of criticism when word of the deceit leaked out, Sony was forced to own up, withdraw the video, and post a contrite apology on the blog. The debacle surely didn’t help sales; 2006 holiday shipments were down 75% from 2005. Engage, but follow the social rules. Social media conversations about brands are usually unstructured or semistructured and moderated by the participants themselves, using unwritten rules. People join in freely because they enjoy and learn from the discussion. Your company can also join, and to some extent influence, the conversation—but only if you are accepted by the other participants. Those in the company who execute its social media strategy should naturally be at home with the culture and rules of each social network. But they must also be deeply knowledgeable about the company’s products and—most important—steeped in its brand and values.   HBR Reprint R1012F Patrick Barwise is an emeritus professor of man­ agement and marketing at London Business School. Seán Meehan is the Martin Hilti Professor of Marketing and Change Management at IMD. Their latest book, Beyond the Familiar: Long-Term Growth Through Customer Focus and Innovation, will be published by Jossey-Bass in March 2011.

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Phil Rosenzweig is a professor of strategy and international business at IMD in Lausanne, Switzerland, and the director of the school’s Executive MBA program.

Robert S. McNamara

And the Evolution of Modern Management

PHOTOGRAPHY: GETTY IMAGES

Lessons from one of the most controversial managers in modern history by Phil Rosenzweig

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EVERY GENERATION OF MANAGERS wrestles with questions about its purpose. In the 1950s and 1960s, to be an able manager was to do four things well: plan, organize, direct, and control. Leading business thinkers conceived of managers as rational actors who could solve complex problems through the power of clear analysis. That view shaped the developing profession, but many questions were left unanswered. Planning and directing were essential, yes, but toward what ends? Organizing and controlling, of course, but in whose interest? By the 1980s and 1990s, one answer had come to dominate popular thinking: The purpose of management was to enrich a company’s owners. Shareholder value creation had the advantage of being precisely and objectively measurable—and made CEOs like Roberto Goizueta, Sandy Weill, and Jack Welch legends. Yet as a managerial mission, the pursuit of financial wealth has proved to be unsatisfactory. In the past decade, as evidence that markets are far

from efficient has mounted and much of the wealth created has been wiped out, basic questions about management have resurfaced. Today the focus has shifted to how management should contribute to society, provide for environmental sustainability, and improve the lives of people at the bottom of the pyramid. The fundamental purpose of management is being debated at leading business schools, where students consider the merits of taking professional oaths that would commit them to pursue goals beyond financial performance. For those who have chosen management as their livelihood, these are not academic questions. They speak to the ultimate question that confronts us all: Has my life’s work been important? As we consider the various purposes to which managers’ talents could be applied, and how their contributions may come to be judged, we may gain useful insights by examining the life of one man who grappled with these issues for more than 50 years. December 2010 Harvard Business Review 87

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ROBERT S. MCNAMARA AND THE EVOLUTION OF MODERN MANAGEMENT

The career of Robert S. McNamara spanned academia, private enterprise, government, and humanitarian service. He was a professor at Harvard Business School in the early 1940s; an executive at Ford Motor Company for 15 years, becoming its president in 1960; the secretary of defense for seven years under presidents Kennedy and Johnson; and the president of the World Bank for 13 years. In the eyes of many, of course, McNamara’s accomplishments were overshadowed by the tragedy of Vietnam. When he died in 2009, at age 93, the New York Times’ obituary headline described him simply as the “architect of a futile war.” Because of his role in it, he tends to be caricatured as smart but not wise, obsessed with narrow quantitative measures but lacking in human understanding. The controversies surrounding Vietnam are complex and will endure, but it would be a mistake not to draw any other lessons from his remarkable career. Perhaps more than anyone else, Robert McNamara personified management in the 20th century. In his legacy we see the triumphs of modern management as well as its most troubling limitations.

Analytical Whiz Kid

McNamara was born in San Francisco in 1916 and came of age during the Great Depression. As a youth

he witnessed labor unrest in local shipyards and massive unemployment. After high school he enrolled at the University of California, Berkeley, where he majored in economics because he felt it offered the most useful tools for addressing society’s largest problems. From the outset he thought of management as a means of bringing positive change to the world, not as a means of financial gain for himself or a company’s owners. After graduating in 1937, McNamara entered Harvard Business School. According to Jeffrey Cruikshank’s history of the school, this was a time when the field of management was on the cusp of great progress. One required course, Business Statistics, had begun to teach methods of quantitative decision making. Its professor, Edmund Learned, later recalled: “We sought to train our men for positions of responsibility that required statistical facts and analyses for diagnosis or action purposes. We wanted men to develop judgment in the use of figures [and] contribute to an intelligent solution of the problem under discussion.” HBS’s accounting courses had been moving in a similar direction. In 1936, Professor Ross Walker offered a course called Aspects of Budgetary Control, which focused on practical aspects of planning and decision making. The curriculum

Robert McNamara’s Legacy

1933–37 At the University of California, Berkeley, majors in economics, seeing its promise to address society’s greatest challenges.

Formative Frameworks 1930

1937–39 Attends Harvard Business School, which had begun to focus on quantitative decision making. 88 Harvard Business Review December 2010

1943–46 Serves in the army on an elite team, Statistical Control, that applies quantitative analysis to the war effort.

Henry Ford II 1960 Is named the first nonfamily president of Ford.

Data and Decision Making 1940

1950

1940–43 Joins Harvard Business School as its youngest assistant professor.

1946 Joins Ford as part of a team from Statistical Control, which becomes known as the Whiz Kids. Gains renown for achieving improvements with modern management control systems.

1956 As an advocate of public safety, gets Ford to introduce the first seat belts in passenger cars.

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Though his name will ever be linked to the tragedy of the Vietnam War, Robert S. McNamara was regarded as a brilliant manager in the decades before and after it—in both public and private sector roles. The phases of his career, and how he approached his work, map broadly to management’s evolution as a discipline.

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Idea in Brief Robert S. McNamara, in turn revered and reviled, may yet be redeemed as an icon of management. His career was a journey toward managerial wisdom and mirrors the very evolution of management as a discipline.

He began as an idealist, seeking the training that would help him address society’s most pressing problems. Embracing the newest tools for problem solving, he gained renown for his analytical prowess at Ford Motor Company.

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covered the techniques of modern professional management: cost accounting, control systems, management information systems, and decision science. McNamara was an eager and receptive student of the new methods. After earning his master’s of business administration, in 1939, he returned to San Francisco for a year, before accepting an offer to join Harvard Business School as a faculty member. At age 24, he became its youngest assistant professor. During World War II, McNamara taught in the Army Air Forces’ statistical school and then took unpaid leave from Harvard to serve in the Army’s Department of Statistical Control. Aircraft were playing an increasingly important role in warfare, but no

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1961 Is appointed secretary of defense by President Kennedy. Starts to apply principles of modern management to the Pentagon, improving efficiency and instituting systems analysis as a basis for making decisions.

1963 Works to reduce the threat of nuclear war, drafting the Limited Test Ban Treaty.

1970

Reflective in old age, he embraced the importance of empathy—and remained, as ever, an idealist.

system had been developed to track planes and their crews, monitor spare parts, or allocate fuel. The complexity of the modern war machine had surpassed the ability to manage it. McNamara helped bring the rigor of statistical analysis to the war effort, improving logistical efficiency and mission planning. His biographer Deborah Shapley found evidence of his influence in an army report from the era: “Much of the success of the system has been due to the Harvard method which stresses the ‘meaning of figures’—the power to analyze something for oneself.” In 1946, rather than returning to academia, McNamara became part of an elite team from Statistical Control that joined Ford. They were nicknamed the

1967 Creates the Vietnam Study Task Force to write an analysis of the Vietnam War, later known as the Pentagon Papers.

Center of Power 1960

As an architect of the Vietnam War, he applied a hyperrational approach to a mission he later saw as fundamentally misunderstood. Chastened by the debacle, he recognized the limits of data and came to appreciate the intangible and the irrational in human affairs.

1968–1981 Serves as the president of the World Bank. Devotes resources to economic development in poor countries.

Humanity and Humility

1964–66 As President Johnson’s secretary of defense, guides American policy in Vietnam, leading to the escalation of bombing and the introduction of U.S. ground forces.

1980

1981 ON After retirement from the World Bank, writes extensively about economic development and about measures to avoid nuclear war.

December 2010 Harvard Business Review 89

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Robert S. McNamara And the Evolution of Modern Management

Barry Goldwater called McNamara “one of the best secretaries ever, an IBM machine with legs.”

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Whiz Kids. The firm’s young president, Henry Ford II, charged them with overhauling the once-proud company, now in disarray and losing money. McNamara’s star rose as he brought the discipline of rational analysis to Ford’s sprawling bureaucracy, emphasizing facts and figures. Austere and formal, with rimless glasses and neatly slicked-back hair, McNamara projected a no-nonsense air. The financial turnaround at Ford was remarkable, yet he did not focus only on shareholder returns. He went about his work with an acute sense of social responsibility. Unlike most automobile executives, he was an early champion of passenger safety. He later recalled, “The prevailing idea in the auto industry was that if you talked about safety, you’d scare the public.” Under McNamara’s leadership, Ford’s 1956 models featured padded instrument panels and safer steering wheels, and were the first passenger cars with seat belts. Rivals scoffed: “McNamara sells safety, Chevrolet sells cars.” Yet he persisted, guided by his sense of responsibility to the public.

The Portable Professional

Selected by President John F. Kennedy to serve as secretary of defense, McNamara arrived in Washington in January 1961. He epitomized the confidence of the American Century: He was a technocrat free of ideological blinders, focusing on the facts and deducing the truth from statistics. BusinessWeek described him as a “prize specimen of a remarkable breed in U.S. industry—the trained specialist in the science of business management who is also a generalist moving easily from one technical area to another.” Once again, McNamara’s sense of public service was strong. He had been among the highest-paid executives in the world, earning $410,000 a year in salary and bonuses at Ford, and gave it up to become a cabinet secretary with a salary of $25,000. More significantly, to avoid even the appearance of a conflict of interest, he chose not to exercise options on 30,000 shares of Ford stock, valued at $47 a share. At the Pentagon, McNamara applied his usual rigorous approach to the management of the vast military establishment. Until then, each branch of the service had had its own budget and pushed its 90 Harvard Business Review December 2010

Lyndon Johnson greatly admired McNamara and relied heavily on his counsel. Here, the two men are shown at McNamara’s retirement ceremony in 1968.

preferred weapons systems. The result was massive inefficiency and questionable effectiveness. McNamara set out to optimize the nation’s arsenal, to provide the best military capability in the most efficient manner, subordinating the parochial interests of the individual services. He also overhauled U.S. military strategy, replacing the potentially catastrophic doctrine of massive retaliation with a doctrine of flexible response, which insisted on proportionality and sought to avert escalation. Congress was highly impressed. Republican Barry Goldwater called McNamara “one of the best secretaries ever, an IBM machine with legs.” Even during the most difficult days of the Vietnam War—which would eventually overwhelm him and President Lyndon Johnson—McNamara did not lose sight of the goal that had inspired him as a youth: contributing to the greater good. In a remarkable 1967 speech at Millsaps College, in Mississippi, he offered a stirring vision of management. (See the sidebar “Management Is the Most Creative of Arts.”) He spoke, too, about the growing gap between rich and poor nations. National security was inextricably linked to global security, and global security to closing that gap. As the Nobel Prize–winning economist Amartya Sen would later observe, economic development is freedom—and conversely, without it, there is no freedom. After leaving the Pentagon and becoming president of the World Bank, a post he held from 1968 to 1981, McNamara turned his energies toward expanding funding for development. He shifted the bank’s focus toward poverty reduction, dramatically increasing the financial support for projects in health, nutrition, and education. He relied, once again, on a fact-driven approach—measuring well-being and funneling loans to the most effective development programs. By the 1980s, McNamara’s star had fallen, and not just because of his role in the Vietnam debacle. American business seemed to have lost its way, and the management methods he exemplified were being questioned. In their landmark 1980 Harvard Business Review article, “Managing Our Way to Economic Decline,” Robert H. Hayes and William J. Abernathy blamed slumping U.S. fortunes on the rise of professional managers. They charged: “What has developed, in the business community as in academia, is a preoccupation with a false and shallow concept of the professional manager, a ‘pseudoprofessional’ really—an individual having no special expertise in any particular industry or technology who neverthe-

photography: Wally McNamee/The Washington Post/Getty Images

DISCUSS Do you have questions or comments about this article? Phil Rosenzweig will respond to feedback at hbr.org.

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“Management Is the Most Creative of Arts” In a 1967 convocation address at Millsaps College, in Jackson, Mississippi, Secretary of Defense McNamara set out his vision of the role of management and its importance in our world:

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Management is, in the end, the most creative of all the arts— for its medium is human talent itself. What—in the end—is management’s most fundamental task? It is to deal with change. Management is the gate through which social, political, economic, technological change—indeed change in every dimension—is rationally and effectively spread through society. Some critics, today, keep worrying that our democratic, free societies are becoming overmanaged. The real truth is precisely the opposite. As paradoxical as it may sound, the real threat to democracy comes from undermanagement, not from overmanagement. To undermanage reality is not to keep it free. It is simply to let some force other than reason shape reality. That force may be unbridled emotion; it

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may be greed; it may be aggressiveness; it may be hatred; it may be ignorance; it may be inertia; it may be anything other than reason. But whatever it is, if it is not reason that rules man, then man falls short of his potential.… [R]ational decision making depends on having a full range of rational options from which to choose. Successful management organizes the enterprise so that process can best take place. It is a mechanism whereby free men can most efficiently exercise their reason, initiative, creativity, and personal responsibility. It is the adventurous and immensely self-satisfying task of an efficient organization to formulate and analyze those options. It is true enough that not every conceivable complex human situation can be fully reduced to lines on a graph, or

less can step into an unfamiliar company and run it successfully through strict application of financial controls, portfolio concepts, and a market-driven strategy.” Yet it was precisely the ability to apply managerial logic that had allowed McNamara to achieve improvements that insiders could not, or would not, produce. At Ford it took someone from outside the auto industry to provide analytical clarity as well as to focus on passenger safety. At the Department of Defense, it took an outsider to bring coherence to the management of the American military establishment, subordinating the interests of each branch to the overall purposes of the nation. McNamara’s skills were precisely what had been needed in sprawling organizations staffed by insiders. Though it was easy to condemn the shortsightedness of professional management for the slump, the truth was more complex. America’s rise to lead-

to percentage points on a chart, or to figures on a balance sheet. But all reality can be reasoned about. And not to quantify what can be quantified is only to be content with something less than the full range of reason.... But to argue that some phenomena transcend precise measurement—which is true enough—is no excuse for neglecting the arduous task of carefully analyzing what can be measured. A computer does not substitute for judgment any

more than a pencil substitutes for literacy. But writing ability without a pencil is no particular advantage. Modern, creative management of huge, complex phenomena is impossible without both the technical equipment and technical skills which the advance of human knowledge has brought us.

ership in the first place had been due in large part to the success of modern management. To blame management for the nation’s failure to maintain the lead reflects a misunderstanding of the ebbs and flows of relative performance, as countries improve and gaps narrow. Furthermore, U.S. carmakers might have fared better against foreign competition from efficient companies with economical cars if McNamara’s views had prevailed. When he’d left for Washington, his plans for the Cardinal—an inexpensive car to be built at lower-cost facilities abroad— were scrapped.

Focused to a Fault

Whether at Ford or in the military, in business or pursuing humanitarian objectives, McNamara’s guiding logic remained the same: What are the goals? What constraints do we face, whether in manpower or material resources? What’s the most efficient way December 2010 Harvard Business Review 91

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Robert S. McNamara And the Evolution of Modern Management

What the Whiz Kids Missed The Later Breakthroughs After the heyday of Robert McNamara, management thinking began to reflect a broader understanding of human behavior. Some of the major advances below were recognized explicitly by McNamara in his later years. Bounded rationality

Moving beyond the prevailing views of the 1950s and 1960s, we now recognize that people possess what Nobel Prize–winning economist Herbert Simon called “bounded rationality.” Not only are decision makers limited by the information they have and by the time available for analysis, but they are also limited by their cognitive abilities. Since the 1970s remarkable research has taken place in behavioral decision theory, with economists such as Richard Thaler and psychologists Daniel Kahneman and Amos Tversky showing how human judgment repeatedly leads to decisions that differ from those predicted by the tenets of rationality.

Escalation of commitment

Organizational processes sometimes inadvertently steer people into making bad decisions. As described by University of California, Berkeley, professor Barry M. Staw, the escalation of commitment has an insidious logic: Each additional step seems to impose only a small additional cost but holds out the promise of victory, so people keep following the process, even though it often leads to greater, sometimes catastrophic, losses.

Emotional intelligence

The importance of human relations in management, widely embraced in the 1930s and 1940s, was eclipsed during the postwar years by the rising emphasis on rational, technical analysis. Today terms like “emotional intelligence,” popularized by Daniel Goleman, signal the importance in management of soft skills as well as hard skills, of empathy as well as cold logic.

92 Harvard Business Review December 2010

The wisdom of crowds

Typical of his era, McNamara was an advocate of central decision making: “I always believed that the more important the issue, the fewer people should be involved in the decision,” he told his biographer Deborah Shapley. Today faith in the expertise of a small elite is balanced by the recognition of settings where the many know more than the few. GE’s legendary Work-Out Program was just one example of the power of broad involvement and demonstrated that organizations can capture the knowledge of numerous employees while increasing their commitment.

Disruptive innovation

The research of Harvard Business School professor Clayton Christensen has shown that incumbent firms often fail precisely because they are well managed—they focus on today’s primary customers but may overlook uncertain prospects in peripheral markets. Yet as low-probability segments grow, they may displace incumbents. An emphasis on efficiency is not enough; it’s also vital to focus on innovation and place large bets even if they have uncertain returns.

Dispersed networks

The preference for large-scale initiatives is being challenged by a belief in local and grassroots efforts. In economic development, where the record of big projects has been disappointing, small distributed efforts, such as the microloans pioneered by Grameen Bank, are getting more attention. At companies, too, commitments to giant initiatives have been balanced by a portfolio approach, in which firms place numerous small bets and then select some for further investment.

to allocate resources to achieve our objectives? In filmmaker Errol Morris’s Academy Award–winning documentary The Fog of War, McNamara summarized his approach with two principles: “Maximize efficiency” and “Get the data.” Yet McNamara’s great strength had a dark side, which was exposed when the American involvement in Vietnam escalated. The single-minded emphasis on rational analysis based on quantifiable data led to grave errors. The problem was, data that were hard to quantify tended to be overlooked, and there was no way to measure intangibles like motivation, hope, resentment, or courage. Much later, McNamara understood the error: “Uncertain how to evaluate results in a war without battle lines, the military tried to gauge its progress with quantitative measurements,” he wrote in his 1995 memoir, In Retrospect. “We failed then—as we have since—to recognize the limitations of modern, high-technology military equipment, forces, and doctrines in confronting highly unconventional, highly motivated people’s movements.” Equally serious was a failure to insist that data be impartial. Much of the data about Vietnam were flawed from the start. This was no factory floor of an automobile plant, where inventory was housed under a single roof and could be counted with precision. The Pentagon depended on sources whose information could not be verified and was in fact biased. Many officers in the South Vietnamese army reported what they thought the Americans wanted to hear, and the Americans in turn engaged in wishful thinking, providing analyses that were overly optimistic. At first, being likened to a computer was meant as a compliment; later, it became a criticism. In the wake of Vietnam, McNamara was derided for his coldness and scorned as one of the so-called best and brightest who had led the country into a quagmire through arrogance. Yet in this dark episode, too, the career of Robert McNamara lets us appreciate how management thinking has taken important steps forward. We know today that people are not the rational creatures suggested by conventional economic theory but exhibit systematic biases of judgment. We know, as well, that organizational processes have their own dynamics—such as the escalation of a commitment to a losing course of action, and the tendency to silence dissenting views—that can lead to flawed decisions. (See the sidebar “What the Whiz Kids Missed.”)

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Reflection and the Search for Wisdom

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The career of Robert McNamara offers more than an overview of modern management and its successes and limitations. It also illustrates that managers have the capacity for reflection and the ability to gain wisdom. In McNamara’s case, the need for introspection and insight was particularly acute. The historian Margaret MacMillan has written that “McNamara spent much of his life trying to come to terms with what went wrong with the American war in Vietnam.” He sought to understand the sources of errors, hoping to square what he earnestly believed were good intentions with the massive waste and tragic loss. When, after many years of silence about Vietnam, McNamara published his memoirs, he admitted: “We were wrong, terribly wrong.” Many people, their lives scarred by the trauma of Vietnam, found such a statement too little, too late. Yet McNamara had insisted that the subtitle to In Retrospect be “The Tragedy and Lessons of Vietnam” because he believed that tragedies could be avoided if lessons were learned. In fact, the willingness to question oneself and learn from experience may be Robert McNamara’s greatest legacy as a manager. At 85, he told Errol Morris, “I’m at an age where I can look back and derive some conclusions about my actions. My rule has been: Try to learn. Try to understand what happened. Develop the lessons and pass them on.” That quest guided McNamara’s later years. He traveled to Cuba and met with Fidel Castro, to understand more fully the 1962 missile crisis and find ways of avoiding future nuclear confrontations. He visited Vietnam and met with Vo Nguyen Giap, commander of the North Vietnamese forces, to discover where things had gone awry in that conflict. One key insight: that it was crucial to empathize with one’s enemies, to attempt to see the world as they did. He concluded that the Cuban Missile Crisis had been resolved peacefully because U.S. diplomats were able to understand Premier Khrushchev’s thinking. But in the case of Vietnam, he admitted, the adversary’s motivations and priorities were misunderstood. McNamara recalled: “We saw Vietnam as an element of the Cold War, not what they saw it as, a civil war.” It was a tragic error that “reflected our profound ignorance of the history, culture, and politics of the people in the area and the personalities and habits of their leaders.” Yet it would be misleading to suggest that McNamara had abandoned the belief in rational analysis. Indeed, the greatest challenges we face today—from

Late in life McNamara met global warming, to water pollution, to health care, to his wartime adversary, economic development—clearly demand the power retired Vietnamese military of logical analysis in service of human ends. At orga- commander General Vo Nguyen Giap, at a symponizations as disparate as the Centers for Disease Con- sium that examined the trol and the Bill & Melinda Gates Foundation, ideal- “missed opportunities” to avoid the war between the ism and rational analysis are not at cross-purposes at U.S. and Vietnam. McNaall. In a 1995 interview, McNamara returned to this mara came to believe that theme: “I don’t believe there’s a contradiction be- the U.S. had erred by failing to empathize with the Viettween a soft heart and hard head. Action should be namese and misconstruing founded on contemplation.” their motivations. IT’S TEMPTING to think of today’s problems as qualitatively different from those that confronted past generations. Surely, the threats to our environment are greater than ever, the pressures of globalization are more intense, and the technologies we use were unimagined even a few years ago. Yet many of the broader questions about the purpose and aims of management remain the same, and managers today confront many of the same dilemmas as their forebears did. In 2005, months before his 89th birthday, McNamara returned to Harvard Business School and spoke with students on the subject of decision making. Among the lessons he stressed: That for all its power, rationality alone will not save us. That humans may be well-intentioned but are not all-knowing. That we must seek to empathize with our enemies, rather than demonize them, not only to understand them but also to probe whether our assumptions are correct. A man often accused of lacking empathy urged us to empathize with our adversaries. A man who prided himself on rationality concluded that humanity cannot be saved by rationality alone—for none of us makes decisions in a completely rational manner—and that systems must therefore be made resistant to the irrationality in each of us. The final measure of a manager, more than amassing wealth or seeking to follow an oath, may be the willingness to examine one’s own actions and seek a measure of wisdom. HBR Reprint R1012G December 2010 Harvard Business Review 93

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China Vs The World Whose Technology Is It?

Illustration: Jack Black

Beijing has been quietly implementing policies to enable China to overtake the West as the globe’s technology powerhouse. They just might be working. by Thomas M. Hout and Pankaj Ghemawat

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I

n the city of Shanghai, a few churches conduct daily services for the faithful, just as churches all over the world do. However, China’s Patriotic Catholic Association doesn’t operate under the auspices of the Roman Catholic Church, which the Chinese government has banned. It is controlled by a state agency, the Religious Affairs Bureau. That’s how the Chinese government deals with foreign organizations, be they churches or companies. They are tolerated in China but can operate only under the state’s supervision. They can bring in their ideas if they deliver value to the country, but their operations will be circumscribed by China’s goals. If the value—or danger—from them is high, the government will create hybrid organizations that it can better control. This approach, which never ceases to

shock foreigners, guides those who are boldly fashioning a new China. At 61, the People’s Republic of China displays all the confidence of a nation that has overcome a midlife economic crisis. Nearly unscathed by the worst global recession in recent history, it is poised to reclaim its place as one of the world’s preeminent economies. The days of double-digit growth may be over, but the Chinese economy still expanded by 9% a year from 2008 to 2010. In August 2010 China passed Japan to become the second-largest economy in the world, and next year it is projected to become its biggest manufacturer, pushing the U.S. into second place. That will mark the return to the top spot for a nation that, according to economic historians, was the world’s leading manufacturer for 1,500 years, until around 1850, when Britain overtook it during the second industrial revolution. December 2010 Harvard Business Review 95

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CHINA VS THE WORLD: WHOSE TECHNOLOGY IS IT?

is quietly and deliberately shifting from a successful low- and middle-tech manufacturing economy to a sophisticated high-tech one, by cajoling, coopting, and often coercing Western and Japanese businesses. The government plans to increase China’s R&D expenditures from the current level, 1.7% of GDP, to 2.5% of GDP by 2020; the U.S. figure today is 2.7%. Like Western governments, it is funding megaprojects in sunrise areas such as new-generation nuclear reactors, nanotechnology, quantum physics, clean energy, and water purification. At the same time, the government is forcing multinational companies in several sectors to share their technologies with Chinese state-owned enterprises as a condition of operating in the country. This is fueling tensions between Beijing and foreign governments and companies, and it raises the critical issue of whether the Chinese brand of socialism can coexist with Western capitalism. Our studies show that since 2006 the Chinese government has been implementing new policies that seek to appropriate technology from foreign multinationals in several technology-based industries, such as air transportation, power generation, highspeed rail, information technology, and now possibly electric automobiles. These rules limit investment by foreign companies as well as their access to China’s markets, stipulate a high degree of local content in equipment produced in the country, and force the transfer of proprietary technologies from foreign companies to their joint ventures with China’s stateowned enterprises. The new regulations are complex and ever changing. They reverse decades of granting

Even as China moves up the ranks of economic superpowers, many discount these recent milestones. They don’t believe that China will become richer than the U.S.—in 2010 America’s GDP was three times China’s, and its per capita GDP was about 10 times greater, at the official exchange rate—or replace the U.S. as the wellspring of new technologies and other innovations any time soon. But almost unnoticed by the outside world, over the past four years China has been moving toward a new stage of development. It

Almost unnoticed, China is shifting to a high-tech economy, by cajoling, co-opting, and often coercing Western and Japanese businesses.

CHINA’S GROWING R&D Over the past decade, China has hiked its R&D expenditures by about 21% a year. During the same period, U.S. R&D spending grew by less than 4% a year. If these growth rates continue, China’s R&D spending will catch up with that of the U.S. by 2020. Factor in the belief that the renminbi is undervalued by 40%, and China’s R&D spending will match that of the U.S. by 2016.

$397

$277

$288

$276

U.S. CHINA

$347

R&D SPENDING ($ IN U.S. BILLIONS) $267

$12.7 2000

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$15.0 2001

$18.0 2002

$402

$389

$372

$22.4 2003

$322

$299

$29.5 2004

$37.3 2005

$45.5

2006

$57.5

2007

$72.3

2008

$85.8

2009

$103

2010

SOURCES NATIONAL SCIENCE FOUNDATION (U.S.), MINISTRY OF SCIENCE AND TECHNOLOGY (CHINA)

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Idea in Brief The Chinese government, determined that China regain its position as one of the world’s leading economies, is enforcing new policies that require foreign companies wanting to do business there to part with the latest technologies in high-tech sectors such as semiconductors, nuclear reactors, avionics, satellites, water purification, and protein science.

These rules, first announced in 2006 and constantly modified to keep multinational companies and governments off balance, mean that CEOs must weigh the benefits of entering the world’s fastest-growing market against the possibility that Chinese corporations will soon become their competitors worldwide.

foreign companies increasing access to Chinese markets and put CEOs in a terrible bind: They can either comply with the rules and share their technologies with Chinese competitors—or refuse and miss out on the world’s fastest-growing market. Just as securing natural resources often drives China’s foreign policy, shifting the origination of leading technologies to China is driving the country’s industrial policy. In late 2009 China’s Ministry of Science and Technology demanded that all the technologies used in products sold to the government be developed in China, which would have forced multinational companies to locate many more of their R&D activities in a country where intellectual property is notoriously unsafe. After howls of protest from foreign governments and companies, the ministry backed down. However, the government still appears intent on creating a tipping point at which multi­ national companies will have to locate their most­sophisticated R&D projects and facilities in China, enabling it to eventually catch up with or supplant the U.S. as the world’s most-advanced economy. This strategy, which we will describe in the following pages, has provoked several disputes between the Chinese government and foreign companies and caused some companies to review their strategies, along one of two lines. The first seeks to tackle the issue of how a multinational company can minimize competitive and security risks to its technologies. The second approaches the issue from the opposite direction, asking which innovations a foreign company must develop in China in order to gain advantage in the fast-changing global marketplace. Above all, China’s strategy casts into doubt the optimistic premise that engagement and interdependence with the West would cause capitalism and socialism to converge quickly, reducing international tensions. Unsurprisingly, during the recession storm clouds have gathered over U.S.–Chinese rela-

The regulations, which also limit investments by foreign companies and mandate a high degree of local content in all equipment, may be making multinational companies unhappy, but they haven’t gotten China into trouble with the WTO, whose technology transfer provisions are more easily subverted than are the provisions covering trade in products.

In addition to forcing multi­ national companies to revisit their China strategies, these regulations undercut the assumption that integrating the Chinese economy with the rest of the world’s would bring about a quick convergence of capitalism and socialism, and reduce global political tensions.

tions. The U.S. considers China a currency manipulator and believes it has failed to meet all its commitments to the World Trade Organization, prompting worries about a coming trade war between the two great economic powers of the 21st century. This isn’t just a fight over the rules of globalization; it’s a larger issue about the inherent difficulties of connecting two big, very different economic systems. Textbook theory suggests that imbalances trigger adjustments, but when economies are very different structurally and follow rigid policies, yoking them together will generate more imbalances—not equilibrium—and heighten tensions. CEOs eager to add another chapter to their lucrative China stories would do well to remember that the relationship between China and the West is historically unstable and to be prepared for unexpected twists and turns.

The Drivers of China’s Discontent

China’s determination to become a technologically advanced economy is driven as much by economic disillusionment with serving as the world’s factory for low-value products as it is by pragmatism. Disenchantment has set in because in spite of China’s huge trade surpluses with the U.S. and Western Europe, the greatest profits have been reaped by foreign rather than Chinese companies, except for a handful of state-owned behemoths. Foreign companies dominate most of China’s high-tech industries, accounting for 85% of the high-tech exports from China in 2008. In value terms the picture is no different: Exports of cellular telephones and laptops, for instance, had less than 10% Chinese content—and foreign-owned factories accounted for most of it. The rest of the hardware and software was imported. Frustrated by the inability of Chinese companies to get a larger share of these markets and forced to pay foreign companies ever-larger royalties as demand grows, Beijing decided four years ago to December 2010 Harvard Business Review 97

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China vs The World: Whose Technology is it?

China’s Plans for Winning the Tech War China wants to strengthen inFour years ago Beijing novation, particularly in energy, transportation, the environannounced its desire to ment, agriculture, information, make China an innovation- and health. It aims to boost the development of proprietary oriented society. intellectual property. It seeks to apply modern technologies to public life and urbanization. And it is looking to modernize its defense capabilities, including its space program.

dramatically increase the number of created-inChina technologies. The government also realized that the renminbi’s inevitable appreciation would eventually render China’s low-tech exports uncompetitive, and that their manufacture would shift to countries such as Indonesia, Malaysia, Thailand, and Vietnam. To keep its economy growing at around 9%, provide jobs for the next generation of better-educated workers, and boost income levels, the state had to ensure that Chinese companies develop, manufacture, and export advanced products. However, Chinese enterprises, such as the aircraft manufacturer Aviation Industry Corporation of China (AVIC), the wind energy companies Sinovel and Goldwind, and the rail-transportequipment companies CSR and CNR, were unable to compete technologically with Western, Japanese, and South Korean market leaders. The Chinese government therefore developed a three-pronged plan to contain foreign companies and enable its companies to create advanced technologies. One, the state has ensured that it will be both buyer and seller in certain key industries, by retaining owner­ship of customers and suppliers alike. For instance, the Chinese government owns CSR and China Railways, AVIC and China Eastern Airlines. This gives the state a great deal of influence over equipment purchases, sales, and technology development. Two, the government has consolidated several manufacturers into a few national champions, to generate economies of scale and concentrate learning. CSR and AVIC both resulted from the mergers of several smaller, loss-making enterprises. Three, Chinese officials have learned to tackle multinational companies, often forcing them to form joint ventures with its national champions and transfer the latest technology in exchange for current and future business opportunities. Companies that resist are simply excluded from projects. The Chinese 98 Harvard Business Review December 2010

Accordingly, Beijing plans to increase R&D spending from 1.5% of GDP in 2006 to 2.5% by 2020, introduce unique technical standards that would reduce dependence on imported technologies by 30%, and ensure that China will become one of the world’s top five economies according to the number of patents granted and scientific papers published.

government uses the restrictions to drive wedges between foreign rivals vying to land big projects in the country and induce them to transfer the technologies that state-owned enterprises need to catch up. Executives working for multinational companies in China privately acknowledge that making official complaints or filing lawsuits usually does little good. Timing is critical: The government is convinced that Chinese companies must acquire the latest technologies and invest in R&D immediately if they don’t want to miss the local and global infrastructure­building booms now under way. It’s also advantageous to act while the renminbi is still undervalued. The government’s hope is that the country will soon become a global innovation center matching the U.S. and Western Europe, and that this position will enable Chinese companies to overtake their foreign partners. This logic hinges on the fact that leading-edge technologies usually emerge in countries where the biggest and most-demanding customers are located, and that these customers provide domestic manufacturers with global advantage; think of French manufacturers of nuclear power reactors and American manufacturers of long-haul aircraft. One early indicator supporting this rationale: Applied Materials, a global leader in semiconductor-making equipment, recently transferred many R&D activities to China and relocated its chief technology officer there. Local-content requirements, mandatory joint ventures, forced technology transfers—these aren’t new elements in Asian development strategies. Japan, South Korea, and India, among others, have used them and were less tolerant of foreign investment than China has been. However, the Chinese government is remarkable in how aggressively it applies these policies, how many of its agencies are involved, how quickly and radically it changes the rules, how many unique technology and product standards it tries to impose, and how subtly its regulations violate

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The government is using four mechanisms to achieve these goals: 1. It offers tax incentives, including accelerated depreciation of investments in R&D facilities and tax breaks on returns from venture capital investments in technology-based start-ups. 2. It has increased spending in 17 areas in which the state’s

research institutions and its enterprises collaborate, banks offer cheap loans, and special funding supports the development of domestic technologies that can replace imported ones. 3. It has tailored procurement policies to favor indigenously developed technologies. This occurs at the national, provincial, and municipal levels, especially in cities such as

the spirit, if not the letter, of multilateral agreements. The WTO’s broad prohibitions on technology transfers and local-content requirements are more complex and easier to subvert than its rules pertaining to international trade in products. Furthermore, China hasn’t yet signed the level-playing-field provisions covering government procurement; it claims that its policies don’t violate them, because the WTO allows domestic policy concerns to be accommodated in government purchases. Although the WTO prohibits mandatory technology transfers, the Chinese government maintains that incentivized transfers, whereby companies trade technology for market access, are purely business decisions.

The State’s Strategies

The Chinese government has deployed several strategies to help local companies acquire state-of-theart technologies and break into the global market. Some work in a top-down fashion, others from the bottom up. Beijing drives the process nationally in most capital-­intensive sectors. Consider high-speed railway systems, now an estimated $30 billion a year market in China. In the early 2000s the superior equipment of multinational corporations such as Alstom, which built France’s TGV train system; Kawasaki, which helped develop Japan’s bullet trains; and Siemens, the German engineering conglomerate, gave foreign companies control of about two-thirds of the Chinese market. The multinationals subcontracted the manufacture of simple components to state-owned companies and delivered end-to-end systems to China’s railway operators. In early 2009 the government began requiring foreign companies wanting to bid on high-speed railway projects to form joint ventures with the state-owned equipment producers CSR and CNR. Multinational companies could hold only a 49% equity stake in the new companies,

Beijing, Shanghai, and Guangzhou, where the state wants technology-rich industries to replace low- and mid-tech ones that are moving inland. 4. Finally, as described in the main text, it is forcing multinational companies to transfer their newest technologies to their joint ventures with China’s state-owned companies.

Beijing uses the new rules to drive wedges between foreign rivals.

they had to offer their latest designs, and 70% of each system had to be made locally. Most companies had no choice but to go along with these diktats, even though they realized that their joint-venture partners would soon become their rivals outside China. The multinationals are still importing the mostsophisticated components, such as traction motors and traffic-signaling systems, but today they account for only 15% to 20% of the market. CSR and CNR have acquired many of the core technologies, applied them surprisingly quickly, and now dominate the local market. In addition, they are cutting their teeth in the estimated $110 billion international rolling-stock market, moving into several developing countries where the Chinese government funds railway modernization projects. The combination of low manufacturing costs and modern technologies is helping them make inroads in developed markets too, with CNR recently winning contracts in Australia and New Zealand. The Chinese government sometimes synchronizes its desire to accelerate growth in a particular sector with the imposition of new regulations on multinationals in that sector. For example, from 1996 to 2005 foreign companies held a 75% share of the Chinese market for wind energy projects. Then the government decided to grow the market dramatically, offering buyers large new subsidies and other incentives. At the same time, it quietly increased the local-content requirement on wind turbines from 40% to 70% and substantially hiked the tariffs on imported components. As the market exploded, foreign manufacturers were unable to expand their supply chains quickly and meet the increased demand. Their Chinese competitors, who had been licensing technology mainly from small European turbine producers, took up the slack rapidly and cost-effectively. By 2009 Chinese companies, led by Sinovel and Goldwind, controlled more than December 2010 Harvard Business Review 99

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CHINA VS THE WORLD: WHOSE TECHNOLOGY IS IT?

two-thirds of the market. In fact, foreign companies haven’t won a single central government–funded wind energy project since 2005. Beijing finds it tougher to deal with multinational companies in industries such as information technology. Software development doesn’t lend itself to mandatory joint ventures, and China has no stateowned companies that can keep pace with the global leaders. It therefore penalizes multinational companies and favors local players in less direct ways. For instance, although Germany’s SAP dominates China’s ERP software market, the government gives hefty tax rebates to domestic players such as the Kingdee International Software Group, which has become the biggest ERP software supplier to small and medium enterprises in the country. In 2010 the government mandated that foreign companies selling software to state-owned customers must disclose their source codes, although it backed down after vehement protests from global vendors and Western governments. China also issues product standards and specifications that force foreign software suppliers to develop special versions for China, allowing Chinese equipment makers to circumvent Western patents and royalty obligations. For example, the country’s wireless and 3G mobile telephone standards, WAPI and TD-SCDMA, will never become global standards, but they give local companies an edge and are hurdles in the path of foreign equipment manufacturers. China’s bottom-up support of the technologies of smaller, non-state-owned companies relies on local and provincial governments’ self-interest and In both China and the U.S., corporate entities perform most R&D. The difference is that in China, the majority of those entities are owned by the state; in 2009 the government funded 69% of the R&D efforts in the country. By contrast, the U.S. government accounted for only 29% of America’s R&D expenditures that year.

R&D FUNDING

corruption, most of which is outside Beijing’s control. For instance, Chinese companies have come to dominate the global silicon-wafer-panel business. That resulted from massive, uncoordinated capacity increases by dozens of private companies, aided by low-cost financing and inexpensive land sales. Many provincial officials provided Chinese entrepreneurs with land at below-market prices or even for free. Subsidies are available in the West too, but in China they often take the form of land grants that are larger than what’s needed to build a factory. Companies build apartment buildings on the surplus land, the cash flow from which pays for R&D and offsets factory losses. State-owned banks give these companies loans at below-market rates, and sometimes the provincial government reimburses interest payments. Owing to hypercompetition between Chinese companies, which spilled into overseas markets, the prices of solar panels fell worldwide by about 50% in 2009 and 2010, driving higher-cost Western producers into the red. Germany’s Q-Cells, an industry pioneer, slid from an operating profit of 16% of sales in 2008 to an operating loss of 60% of sales the following year. China now exports 95% of its solar panels, and Chinese companies such as Suntech, Yingli, and JA Solar control half of the German market and a third of the U.S. market. So far the Chinese government’s technology policy has produced mixed results. In areas such as rail and wind, Chinese companies have replaced multinational corporations in the domestic market, are boosting exports, and are making profits. It’s too early

R&D EXECUTION UNITED STATES

CHINA

GOVERNMENT

GOVERNMENT

GOVERNMENT

INDUSTRY

INDUSTRY

INDUSTRY

INDUSTRY

ACADEMIC/NONPROFIT

ACADEMIC/NONPROFIT

ACADEMIC/NONPROFIT

ACADEMIC/NONPROFIT

UNITED STATES

CHINA

GOVERNMENT

29 69 10 23 % % % % 71 65 21 67 % % 19% 10% 6 10 %

%

%

%

SOURCES BATTELLE INSTITUTE, “GLOBAL R&D FUNDING FORECAST,” DECEMBER 22, 2009; CHINA ECONOMIC QUARTERLY, Q3, 2006; OECD R&D STATISTICS, 2009

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to tell in businesses such as jet aircraft manufacture and power generation, where Chinese enterprises lag well behind Western market leaders. In other sectors, such as solar panels, profits are scarce, and foreign rivals with higher-tech products are price competitive and more profitable. China’s silicon foundries are unable to compete with sophisticated Taiwanese and South Korean producers, and among the country’s computer hardware manufacturers, for instance, only Lenovo and TechFaith, a mobile phone designer, have gained any traction.

Is Conflict Inevitable?

China’s policies raise the issue of whether economies with disparate objectives and at different stages of development can coexist without conflict. Tensions between China and the U.S., in particular, are growing, and something has to give if the two nations are to avoid a nasty confrontation soon. The likelihood of conflict depends on the governments of the two countries. The good news is that both of them appear to be pragmatic, operate by consensus at the top, and seem unlikely to commit to self-­destructive policies. The two governments also want trade flows between their countries to keep increasing, because people and companies on both sides of the Pacific count on them for wealth and power. Besides, the Chinese government isn’t a monolithic body; many senior officials in the Communist Party want the renminbi to appreciate, would like to gain control over opportunistic local officials, and hope to reduce environmental problems. However, China and the U.S. are structurally prone to economic conflict. They differ radically in their beliefs, expectations, and objectives because of their histories, economic and political systems, and policies. For instance, China regards the management of trade and investment flows as a legitimate way to regain its global leadership, while the U.S. believes the state should play a limited role. Connecting these two systems has reinforced imbalances rather than bringing about equilibrium. There’s a link between China’s rapid development and America’s slowing growth. China has only about a tenth the capital stock of the U.S., in per capita terms, so it invests roughly three times more, as a percentage of GDP, than the U.S. does. It funds these investments from government surpluses and the profits of state-owned enterprises, by minimizing health care and pension safety nets, and by preventing its savers from accessing investment opportuni-

ties abroad. There’s also a difference in expectations about future benefits: China is inclined to save more today, while the U.S. prefers current consumption. Despite the postrecession increase in the household savings rate, the U.S. government continues to borrow to maintain consumption levels. It keeps interest rates low, supports current consumer spending, enlarges its net debtor status—and compromises its

There will be no shortage of crises, especially because China “manages” its foreign policy by pressuring rivals. future growth. Meanwhile, China has invested heavily in manufacturing to cater to this consumption. To keep prices low, it pegs the renminbi to the dollar by limiting currency holdings outside China and requiring exporters to sell their dollars to the central bank. Instead of selling surplus dollars on the foreign exchange market, China’s central bank uses them to purchase U.S. debt, keeping the renminbi’s exchange rate low and the U.S. economy ticking. China faces policy rigidities. The Communist Party’s ability to remain in power depends on maintaining the rapid growth of the economy and making larger capital investments. The popular view in China is that both trends will continue, that Beijing is doing the right things, and that foreign complaints are de facto attacks on the country. Many economists fear that the government is turning its back on the forces that brought China to where it is today, but its leaders see state capitalism and the containment of foreign companies as China’s best chance of regaining technological superiority. As noted earlier, Beijing has little control over local and provincial policies, which deliver most of the subsidies to exporters. Local tax revenues are calculated in relation to sales, not profits, and officials are promoted according to how much employment they generate. This incentive structure for decision makers reinforces the creation of excess capacity, leading to lower prices, which spill over into export markets and irk the U.S. The U.S. and China do have common interests, such as developing clean energy, protecting the environment, and reining in rogue states. However, an agenda of cooperation between disparate and December 2010 Harvard Business Review 101

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China vs The World: Whose Technology is it?

Whose R&D Will Deliver Results? Are China’s R&D efforts as productive as America’s? Creative destruction is a major force in U.S. business: A company now on the S&P 500 can hope to stay there for 15 years—half the life expectancy in 1990. In China, the corporate pecking order is more apt to change because of state-sponsored mergers than competition. That fact alone suggests that

America’s R&D is more productive than China’s. China’s most innovative technologies have come from privately owned companies, such as the electric automobile maker BYD, the telecom firm Huawei, and the solar panel manufacturer Suntech. However, 40 of the 50 Chinese companies with the largest R&D expenditures are state

owned; they will have to become more innovative if China is to catch up to the U.S. And catching up isn’t the same as keeping up. Of course, the U.S. has problems, too. Government funding of basic research has been flat, in real terms, since 1995, and the U.S. is falling behind in areas such as clean energy and water. In addition, the com-

conflicting systems brings problems. Working with the other side is beneficial but not a core objective, so if the U.S. values cooperation more than China does, it may compromise its interests during negotiations. It might be useful for the U.S. to dispense with the premise that it can have an economically compatible relationship with China. That would clarify China’s development strategy and its adverse effects on Western interests, thus brightening the lines the U.S. simply cannot allow China to cross. It’s not clear what will alleviate the structural problems. Changes in China’s economic policies are unlikely to happen soon, and counting on them only delays coming to grips with the issue. Although most people anticipate that the Chinese and U.S. systems will eventually become more similar, they are likely to remain fundamentally different until China gets bigger and much richer—and more technologically sophisticated. There will be no shortage of crises along the way, especially because China “manages” its foreign policy by pressuring rivals. America’s challenge, in addition to raising U.S. saving and investment rates, is to overcome its passive reliance on markets and develop aggressive public development strategies of its own. The U.S. either misread what would happen or undervalued its own economic interests while integrating China into the global system. Five years ago Robert Zoellick, then the U.S. deputy secretary of state and now the president of the World Bank, stated with confidence, “[U.S.] policy has succeeded remarkably well: The dragon emerged and joined the world.” Perhaps, but in the process the U.S. may have gotten more than it bargained for.

Succeeding in the New China

Multinational corporations must adjust to the growing tensions between China and the U.S. on their own; they operate across national boundaries and 102 Harvard Business Review December 2010

mon U.S. practice of awarding narrowly focused, shortduration federal research grants underperforms the establishment of multidisciplinary teams that stay together. Still, the U.S. may well respond to the Chinese challenge once that challenge becomes widely known—as it successfully did to the Soviet space program in the 1960s.

cannot wait for balancing macroeconomic forces or multi­lateral solutions. The Chinese government constantly tests the resolve of foreign companies, but many can’t complain. The state pays less attention than it once did to consumer product giants such as Procter & Gamble, Unilever, and Yum Brands. These corporations have been selling in China for so long that consumers regard the brands as local, and their top management teams are chockablock with Chinese executives. However, the state is becoming more intrusive in some ways. By stopping Coca-Cola’s acquisition of Huiyuan Juice in 2009, for instance, the government showed that it would protect promising local companies and brands. As for mid-tech manufacturers, such as Otis Elevator, Emerson Electric, and Danaher, they are of little strategic interest to Beijing and will continue to flourish in China. But the government has fundamentally changed the game for technology-rich companies. China is a big market for them; many operate dozens of subsidiaries and employ tens of thousands of people there. It’s also a learning space: The market’s complexity and rapid development have already prompted these companies to locate more R&D facilities and develop products in China. The government’s new policies will accelerate this trend, forcing companies to bring cutting-edge R&D into the country earlier than they might have planned and on different terms than they would have liked. Still, these companies’ best response would be to continue making themselves indispensable to the Chinese government, stateowned partners, and customers. Western corporations have much that China needs. For example, IBM is helping to build a “smart” railway-management system for the state-owned metro in Guangzhou City. Similarly, GE, because of its knowledge of aviation technology, was able to negotiate a partnership with Aviation Industry Corporation of China in 2009 for the development

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of commercial aircraft. GE would have liked full control of the venture, as it enjoys elsewhere, but that’s unlikely in China. Multinationals have the strongest hand with authorities when they have a technology that China wants and no one else has. In 2007 the French company Areva successfully rebuffed Premier Wen Jiabao’s attempt to force it to transfer its unique nuclear-fuel-recycling technology as part of a $12 billion nuclear reactor deal. But this was a rare exception; China usually wins. The most technology-rich multinationals can gain direct access to China’s leaders, who find it more efficient to deal with the CEOs who own the technologies they want than with their governments, who like to scold. Former CEOs Hank Greenberg of AIG and Bill Gates of Microsoft are cases in point. Greenberg started cultivating China’s leaders in the 1970s, buying and returning stolen Chinese works of art, and 25 years later the Chinese government rewarded AIG with special privileges when it opened the insurance market to foreign companies. Gates, after some early struggles, warmed to the challenge, looked past the software piracy in China, and learned to work with Beijing. In return, the government forced PC manufacturers in the country to load legal software onto their computers and required the computers it bought to have legal software. The Chinese have long memories; they admire the time horizons of CEOs like Greenberg and Gates. Many multinational companies have long collaborated with state-owned enterprises to create stronger business positions than either could have achieved on its own. Cummins is an equal partner in both production and R&D with its largest Chinese diesel engine customer, Dongfeng Motor. This has allowed the U.S. corporation to develop products in China faster than it otherwise could have and to strike relationships with new customers, such as urban mass-transit operators, that value Cummins above other suppliers. All this has helped Cummins’s facilities outside China sell four times as many products in China as they export from the country. Global forces have catalyzed new forms of cooperation between Chinese companies and foreign corporations. Many products sold in emerging markets have different design requirements from similar products used in developed countries, and China, the world’s largest developing country, is often the best place to develop them. For instance, Shanghai Automotive Industry Corporation and Volkswagen’s 50/50 joint venture has designed a car that it will

Companies would do well to make themselves indispensable to China. license to both partners for sale in other emerging markets, and Shanghai Auto has formed a venture with its other partner, GM, to serve India’s car market. In fact, teaming up with Chinese companies is becoming essential for multinational corporations wishing to compete cost-effectively in emerging markets. New entrants in the global power industry, such as (South) Korea Electric Power, have shrunk the odds that Western companies will win bids in developing countries unless they source from China. More collaboration options are available than ever before, and the Chinese government, through its aid budgets, policies, and support of business deals, is influencing how the new order will evolve. Already multinational companies have learned to better protect their intellectual property in China. They split cutting-edge technology between different partners, post more employees from home to handle sensitive work, and build stronger personal and organizational links with their partners. They negotiate with the government over such things as the use of their technology, which officials will see it, and which jurisdiction will settle any legal disputes. Protests by Western governments can moderate only the most aggressive of China’s policy initiatives. A global realignment of business is under way. It includes the spread of competitive capability to China and other emerging markets, a surge of investment in those countries, and a shift of wealth and business platforms from developed to developing economies. If they wish to remain global technology leaders, Western corporations—which are more innovative than slow, debt-ridden governments and Chinese state-owned enterprises—must bring to bear greater imagination as they search for growth, collaboration, and advantage.   HBR Reprint R1012H Thomas M. Hout ([email protected]) is a visiting professor at the University of Hong Kong’s School of Business and a fellow at the Center for Emerging Market Enterprise at Tufts University’s Fletcher School of Law and Diplomacy. Pankaj Ghemawat ([email protected]) is the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona. December 2010 Harvard Business Review 103

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What’s the Hard Return On Employee Wellness Programs? The ROI data will surprise you, and the softer evidence may inspire you. by Leonard L. Berry, Ann M. Mirabito, and William B. Baun

104 Harvard Business Review December 2010

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hbr.org DISCUSS Do you have questions or comments about this article? The authors will respond to feedback at hbr.org.

Illustration: Tomasz Walenta

Since 1995, the percentage of Johnson & Johnson employees who smoke has dropped by more than two-thirds.

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The number who have high blood pressure or who are physically inactive also has declined—by more than half. That’s great, obviously, but should it matter to managers? Well, it turns out that a comprehensive, strategically designed investment in employees’ social, mental, and physical health pays off. J&J’s leaders estimate that wellness programs have cumulatively saved the company $250 million on health care costs over the past decade; from 2002 to 2008, the return was $2.71 for every dollar spent. Wellness programs have often been viewed as a nice extra, not a strategic imperative. Newer evidence tells a different story. With tax incentives and grants available under recent federal health care legislation, U.S. companies can use wellness programs to chip away at their enormous health care costs, which are only rising with an aging workforce. Government incentives or not, healthy employees cost you less. Doctors Richard Milani and Carl Lavie demonstrated that point by studying, at a single employer, a random sample of 185 workers and their spouses. The participants were not heart patients, but they received cardiac rehabilitation and exercise training from an expert team. Of those classified as high risk when the study started (according to body fat, blood pressure, anxiety, and other measures), 57% were converted to low-risk status by the end of the six-month program. Furthermore, medical claim costs had declined by $1,421 per participant, December 2010 Harvard Business Review 105

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What’s the Hard Return on Employee Wellness Programs?

What Is Workplace Wellness?

compared with those from the previous year. A control group showed no such improvements. The bottom line: Every dollar invested in the intervention yielded $6 in health care savings. We’ve found similar results in our own experience. In 2001 MD Anderson Cancer Center created a workers’ compensation and injury care unit within its employee health and well-being department, staffed by a physician and a nurse case manager. Within six years, lost work days declined by 80% and modified-duty days by 64%. Cost savings, calculated by multiplying the reduction in lost work days by average pay rates, totaled $1.5 million; workers’ comp insurance premiums declined by 50%. What’s more, healthy employees stay with your company. A study by Towers Watson and the National Business Group on Health shows that organizations with highly effective wellness programs report significantly lower voluntary attrition than do those whose programs have low effectiveness (9% vs. 15%). At the software firm SAS Institute, voluntary turnover is just 4%, thanks in part to such a program; at the Biltmore tourism enterprise, the rate was 9% in 2009, down from 19% in 2005. According to Vicki Banks, Biltmore’s director of benefits and compensation, “Employees who participate in our wellness programs do not leave.” Nelnet, an education finance firm, asks departing employees in exit interviews what they will miss most. The number one answer: the wellness program. To understand the business case for investing in employee health, we examined existing research and then studied 10 organizations, across a variety of industries, whose wellness programs have systematically achieved measurable results. In group

Our extensive research on workplace wellness has led us to arrive at this definition of it: an organized, employersponsored program that is designed to support employees (and, sometimes, their families) as they adopt and sustain behaviors that reduce health risks, improve quality of life, enhance personal effectiveness, and benefit the organization’s bottom line. 106 Harvard Business Review December 2010

and individual interviews, we met with about 300 people, including many CEOs and CFOs. We asked about what works, what doesn’t, and what overall impact the program had on the organization. Using our findings, we’ve identified six essential pillars of a successful, strategically integrated wellness program, regardless of an organization’s size. Passes to fitness clubs and nutrition information in the cafeteria are not enough, as you’ll see. Pillar 1

I

Multilevel Leadership

t’s easy to find employees who don’t participate in wellness programs. Some cite lack of time, little perceived benefit, or just a distaste for exercise. Others don’t know about available services or blame unsupportive managers. A few think their health is none of the company’s business or mistrust management’s motives. As with any worthwhile initiative, creating a culture of health takes passionate, persistent, and persuasive leadership. The C-suite. Although employee health correlates with financial health, workers won’t buy into a program that’s just about money. If the CEO makes time for exercise, for instance, employees will feel less self-conscious about taking a fitness break. When MD Anderson initiated its wellness program, president John Mendelsohn took walks throughout the building with wellness coach Bill Baun. For many, it was the first time the president had been in their work space or had shaken their hand, and he tended to start conversations with “How’s your wellness?” Then there’s Johnson & Johnson, which has about 250 distinct businesses around the world. J&J has

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Idea in Brief Employee wellness programs have often been viewed as a nice extra, not a strategic imperative. But the data show otherwise. The ROI on comprehensive, well-run employee wellness programs can be as high as 6 to 1.

The most successful programs have six essential pillars: engaged leadership at multiple levels; strategic alignment with the company’s identity and aspirations; a design that is broad in scope and high in relevance and quality; broad accessibility; internal and external partnerships; and effective communications.

Companies in a variety of industries have included all six pillars in their employee wellness programs and have reaped big rewards in the form of lower health care costs, greater productivity, and higher morale.

Nelnet asks departing employees in exit interviews what they will miss most. The number one answer: the wellness program. only a few companywide mandates. Two concern health: Any employee with HIV/AIDS will have access to antiretroviral treatment, and all J&J facilities will be tobacco free. The latter mandate was implemented in 2007 after several years of intense internal discussion. Both decisions demonstrated serious commitment from the top. Middle managers. Except in tiny companies, most employees report to a middle manager. By shaping minicultures in the workplace, middle managers can support employees’ wellness efforts. Some companies even ask managers to adopt a personal health goal as one of their unit’s business goals. Wellness program managers. Every organization in our study has an expert who develops and coordinates a clear, comprehensive wellness program, continuously sells it throughout the organization, and measures its effectiveness. The best wellness managers connect their expertise to the culture and strategy of the organization. These people are collaborative by nature, and analytical and credible by background and performance. It’s no ordinary management job. Wellness champions. Volunteer health ambassadors offer local, on-the-ground encouragement, education, and mentoring—in addition to organizing and promoting local health events. No company in our study embodies this concept better than supermarket chain H-E-B, which has more than 70,000 employees at about 350 stores and other facilities. With more than 500 site-specific and nine regional wellness champions, the company hosts

monthly conference calls for the wellness leaders, sponsors training webinars, and maintains an online wellness-resource center. Pillar 2

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Alignment

t’s not unusual for firms to enter the wellness space with a big splash that subsides to a ripple. As management priorities shift, the opportunity to integrate a culture of health can pass. Ideally, a wellness program should be a natural extension of a firm’s identity and aspirations. But many executives forget that the cultural shift takes time. Planning and patience. At Healthwise, CEO Don Kemper’s personal commitment has allowed wellness to permeate the culture from day one. The company holds monthly all-staff meetings that always include a wellness team report on current wellness activities and resources. It sponsors an annual Wellness Day, featuring speakers and health-related activities, when employees are encouraged to reflect on the question “How can I be well?” In addition, every other Wednesday afternoon, workers are invited to share a healthy snack and connect with others. One executive calls it “adult recess,” an investment that “pays back in spades” by creating opportunities for cross-team connections. In contrast, Nelnet’s early investment in wellness rankled employees. Senior management unexpectedly required health screenings to educate workers about their health risk factors. Not ready to address such personal topics and confused about the compa-

4

%

is the voluntary turnover rate at SAS Institute, thanks in part to a highly effective employee wellness program.

57%

of people with high health risk reached lowrisk status by completing a worksite cardiac rehabilitation and exercise program.

December 2010 Harvard Business Review 107

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WHAT’S THE HARD RETURN ON EMPLOYEE WELLNESS PROGRAMS?

The Pillars of an Effective Workplace Wellness Program Strategically integrated wellness programs have six strong pillars that simultaneously support their success, regardless of the size of the organization. Construct them well, and your institution could see the kinds of big returns that the 10 companies in our sample have garnered.

Multilevel Leadership

Creating a culture of health takes passionate, persistent, and persuasive leadership at all levels—from the C-suite to middle managers to the people who have “wellness” in their job descriptions.

Alignment

A wellness program should be a natural extension of a firm’s identity and aspirations. Don’t forget that a cultural shift takes time.

Scope, Relevance, and Quality

Wellness programs must be comprehensive, engaging, and just plain excellent. Otherwise, employees won’t participate.

Nearly three-quarters of the employees at SAS’s Cary, North Carolina, campus choose the on-site health services for their primary care. ny’s motives, employees pushed back. The company then hired professional wellness staff and developed a comprehensive, long-term wellness strategy. It now emphasizes early communication and clear explanations to give employees time to ask questions and prepare for change. Today employees embrace Nelnet’s wellness culture: 90% participate in health risk assessments (HRAs); about three quarters of those engage in wellness activities. Carrots, not sticks. The organizations in our sample favor positive incentives because employees lose trust when they feel they’re being forced to act against their wishes. There are, for example, many horror stories about managers who suddenly mandated smoke-free work sites, with violators risking termination. That just sends the behavior underground instead of providing support in beating an addiction. Lowe’s takes a measured approach by initially introducing a concept then eventually making it mandatory, if necessary. Before instituting its tobaccofree policy in 2005, the company gave advance notice and offered assistance to employees who were trying to quit smoking. Starting in January 2011, Lowe’s will offer employees a monthly $50 discount on medical insurance if they pledge that they and covered dependents will not use any tobacco products. A complement to business priorities. If a program doesn’t make business sense, it’s automatically vulnerable. Take Chevron, where 60% to 70% of all jobs are considered safety-sensitive, in that employees put themselves or others at risk. Fitness for duty 108 Harvard Business Review December 2010

is a central concern on oil platforms and rigs, in refineries, and during the transport of fuel. To reinforce the mantra that healthy workers are safer workers, Chevron has developed a strong wellness program that includes a comprehensive cardiovascular health component, a 10K-a-day walking activity, fitness centers, a repetitive-stress-injury prevention program, and work/life services. Where Chevron does business in countries that lack basic health care resources, it plays a leadership role by partnering with local health ministries, NGOs, and other private sector firms to build infrastructure that helps to combat diseases such as HIV, malaria, and tuberculosis. It’s a matter of both corporate responsibility and business necessity for a company that wants to sustain a healthy, talented, satisfied labor pool. For example, Chevron employees staff two hospitals and four clinics in Nigeria, including a riverboat clinic that sends health care providers to riverside communities. PILLAR 3

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Scope, Relevance, and Quality

t’s not unusual for a company to think about employee health narrowly. Exercise is exercise, right? But employees’ wellness needs vary tremendously. More than cholesterol. Wellness isn’t just about physical fitness. Depression and stress, in particular, have proved to be major sources of lost productivity. Wellness program administrators need to think beyond diet and exercise. Biltmore, for exam-

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Accessibility

Aim to make low- or nocost services a priority. True on-site integration is essential because convenience matters.

Partnerships

Active, ongoing collaboration with internal and external partners, including vendors, can provide a program with some of its essential components and many of its desirable enhancements.

ple, offers a nondenominational chaplain service— on call 24 hours—to assist employees and immediate family members with divorce, serious illness, death and grief recovery, child rearing, and the care of aging parents. The services are confidential, free, and voluntary. The chaplains meet their clients at sites ranging from the family residence to a funeral home to Starbucks. Individualization. Many organizations use online employee HRAs to guide investment in wellness. An HRA combines a lifestyle survey and biometric tests such as blood pressure, cholesterol, glucose, and body mass index. The lifestyle responses (stress levels, physical activity, eating patterns, tobacco and alcohol use, and other health behavior information) are often combined with the biometric data to calculate a health-risk status, or “real age.” This information is shared confidentially with each participant to help him or her track wellness progress and, when appropriate, receive company-provided assistance in an area such as nutrition counseling. Employees can often complete their biometric tests at company health fairs or on-site medical clinics. Companies are required by law to protect individual health information, but managers can receive aggregated data that identify categories of greatest need and document changes in workforce health status. H-E-B, for example, tracks the percentage of employees in each retail territory and business unit who are at risk in areas such as high blood pressure, physical inactivity, and smoking against benchmark goals. The information helps management decide where to allocate resources. Persuading employees to complete HRAs is a challenge, of course, for reasons ranging from privacy, to limited self-awareness about biometric numbers such as blood pressure, to lack of computer access. J&J, however, has managed to achieve an HRA participation rate above 80%. That’s in part be-

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Outcomes Lower costs

The savings on health care costs alone make for an impressive ROI.

Communications

Wellness is not just a mission—it’s a message. How you deliver it can make all the difference. Sensitivity, creativity, and media diversity are the cornerstones.

Greater productivity

Participants in wellness programs are absent less often and perform better at work than their nonparticipant counterparts.

Higher morale

Employee pride, trust, and commitment increase, contributing to a vigorous organization.

cause employees who complete an HRA and receive the recommended health counseling have their personal health insurance contributions reduced by $500 annually. High participation plus a comprehensive HRA instrument enables J&J to tailor its wellness programs from business to business: One may focus more on cancer prevention, another on diabetes, and so on. A signature program. A high-profile, highquality initiative within a broader wellness program can foster employee pride and involvement. Consider, for instance, when MD Anderson became the first health care organization to earn gold-standard accreditation from the CEO Roundtable on Cancer. Earning the accreditation is no small task: It requires tobacco-free work sites, benefit plans that cover recommended cancer screenings, assistance to employees with cancer in entering appropriate clinical trials, and investment in workers’ physical activity and nutrition. Many people throughout the organization view this commitment as a badge of honor. Fun. Never forget the pleasure principle in wellness initiatives. For example, Healthwise’s 2009 Wellness Day—with the theme Joy, Play, Spirit—featured square dancing. Lowe’s sponsors Step It Up, a 10-week walking challenge in which employees are given a pedometer and a step log. The first year’s campaign pitted employees against senior management. And SAS’s recreation center features a large swimming pool, where director Jack Poll says people can do anything that they do on land, including play basketball, lacrosse, and Ultimate Frisbee. It’s a gymnasium on water. High standards. Health-related services are, by nature, personal. Employees who perceive them as substandard won’t use them. Communication services provider Comporium, for example, has an onsite health and wellness center staffed by an independent medical practice including nurse-practitioners December 2010 Harvard Business Review 109

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What’s the Hard Return on Employee Wellness Programs?

(NPs), with a physician available as needed. It offers useful services such as hypertension management and treatment for strep throat and sinus infections. Initially, the program faltered because quality was not perceived as high. But the company turned that around, and now the experienced NPs enjoy a loyal following of employees, spouses, and eligible retirees. Program participation exceeds Comporium’s 2010 goal. At SAS’s Cary, North Carolina, campus, 90% of employees used the on-site health services in 2009, and 73% currently choose the center for their primary care. In the words of Gale Adcock, the director of corporate health services, “Everyone will come for free and good; no one will come for free and lousy.” Pillar 4

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Accessibility

ur sample companies make low- or no-cost services a priority, and they know that convenience matters. On the SAS main campus, 70% of employees use the recreation center at least twice a week. Director Jack Poll’s explanation: “Our high participation rates are because, when we opened, we thought of all the reasons people wouldn’t use the facility and we worked to eliminate every one of them.” The center is open before and after work and on weekends, and the staff develops a variety of fresh, engaging programs. True on-site integration. On-site fitness centers are sometimes criticized for attracting people who would exercise anyway. But employees at companies who have them love them, and employees at other companies want them. As one Healthwise employee put it, “You see coworkers working out every day. That makes me realize I can do it, too.” And Chevron conducts daily “stretch breaks” within certain units at set times. In Houston, for example, professional trainers go to the trading floor each day at 2:30 for a 10-minute stretch series. Biltmore’s two-day health fairs twice a year focus on physical, financial, and spiritual wellness. A wide variety of screenings are offered, including bone scans, cholesterol, blood sugar, lung capacity,

and hearing. Women can make appointments for mammograms. Chiropractors are available. The local fire department demonstrates how to install a smoke detector, and the police conduct sessions on home safety and give children a chance to be fingerprinted for safety. Yoga instructors, chaplains, and many others lead seminars. Local bank representatives provide private consultations. Vendors for health and dental insurance and 401K plans are available. Employees typically consume one or several meals plus snacks during work hours. Healthful food at work has to be tasty, convenient, and affordable. Chevron’s food service vendor has a “stealth health” philosophy: It uses quality ingredients and few highly processed foods to offer menu items that delight rather than require sacrifice. Instead of seeing a daily “healthy entrée,” employees choose from an array of appetizing healthful options, such as meatloaf made with whole grains and low-sodium soups made from scratch. Going mobile. Organizations increasingly use online resources to deliver wellness messages and to let individuals input information such as HRA data and activity reports. Companies can also make wellness websites available on smartphones to increase portability. For decentralized companies such as Lowe’s and J&J, online access is critical, although high-tech tools must be complemented by hightouch programs that unite individuals in a culture of health. Pillar 5

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Partnerships

nternal partnerships help wellness programs gain credibility. At Biltmore, for example, wellness professionals partner with the company’s finance division to vet the cost-effectiveness of various programs. External partnerships with specialized vendors enable wellness staffs to benefit from vendor competencies and infrastructure without extra internal investment. Lowe’s has contracted with a partner to drive custom-built laboratory buses to stores, distribution centers, and corporate offices so

H-E-B estimates that moving 10% of its employees from high- and medium-risk to low-risk status yields an ROI of 6 to 1. 110 Harvard Business Review December 2010

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A Dashboard for Workplace Wellness Programs

that employees can conveniently receive biometric health screenings and complete their HRAs in private kiosks. The smallest companies in our study have developed comprehensive wellness programs in part by leveraging the resources of vendor partners. Comporium worked with the YMCA and a local medical practice to design a “metabolic makeover” program for willing at-risk employees. Described by one participant as “pure torture” but “a great thing,” it is a low-investment way for the company, which has just over 1,000 employees, to enhance its wellness program. Pillar 6

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Communications

ellness communications must overcome individual apathy, the sensitivity of personal health issues, and the geographic, demographic, and cultural heterogeneity of employees. The range and complexity of wellness services also can pose challenges. Our sample companies have honed effective practices over time. For one, they tailor their messages to fit the intended audience. H-E-B’s culture, for example, is highly competitive, so the company created internally public wellness scorecards for geographic and other company units. Intranet videos featuring employees’ health-success stories are especially popular at H-E-B, which recognizes that not all employees read a lot. Media diversity also helps. Nelnet, for example, includes information about wellness in its regular corporate e-mail on Wednesdays, features healthrelated messages on its intranet portal, advertises specific wellness benefits, posts flyers about health in elevators and stairwells, and distributes wellness stickers and magnets. At health screening time, employees are greeted with an attention-getting “desk drop” such as a piece of fruit. Wellness “clues” can be embedded throughout the workplace. According to Dr. Martin Gabica, the chief medical officer at Healthwise, “Wellness is a viral thing. When I meet with a new employee, I say, ‘Let’s go for a walking meeting.’” MD Anderson provides bicycle racks in parking garages with showers nearby, and it places elliptical trainers in work areas throughout its campus to encourage five-minute stress breaks. At Lowe’s headquarters, an arresting spiral staircase in the lobby makes climbing the stairs more appealing than riding the elevator.

Companies in our sample Employee Metrics of 10 adopted wellness Employee participation programs because, as Utilization—the total number of emBiltmore executive VP Steve ployees involved in specific program Miller said, “It’s the right activities thing to do for our peoPenetration—the percentage of ple.” Managers also have employees who have participated in a responsibility to invest at least one wellness activity resources wisely, and all the companies in our study Depth—the percentage breakdown emphasized the imporof employees who are light or heavy tance of measuring a wellusers of wellness activities ness program’s success. Sustainability—the number of By capturing key metrics, employees who continue to engage a wellness dashboard helps in a specific risk-reducing behavior to connect investments in Satisfaction with the program’s a program with short- and scope, relevance, quality, and acceslong-term results. Sophissibility (from survey data) ticated companies set Health-risk status identifying the metrics-related goals and examine trends closely, just percentages of employees at high, moderate, or low health risk (from as they do for other facets HRAs) of the business. Our example dashboard (right) is based on our work Organizational Metrics Health care in the wellness field. This Medical care and pharmaceutical rubric of the most usecosts and utilization (from claims ful metrics incorporates analysis) (1) employee measures of Disability costs participation, satisfaction, Workers’ compensation costs and well-being; and (2) orSafety ganizational measures of Safety incident rates by financial, productivity, and category or type cultural outcomes. Items Lost and modified work days are typically measured related to safety incidents monthly, quarterly, or Productivity yearly, depending on the Absenteeism metric, and are tracked Presenteeism over time. Organizational culture

Trust in management (from anonymous survey data) Voluntary turnover Willingness to recommend the firm as an employer

December 2010 Harvard Business Review 111

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What’s the Hard Return on Employee Wellness Programs?

The Study To learn how companies can support their employees’ wellbeing in a way that makes good business sense, we conducted field visits with 10 organizations that have financially sound workplace wellness programs. Biltmore hospitality and tourism Chevron energy Comporium communications

Healthwise health information publishing H-E-B grocery retail

During our visits to this diverse array of companies, we conducted interviews, lasting 30 to 60 minutes, with senior executives (including the CEO and CFO in most cases); wellness managers and staff; and managers of related functions such as HR, occupational health, employee assistance services, on-site medical clinics, fitness centers, safety, and food service. We also conducted focus group conversations, lasting 60 to 90 minutes, with middle managers, employees who actively used the programs, and employees who chose not to participate in the programs. In all, about 300 people shared their perspectives. We tailored our questions to the respondents. Senior executives, for

Johnson & Johnson health care products manufacturing Lowe’s home-improvement retail

MD Anderson Cancer Center health care Nelnet education planning and finance SAS Institute software

example, discussed lessons they had learned, what they would do differently, the business case for wellness, and their vision for the future. We asked middle managers about the on-the-ground management advantages and challenges of the program. Employee participants spoke about what they considered to be the most successful parts of the program, how it could be improved, and why they thought nonparticipants had opted out. We directly asked nonparticipants why they didn’t use the program, whether they were considering using it in the future, and what might change their minds.

The Fruits of Workplace Wellness

Although some health risk factors, such as heredity, cannot be modified, focused education and personal discipline can change others such as smoking, physical inactivity, weight gain, and alcohol use—and, by extension, hypertension, high cholesterol, and even depression. The results are worth the effort. Lower costs. H-E-B’s internal analyses show that annual health care claims are about $1,500 higher among nonparticipants in its workplace wellness program than among participants with a high-risk health status. The company estimates that moving 10% of its employees from high- and medium-risk to low-risk status yields an ROI of 6 to 1. For every dollar SAS spent to operate its onsite health care center in 2009, it generated $1.41 in health plan savings, for a total of $6.6 million in 2009 alone. SAS’s team-based delivery of health care is less expensive than external care. Not included in the $6.6 million figure is the benefit of employees 112 Harvard Business Review December 2010

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missing an estimated average of two fewer hours per visit by receiving on-campus care. As one manager noted, “I used to have to take a half-day leave for an appointment. Now I’m in and out without missing a beat.” Greater productivity. Illness-related absenteeism is an obvious factor in productivity. Less obvious but probably more significant is presenteeism—when people come to work but underperform because of illness or stress. Research consistently shows that the costs to employers from health-related lost productivity dwarf those of health insurance. A 2009 study by Dr. Ronald Loeppke and colleagues of absenteeism and presenteeism among 50,000 workers at 10 employers showed that lost productivity costs are 2.3 times higher than medical and pharmacy costs. In a seminal Dow Chemical study from 2002, of the average annual health costs for a Dow employee an estimated $6,721 were attributable to presenteeism, $2,278 to direct health care, and $661 to absenteeism. A variety of studies confirm the health conditions that contribute most to lost productivity: depression, anxiety, migraines, respiratory illnesses, arthritis, diabetes, and back and neck pain. Employees with multiple chronic health conditions are especially vulnerable to productivity loss. Higher morale. Most analyses of workplace wellness programs focus on hard-dollar returns: money invested versus money saved. Often overlooked is the potential to strengthen an organization’s culture and to build employee pride, trust, and commitment. The inherent nature of workplace wellness—a partnership between employee and employer—requires trust. Because personal health is such an intimate issue, investment in wellness can, when executed appropriately, create deep bonds. Health care is a monumental issue for employers, and too much is at stake to be reactive. It’s time for companies to play offense rather than defense. A verifiable payback isn’t certain, and the journey can be arduous. But what is the alternative?  HBR Reprint R1012J Leonard L. Berry is the Presidential Professor for Teaching Excellence, a distinguished professor of marketing, and the M.B. Zale Chair in Retailing and Marketing Leadership at Mays Business School, Texas A&M University. Ann M. Mirabito is an assistant professor of marketing at the Hankamer School of Business, Baylor University. William B. Baun is the manager of the wellness pro­gram at the MD Anderson Cancer Center, a director of the National Wellness Institute, and a director of the Interna­tional Association for Worksite Health Promotion.

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The Globe Shoppers at a Magazine Luiza store in Belo Horizonte in southeastern Brazil. The chain is one of Brazil’s largest appliance and home electronics retailers.

photography: Alex De Jesus/AP Images

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Let Emerging Market Customers Be Your Teachers You can learn a lot about consumer marketing in the developing world by looking at how retailers engage with shoppers. by Guillermo D’Andrea, David Marcotte, and Gwen Dixon Morrison 

ure, you’ve crafted detailed marketing plans for your products in those fast-growing emerging economies, but do you know how consumers will respond in the store aisles? If you don’t, you’re vulnerable to competitors, particularly local ones, who know how emerging market shoppers think, what they need, what they crave, and how they buy. Multinationals have been slow to understand consumers outside Europe and North America: Baseball bats were met with amusement in soccer-loving Argen­ tina; gardening tools flopped in Latin America’s yardless neighborhoods. Unilever, having established its Ala powder detergent as a leader in southern Brazil, was unable to build a strong position in the northeastern part of the country, where women wash laundry in streams and prefer bar soap for the task. Procter & Gamble’s Always feminine hygiene line, which had done well in the United States, hit a wall in Mexico, where women did not like the product. Local retail chains, by contrast, have been quick to understand their customers and develop offerings and approaches that work for them. As a result, a new generation of retailers have steadily captured market share from savvy street vendors and December 2010 Harvard Business Review 115

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The globe

mom-and-pop operations. They’ve also kept most multinational retailers at bay. In developing economies, the retail aisle is where the marketing action is—it’s where customers make purchasing decisions. McKinsey studies show that in China, for example, as many as 45% of consumers make those decisions inside stores, compared with 24% in the United States. To understand how the top local chains have been so successful, we conducted a study in 2009 of large retailers in six countries. We chose homegrown leaders representing a variety of ownership models, formats, and organizational types—from family owned to public, from supermarkets to consumer electronics stores, and from hierarchical to flat. They include Beijing Hualian Group (China), Biedronka (a

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Where’s the demographic middle?

In developed countries, income groups form a more or less classic pyramid. So you can create a mass market for a sophisticated new product (think MP3 players) by first winning the approval of early adopters in the upper segments of the pyramid and then simplifying the offering and reducing the price until the product is accepted by the much larger segments at the bottom. In emerging markets, that strategy doesn’t work. The number of affluent consumers who could adopt and champion your product remains small, and they tend to gravitate toward specific luxury stores, many of them overseas. Most important, incomes don’t form a smooth continuum. The distribution looks less like a pyramid than like a small stone (the wealthy)

Consumers in emerging markets buy a lot of the cheapest and a little of the best—and often ignore the middle. Polish firm owned by Portuguese retailer Jerónimo Martins), BIM (Turkey), Magazine Luiza (Brazil), Pick n Pay (South Africa), and Supermercados Peruanos (Peru). In this article, we’ll explain the challenges these retailers have encountered in catering to the emerging market consumer and show that the solutions they’ve come up with offer important lessons to multinationals. By tapping into the wisdom of these market leaders, you can put yourself a big step ahead of your competitors, both local and global.

The Lay of the Land

In extensive interviews with shoppers, store managers, department heads, and corporate executives, we discovered that despite significant differences among markets and populations, there are some problems that all the companies we studied have faced. Most of these challenges are unfamiliar to retailers accustomed to functioning only in developed economies. 116 Harvard Business Review December 2010

perched on a thin column (the upper middle class) that stands on a vast base (the middle and lower classes).

Customers buy the cheapest or the best. Whether the economy is strong or

weak, developed market consumers tend to buy across the price spectrum. They might show up at the register with a highend digital camera, medium-quality linens, and cheap sunglasses. Emerging market consumers focus on essentials, favoring the lowest-priced items that offer acceptable quality, even when it comes to luxuries. They tend to know the exact price of everything they want and refuse to pay more. They also refuse to buy in greater quantities than they need, even if that means they must purchase an individual piece or two from an opened package in a traditional outdoor market. At the same time, shoppers typically save up to indulge in more-aspirational categories such as sport shoes, cosmetics, and plasma TVs. Thus they purchase a lot

of the cheapest and a little of the best, often omitting the middle entirely. Multinationals, enamored of the middle and the high end, often miss that fact.

Product knowledge may be lacking. In developed countries, consumers

in all income segments are sophisticated and knowledgeable about retail offerings. So are employees, many of whom grew up using complex products and have some higher education. But consumers who are moving into the formal economy tend to lack knowledge about such things as what products can do, why various services might improve their lives, and how to access companies’ offerings. Nor do they fully understand what the consumer society is and how it works. As a result, they may be baffled by products and packaging that developed world consumers would comprehend instantly. Store employees in emerging economies suffer from the same lack of knowledge, posing an obstacle for retailers’ efforts to educate shoppers.

Consumers care about quality, not status. In developed economies, many

companies successfully position their brands as status symbols. But in areas with low incomes, that strategy often falls flat. The allure of status isn’t enough to induce consumers to buy. Instead, shoppers care most about quality. Multinationals may feel they’ve got the quality issue covered, but it’s not always that simple. Modern packaging, for example, is a crucial element of high quality in developed countries, but it can put an offering at a distinct disadvantage in an emerging economy, conveying artificiality or lack of freshness to consumers accustomed to shopping in traditional markets. Western retailers learned the hard way that their packaging often discouraged shoppers in China, who are used to handling food products before buying them.

Markets are changing at breakneck speed. Finally, unlike most developed

world retailers, those in emerging economies face the daunting task of keeping up with rapid market expansion and demographic change. The consumer base is

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Winning Trust growing constantly, and, despite recent setbacks due to the global downturn, average incomes have been rising steadily. Consumers, once mainly rural, are now largely urban—75% of Brazil’s and 47% of China’s citizens live in cities. Consequently, they have new needs and, in many cases,

A store must be more than a source of necessities; it must also be a center of knowledge and learning. greater financial resources. In addition, some countries are making it easier for consumers to get and use credit. Brazil, for example, now issues IDs that are like credit cards, greatly increasing shoppers’ purchasing power. Rapid growth may sound great, but emerging market retailers face enormous challenges in keeping customers and facilities safe, arranging credit, and getting people to and from stores. In many areas, the transportation infrastructure is weak or nonexistent: There was still no nearby bus terminal when the Wong Group built a shopping center in the low-income North Cone area of Lima.

Marketing Solutions

Each retailer we studied deals with these problems in its own way, adapting its solutions to the needs of target customers. But the solutions share certain broad features, which have far-reaching implications for multinationals’ marketing strategies. Aim low. Forget multinationals’ cherished myth that the high end is the most lucrative segment in emerging markets. Leave the rich to their shopping trips abroad, and forget about using the demographic pyramid to create a mass market for your gadget. Even if there were a sizable affluent segment to get the product started, there’s little elasticity of demand in the lower segments. To make your product affordable for the masses, you’d have to trim off so many bells and whistles that it would 118 Harvard Business Review December 2010

become unrecognizable. Instead, aim your products at the low-income segments from the very beginning. The telecommunications company Tigo at first hesitated to lower the minimum recharge on its phone cards in Paraguay (you can’t make much of a call for a centavo, company managers reasoned), but the company tripled its sales when it allowed users to recharge for tiny amounts. It wasn’t that customers planned to make very short calls; they were using the cards as savings vehicles, adding a few centavos to them whenever they could. Moreover, those customers tended to make calls at night, when rates were lower, increasing utilization during off-peak hours. Adapt to consumers’ habits. Cater to the demand for the cheapest and the best by providing decent quality at the low end and aspirational choices at the high end. Rather than position its packaged barley breakfast as an alternative to Quaker Oats’ high-end offering, the Peruvian company Malteria Lima (part of Peru’s leading brewer, Grupo Backus) marketed it as a less-expensive purchase for the lower end. The product provides the breakfasts that customers are used to, with a few pluses: It comes in one-meal servings, it offers good nutritional value, its chocolate flavoring improves the taste, and it carries an endorsement from Peru’s heart association. Don’t just sell—educate. Successful retailers figured out long ago that in an emerging market, a store must be much more than a source of basic necessities and a target for aspirations; it must be a center of knowledge and learning. For example, many retailers, including South Africa’s Pick n Pay, make a concerted effort to connect with the very lowest earners, who visit stores mainly out of curiosity and for entertainment. To entice them and educate them about products, retailers often display the broadest possible range of items, even if that means stocking limited quantities of each. And they devote extensive resources to on-the-job training, turning salespeople into frontline educators.

Nowhere is it more important for companies to demonstrate that they care about their customers than in emerging markets, where many shoppers start with a mistrust of multinationals, large corporations, and chain stores. Show your concern for consumers and their values, and you will be rewarded with enduring loyalty and affection.

During a hyperinflationary period in Turkey, BIM, a discount grocer with more than 2,500 stores that target the urban and rural poor, froze prices on 100 important items for three months while other retailers were raising prices daily. The tactic yielded significant gains in consumer trust as well as market share. That trust benefits BIM’s private label, which now accounts for about 75% of the stores’ total assortment. BIM’s organizational structure was one of the reasons the company was able to implement and afford this action: Initiatives flow down from headquarters and are executed according to companywide standards, resulting in efficient, lowcost operations. Another Turkish grocer, Tansas, posted what it called the Incredible Consumer Rights declaration, guaranteeing satisfaction, allowing returns of partially consumed items, and vowing that out-of-stock items would be replaced with similar or better products at the same price. This daring move resulted in a 44% increase in sales.

At Magazine Luiza, one of Brazil’s largest appliance and home electronics retailers, new employees receive a month of training prior to deployment, and the company continues to emphasize knowledge development even after employees have achieved high levels of expertise. These salespeople then transfer their knowledge to customers, who also receive information from presentations on TV screens throughout the stores, on such topics as cooking,

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SAS and all other SAS Institute Inc. product or service names are registered trademarks or trademarks of SAS Institute Inc. in the USA and other countries. ® indicates USA registration. Other brand and product names are trademarks of their respective companies. © 2010 SAS Institute Inc. All rights reserved. S64298US.1010

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The globe

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Keeping Customers Safe Emerging market consumers respond well to companies that watch out for their comfort, security, and dignity. Those factors are critical to the success of Pick n Pay, an innovative familyowned retailer with nearly 900 company and franchise stores in South Africa and other countries.

housekeeping, health, navigating the internet, and learning English.

Focus your brands appropriately.

The most successful brands are those that stand for quality and reliability. Biedronka, Poland’s largest retail chain, offers a limited assortment of high-quality foods at more than 1,400 locations. Because of longstanding supply-chain problems in Poland, food safety is a customer priority, so the chain advertises that every day 200 of its items are tested by an independent laboratory. The policy has strengthened customer loyalty. In places where consumers object to packaging on food, additional information helps allay concerns about lack of freshness.

To make customers feel valued and at ease in what might otherwise be an intimidating environment, stores use text messaging (shoppers voluntarily provide phone numbers) and display cashiers’ names at checkouts. When a store card is scanned, the register responds with a greeting identifying the

shopper by name and adding a brief, customized sales message. Given South Africa’s security issues, Pick n Pay works hard to make its stores places where people can feel safe. Surveillance systems monitor the aisles, and the company maintains a security force. But safeguarding shoppers’ dignity

In China’s big cities, customers of the grocer BHG can learn where a product originated and how it got to market (in refrigerated trucks, for example) just by passing it under a scanner in a special kiosk. Develop quick reflexes. Emerging market retailers have a great deal to teach multinationals about flexibility, rapid adaptation, and expecting the unexpected— qualities that have helped the chains stay competitive. Magazine Luiza is nimble and adaptable in its deployment of no-­inventory stores: 300 locations where customers can find salespeople and online catalogs but no physical items for sale. These stores allow Magazine Luiza—a technology-­focused

is paramount in a country where many have vivid memories of their treatment by former regimes. So guards are trained to adopt a helpful, nonthreatening attitude.

company founded a half-century ago—to keep pace with Brazil’s booming middle class without building and maintaining expensive, large-footprint facilities. They also limit the need for transporting inventory along poor roads amid heavy traffic. Salespeople assist customers with the online catalog, provide product knowledge, establish credit terms, close the sale, and arrange for home delivery. Multinationals need to learn to be just as flexible, quick, and alert to the unexpected as emerging market retailers, taking the time to understand local markets and adjusting to changes in consumers’ attitudes and innovations in selling.

“Sure, he can hunt down the competition like no one else. But good luck getting him to take direction.” 120 Harvard Business Review December 2010

Guillermo D’Andrea ([email protected]) is a professor of management at IAE Business School in Buenos Aires and the research director of the Coca-Cola Retailing Research Council, Latin America. David Marcotte (david. [email protected]) is the senior vice president of retail insights at Kantar Retail, part of the WPP Group. Gwen Dixon Morrison (gmorrison@ wpp.com) is CEO for the Americas and Australia of WPP’s The Store.

Cartoon: Sue Konar

The lessons of emerging market retailers derive from the companies’ experience of vying for consumers’ affections against scrappy competitors amid the economic shocks and disruptions that are endemic to the developing world. Perhaps no lesson from these retailers is more important than the value of nimbleness. In fact, the best way to approach an emerging market is with openness and a sense of discovery. Customers are on a journey toward greater affluence, and your job as a marketer is to understand the realities of that journey.  HBR Reprint R1012K

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SAS® Business Analytics Software Data Management | Analytics | Reporting | Targeted Business and Industry Solutions

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SAS and all other SAS Institute Inc. product or service names are registered trademarks or trademarks of SAS Institute Inc. in the USA and other countries. ® indicates USA registration. Other brand and product names are trademarks of their respective companies. © 2010 SAS Institute Inc. All rights reserved. S64655US.1010

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Work.

Now there’s an app for that, too.

Introducing Junos Pulse Mobile Security Suite. The most popular consumer smartphone is ready for work. Thanks to the Junos Pulse iPhone app, secure enterprise connectivity is at your fingertips, giving iPhone users access to business apps and networked data on their corporate intranet from anywhere in the world. The Junos Pulse Mobile Security Suite helps you get more done, on the go. Your office is your iPhone. ®

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CRucible 130 An emerging markets entrepreneur battles back from betrayal

Case Study 133 Could a chief sustainability officer help win business?

Synthesis 138 Why the internet might destroy us

Life’s Work 144 Manolo Blahnik on shoe design success

Experience Managing Your Professional Growth hbr.org

A

s a child psychiatrist, I’m asked every day to help a struggling young person do better. For example, I recently saw a boy I’ll call Tommy, who was floundering in sixth grade in spite of increasingly vehement exhortations from his teachers and parents to try harder. I could see how downcast he was, so I immediately turned to a process I’ve developed for kids like him. It began with figuring out what he liked to do (build things and play guitar) and what he was good at (math, science, music, and hands-on projects) and urging him to do those things more often. I also arranged for him to be switched out of a class where there was a clear conflict with the teacher and into one where he felt more at ease, and I advised the adults in his life to make sure he was imaginatively engaged in the classroom, not just sitting there, bored. I told them to challenge Tommy but not in a punishing way; the message should be “I’m asking more from you because I know you have it in you.” Within weeks, he was working harder and was even eager to go to school. He started to receive positive feedback, which fueled his desire to work harder still. You may be asking how this story applies to you, an adult working in— perhaps running—a complex business organization. Many people at work feel exactly the way Tommy did at school. Consider these three executives: Megan, a marketer with superlative skills and work habits, has to drag herself to the office because the culture at her company

managing yourself

What Brain Science Tells Us About How to Excel

Illustration: Jon Han

A doctor’s prescription for achieving peak performance by Edward M. Hallowell

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December 2010 Harvard Business Review 123

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Experience

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Working on a connected team galvanizes people in ways nothing else can. But positive connection in business is slipping away, and disengagement is on the rise. is full of backbiting, favoritism, and cliques. Alex, a graduate of Harvard Law School, is on track to become a partner in a prestigious New York law firm but hates his job. Each day he has to force himself into a suit and tie and paste on a smile as he exits the elevator. Luke is a senior manager at a successful pet food company that was recently acquired by a large corporation. He is amazed by how quickly the magic of the small business has been destroyed. My diagnosis in each case is a “disease” called disconnection. It can spread like a virus. It saps companies of their vital juices. And given the rapidly changing world of work—where new is soon old, fast is slow, private is public, focus is fragmenting, loyalty is decreasing, debate has devolved into sound bites, and policies have become platitudes—it is now rampant in organizations. How do you perform at your best under those circumstances? The question of how people can achieve peak performance has been my focus for 30 years, as a specialist in child development and learning differences such as ADHD and dyslexia, and as a counselor to people of all ages. The process I’ve developed to help kids like Tommy and adults like the three executives I just described is the Cycle of Excellence. It consists of five steps: select the right tasks, connect with colleagues, play with 124 Harvard Business Review December 2010

problems, grapple with and grow from challenges, and shine in the acknowledgment of your achievements.

Select

Millions of workers toil fecklessly in the wrong jobs. They don’t want to cause problems—or risk losing their positions— by complaining, so they simply do what they are told. I have counseled hundreds of adults looking for tips on how to make their work life better. And, time and again, I have told them that they must first find the right job. In a 2004 review of the research on person-organization fit and person-job fit, Tomoki Sekiguchi concluded that a good fit increases job satisfaction, reduces stress, and improves attendance and performance. From my work with patients, I have seen that job fit ranks with choice of mate in predicting success and well-being. In work, your goal should be to spend most of your time at the intersection of three spheres: what you like to do, what you do best, and what adds value to the organization. There are various psychological tests that aim to assess job fit. But it can also be done through a set of questions I’ve developed (see the sidebar “Is Your Job a Good Fit?”). If your answers indicate that you aren’t well matched to your job, you should consider talking to your manager about shifting some of your responsibilities. At the extreme, you

might consider changing positions or even careers. I recently met with a woman who felt stuck in her customer service job. She was supervising employees who did most of their work on the telephone, and she disliked dealing with the constant conflict that arose from customers’ complaints. I suggested she speak to her boss to discuss fit. Her boss appreciated the initiative and reassigned her to a marketing research role, which she vastly prefers. This simple reassignment may have avoided years of therapy and antidepressants.

Connect

Connection is the bond an individual experiences with another person, a group, or anything else that stirs feelings of attachment, loyalty, excitement, inspiration, comfort, and a willingness to make sacrifices. Working on a connected team galvanizes people in ways nothing else can. But positive connection in business is slipping away. Colleagues often work in different cities, countries, and continents, and, thanks to technology, even those working in the same building may not speak face-to-face for months or years. At the same time, the recent economic crisis has created a climate of fear, anxiety, and mistrust. As a result, disengagement, one of the chief causes of underachievement and depression, is on the rise, and that can have big personal implications. For example, a study of about 20,000 employees working in a wide range of jobs in Sweden, Finland, Germany, Poland, and Italy recently found that people who felt disconnected from their managers were more likely to get sick, miss work, or even suffer a heart attack. By contrast, data released by Gallup in 2007 show that people who have a best friend at work are seven times as likely as others to be positively engaged with their jobs. Engagement, research has shown, boosts performance, and a sense of connection in the workplace leads to engagement. So, establishing robust

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Is Your Job a Good Fit? Your answers to the following questions can help determine if you’re in a job that combines what you like to do, what you do best, and what adds value to the organization. If you aren’t, consider shifting some of your responsibilities or even finding a different position or career.

1

6

11

2

7

12

What are you best at doing? It is amazing how many people spend years trying to get good at what they’re bad at instead of getting better at what they’re good at.

What do you like to do the most? This is not always the same as the answer to question 1. Unless it is illegal or bad for you, do what you like. If it is also productive and useful, it ought to be your career.

3

What do you wish you were better at? Your answer may guide you to a course you should take or a mentor you should work with. It may also indicate a task you should delegate.

4

What talents do you have that you haven’t developed? Don’t say none.

5

Which of your skills are you most proud of? This often reflects obstacles you’ve overcome.

What do others most often say are your greatest strengths? This question helps you identify skills you may not value because they seem easy to you.

What have you gotten better at? This gives you an idea of where putting in additional effort can pay off.

8

What can you just not get better at no matter how hard you try? This tells you where not to waste any more time.

9

What do you most dislike doing? Your answer here suggests what tasks you might want to delegate or hire out.

10

Which skills do you need to develop in order to perform your job? Your answer to this question might lead you to take a course, read a book, or work with a mentor or coach.

126 Harvard Business Review December 2010

What sort of people do you work best/worst with? Do you love to work with highly organized, analytic types? Do creative types drive you crazy? Make up your own categories. What sort of organizational culture brings out the best in you? It is amazing how many people won’t leave a culture for which they are hideously unsuited.

13

What were you doing when you were happiest in your work life? Could you find a way to be doing that now?

14

What are your most cherished hopes for your future work life? What could keep you from realizing those hopes?

15

How could your time be better used in your current job to add value to the organization? Your answer here gives your manager valuable input he or she may never have thought to ask for.

relationships at work should be a top priority. Small talk seems trivial, but it pays big dividends, building affinity and trust. Reach out to colleagues. Pay attention to everyone. Appreciate the maintenance people and the cafeteria staff. Notice personal details, like a new dress or a sad look. Most of all, be real. Bring your full self into every interaction. Executives often spend enormous effort, time, and resources trying to get people to know and buy in to an organization’s mission. But positive human relationships are much more important. If you look forward to coming to work, it doesn’t matter what cause you’re working toward. Soldiers in the trenches aren’t in that moment fighting for freedom or country; they’re fighting for one another. When people say they just don’t have time for connecting at this level, I tell them about my friend Joe Loscalzo. Joe is a professor at Harvard Medical School, chief of medicine at Brigham and Women’s Hospital in Boston, a research scientist, editor in chief of the cardiology journal Circulation, and a doctor with a busy practice. It is hard to imagine how anyone’s days could be fuller, yet the shortest appointments he makes with the people who work for him are a half hour. “People just assume that you are too busy to talk to them,” Joe says. “I don’t think that is the best way to operate.” When someone needs less than 15 minutes, he’s happy. “Then we get to talk about what’s really going on,” he explains. Joe does this not only for employees but also for himself. He loves his work in part because he knows his people so well. The value of genuine connection always goes two ways.

Play

If you’ve selected the right job and are working in a connected environment, you naturally move to the next step: imaginative engagement with the task, a state I call play. Play is the activity of the mind that allows you to develop ideas, approaches, and plans. When you’re at

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EXPERIENCE

The Cycle of Excellence SELECT play, an fMRI scan will show activity in the right hemisphere of your brain—where your spontaneous, intuitive thinking occurs—as opposed to the left side, which is responsible for your grounded, detailoriented, analytical thoughts. But you can enter into play even when doing routine work like accounting. Your goal should be what Mihaly Csikszentmihalyi calls “flow,” the state in which a person is so caught up in what he’s doing that he loses self-consciousness. That is when people perform at their best. As Southwest Airlines says in its corporate credo: “People rarely succeed at anything unless they are having fun doing it.” We know from neuroscience that play builds your brain. It stimulates the secretion of brain-derived neurotrophic factor, or BDNF, a recently discovered molecule that promotes nerve growth. Play engages the amygdala, a clump of neurons that helps regulate emotions. In addition, it has a beneficial effect on the prefrontal cortex, which regulates executive functions such as planning, organizing, prioritizing, deciding, scheduling, anticipating, delegating, analyzing—in short, most of the skills you need to excel in business. Play at work may sound like an oxymoron. After all, you’re paid to do your job—to follow a plan and get results. But that doesn’t mean you shouldn’t bring imagination into all that you do. Instead of mindlessly completing a task, allow yourself to think, to change course according to necessity or curiosity. The end product will be better as a result. In fact, people perform best when they are at play. They are exerting effort—one definition of work—but they are doing so in a state of excitement, not drudgery. A surgeon in the operating room, a defense attorney delivering a summation, an executive elucidating a new strategy, a trader zeroing in on a new stock, and a manager running a complex meeting are all hard at work but also at play. I once had a patient who hated his job because his manager insisted that he 128 Harvard Business Review December 2010

Find the right job.

CONNECT

Tap into the power of other people.

PLAY

Imaginatively engage with work.

GRAPPLE AND GROW

Conquer difficult challenges.

SHINE

Ensure that you are recognized.

rigidly adhere to rules and procedures. As he put it: “I am asked to do stupid things all day long.” In essence, he felt he was being barred from play, from creative thought, from taking initiative. I coached him on how to ask his manager for more freedom. If you approach them the right way, superiors are often willing to change their own practices; after all, peak performance is their goal, too.

Grapple and Grow

If you’ve come to a point where you are imaginatively engaging with your job, you will naturally want to work harder at it. The notion that some people have a better work ethic than others, owing to moral superiority or a stronger character, is misguided. The real reason people work hard is because they want to, usually because they have, deliberately or not, followed the first three steps in the Cycle of Excellence. The fourth step involves working hard to achieve a difficult goal. This may include some drudgery, but you’ll be willing to endure it if you feel connected and have helped create the assignment.

Pain abounds on the way to excellence. But this is good stress, as demonstrated by the work of Eric Kandel, who shared the Nobel Prize in Physiology or Medicine in 2000 with two other scientists for discovering the phenomenon synaptic plasticity. Let’s say you’re trying to memorize a telephone number. At first, you need to write it down. The nerve cells involved in learning that number fire a neurotransmitter, glutamate, to get the process started. If you never dial the number again, nothing changes. But if you work to memorize it, the synapses enlarge and the connections between the nerve cells involved become more securely established. They are, to use the scientific term, plastic. As you stress your brain in this way, what was difficult becomes easier, owing to those strengthening neural pathways. As the brain geeks say, neurons that fire together wire together. That is why practice—which in neurological terms means the repeated firing of neurons—leads to improved performance. Hard work may make you want to pound your desk or jettison the task. But after it is over, your brain will be the stronger for it, and you will be glad you endured it. James Loehr, one of the leading thinkers on peak performance, puts it this way: “Stress is not the enemy in our lives. Paradoxically, it is the key to growth.” Bad stress, by contrast, can’t be endured without damage. It is unplanned, uncontrolled, exceeds the capacity of the system to adjust to it, and allows no time for rest and recovery. It also reduces brainpower. Adam Galinsky of the Kellogg School and researchers from the Netherlands have shown that when a person feels a diminished sense of power and control, his or her executive functioning is significantly impaired. Toxic stress usually comes from without—for example, in nature from the weather, in human physiology from disease, and in business from the economy or a bad boss. But sometimes, in an effort

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HBR.ORG DISCUSS Do you have questions or comments about this article? Edward M. Hallowell will respond to feedback at hbr.org.

to excel, you can drive yourself to it. You must avoid this because toxic stress kills. It kills good work, brain cells, heart cells, and, eventually, people. A 2010 study in the Netherlands found that high levels of urinary cortisol, a so-called stress hormone, increased the risk of death from cardiovascular causes fivefold in the study sample of more than 800 subjects. To manage yourself properly, it is important to court the good stress, in the form of surmountable challenges, while avoiding the bad. I have a patient who was working with a team of programmers to develop new software by a certain date. As the deadline approached, toxic stress began to spread. Team members were worried and frustrated, working later and harder but less effectively, until my patient blew the whistle, literally, by putting two fingers in his mouth and emitting a piercing sound. “C’mon guys,” he said. “Let’s regroup and get this done.” They had

an on-the-spot meeting, determined their next steps, and completed the project before deadline. They reduced toxic stress first by connecting (one of my basic rules is never worry alone) and then by formulating a plan, thus restoring a sense of power and control.

Shine After you grapple, you progress, and the final step should be acknowledgment of your achievements. We have known for a long time that the need for recognition is fundamental to optimal human performance. On a neurochemical level, praise is usually accompanied by the release of dopamine, a transmitter associated with pleasure and well-being. That is why it feels good physically. On a social level, it fills the uniquely human need to serve, to be of value, to matter. These facts are well established; what’s new is our increasing disconnection, which makes

Executive MBA

recognition both less available and more necessary. Work tasks happen so quickly and involve so many virtual hands that it can be difficult for managers to single out people for praise even when they most need it. Remember that in your dealings with colleagues. But, more important, if you’re grappling and growing but not receiving acknowledgment from your organization, speak up. Lay claim to what is yours. If the culture of your group chronically withholds praise, consider finding another place to work. Recognition completes the Cycle of Excellence, encouraging you to work even harder to achieve your best. HBR Reprint R1012L Edward M. “Ned” Hallowell (drhallowell@ gmail.com) is a psychiatrist, the founder of the Hallowell Centers in Sudbury, Massachusetts, and New York, and the author of Shine: Using Brain Science to Get the Best from Your People (Harvard Business Review Press, 2011).

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Experience

Crucible

Transformative events that shape leaders

Battling Back From Betrayal

Scrap metal entrepreneur Stephen Greer naively trusted his foreign partners—and lost millions to fraud. Here’s how he reclaimed his confidence and rebuilt his company. by Daniel McGinn

S

tephen Greer hired the first general manager for his fast-growing company’s Mexican operations after several evenings drinking tequila with the man in Guadalajara. Impressed by the candidate’s industry contacts and apparent honesty, Greer thought he’d found the perfect person to help him expand his Hong Kong–based scrap-metal-processing enterprise, Hartwell Pacific—until nine months later, when he realized the new hire was scamming him for thousands of dollars. The second general manager in Mexico wasn’t in the job much longer before suppliers began telling Greer he was taking kickbacks. The third set up a fake supplier bank account in his wife’s name and siphoned off more money. And as this was going down in Mexico, Hartwell Pacific was experiencing similar pilferage in Malaysia. All told, fraud and theft in emerging market locations cost the company several million dollars—and imperiled its founder. “By the time I was 28, I was a multimillionaire. By the time I was 30, I was almost bankrupt,” Greer says. “That happened because we lost control of our business.” Developing economies offer some of today’s best growth opportunities. But Greer’s experience is a vivid illustration of what can go wrong when an entrepreneur expands without understanding local cultural and legal contexts. Greer didn’t realize that the corollary to cheap 130 Harvard Business Review December 2010

local wages is a poor population that may be tempted to supplement paychecks by stealing from employers. He underestimated the risk that local managers, who are often not well supervised by headquarters, will demand kickbacks or pay inflated prices for supplies from relatives or turn a blind eye to employees who are walking away with inventory. “It’s our job to make it difficult for people to steal from us. In a poor country, they’re going to be tempted,” Greer says. “We left our wallet on the ground.” Until the problems surfaced, Hartwell Pacific and its founder were enjoying an impressive rise. Greer, who was born in Pittsburgh, graduated from Penn State in 1991. After a disappointing job search on Wall Street, he cadged a frequent flyer ticket from his father and moved to Hong Kong, couch surfing with friends while trying to start a business. He settled on scrap metal trading. After the Asian economic crisis of 1997–1998, he shifted to scrap metal recycling, a complex business that requires warehouses, machinery, and a big employee base. He expanded into Malaysia, Thailand, China, the Philippines, and Mexico. In 18 months during the late 1990s, Hartwell Pacific went from two employees to 200 and opened eight operations in seven countries. When companies grow that quickly, problems often emerge. Doug Tatum, a financial consultant and the author of the

2007 book No Man’s Land, compares this to the gawky adolescent phase in human development. For small businesses, the awkwardness manifests itself as they outrun their existing financing or outgrow the capabilities of their managers. These organizations are, as Tatum puts it, “too big to be small but too small to be big.” The problems can be even more acute in developing economies. “People look at a good business model, cheap labor, and an untapped market, and they see great advantages,” says Robert Brenner, a vice president at Kroll, a global risk consulting firm. But they don’t account for the vastly different societal rules regarding company property, bribery—and, crucially, enforcement of laws and contracts. And distance precludes close supervision. “Your day-to-day sense of what’s going on—whether inventory is going out the door, whether sales numbers are real—is hard to get a handle on,” Brenner says. He

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photography: gareth jones

After uncovering theft and fraud in his company’s far-flung operations, Stephen Greer began asking hard questions.

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describes a large luxury goods company that thought its factory in Southeast Asia was running two shifts per day. In fact, the local manager was running a third shift, making products that competed with his employer’s. For Hartwell Pacific, the biggest strain was a lack of control systems. Greer was so focused on new markets that he glossed over niceties like accounting procedures, inventory audits, and reference checks for new hires. “He wanted to grow fast, and

he thought it was a situation where he could fix it later,” says his wife, Mei Greer, who was the chief financial officer during that time. “He kept thinking that if he could control the market, we could keep moving. But we couldn’t catch up with him, and we didn’t have the right people.” When he finally realized the extent of the fraud in his nascent empire, Greer pulled back, eventually liquidating the operation in Mexico. He also instituted a system of close oversight. He appointed local finance managers who reported directly to headquarters, creating checks and balances on local general managers. He started requiring three signatories for all company checks. He installed metal detectors to prevent theft. Once a month, the local managers flew to headquarters, where they compared revenues, costs, and overall performance. If one plant seemed to be overpaying for supplies, or if revenues seemed out of line with inventory, 

Greer began asking hard questions—ones he should have been asking all along. On a personal level, Greer says, he was too trusting before the fraud and too suspicious—maybe even a little paranoid—immediately after it. But his initial naïveté, he believes, did serve a purpose: “If I had been too distrusting, I never would have made the move to incorporate, build a team, and expand into countries where I couldn’t speak the language. It takes optimism and faith in people to achieve that.” In Starting from Scrap, a memoir of his 12 years building the business, Greer writes that one of his biggest lessons was the need to balance growth with control, to give remote employees both independence and supervision. “I learned to love bureaucracy, because it’s better than bankruptcy,” he says. “People need freedom to think and act, but they should be aware that their actions and performance are being measured.” It’s easy for Greer to look back on this episode, because Hartwell Pacific’s story has a happy ending. Shortly after he dealt with the fraud in his far-flung operations, the global commodities markets began to boom. By 2005 the company had annual revenues of more than $200 million and was solidly profitable. Greer sold Hartwell Pacific to a publicly traded Australian recycling company; he won’t disclose the price but says the proceeds “set my family up for life.” As part of the deal, he stayed on for three years to lead the Asian operations. Since 2008 Greer has been a senior adviser at Oaktree Capital, a private equity firm looking to acquire a company and appoint him as its CEO. If that happens, he says, his near-bankruptcy experience will serve him well—he thinks of it as the next best thing to an MBA, which he never was able to pursue. And if he has the opportunity to lead another company into emerging markets, presumably he’ll check references before hiring someone he meets at a cantina in Guadalajara.  HBR Reprint R1012M Daniel McGinn is a senior editor at Harvard Business Review. December 2010 Harvard Business Review 131

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Experience

hbr.org

Case Study Bent on improving its ecocredentials, a company debates the need for a chief sustainability officer. by Eric J. McNulty and Rupert Davis

The Experts

Should the C-Suite Have a “Green” Seat?

Peter Graf is the chief sustainability officer at SAP.

J

Illustration: graham samuels

Muhtar Kent is the chairman and CEO of Coca-Cola.

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HBR’s fictional case studies present dilemmas faced by real leaders and offer solutions from experts. They appear at hbr.org prior to publi­ cation here.

ennifer Brown, CEO of Narinex, an electronic components manufacturer based in Michigan, re-read the news alert on her screen. The company had lost another major contract to Glis­ trom, a UK-based competitor it had regularly beaten. She called out to her secretary. “Sally, I need Herb Tyler and Laura Dyson right away.” Losses like these were not just the normal ebb and flow of deal making, and Brown wanted input from her COO, Tyler, and her CFO, Dyson. She was determined to keep Narinex on top. With $3.2 billion in revenue and operations in North America, Europe, and Asia, Narinex had performed consistently well with Brown at the helm. A favorite of Wall Street analysts, it had kept costs low even as it expanded into new lines and markets, and Brown was now regarded as both innovative and hard-nosed. At her direction, Narinex had outsourced some of its R&D to 

bring new offerings to mar­ket more quickly, and she had negotiated performance-based contracts that kept the supply chain lean and mean. She had also sold the corporate jet and refused a company car, to show her commitment to limiting overhead. Within 20 minutes Dyson and Tyler were waiting for Brown. These senior managers were accustomed to her urgent summons and the subsequent grilling. Tyler had also seen the Glistrom announcement and knew Brown would be anxious. It was a multiyear deal potentially worth $50 million. “I’ve already asked Ian to get competitive intelligence from his team,” Tyler said, referring to Ian Jones, the VP of sales. “He did mention that Glistrom is generating buzz in the field.” “‘Buzz’ doesn’t tell me much. How quickly can you two turn whatever he has into something we can act on?” Brown demanded. December 2010 Harvard Business Review 133

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Experience

Tyler and Dyson exchanged a glance. “Can we have 24 hours?” Dyson asked. With a nod, Brown sent them off to solve the Glistrom puzzle.

From the Mouths of Babes

At 9:00 the next evening, Brown was sitting at her kitchen counter with a bowl of tomato soup and a two-page memo from Tyler and Dyson. Their analysis of previous-versus-current RFPs highlighted one clear area of concern: sustainability. “Our initial research shows that we’re on target with pricing and terms. Anecdotal information suggests that competitors are offering codevelopment of custom components, but we are confident we can match that. Previous initiatives to outsource some R&D have connected Narinex to a great network of global designers. The biggest change in the market is greater emphasis on sustainability: Some customers are looking beyond compliance issues to how we’re handling waste, whether our suppliers pay fair wages, and even if we’ve eliminated printed documentation and moved everything online. The U.S. federal government and Wal-Mart have incorporated sustainability disclosures into their purchasing RFPs, and we believe the prevalence of such disclosures will continue to

“You weren’t the worst company we talked about, but you weren’t the best either.”

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grow. Glistrom recently hired its first chief sustainability officer (CSO), possibly in response to these market pressures.” “And what are we doing about it?” Brown wondered aloud. She examined the summary of sustainability initiatives the company had already pursued: installing a green roof on its German plant to cut energy costs, reducing packaging by a third, shifting the bulk of its international shipping to a vendor with the most fuel-efficient air fleet, and, yes, moving 134 Harvard Business Review December 2010

all documentation online. She noted that some efforts had yielded remarkably fast and solid paybacks; others would take years to confirm a certain ROI. “We are in compliance with our manufacturing, but that target moves depending on the country of manufacture and receipt,” the memo stated. “Where regulations are looser and customer specifications permit, we produce goods with lower-cost substances that would not be acceptable in all regions.” Putting down the memo, Brown turned to a report on Narinex’s environmental practices. It had been prepared by none other than her 17-year-old granddaughter as a school assignment. Zoe had e-mailed it to her a few days earlier with a short note:

Thanks for your help getting information for this, Nana. You should read it. You weren’t the worst company we talked about, but you weren’t the best either! XOXO. The teenager’s analysis was refreshingly direct—free of corporate politics and personal ambition. Zoe’s top recommendation: Hire a CSO. “From the mouths of babes,” Brown mused. She knew several other companies had appointed CSOs. She’d generally resisted hiring a chief whatever officer to address the latest competitive challenge. But could sustainability be different? She had to admit she was no expert. She texted Tyler and Dyson to ask for their opinion.

From the Mouths of Experience

Brown crossed the catwalk that spanned the atrium of Narinex’s headquarters and glanced out at the gathering clouds. Spits of rain began to dot the three-story glass windows. In a few minutes, she would meet with her executive team to discuss the Glistrom situation. Scrawled at the top of the Dyson/Tyler memo tucked under her arm was an excerpt from Zoe’s report: “The emerging best practice is to make sustainability a C-suite responsibility.” Outside the Delphi conference room, she breathed deeply and heaved open the

doors. On one side of the table were Dyson; Stanley Samson, the head of communications; and Hans Stevenson, the global head of R&D, who had recently taken that post after a successful stint at Narinex’s European headquarters in Hamburg. On the other side sat Ian Jones and Herb Tyler. Brown turned first to her sales chief. “Alright, Ian, let’s have it. What the hell is going on out there?” Ian Jones smiled ruefully. He’d been in sales at Narinex for 20 years, rising gradually during the tenure of three CEOs before Jennifer Brown. He liked her nononsense manner and willingness to engage with customers. “Glistrom’s on a roll,” he said. “They aren’t beating us on price, and their service has always been good. Laura filled me in on this green angle, and I think she’s on to something. Their chief sustainability officer has been everywhere recently—at conferences, on cable news shows, even blogging. Customers are more and more concerned with this stuff, and Glistrom has a better story to tell than we do. My folks in the field get asked about it a lot.” Stanley Samson piped up. “Maria Capelli is her name. I’ve been tracking her clips.” Brown remembered hearing about Capelli’s appointment. “She was quiet for about six months, probably learning the ropes. But this fall, she’s had something every day or two. I don’t know if Glistrom’s actually doing more than we are on green issues, but they are certainly raising their profile. I’d love to be able to make that happen for us.” “Well, shouldn’t we be getting some clips of our own?” asked Dyson. “We have our own story, and Jennifer can tell it. Isn’t it even more powerful to have this message coming from the very top? In fact, the one criticism I’ve heard about Glistrom is that speaking through a surrogate weakens their message.” Herb Tyler nodded in agreement. “We’re pretty good in some areas—but mostly those where we ‘went green’ because it lowered costs,” Samson replied. “I don’t want us to be accused of green-

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washing. It could undo all our good work.” He looked across at Tyler. “Truthfully, our progress has been largely inadvertent. Right, Herb?” Tyler agreed. “In terms of manufacturing and operations, this has primarily been a cost and compliance issue. We’re not at the head of the class. And getting there means complex, costly tracking and reporting of not only our direct impact, but also that of our suppliers and their suppliers. Frankly, some parts of our

of the cost savings is based on projections whose underlying assumptions may not hold true over time. In some cases, we might need to absorb short-term cost increases to get the long-term benefit.” “What concerns me,” said Brown, “is that I see and hear tactics but no strategy. Could a CSO pull it all together? Hans, you’re just back from Europe. What are your thoughts?” “I think we’ve been asking the wrong questions,” Stevenson replied. “It doesn’t

“I don’t want the executive team to be any larger than necessary—particularly not for show. And I have seen surrogates dilute a message.” supply chain I’d rather not see on the evening news. Remember when Global Green Action came after us in Taiwan?” Brown and the others well remembered the protestors who had thrown empty barrels marked with a skull and crossbones into the decorative fountain outside Narinex’s main Asian facility the previous year. Fortunately, only the local chapter of the activist organization had been involved, and media coverage was thin. Brown had dispatched Tyler to pacify the group with a commitment to review the company’s practices. After they tightened up a few things that had no impact on cost, the problem went away. But video footage of the protest was still easily accessible online. “Let’s pull back for a moment,” Brown said. She encouraged spirited discussion among her executive team, but at times it led to chaos. “You’ve already persuaded me that the sustainability issues are real. The challenge is what to do about them. We can’t afford to lose business to Glistrom or anyone else on a regular basis. On the other hand, being, in Herb’s words, ‘head of the class’ is often code for ‘expensive’.” Laura Dyson inserted herself. “And these are mostly things we’ve never done before; calculating return is dicey. Much

matter whether we go tit-for-tat with Glistrom on executive hires. Maria Capelli’s luster will dull soon enough. With all due respect, it isn’t even about RFPs. It’s whether being greener than Glistrom and the rest of our competitors helps us seize competitive advantage. If merely being in compliance gets us all the possible benefit, let’s stop there. But I think we have a bigger strategic opportunity, and a CSO can be a catalyst.” Brown had always liked Stevenson and guessed that he might want to be CSO. He cared about the issues and knew the business cold. It would be a challenging career move for him. Stevenson went on to explain how his division’s biggest cost-saver over the past three years—a change in sourcing that made the Emerald line of components 20% less expensive to produce—was attributable to the European Union’s RoHS regulations governing hazardous substances. “If a CSO, an internal champion, can take a compliance issue and use it to catalyze real innovation across our company, we’ll leave Glistrom in the dust. And then we’ll have a great story to tell,” he concluded. “Hans, I certainly was impressed with what your team did with Emerald, but let’s not forget that you got great results with existing resources,” said Dyson. “We 

didn’t need a new C-level position and the overhead that would have come with it. And it takes up to a year to get a new function running.” She shot a glance at Brown. “Hans, you and Herb and the rest of this team can tackle these issues.” Ian Jones turned the discussion back to Brown. “Jennifer, what are your thoughts?” Brown paused for a moment. “I don’t want the executive team to be any larger than necessary—particularly not for show. And I have seen surrogates dilute a message. However, these issues may challenge some deeply cherished parts of our culture. We can’t wait for this to blow over, and the sales team needs a story to share now. Sometimes you need someone to advocate a fresh viewpoint.” “Isn’t that what consultants are for?” asked Dyson. “They can quickly bring in specialized knowledge, and we can charge them specifically with targeting sacred cows. We have a track record of hiring consultants who get the job done.” “Only an insider can make this part of our DNA,” Stevenson shot back. “Consultants won’t be invested for the long term.” “Or if they are, it will cost us a fortune,” Dyson quipped. “Insider or outsider, I just want to make sure that the priorities of some customers don’t distract us from meeting the needs of the rest. We still have a lot of customers who care more about cost than biodegradable materials.” “Not as many as we used to,” Brown mused. “Not as many as we used to…” Eric J. McNulty writes on leadership and sustainability. He can be reached at [email protected]. Rupert Davis (rupert@ montarosasearch.com) heads the sustainability practice at MontaRosa, a leadership consulting and executive search firm.

Q

Should Narinex hire a CSO? See commentaries on the next page.

December 2010 Harvard Business Review 135

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Experience

The Experts Respond Peter Graf, the chief sustainability officer of SAP

Narinex should hire a CSO if its man­ agement team believes that a sustainable business strategy is critical to the organi­ zation’s success. A companywide transfor­ mation requires a full-time C-level leader who can bridge departmental rivalries and view sustainability as integral to the busi­ ness principles of the organization. Given that Brown is regarded as an innovative CEO who leads by example, she seems to be ready to take this step forward. The executives at Narinex recognize that the firm must offer more than competitive pricing and favorable business terms to gain competitive advantage today. Indeed, it barely escaped global brand damage from the protest in Taiwan. Communicating the existing sustainable initiatives merely as a short-term strategy to counter market pressures is not a viable option, as it leaves Narinex open to charges of greenwashing. It is troubling that some of Brown’s team members worry more about the potential cost of hiring a CSO than about the hefty price of brand loss. Fortunately, though, Brown appreci­ ates that many aspects of the business must change before sustainability can be adopted as a strategic priority. She should consider three key points as she decides whether to hire a CSO.

First, substantive transformation de­ mands commitment in the C-suite. To be effective, a CSO must work closely with the CEO to develop a sustainability mission for the company and its entire supply chain. To gain trust and credibility, Narinex needs to holistically manage economic, environ­ mental, and social risks and opportunities. Such a broad approach requires balancing short- and long-term profitability through more-sustainable business practices. Second, the company needs to ac­ cept that it will be held to new levels of accountability by customers, partners, employees, investors, and governments alike. Its sustainable business practices, including product development, must sup­ port these changing demands. Third, Narinex should reduce costs by becoming more efficient with energy and resources. A CSO could help Brown not only reduce the carbon footprint of the company and achieve other sustainability goals, but also have a positive impact on the bottom line. R&D head Hans Stevenson discussed how one of Narinex’s divisions, prompted by RoHS regulations in Europe, had significantly reduced costs through a sourcing change for a product line. A CSO would initiate even more innovation across the organization.

A companywide change requires a full-time C-level leader. To start this transformation process, I would advise that a newly appointed CSO take these five steps: 1. Learn what really matters to stake­ holders and what really matters to the company. 2. Work with the leadership team on a vision for how the company will embrace sustainability as a strategic priority. 3. Create a five-year plan for energy- and resource-efficiency projects and determine how to measure ROI. Understand the life cycle of manufactured components and engage with the supply chain to improve the social and environmental impact of products. 4. Identify future customer-demand patterns and engage design, operations, “product life cycle” partners, and the sup­ ply chain to make the end product more competitive. Consider which new offerings customers will want to buy. 5. Emphasize sustainability with Na­ rinex’s employees. Publicly report progress on defined short- and long-term goals. Only with such a multipronged approach can a new Narinex CSO truly succeed.

What Would You Do? Some advice from the HBR.org community

Sustainability is not the same as green: It is about long-term pres­ ervation of the business. That said, things both sustainable and green should be part of the corporate strategic plan, not the responsibility of one person. Having a chief this and a chief that is a fad. Sustain­ ability should not be a fad but part of the fabric of the organization. Katherine E. Putnam, president, Package Machinery Company

136 Harvard Business Review December 2010

Most CEOs appoint the CSO, then ask the incumbent to come forward with proposals. This often leads to power struggles, empire building, and bureaucracy. Initially, Brown should make the CSO an “internal lobbying” role: no power, just influ­ ence. If it looks as though advantage can be developed, she can then add power to the role. Andrew Campbell, director, Ashridge Strategic Management Centre

If Brown wants to lead Narinex down a path of comprehensive sustainable design initiatives where raw materials, not simply opera­ tions, are the primary targets, then hire a CSO. Developing a sustainable program for all raw materials and by-products will require the focus of a CSO and detailed-oriented in­ novation on the ground. Done right, it will save the company money. Eli Mueller, SEO strategist, Covario

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HBR.ORG

Muhtar Kent, the chairman and CEO of Coca-Cola

DOES NARINEX merely have a perception problem or a fundamental business problem? I think that is the real question, and in this case I fear that appointing a CSO could lead to unintended consequences, such as causing people within the company to view sustainability as a bureaucratic compliance issue, not as an overarching strategy. Woe is the company that treats sustainability as tangential to the business rather than integral to its growth. Narinex clearly has some structural, transparency, governance, and accountability problems. The incident in Taiwan, which should have been a wake-up call, underscores at least three issues: a crack in the foundation of the quality of Narinex’s suppliers; the global pervasiveness of environmental awareness and activism; and the naïveté of Narinex’s executives in assuming that they had dodged a bullet with this local protest. Recent, high-profile events illustrate how lack of oversight of suppliers and poor communications can cripple powerful global brands. With the proliferation of YouTube, Facebook, and other social media, not to mention 24/7 news coverage, nothing is local for long. A small incident, even one from a year prior, can blossom into a huge reputation problem if similar situations

CHIEF SUSTAINABILITY OFFICER or not, in the absence of a relevant vision, goal, or target—or even any guiding values or principles— Narinex’s sustainability initiatives will be uneven, true sustainability will remain elusive, and Narinex will increase its exposure to risk, miss business opportunities, or both. Celesa Horvath, principal consultant, corporate responsibility and sustainability, Ventus Development Services

pop up globally and give the old event new currency. In this case, the CEO must come to understand that her company has a fundamental business problem. Sustainability should never be perceived simply as an environmental, a compliance, or, most naively, a public relations matter. It relates to many other elements that are at the heart of running a successful, growing business. Adding another layer of bureaucracy in the form of a CSO is not the answer. That’s

Adding another layer of bureaucracy in the form of a CSO is not the answer. why at Coca-Cola the CSO role is part of my job as CEO. I suggest that any CEO ask four critical questions when weighing the decision to create a CSO position: 1. Who would have more influence within the company to champion and effect positive change, a CEO or a CSO? 2. Who would better mobilize suppliers and reassure customers? 3. Who is ultimately more accountable to the board of directors, shareholders, government policy makers and NGOs? 4. Who would have better insight into the relationship between sustainability and corporate strategy and vision? If the answer to any one of these questions is the CEO, then Brown needs to step up to the role herself. Of course, with that decision come enormous responsibilities. Brown will have to face a huge learning curve, but if she embraces this role, seeks constant counsel, and leads by example, Narinex could turn this important decision into an opportunity for achieving significant growth and gaining competitive advantage.   HBR Reprint R1012N Reprint Case only R1012X Reprint Commentary only R1012Z

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TO ORDER, VI HBR.ORG

Lead with Vision If you want to make a difference, if you want to make bold changes in your organization or industry, you need a vision. You also need to convince people to believe in it. And you need to execute it effectively. The Winter 2010 issue of Harvard Business Review OnPoint brings into sharp focus the thinking, planning, and skills you need to become a visionary leader. ARTICLES INCLUDE:

Building Your Company’s Vision by Jim Collins and Jerry I. Porras How to Grow Great Leaders by Douglas A. Ready What Titans Can Teach Us by Richard S. Tedlow PLUS, FROM HBR.ORG:

Having Ideas Versus Having a Vision by Roberto Verganti and more…

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Harvard Business Review OnPoint (available quarterly on newsstands and at hbr.org) focuses on a single theme each issue. It includes expert-authored articles from HBR’s rich archives, helpful article summaries, company examples, and suggestions for further reading.

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Synthesis

A review of emerging ideas in the media

Two tech-industry pioneers warn of the dangers built into our rapidly changing networked world. by Katherine Bell

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n the decade and a half since the commercialization of the internet, there’s been no shortage of prophecies about how it will change our lives, for good or evil. Lately, these have focused on neuroscience, social media, and the wikification of everything. As we turn away from professional opinion makers and toward algorithms and one another, what do we risk losing? Can our overburdened brains adapt to such an onslaught of fragmentary information? How innovative—and, for that matter, how wise—can the wisdom of crowds be? Many of the recent contributions to this genre—What Is Happening to News: The Information Explosion and the Crisis in Journalism (University of Chicago Press, 2010), by 40-year newspaper veteran 138 Harvard Business Review December 2010

Jack Fuller, for instance, and the over­ ambitiously titled I Live in the Future & Here’s How It Works: Why Your World, Work, and Brain Are Being Creatively Disrupted (Crown Business, 2010), by New York Times Bits blogger Nick Bilton—are written by the media for the media. Others—like Nicholas Carr’s much-debated The Shallows: What the Internet Is Doing to Our Brains (W.W. Norton & Company, 2010) and Bill Kovach and Tom Rosenstiel’s Blur: How to Know What’s True in the Age of Information Overload (Bloomsbury USA, 2010), a useful book if those who most need it actually read it—address the overwhelmed citizenry directly. But the most fascinating and far­reaching critiques have emerged from Silicon Valley insiders instrumental to

the early evolution of the internet. From William H. Davidow, a venture capitalist and former senior vice president at Intel responsible for the design of the microprocessor chip that proved Moore’s Law (calculating the rate at which computer power increases), comes Overconnected: The Promise and Threat of the Internet (Delphinium Books, 2011). And Jaron Lanier, a virtual-reality pioneer who is now a scholar-in-residence at the Center for Entrepreneurship and Technology at the University of California, Berkeley, brings us You Are Not a Gadget: A Manifesto (Knopf, 2010). Both books offer dire warnings based in large part on the authors’ insights as engineers. Overconnected focuses on the risks inherent in any system in which “connectivity increases dramatically both inside and outside….and parts, if not the whole system, are unable to adjust.” In fact,

Illustration: pete ryan

Will the Internet Destroy Us?

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hbr.org HBR.ORG As a matter of policy, we don’t review our own books, but check out the “New Books from the Press” blog post each month at blogs.hbr.org/synthesis.

Davidow blames the intensity of the current global economic crisis on the internet, using the case study of Iceland to show how a confluence of factors—a traditionally isolated country suddenly connected to the world, the anonymity of online banking, the failure of institutions to keep up with rapid change, and the speed with which information and panic spread online—led to disaster. Positive feedback—change that breeds more change, forming a loop—is the primary culprit. Systems driven by positive feedback have been responsible for much of human progress. But as they grow more complex and develop more quickly, there are two dangers: first, that the accelerated pace creates instability; second, that the loop becomes a vicious

“A fashionable idea in technical circles is that quantity not only turns into quality at some extreme of scale, but also does so according to principles we already understand.... I disagree. A trope from the early days of computer science comes to mind: garbage in, garbage out.” Jaron Lanier, from You Are Not a Gadget: A Manifesto cycle, locking the system into an extreme, unsustainable position. Davidow points to a couple of classic 20th-century examples of this lock-in: the American automobile industry’s crippling dependence on foreign oil and Pittsburgh’s steel industry, which was responsible for the city’s flourishing and then, owing to overspecialization, its decline. The trouble with the 21st-century internet, of course, is that it moves at an exponentially faster rate than these industries do. Lanier, the dreadlocked, idealistic techie turned Web 2.0 skeptic, is also

worried about the damage lock-in can do, not only to our economy but also to our culture and our very identities. In You Are Not a Gadget, which will be rereleased with a new afterward in January, he explains that the software through which we now conduct so much of our lives nearly always builds upon code in other complex software, regardless of its imperfections. This process results in a brittle system that no one dares risk changing. “So software presents what often feels like an unfair level of responsibility to technologists,” Lanier writes. “Because computers are growing more powerful at an exponential rate, the designers and programmers of technology must be extremely careful when they make design choices. The consequences of tiny, initially inconsequential decisions often are amplified to become defining, unchangeable rules of our lives.” Lanier presents the origin of digital music as a cautionary tale. In the early 1980s, a programmer working on the design for a music synthesizer came up with a simple way to represent musical notes in code. His scheme, called MIDI, described notes as “key-up” or “key-down”—a rigid on-off idea of a musical note that could approximate the sounds produced by a keyboard but not the flowing sounds of a human voice or a saxophone. MIDI-based hardware and software proliferated rapidly, and soon it became the standard for digital music. So much depended on it that despite its limitations and the industry’s efforts over decades, it was impossible to dislodge. Lanier’s darkest fear is that just as we’ve reduced music to a simple formula understandable to a computer, we are now reducing our culture and ourselves. He can sound overwrought at times—are we really so naive that we can’t tell the difference between a Facebook friend and a real friend?—but his critique of the reigning dogma of open-source innovation and the algorithmically enhanced wisdom of the crowd is chilling. What we stand to lose is our originality. Linux, the darling operating system of the open-source set, is hardly innovative; it’s a

Overconnected: The Promise and Threat of the Internet William H. Davidow

You Are Not a Gadget: A Manifesto Jaron Lanier Knopf, 2010

Delphinium Books, 2011

bulky derivation of 1970s-era Unix. We accept Wikipedia’s committee-approved version of events and by extension the idea that it’s possible to define a universal version of events as long as we do so together. Culture—pop and otherwise—has all gone retro. Anonymity and the fragmentation of ideas are locked-in features of Web 2.0. We’ve come up with no working business model to reward original digital expression. And devastating consequences will ensue if the “hive mind” succeeds in taking over science. When everything is connected and everything is derivative, there can be neither stability nor genuine innovation. (Here we come full circle to the financial crisis, provoked not only by overconnection but also by derivatives.) Without enough of either one, the whole human system fails. Davidow and Lanier retain enough optimism to muster alternative visions of how the internet and our technologyreliant economy could work, along with a handful of recommendations relevant to business strategists as well as policy makers. The problem is that most of these ideas—for example, radically restructuring international banking regulations, pricing the effects of positive feedback, or embedding digital content into “all the tchotchkes of the world”—seem not only difficult to achieve but also less romantic, less exciting, less human even, than the messy, fast, collaborative, risky (though unoriginal) projects they aim to rein in.  Katherine Bell is the deputy editor of Harvard Business Review Group. December 2010 Harvard Business Review 139

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EXECUTIVE SUMMARIES

Executive Summaries December 2010 SPOTLIGHT ON SOCIAL MEDIA AND THE NEW RULES OF BRANDING Spotlight

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70

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Branding in the Digital Age: You’re Spending Your Money in All the Wrong Places by David C. Edelman

Why You Need a NewMedia “Ringmaster” by Patrick Spenner

hbr.Org

Reputation Warfare by Leslie Gaines-Ross

The One Thing You Must Get Right When Building a Brand by Patrick Barwise and Seán Meehan

Social Media and the New Rules of Branding

ARTWORK Alex MacLean Home Run Hotel I 1999, photograph Orlando, Florida

Because companies no longer have total control over how their brands are presented, marketing is a lot more complicated than it used to be. The fundamentals, though, have not changed: Get to know your customers extremely well, find out what they need to do, and help them do it.

Facebook, Twitter, and their cousins can help build—or destroy—your brand. December 2010 harvard business review 61

CONSUMER DECISIONS

Branding in the Digital Age: You’re Spending Your Money in All the Wrong Places

SOCIAL MEDIA

Reputation Warfare

Leslie Gaines-Ross | page 70

Patrick Barwise and Seán Meehan | page 80

David C. Edelman | page 62 Consumers today connect with brands in fundamentally new ways, often through media channels that are beyond manufacturers’ and retailers’ control. That means traditional marketing strategies must be redesigned to accord with how brand relationships have changed. In the famous funnel metaphor, a shopper would start with several brands in mind and systematically narrow them down to a final choice. His relationship with both the manufacturer and the retailer ended there. But now, relying heavily on digital interactions, he evaluates a shifting array of options and often engages with the brand through social media after a purchase. Though marketing strategies that focused on building brand awareness and the point of purchase worked pretty well in the past, consumer touch points have changed in nature. For example, in many categories today the single most powerful influence to buy is someone else’s advocacy. The author describes a “consumer decision journey” of four stages: consider a selection of brands; evaluate by seeking input from peers, reviewers, and others; buy; and enjoy, advocate, bond. If the consumer’s bond with the brand becomes strong enough, she’ll enter a buy-enjoy-advocatebuy loop that skips the first two stages entirely. Smart marketers will study the decision journey for their products and use the insights they gain to revise strategy, media spend, and organizational roles. HBR Reprint R1012C 140 Harvard Business Review December 2010

BRANDING

The One Thing You Must Get Right When Building A Brand

Companies today increasingly find themselves under attack from dissatisfied customers, disgruntled employees, and just about anyone who has a personal computer and an ax to grind. As many are learning the hard way, small-scale snipers in command of new-media and social-network weapons can inflict large-scale damage to a company’s reputation—and fast. Blogs, tweets, text messages, online petitions, Facebook protest sites, and digital videos all represent potent new threats, and companies need to learn how to respond. Gaines-Ross, the chief reputation strategist at a global public relations consultancy, outlines six defensive tactics for companies whose good names come under assault. It’s important to avoid a disproportionate show of force; to respond quickly, with instincts honed by advance training; and to empower the front line to meet message with counter message. Companies should not be afraid to “go rogue” themselves, and they should recruit and deploy supporters to serve as “force multipliers.” Finally, they should muster their past credentials as they prepare to go into battle. It may never be possible to declare final victory in reputation warfare; the battle is ongoing. But by changing their mind-sets and adopting new tools, companies can protect their businesses from the worst of the reputation snipers’ attacks. HBR Reprint R1012D

It’s wrong to think we’re entering a world in which traditional marketing activities will become irrelevant. Yet the scale and speed of social media make it urgent to get the branding basics right: Think of the internet-fueled backlash against Dell’s flammable laptops and Kryptonite’s expensive but easily picked lock. The obvious danger is failing to keep pace with social media developments. An equal if less obvious danger is getting distracted by them and losing sight of the fundamentals. Brands should exploit new media’s possibilities to deliver on four basics: offering and communicating a clear customer promise, building trust by delivering on that promise, continuously improving on it, and innovating beyond the familiar. Virgin Atlantic does this by, for example, including travel tips from crew members on its Facebook page; communicating with customers on Twitter in rapidly changing situations; offering a taxi-sharing system to enhance its brand; and maintaining Vtravelled.com, a site where customers exchange information, stories, and advice. As customers experiment with social media, companies should gain customer insights rather than simply try to increase sales, capitalize on the media’s speed and reach while protecting the brand’s reputation, and carefully follow the unwritten rules of customer engagement online. HBR Reprint R1012F

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The Big Idea

Features

The Big Idea

ChIna Vs The World

Robert S. McNamara

r e fo Cassional e h T ofes Pr ards Bo t zen men gage C. Po e en bert mor s. by Ro get e to rector It’s timyour di from

And the Evolution of Modern Management

Whose Technology Is It?

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Beijing has been quietly implementing policies to enable China to overtake the West as the globe’s technology powerhouse. They just might be working. by Thomas M. Hout and Pankaj Ghemawat

Lessons from one of the most controversial managers in modern history by Phil Rosenzweig

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GOVERNANCE

GENERAL MANAGEMENT

Robert C. Pozen | page 50

Phil Rosenzweig | page 86

Pankaj Ghemawat | page 94

When the world’s largest financial institutions had to be rescued from insolvency in 2008, many experts laid the blame at the feet of corporate boards. But insufficient board oversight is a problem that had supposedly been solved in 2002. As the United States reeled from the blatant failures of corporate governance at Enron and WorldCom, Congress passed the famous Sarbanes-Oxley Act to prevent such failures from happening again. The new rules looked promising. The majority of a board’s directors now had to be independent. And senior executives were required to conduct annual assessments of their internal controls for review by external auditors, whose work would be further reviewed by a quasi-governmental oversight board. By the time of the financial meltdown, most major financial institutions were SOX compliant—but that didn’t stop the failures. More than 80% of collapsed banks’ board members were independent, as were all members of their audit, compensation, and nominating committees. All the firms evaluated their internal controls yearly, and, in 2007, their external auditors’ reports showed no material weaknesses. Neither did the reviews by the quasi-governmental board. So why were the SOX reforms so ineffective? In the author’s view, it’s because they merely added a new layer of legal obligations for governance without improving the quality of people serving on the boards or changing their behavioral dynamics. The author—formerly the president or chairman of two global financial firms, an independent director of several large industrial companies, and a longtime scholar of corporate governance—identifies three chronic deficiencies of boards: They tend to be too large to operate effectively. Members often lack sufficient expertise in the relevant industry. And few devote enough time to fully understand the complexities of the business. In this article, Pozen presents a new model for the corporate board. HBR Reprint R1012B

When the name Robert S. McNamara is mentioned, one thought usually springs to mind: the tragedy of Vietnam. But McNamara’s career was brilliant long before he served as secretary of defense under presidents Kennedy and Johnson—and long after as well. Spanning five decades, it included leading roles in academia (as a professor at Harvard Business School in the early 1940s), private enterprise (as an executive who helped turn around the ailing Ford Motor Company after the war), government (in his

No longer content with being the world’s factory for low-value products, China has quietly opened a new front in its campaign to regain its place as the globe’s most powerful economy: The country is on a quest for high-tech dominance. In pursuit of this goal, the Chinese government has ensured that it will be both buyer and seller in certain key industries by retaining ownership of customers and suppliers alike. It has consolidated several manufacturers in those industries into a few national champions to generate economies of scale and concentrate learning. And it is co-opting, cajoling, and coercing multinational corporations to part with their latest technologies, imposing regulations that put those companies’ CEOs in a terrible bind: They can either comply with the rules and share their technologies with would-be Chinese competitors or refuse and miss out on the world’s fastestgrowing market. China’s actions have provoked several disputes between Beijing and foreign companies and prompted some companies to review their strategies along one or the other of two lines. The first seeks to tackle the issue of how a multinational corporation can minimize competitive and security risks to its technologies. The second asks which innovations a foreign company must develop in China to gain advantage in the global market. Foreign companies doing business in China cannot wait for balancing macroeconomic forces or multilateral solutions; if they wish to survive as global technology leaders, they must bring greater imagination to bear on the problem. Above all, China’s maneuvers cast into doubt the optimistic premise that engagement and interdependence with the West would cause capitalism and socialism to converge quickly, reducing international tensions. Storm clouds are gathering over China and the U.S. in particular. Can two economies with such radically different structures and objectives peacefully coexist? Most people expect that the systems will eventually become more similar. However, the authors argue, this will happen only when China becomes as rich—and as technologically advanced—as the U.S. HBR Reprint R1012H

The Case for Professional Boards

Robert S. McNamara and the Evolution of Modern Management

McNamara summarized his approach with two principles: “Maximize efficiency” and “get the data.” seven-year stint at the U.S. Department of Defense), and humanitarian service (as president of the World Bank for more than a decade). In this illuminating essay, Rosenzweig, a professor of strategy and international business at IMD, presents McNamara not only as an idealist and an accomplished manager but as the personification of management itself in his time. In his work we see the evolution of the discipline, from the development of frameworks to make sense of markets and organizations, to the embrace of quantitative analysis in decision making, to the growing understanding of human psychology. Vietnam was a crisis that revealed the limitations of managerial thinking at the time, but McNamara never stopped learning. As the discipline of management continued to evolve, so did he. In the end, his willingness to examine the mistakes of the past and learn from them may be his greatest legacy. HBR Reprint R1012G

GLOBALIZATION

China vs the World: Whose Technology Is It? Thomas M. Hout and

December 2010 Harvard Business Review 141

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142 Harvard Business Review December 2010

What’s the Hard Return on Employee Wellness Programs?

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ORGANIZATION & CULTURE

Employee wellness programs have often been viewed as a nice extra, not a strategic imperative. But the data demonstrate otherwise, according to Berry, of Texas A&M University; Mirabito, of Baylor University; and Baun, of the University of Texas MD Anderson Cancer Center. Their research shows that the ROI on comprehensive, wellrun employee wellness programs is impressive, sometimes as high as six to one. To achieve those kinds of results, employers cannot merely offer workers a few passes to a fitness center and nutrition information in the cafeteria. The most successful wellness programs are supported by six essential pillars: engaged leadership at multiple levels; strategic alignment with the company’s identity and aspirations; a design that is broad in scope and high in relevance and quality; broad accessibility; internal and external partnerships; and effective communications. Companies in a variety of industries—including Johnson & Johnson, Lowe’s, H-E-B, and Healthwise—have built their employee wellness programs on all six pillars and have reaped big rewards in the form of lower costs, greater productivity, and higher morale. Those benefits are not easy to achieve, and verifiable paybacks are never a certainty. But the track record inspires emulation, especially when you see the numbers. HBR Reprint R1012J

ISSUE DATE FOR THE CIRCULATION DATA BELOW September 2010 (filed and subject to audit)

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HBR.ORG

How I Did It

Managing Yourself

LEADERSHIP

What Brain Science Tells Us About How to Excel Edward M. Hallowell | page 123

Best Buy’s CEO on Learning to Love Social Media Brian J. Dunn | page 43

M Millions of p ple are peo Experience struggling s at A w work. Some are in the wrong jo Others feel jobs. n connection to no t their colleagues o engageor tasks The result ment with their tasks. is rampant dissatisfaction and underachievement. Hallowell, a child psychiatrist specializing in learning differences, describes the Cycle of Excellence, a plan for helping people achieve peak performance. It consists of five steps: Select a job that reflects what you like to do and what you do best and that adds value to the organization. Research has shown that good job fit reduces stress and increases satisfaction and performance. Connect with the people around you. Robust relationships in the workplace galvanize people and CRUCIBLE 130 An emerging markets entrepreneur battles back from betrayal

t greater the the How I Did It… Best Buy’s CEO on d demand for Learning to Love Social Media c connectivity a the PCs and and m mobile devices I tthat deliver it. TThat’s why Best B Buy has a Twitte ter feed called Twelpforce cu Twelpforce, where customers can post tech problems and company associates or other users can post solutions. Dunn acknowledges that social media can have a downside— such as when his Twitter account was hacked in a particularly embarrassing way, causing a brief crisis at Best Buy—but he remains a committed fan. HBR Reprint R1012A HBR.ORG

THE IDEA

Despite the headaches they can cause, sites like Twitter, Facebook, and YouTube are powerful tools for spotting trends and communicating with employees and customers. That’s why Brian Dunn intends to keep posting.

by Brian J. Dunn

was on an overseas business trip early this year when my phone began ringing at 4 AM. The first person to reach me was Best Buy’s VP of operations, but she wasn’t the last—I received a quick series of panicked calls. The “crisis” we needed to manage involved my Twitter account. Ordinarily, I tweet on a variety of subjects— my experiences in Best Buy stores, my kids, even my thoughts on the Minnesota Twins. But this morning my coworkers back in the U.S.—and my 5,000 or so Twitter followers—had read a rather unusual tweet from me: “I’VE BEEN HAVING A LOT OF GREAT SEX LATELY, AND HERE’S WHY.” It was followed by a link to a website, presumably one offering male enhancement pills. Obviously, I’d been hacked. It was embarrassing and irritating. I felt violated. Like many people, I’d been using a password that was easy to remember because it was based on something in my life. We never figured out who got into my account, but it shouldn’t happen again: Having received help from my IT team, I now use well-constructed, tortured passwords, December 2010 Harvard Business Review 43

THE GLOBE MARKETING

CASE STUDY 133 Could a chief sustainability officer help win business?

SYNTHESIS 138 Why the internet might destroy us

LIFE’S WORK 144 Manolo Blahnik on shoe design success

Managing Your Professional Growth hbr.org

MANAGING YOURSELF

What Brain Science Tells Us About How to Excel A doctor’s prescription for achieving peak performance by Edward M. Hallowell

ILLUSTRATION: JON HAN

When Dunn’s interest in social media began, about five years ago, it was a personal interest, not a strategy. Now he uses Twitter and Facebook to connect directly with customers and employees, watch trends, and keep on top of the news. On Memorial Day 2010, after Dunn tweeted a simple thank-you to U.S. service members and Best Buy employees in the reserves, a company product specialist let him know that her fellow employees had put together a technology system that enabled her and her three children to talk with their father, a soldier in Iraq. To Dunn, this was a moment of serendipity—and an illustration of how important his employees’ work can be. Social media are absolutely core to his company’s strategy, Dunn says, because the more people become involved with them,

s a child psychiatrist, I’m asked every day to help a struggling young person do better. For example, I recently saw a boy I’ll call Tommy, who was floundering in sixth grade in spite of increasingly vehement exhortations from his teachers and parents to try harder. I could see how downcast he was, so I immediately turned to a process I’ve developed for kids like him. It began with figuring out what he liked to do (build things and play guitar) and what he was good at (math, science, music, and hands-on projects) and urging him to do those things more often. I also arranged for him to be switched out of a class where there was a clear conflict with the teacher and into one where he felt more at ease, and I advised the adults in his life to make sure he was imaginatively engaged in the classroom, not just sitting there, bored. I told them to challenge Tommy but not in a punishing way; the message should be “I’m asking more from you because I know you have it in you.” Within weeks, he was working harder and was even eager to go to school. He started to receive positive feedback, which fueled his desire to work harder still. You may be asking how this story applies to you, an adult working in— perhaps running—a complex business organization. Many people at work feel exactly the way Tommy did at school. Consider these three executives: Megan, a marketer with superlative skills and work habits, has to drag herself to the office because the culture at her company

December 2010 Harvard Business Review 123

Business Book Summaries in the Palm of Your Hand.

Let Emerging Market Customers Be Your Teachers

Anywhere. Anytime.

Guillermo D’Andrea, David Marcotte, and Gwen Dixon Morrison | page 115 M Multinational retailers have b been slow to understand c consumers in the developing w world. As a result, they’ve S b been vulnerable to local c competitors that know how Let Emerging Market Customers t their shoppers think, what Be Your Teachers t they crave, and how they b These local retailers offer buy. some valuable lesson lessons: Forget the myth that the high end is the most lucrative segment. In emerging markets, the number of affluent consumers who could champion your product is small, and the wealthy tend to favor shopping trips abroad. Instead, aim your products at low-income segments from the start. Cater to consumers’ tendency to buy a lot of the cheapest products and a little of the best by providing decent quality at the low end and aspirational choices at the high end. Turn your stores into centers of learning, where shoppers can fill the gaps in their product knowledge. Expect the unexpected and develop quick reflexes—you’ll need them to deal with the rapid market expansion and demographic change of emerging economies. HBR Reprint R1012K The Globe

build their engagement with their jobs. Small talk may seem trivial, but it pays big dividends. Play on the job. It sounds like an oxymoron, but people do their best—and are most satisfied— when they’re imaginatively involved with their work. And when you’re hard at play, you're building your brain. Grapple and Grow—that is, work hard to achieve a difficult task. The stress you may feel as you engage with a tough assignment and connect with others to complete it is not the toxic kind. Shine in the acknowledgment of your achievements. Praise releases chemicals that make us feel good, and it fills our uniquely human need to be of value, to matter. If you aren’t getting it, ask for it. The need for recognition is fundamental to optimal human performance. HBR Reprint R1012L

HBR.ORG

PHOTOGRAPHY: ALEX DE JESUS/AP IMAGES

Shoppers at a Magazine Luiza store in Belo Horizonte in southeastern Brazil. The chain is one of Brazil’s largest appliance and home electronics retailers.

You can learn a lot about consumer marketing in the developing world by looking at how retailers engage with shoppers. by Guillermo D’Andrea, David Marcotte, and Gwen Dixon Morrison

ure, you’ve crafted detailed marketing plans for your products in those fast-growing emerging economies, but do you know how consumers will respond in the store aisles? If you don’t, you’re vulnerable to competitors, particularly local ones, who know how emerging market shoppers think, what they need, what they crave, and how they buy. Multinationals have been slow to understand consumers outside Europe and North America: Baseball bats were met with amusement in soccer-loving Argentina; gardening tools flopped in Latin America’s yardless neighborhoods. Unilever, having established its Ala powder detergent as a leader in southern Brazil, was unable to build a strong position in the northeastern part of the country, where women wash laundry in streams and prefer bar soap for the task. Procter & Gamble’s Always feminine hygiene line, which had done well in the United States, hit a wall in Mexico, where women did not like the product. Local retail chains, by contrast, have been quick to understand their customers and develop offerings and approaches that work for them. As a result, a new generation of retailers have steadily captured market share from savvy street vendors and December 2010 Harvard Business Review 115

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Experience

Life’s Work

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hbr.org HBR.ORG To read the extended interview, go to hbr.org/blahnik.

Manolo Blahnik

is one of the world’s most successful shoe designers. Raised by his Spanish mother and Czech father on a banana plantation in the Canary Islands, he studied law, languages, and art in Geneva and Paris before opening his London boutique in 1973. His eponymous company now has shops or department store concessions in 20 countries, yet Blahnik has retained full control of the business and still designs every shoe—even hand carving the wooden form around which it’s crafted— himself. Interviewed by Alison Beard

see people walking in shoes, how they decorate feet. They bring a refreshment to people’s lives. They’re entertainment for women—or their husbands.

Were you immediately successful?

I didn’t have a clue. It took me about 10 years to learn the craft—not in school, in the factories. But I was lucky to have incredible women around me who were mad about what I was doing—Bianca Jagger, Paloma Picasso, Marisa Berenson, so many. My shoes looked different from the horrible platforms of the time. I was a classicist, inspired by the 19th century. I guess that was the trick of it.

How do you balance art and commerce?

I’ve never been a great strategist about what sells. I do fashion, yes, but I think it’s obscene to change drastically from one season to the next. Of course, I’m aware of the climate now. And maybe the shoes are expensive for some people. But they are made by hand with beautiful materials, so you cannot produce them for $150—no, impossible. But they last; you’re not going to buy them and throw them away a few months later.

Would you ever partner with a low-cost retailer to create a less-expensive range?

If somebody asked me, yes. Why not? If you can afford the same silhouette and instead of using the most beautiful chiffon, you can do it in wonderful linen, that is great. I adore that idea.

tional law, but I wasn’t into it. So I asked permission to go to art school, and I found my way. I wanted to do something creative, something with my hands. I moved to England, and the people doing exciting visual things there interested me tremendously. [The fashion designer] Ossie Clark was the one who said, “Do the shoes for my show” in 1972. But if I’m doing shoes today, it is because I came to America and showed my drawings to Diana Vreeland, who was the editor of Vogue at the time. That’s when I started to do shoes for real. I was hooked.

Why shoes?

Because they have a life for themselves: You have them on the floor; you look at them as objects. A dress, you have to wear it. I also love the way you 144 Harvard Business Review December 2010

Why have you stayed independent?

I don’t like large companies, where they have these endless meetings to do one little detail. I can’t deal with these things. We’re a family-owned company— my sister, my niece, a few people more. And that’s easier for me, because if I have a moment of panic or rage, I just say, “I’m sorry.” I design all the shoes myself, and I wouldn’t have it otherwise. I don’t want to be influenced. Sometimes I’m successful, sometimes I’m not, but it’s my product, my idea, and I follow it to the end.

Including overseeing work in the factory.

Yes, that’s my relaxation. Sometimes I’ve been there all day, and I say, “My God, I don’t believe it’s so late. I have to sleep.” Time goes quickly because I’m enjoying every second. I’m lucky to do what I love and, on top of that, have a little success.   HBR Reprint R1012P

Photography: steve double

HBR: How did you become a shoe designer? Blahnik: My father thought I should do interna-

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