Harvard Business Review - September 2010

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SEPTEMBER 2010

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Why Men Still Get More Promotions Than Women Herminia Ibarra, Nancy M. carter, and Christine silva 39 How I Did It

Timberland's CEO on Standing Up to 65,000 Angry Act ivists Jeff Swartz 106 Managing Yourself

The Boss as Human Shield Robert I. Sutton

Why the world needs audacious business solutions

SPOTLIGHT PAGE 55

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AbouttIY Spotlight Artl$t

Josh Keyes was born in Tacoma, Wa sh ington. He received a BFA in 1992 fro m

the School o f the Art Inst itut e of Chicago and an MFA

in 19 98 from Yale. Keyes is influenced by eighteenthcentury aesthetics and

drawn to scientific textboo k illustrations, which express the empirical "truth" of the world. He incorporates into

his work many references to contemporary events. along with images and themes from his personal experience. These elements come together in a vision that spea ks to the hope. fear, and anx iety o f our time . (see Keyes's w ork starting on page 55.)

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56 A New Alliance for Global Change The " hybr id value chain" is a business model that enables companies t o t ap into new markets, social entrepreneurs t o increase t heir impact , and people's tives t o be much improved. Bill Drayton and Valeria Budinich

66 Making Social Ventures work Many won't survive. But you can improve your odds by defining possibilities, redirecting st rat egies. and learning as you go. James D. Thompson and Ian C. MacMillan 74 The High-Intensity Entrepreneur In unexamined corners of th e developing world. savvy. driven entrepreneurs have built ventu res t hat are poised for significant growth. They j ust might reenergize t he global economy. Anne S. Habi by and Deirdre M. Coyle. Jr.

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Josh Reps. S..... rmlng (The Hollow Rumble of w ln9 ' ). 200 8.

ac::ylic on canvas, 30 x 40" HBR.ORG

Read an excerpt from Tarun Khanna's Billions

of Entrepreneurs. hbr. orglslHltlightl entrepreneurs

September 2010 Harvard Business Review 3

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Feat ures September 2010 THE BIG IDEA

The Judgment Deficit Individual reasoning is crucial to the success of the modern economy. Yet in recent years the financial sector has increasingly replaced it with statistical models. to disastrous effect. Amar Bhide

80 86 '-'12

Why Men Still Get More Promotions Than Women It comes down to the difference between mentoring and sponsorship. Herminia Ibarra,

Nancy M. Carter, and Christine Silva

Four Mistakes Leaders

Keep Making These deep-seated behaviors block organi· zational change. Overcome them, and you'll see major gains. Robert H. Schaffer

80

of men were actively mentored by a CEO or anothe r se nior executive in 2008, compared with 69% of women

Kaiser Permanente's Innovation on the Front Lines A blend of anthropology, journalism, and empathy can lead to radical improvements

in the quality of health ca re delivery -or any people-b ased business-wi thout requiri ng expensive technology. Lew Mccreary

HBR.ORG AMAR BHIDi

Listen to our interview.

blogs.hbr.orgl ideaeast 39 HOWIDIDIT

Timberland's CEO on

Standing Up to 65 ,000

Angry Activists Under attack from c reenpeace supporters, an environ mentally committed boctmaker suddenly had to face a t ro ubli ng question : Was it inadvertently harming the Amazon rain forest? Jeff Swartz 99 THE GLOBE

A Cautionary Tale for Emerging Market Giants The very factor s pr opelling the r ise of BRICnat ion com panies may be thei r undoing. A fr esh look at t he stall-out of Japan's juggernauts explains why. J. Stewart Black and Allen J. Morrison 6 Harvard Business Review september :1010 Scan & PDF: worldmags & avaxhome

Cows, trees, and boot s.. ,

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Departments September 2010 HBR.ORG BENSRAOLII

12 From the Ed ito r

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The more you gossip, the greater your informal influence among your peers,"

Int eracti on

Idea Watch

page 28

21 FIRST

30 VISION STATEMENT

CEOs with Headsets

Tired of PowerPoint? Try This Instead.

Analysis of NCAA coaches' salaries shows how hard it is to align elite leaders' pay with performance. PLUS rxpats and creativity, anger's insidious effects, and the neurology of strategic t hinking

GOSSIP .TWORK

Do you think it has value? Add your comments at hbr.orgl magazine .

Helping people make connec tions and boost their recall t hrough visual representati on 32 STRATEGIC HUMOR

28 DEFEND YOUR RESEARCH

COLUMNS

It's Not "Unprofessional" to Gossip at Work

34 sethGodln If you care about value, you'll broaden your definition offailure.

Gossip can actually be good for your company and your career.

Read the extended interview. hbr.org/brad lee

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DanAriely

Chile forces its people to make better finan cial decisions -whether t hey like it or not.

STRAIGHT MARR IEO WOMEN

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A lead er's defining mom ent page 110

Experience 106 MANAGING YOURSELF

117 CASE STUDY

The Boss as Human Shield

When the Longtime Star Fades Bob is a music legend - but he's losing t ouch wi th t he ti mes. Should his label keep him? Jimmy Guterman

Protecting your employees from t hreats t o their prod uctivity requires courage, foresight. and a healthy dose of self-awareness. Robert I. Sutton

122 SYNTHESIS Reviews 110 CRUCIBLE

A New will to Win How NASCAR team owner Rick Hendrick rebuilt his company after a plane crash killed his son and most of his management team. Daniel McGinn

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125 EXECUTIVE SUMMARIES

'28 LIFE'S WORK Ben Bradlee The editor who led the Washington Post through Watergate talks about hiring, inspiring. and the future of pr int .

To fiod out why Sa Diogdinog ;s a tan visit _ ,(fa dao i oie..tal,com BANGI«){ · ElIl.nLONA • OCISTON • CHWlG MAl • GENEVA· I()NG KONG · JAKARTA · KlJAI.A l.lJMP\.I'l • LAS VEGAS • LONDON · MACAU • MANILA MIAMI· MUNICH · NEW '«'lR< • ~ • RIVIERA lMYA • SAl' FRANCISCO · SAINiI • SiNGAPORE · TOKYO • WASHINGTON D.C. Scan & PDF: worldmags & avaxhome

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This month at hbr.org How Technology Is Fueling Social Entrepreneurship View our slide show about social entrepreneurs that are using new technologies in breakthrough ways.

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Imagining the Future of Leadership Harvard Business School convened dozens of experts for a symposium on what t he future of leadership might look like. Starting September '4. you can watch video highlights from the event. btogs.hbr.org/video

hbr.org/spotlight/entrepreneurs

Webinars with Management Experts

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Watch our archived videos and read our commen tary. bLogs.hbr.org/events

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Discovery-drivenplan ning expert Rita McGrath of Columbia Business SChool btogs about executing on strategy and innovation. blogs.hbr.org/hbr/ mcgrath

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You've heard of Ente rprise 2.0. but what does it mean for your firm? Find out from the ma n who coined t he term, MIT research scientist Andrew McAfee. blogs.hbr.org/hbr/ mcafee

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From the Editor Turning Challenges into Opportunities n a celebrated 2002 article in HBR, Warren Bennis and Robert Thomas wrote t hat great leaders often emerge out of the depths ofadversity. Severe tests can prompt managers to reflect on their values an d beliefs and draw from their core the skills and perspective need ed to become exceptional, inspiring bosses. The authors called these challenging moments crucibles, "after the vessels medieval alchemists used in their attempts to turn base metals into gold ." We are honoring their end uring insight by introdu cing a depart ment tit led Crucible. Each mont h we'll profile a business leader who has undergone a jarring test and show how it affected him or her and changed the company's outlook. This mon th we examine how NASCAR team owner Rick Hendrick, of Hendrick Motorsports, managed to pick up the pieces after a devastating plane crash killed his top executives and several ofhis family members. His resilience and adaptivity helped propel his auto-racing teams to record achievements. Wealso focus in this issue on t he growing sphere ofentrepreneurship. In ou r spotlight package, we pose a big, audacious question-Can entrepreneurs save the world?- and look to some big, audacious authors for answers. Increasingly, the new impresarios ofbusiness are turning up in emerging economies. The trick for governments and Western businesses searching for opportunities in these markets, say Anne Habiby and Deirdre Coyle, Jr., fou nders ofthe internation al economic development firm AllWorld Network, is to fi nd these entrepreneurs, nurture them, and unleash their potential to develop innovative businesses that can drive global prosperity. Even more optimistic are Ashoka's Bill Drayto n and Valeria Budinich, who argue that a coming era ofcollaboration betwee n corporations and social entrepreneurs promises to expand and create markets on a scale not seen since the Ind ust rial Revolution. Finally, Wharton's Jam es Thompson and Ian MacMillan offer practical advice for entrepre neurs trying to build companies in today's un certain economic climate. To succeed, they say, you must launch experiment s, learn from them, and be agile enough to adapt your strategy along the way. And then who knows? You just might save the world.

I Illustrating this month·s Spotlight package is Josh Keyes, an oregon -based multimedia artist whose work is known for its often unsettling combinations of man-made objects and the natural world.

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ABOVE Detail from Shedding, 2009 acrylic on panel, 30· x 40'

Adi Ignatius, Editor in Chief

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The power of virtualization.

Simplicity is essential. At Citrix, we believe enterprise computing has become far too complex. Web-era companies have changed the rules. With cloud computing and software as a service, it's now about

minutes instead of months, pennies instead of dollars. II's lime for enterprise IT to embrace a service-oriented model that's powerful, versatile and cost-effective. In short, it's time for IT leaders to step up and simplify. Simplicity is flexibility. We believe in virtualization. Instead of grappling with infinite combinations of desktops, applications and server workloads, virtualization allows you to manage one copy of each. Assemble them dynamically at runtime. And deliver as rich, personalized, on-demand services. Simplicity is savings. We harness the power of virtualization, networking and the cloud to dramatically reduce the cost of computing , To put unprecedented control into the hands of IT. To keep your business competitive. Profitable. Unstoppable. Simplicity is power. Citrix. Citrix.com/SimplicitylsPower.

CiTRIX· • 0 2009 Citri. Systems, Inc. All rig/1tsreso",,",

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Interaction

" N o, Management Is Not a Profession HBR article by Richard Barker, July-August 2010

"It is natural to view manage-

No,

ment as a profession. Manag~~ Al .J! ~,., ers' status is similar to that --- .-of doctors or lawyers, as is 1 - - -------their obligation to contribute ----to the well-being of society.... [But] management is not a profession at all and can never be one;' writes University of Cambridge professor Richard Barker. "The professional is an expert, whereas the manager is a jack-of-all-trades and master of none!' Good management, then, relies on the smart integration of knowledge, skills, and experiencea competence that cannot be taught and must be learned on the job.

""""-"

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move toward bei ng a p rofessio n in wh ich people are t ested and certified on t heir abiLity to think integrati vely. Still. Let's not run before w e can walk. Posted by Roger Martin, Dean. Rotman School of Management. University of Toronto

Sq uabbling over t itles is an academi c pursuit of no value. The real world is int erested in results, not positio n or status. Posted by Chuck Blakeman, Founder, The Crankset Group

::.=~-:::.

If you believe managing your subordinates means sharing your knowledge and inspiring them to achieve better resuLtsthen management is a profession . However, if you t hink management is giving o rders and pu shing peo ple around , then it is not . Posted by Olena Mishakova. Market Intelligence Specialist, Samsung Electronics Ukraine

At the heart of thi s debate is t he que sti on,

Why sho uld management be considered a p rofession? Most proponents argue that the impact a manager's acti ons can

Barker falls prey to a logical fallacy t hat I experience every day in my world of

business education-peopte beLieve that because something is not taught, it is unteachable. It's a handy argument, of course, because it enables management educators

I be lieve t hat integration is absolutely teachable, and teaching it is the challenge

hav e on society is reason enoug h. And

my colleagues and I set ourselves up for.

a g row ing sociaL inequality, reaching way

Success will not be easy; it req uires rig or-

beyond their orga nizat io ns and share-

ous advances in managem ent t heory and

holders , managers must act more et hi-

smart ped agog ical development t o bri ng

cally, and t heir cond uct sho uld be more

everywhere t o sit on t heir hands and con -

those advances t o life in t he clas sroom.

t inue to teach t he easy st uff they've taught for the past 50 years.

If we and ot her business schools can get there, t hen perhaps management could

because t hose action s are co ntributing t o

" p rofes sional." Posted by Kamini Kinger. Cofounder, Krysalis Social Impact Advisors

Blog post by Jeffrey pfeffer, June 2010

~

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Oprah, Tiger, Lady Gaga: Do They Really Have Power?

The Forbes Celebrity 10 0 ranking inspired Jeffrey Pfeffer to consider who truly has clout. "You can't really claim power unless you can 'have your way' through your influe nce over others," he concl udes. "By that measure, some of the most powerful media figures aren't any of t hose on the Forbes list."

after day in my own house. I have two teenage girls, and the effects of Gaga (and Madonna before her) on emotions and identity are strong. She encourages young wo men and girls to be comfortable in their own skin and shows t hat it is OK to be weird -even

better than OK.

Also, Gaga is a vehement supporter of gay rights. So if her popu larity persist s,

I accept your argument that in terms

high as the others on your list. But you

she may have an impact on voting pat-

of what people do -their choices and

leave out two kinds of powerful influ-

terns over t he long haul. On t he other

actions-Lady Gaga does not rate as

ence t hat Gaga has th at I see day

hand , I think your analysis applies per-

16 Harvard Business Review September 2 0 10 Scan & PDF: worldmags & avaxhome

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You get bad breaks from good shots; you get good breaks from bad shotsbut you have to play the ball where it lies. - BOBBY JONES

To underst and that management is a profession, compare a company with a human body. The manager's role is to make t he different parts work t ogether properly and healthily, so that the whole body can achieve its maximum outc ome. people who don't have the right knowledge or training can't do t his. Experience? Ye s, you can also learn a few things through experience, but t o grasp how everything fit s together, you need more t han that. Post ed by Sitke Green, Management Consultant

We help' you out of the rougli. These days. even the most successful organizations are fa cing new and unexpected challenges. Traditional approaches to management that may have worked in a booming economy are no longer sufficient to meet the demands of a changing marketplace. At MIT Sloan, we prepare

Barker responds: The very nature of integration is pulling together disparate elements of knowledge, skills, and experience, and this process-because it takes place within the mind of an individual-is, at its

heart, unteachable. This realization matters a great deal for the design of effective business education. If we want to improve the quality of learning in MBA programs, we must recognize that teaching is but one of the mechanisms by which we learn, and not always the best. Arguing that the classroom is only one piece of the integration puzzle absolutely does not, as Roger Martin asserts, give license to "management educators everywhere to sit on their hands and continue to teach the easy stuff they've taught for the ~~ past 50 years." ••

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Nov 3D-Dec 1 Building. Leading. and Sustaining th e Innovative Organization fectlyto Paris Hilton, whose main skill is attracting attention, and I don't think her behavior has deep effects on the identity or emotions of her fans. I t hink Gaga is a different case, although it may be too early t o tell. Listen to her and her message-she isn't famousj ust for being famous. Ro bert Sutton, Professor of Management Sc ience and Engineering. Stanford Univer sity

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Developing and Managing a Successful Technology and Product Strategy

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Learning from

reo rg was more of a cost-saving measure and a quick fi x to a ppease shareholders than a decis ion ba sed on ratio nal risk analysis. Flat organi zational setups have always prove n to be more efficie nt t han hie ra rc hies- unless they're established mindlessly. Posted by Kinshuk Agarwal, Senior Analyst, e-c omrrerce Channel Technology. Bank of America

BP's Mistakes

HBRblogs, J une

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As BP'S oil spill reached epic proportions, HB R.org's btoggers examined what went wrong, focusing not on who was to blame but on what lessons leaders could ta ke away from the disaster. "The Accident That BP Got Transparently Right," by Michael Schrage "One immediate insight emerging from the muck is that people literally want to see what's going on....That's why 'strategic transparency' will receive an enormous technical and conce ptual boost from this unhappy episode." Let us remembe r two t hings: First, "st rategic t ransparency" was forced on BP by U.S. congressman Ed Markey. BP did n't come to it wiUingly. Second, t he e nginee ring lite racy of t he average viewer of t he stream

I'm sure BP's employees would like to do the right things. but they seem trapped in a cult ure that inhibits them from doing

so. - CorDell Larkin (including t he media inte rpreters) is a bout zero. seeing is one th ing, but unde rsta nding is anot her- and, in t he e nd, fa r mo re important. Posted by Eric McNulty, National Preparedness Leadership Initiative, Harvard School of Public Health schrage wrote, "If we can see underwater ve hicles fi xing ruined oil wells a mile beneat h the sea, then why can't we see our ca r being made, our de layed plane's location, our child's nurse ry school class, o r t hat alleged sweatshop in Sri Lanka?" 18

Harvard Business Review September 2 0 10

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I unde rstand and fully s upport t he need for t ran spa rency, but I think we're screwed if we feeL the need to monitor our cars com ing off produ ctio n lines. Complete t ra nspa re ncy is to some degree at odds wit h tru st ; ifyou get to see everything, what need is t he re to t rust a nything? Posted by Joseph Kingsbury, Senior Vice President and Director of Online Engagement in Corporate & Public Affairs. Edelman "BP's Tony Hayward and the Failure of leadership Accountability," by Rosabeth Moss Kanter ':A true leader should apologize quickly and ta ke responsibility." That sounds wonderful in t heo ry, but I t hink you'd be hard-pressed to fin d it in the business world. Accepting blame isn't the sale decision of the CEO. The re are Legal tea ms that sit and pore over t he opt ions. What's more, taking responsibility for what may be one of the worst disasters in history just to save your job? Seems questio nable. Posted by Rob Ridder "Why BP Crashed and Killed the Gulf," by Jeffrey Stamps and Jessica Lipnack "[Hayward] aimed 'to improve performance by simplifying how the company is structured'-specifically, to create a 'fI0tter' organization .... /n reality, BP's reorganiza· tion was likely suicidal." Haywa rd's testimonials seem juvenite a nd unprofessional at the core, to say t he Least. With t hat leveL of judgment and ownership, it shouldn't come as a surprise t hat the

"The BP Brand's Avoidable Fall," by Stephen A. Greyser "The stark con trast betwe en BP's image and reality has substantially wea kened the company's reputation. The company's green multipetaled logo is well on its way to being a symbol of environmental disaster." At t he end of the day, BP provides a product that people need. Ift he com pa ny offers petrol at competitive prices in t he most convenient places, I don't t hink ma ny people will make t he decis io n to buy it elsewhere just because of rece nt eve nts. BP's brand and s hare vatue may be falling right now, but in t he long te rm its sales will stay strong. Posted byColin Cooper, Proprietor, ccsctonons "I'm Thinking About BP's EmpLoyees," by Vineet Nayar ':Around 80,000 people in 100 coun tries work for BP. Most don't cause oil wells to fail and gush into oceans." I a m re minded of o ne of my favo rite Peter Druc ke r q uotes : " Ma nage me nt is doing thi ngs right ; leadership is doing t he right t hings ." BP has been we lL ma naged fo r some time -its operati ng ma rgin has histo rically been bette r t han 70% to 80% of its competitors'. But th e incident in the Gulf shines a light on t he compa ny's a ppa rent lac k of leade rship to do t he "right t hings." I fee Lfor t he majo rity of BP's e mployees, who I'm s ure wou Ld like to do t he right t hings but appear trapped in a cultu re t hat inhibits t hem from doing so. Posted byccroen Larkin, Principal. .... .... corneu & Company ••

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FIRST

CEOs with Headsets Analysis of college coach compensation shows how hard it is to align pay with performance. by A ndrew Z imbalist •

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ack in 1924 , Cente nary College in Shreveport, Louisiana, was denied accreditation by the Southern Association ofColleges and Schools because the school placed an "undue emphasis on athletics."The primaryevidence ofCentenary's misplaced priorities was that the college paid its football coach more than its president. The next year th e football coach was gone and the collegegained accreditation . Starting in the 1950s, Bear Bryant, the legendary footb all coach at the University ofAlabama, insisted his salary be $1below that of the school's president and kept it that way for his nearly quarter-cent ury tenure. Bryant believed that it was symbolically important for the university president to be paid more than the head football coach . Today, suc h policies h ave been rei· ega ted to the dustbi n of histor y. The cult ofthe leader has in filtrated college athletics. Coaches are CEOs wit h headsets, and ju st like real CEOs, they wa tch their pay climb steeply even as their organizations face stagnant revenues. From 2007 t02009, head football coaches' salaries rose 46%, to an average of $1.36 million in the Football Bowl Subdivision (FBS) of Division I. Some coaches earn five to 10 times what university presidents do. And this despite no real evidence that higher pay produces better results and some compelling economic evidence that it doesn't.

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Pay for Performance? At Bryant's Alabama , head footb all coach Nick Saban will begin his defense of a na tional title this mo nt h with a contract that, in addition to handsome perquisites, guarSepte mber 2010 Harvard Business Review 21

IDEA WATCH

Paid Less and Rewarded Less

This month we're looking at a few perspectives on t he different ial between men's and wome n's pay. Everyone knows th ere's a gap, but not everyone is bothered by it- and young women entering th e workforce seem oblivious to what's a bout t o hit them.

antees him $44 million through 2018. Saban's team won a national championship, but packages like his are not reserved for exceptionally talented leaders. Despite a 10- 15 record, for example, Texas A&M's Mike She rman earns $1.8 million , and if he were fired tomorrow he'd be guaranteed $150,000 a month through March 2015-a golden hands hake wor th about $9 million. More than 100 college football coaches' annual compensation packages surpass $1 million; over a dozen of them exceed $3 million. Bear in mind that this is happening while U.S. universities are in the midst of a serious financ ial crisis. Over the eight years that Saban will earn $44 million, full-time

In the UK, female executives tend not to reap the rewards of st rong corporate performance. That is in addition to the sizable gender gap in wages in the c-sulte. Data show that women's bonuses stay flat regardless of how well t he company is doing- in stark contrast to men's. The term "performance- based pay" is a misnomer when it comes to female Leaders, say clara Kulich of the university of Exeter and four others who studied UKfi rms from 1998 to 2004. The fact that women's bonuses are unaffected by company performance indicates "organizational apathy towards women," they say. EXPECTED BDNUSAS %OFBASE SALARY

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NEGATIVE COMPANY PERFORMANCE

ate. Higher salaries do no t correlate wit h higher performance or revenues in athletics, never mind witha strengthening ofthe educational mission of the institutions. To be sure, certain coaches have turned a rou n d t h e fortunes of teams, taking the m from oblivion to prom inen ce over the course of a few years, and, in doing so, have added significantly to the schools' reve nues. But these cases are rare. The vast majority of at hletic departments lose millions of dollars annually. According to the NCAA's latest report, the average operating defi cit at the 119 FBS schools in the 2007-2008 academic year was $8.1million. And that's excluding an nual capital costs, whic h, accordi ng to anot her NCAAreport,

POSITIVECOMPANY PERFORMANCE

by several factors: (a) no mo netary compensation is paid to the workforce, the athletes; (b)intercollegiate sports benefit from substantial tax priv ileges; (c) there are no shareholders demanding d ividend distributions or boards demanding higher profits; (d) athletic departments are nourished by university and state financial su pport; and (e) coaches' salaries are nego tiated by athletic direc tors whose ow n worth rises with the salaries of their employees. The outsize pay packages defy one of the central principles ofa competitive ma rket. Collegefootballand basketball coaches earn, on average, almost the same amount as their NFL and NBA pee rs, although college programs generate a fraction of the

If the NCAA were to place, say, a $400,000 limit on coaches' compensation packages, it would not materially affect the quality of coaching or schools' ability to attract top talent. faculty members at Alabama, whose salaries dro pped 1.5% last year, will amass an average of only about $650,000. Another stark case: DCBerkeley is facing reductions of $150 million in state fun ding, laying off faculty and staff, cutting enrollment, slashing course offeri ngs, and raising st udent tuition. Yet the university guaranteed its head footba ll coach, Jeff Tedford, a salary Of$2.8 million in 2009-2010. These compensation packages make no economic se nse. My research and ot hers', and the application of core economic principles, show that the pay far outstrips the value coaches and their assistants ere22 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

average more than $20 million. None theless, virtually every head football coach in the FBS-including those of perennially losing teams-earns more than $1 million, plus lavish perks and the pote ntial for significant outside income.

Untethered from Market Forces Defenders of the multimillion -dollar head coac hes' salaries chant the sa me mantra that defenders of exo rbitant CEO compensa tion packages do: "Compensation packages are driven by market forces." Perh ap s-but in collegiate at hletics market forces are arti ficially influ en ced

revenue ofprofessional team s. The top 32 college football programs bring in $40 million to $80 million, whereas NFL teams generate an average of about $230 million. The d isparity is eve n greater in basketball, where the top 30 Division I teams average about $15 million in revenu e, one-tenth the average NBA team revenue of app roximately $150 million. The factor con tributing most directly to the coaches' outsize pay is the at hletes' amateur status. In significant part, coaches are paid for the value produced by ot hers, most notably the athletes they recruit. That is, the marginal revenue prod uct ofthe star

HBR.ORG

Making Less and Happy

IN PROGRESSIVE COMMUNITIES

ASwiss stu dy find s that women's satisfaction with Life and work reflects not the size of the wage gap between men and women but, rather, whethe r the women's community values equal pay as a worthy goal. Rafael Lalive of t he university of lausanne and Alois Stutzer of the university of Basel discovered that employed women in communities with traditional gender views but high wage gaps were more satisfied with Life and work than women in areas with a smaller wage gap but greater community emphasis on the concept of equal pay.

FROM 1986 TO 2007 THE AVERAGE COMPENSATION OF••• HEAD FOOTBALL COACHES

rose 500%

HEAD BASKETBALL COACHES

rose 40 0 %

UNIVERSITY PRESIDENTS

rose 10 0 % FULL PROFES ORS

rose 30% Scan & PDF: worldmags & avaxhome

IN TRADITIONAL COMMUNITIES THE PAYGAP

WAS Ll. RGU

BUT WO MEN WERE LESS SATISFIED (ON • SCAlE Of 1 rc to}

players accrues largely to the head coach, rather than to the players themselves. The value produ ced from recruiting-whose success relies on many factors, such as assistant coaches, the sc hool's conference, its reputation and facilities -is attributed to the head coac h. This situat ion is ma rkedly worse than that in the corporate world, where giant pay gaps exist, to be sure, but employees ea rn a salary for producing value. Collegeat hletes make not hing.

Fixing the System It's clearly in the business interest of colleges and universities to better align their coaches' pay with the institutions' st rategic goals, performance of the teams, and revenue potential. It won't wor k to impose a Bear Bryant rule of matching coaches' salaries to college presidents'. That would only innate the presidents' salaries to accommodate the coaches'. Another approach would be to peg coaches' maximum compensation to some multiple of the average salary for assistant professors. If the approach raised professors' pay, that would be beneficial to the mission of the institution but would not be sustainable or realis tic from a cost perspective. Ibelieve there are compelling economic argu ments for capping coaches' salaries. If the NCAA we re to place, say, a $400,000 cap on coaches' compensa tion packagesabout five times an assistant professor's pay, which woul d also put coaches' pay in line with the average pay of co llege presidents-it would not materially affec t the quality of coaching or the college pro-

BUT WO MEN WERE MOllE SATISfiED (ON. SCAlE Of 1 to t o}

W ITH LIfE

W ITH J OB

grams' ability to attract top talent . Why? Because the pay for the nex t best alternative for elite college coaches (the reservation wage) is likely to be well below this level. Many of them would be reduced to coac hing at lower-division collegiate programs for a third of the cap ped amount, or at high schools for less than $50,000 a year. Any com pensation above the reservation wage is what economists call economic rent- that is, it's pay me nt above and beyond what is needed to achieve the des ired allocation ofresources. A sala ry cap wo uld meet wi th fierce resistance from the NCAA, of course. The NCAA has long funct ioned as a sort of trade association for coaches, athletic direc tors, and conference commissioners. Whywould they want to ca p themselves? And they would surely point out that a cap would most likely run afoul of antitrus t laws. Congress would have to grant a partial antitrust exemption to control salaries. True enough-but anyone who asked for such an exemption would probably find support from the Justice Department and Congress. The Southern Association of Colleges and Schoolsforced the issue on Centenary College many years ago. Collegepresidents and their organization, the American Council on Educa tion, could be just as effective in reining in coaches' pay today, by req uesting the exem ptio n. But they must first step up to the challenge. 0 HBR Reprint Fl009A " Andrew Zimbalist is the Robert A. Woods ~ Professor of sccocmrcs at Smith College. His lat est book, Circling the Bases: Essays on the Business of Sports. will be published this fall.

Se pte mber 2010 Harvard Business Review 23

HBR.ORG

IDEA W ATCH

The Gender Wage Gap

Fewer Routine Tasks • In Women s Work

•

GROWTH RAT'ES 1P
,

The gender wage gap has narrowed in recent decades, and one reaso n may be a marked decline in t he amount of rout ine work in women's jobs. That's according to Sandra E, Black ofthe university of Texas o and Alexandra sptte-oener of Humboldt u niversity. With t he introduction of computers in 1979, routine tasks such as operating machinery and calculating were dramatically reduced. Women, who disproportionately held such low-skilled jobs, moved into more analytic jobs, which tended to be higher paid .

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Be a Better Manager: Live Abroad

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24 Harvard Business Review Septe mbe r 2010 Scan & PDF: worldmags & avaxhome

fact, 60% of st udents who had previously lived abroad solved the problem compared with 42% of students who hadn't lived abroad. Interestingly, time spent traveling abroad had no effect on creativity. In another study, we asked undergraduates at the Sorbonne to complete a creativity test called the Remote Associates Task (RAT). Participants were shown t hree

People with international experience are more likely to create new businesses and products and to be promoted. words and asked to come up with a word that is associated with all of them. (For example, for "manners," "round," and "tennis," they'd need to come up with "table"; table manners, round table, table te nnis.) The students who recalled and wrote about an experience living abroad just before doing the RAT answered more questions correctly than those who recalled and wrote about other experiences. This creativity effect was even more pronounced in students who had made an effort to adapt to their host cou ntries. In a study of l33 1nsead students from 40 countries (15 of whom held dual citizenships),

OPERATING MACHI NERY

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1991

w. Maddux, Adam D. Galins ky, and Carmit T. Tadmor

ravel and living abroad have long been seen as good for the so ul. What's perhaps less we ll-known is that they're also good for the company. People who have international experience or identify with more than one nationality are better problem solvers and display more creativity, our research suggests. What's more, we found that people with this international experience are more likely to create new businesses and products and to be promoted . For exa mple, we ran an experiment in which 220 MBA students from Northwestern's KelloggSchool were asked to solve the famous Duncker candle problem. In this behavioral test, individuals are presented with three objects on a table; a candle, a pack ofmatches, and a boxoftacks. They're asked to attach the candle to a cardboard wall-using on ly the objects on the tableso that the candle burns properly and does not drip wax on the floor. The correct solution demands the ability to thi nk creatively: Empty the box of tacks and use it as a candleholder. The solution is considered a measureof "insight creativity" because it involves maki ng the "aha!" discovery that the box is not just a reposi tory for your tools bu t a tool itself. We foun d that the longer students had spent living abroad, the more likely they were to use the box as a cand leholder. In

MANAG INGAP
we found that creative enhancement was significantly higher for students who said they had adapted to the foreign countries while they lived there than for st udents who said they had not. Asubsequent study reinforced the fi nd ing. Israeli managers working in Silicon Valley who had incor porated bot h Israeli and American cultures into their personal identit ies (such people are called biculturals) had better professional reputations and got promoted faster than ma nage rs who identified themselves wit h on ly one cu lture or the other (rnonocultu rals). When we measured the ability ofthese managers to see and integrate multiple perspectives on different issues -what psychologists call "i ntegrative complexity" - we found that bicultural managers scored higher, and it was this enhanced integrative complexity that led to better job performance. In another study, we found that biculturals were more likely than monoculturals to crea te new products. Expat riate programs are good for developi ng better managers, our research suggests. We believe that companies could ma ke them even better by ensur ing that expats are not cocooned from the local culture during the ir stints abroad. The more expats interact with locals and local institutions, the more creative and entrepreneurial they'll become. \:' HBR Rep rint Fl009B "

Willia m W. Madd ux is a professor at ~ rnsead. Adam D. Gali nsky is a professor at Northweste rn's Kellogg School of Manage ment, and Carmit T. Tadm or is a professor at TelAviv Univers ity.

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IDEA W ATCH

The Rewards-and Penalties-of Parenthood Having children tends to result in higher wages for men, whether they're straight or gay, married or pa rtnered. Women are not so fortunate : Most mothers make less t han childless women, according to Amanda K. Baumte of the university of Houston, who analyzed 2000 U.S. Census data . Only lesbians get a salary bump from having kids: in fact , gay women's earnings advantage from parenthood is even greater than men's. aaumte's theory: In employers' stereotypical view, Lesbians maintai n a work t rajectory after having children that is more like t hat of a childless woma n or a man. Meanwhile, employers' perception of straight women's co mpetence drops when they have children, Baumle says.

STRAIGHT MARRIEO WOMEN

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THE KID EFFECT PERCE NTAGE DIFFERENCE iN SALARY FOR EACH GROUP BETWEEN THOSE WITH CHILDRE N (SHOWN HERE) AND TrlOSE WITHOUT. FOR INSTANCE. STRAIGHT MARRIED MOTHERS MA KE 4.4% l ESS THAN STRAIGHT MARRIED WOM EN WHO ARE CHILD LESS.

I DECISION MAKING by Jennifer S. Lerner and

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...

Katherine Shon k

How Anger Poisons Decision Making ou 're late for work, and it's pouring ra in . In the pa rking lot, a car speeds aro und you and takes the last spot near the building entrance. You end u p trudging fro m the back of the lot and get soaked to the skin. You're mad, and you know your judgment at the moment is probably impaired. Worse, the leftover anger will continue to color your decisions at work, our research suggests, without your awareness-not a good thing for anyone trying to steer the best course through the day'S business problems. Many organ iza tions ha ve anger managem e nt p rog rams for t heir most egregious bullies, but the reality is that the vast majority ofemployees will experience anger triggered by anything from a family quarrel to a lost parking space-and their work will su ffer for it. For example, angry people te nd to rely on cogni tive shortcutseasy rules of thu mb- rath er tha n on more sys tematic reasoning. They're also quick to blame individuals, rather th an aspects of a situation, for problems. Companies can effectively work around this human tendency and m itigate the im pact of anger-fueled actions in the workplace by introducing accountability. If you expect that your decisions will be evaluated by someone whose opinions you don' t know, you' ll unconscio usly curb the effects of ange r on th ose decisions. When you can't be sure how your evaluator wiltjudge your behavior, you'll pay more attentio n to the key fac ts of a situation, which will

Y

26

Harvard Business Review september 2 0 10

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the n crowd out the (unwanted) influence of your own feelings from past events. This find ing has im po rta nt implications for organizations and their populations of semirational, emotion-ridden individuals who endeavor to produce good decis ions in spite ofthemselves.

ANG ER'S LING ERING EFFECTS

participants in a study watched an enraging video and then served asjurors on unrelated lictionaltort cases. Those who knewthey would have to account for their decisions were better at managing the effects of their anger.

Unaccountable Accountable participants participants J udged the behavior Were evenhanded

of defendants in unrelated cases harshly

in subsequent decisions

Dismissed the mitigating circumstances in the situations

Based their decisions on the facts of the case

Faited to consider whether their decisions were defensible

Engaged in selfcritical thought about the defensibility oftheir decisions

Blamed others

Corrected for their tendency to bLame others

A study conducted by Jennifer S. Lerner wit h Julie H. Goldberg of the Univers ity of Illinois and Philip E.Tetlock ofUC Berkeley documented the psychological effects of residual anger. The stu dy found that people who saw an anger-ind ucing video of a boy being bullied were the n more punitive toward defendants in a se ries of unr elated fictional tort cases involving negligence and injury than were people who had seen a ne utral video- unless they were told that they'd be held accou ntable and would be asked to ex plain the ir decisions to an expert whose views they didn't know. After watching the bullying Video, the subjects in this accountable group were every bit as angry as the others, yet they judged the de fenda nts' behavior less harshly. Accountability appears no t to change what decision makers feel; rather, it changes how they u se th eir feeli ngs -a much mo re manageable objective for the workplace. Wit ho u t revea ling the ir ow n views, ma nage rs should inform employees that they will be expected to justi fy their decisions on certain projects- not just the outcomes-after the fact. By improving accountability, m anage rs can steer employees toward decisions free from the nega tive effects ofanger. I::' HBR Reprint noose " Jennifer S, Lerner is a professor of public a.:I policy and management at Harvard's Kennedy School and the director ofthe Harvard Decision Science Laboratory. Katherine Shonk is a research associate at Harvard Business School and Harvard Ke nnedy School.

HB R.ORG

College students' perceptions of the gender discrimination they'll face- or take advantage ofwhen t hey graduate are out of step with the reality that researchers have found in the workplace. The vast majority of abo ut 1,30 0 U.S. stu den ts surveyed in 2006 pred icted that gender wouldn't affect their payor promot ions, according to a study led by Stephanie Sipe of Geo rgia Southe rn University. Its fi ndings dovetail with t hose of other studies in which women report that their education left t hem unprepared for the discrimination t hey faced in their professional lives.

STRATEGY & EXECUTION by Roderick Gilkey,

said female grads would find it more difficult to network

but only

but only

13%

believed that gender bias would affect them personally

7% believed that networking would be harder for them personally

Ricardo Caceda, and Clinton Kilts

When Emotional Reasoning Trumps IQ anycompa niesandBschoolsstill trea t st rategy and execution as separate beas ts, despite increasing evidence tha t th e divide does muc h more damage than good. A large part ofthe problem may be that people view strategic reasoning as a high -level executive function of the brain and tactical thought as a discre te, lower-level activity. But the two kinds of thinking are linked in an important way: They both draw considerably on social-emotional reasoning, particularly in the brains of the most adept strategic thinkers. Indeed, strategic thought entails at leas t as much emotional intelligence as it does IQ.

M

In a recent study we cond ucted wit h Diana Rober tson and Andrew Bate of the Wharton School, we asked ma nagers in an executive MBAprogram to react to fictional s trategic and tactical management dile mmas and m easured their brain ac tivity using func tiona l magnetic resona nce imaging, or fMRI. Inst ead of simply identifying which parts ofthe brain "lit up" in res ponse to particu lar tasks, we looked at how the brain regions were interacting. The area of the brain people tend to associate with strategic thought is the p re frontal cortex, know n for its role in execu tivefunction. lt allows humans to engage in antic ipation, pa tte rn recognition, probabil-

People associate st rategy wit h rat io nal th inki ng a nd ot her high-level functions of the prefrontal cortex...

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but the best strategic t hi nkers show more activ ity in parts of the brain linked wit h emotion and intu ition. Their nervous systems may eve n re press rat ional thought to free th ose a reas up.

but only

27%

believed that gender would affect their own pay

ity assessment, risk appraisal, and abstract thin king. Those abilit ies do hel p managers solve problems. However, when we examined the best strategic performers in our sample, we fou nd significantly less neural ac tivity in the prefrontal co rtex than in the areas associated with "gut" responses, empathy, and emotional intelligence (that is, the insula, the anterior cingulate cortex, and the superior temporal sulcus). In other words, the conscious executive fu nc tion was dow nplayed -while regio ns associated w ith unconscious emo tion processing operated more freely. Wh at's more, t he strongest perfor mers' tactic al reasoning relied not only on the insula (associated with emot ion al processing) and the anterio r cingulate cortex (crucial for m aking new choices based on the assess ment of past outcomes). It also engaged the part of the brain (the superior tem poral sulc us) associated with parsing sensory stimuli and anti cipating other people's thoughts and emotions -for instance, understanding how action plans wo uld be recei ved by the wo rkers charged wi th impleme nting them . o f course, IQ-based reasoning is valuable in both strategic and tactical thin kingbut it's clear that managers integra te their brain processes as they become better strategists. When companies realize that, they may approach strategy and execution more holistically. " HBR Reprlnt F10090 "

Roderick Gilkey is a professor at the Emory ~ University School of Medicine and Goizueta Business School. Ricardo Caceda is an assistant professor at Miami University. Clinton Kilu is a professor at the university of Ar ka nsas for Medical Sciences. September 201 0 Harvard Business Review

27

IDEA W ATCH

Defend Your Research HBR.ORG Do you have

H8R puts some surprising findings to the test

questions or comments about this article? Tile aut hors will respond to reader feedback at hb r.org t hrough mid-september.

It's Not "Unprofessional" to Gossip at Work The finding: Gossip can ben efit individuals and orga nizations, though managers often consider all of it to be derogatory and te nd to punish gossipers with lower pe rformance rat ings. The study: Wit h Travis J . Grosser a nd Virginie Lo pez-Kidwell. bot h doctoral cand idates in man agement, Joe Labian ca exa mined th e social int eractions in a b ran ch of a U.S. co mpany. surveying 30 of its 40 employees about th eir social networks in the office, whom they gossiped wit h and how, and how much informal influence each colleague had. Th e more staff members gossiped , the better their understanding of thei r social environme nt and t he higher t hei r peers rated their influe nce. The challenge: Gossip often co nsists of hearsay, half-truths, and innuen do, a nd can absorb la rge a mounts of your staff's t ime . Can it really be valuable? Professor Labianca, defend your research. Labianca: Gossip can be very helpful to people in organizations, especially when the flow ofinformation from the top gets choked off, as often happens when companies are in crisis or undergoing change. If a few people know wha t's really going on, gossip becomes the means ofspreading that information to everyone else. What's more, research shows that gossip often reduces individuals' anxiety and helps them cope with uncertaint y. HBR: That so unds like th e opposite of th e conve nt ional view th at gossip is a great way to spread fear and anxiety. It's true that gossip ca n sometimes crank up the fear level in an organization, but research shows it usually does the reverse. By sharing gossip, you make a personal connection, which gives you social and 28 Harvard Business Review september 2010 Scan & PDF: worldmags & avaxhome

emotional support. Gossip also dissem inates valuab le infor mation about a network-who's a free rider. who's a bully. and who's impossible to work with-and provides a means for censuring those who don't adhere to the group's norms. But aren't perceptions of who's a bully or a free rider based on th e gossiper's biases and opinions? where's th e value in information t hat's so subjective? The information isn't completely subjective. because these norms are established by the grou p itself. That's one of the reasons for gossiping in the first placeto negotiate wha t "proper" behavior is so that the group has an understanding of right and wrong. OK. but we don't see how gossip helps th e organizat ion as a whole.

It can be a great diagnostic tool. The manage r who keeps an ear to the ground has a good chance to hear about potentially troublesome issues as they arise. And strange as this may sound, gossip can reinforce the company's values. If you establish a culture that's high performing, people watch one another and push one another to do their best work. Aren't people more likely to undermine th e company's values by goss iping? Gossip is merely th e exchange oftnformanon between two people about a th ird, absent person. A huge amount ofgoss ip is devoted to praise. If someo ne stays late to help you, you'll probably tell someone else in your ne twork about it. In fact, pos itive gossip is more typical than the negative kind. We found an even blend ofpositive and negative gossip in 72% ofthe gossip relationships, predominantly positive gossip in 21%, and predominantly negative gossip in only 7%. Then why do managers so often ta ke a dim view of goss ip? On the basis of past research, we know that managers consider gossip to be subvers ive. And it is. Our study shows that the more you gossip, the greater your Informal influence among peers. It's a democratizing force. It levels the playing field between managers and em ployees. That's a threa t to managers' desire for complete control. So it's not surprising that when we asked the manage rs in our study to evaluate employees' performance. they gave lower ratings to th e employees who gossiped more. That happened whe ther the gossip was negative or positive, which

H BR.ORG

HARVARD The

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Supervisors gossipwith far more people than regular staffers do.

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suggests managers assume any gossip is negative. Aren't there legitimate reaso ns for managers to dislike gos sip? Of course. In another orga nization we studied, a lot of the gossip revolved around an intergroup conflict. The negative talk was undermining the organization's ability to funct ion. But the root problem was the conflict. Still, if my company we re rife wit h gossip, I'd do my best to sta mp it out. You can't simply ban gossip- in our research, we find that 96% ofemployees admit to engaging in gossip at wo rk. Directives to halt gossip usually back fi re and generate more gossip. Too often organizations try to squelch it without add ressing the problems that are generating it. Negative gossip is a symptom of a larger organizational issue. You should focus on resolv ing it and on increasing com mu nication and showing that the information you give out is tru thfuLThose actions will have a much bigger impact. And you shouldn't use pe rformance appraisals

I, ~

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Too often managers try to squelch gossip without addressing the problems that are generating it. Gossip is a symptom of a larger organizational issue.

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to try to suppress negative gossip-that wo n' t wo rk, either. Should man agers gossip too? They already do. In our sample, supervisors had more gossip partners than nonsupervisors did- an average of7.4 versus 3.9. That makes sense when you consider that managers need a lot ofin forma tion to do their work. For managers, the question is whether they're gossiping with the right people. Are they folks who will rein force what the managers already think, or people who are different from the ma nagers and will actually pass on things that are informative about the state ofthe company? It's all too easy for a manager to have friends among ot her managers but none among frontline workers. But those people are critical to the organization's functioning. If they're not feeling good, they can find all kinds ofways to bring the organization down. So gossiping isn't necessarily unprofessional? IfI could tak e one word out of our lexicon, it would be "unprofessional." When managers warn us not to be unprofessional, they're really saying that wh en we show up for work, they expect us to leave be hind the emo tional and social parts of who we are. But we're un able to leave our humanity at the doo r. We react to things emo tionally, we form bonds wit h people, we gossip. To pretend ot herwise makes HBR Reprint Fl009E things worse. \7 Gi useppe '~oe" la blanc:a is a Gatton Endowed Associate Professor of Management at the University of Kentucky's LINKSCenter for Research on Social Networks in Business.

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

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Tired of PowerPoint? Try This Instead. Text by Daniel McGinn; illustration by Stephanie Crowley

For a big clie nt meeting in April, Accenture senio r man age r Mark Papia hired a type of practit ioner he'd never e ncount ered before: a "grap hic recorder: ' During t he session , artist J ulie

Stuart drew large murals depicting the participants' discussion on a-foot-by-a-foot sheets

of paper. The goal: to help people make connections and

better recall key point s. " The artwork generated a t remendous amount of interaction," Papia says. Graphic recording-also called visual facilitation- has

30 Harvard Business Review Septem ber 2010 Scan & PDF: worldmags & avaxhome

been aroun d since at least the 19705, when it was popularized by a group of San Francisco architects. It's grown lately, driven in Large part by Power-

Point fatigue. The watt-sized depictions can be capt ured digitally a nd distrib uted wideLy

by e-mail, and serve not just as meeting s umma ries that get stuffed in folders but also as visual references for key goals

or processes. " , want somebody who hasn't been in the conversat ion to be able to look at something I've don e and quickly digest the key points," says San Francisco artist aree Sanchez.

Does It Wo rk? Professor Martin Eppler of the university of St. Gallen in Swit zerland has studied how well

HBR.ORG

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visual representations boost recall. He found that grap hic recording trumps PowerPoi nt slides, particularly if people feel invested in the drawings. "vou remembe r best what you've created yourself," Eppler says. With PowerPoint, presenters make the slides in advance; it's not interactive or pa rticipatory. With graphic recording, all participants actively contribute ideas to the image, so they feel that their hands are in it.

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However, Epple r's research suggests that software progra ms that let participants create their own visual re presentations- Let's Focus or SmartDraw, for insta nce - may be more effective than a pricey a rtist's handiwork . (Experienced professionals charge from $1,000 to $3.50 0 a day.)

What Companies Say Compan ies using the technique include HP, Dell, s.c. Johnson,

A Fresh Look at

--"""M "a"r"k"'et ;:i"ng My'o~~ia~·. · _ _~ Graph ic recorder Stephanie Crowley depicts the ce ntra l themes of the classic 1960 HBR article by Ted Levitt.

and Charles Schwab. Kraft Foods has bee n utilizing graphic recording in its leadership training program since 2005. "ror me, th e drawings are really a trigger," says Nicole polarek, associate director of organizational development. "1 can look at t he picture a nd re me mbe r the conversation." Jason Dirks, Kraft's director of training, says graphic recording kee ps people interested and engaged on two levels. "vou have this initial

'wow' fact or while watching this person draw the image," Dirks says, and afterward people can study t he depiction more closely. "The artists are able to capture a lot of depth." HBR Reprint Fl 009Z

Dan iel McGinn is a senior editor at HBR. St ephanie Crowley is the founder of Chrysalis Stud ios in Los Angeles .

September 2.010 Harvard Business Review 3'

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32 Harvard Business Review september 2010 Scan & PDF: worldmags & avaxhome

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Godin

Set h God i n is an entrepreneur. a blogger, and an author. His latest book is Linchpin: Are You Indispensable? (Portfolio. 2010).

Redefining Failure e think we know wha t failure looks like. Products don't get purchased. Reorganizations make things worse. Shipments aren't delivered. Speeches don't get applauded. Things explode. These are the emergencies an d disasters that we have nightmares about. We think that failure is the opposite of success, and we optimize our organizations to avoid it. We installiayersand layers of management to elimina te risk and prevent catastrophes. One surefire way we've found to avoid failing is to narrowly define what failure is-in other words, to treat almost everything that happens as a nonfailure. If the outcome of our efforts isn't a failure, there's no need to panic, is there? Failure crea tes urgency. Failure gets you fired. Failure cannot sta nd; it demands a response. But the status quo is simply embraced and, incredibly, protected. Given our strong cultural bias against failure, this probably wo n' t win me any fans, but I think we have n o choice but to aggressively redefine the concept to

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include far more outcomes tha n our current defi nition does. Every day, there's a line (someti mes 10 minutes long) to use the lad ies' room at Grand Central in NewYork. This is a failure. It's a failure of design, of gender relations, and of resources. Because it's not currently treated asa failure. it doesn't get addressed. We're fine with the status quo.

Failure demands a response. But the status quo is embraced and, incredibly, protected. Every day,thousands of people call your busi ness's customer support line because they don't u ndersta nd how to use one of your products. This isa failure. It's a failure worse than if they hadn't bought your product at all. A zero-sales situation might set off alarm bells- but the ringing phone feels like a normal interaction, not a failure.

And every day, some of your company's reso urces and assets go to waste. The permission your best cus tomers have given you to market to t hem is ab used when you send them u nwanted p itch es. The momentum you've workedso hard tocreate for your new product line is squandered because your marketers are busy focusing on other th ings. These are failures. failures as urgent as if a wheelbarrow of cash were burn ing unch ecked in the parking lot of your building. If you care about your company, your customers, and the meaningofvalue, you'll care enough to reexamine your definit ion offailure. Here are a few types to consider adding to the mix: Design failure. If your product or service is misdesigned, then people don't understand it, don't purchase it, or may even harm themselves when they use it, and you have failed. Failure of opportunity. If your assets are poorly deployed, ignored, or decaying, it's as if you are des troying them, and you have failed. Failure of trust. If you was te stakeholders' goodw ill and respect by taking shortcuts in exchange for short-term profits, you have failed. Failure of will. If your organization prema turely abandons important work because of internal resistance or a temporary delay in market adoption, you have failed. Failure of priorities. If your management tea m chooses to focus on work that doesn't crea te val ue, t hat's like sending cash directly to your competitors. and you have failed. Failure to quit . If your organization sticks with a mediocre idea, facility, orteam too long beca use it lacks the guts to create something better, you have failed. Failure of respect. If you succeed without treating your people, your customers, and your resources with respect and honesty, you have failed. And. ofcourse, the most self-referential form of failure is th e failure to see when you're failing. I::' HBR Reprint Fl009F

34 Harvard Business Review Sept ember 2010 Scan & PDF: worldmags & avaxhome

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Dan A ri ely ([email protected])istheJamesB. Duke professor of Behavioral Economics at Duke University and the author of Predictably Irra tional (HarperCollins, 2008).

Want People to Save? Force Them. n Chilelast June, I had the opportunity to spend some time with Felipe Kast, the new government's minister of planning, and a few of his compadres. (We also went dancing, but that is another story.) One of the topics we talked about was the Chilean retirement saving plan. Bylaw, 11% of every employee's salary is automatically transferred into a retirement accou nt. Employees select their preferred level of risk, with the following restrictions: They may not choose either 100 % equ ities or 100% bonds, and the percentage ofequity that they can select diminishes as they age. When employees reach retireme nt, their savings are converted into annuities. The

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Why do we accept so much government intervention in some areas but chafe when it comes to a few simple rules in others? live, so insura nce companies charge a high premium to cover that risk,which makesfor an inefficient ma rket. Annuities also suffer from an adverse selection problem, further increasing risk. (The classic example of adverse selection is health insurance : The healthiest people arethe least likely to opt in, which increases the pool's riskiness, mak-

I was imp ressed with this system and wo ndered how it would fly in the United States, where our own mandated savings program -Social Security-undergoes sporadic efforts to privatize it. I suspect Americans would consider the Chilean system heavy- han ded and limiting- a flagrant example of nanny-state controJ. You canforce me to save money when you pry itfrom my cold, dead hands. Paradoxically, we happily accept deeply controlling (and expensive) regulation on our behavior in other areas with little thought or protest. Consider the strictures we atlow on driving. Wear a seat belt. Drive this speed. Bear the cost of air bags. Pollute only this much. Don't text while driving. Why do we accept so much government intervention in driving bu t chafe when it comes to a few simple rules that would help us ma ke better financial decisions? It's probably not because we think we're smarter about finances than driving. I think the reason has to do with our ability to imagine negat ive consequences. Car wrecks have a way of vividly communicating our incompetence as drivers and making the benefits of'reguletion crystal dear. Poor money management can carry similarly devastating consequences, but they are less readily appa rent. Even in times of economic crisis, we don't recogn ize our ow n bad judgment because people around us are in the same boat and we compare our fortune with theirs. But the inability to see our own irrationality shouldn't be an excuse to let it go unchecked. We need to analyze what people and markets are good at and what they'renot good at, and use those insights to improve our institutions. Chile's approach to saving shows us that it can be done, and done well. l:'

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government auc tions off rights to annuitize retirees in groupsof'aso.ooo. • This brilliantly con, ceivedapproach solves thorny behavioral and inst itutional ch a llenges. Behaviorally, it recogn izes that peop le are not good at two as, pects of finan cial plann ing for retirement deciding to save and , eli mina ti ng risk in lat er years -a nd it forces them to act in , a be tter way. At t he same ti me, the system acknow ledges that people who enroll in retirement plans are reasonably good at managing their own risk. So investment choices are left to the individ ual, with limits on too-risky behavior, especially as a person ages, when bad choices can do irrecoverable damage. Institutionally, Chile has cracked an age-old problem with annuities. It's risky business to predict how long people will

6

36 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

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ing health care less appealing for insurance companies and policies more expensive for the people who want them.) By pooling the risk, the Chileangovernme nt makes annuities an attractive bu siness with more com petition and better prices. And since everyone is forced toannuitize, the adverse selection problem simply disappears.

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Press

ALSO BY JOSH BERNOFF

-USS 29.95

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How I Did It

by Jeff Swartz

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THE IDEA

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After Greenpeace pressured Timberland to pull out of Brazil. CEQ Jeff Swartz chose instead to engage with the activist group and Timberland's Brazilian supplier in hopes of making a positive difference.

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ou can tell a lot about how your day is going to u nfold by the nu mber of e-mails that are waiting for you. I'm a pretty early riser -s-a AM most days so I typically start ou t ahead of the game when it comes to e-rnails. But on June 1, 2009, they kept coming, and com ing. and coming. Th e first one accused Timberland of supporting slave labor, destroying Amazon rain forests, and exacerbating global warming-all in the first se ntence. The second was a repeat of the fi rst, as was the next, and the next. I had a funny feeling it was going to be a long day. The fan mail was from Greenpeace supporters reacting to a newly released Greenpeace report about deforestation in the Amazon. Thegistofthereport was (a) Brazilian cattle farmers are illegally clear-cutting Amazon rain forests to create pastures, and (b) the lea ther from their cows might be winding up in shoes- incl uding Timberland's. (A) plus (b) equals (c): New Hampshire-based bootmakers are desecrati ng the environment. Take them to task. And take us to task they did. The senders didn't threaten a boycott but said they were "concerned" an d urged us to work wit h Green peace to fi nd a "permanent global solution" to both deforestation and climate change. As a CEO, I' m used to gett ing a ngry e-rnailsc-most of them along the lines of "You support something I oppose; therefore you're an idiot." But these were different. Even though their text was a form letter pulled off the c reenpeace website, it September 2010 Harvard Business Review 39

HOW I DID IT

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committed to addressing, defores tation tops the list. We've planted a million trees in China; we host community regreentng events incities allover the world. Ourlogo is a tree, for crying out loud . How much more ridiculous could this campaign be? It would have been laughable- if not for the 65,000 Greenpeace supporters who were buying into the allegations and making clear their expectation that we'd come u p wit h an acceptable solution. The "orelse" was implied, but we've all seen videos and news articles about big corporate bullies that fall victim to Greenpeace's wrath. I didn't want Timberland to be painted as either a corporate bully or a victim.

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was well written and informed. And it was coming from a potent activist organization, suggesting a problem I wasn't intimately familiar with. Even in my early-morning haze, I knew that was a bad combination. Throwaway the Monday morning to-do list- we've got us an issue here. That morning our IT department set up a system to auto matically reroute all the activist e-mails from my inbcx to a separate folde r- not so that I could avoid them (although it was nice to have my inbox back), but because we wanted to make sure each one got a response. Nexton the agenda was figuringout how to respond-not just to creenpeace's allegations, but to the angry senders, who totaled 65,000 over the next few weeks. I figured if that many people were taking the time to send an e-mail, there must be at least half a million not sending e-mails who were also pissed off.That's a big number.Our brand's reputation was at stake. My first response to the e-mans was to be pretty angry myself. Ofall the environmental problems Timberland has been actively 40

Harvard Business

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Re~iew

September 2010

Some members of our team, justifiably, th ought our prima ry goal should be to figure ou t how to end the conversation meaning get the angry activists to go away. Only about 7% of our leat he r is sourced from Brazil, so it would have been relatively easy to find another source that didn't come with str ings such as deforestat ion issues and Creenpeace reports attached . This option became more compellingas other companies, including some of our competitors, started issuing statements in which they vowed to immediately stop buyi ng leather from the region in question. "Let's just do what they're doing and say 'We're out," some colleagues advised. I'm a third-generation CEO. I'm not the first guy into a fight. But I'm also not one to take the politically correct, cut-and- run route when I think so mething is wo rth staying and talking about- in this case, the reputation of our business and a serious environmental issue. As much as I did n' t want to admit it, Greenpeace was asking a legitimate question: Where was our leather comi ng from? Second on the Jist of things I didn't want to admit was that we didn't know the answer. We-our company, our industry- had until then never been asked, or asked ourselves, that question. Sure, we cared whether the leather came from a cow, a goat, or a pig. But where did the animal graze before it went to

My first response to the e-mails was to be pretty angry myself. Our logo is a tree, for crying out loud . the slaughte rhouse? I'm a bootmaker, not a cattle rancher. That's not a qu estion that was keeping me up at night-at least not before that June. The fact is, the origin of hides has neve r been easily traceable: They're treated as a waste product by slaughterhouses, which are mostly interested in the meat. In some parts of the world, hides are sold in batches of two or three by guys on the side of the road . They're n ot tracked the way other materials -pharmaceuticals. for exam ple. and most food products-are. The lack of traceability in our materials supply chain is almost archaic. But the thought of tracing one hide back through the tannery to the s!aughterhousetothecow tothe herd to the pasture to the land - multiplied by however many hides make up the 7% ofour leather tha t issourced in Brazil-is enough to make your head hurt. Iwas willingto suffer the headache- and impose it on my team-because I thought Greenpeace had raised a good question and that the re was value in trying to answer it. Ialso saw this tssueasa batt lefor the hearts and minds of environmental activists-the ones who believe that private en terprise by definition sucks an d the world would be better off if companies bu rned down. I wan ted to confront that notion head-on, to convince them that if they reallywant to help the rain forest-to make a sustainable environmental impact- they need the help of com panies like Timberland. I wanted them to know tha t it's possible to be a profitable global business and also be actively engaged in protecting the environment.

Frugality Drives Sustainability To un de rstand how we respo nded to Greenpeace, it helps to understand the role

HBR.ORG

that stakeholders-and issues like the environmen t-play in how Timberland operates. It also helps to understand that activist groups like c reenpeece have a un ique operating model or their own. Our enviro nmental sensibility stems from being a frugal Yankee outdoor cornpany. In Timberland's first facto ry, my grandfather used to walk around picking up the bobbins that fell offthe machines to reuse th em; every time, he'd say, "That's a penny." Leather came wrapped in thick green paper, and instead of th rowing th e wrap per away, my grandfathe r wou ld smooth it out and make patterns from it. He wasn't recycling to save trees -he was thinking about not having to pay for the stock to cut a pattern. Tod ay we do a varie ty of thing s to minimize our use of resources -because my grandfather's frugality runs deep, and because we'd rather leave a light footprint on the earth than a heavy one. Our efforts to be environmentally responsible - from powering o ur faciliti es wit h renewable energy to calculating the carbon footprint of our footwear-made Greenpeace's atlegations hard to swallow. Furthermore, we actively participate in cross-brand collaborations to address industry issues, and we host stakeholder callsonce a quarter so that anyone concem ed about the impact of our business can share questions and criticisms with us. It's not always comfortable to be bumping elbows with our toughest competitors or to sit in th e hot seat during those calls. But we benefit from outside perspectives. That's ano ther reason why Greenpeace's guerrilla tactics-accuse first and engagelater- felt likesuch an affront. For c reenpeace. guerrilla tactics are supremely effective-something I was naive about when all this began. There's nc question the organization cares abo ut sav ing rain forests, but it also cares about recruiting new members and collecting membership fees. Making headlines by attacking companies helps it do that . IfGreenpeace wanted to start a dialogue with the footwear industry about how our supply chain might be hur ting rain forests,

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HOW I DID IT

For Greenpeace, guerrilla tactics are supremely effective-something Iwas naive about when all th is began . I st rongly feel that someone there should have picked up the phone. The organizati on could have convened the ind ustry's CEOs to talk about these issues and craft a solution-and then held a press conference where it took credit for getting us to address the problem. There isn 't one executive in our industry who wouldn't have wanted to be at that press conference. But phone calls and press conferences aren't as sexy as an attack campaign and wouldn't have riled u p Greenpeace's member base, which is part ofwhat drives its revenue. So it came at us instead, leading us to waste a ton of energy fighting a goopy mess rather than making meaningful progress. We called Green peace wi th in a few hours of receiving the first e-mail, but it took days to get someone knowledgeable about the issue to come to the phone. While we waited for the organization to talk to us, our supplier tr ied to get some answers. To illustrate its claim that ranchers were illegally clear-cutting the Amazon forest, c reen peace published p ictures from Google Earth showing cows grazing in places that had been forest just a month before. In conversat ions with our supplier, we learned that it didn't actually know where ranchers were pasturi ng their cattle-so c reenpeace might be right. Hmm...not the answer I was hoping for. My nex t question for the team: If our supplier d id n't know where t he ca ttle originated, could we start figu ring it out? Could we track where specific cows were grazing? Our engineers concluded t hat the task was ardu ous but not impossible; although there was n' t a system in place to ca pture and manage that data, there cou/d be, given enough time and resources. What would make it impossible, they said, was jf the companies furthe r u p the supply chain - the ca ttle ranchers and the slaughterhouses -were unwilling to go along with it. 4 2 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

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It's called a supply chain for a reason: There are a lot ofhnks-cranchers, slaughterhouses, tanneries. In the scheme of things in Brazil,we're a very small player with very little leverage. To its cred it, Greenpeace understood this. So it didn't come after shoe companies on ly-it also targeted com panies that buy beef, including Wal-Mart and other grocery chains. It applied pressure to Brazilian politicians, who turned to Brazilian law enforcement, wh ich began going after the ranchers who were breaking the law. Greenpeace effectively bro ught a coalition of pressure against every link in the chain simultaneously- a powerful tactic, and one it knew would work. Our supplier had littlechoice but to take this seriously: All its customers were asking the sa me hard questions at the same time. We did n't have to threaten to cancel our contracts-the threat was implicit. The supplier knew it was going to have to step up.

Crafting a Response Dealing with the supply chain would take weeks, ifnot longer-but in the meantime, we had 65,000 love notes to respond to. Bill Clinton likes to say that when it comes to win ning votes, you need to consi de r two kinds of people: the Nos and the Maybes.

Now, the Nos are against you all the way; you can't win their votes, so you should n't waste time trying. Every election, he says, is won or lost on the Maybes-they're your fighting chance. Even though we had no way of differentiating Nos from Maybes, given the cookie-cutter e-mail, we knew we had to craft a response that had the best possible chance of winning the Maybes (provided t here were any in the bunchj-. those who might, just might, see that we were trying to do the right thing. Our response ended up evolving over time (see the sidebar "Finding the Right Tone"). Writing an e-mail respo nse may seem likea no-brainer, but we worked really hard to get it right. For instance, if an e-mail had come from an Italian inte rnet add resseven if the message was in English-we reo plied in Italian. And we watched how many senders replied . We neve r expected that everyone would write back and say,"Wow, we never realized you were great guys!"but we did hope to hear from activists who appreci· ated our response. And some of them did. By July, we'd begun to make progress in working with our supplier and in consulting with our competitors and with Greenpeace. Although Greenpeace had hoped that we'd simply come out with a high-levelstatement agreeing with its position, we wanted to really und erstand the problem - and to make sure our supplier had a system in place that could be implemented and sustained. On July 22, Nike announced that it would require its Brazilian leather suppliers to certify in writing that their hides had n't come from deforested areas. Now, Nike is hugea much bigger player than we are in terms of leather sourcing- and its suppliers would have tostart mappi ng and tracking ranches all over the country.Afew days later-seven weeks after the e-mail onslaught beganwe reached a similar agreement with our supplier. Implementing the agreement has been just as ha rd as we expected-even harder. Ourleather supplierwas acquired by a larger company last fall, which has predic tably slowed things down. But our su pplier has committed to certifying, in short order,that

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Finding the Right Tone When Timberland faced an implied boycott th reat from Greenpeace

act ivists, it attacked th e problem on two fronts: working wit h its Brazilian supplier to ensure that its practices weren't hurting t he th e hides it b uys from la rge cattle ranches a ren't coming from deforested areas-and to having smaller ranches m ap ped by 20U. At the e nd ofJuly 2009 we issued a statement praising Oreenpeace for bringing the matter to th e industry's a ttentio n, a nd it was ab le to d eclare victory. In return, it issued a state men t saying that Timberla nd had taken a leade rship posit ion on t he issue, which was as gratify ing as p ra ise from a n o rgan ization t hat ha s pain fu lly put yo u th rough t he paces can be. Here are some t hings I learned from the

expe rience: When a ngry act ivists c o m e at you, d on 't s ta n d there w it h yo ur a r ms folded a nd y o u r m ind closed. Yo u may not ag ree with thei r tact ics , but they may be asking legitimate qu estion s you should have been asking yourself. An d if you ca n find at least one common goal- in th is case, a solution t o deforestation-you've also found at le ast one reason for working with each other, not agai nst. On t he o t he r hand , do n't greet them n a iv ely w it h open ar ms, For every common goal, half a d o ze n p e rson a l agendas a re in play. Gre e n pe ace 's incl ude selling membership subscriptions as well as saving th e world. If t hat weren't true, th e organization would be making more phone calls and fewer sexy headlines. In time s o f t ens ion. watch a n d tls t en , That's w hen yo u lea rn just how committed yo u are to your principles- and how comm itted yo ur tea m a nd yo ur partners an d even your com petitors are t o t hei rs. Did any o f this m ake a di fference for t he issue of deforestation in Brazil? The jury's still out a nd probably will be for a w hile . But I believe there's real val ue in the outcomes we've already seen and in the lessons I'll take wi th me as I continue to work to ma ke Tim berland a more respo nsib le a nd sustainable organ ization-the same path I was on before t he first e-mail came in, and the same path I'll b e o n t om orrow. \:l HBR Reprint Rl009A

P . Jeff Swam is the president and CEO of Timberland.

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environment, and comm unicat ing wit h the Greenpeace e-mailers

resp ectfully and transparently about its effo rts to be part of a collaborat ive solution. Below are edited exce rpts showing how th e compa ny's response evolved during th e course of t he campaign.

ON THE MORNING OF JUNE 1, 2009, THE E-MAILS BEGAN FLOWING INTO CEO JEFF SWARTZ'S INBOX: Dear Mr. Swartz, I am conce rned that, given your company's dependence on leather to make shoes sold around the world, you may be supporting forest destruction, slave labor, the expulsion of indigenous groups within the Amazon Rainforest, and global climate ch ange ... . As a consumer, ! want to be confi dent that when I buy your shoes! have not contributed to Amazon destruct ion and climate ch ange ....! look forward to hea ring what steps you will ta ke t o help solve th is problem. Sincerely,

DURING THE FIRST FOUR DAYS OF THE CAMPAIGN, TIMBERLAND REPLIED WITH A LENGTHY, SOMEWHAT DEFENSIVE E-MAIL: Than k you for your inquiry....We take our environmental and community impact very seriously and work hard to do our part t o pres erve the planet by planting tre es. reducing our contribution to global warming, developing environmentally-conscious products and encouraging civic action... .We do source some leather from Brazil, but we have been assured th at the material is not sourced from deforested areas....We share your concerns about deforestation.. .Timberland's tree planting initiative has result ed in more than one million t rees planted across t he globe since 2001....We ptan to plant a not her million t rees by t he end of 2011 ....

STARTING ON THE FIFTH DAY, TIMBERLAND DECIDED A LESS-IS-MORE APPROACH MIGHT BE MORE EFFECTIVE: Thank you for your inquiry....Ti mbe rland is committed to minimizing the environmental im pact of our business operations. We're interested in engaging with Greenpeace and others in our industry about this situation....

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ON OCTOBER 30 TIMBERLANO SENT A

...Three months lat er, real progress to report... .Last month [our supplier] publicly a nnounced t he ir official Amazon cattle morat orium ...and is working aggressively to meet t raceability targets to ensure the origin of all t he cattle they source is acce ptab le and not contributing to Amazon deforestation ....For its part, Green peace has done an outs ta ndingjob gathering data, c reating a complete and compelling case for th e issue, and mobilizing its tens of thousands of supp orters....Their effort has driven change into t he system. We applaud their activism .. ..

A FTER STRIKING AN AGRE:MENT WITH GREENPEACE. TIMBERLAND CRAFTED A NEW MESSAGE ON JULY 24:

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LENGTHY E-MAil UPDATE SIGNED BY CEO JEFF SWARTZ TO EVERYONE WHO'D CONTACTED THE COMPANY ON THIS ISSUE:

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...For more than 20 years, Timberland's approach to supplier relationships

b tact! I as een one 0 active, mutua engage ment.. .we have an unflinching commitment t o work with our value cha in to add ress failures ....Our principles apply in the Amazon, and so we are worki ng close ly with ou r supplier in Brazil to ensure t hey have an action plan in place that addresses their commitment to an immediate moratorium on deforesta tion in th e Amazon acme. and of course refraining from sou rcing products from indigenou s or protected lands or entities th at engage in slave labor... . h

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WorldMal/S - Oil/ital Mal/azines

The Big Idea

• Statistical models have deprived the financial sector ofthe case-by-case judgment that makes capitalism thrive. That must change . by Amar Bhide

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Amar Bhide is the Schmidheiny Professor at Tufts University's Fletcher SChool. He is the author of A Collfor Judgment:

Sensible Finance for a Dynamic Economy (Oxford University Press, :2010), on whic h t his article is based.

he modern economy creates and spreads unprecedented prosperity by drawing on the resourcefulness and enterprise of the many, not by blindly following the dictates of a few. Individuals today make and act on their own judgments to a degree that would have been unimaginable to our forebears. Indeed, many of us value this humanization of our work as highly as we do the material comforts that the work secures. (The great virtue of a dynamic capitalist ..... economy, the economist ". Edmund Phelps argued in his 2006 Nobel prize lecture, lies in the opportunities it provides for more engaging work rather than for more leisure.) septembe r 2010 Harvard Business Review 45

THE BIG IDEA THE JUDGMENT DEFICIT

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This triumph of independent initiative and judgment- ot what I call the venturesome economy-is, however, far from absolute, nor should it be. Yes, the collapse of the Soviet Union and of top-down, Sovietstyle management in monolithic corporations liberated millions from mindless, unp roductive toil. But we are all su bject to traffic laws telling us which side of the road we can drive on, and that's a good thing. The designers of the iPho ne and iPad (and of their apps) defer in matters large and small to the dictates of Steve Jobs, to the benefit ofApple consumers and shareholders alike. Discerning the appropriate balance between top-down com mand and control, on the one hand, and individual initiative and judgment, on the ot her, will always be a challenge for our society and our organizations. But at least we're aware of the conflict and have experience managing it. In recent times, though , a new form of centralized control has taken root- one that is the work not o f old-fashio ned autocrats, committees, or rule books but of statistical models and algorithms. These mechanistic decision-making technologies have value under certain circumstances, but when misused or ove rused they can be every bit as dys functional as a Muscovite politburo. Consider what has just happened in the financial sector: Ahost of lending officers used to make boots-on-the-ground, case-by-case examina tions of borrowers' creditworthi ness. Unfortunately, those ind ividuals we re replaced by a small number of very similar statistical models created by financial wizards and disseminated by Wall Street firms, rating agencies, and government-s po nsored mortgage len ders . Th is centralization and robo tization of credit flourished as banks were freed from many regulatory limits on their activi ties and regulators embraced top- dow n, mechanistic capital requirements. The result was an epic financial crisis and the nea r-collapse of the global economy. Finance suffe r'ed from a judgment' deficit, and allofus are paying the price. I , I

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Mechanistic decision making has value, but when ' misused it can be every bit as -, dysfunctional asia Muscovite politburo.

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The great twentieth -century thinker Friedrich Hayek made the classic argument for decentralized choice in his essay "The Use of Knowledge in Society." The stability of the economy depends on constant adjustments to small changes, he believed - "Bstep ping in at once when Afails to deliver." Nosingle individual has the knowledge to make those adjustments; rather, it is widely dispersed across many individuals. But information about "the circumstances ofthe fleeting moment" cannot be quickly and accurately communicated to a central planner. Therefore, individuals who have on-the-spot knowledge must be allowed to figure out what to do. Published in 1945, this treatise was a critique of central planning, then seen as an attract ive solution to the economic and political problems capitalist societies faced during the Great Depression and the Second World War. Over the years, the sledgehammer style of central plan ning has fallen out of favor. Nevertheless, Hayek's case for decentralization remains relevant . Adaptation to cha nges-the foc us of Haye k's article-is only part ofthe story. The success of the

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The Case for Decentralization and Individual Judgment

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As we rebuild from the economic crisis, we must renew the search for the app ropriate balance - in finance and in other endeavors-not just between centralization and decentralization but also between case-by-case judgment and standardized rules. The right level of control is an elusive and moving target: Economic dynamism is best maintained by minirruzing centralized control, but the very dynamism that individual initiat ive unleashes tends to increase the degree of control needed . And how to centralizewhether through case-by case judgment, a rule book, or a computer model- is as d ifficult a question as how much. But these are questions that we cannot afford to stop asking.

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Idea in Brief Decentralized individual At the same time, rules and judgment and initiative centralized systems are needed to bring order and are essential to the prevent waste. Getting the success of the modern balance between these two capitalist economy.

modes of decision maki ng right is a constant struggle. But managers, policy makers, and others are aware of the conflict and have experience managing it .

modern economy also depends on innovation . As it happens, decentralization beats central planning here, too. Innovations are unprecedented, one-of-akind developments. Even incremental ones require imagination. An innovator cannot simply rely on historical patterns in placing bets on future opportunities. Knowing what has worked before and wha t hasn't is but a starting point. Innovation also requires considerable trial and error. Unforeseen technical problems- or customers not doing what they had told market researchers they would -demand recalibrations that combine on-t he-spot observations and historical knowledge with leaps of jmagination. Envision a centralized in novation process: Organizations like the National Science Foundation an d the Food and Drug Administration might convene panels of experts to sc reen proposals and decide wh ich new products merit sale to consu mers. Such a formal, remote process would limit innovators' ability to communicate the wide range of onthe-spot knowledge that con tin ually informs their judgments. And communicating their hunches and imaginative leaps would be virtually impossible, as would resubmitting data and proposals whe n innovators encountered unexpected problems. Moreover, because innovators' judgmen ts combine facts, past experiences, and imagi nation, d iffere nt individuals faced with th e same situation would respond differently- no panelcould predict whose judgment would be best. In a decentralized capitalist economy, innovators are not restricted by their track records or qualifications, or by expert panels saying yea or nay.They are free toact on their judgments, if they can muster the necessary resources. As a result, the system summons forth a considerabl e variety of innovations. The process does involve duplication of innovative effort. But it eliminates the favoritism and aversion

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In recent times, though, a new form of centralized control has ta ken root that is the work not of old-fashioned autocrats, committees, or rule books but of stat istical models and algorithms. This has been especially true in fin ance, where risk models have replaced the judgment s of t housands of individual bankers and inves-

tors, to disastrous effect . The problem with t he statistical app roach is that it cannot adequately account fo r the uncertainty and idiosyncrasies inherent in economic decisions. What finance in particular needs is a return to judgment.

to unconventional ideas that a centr alized system would entail. Symmetrically,individual consumers rather than expert panels choose among alternative innovations in the marketplace. And consumers' choices are n't robotic: When offered something new, users have to make imaginative, venturesome judgments. Independent, case-by-case judgments are crucial throughout a dynamic economy, not just in high tech. Faced with a spike in raw material prices, for instance, a metal fabricator can not simply repeat what wor ked the last time prices were h igh. She has to make a judgment on the basis of how she thinks customers and compet itors will respond, given changes in tech nologies and tastes si nce the las t spike in prices. As a neighborhood becomes gentr ified, restaura te ur s have to ad just their menus and decor. Consumers, too, are constantly forced to make new judgments: Should I buy a hybrid car to reduce my fuel costs, or reinsulate my home? Give the new restaurant a chance, or stick to the tried -and -true? Dialogue and relationships. Effective decentralization demand s mechanisms to coordinate independent initiatives. And so dyna mic societies and organizations rely on dialogue and relationships to a greater degree than do top-down systems, in which a few tell the many what to do. An ecosystem encompassi ng dozens of semiconductor compa nies, scores of printer manufacturers, hundreds of Pe makers, and thousands upo n thousa nds of software developers has hel ped Windows dominate the operating system market. When Microsoft is developing a new version of Windows, it consults closely wit h these players so that com patible hardware and software are ava ilable as soo n as the operating system is released . Similarly, as the other players develop new features fort heir products, they benefit from discussions with Microsoft. September 2010 Harvard Business Review 47

THE BIG IDEA THE JUDGMENT DEFICIT

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Statistical models reveal broad tendencies and recurring patterns, but in an ever-changing world, they cannot make reliable predictions. Established relationships com plement dialogue in sha ring information and facilitating coordination. Doing business repeatedly with the same parties reduces the ambiguities and misu nde rstandings that exist even in carefully negotiated contracts, for instance. No matter how much discussion takes place, gaps in agreements can not be elimina ted because words are not always precise. What isa "best effort"? Diligence in the eyes of one party may be seen as sloppiness by anothe r. The same medium-rare stea k can be just right for one pat ron an d overcooked for another. Repeated transactions help each party learn what the other means and expects. Relationships can also smooth the way for making adjustme nts when things go wrong. A vendor ma y fail to meet the promised de livery d ate of a next-generation ha rd drive. The buyer has the contractual right to cancel the order, which might be sensible ifthe delay is due to a des ign flaw that will take a long time to fi x. But an extension wou ld be in orde r if the problem lay in a temporary hold up in the production line. Without a relationship in place, a buyer is less likely to take the circumstances of the situation into account and more likely to default to a prescribed response.

The Case for Centralization Tech nologically adva nced societies couldn't function without some centralized control, of course. Governments need to regulate how businesses drill for oil, develop genetically modified crops, an d pick the paints they use in toys, for instance. In fact, technological advances usually broaden what most people would regard as legitimate constra ints on independent choice. The invention of the automobile made driv ing rules and vehicle inspections necessary. The growth of air travel required a system to control tra ffic and certify the mecha nical condition of aircraft. Radio and television airwaves had to be 4 8 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

regulated to avoid the collision of competing broadcaste rs' signals. The development of petrochemicals necessitated rules to control pollution. Besides submitting to the coercive powe r of the state, individuals also voluntar ily subject t hemselves to the authority and rules of private organizations. Bosses exercise control not only over their employees bu t also over subcontractors and outside lawyers and consultants. Below the appa rently freewheeling open-sour ce develop men t of the Llnux operating system lie elaborate processes and rules and-gasp-a hierarchy headed by fou nder Linus Torvalds. fnternet entrepreneurs conform to specifications established by a labyrinth of standard-setting bodies . The orig ins of modern organizational con trols date back to efforts to realize economies of scale and scope during the nineteenth and early twentieth centuries. Rail transportation, for instance, was an innovation that offered huge adva ntages but posed coordina tion problems that could not be solved purely by the kind of sequential, ad hoc adaptation Hayek celebrated. Building a Pacific-to-Atlantic railroad starting from both coasts required considerable advance planning and ongoing monitoring by a centralized authority, as did the safe operation ofthe railroad afte r it was bu ilt. (The outcry after the collision of two passenger trains in 1841, the historian Alfred Chan dler records, "helped bring into being the first modern, carefully defined , internal organizational structure used by an American bus iness enterprise.") The specialization and consciously directed coordination of labor has now been brought, to great advantage, from the production line to the deve lopment of new products. In the n ineteenth century, new products were developed by a few individuals . Thomas Ed ison brought forth a remarkable comucopia- incandescent bulbs, motion pictu res, and

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_ _ _ _ _ _--------'[! J'------FOR FURTHER READING To lea rn more, consult the following:

gramop hones -from a small facility in New Jersey with fewer employees than the typical SiliconValley start-up. Whe n he invented the telephone, Alexander Graham Bell had one ass istan t. Such small organizations couldn 't quickly develop good products at affordable prices, so many inventions were, at the outset, playt hings for the rich. Now large teams come up with cheap, reliable smartp hones and ne tbooks for mass markets from the get-go. Product development, which involves a wide range of team members with broad expertise, has to be tightly controlled, with well-defined tasks and timetables. To play in the big leagues, even companies that start offwith no management to speak of, such as Microsoft and Dell, have to routinize their approach-and sometimes hire managers from large companies to oversee the new development processes. Eventually, however, big business ran up against the limits ofext reme cent ralization. Telling workers exactly what to do was demotivating- Henry Ford famously paid workers high wages, but that did not buy him great loyalty. And, as Hayek wou ld have predicted, centralization was wasteful: Workers who had knowledge of specific circumstances weren't empowered to ma ke adjustments or u ndertake initiatives. Organizations therefore began to adopt what Tom Peters and Robert Waterman call "loosetight" controls, with structures that centralize some activities and decentralize others.

The Rise of Mechanistic Decision Making Howtop·down decisions are made matters as much as what is centrally controlled. Bosses can make case-by-case judgments -think of Henry Ford's or Vogue's Anna Wintour's idiosyncratic decrees about product design. Alternatively, codified and mec hanistic rules can be imposed to exercise control: Rate cards or formulas can replace a salesperson's discretion and judgment about prices. Dynamic societ ies and organizations blend case by-case judgment with more or less fixed rules, just as they learn to balance authority and autonomy. In deciding on bonuses, for instance, organizations usually take into account a mix of supervisors' assessments of their subordinates and employees' performance against measurable targets. The legal system relies on precedents and codi fied rules together with a consideration of the facts specific to each case . Physicians must make on-the-spot judgment calls, but they have also found tha t adhering to

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Th e Ven tu resome

simple checklists can dramat ically reduce operating- Economy: How Innovation room errors. Sustains Prosperity in a More Connected World, Th e in forma tion technology revolution has by Amar ehide (Princeton shi fted the balance between judgment and rules, University Press. 20 0 8) giving a strong economic and psychological boost to " The Use of Knowledge judgment-free decisio n making. If lBM's Deep Blue in Society," by Friedric h computer can be prog rammed to beat the world Hayek (American Economic chess champion and its Watson computer can learn Review, September 1945) to crush the competition at Jeopa rdy l, what else The Visible Hand: The Managerial Reva/ution could they do? In some cases, computers have clearly in American Business , proved their superiority over h uman ju dg ment. by Alfred D. Chandl er, J r. Computers waste less material in cutting fabric and (Harvard University Press, leather to make shirts and shoes. They are also better ' 9n) at managing the deployment oflarge fleets of trucks, "Securit izat ion a nd Oistressed Loan laying out circuits in chip design, an d cont rolling Renegotiation: Evidence refineries. from t he Subprime The superior ability of computers to rapidly per- Mortgage Crisis ," by tomasz Piskorski, Amit seru, form mat hematical calculations and si mulations and Vi krant Vig (Chicago typically provides advantages in controlling passive Booth School of Business or inanimate objects, which obey the laws of nature Research Pape r No. 09 -02, September 30, 2009) (or in some cases geometry or deductive logic) and do not try to u ndermine what t he compu ter pro- understanding rech nical Change as an grams are intended to achieve. Effective automated Evolutionary Process, by Richard R. Nelson (Northcont rol ofhuma n affairs is far more elusive. Because natural laws and ma th ematical infer- Holland,1987) ences cannot predict behavior, algorithms are built upon statistical models. But for all their econome tric sophistication, statistical models are ultimately a simplified form of h istory, a terse numerical na rrative of what happened in the past. (The simplifying assumptions of most stat istical models are in fact so great that they can almost never be used successfully to reconstruct the very historical data used to construct the models.)They reveal broad tendencies and recurring patterns, but in a dyna micsociety shot throu gh with willful and imaginative people making conscious choices, they cannot make reliable predictions. It is co mmon to mock Pollyan nas who ho pe "things will be different this time," but in a venturesome economy, things act ually are different every time. Statist ical models disregard the un iqueness of events, treating them like balls in a jar that vary only by diameter or color.What's more, statistical models of human behavior tend to focus on a small number of variables. Ignoring the one-offcharacteristics and richness of individual situations, though, is fundamentally incongruent with what makes a decentralized economy tick. As Hayek pointed out in 1945, the inability to cope with context-specific information makes centralized organizat ions inflexible. September 201 0 Harvard Business Review 4 9

THE BIG IDE A

THE JUDGME NT DEFICIT

Banning mass-produced derivatives or supervising them closely would be unwise: Blanket prohibitions rarely work. Even com panies whose procedures work well at the outset can become victims of their own success, because others will quickly imita te their successful innovations. Yield-management programs to fill airplanes or "by the nu mbers" sabermetrtcs methods to manage a baseball team (as described in Michael Lewis's M oney bal/) can work wonderfu lly for the first airlines and baseball teams that use them bu t tend to lose their potency w ith w idespread adoption. Moreover, unlike airpla ne fleets or chess pieces, people don't passively submit to control. They learn to game programs that seek to direct their behavior. The half-life of an effective mechanistic model to control human action is quite short. This does n't mean sta tistical controls and da tamining programs are useless in huma n affairs. They can debu nk false assum ptions and stereo types or suggest new rules ofthumb. Faced with a large numberof choices (as when thousa nds apply for one job), they can provide a quick, objective first-cut screen. But pred ictions of hu man activity based on statistical patterns are da ngerous when used as a su bstitute for ca reful case-by-case judgment. They nonetheless continue to gain asce ndency. Nowhere has this been more apparent-or more dange rous - tha n in the fi nancial industry.

Robotic Finance In a ven turesome economy, the dece nt ralized, subjec tive choices of developers and co nsumers of innovations call fo r decentralized, subject ive ju dgments by those evaluating their fu nding requests. Fina nciers should play the role of English teachers helping improve st ude nts' essays, no t of math teachers grading algebra tests- m uch less an au to ma te d SAT scoring machine. In the financial sector, though, fun ding mechanisms have become inc reasi ngly centralized and mechanistic. They no longer reflect the decentralized real economy they were meant to serve. The lack of judgme nt has been destructive not just in the economy's cu tting-edge out skirts: The interconnections that make the modern economy so dynamic leave fi nanciers with few places where they can count on history to repeat itself or events to follow pred ictable rules. Seemingly mature and untrendy industries are frequently buffeted by innovations elsewhere. The housing mar ket is a stark example. As Japanese companies figured out how to make moredesi rable cars tha n those of GM, Ford, and Chrysler, housing prices in Detroit sa nk. The average price of a home there fell to $15,000 in October 2009 from

Derivatives for Robots Robotic methods have opened new frontiers in dangerous speculat ion. t outed as innovations in risk sharing and cont rol. The notional value of over-thecounter de rivatives grew more than sixfold, from $95 trillion to $684 trillion, between 2000 and mld-aooa - fn the process helping bring on (or at least exacerbate) the fin ancial crisis. Derivatives that insure against loans gone bad- the now infamous credit defauLt swaps

(CDSes)- gave purchasers of bundles of subprime mortgages a false sense of sec urity, thus enabling the spectacular and ultimately disastrous growth of t he subprime market. Because CDSes were also a vehicle for highly leveraged and opaque-speculation, fear that fi nancial institutions faced

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large losses on t hem spread, hetping freeze credit markets in the fall of 2008 . Derivatives themseLves have been with us for cent uries and can serve useful economic purposes. The modern derivatives explosion. though, has been built around a mechanistic and flawed approach to risk. The traditional view of risk heeded its numerous facets, several of which elude quantification, and accounte d for the

uniqueness of individual situations. The modern view asserts that sit uation-specific factors can be diversifi ed away, and that risk can be reduced to a single number whose value can be de rived from statistical analyses of historicaLdata. The models t hat generate prices for stock options using just a handful of variables are the simplest case in point . The key variable is volatility-a measu re of how much the

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almos t $98,000 in 2003, making a mockery of estimates of mortgage de faults based on historic rates. The traditional lending model was built around case-by-case judgment. Home buyers wo uld apply for loa ns from their local bank, with which they often had an existing relationship. A ba nke r would rev iew each ap plication and make a judgment, taking into account what the banker knew about th e applicant, the applicant's employer, the property, an d co nditions in the local market . The ba nker would ce rta inly consider history- what had happened to housing prices, and the track reco rd of the borrower an d other similarly situate d individuals. But good practice also req uired forward-looking judgmentsassessments ofthe degree to which the futu re would be like the past. Dialoguean d relationships were also important: Bankers wou ld talk to borrowers to ascertain their beliefs and intent ions. And staying in touch after the loa n was made facilitate d judgments about adjus ting te nus when necessary. Over the past several decades, centraliz ed, mechanistic finance elbowed aside the traditional model. Loan officers made way for mortgage brokers. At the height of the housing boom, in 2004, some 53,000 mortgage brokerage companies, with an estimate d 418,700 employees, originated 68% of all residential loans in the United States. In other words, fewer than a third ofallloans were originated by an actual lender. The brokers' role in the credit process is mainly to help applicants fill out forms. In fact, hardly anyone now makes case-by-case mortgage credit judgments.

The modern view asserts that situation-specific factors can be diversified away.

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stock will fluctuate in t he future. Its correct value can be known only by an omniscient being. Traders therefore plug in histo rical volatility, shading it a bit to reflect their guesses about the future. Estimates of volatility made mainly on the basis of historical values can be wildly wrong, and at the most inopportune times. But because these models don't require labor-intensive, on-the-spot analyses of real

Mortgages are granted or denied (and new mortgage products like option ARMs are designed ) using cornplex models that are conjured up by a small number of faraway rocket scien tists an d take little heed ofthe specific facts on the ground. The securitization and saleofmortgages has meant th at financial companies' loan origina tion is no longer limited by their deposit base or capital, allowing some institut ions to capture a very large share ofthe market. Count rywide Financial, which was started in 1969,grew from a two- man operation into a mortgage behemoth with approximately 500 branches. Before it imploded, in 2007, it was issuing nearly a fifth of all u.s. mortgages. The governmen t/private hybrids Fannie Mae an d Freddie Mac made Countrywide'S role seem small. When they were taken over by th e Treasur y, in 2008, the two enterprises owned or had guarant eed about half of the cou ntry's $12 trillion wor th of outstanding mortgages. Since then, their share ofthe market has only gone up. The buyers of securitized mortgages don't make case-by-case cred it de cisions, either. For instance, buyers of Fannie Mae or Freddie Mac paper weren't, and still aren't, making judgments about the risk that homeow ners woul d default on t he und erlying mortgages. Rather, the y we re buy ing government de bt-and earning a higher ret urn than they would from Treasur y bond s. Even when securi ties weren't guaranteed, buyers ignored the creditworthiness of individual mortgages. They relied instead on the models of the wizards who developed the

companies or borrowers, they quickLy caught on after being introduced in the earLy 1970S. Since then the same basic approach has bee n used to generate purportedly fai r prices for all manner of derivative contracts. Such highLy abstracted, top -down conceptions of risk- the "delta" of a de rivatives book or the "beta" of a stock portfolio-allow the CEOs of fmancial behemoths, at least in principle, to manage

a wide range of activities with little knowledge of the details of anyone. Regulators, who once focused on loan-by-loan examination of ban ks, have aLso embraced the top-down approach to risk cont rol. The scr utiny of individuaL risks has been abandoned . - A .B.

Septe mber 2010 Harvard Business Review 51

THE BIG IDE A THE J UDGMENT DEFICIT

Fixing Financial Services What can lawmakers and regulators do about the rise of computerized, standardized credit and its attendant dangers? More rules t hat make black boxes work better aren't the answer. Rather, we need to just say no to judgment-free risk-taking by banks (whose recklessness affects us aLL). I propose that we reinstate old-fashioned banking, in which bankers know their borrowers. This couLd be acco mplished by tightly limiting what banks can do: Specifically, they should do noth ing besides make Loa ns to individuaLs and nonfin ancial businesses-after conducting beets-en-the-ground due diligence- and conduct simpLe hedging tra nsaction s. The standard for making a Loan or hedge wouLd simply be whether it could be monitored by bankers and examiners who don't have PhDs in fi nance, and whether the risk is one that bankers would take if it were their own money-a "prude nt lender " rule, in other words.

These ruLes wouLd appLy to any entity taking short-term de posits from the public, whether or not it was called a bank. All ot hersinvestment banks. hedge funds. trusts. and the Like-could innovate and speculate to the utmost , free of add itional oversight. But they would not be altowed to trade with or sec ure credit from regulated banks. except perhaps through loans cotlateralized by Liquid, high-quality sec urities. No lending against or purchasing of coLLateralized debt obligations, and no financing of warehouses of loans awaiting sec uritization, for instance. Mechanistic finance wouldn't disappear, but it wouldn't imperil our Livelihoods as it so palpably has in recent years. - A .B.

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underwriting standards, the dozen or so banks (the likes of Lehman, Goldma n, and Citicorp) that securitized the mortgages, and the th ree rating agencies that vouched for the soundness of the securities. Dispensing with judgment has also he lped funnel the mass productio n of derivatives into a few mega-institu tions, posing systemic risks that their top executives and regulators ca nnot control. (See the sideba r "Derivatives for Robots." ) The fallout . Little good has come of this robonzation of fina nce. Reduced case- by-case scrutiny has led to the misallocation of resources in the real economy. In the recent housing bubble, lenders who, without much due diligence, extended mortgages to reckless borrowers helped make prices unaffordable for more prudent home buyers. The replacement of ongoing relationships with securitized, arm's-length cont racting has fundamenta lly impaired the adaptability of financi ng terms. No cont rac t can anticipate all co ntingenci es. But securitized financing ma kes ongoing adaptations infeasible; becau se of the great difficuLty of renegotiating terms, borrowers and lenders must adhere to the deal that was struck at the outset. Securitized mo rtgages are more likely than mortgages reta ined by banks to be foreclosed ifborrowe rs fall behind on their payments, as rece nt research shows. When decision makingis centraiized in the hands of a small nu mbe r of bankers, fi nancial institutions, or quanti tative models. their mistakes imperil the well-being ofindividuals and businesses throughout the economy. Decentralized finance isn't immune to syste mic risk; individual fi nanciers may follow the crowd in lowering down pay ments for home loans, for instance. But this behavior involves a social pathology. With centralized authority, the process requires no widespread mania -just a few erran t lending model s or a couple ofCEDs who have a limited grasp of the risks ta ken by subordinates. ~ There is a categorical difference between the ageold sec unnzanon of debt by railroads and electnc utilities and the n ewer secur itization of mortgage and co nsumer loans. The issuance of railroad and utility bonds does not eliminate holistic, case-bycase judgment . Rat her, a few unde rwrite rs and rating agencies playa pivotal role in making these judgments, us ually after extensive dialogue with the borrowers. Furthermore, the econom ies of scale in the railroad or power plant being financed compensate for the concentration of dec ision -making power. When housing and au to loans are sec uri tized, by

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If we are to preserve the primacy of human judgment, we must harness and control statistical models, not submit to them. contras t, the concentration is not accompanied by any detailed analysis of the ultimate borrowers' circumstances. The supposed benefit of cookie-cutter credit decisions is the lower cost ofautomated lending. But low-cost lending to borrowers who can't repay is no bargain for anyone. The mass production of consumer loans isn't like the mass production of consumer goods. The long-term consequences of excessive lending can be disastrous for bo rrowers, creditors, and society at large. As lawmakers and regulators respond to the financial crisis, they are not evaluating the practice of securitization thoughtfully,asking when and whether it beats traditional bank lending; they are merely striving to restore securi tization to its precollapse levels. Yes, there are a few stabilizing improvements: New laws require banks to keep 5% of securitized subprime mortgages. Beleaguered credit rating age ncies promise to improve their models and provide more transparency. But policy makers are ducking the question of whether loans made to home buyers and consumers based on computerized cred it scores should be securitized and rated at all, given the absence ofany fi rsthand scrutiny ofthe borrowers. I'm not arguing that Congressor regulators should decide how much or what kind of securitization is right. Banning mass-produ ced derivatives or supervising them closely would also be unwise: Blanket prohibitions rarely work, and nua nced restrictions just create more work for regulators, lobbyists, and lawyers. Reforms should focus on reston ng judgme nt to those institutions where its absence does the greatest harm- na mely, banks. (See the sidebar "Fixing Financial Services.")

A Balancing Act "Face it," the Silicon Valley savant Paul Saffodeclared recently, "innovation is an elite activity." It isn't, though. SteveJobs may orchestrate the development of iPhones and iPads, but the success of these products requires the contribut ions ofthousands of engineers, designers, marketers, and copyright lawyersemployedby Appleand its wide network ofsuppliers and developers of applications and add-ons-as well as the venturesomeness of million s of consumers.

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The mode rn economy makes change routi ne and ubiquitous. Many have the opportunity to advance; few can afford tostaystill. Whether they likeit or not, the ma kers of potato chips and of semiconductor chips-along with their financiers, regul ators, and customers- all have to figure out what comes next. Paradoxically, the great advances realized by giving so many an op portunity to use judgment and imaginat ion engende r a need for more centralized control. The negligible au thority of governments or private organizat ions possible in a Jeffersonian society of yeoma n farmers is inconceivable in an advanced economy wit h complex, large-scale activity. So the challenge is to keep control by human au thority- or computer models-within judicious limits. I can think of some broad guidelines: Computerized controls work best with ina nimate products or processes that can be physically shielded so that varia tions in conditions (such as the temperatureor humidity inside a plant or prod uct casing) can be minimized and when feedback from measured outcomes can be continuously used to adjust or improve the decision-making algorithms. Computers also shine when, as with the configurations of pieces on a chessboard, the number of possible outcomes is vas t (in fact , this vastness often gives the computer its edge) but they all conform to well-specified rules. Conversely, human judgment is favored when shieldi ng is difficult, outcomes are amb iguous, and the possibilities are open-ended. Ultimately, however, the "right-sizing" ofjudgment is itselfa matter of judgment. Longexperience has ta ught us how to strike a sensible bala nce in the area of centralized human control. We no longer blindly trust scie ntific management, time-and motion experts, or the wisdom of corporate executives and committees; but we do rely on bosses and rules to provide some order. Black-box econometric models are harder to blend with human judgment . Their dictates, which can be as rigid and stultifying as those of time-and-motion exper ts, are invisible and disembodied and thus more difficult to confront. Yet if we are to preserve the primacy of human judgment, we must learn to harness and con trol these models, not subm it to them. I::' HBR Reprint R1009a September 2010 Harllard Business Review 53

O ur three tiers of co mprehensive leadership programs cul tivate success at all levels. Eac h offering brings toget her global business leaders to t urn visionary ideas into best management practices that deliver results. Email ctojnrcebbs.ecu to receive detailed information. G lobal Perspe ct ives. Tangible Business Results. Scan & PDF: worldmags & avaxhome

HARVARD BUS I N E 5 5 SCHOOL E X ECU T I V E E D U CA T IO N

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Spotlight

56

A New Alliance for Global Change by Bill Drayton and valeria Budinich

66 Making Social Ventures work by James D. Thompson and Ian C. MacMillan

Can Entrepreneurs Save the World?

ARTWORK Josh Keyes, Scorch II , 2009

acrylic on panel, 30" x 4 0"

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74

The High-Intensity Entrepreneur by Anne S. Ha biby and Deirdre M. Coyle, Jr.

Innovative ventures are using mobile devices and the web to scale social change. profi les begin on page 58. by Rasika Welankiwar

We need out-of-the-box thinking, audacious goals, and lots of experiments. Today's entrepreneurs bring all that and more to the table. September 2010 Harvard Business Review 55

SPOTLIGHT CA N ENTREPR ENEURS SAVE THE W ORLD?

Spotlight

ARTWORK Josh Keyes, Burst I. 2009 acrylic on panel, 30" x 80·

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Bill Drayton is the CEO of Ashoka: Innovators for the Public, a globa l organizatio n with headquarters in Arlingto n, Virgini a.

Valer ia Budi nich is the founder and chief entrepreneu r of Ashoka's Full Economic Citizenship Initiative.

Working together, corporations and social entrepreneurs can reshape industries and solve the world's toughest problems. by Bill Drayton and Valeria Budinich

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Septe mbe r 2010 Harvard Business Review 57

SPOTLIGHT CA N ENTREPRENEURS SAV E THE W ORLD?

S . l

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PROFILE

Making Emergency Care More Efficient In India, ma ny lives a re lost for wa nt of t imely medical care. Not acceptable, decided a g roup of young Indian professionals, who started Dial 1298 for Ambulance. This initiative makes ambulances simple t o access through an easy-toremember four-digit telephone number and provides service regardless of a person's ability t o pay. cha rg· ing on a sliding scale. With the hel p of global posit ioning a nd realtime tracking systems. the q uick dispatch of 1298 ambulances has so fa r saved some 50,000 lives in Mumbai. - Rasika Welankiwor

We are witnessing a sea change in the way society's problems are solved, work is performed, and businesses grow. Collaborations between corporations and social entrepreneurs can create and expand markets on a scale not seen since the Ind ustrial Revolution. These markets will reach everyone. but especially the 4 billion people who are not yet part of the world's formal economy. They will offer new and remarkable products and services in sectors as diverse as education. transportation, and fi nance. You may be skeptical of thisdaim, and with good. reason. The citizen sector- the te rm we use to define the millions of groups established and run by mission -minded individuals across the globe who are attempting to address critical social needs-has long been regarded as understaffed and inefficient. But that has cha nged. We work with some 3,000 social entrepreneurs worldwide, and over the past 30 years we've seen the citizen sector catch up with bu siness as it has increased its productivity, size. and reach. Its organizations are attracting talented and creative leaders, and their work is changing the game in crit ical industries and areas suc h as energy and health care. For-profi t organizations today have an op portunity to collaborate with citizen-sector organizat ions (C50s) on large-scale problems that neither group has been able to solve on its own. The power of such partnerships lies in the complementary strengths of the participants: Businesses offer scale, expertise in manufacturing and ope rations, and fi nancing. Social en trepreneurs and organizations contrib ute lower costs, strong social networks, and dee p insights into customers and communities. But to work together effec tively,they must focus on creating real economic as well as social value. We believe they can do so by formi ng what we call hybrid value chains (HVCs), which capitalize on those complementa ry strengths to increase benefits and lower costs.

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This trend has been developing for years. and we've participated in pilot projects that have delivered imp ressive results and promise extraordinar y growth. HVCs can now be found in many ind ustries all ove r the world. Collaboration between corporations and C50s has reached a tipping point: It is becoming standard op erating procedure. Indeed, we believe that if you're not thinking about such collaboration, you'll soon be guilty of strategy malpractice.

The Vibrancy of the Citizen Sector Before we explore the inner workings of hybrid value chains, it may be help ful to look at how we got here. In the 1700Sbusiness became entrepreneurial. Upstarts devising faster and more-efficient ways to prod uce goods ushered in the Industrial Revol ution. They introduced innovation after innovation, u ltimately changing the world. After remaining flat for a millenni um, per capita income in the West rose by an ave rage Of20% in the 1700s. 200% in the 1800s, and 740%in the past century. But while the for-profit sector enjoyed sweeping progress. the citizen sector languished . It faced little outside ma rket pressure and relied heavily on fundi ng fro m governments that, as mo nopolies. feared competition. C50s felt little push to innovate; as a result, they fell far behind in productivity, performance, pay rates, confidence. and reputation. By 1980 th e imbalance between the business and social sectors of society had become intole rable. (We had great TVs but lou sy ed uca tion.) New opportunities emerged across the world (except where governments got in the way), and the citizen sector restructured itself to become entrepreneurial and competitive. It rapidly increased produ ctivity and scale. lowering the cost of goods and services it provided relative to business's offerings. Since then. the citizen sector has been creating jobs about three times as fast as have other employ-

A NEW ALLIANCE FOR GLOBAL CHANGE HBR.ORG

The time is ripe for coLLaboration between for-profit businesses and mission-driven individuals and organizations.

By forming "hybrid value chains" the for-profit and citizen sectors can togeth er remake global economies and create lasting social change. Businesses offer sca le, expertise in ope rations, and fi nancing. Social entrepreneurs offer lower costs, strong social networks, and a deeper understanding of customers and communities.

ers in the Organisation for Economic Co-ope ration and Development countries. In Brazil the number of C50s rose from about 36,000 to nearly a million over the past 20 years. In the United States their number has grow n by more than 300% since 1982. Today millions of these groups attract talented individuals who long for challenging and lucrative work that is consistent wit h their personal values and goals. Take David Green, who helped start Aurolab, an Ind ia-based nonprofit that p roduces intraocular lenses to restore sight to cataract patients. It has ma nage d to reduce the p rice of lenses from $300 to $10 or less, by using emerging tech nology and restructuring its manu factur ing cos ts. Aurolab is the ma nufacturing division of Aravind Eye Hospitals, wh ich charge patients for the lenses on a sliding scale depending on their income. It hascaptured about 8% of the global intraocular lens market and sells about 1.5 million such lenses each year in 109 countries. Green, working with Ashoka, the International Agency for the Prevention of Blindness, and Deutsche Bank, has also lau nched The Eye Fund , a $15 mill ion loan fund that will enable eye-care groups to grow far faster than they ot herwise could, significantly speeding the reduction of blindness. Or consider Rodrigo Baggio, who created a chain of computer sc hools serv ing hundreds of slums across Latin America and Asia. He persuaded one organization after another to do nate, warehouse, and transport their used computers, and thousands of slu m dwellers to set up and run the schools. These schools now boast some 700,000 graduates. We could go on and on. Butour point is that many social entrepreneu rs are already out the re changi ng the world -and businesses have largely been ove rlooking them. It was previously safe to ignore the citizen sector, because this segment ofthe economy was relat ively small in scale and low in productivity. That's no longer true. The companies that work wit h

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l ocal citizen groups helped to persuade Amanco, a maker of water-conveyance products, that smalL farmers in Mexico represented a significant market opportunity. They partnered with the company to organize farmers into loan groups, promote irrigation technologies, and even install syste ms. The social entrepreneurs are helping t he farmers EXAMPLE

get financing so t hat they can afford Amanco's products. This newly created dripirrigation market is worth abo ut $56 million a year-and farmers are enjoying higher yields.

and learn from the sector and its leaders will reach large new ma rkets. They will also gain competitive advan tage from new business models and firstmover benefits. The time is ripe for collaboration beca use the two sec tors are now equally innovative. Together they can promote changes as powe rful and widespread as those produced by the Industrial Revolution.

Hybrid Value Chains Hybrid value chains represent a systemic shift in the way businesses and C50 s interact. They are collaborations that redefi ne value in game-changing ways, wit h each side clearly understanding (and willingly accepting) the risks and rewards. Consider the housing industry. Curre ntly, onesixth of the world's population lives in slums and squatter cities. That's a billion people who are shut out of the formal hou sing market. If you're a cement compa ny, a tile maker, a brick manu facturer, a ban ker, a developer, or a u tility, just think: What would it mean for your business if you could unlock the potential of a tr illion-d ollar ho using market? Until recently, that was nearly impossible, because the busi ness world acting alone -with its existing cost structures and limited un de rstanding oflocal markets-could not reach those customers. Nor, for their part, had governments or CSOs figured out

If you're not thinking about HVC collaboration, you'll soon be guilty of strategy malpractice. September 2010 Harvard Business Review 59

SPOTLIGHT CA N ENTREPRENEURS SAVE TH E WO RLD?

S . l

~W'ange how to serve them. But look what happened when a for-profit ceramic tile maker partnered wit h a South American CSO. Colceramica (a Colombian subsidiary of Corona, one of the largest building-materials retailers in South America) wanted to learn more about the low-income market for ceramics and home products. We introduced the company's executives to Haid y Duque, a cofounder of Kairos, which grew out of a human-rights organization tha t works w ith people dis placed by armed conflict. They collaborated on market research an d developed a business plan. Colceramica provided the prod uct - its Iberica tile line - an d the techn ical an d business knowhow (sales and marketing tec hniques, for instance). Kairos, in return for fees, rec ru ited and managed a female sales force. That model generated income for previou sly u ne mployed wo men and pushed the product into the hands of potential customers, rat her tha n waiting for a storefront to pull th em in. It reduced Colceramic a's distribution costs by a third, so the company could afford to pay a percentage of its profits to the women sales promoters and commu nity partners. Other local CSOs performed administrative functions in ret ur n for a percentage of revenues, w hich th ey reinvested in community projects. The program, now called Viste Tu Casa (Dress Your Home), launched in January 2006. In 2009 its sales reac hed nearly $12 m illion as it expanded to five of the six largest cities in Colombia, in partnership with five CSOs. It has helped more than 28,000 fa milies im prove th eir livin g conditions, and 179 saleswomen are each earni ng $230 a month. In India, Ashoka is working with mortgage co mpan ies, for-profit housing developers, an d local citizen-sector groups to create a thr iving housing market -delivering affordable new apa rtments for the "informal" members of the local workforce. These consumers often have a steady source of income but lack proof of stability and therefore are ineligible for mortgage loans. India's housing deficit has been conservatively estimated at about 24.7 m illion homesperhaps the largest potential housing market in the world. And that doesn't include what will be needed as more than 700 million Ind ians move from villages to cities . Within this new-constru ction HVC, CSOs can serve asdemand aggregators, bringing groups of consumers to for-p rofit developers, or as full design and investment partners. More than 2,500 homes are being bu ilt, with the promise of ano ther 7,500

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within the ne xt 18 months- representing more than $100 million in sales. Agriculture is another market that profits fro m hybrid value chains. Consider d rip-i rrigation syste ms in Mexico, where more tha n 2 million small fanners live on less than $2 a day and work, on average, fewe r than five hectares (about 12 acres) ofl and . Most companies believe it isn't cost -effective to serve such low-income consumers. But Ashoka and local cit izen groups persuaded Amanco, a maker of waterconveyance p roducts, ot he rwise. Viewing these farme rs as a significant market opportunity, it is reo engineeri ng its business model to increase the value of small individ ual transact ions. CSOs are critical to this effort: They organize farmers in loan groups, promote irr igation technologies, and even install systems. They also he lp the farmers gain access to consumer financing so that they can afford Amanco's products. This n ewly crea te d d rip-irrigation market is es timated to be worth $56 millio n a yea r. The customers have become more-efficient fanners and enjoy higher and more-certain yields ofmultiple crops, sometimes trip ling their prior income.

A Win-Win-Win Proposition Businesses th at enter into HVCs ca n ex pect three kinds of retu rn on their investments: Profits. HVCs u nleash many op portunities for growth . For example, on the basis of their joint research, Ashoka an d the consulting fi rm Hystra estimate that a $553 billion market exists for sa fe, clean, an d affordable energy for low- income cons umers. Moreover, ifa business can construct an HVCto profitably serve lower-income consumers, it can often provide those services to higher-income consu mers as well. KnowLedge. Companies that pioneer HVCs will run up the learning curve, leavi ng competitors behind. And as they gain experience, they can carry their new knowledge into di ffere nt environments. In "How GE Is Disru pting Itself" (HBROctober 2009), Je ffrey R. lm me lt, Vijay Govi ndarajan , and Chr is Trimble w rite: "Success in developing coun tries is a prerequisite for continued vita lity in developed on es." GE is pu shing to "reve rse innovate" prod ucts in emerging m arkets because they can "create brand-new markets in the developed world -by establis hing dramatically lower price points or pioneering new ap plications." Whe n designed correctly, HVCs, too, can be a prime source of such disruptive offerings.

A NEW ALLIANCE FOR GLOBAL CHANGE HBR.ORG

Ta le nt . HVCs req uire entrepreneurs who can spo t opportunities, devise creative solut ions, and collaborate with a diverse group of partners. They give companies a chance to iden tify and encourage talented leaders. They also attract progressive thinkersand increase commitment to employers, because working on this new frontier of business is exciting, socially relevant, and challenging. C50s will gain at least as much, beginning with access to cheaper capital. McKinsey estimates that philanthropic capital actually costs those seeking it

viron ment, custo mers are often asked to make big comp romises because existing business models are inflexible. HVCs can help organizations figure out ways to lessen those comprom ises. For instance, in many parts of India people use stoves fueled by kerosene or wood to cook and to heat their homes, at great cost to both their personal health and the environme nt. On the adv ice of the late C.K. prahalad, SP partnered with local manufact urers and two Indian Ashoka fellows, Muthu velayutham and Prema Gopalan, to ma nufacture and sell biofuel for stoves.

What would it mean for your business if you could unlock the potential of a trillion-dollar housing market? anywhere from 25% to 40% of what they get, once the expense of pursuing grants is factore d in. Capital from for-profit finance fi rms typically costs 2%to 5%- and, surprisingly, business sources are much more patient. C50s, especially early actors, will take market share from other C50 s that can't provide the same goods or services. This will allow them to scale up, driving costs down further. The profits from an HVC can be reinvested in the group's work or used to subsidize those who can't pay full price for the service or product. C50s will attract and retai n talented people who want their work to make a positive dilference on a largescale. And, last but not least, CSOs will vastly improve the livesof the people they sought to help in the first place. Customers, too, be nefit greatly from an HVC. They get lower-cost access to high-quality products, from building mate rials to medical diagnost ickits. Not every situation calls for an HVC, of course. Three kinds ofopportunities are particularly ripe for this form of business strategy: When the citizen sector is large and growing fast . Ashoka est imates that the global low-income health care market is now wort h $202 billion but will grow exponentially becau se of eme rging business and social innovations. The global low-income food market is even more immense: a fast-growing $3.6 trillion. Any entrepreneur's hea rt would beat faster thinking about all this untapped potential. When market values are changing dramatically. In markets such as energy and the en-

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Users' monthly energy costs dropped , as did their exposure to indoor smoke. Although this business is still in its infancy, the goal is to reach 20 million house holds in rural India by 2020. BP has decided not to continue, because it considers the business outside its core product line, but local India n compan ies in partnership with C50s and rural retailers have stepped in to fill the gap. When charitable funding and "free services" can be replaced with genuine markets. Innovat ive pricing and new approaches can lead to goods and serv ices that deliver both traditional and new value. Microcred it comes to mind: Thanks to the wor k of Grameen Bank and similar lending organizations worldw ide, microborrowers have bee n able to create their own businesses-spurring economic growth in their communities -while generating a multibillion-dollar finance industry.

constructing a Hybrid Value Chain From our experience devising HVCs and wor king with organizations involved in them, we offer the following advice to executives who are ready to build their own: Ask hard questions about how the business is currently done. The value chain concept, developed simultaneously in the 1980s by Michael Porterand a group of McKinsey consultants, replaced a framework called t he busi ness system, whic h essentially created a product, made it, and sold it. The value chain involves choosing, providing, and Septem ber 2010 Harvard Business Review 61

SPOTLIGHT CA N ENTR EPREN EURS SAVE THE WORLD?

A Huge Market, and Not Just at the Bottom What's the value of the untapped markets that might be reached by hybrid value chains?

If we consider only Low-

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incomes in India, china, Brazi~ • and elsewhere. A conservat ive • est imate is that t hese market s

internationaLdollars) in 2005, according to a pioneering study by t he w orld Resources Instit ut e and t he International Finance Corporati on. Market

have grown 5% annually since 2005. The bulk of t he tot al value comes from;

MARKET FOR HEALTH CARE

oppo rtu nities in emerging economies have increased sharply since t hen, because

communicating the value. It forces managers and strategists to examine the relationship between benefits and price. It pushes executives to think deep ly about how customers define price: Do they focus on purchase price or lifetime costs? How price sensitive are diffe rent segments? How elast ic is demand? These are all critical questions for the would-be creator of a hybrid value chain. Organizations considering one must think holist ically about their business strategy and the industry they're in. Reconceive value along multiple dimensions to find new markets, The for-profit Healthpoint Services, incubated at Ashoka, brings together Indian businesses, citizen-sector groups, and forpro fit venture capital and social funds to deliver modern, evidence-based health care to rural villages in India. Its clinics, called E Health Points, use telemedicine -video technology and electronic medical records -so that patients do n't have to travel for a day or more (and sacrifice income during that time) to reach a doctor. The clinics keep costs low for patients with a combi nation of advanced point-of-care diagnostics, generic drugs, and careful local staffing. Consultations are just $1. Many diagnostic tests cost less than 50 cents; none costs more than $4. The clinics also provide dean d rinking and cooki ng water on a monthly subscri ption basis at a cost ofroughly 5 cents a day per household. And when customers come to collect their water, staffers take the opportunity to raise awareness of health issues and early prevention. On the basis of initia l success, the fi nan ce min ister for Punjab has asked that 600 E Healt h Points be built in that state. Models like this can be exported to many countries, including developed ones, turning scarcity into abundance. Healthpoint already has pilots planned in Southeast Asia and Latin America. For its targe t ma rket, the scarcity was access to services: Most 62. Harvard Business Review se pte mber 2. 010 Scan & PDF: worldmags & avaxhome

patients in rural areas lacked transportation an d needed to work long hours. Byputting clinics nearby and using technology to bring doctors to patients, Healthpoint unlocked latent demand , showing that even low-inco me consumers are willing to pay for quality services. Look for pricing and financing innovations, This is a critical point . Just like businesses, HVCs need different types of capital at different stages of their life cycles. They may need up-front seed money, but sooner rather than later, customers will have to pay for the product or service they're receiving. And designers of HVCs will have to come up with appropriate financing solutions. They may work with nontraditional partners-some utility companies, for instance, provide "retail" fi nancing at relat ively low risk because they are dose to their customersor they may need to work with the usual suspects in unusual ways: The Indian com pany Selco brought its $400 solar home-lighting system within reach of customers by working with banks and microfinance institutions to help the lenders understand how solar products increase productivity. Other organizations turn to leasing models. Commercial microcredit funds are an ea rly (if small) example of how the fi nance industry profitably provides d irect investments in citizen-sector work. The industry can do so because there are 120 to 150 large, well-established microcredit lenders in whose secu rities these funds can safely invest large sums without incurring significant expense. Financial ins titutions will have many attractive opportuni ties to invest in markets created by hybrid value chains. Indeed, HVCs present a huge opportunity for the fi nance industry. Here is why: First, beca use HVCs are businesses, they are both stable and easi ly unde rstood by businesspeople. Second, HVCs with successful fi nancing structures can generate what finance firms love-millions ofloans that

A NEW ALLIAN CE FOR GLOBAL C HA N GE H BR.ORG

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MARKET FOR AGRICULTU RAL PRODUCTS AND FOOD

have low transaction costs and low to moderate risk. (Such financing st ructures themselves are commonly HVCs: CSOs make the loans and sell them to bankers.) Third , packaging these loa ns allows financial companies to give thei r clients a choice among significant social impac ts (from housing to ed ucation) and loca tio ns (from Brazil to Poland) along with solid returns. At least for early movers, the ability to offer so much choice will confer a competitive adva ntage. It's time for the fi nance industry to develop smart ways for clients to invest in the world and the people who want to change it. Right now, th ose investors are limited to foundations and various kinds of "impact ph ilant hropy." Individuals and institutions sho uld instead be able to invest in financial products that deliver solid ret urns and enable people to irrigate their land, rebuild their homes, educate their children, and trans port produ cts to market. lnvestors should be able to weigh their risks and rewards on the basis of fi nancial as well as other returns they value. Org an ize t o innovate . Two distinct in novation challenges arise when build ing HVCs- finding good idea s an d develop ing bu siness models to deliver them at scale. Id eas are everywhere, of course, but they increasingly come from emerging ma rkets. Mukesh Ambani, the chairman and managing director of Reliance Industries, says, "Twenty years fro m now we will not talk about garages in Silicon Valley. We will talk about projects in rural areas of Ind ia, wh ich are then sca led all over the world." The Ashoka -Le melson Fellows program has identified 100 inventor-entrepreneurs, largely from developing count ries, who have launched social enterprises in clean energy, mobile technology, water and sanitation, and many other areas. We've already men tioned that GE and others have learned to reverse-in novate products designed for emerging

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These markets are all much Larger than t he oft-touted and explosive one for mobile telephony among low-income populations- and the potential market for HVCs overall certainly exceeds t heir total value, because HVCs can spread across the economic spectrum. Consider t he need

for improved education and health care among the urban middle classes in developing countries, or the demand for lower-cost heaLth care, morenutritional food, and affordabLe housing in wealthy countries like the United States.

markets. Keeping a close eye on these markets is a good first st ep. Because HVCs are still evolving, there's no single formul a for success. But experience has taught us some lessons abo ut the second challenge-developing business models. We know, for instance, that com panies wrestle with where to house their hybrid ventures. We recommend not categorizing such efforts as corporate social responsibility, beca use the CSR arms of most compa nies focus on doing good an d demonstrating impact but are rarely asked to generate healthy returns. Appoint a leader. HVCs, which start as constellations of potential players, are not self-orga nizing.

It's time the finance industry developed smart ways to invest in the world and those who want to change it. Someone must take the lead and decide who is in and who is out. Because HVCs are a pat hway to explosive growth, bo th partners- corporation s and CSOs- willwant to assign talented executives to the opportunity. Those people must be patient, persistent, and able to earn the trust ofall the actors-that is, they must be empathetic, good at team building, and willing to work directly both across sectors and with u nfamiliar suppliers and customers. A corporate intrapreneur or the head ofa CSO might lead the team -whoever it is, he or she will have to ma nage lots of complex moving pieces as the HVCforms . Give the t eam tim e a nd pe rm is sion to fa il. Organizations can afford to to lerate missteps and September 2.010 Harvard Business Review 63

SPOTLIGHT CA N ENTREPREN EURS SAVE THE WORLD?

Hy brid vaLue c ha ins The business has th e can transform potential to be la rge in ~_r 5Cale and to cross borders. industries a nd create The best HVCs will have enormous impact, not only w ho te ne w one s if they meet the se criteria : on a company's bottom line but on millions of lives.

H BR.ORG

For-profits a nd soc ial e ntrepre neurs work t ogethe r to create mult iple kinds of value. Companies and citizen-sector organizations capitalize on their particular areas of expertise to deliver a valuable product or service that neither partner could provide on its own.

failures when the goal is to exploit an immense opportu nity. Learning what doesn't work will move them one step closer to discovering what does. Of course, results are important- sooner or later the busi ness model needs to show that it can be pro fitable an d scalable. It's critical to strike a bala nce between being patient and being demanding. Remember Tracy Kidder's marvelo us book The Soul ofa New Machine, about a project team and its race to develop a new comp uter? Forming a hybrid value chain is a similar story: It involves a relentless team of players whoare ready to welcome risks and challenges because they believe strongly that what they are doing is not only about profits but also about human progress.

Consumers-broadty defined -pay for the product or service. This is not charity work or a CSR project . Susta lna bility and scalability rest on profitability.

A syste m-changing idea provides t he basis for new competi t ion. Muha mmad vunus's mlcrocredlt idea of 30 years ago has been expanded to include health care a nd insurance products as well as financial services.

today have the sense that as change accelerates, the world's problems are multiplying faste r than solutions. Slums are growing daily; affordable and sustainable energy is elusive; we are failing to provide adequa te health care for man y citizens. Whatever the issue may be, we believe that the mos t powerful and profita ble answer is often a new form of partnership between business and the citizen sector, which is now composed of millions of competent and competitive organizations, often led by entrepre neurs. The more eyes we have on society's problems-and opportunities-the better our chances of coming up with viable solutions. lj MANY PEOPLE

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"impressive resume. Can you still be reac hed at smashedntrashedgowoohoo.com?"

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2010

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LET'S PASS ENERGY ON TO THE NEXT GENERATION. LET'S GO. The Yosh ida child re n hove a lot of energy. But the country they're growing up in doesn't. Japan, like mony othe r countries, needs a reliable source of energy. That's why Shell is helping 10 deliver natural gas to more countries thon any other energy co mpany. N ot just for tonig ht's bowl of warming noodles, but for years 10 come, when the child re n may have children of their own . let's build a better energy future. let's go. www.shell.com/letsgo

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• 66 Harvard Business Review Septe mber 2010 Scan & PDF: worldmags & avaxhome

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HBR.ORG ARTWORK Josh Keyes, Sprout 11, 20 0 9 acrylic on panel, 30' x 40· J ames D. Thomp!l(ln ([email protected]. edu) teaches innovation, entrepreneurship, and corporate growth at th e University of Pennsylvania's Whart on School of Business. He is a cofound er and director of t he Wharton Societal Wealth Progr am .

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Ian C, MacMillan ([email protected] n. edu) is the academic director of the Sol C. Snider Entrepreneurial Researc h Center and t he Dhirubhai Ambani Professor of Innovation and Entrepreneurship at t he Wharton School.

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Five guidelines can help you build profitable, socially beneficial new businesses in the face of daunting uncertainty. by James D. Thompson and Ian C. MacMillan n recent years, we've all ex perienced considerable volat ility-financial breakdow ns , natu ra l d isasters, wars, a nd other disruptions. It's clear we need new approaches to the world's toughest economic challenges and social problems. Entrepreneurs can play a central role in fi nding the solutions, driving economic growth (building infrastructure, deve loping local talent, infus ing struggling regions with investment capital) and helping hu ndreds of millions of people worldwide. If successful, socially minded entrepreneurial efforts create a virtuous cycle:The greater the profits these ventures make, the greater the incentives for them to grow their businesses. And the more societal problems they help alleviate, the more people who can join the mainstream ofglobal consumers. The failure rates for new companies and markets, however, are high. That is true anywhere in the world, including emerging economies. The management challenges associated with producing and marketing goods and services at the base of the econo mic pyramid include imperfect markets, uncertain prices and costs, nonexistent or unreliable infrastructure, weak or totally absent formal governance, un tested applications oftechnology, and unpredictable competitive responses. Given th is daunting

September 2.010 Harvard Business Review 67

SPOTLIGHT CA N ENTREPRENEURS SAVE TH E WO RLD?

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~W'ange uncertainty, en trepreneurs need a framework for "unfolding" success from a perceived or an emergent opportunity. Entrepreneurs and others who wa nt to lau nch businesses in, say, Latin America, Asia, or Africa but lack reliable data about those environments need to put together the best models and mechanisms they can, docu menting their assumptions as they go. Critically, however, the y need to systematically test each ofthe assump tions underpinning their preliminary models against a ser ies of check poi nts and be prepared to change on the fly, redirecting their efforts thro ugh a process known as discovery-driven planning. In this way, they can act on emerging evidence instead of obstinately and blind ly purs u ing infeasible object ives. (See Rita Gunther McGrath and Ian C. MacMillan's " Discovery-Driven Planning;' HBR July-August 1995.) However , this method of pla nni ng is necessary but not su fficient to handle high-uncer taint y ventures. In the following pages, we'll look at how to com bine discovery- drive n pla nning with four othe r guidelines for building success ful businesses in uncertain markets that we developed dur ing a sustained field program carried out by the Wharton Societal Wealth Program (WSWP). Specifically, we'll consider four social enterprise pro jects we helped launch in Africa and examine how the guidelines informed the work in each. It's important to note that the lessons here aren't just for entrepreneurs. The ma nagement teams of established multinationals, foundations, large NGOs, and ot her nonprofits can apply them in any challenging and highly uncertain business situation. In doing so, they can better control their costs, increase their impact on society, minimize the effects of surprises, and know when to disengage from questi onab le projects.

Lessons from the Field As part of our research in the WSWP- a nine-year-old

field resea rch progra m at th e University of Pennsylvarna's Wharton School of Business intended to examine the use ofbusiness models to develop projects that attack societal problems- we wo rked wit h 10 groups oflocal entrepreneurs trying to launch baseof-the-pyramid ventures in the United States and several African cou ntries. Each project faced some or all of the elements of u ncertainty cited earlier. In a few instances, even the initial objectives and desired outcomes were unclear, which made it tougher 68 Harvard Business Review Septe mber 2010 Scan & PDF: worldmags & avaxhome

to make decisio ns about where and how to allocate resources. We and our student teams worked with each venture, reviewing socioeconomic and political factors as well as market and com petitive conditions, conducting interviews with project par ticipants, and observing and doc umenting their operations. We helped the entrep rene urs establish strategic par tnerships where appropriate, develop business plans, and deploy relevant technologies. Our insights from the fieldwork have been distilled into th e following gu idelines for creating new bus iness models in emerging or other highly uncertain markets. 1. Define the ballpark-or the scope of the venture . This is a t hree -part process. First, concretely outline the disqualifying conditions, the factors that would preclude the vent ure's launch.These might include an inability to scale operat ions, an environment in wh ich corruption is rampant and can't be circumvented, situations in which the necessary equipment is of poor quality and is difficult to operate and repair, and a lack or shortage of suitable talent. Second, defineyour acceptability space: the minimum number of people the venture should serve and the minimum level of profitability it should attain. And third, after a thorough review of the economic, national. and cultural contexts in which the venture will operate, draw up the business's rules ofengagement. These might include tenets such as "no sales on credit," "no transgressions of home or host country laws;' or "absolutely no payments of bribes:' All three filters will help you allocate scarce resources only to ventures that sa tisfy minimally acceptable outcomes. 2. Attend to the s oc io p o litics . Before you even start, you must develop a fine-grained view of importan t sta keholders. th eir roles, and the resou rces they can provide. Identify beneficiaries-the (often reluctant) part ies who stand to gain from the venture but could nonetheless be initially skeptical ofit; potential allies-those most likely to support the project; needed indifferents - those unlikely to care much about the project bu t whose su pport may be critical; and meaningful opponents- those who will be adversely affected by th e success of the project and have the wherewithal to obstruct it. With such an analysis in hand, you can figure out how best to mobilize supporters and neutralize opponents. 3 . Emphasize dis covery-driven planning. From the get-go, recognize the evolving nature of your project. Of course, you must delineate the ini-

MAKING SOCIAL VENTURES WORK HBR.ORG

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Idea in Brief Many entrepreneurs go into emerging markets with fixed plans and the best of intent ions: l aunch a business. solve a problem. But the dearth of information about customers. cultures, and compet itors often stops them in their tracks. The aut hors offe r fi ve guidelines for creating markets in uncertain environments.

Define the ballpark-or the scope of the venture. What are you trying to do. and what constitutes success?

Attend to the sociopolitics. How will you mobilize supporters and neutralize opponents?

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Emphasize Plan disengagediscoveryment. How can driven planning. you exit witho ut What will emergleaving a large ing data teach footpri nt? you about your proposed business modeL?

Try to anticipate unintended consequences. What kinds of second-order effects, both negative and positive. is your venture creating?

You must delineate the initial business model for the venture and the value proposition. But you're probably going to be wrong. tial business mod el. the delivery mechanisms, and th e val ue proposit ion for customers . But you're probably going to be wrong. The idea is to start with a clearly hypothesized model for the vent ure, launch it at the lowest possible cost. and use the business data that emerge to continuously update your assumptions. systematically learning your way to the eventual solution . First, specifyboththe unit ofbusiness and the unit ofbenefit. The uni t ofbusiness is the transaction uni t for which the customer pays- for example. a sack of grain, an hour of se rvice. or a load of materials hau led. The unit of be nefit is the met ric by whic h societal impact will be measured - for example, a daily protein serving , a patie nt treated. or a person taught to read a simple book. There may be few precedents on whic h to base your assum ption s abo ut those factors. but developing and specifying initial assumptions will help you articulate your business and revenue models. Make sure to doc u ment you r hypot heses and delineate a series of checkpoints at which you'll test them before making major investments in the venture. Second, anticipate the challenges ofgrowth. One of the biggest obstacles to scaling u p ven tures in emergi ng economies. for instance, is the shortage of mana gement talent and expertise. It's difficult to attract experienced employees and partners (or even high -potential candidates for education and training) to an uncertain venture. This limitation alone can seriously undermine aggressive growth plans.

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4 . Plan d is engagement. There is more than just financial cap ital at stake in societal-wealthgenerating initiatives;the livelihoods and well-being of hundreds, if no t thousands. of people also hang in the balance. Before you begin. you must plan how you could disengage with a minimal footprint. How could you exit in an accep table manner? Could you sell off or donate equip ment or other assets? Could you shut down until conditions (say, access to electricity) improve? 5 . Try to anticipate unintend ed conse quen c e s . Recognize that societal intervention s (and, in fact, any form of commercial intrusion) in emerging markets can create unintended secondorder effects. both negative and positive. For instance. when various NGOs and governments encouraged intensive growth in shrimp farming in orde r to bolster local economies and create new export markets, mangrove forests in par ts of Thailand and China were decimated.

Putting the Guideli nes to Work These five guidelines can be applied to any newmarket-crea ti on challe nges-for in st an ce, fin ding markets for radically new technologies such as nanotechnology, or developing submarkets (such as Ch inese and Ind ian teenagers) in rapidly growing economies. Let's look at four of the 10 Wharton projects and see wh ich guidelines were particularly germane in the case of a venture that has been very successful, one that has been only marginally so, one Septem ber 2010 Harvard Business Review 69

SPOTLIGHT CA N ENTREPREN EURS SAV E THE WORLD?

What Is Discovery'-Driven Planning.. ? Discovery-driven planning is a practical tool (introduced in a 1995 HBRarticle by Rita Gunther McGrath and Ian C. MacMillan) that acknowledges the difference between planning for a new venture and for a more conventional line of business. It recognizes that at the start of a ventu re, little is known and much is assumed. When new data are uncovered,

...1.-_

New ventures call for entrepreneurs to envision what is unknown, uncertain, and not yet obvious to the competition.

for which the jury is still out, and one that has been discontinued. SUCCESS

The Fe eds Project The goal of this venture was to produce high-quality, low-cost animal feed in northwest Zambia so that small-scale chicken fa rmers could generate food for themselves and income from the sale of surplus chickens at competitive prices. The region. known for its copper production, faced staggering levels of unemployment in the 1980s and 1990s, after several mines were shut down. This led to severe malnu trition; ma ny people were close to starvation. The leaders of the Feeds Project sta rted small: Six men, wo rking in a shed, used shovels to mix the feed (a combination of corn, soya, minerals, and ot her nutrients). The plan was to distribute it through centers affiliated with a large, well-es tablished corporate group. Here's how the Feeds Project applied several of the guidelines: Scope. The project sought to increase regional cons umption of chicken meat by at least 1 million servings per year and to generate a re turn on sales of animal feed (the bulk ofwhich was for poultry) of at least 12% withi n three years. The venture would sell its feed for cash, not credit. Initially, it could not poach customers from established regional competito rs, nor could it purchase any assets before demonstrating proofof concept. Harsh te nus, perhaps, but they acknowledged the difficulties ofdoing business

in a region where bad deb t was rampant and u ncollectible, and established competitors responded to threats with drastic price-cu tting. Sociopolitics. Many small-scale farmers had little confidence in their ability to raise chickens profitably. So, with coopera tio n fro m leaders in eac h village. the lead entrepreneur of the project designed an education program to convince these potential beneficiaries of the viability of chicken farming. Going from village to village, she held simple but powerful seminars in which she explained possible financial outcomes and d iscussed which types of poultry to breed and how to prevent disease. Only the n di d new growers begin buying the feed. Discovery. The local entrepreneurs initially assumed th at farmers would bu y fee d by the sack; however, many customers lacked easy access to affordable transportation and needed enough feed for six to eight weeks (a prod uction cycle) at a time. So the venture leaders updated their distribution system accordingly. As demand grew, they expanded thei r operations and product offerings, first by salvaging discarded eq uipment and then by purchasing new eq uipment that could churn out more than 2,000 tons offeed per month, including high-quality poultry pellets. Second-order effects. The project is generating negative and positive second-orde r effects. One rather bizarre outcome: As the plant ex pands to fulfill the demand for more feed for ever-more chickens, communities have to deal wit h an excess ofchicken

Farmers don't buy feed by the sack, as had been assumed. The venture needed a new distribution system. 70 Harvard Business Review septembe r :1010 Scan & PDF: worldmags & avaxhome

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feathers. There is currently no way to recycle them, and de mand for cushions and comforters in a poor, tropical society is limited. So the entrepre neur is developing a furnace for the feathers. Still, positive effects abound: Hundreds have entered the chickenfarming market, many of them hiring as they expand. The greater efficiency of the feed market has led to greater investment: New hatcheries and processing facilities are being bu ilt across the region. Several churches are attempting to establish communitybased poultry programs in remote areas, and a new market for product sales has ope ned up in a neigh boring count ry, where the project isalready negotiating to develo p a feed manufacturing plant. The Feeds Project, init ially created for small poultry breeders, selling for cash in local markets, is now supplying larger commercial poultry growers, mining kitchens, and retail chain stores. It offers broader product lin es (such as different size bags and lifecycle-stage formu lations) as well as feed for other species, such as dogs and dairy cat tle. The path to scaling the business has been through higher-quality mach inery, expanded distribution , and moves into adjacent markets. MARGINAL SUCCESS

The Cookie Project Hugenumbers ofu neducated, unmarried mothers in South Africa eke out a precarious living, barely able to feed their children. The Cookie Project was conceived in 2004 to train such women to ope rate bakeries in distressed areas, making high-q uality cookies (using natural ingredients) for health -conscious consumers throughout the country. The pilot site was in the town ship of Mfuleni; the lead entrepreneur launched it t here because she found a small facility, donated to the township by a wealthy woman from Europe, that ha d electricity, run ning water (but no hot water), and, most important, three working ovens. The entrepre neur "leased" the facility from the com mu nity, rent-free, in exchange for training an d jobs for local wo men. The company has now relocated to a larger plant. The next step will be to replicate the operation, fi rst in othe r parts of Africa and then in India and Latin Amer ica -but only if the business model can be p roven to delive r investment-grade profitability. The entrepreneur has calculated the sales requi red to create new jobs (b uildi ng in the cost of training each employee). Here are some guidelines the team used to achieve early success:

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Scope. The acceptab ility space the lead en trepreneur set for the project included trai ning and employing a minimu m of300 so-called unemplcyables. Apart from lea rning how to produce cookies, the women were also trained in basic life skills, such as household budgeting and personal hygiene. Theventure also set a fina ncial goal: to earn $100,000 in profits in South Africa in the third year of operations. Sociopoiitics. Potential employees had been so beaten down by their adverse circumstances that they had to be convi nced that they could, in fact, fi nd gainful work without being exploited. And un involved but influential members ofthe community initially resisted the project for fear that it would decrease their influence. A local elder, for instance, tho ught that the venture was making too much mo ney, thus undermining her position. (She had no concept of net profits-she just saw hundreds of cases of cookies going out the door.) She and other elders demanded a large fee from the project to continue using the com munity bu ilding. The entrepreneur (and the em ployees) spent considerable time talking with the elders, explaining the project's profit challenges, broader goals, an d the resulting expansion oft he local econom ic base. Discovery. The original business model was sales of home-style cookies to loca l d istributors. These days, however, the Cookie Project has access to sophisticated food scien tists, uses best-in-c1ass ingredients, and exports its products to the United States. It also employs men and women on both sides of the Atlantic. Th e financia l challenge remains; bu ild ing a new food brand in the current economic climate is tough. Ifthe venture fails to come u p with a profitable d istribut ion model, it may need to red irect its strategy toward e-commerce in order to reduce its marketing costs and extend the lifespa n of its current investments. Disengagement. The lead en tre pre neur of the CookieProjectdecided that even if the project proved u ntenable, at the very least it would have consider ably enhanced the employability ofits workers.They would know, for example, how to read a basic invoice, write chec ks, and manage customers. Each woma n was treated as an entrepreneur in he r own right, responsible for her own recipe. For instance, the company charged one worker with figuring out ways to improve the taste, look, quality, and packaging of a particular type ofcookie. She "owned" that recipe. The lead entrepreneu r also helped gua rantee the

Improving Communication Without the Net FrontlineSMS gives re source-stretched o rganizat ions (t hink most grass roots nonprofits) a mean s of communicat ion in remote areas th at have no int er· net access. Realizing th at eve n the poorest: members of society have aceess to mobile phones, its c reator developed software that allows users to reach la rge g rou ps ofpeople via t ext message. NGOs in more th an 50 nations have adopted th e technology t o better monitor elections, broadcast security advisories, and pro vide medical services in rural areas, amon g other efforts. - R.W.

September :1010 Harvard Business Review 71

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HBR.ORG 00 you have questio ns or comments about this article? Ian MacMillan will respond to reader feedbac k at hbr.org through mid -September.

workers' employment in theevent that she had tosell the business: As a condition of sale, the new owners would be required to hire all existing employees. THE JURY'S STILL OUT

The EM R Project One ofthe biggest constraints in addressing pandemics in resource-poor environments is the scarcity of physicians. Botswa na is a case in poi nt. Its popu latio n is being hollowed out by AIDS-related deaths in the economically active IS·to-50 age grou p. The EMR Project set out to develop an electronic medical records (EMR) system that would help improve patient care. Eventually, the entrepreneurs tho ught, the system could alleviate the unbearable workload of the country's physicia ns by allow ing nurses to diagnose cond itions and prescribe medications for stable patients, consulting doc tors only when necessary. The following guidelines were most relevan t to this project: Scope. The ven ture managers wanted to make at least $80,000 in profits pe r year and increase the length and improve the quality of life of at least 20,000 patients for at least eight years . With these goals in mind, the project initially trained four nurses to use th e EMR system at a pilot site, with an eye towa rd expand ing to at least 70 nurses nationwide. The leaders of the initiative adopted severa l non negotiable rules of engagement. First, high-quality patient care was the nu mber one priority; typical health markers in AIDS patients (such as viral load and CD4 counts) were to be used as measures ofquality. Secon d, patient confidentiality was to be u pheld. And third, the project had to comply wit h the healt h care laws of both Botswana and the United States. Discovery. The first hypothesized unit of buslness was a suite of reports containing clinical data that could be purchased by pharmaceutical com panies conducting AIDS resea rch in Botswana. The reports would contain anonymous data from patients who had opted in to the project. The research, it was ho ped, would yield improvements in preventive and palliative care. As the venture unfolded, how-

ever, it became clear that the pilot site was too small for large research projects; and negotiating multiple patient privacy protocols was too complex at such an early stage. So the primary u nit of business became an annual software license contract for clinics and health insurance providers interested in using the EMR system's data to improve their client management and claims processes. Instead of trying to lau nch a majo r nat ionwide program with full EMR and diagnostic capab ilities, the project focused on a single private clinic (the largest) and started to build records for 16,000 patients. Disengagement. The EMR Project gives patients and caregivers access to info rmation about realtime physiological responses to treatment and nonadherence to treat ment . So the venture pledged to do no harm: Ifit needs to exit the market, it will help to maintain this reporting and diagnostic capability by identifying an EMR wit h similar capabilities and transferring all patient data to its system. The EMR Project has undergone a number of deliberate red irections, precisely because its lead ers haven't figured out how to alleviate the fallout from AIDS and HIV-related illnesses while generating profits from any of their business model revisions. They have been able to continue probing for solutions at a relatively low cost, however: One redirection occurred when patients ove rwhelm ingly sai d t hey wanted the sam e visual aids the physicians used: charts showing the rise and fall of their health markers according to whethe r they took their medications. This request led to a study to determine whethe r text messages reminding patients to refill their presc riptions and attend regular con sult ations with th eir doctors would increase their adherence to drug regimens and scheduled clinic visits. The data are currently u nder analysis. Should text messaging prove effective, the next steps would be to determine the impact ofincreased adherence on important patient outcomes. If suc h a study demonstrated positive effects on patient health, the text message remind ers could become a component of the EMR business model. However, ifthe study

Entrepreneurs in Botswana hope lowcost revisions will help them find a better model for an EMR project. 72 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

MAKING SOCIAL VENTURE S WORK HBR.ORG

Turning Uncertainty into Risk The discovery-driven process of transforming the uncertainty around a business vent ure into risk (which ca n be managed) allows Leaders to experiment, Learn, and eit her develop a plausible business model or abandon the project early and

POSSIBLE

at little cost. The idea is to reduce uncertainty to the point where probability distributions can be assigned to expected outcomes, making t hem plannable- that is, you develop ideas to the point where it's possible to use convent ional

PLAUSIBLE

methods of assessing risk. When you simply don't know what will hap pen, when the re are as many possible answers as there are questions, the re's a big opportunity for effectuation-that is, for just starting something

PROBABLE

inexpensivety, for ta king some sort of action that has an outc ome. By analyzing these preliminary results, you can then furt her develop your ideas, monitor your progress, and exploit the evolution of any plausible modeL that emerges.

PLANNABLE

NCERTAJN

showed litt le or no impact on pat ient adherence and outcomes, and if no sustainable reven ue model can be found, the project could be terminated. THE PLUG'S BEEN PULLED

The Peanut Project Peanuts, in combination with milk, can fulfill about 90% of a person's nutritional requirements . But shelling peanuts by hand is arduous, and the cost of modern peanut-shelling equi pment is prohibitive for mos t small-scale producers. The init ial concept of the Peanu t Projec t was to encourage relatively isolated rural com munities in Africa to grow nuts in order to supply localen trepreneurs who would build small, low-cost plants to process the crops, imp roving the local distribution of peanuts. In the event of success, a proposed extension ofthe program was to increase production of the nuts and export them to higher-value customers in more-cent ral locations, such as South Africa. The following guidelines were crucial in assess ing the project's viability: Scope. To de te rmine if its efforts would be worthwhile, the vent ure defi ned its scop e according to a minimum number oftons ofpeanuts to be processed and jobs to be created rela tive to a minimum net profit of $75,000 . The projec t also set the following rules: Secure a sa fe central processing center. Obtain permissions and authorizations from the local chiefs an d village heads. And retain a full-time entrepreneur with the local agricultural experience and skills required to bui ld and manage a processing plant and oversee a network of growers. Sociopolitics. For rural farmers accusto med to being in control of existing crops and using stored produce to generate cash as needed , the idea ofharvesting and then giving up their crops toa third party for process ing was hugely suspect. Furthermore, in many rural areas ofAfrica, arable land is assigned by

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chiefs or village leaders to growers they deem worthy. The lead ent repreneur quickly understood that he would need buy-in from these elders before the project could launch. Discovery. The envisaged bus iness mo del and path to scale for the Peanut Project resembled that of the Feeds Project. In the peanut-processing case, however, a critical drive r of success was the management of prod uct "shrinkage" across the logistics chain. Discovery-driven planning showed that a loss of as litt le as 5% would com promise the likelihood of ge nerating the minimum net profit . The second most influential driver was the transportation of peanuts to the processing facility and then to market. Given the scarcity of tru cks, poor roads, and high fuel prices, even the best prod uct was unlikely to capture a high enough price for the growers to com pete. These p ract ical realities inva lidated the early-stage ass umptions. The entrepreneurs were u nable to design a syste m to cope with them or to redirect the project in a way that would attract management know-how. Reluctantly, the venture leaders terminated the project. the fi ve guidelines we've de rived from our fi eldwork offer an effective framework for all organizations-not just entrepreneurs and social enterprises-seeking to create radically new and profi table markets. Large, incumbent organizations and startups alike can use them to create markets for their products. Nonprofits, NGOs, and foundations with limited resour ces can im prove their odds of affecting society in the ways they intend. The discipline engende red by these guidelines-you'll necessa rily come back to the framework again and again as your busi ness evolves-will ensure that you maximize limited resources in pursuit ofyour goals. " TAKEN TOGETHER,

HBR Rep rint Rl 0 09 D September 2010 Harvard Business Review 73

SPOTLIGHT CA N ENTR EPREN EURS SAV E THE WO RLD?

Spotlight

Key es , Sh ado w, 2010 acrylic on panel, 30· x 40·

ARTWORK Josh

The High-Intensity Entrepreneur World-class entrepreneurs have reached critical mass in some surprising places-and their number is growing quickly. These innovators just might revive the global economy. by Anne S. Habiby and Deirdre M. Coyle, Jr.

74 Hafll ard Business Scan & PDF: worldmags & avaxhome

Re ~ iew

Septembe r 2010

he story of e ntrepreneurshi p in the twentieth century was about individuals who got access to sophisticated capital in a few advanced markets and created massive economies ofscale. That's how AT&T, Home Depot, and Microsoftswiftly made thei r way onto the Fortune 500. But in the twentyfirst century, a very different story is unfolding. Today entrep re neurs anyw he re ca n create value with rela tively little capital. Barriers to entry in almost every ind ustry have come crashing dow n, ope ning vast opportunities for small companies. These developments are especially apparen t in emerging mar kets, where we're seeing signs

HBR.ORG

-------------~c=_~~----------Anne S. Habiby (ahabiby@ allworldlive.com) and Deirdre M. Coyle, Jr. (dcoylejr@ allworldl ive.com), are cofounders, with Ha rva rd Business SChool professo r Michae l Porter, of t he AIiWorid Network, an organization in Boston t hat works to advance e ntr eprene urship in eme rging mar kets .

that an ent repreneurial economy is ready to bloo m. We've spent the past two yea rs studying entre preneurship in the Middle East, Africa. a nd South Asia, and we've found hundreds ofworld-dass ventures poised for significant grow th there. Most peo ple's

assumptio ns about entrepreneurs hip in th e developing wo rld-that entrepreneurs eit her don't exist th ere or are microentrepreneurs-are wrong . High -

potential vent ures are surfacing where no one is looking for them-in Beiru t inst ead of Boston, in Cape Town instead of Silicon Valley- among people

who have historically been outside the economic power structure. What's surprising is that so m any of these com panies aren't in t he fast-growing markets the world is already watching, such as India or Brazil. They're cropping up in places like Jordan, Saudi Arabia, and Africa- whose economies have been driven by topdow n government po licy, large business groups, multi na tional co rporations, and even social elites, such as loca l royalty. Until relatively recent ly, such p laces we re thought to ha ve a critical shortage of busi nesspeople who could build companies. The vent ures that we uncovered in our research gene rate far more jobs and wealth than typical small busi nesses do, and they often create new industries or open new markets. They include companies like the UAE's Bayt.com, the leading Middle Eastern job sea rch site , which attracts 4 .5 million job seekers; Jord an's Aramex, the FedEx of the Middle East, which has honed its edge by maki ng deliveries to places global distribution companies avoid; Airblue of Pakistan, the first pap erless airline in the wo rld, which quickly acquired a 30% share of that country's domest ic market; an d Meeting Point, launched by Christine Sfeir, who at 22opened the fi rst Dunkin' Donuts store in Beirut an d 10 years later ru ns 30 stores that, unlike any Dunkin' Donuts you haveever seen, are elegant hot spots for young professionals. These businesses are scaling up at dramat ic rates and introducing exciting new product-market combina-

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tions. Acase in point is Rumman, the fi rst events and publishing company focused on SaudiArabia's large youth mar ket. Operating with a tea m of 30 recent college graduates, it has become so successful that bra nds such as MTV now work with it to market to young Saudis. Countries that want to play in the global economy need companies like these. which are building and redefi ning industries that satisfy domestic de mand and generate export income-not to mention create employment for the rapidl y growing younge r population . For multinationals, these ventures ca n be a path to accessing the new ideas, custo mers. suppliers, and talent of emerging markets. Finding and investing in them may beone key to reenergizing the global economy.

The Great Economic Detour: A Focus on Small Companies The world at large urgently needs to ram p up the pace of job growth and new value creation. Accord ing to the World Bank, th e Middle East alone must create 80 million more jobs by 2020 just to abso rb new entrants to the labo r market wit ho ut lowering living standards. This issue is graver in parts ofAfrica and Asia, whe re job creat ion is imperative to lift millions out ofcrushing poverty. The question is how to make it happen . Almost all government economic development and entrepreneursh ip programs tend to focus on a wide swath of small to medi um-size firms. To explain this approach, they often quote statistics about how the overwhelmi ng majority of job creation comes from these enterp rises. Bu t their b road efforts may be misd irected . In 2009 the Global Entre pre ne urs hip Monitor (GEM), which looks at 54 countries in the emerging and develo ped ma rke ts, concluded that only 14% of all start-ups expect to create 20 or more jobs. The zo ne for sig nificant job growth is very small- and it's especially hard to find in developing countries September 2010 Ha rvard Business Review 75

SPOTLIGHT CA N ENTREPRENEURS SAV E THE WO RLD?

tha t have yet to identify thei r own entrepreneurial communities. But those commu nities are out there, and th ey have grea t ambitions. The GEM data, the only global data on entre pre ne urs hip, show that the incidence of entrepreneurship is tw ice as h igh in emerging markets as in the developed world. Out of every 100 people GEM interviewed in developing countries, 10were lau nching businesses. Four of those 10 firms were "necessity driven" and six were "opportunity driven." In developed economies, only five out of every 100 people were launchi ng businesses, and of those firms, one was "necessity driven" and four were "opportunity driven." Although there are ma ny more necessity-drive n entrepreneurs in emerging markets than in the developed world, what is often ove rlooked is th at those markets are home to even more opportunity-d riven entrepreneurs. Opportunity-driven entrepreneurs te nd to ereate larger enterprises, but only a small pe rcentage of them will bu ild high-growth companies- so-called gazelles. Gazelles have a dis propo rtionate impact. They consistently create new products, new supply or distribution channels, and new customers, and generate economic value. Butthey can be hard to see when they are in the making- especially ifthey're in ma rkets such as the Middle East and Africa, which are largely unscrutinized by investors, mu ltination als, and the business media.

Looking for the Market Movers At t he in vit ati on o f the Saudi Arabian General Investment Au thority (SAGIA), we started our re sea rch in Saudi Arabia. The country is arguably one of th e most unlikely markets for entrepreneurs; its economy is domina ted by the state-controlled oil industry and large fam ily-ru n bus iness conglomerates. It u rgently needs to diversify. When we began, SAGIA and our other pa rtners (the news organization AIWatan, National Commercial Bank, Siraj Capital, and real estate de veloper Sukoon International) were hard -pressed to name more tha n a ha nd ful of entrepreneurial grow th companies. Nine months later we announced a list that we ca ll the Saudi Fast Growth 100. These 100 rapidly growi ng companies had p rovided audited stateme nts to docu ment their performance and met the same criteria as the Inc. SOO-considered by many to be the go ld standa rd of entrepreneurship. Without the bene fit ofattention from either the government or the media, these companies had grown an ave r76 Harvard Business Review Sept ember 2010 Scan & PDF: worldmags & avaxhome

age of 40% a year for three or more years -to tim es the na tional private sector growth rate- collectively creating 30,000 jobs. They represented a wide range of indust ries, includ ing IT, telecommu nications, media, public relations, pu blishing, health care, and education. But almost everyone in the country had assumed that suc h competitive entre preneurs didn' t even exist. More recently, when we compiled fast- growth listings for Lebanon and Jordan , we found a similar base of competitive entrep reneurs. Ju dging by our initial research for the Arabia 500, we expect to find comparable growth companies throughout the Middle East an d Nort h Africa. (Our fi nd ings w ill be public in 20 11 .) We've see n a sim ilar pattern in Pakistan and India (starting points for our Jist of the 500 fastest-growing entrepreneurial companies in Asia) and when com piling the South Africa 100 (the starting point for the Africa 500). Until now, emerging markets have mostly been seen as sources of new revenue for large Western companies or homes for emerging giants in fi nance, construction, and the extractive indust ries. What we've found changes th e way we should be looking at the potential ofemerging markets. It suggests they are home to a growing community of latent gazelles. In fact, t he company fou nders we e ncountered there are as sophisticated as their Western counterparts-and, some m ight argue, perhaps have more potential. Entrepreneurial DNA. If you took away their national identit ies, it would be impossible to distingu ish entrepreneurs from Saudi Arabia, South Africa, and the United States. (Our American reference point is the Inc. 500.) On paper, entrep reneurs fro m these three countries look th e same w ith respect to their educational and professiona l backgro u nds. Most of them ha ve unde rgraduate degrees , and many have master's degrees. Most have five or more years' worth of experience in industry with a top firm like Procter & Gamble, Pepsi, Unilever, Toyota, or HSBC. The average age of the fou nders at start-up is even the same in eac h count ry: 33. Entreprene urs of all three nat iona lities form companies in the same neweconomy industries and have similar ins pirations and mind-sets. Most are self-financed at start-up. Consider Osama Natto, formerly an execu tive at P&G. At the age of32 he established Jeddah-based Innovative Business Solut ions, a strategy consulting firm with expertise in markets from Kazakhstan to Casablanca. To raise cash for operations, Natto sold

THE HIGH-INTENSITY ENTREPRENEUR HBR.ORG

his house and moved his family into an apartmentjust as many u .s . compa ny founde rs do- and since the n, IBS has grown 280% a year to reach revenues of dose to $3 million. Entrepreneurial intensity. One notable characteristic dis tinguishes emerging-market en tre preneurs, our research shows. They demonstrate higher levels of "entrepreneurial intensity"- a measure we created to capt ure the volume of successful companies they form. Historically, entrepreneurs we've

firms don 't just hang on to the global economy's coattails. In fact, they may be uniquely designed to thrive in a new global economy that favors leanly financed, adaptable companies-and could be turning the ability to execute in the challenging business environment of emerging markets into a competitive advantage. Look at Qanawat, a Saudi 100 telecomm unicatio ns company, which rap idly scaled u p to $1 billion in revenue in its first four years by serv ing rural areas ofSaudi Arabia that were difficult

Entrepreneurs in emerging markets start 25% more companies than their u.s. counterparts do, and their firms have a higher survival rate. identified in emerging markets have started 25% more companies than their U.s. counterparts on the Inc. 500 have. The emerging-market start-ups have a higher surv ival rate, and when asked about their future plans, an amazing 80% of their founders said they intended to launch another business within the next two years. What explains the higher entrepreneurial intensity? In our interviews with more than 100 entrepreneurs, a pattern surfaced. In emerging markets there are many undefended niches to occupy. The other side of the coin is th at to grow, new ventures there often have to fill in missing parts of the ma rket. Forexample, Eye-2-Eye Optical, a high-end eyewear chain founded by a Saudi woman, Aisha Natto, had to create a lens-ma nufacturing plant to keep upwith demand and to tailor prod ucts for its stores. Emerging entrepreneurs often have to grow the spaces adjacent to their business-effectively building out the industry d uster-so that thei r initial com pany can succeed. And in the process, they become more adept entrepreneurs. Growth momentum in 2009, Another surprising finding related to performancein zooq, which we looked at in the aud ited sta tements of hund reds of ventures from the Middle East, Africa, and Sout h Asia that had grown rapidly fro m 2006 to 2008 . While the global economy contracted 2%, most of these companies picked up their pace in 200g-in the majority of cases, growing 20% to 50% faster than they had in 2008. What this suggests is tha t e merging en tre preneurs' business models have staying power; their

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to reach and untapped by industry leaders. With that experie nce behind it, Qanawat is well positioned for a move into Africa an d other Midd le Eastern markets. We believe these high -intensity entrepreneurs could be among the gaze lles of the emerging markets. They are skilled at identifying opportunities that others do n't see and executing amid the uncertainty, scarcity, and risks that characterize the business landscape in most of the world.

Forces for Global Entrepreneurial Expansion As we look across companies and countries, we see three trends that will accelerate high-growth entrepreneurship in the emerging world. Migration of talent. Entrep reneurial talent is being distributed around the world as the best and brightes t leave the West and retu rn to their home coun tries to sta rt companies. These entrepreneurs have developed core market skills and international networkswhile studying and workingin the U.S. and Europe. Aperfect example is Amjad Aryan, a former CVS executive in th e U.S., who returned to Jordan to launch Pharmacy 1, the coun try's fi rst drugstore chain, which now has more than 40 stores and is rapidly expanding throughout the Middle East. A pent-up supply ofentrepreneurs. As political and economiccond itions relax in emerging countries, and as more entrep reneurs from Africa. Asia, Latin America, an d the Middle East become household names, we expect to see entrepreneurship take off as it has done in lndia and China . Sur veys September 2010 Harvard Business Review 77

SPOTLIGHT CA N ENTREPRENEURS SAV E THE WO RLD?

H BR.ORG

S . l

~'Jfange ofyouths in emerging countries often fi nd that more than 25% ofthem want to become entrepreneurs.

RelativeLy low seed-capital requirements . The dearth of banks and venture capital and private equity firms in emerging markets used to be a significant constraint on company formatio n there. Among firms that have applied to be par t ofour fast-growth rankings, however, the average first-year investment was $200,000. Most mldcareer en trepreneurs have litt le trouble rais ing that amount from th eir own savings or from their fi rst rou nd of customers. The opportu nity to enter indust ries without significant bank and venture fi nancing has never been greater.

High-Intensity Entrepreneurship Is the Future Growth Engine The h igh-intensity entrepreneurs we have come across in our research don't just build companies that scale up quickly from 20 to 200 employees or from 200 to 2,000. They create jobs that develop people. They establish wor k environments that mo tivate employees, investing heavily in on-the-job training

of Light & Electricity, has already helped 10 employees launch their own start-ups. And one Saudi 100 win ner, the foun der of the high-e nd fashion design house Lomar, worked at another Saudi 100 win ner, 3Points Advertising, where he was encouraged to start his own busi ness .

Unleashing the Next Century of Entrepreneurship It's time to redefi ne the relationship between entrepre neurship and the developing world. What holds developing countries back is not a lack of world-class entre preneurs but a lack of awareness about them, which arti ficially su ppresses growth and keeps value trapped. Building systems to identify grow th companies and put them on the economic map will have an immediate impact. When nascent gazellesget on the global radar screen, customers, talent, and global capital come to them. We call this phe nomenon "visibility economics." Visibility can give high-potential companies many ofthe benefits of going public. But without it, they stall out at a small size.

Emerging-market ventures are proficient incubators of other entrepreneurs. and providing a wide range of benefi ts, from health care to profit sharing. Their companies are ch ronically searc hing to fill positions and often promote from within to keep their culture strong and reduce hiring and training time and costs. Agood example is Saudi-based Secu'l'ronic,a hightech security company that grew an amazing 2,500% in five years. It has a flat management structure, according to cofounder Ihab Elsamannoudi. "There is no boss- just 200 entrepreneurs working together," he says. Adds cofounder Iawad Ali, "This creates an energy that benefits the entire company, as well as our clients and shareholders. Behind any leader at SecuTronic there are ma ny trained and prepared minileaders. This is the only way togrow very fast: ' These entrepreneurs' vent ures are p roficien t incubators of other entrepreneurs. Fully a third of the companies we looked at in emerging markets actively su pported em ployees who were creati ng new companies. One Lebanon 25 company, World 78 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

Our research to date suggests that every region in the developing world has a hidden commun ity of poten tial gazelles. We estimate that after we identify the Africa 500, Arabia 500, Asia 500, Eurasia 500, and Latin America 500, and they gain wo rldwide recognition, those companies will be able to create one million jobs in five years. But this is just the first installment. The firms on those lists have the potential to be massive-force multipliers, smoothing the way for new industries and inspiring thousands to expand markets as entrepreneurs. We may be on t he verge o f a globa l entrepreneurial heat wave. High-intensity entrepreneurs are begin ning to flourish in un likely places, generating new product-ma rket combinations with unbounded potential. For multinationals an d investors, they present immediate channels for growth. For governments and foundat ions, this new breed of innovators prov ide the pat h to progress and prosperity. " HBR Reprint R1009E

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i

WhyMen Still Get More • Promotions ThanWomen Your high-potential females need more than just well-meaning mentors. by Herminia Ibarra, Nancy M. Carter, and Christine Silva Scan & PDF: worldmags & avaxhome

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•

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I

Nathalie (all names in this article are disguised), a senior marketing manager at a multinational consumer goods company and a contender for chairman in her country, was advised by her boss to raise her profile locally. An excellent intracompany network would n't be enough to land her the new role, he told her; she must also become active in events and associations in her region. Recentl y matched w ith a high-level mentor through a cornpanywide program, she had barely completed the lengthy prework assigned for that when she received an invitation to an exclusive executive-training program for high potentials- for which she was asked to fill out more self-assessments and career-planning documents. "I'd been he re for 12 years, and not hing hap pened," observes Nathalie. "Now I am being mentored to death." Amy, a rnidlevel sales manager for the same firm, struggles with a similar problem: "My mentor's idea of a development plan is how many external and internal meetings I can get exposure to, what presentations I can goto and deliver,and what meetings Ican travel to," she says. "I just hate these things that add work. I hate to say it, bu t I am so busy. I have th ree kids. On to p of that, what my cu rrent boss really wants me to do is to focus on 'breakthrough thinking,' and I agree. I am going to be in a wheelchair by the time I get to be vice preside nt, because they are going to drill me into the grou nd wit h all these ex tracredit projects." With turnover sky-high in the com pany's fas tgrowing Chinese market, Julie, a m uch-valued finance manager with growth potential, has likewise undergone intensive me ntoring- and she worries that she may be getting caught betwi xt and between . Whe n she was nominated for a high·potential program, her boss complained that the corporate tea m was interfering with the mentoring operation he was already running in the region. Julie also took part in a less formal scheme pairing junior and senior finance leaders. "I'd prefer to be involved in the corporate September :1010 Harvard Business Review 81

WHY MEN STILL GET MORE PROMOTIONS THAN WOMEN

HBA.OAG Do you have questions or comments about this article? The authors will respond to reade r feedbac k at hbr.org through mid-September.

Are women as likely as men to get mentoring? Yes. They're actually more so: Inthe 2008 Catalys t survey,

program because it is mo re high-profi le," says Julie, "but it all adds up toa lot of mentoring,' Nath alie, Amy, and Julie are not atypical. As companies continue to see their pi pelines leak at mid -to-senior levels even though they've invested considerable time and resources in men tors and developmental opportunities, they are actively searching for ways to retain their best female talent. In a 2010 World Economic Forum report on corporate prac tices for gender diversity in 20 countries, 59% of the companies surveyed say they offer internally led mentoring and networking programs, and 28% say they have women-specificprograms. But does all this effort translate into actual promotions and appointments for both sexes? The numbers suggest not. A2008 Catalyst survey of more than 4,000 fu ll-time-employed men and wo men - high potentials who grad uated from top MBA programs worldwide from 1996to aooz-ehows that the women are paid $4,600 less in their first post-MBA jobs, occupy lower-level management positions, and have significantly less career satisfaction than their male counterparts w ith the same education. That's also the case when we take into account factors such as their industry, prior work experience, aspi rations, and whether they have children. (For more findings, see Nancy M. Carter and Christine Silva, "Women in Management: Delusions of Progress," HBR March 2010.) Yet among that same group, more women than men report having mentors. Ifthe women are being mentored so thoroughly, why aren't they moving into higher management positions? To better u nderstand what is going on, we conducted in-depth inte rviews wit h 40 high- potential men and women (including Nathalie, Amy, and Julie) who were selected by their large multinational com pany to participate in its high-level mentoring program. We asked about the hurdles they've faced as they've moved into more-senior roles, as well as what kinds of help and support they've received for their transitions. We also analyzed the 2008 survey

O of women and 76% of men say they've had at least one mentor at some point in t heir careers.

it%

of women say they've had four or more me ntors, compared with 1S% of men.

Does mentoring provide the same career benefits to men and women? No. Among survey part icipants who had active mentoring relationships in 2008, fully

%

of the men had received one or more promotions by 201 0 , compa red with 6S% of the women.

to uncover any differences in how men and women are mentored and in the effects oftheir mento ring on advancement. Last, we compared those data with the resul ts of a 2010 survey of the same populatio n, in which we asked participants to report on promotions and lateral moves since 2008. All men toring is not created equal, we discovered. There is a special kind of relations hip -called sponsorship-in which the mentor goes beyon d giving feedback and adv iceand uses his or her influence w ith senior execut ives to advocate for the mentee. Our interviews and surveys alike suggest that highpotential women are ovennentored and undersponSOled relative to their male peers- and that they are not advancing in their organizations. Fur thermore, without sponsorship, women not only are less likely than men to be appointed to top roles but may also be more reluctant to go for them.

Why Mentoring Fails Women Although more women than men in the 2008 Catalyst survey report having mentors, the women's men tors have less organizational clout. We find this to be true even after controlling for the fact that women start in lower-level positions post-M BA. That's a real disadvantage, the study shows, because the more se nior the mentor, the faste r the mentee's career advanceme nt. Despite all the effort that has gone into developing the women since 2008, the follow- up survey in 2010reveals that the men have received 15% more promotions. The two groups have had similar numbers oflateral moves (same-level job assign ments in different functions, designed to give high poten tials exposure to various parts of the business). But men we re receiv ing promotions after the lateral moves; for the women, the moves were offered in lieu of advancement. Of course, the ultimate tes t of the power of mentoring would be to show that its presence during the 2008 survey is a stat istically significant predictor of promotion by the time ofthe 2010survey. That's true

Just when women are most likely to need sponsorship-as they shoot for the highestlevel jobs-they may be least likely to get it. They're still viewed as "risky" appointments. 82 Ha rvard Business Review Sept ember 2010 Scan & PDF: worldmags & avaxhome

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Idea in Brief

Although women are mentored , th ey're not being promoted. A Catalyst st udy of more th an 4,0 0 0 high pot ent ials s hows th at more wome n th an men have men tors-yet women a re tess likely t o adva nce in th eir ca reers. That's because t hey're not act ively s po nsored t he way th e me n are.

for the men but not for the wome n. Though women may be getting support and guidance, mentoring relations hips aren't leading to nearly as many promotions for them as for men. The survey findings are echoed in our interviews: Men and women alike say they get valuable career advice from their mentors, but it's mostly men who describe being sponsored. Many women explain how me ntoring relationships have helped them understand themselves, their preferred styles ofoperating, and ways they might need to change as they move up the leadership pipeline. By contrast, men tell stories about how their bosses and informal mentors have helped them plan their moves and take charge in new roles, in addition to endorsing their authority publicly. As one male mentee recounts, in a typical comment: "My boss said, 'You are ready for a general man agement job. You can do it. Now we need to find you a job: What are the tricks we need to figure out? You have to talk to this person and to that one and that one: They areallexec utive committee members. My boss was a network type ofa person.... Before he left, he pu t me in touch with the head of supply chain, which is how I managed to get this job." Not only do the women report few examples of this kind of en do rse me nt; they also share numerous stories about how they've had to fight with their mentors to be viewed as ready for the next role. Paradoxically, just when women are most likely to need sponsorship-as they shoo t for the highestlevel jobs -they may be least likely to get it. Women are still perceived as "risky" appointments for such roles by often ma le·domina te d co m mittees. In a study of top -performing CEOs, for instan ce, the wo me n were nearly twice as likely as the men to have been h ired fro m outside the co mpany (see Morten T. Hansen, Herminia Ibarra, and Urs Peyer, "The Best -Perfo rming CEOs in t he World," HBR

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Sponsors go beyond giving feed back and ad vice; they advocate for their mentees and help t hem gain visibility in the company. They fi ght to get t heir proteges to the next level. o rganizations such as Deutsche Bank. Unilever, Sodexo, and IBMEurope have esta blished spo nsorship programs to facilitate the promotion of high-pote ntial women.

Programs that get results clarify and communicate goals, match sponsors and rnentees on the basis of those goals, coordinate corporate and regional efforts, train sponsors, and hold sponsors accountabt e.

January- Februar y 2010). That fi nding suggests that wome n are less likely to eme rge as w inners in their fi nns' own CEOto urnaments.

Sponsorship That Works Impatien t with the speed at which women are reaching the top levels, many leading-edge com panies we work with are converging on a new set ofstrategies to ensure that high-potential women are sponsored for the most-senior posts. Those principles can make all the difference between a sponsorship program that gets results and one that simply looks great on paper.

Do men and women have the same kinds of mentors? No. In 20 0 8 ,

%

Clarify and communicate the intent ofthe program. It's ha rd to do a good job of both mentot ing and sponsoring within the sa me program. Often the best me ntors-those who provide cari ng and altruis tic advice and counseling-are no t the highflie rs who have the infl uence to pull people up through the system. Employees expecting one form of support can be very d isappointed when they get the othe r. And com panies hoping to do A can find them selves with a program that instead does B. To prevent such problems, they need to clearly define what they're trying to accomplish. At Deutsche Bank, for example, internal research revealed that female managi ng directors who left the firm to wor k for com petitors we re not doing so to improve their work/life balance. Rather, they'd been offered bigger jobs externally, ones they weren' t conside red for internally. Deutsche Bank responded by creating a sponsorship program aim ed at assigning more women to critical posts. It paired rnentees with executive committee members to increase the female talent pool's exposu re to the committee and ensure that the women had influential advocates for promotion. Now, one-third of the participants are in larger roles than they were in a year ago, and another third are deemed ready by senior management and HRto take on broader responsibilities.

of men were actively mentored by a CEO or anot her senior executive. compared wit h 69% of women. More women t han men had junior-level ment ors:

of wo men were rnentored by a nonmanager or a first-level manager, compared wit h 4% of men.

Though both groups had more male t han female mentors on balance,

36% of women had fema le mentors. whereas only 11%of men did.

September 2010 Harvard Business Review 83

WHY MEN STILL GET MORE PROMOTIONS THAN WOMEN

Mentors and S onsors: How The Differ Companies need to make a sharper distinction between mentoring and sponsorship. Mentors offer "psychosocial" support for personal and professional development, plus career help that includes advice and coaching, as Boston University's Kathy Kram explains in her pioneering research. Only sponsors actively advocate for advancement.

"Classical mentoring" (ideal but rare) combines psychosociaL and career support. Usually. though. workers get one or t he other-o r if they get bot h, it's from different sources. AnaLysis of hundreds of studies shows that people derive more satisfaction from mentoring but need sponsorship. w ithout sponsorship, a person

is likely to be overlooked for promotion, regardless of his or her competence and performance-particularly at mid -career and beyond, when competit ion for promotions increases.

The strategies that help men progress in their careers may not be appealing or feasible for women.

Do men and women get their mentors in the same way? Yes. Most men and women-

o ~ of the groups combinedfound their mentors on their own, relying on personal networks. Just

Select and match sponsors and highpotential women in light of program goals. When the object ive of a program is career adva ncement for high potentials, mentors and sponsors are typically selected on t he basis of position power. When the goal is personal develo pment. matches are made to increase the likelihood offreque nt contact and good chemistry. Unilever has established a program with the expltcit objective of promoting more high-potential wo men to th e firm's most-sen ior levels. The two key criteria for selecting the sponsors, all members of Unilever's senior ranks. are experience in areas where the high poten tials have developmental gaps, and presence at the table when the appointment decisionsget made. Given the company's international scope and matrix organization, this means that many of the women do not live and work in the same locatio n as their sponsors. $0 som e don't spend much face- to- face time with sponsors. but they do have advocates at promotion time. Coordinate efforts and involve direct su• perviscrs, Centrally run mentoring programs that Sideste p direct bosses can inadvertently com municate that diversity is an HR problem that requires no effort from the front lines. Coordinat ion of corporate and local efforts is especially important when it comes to senior-level participants in whom companies invest significantly. Effective sponsorship does not stan d alone bu t is one facet ofa comprehensive progra m that includes performance evaluation. training and development. and succession planning- all of which add up to more than the sum ofthe parts. The Deutsche Bank

~O

of women and ,6% of men formed their mentoring relationships with the help offormal programs.

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sponsorship program for female man aging directors. for instance, is one piece of a highly tailored initiative that also involves leadership evaluations. exte rnal coaches, and leadership workshops. Train sponsors on the complexities of gender and leadership. Good sponsorship requires a set of skills and se nsibilities that most companies' star executives do not necessarily possess. When you layer on top some of the complexities of sponsor relationships between se nior men and junior women, you easily have a recipe for misund erstanding. The strategies and tactics that helped the men progress in the ir careers may not be appealing or even feasible for the women. Aclassiccase is the challenge of developing a credible leadership style in a context where most of the successful role models are male. One of the women in our research describes the problem like this: "My mentor advised me that I should pay more attention to my strategic influencing skills...but often he suggests I do things that totally contradict my personality." The behavioral styles that are most valued in tradit ionally masculine cultures-and most used as indicators of"potential"-are often unappealing or unnatural for high-potential women. whose sense of authenticity can feel violated by the tacit leadership requirements. Afurt her complexity is the famed "double bind " examined in Alice H. Eagly and Linda L. Carli's book Through the Laby rinth (Harvard Business Review Press. 2007) and in the 2007 Catalyst research report "The Double-Bind Dilemma for Women in Leade rship." Here's the problem, in short: The assertive, authoritative, dominant behaviors that people

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MENTORS

SPONSORS

• Can sit at any level in t he hierarchy • Provide emotional support, feedback on how to improve, and other advice • Serve as role models • Help mentees learn to navigate corporate politics • Strive to increase mentees' se nse of competence and self-worth • Focus on mente es' personal and professional development

• Must be senior managers with influence • Give proteges exposure to other executives who may help their careers • Make sure t heir people are considered for promising opportunities and challenging assign ments • Protect their proteges from negative publicity or damag ing contact with se nior executives • Fight to get their people promoted

associate with leadersh ip are frequ ently deemed less attractive in women. Male me ntors who have never faced this dilem ma themselves may be har dpressed to provide useful advice. As one of our interview participants describes, even well-intended mentors have trouble helping wome n navigate the fine line between being "not aggressive enough" or "lacking in presence" an d being "too aggressive" or "too cont rolling." She explains the challenge of dealing with conflicting expectations from two different bosses: "Myoid boss told me, '!fyou want to move up, you have to cha nge your style. You are too brutal, too demanding, too tough, too clear, and not participative eno ugh.' My new boss is different: He drives performance, values speed. Now I am told, 'You have to be more demanding.' I was really working on being more indirect, but now I willtry to combine the best of both." Male sponsors can be taught to recognize such ge nde r-r elated d ilem mas . Wom en in Sodexo's reciprocal-mentoring program, for example, have been promoted at h igher rates than other hig hpotential women at the company,in part because the senior male mentors se rve as career sponsors and (than ks to the upward me ntoring) learn to ma nage their unconscious biases. Hold sponsors accountable. To fully reap the ben efits of sponsorship, companies must hold sponsors accountable. At IBM Eu rope, a sponsorship program designed for senior women below the executive level aims to p romote selec ted par ti cipants within one year. Sponsors, all vice presidents or general managers, are charged with ma king sure that par ticipants are indeed ready within a year. So they work hard to raise the women's profiles, talk up the candidates to dec ision makers, and fi nd the high potentials inte rnal projects that will fill in their skills gaps and ma ke them promotable. Failure to obtain a

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promotion is viewed as a failure ofthe sponsor, not of the candidate. Altho ugh our data show that formal progra ms can be quite effective in gett ing women promoted, a potential pitfall is their fixed duration. Sponsors typically declare victory and move on after their high potentials advance -just when they need help to success fully take charge in their new roles. We know of no programs designed to shore up participants past promot ion and through the "first 100 days" in t he new posi tion. With that extra bit of attent ion , sponsors could help deliver not just promotions but strong transitions. ALTHOUGH THE women we interviewed all come from

the same company, the trends there mirror those at many ot her fi rms we've worked with and observed. And the survey responses, gathered from men and women at hu ndreds offirms, also provide strong evidence for gender difference in mentoring outcomes. More sponsoring may lead to more and faster promotions for women, but it is not a magic bullet:There is stillmuch todo to close the gap between men's and women's advancement. Some imp rovements-such as supportive bosses and inclusive cultures-are a lot harder to manda te than formal mentoring programs but essential if those programs are to have their intended effects. Clearly, however, the critical first step is to stop overmentoring and start accountable sponHBR Reprint RI009F soringforbothsexes. 0 ~

Herminia Iba rra (herminia.iba [email protected]) is

~ a professor of organizational behavior and the Cora

Ch aired Professor of Leaders hip and Learning at Insead in Fontaineb leau, France , and the author of working Identity: Unconventional Strategies for ReirlVenting Your Career (Harvard Bus iness Review Press, 2003). Nancy M. Carter (ncartengicatalyst.org) is the vice president of resea rch at Catalyst, a New York- ba sed nonprofit that works with businesses to expand opportunities for women; she is also a visit ing scholar at Insead. Chri stine Silva (csilva@catalyst. org) is a director of research at Catalyst.

Does having formal versus informaL mentoring make any difference in terms of promotions? Yes. Women who had found me ntors through formal programs had received more promotions by 2010 than women who had found mentors on their own (by a ratio of almost three [0 two). Among all partici pants who had found mentors on the ir own, the men received more promotions tha n the women (again, by a ratio of a lmost three to two). For more on how companies are providi ng sponsorship, go to www.catalyst.org/ publicat ionf4131 mentorin g-s poonsors hip.

Septe mbe r 2010 Ha rva rd Business Review 85

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Leaders Keep Making --

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How to overcome deep-seated obstacles to change

by Robert H. Schaffer

-_....

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50 Y EA RS I've worked with business lead ers have been marked by a dizzying rate of economic, social, and environmental change. In response, senior managers and scholars have produced a fl ood of research, articles, books, and consulting programs offering countless methods for adapting to new circumstances. Strangely, just about all those efforts overlook four basic behavior traps that thwart organizational cha nge, particularly its elusive hum an dimension . Deeply rooted in the managerial psyche, the traps are extremely difficult to recognize because they are almost always mecha nisms for avoiding anxiety. They serve to protect egos and prevent discomfort. In ad visi ng companies on organizational and cultural change, my colleagues and I have seen hu ndreds of clients fall into these traps again and again- but we've also found some ways to mitigate their impact. Drawing on that experience, I' ll de scribe th e tra ps and share exam ples that show how executives can manage them. THE

BEHAVIOR TRAP 1

Failing to Set Proper Expectations

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Everyone has see n se nior managers an nou nce major directionalchanges or new goals without spelling out credi ble plans for achieving them or spec ifying who's accountable: for instance, "We are going to reduce the use of cash by 40% next year" or "We are going to cut train accidents significantly" or "Weare going to shift focus from mid market customers to the u ppe r en d during the next two years." Such efforts go nowhere. More than 35 years ago, in "Dema nd Better Results-and Get Them" (HBR November- December 1974), I asserted that sett ing expectations that actually evo ke maximu m performa nce was executives' single weakest skill. Nothing has changed . In all the

organizations I have obser ved, managers commit several transgressions w hen making demands of their people tsee the sidebar"The Seven DeadlySins ofSett ing Demands"). Here's an example: A la rge iro n mining and . . . p rocess mg com pany was receiv mg many angry complain ts abo ut quality from its largest customer. The CEQ met those com plaints with apologies and vague promises, an d strongly repri manded the general man ager of the guil ty operation. The GM in tu rn held management meetings and communicated with employees about quality- month after mo nth-but there was no discernible improvement . He would have been affronted by the suggestion that his expecta tion setting was faulty, even though he'd never established specific goals or explicit plans for achieving them. Another common offense is to describe w hat must be done and then signal, albeit u nintentionally, "if you possibly can do it" - as in, "I know you've lost some people, Stan, but you have to give it a go; we really need to increase sales in your te rritory." Such problems are especially insidious because senior ma nagers often lack insight into their own behavior. I vividly remember watching the world-renowned head of a major med ia company wave his fi nancial reports in the air at officer meetings and refer to them as "confusingjun k," much to the conste rnation ofhis CFO. When I quietly suggested that he was reinforcing the CFO's behavior by not explaining clearly what improvements he wanted to see, he brushed me off. His dramatics continued with no impact whatsoever on the qua lity of the reports. A lot of the time, the failure to define requ irements comes down to an xiety. Being clear requires considerable thought and is much more d ifficu lt than issu ing general statements like "We need to speed up payments, so get olfyour..:' Managers may Septembe r 2 010 Harvard Business Review 87

FOUR MI STAKE S LEADER S KEEP MAKING

worry th at if they set specific targets th eir people can't achieve, they too will look like failures. They ma y fea r being viewed as unreasonable ogres by those with who m they work and play golf. Or they may sec retly dread some sort of subtle rebe llion, where employees appear to comply but undermine initiatives through inattention, focus on competing projects, lapsed communication, or the like. BEHAVIOR TRAP 2

Excusing Subordinates from the Pursuit of Overall Goals

on the big picture meant they didn't add up to much improvement. Tunnel vision on the part of unit heads is understandable. They're invested in their own work, and reward sys tems are typically geared to individual roles and resu lt s. Bu t why do se nior ma n agers just accept this as the way th ings are-especially since it forces them to actively coordinate projects their people could be ma nag ing independe ntly? Having to play nursemaid to so ma ny activities saps executives' time and energy. Yet very few seem willingto assign a subordinate full responsibility for achieving results that will requ ire substantial input from peers.

Every operating or staff manager is naturaJly preoccupied with the performance of her own unit. People with such singular focus tend to "delegate" respon sibility for organization-wide performa nce upward BEHAVIOR TRAP 3 to already overloaded senior managers, who often Collud ing with Staff Experts don't push back. a nd Consultants For instance, the CEO of a large IT-based com- The work performed by inte rnal sta ffexperts and expany had determined that demographic and techno- ternalconsultants has multiplied by 20 to 40 times in logical trends would grad ually render many of the the past five decades, and the scope oftheir activity firm's business lines obsolete. When he tried to draft has greatly expanded. But the vast majority ofthem the smartest peo ple in several units to help him de- st ill get se nior management to go along with the velop new strategies, however, their bosses objected. same old flawed cont ract: They agree to deliver their They claimed they understood the dangers of obso- "product" (such as a new system, organization struclescence but protested, "We have critical problems ture, marketing plan, training program, or corporate today that we need these peopl e to deal with." The strategyj-cand even to implement it- but they don't assume responsibility for outcomes. They imply that performance will improve bu t almost never include measurable gains as part of the deal. The re ason is s imple : They are confident they can provide th eir ow n experCEO backed off in the face of th is strong and seem- tise, but they are not so sure about working with the client ingly valid resistance. Another illustration: The largest division of a to pro duce results, so they global tel ecommunications-manufacturing com- limit their commitme nt. Clipany suffered com petitive disadvantage due to its ents almost universally accept this kind of deal. Only slow new-product development. The head of prod - a small number of companies require consultants uct developme nt worked with each o f her u nits to agree to a fee structure based partly on results or to pick up the pace . She asked for and got faster hold their staffexperts accountable for the outcomes preparation of drawings, faster tool design and de- of their work. One alum inum-p rocessing plant hired a consulvelopmen t, faster lab and ma rket testing, and faster manufacturinggear-up-but she never asked any of tant to improve its au tomated contro l system with her people to take responsibility for improvements the aim of speeding up its rolling mill's throughput. beyond the ir own functions. As a res ult, she was Aconsiderable investment in software and hardware the only one who felt personally accountable for the upgrades did n't accom plish that, however. Instead overall results. Though each unit reported significant of being apologetic about the results, the consultant gains in its own performance, the lack of joint focus hinted that the compa ny was not exploiting the new

Unit heads' tunnel vision is understandable. But why do senior managers just accept it?

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Idea in Brief Four behaviors deepLy rooted in the managerial psyche block organizational change: Failing to set proper expectations. Leaders announce shifts in goats or direction without spetLing out specifics, saying who's accountable, or setting clear deadlines.

1.

2. Excusing subordinates from the pursuit of overall goals. Managers allow employees to focus narrowly on their units, and so responsibility for companywide performance gets "delegated" upward. 3. Colluding with staff experts and consultants, Executives permit experts to deliver solutions wit hout assu ming responsibility for outcomes.

system properly and suggested further improvements. Unfortunately, it's not u nusual for consultants to recommend solutions that are impractical or that ignore the limits on the kinds of cha nges the client organization might be capable of carrying out. It is obvious why the world's ex perts feel protected by such con tracts. But why do clients collude with them? From what I've observed, specifying sharp, measurable goals for a project puts the rep utation of the se nior executive client on the line. She must playa much more active role in its design and implementation. It 's safer psychologically to place the initiative in a sta ff expert's han ds or sign a fat check to a consultant and hope for th e best. If the project succeeds-or ifthings seem to be going better for whateve r reason- the client executive isa hero. If it fails, she can say, "Even Xcould n't solve this one!" BEHAVIOR TRAP 4

Waiting While Associates Prepare, Prepare, Prepare When senior managers challenge people to improve sales , accelerate turnaround , reduce costs, develop products faster, or make other needed improvements, the usual response is "Yes, but first we have to..:' Finish the sentence : Train our people. Study the market. Replace a key player who retired . Launch the new system. Set up focus groups with some customers. Bring in SixSigma. Make our culture more change oriented. And so forth. Modern managerial culture world~ wid e is imb ued with the no tion that the first step in improving performance is findi ng new p rograms to prod uce the gains. Seldom does a leader naturally shoot for imp rovement within existing systems and structures. That's because most managers wan t to believe they arealready doing the best they can with

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4. Waiting whiLe associates prepare, prepare, prepare, Endless preparation gives the illusion of progress but ultimately gets in the way. Managers can best avoid these traps through small personal experiments that minimize risk and offer early payback.

For example: Faced with an unacceptable rate of late shipments, an operat ions VP at an aluminum company organized and conducted a "model week," during which 10 0% of orders would ship on time. It was a success, and t he company applied t he lessons tearned more broadly.

the available resources. To safeguard their egos, they conclude that they can't achieve better results without adding someth ing new. They're inclined to make announcements like"Once we get the new inventory system in, we ought to be able to get our inventory turns way up"-providing the illusion that the issue is being handled. The alum inum company with the rolling-mill problem s fell into the perpetual-preparation trap. About 20% of its orders we re shipping late. Since customers mainly used its products in their ow n manufacturing processes, on-t ime delivery was essential.The IT manager suggested a solution: Engage a consultant to work with he r to install a customerorder-trac king system. Iffollowed, that recommendation would have requi red six or seven months of work and several million dollars, plus an unspecified num ber of months to find out whether the system would improve deliveries. Having no alternative solut ions in mind, top ma nagement seriously cons idered buying the system.

Overcoming the Traps The examples I've mentioned represent the hu ndreds my colleagues and I have seen. The behavior traps can sabotage even the most prod uctive organizations - especially because they reinforce one ano ther in ways that senior management may not see. Grim as the situation may be, it does have its bright side: These traps accoun t for such significant productiv ity losses th at if you're will ing to confront them, you can fi nd majo r gains. The first (and toughest) step is simple awareness. Try to identify recent events whe re you encountered some of the behaviors I've described. Then you can start to push yourselfoutside your comfort zone, experiment with more-effective methods, and enjoy September 2010 Harvard Business Review 89

FOUR MI STAKES LEADER S KEEP MAKING

To escape the behavior traps, managers have to battle their own resistance. positive results as your reward. Smallpersonalexperiments by senior executivestend to be the most liberating. No"program" can yield benefits as compelling as those experienced by a manager trying out a new way of setting performance demands. A useful experiment of th is kind meets three criteria: It rapidly produces tangible, reinforcing results (that is, it's not just a preparatory step), it incurs very little risk offailure, and it's confined enough to demon strate a clear, incontrovertible link be twee n the experimental behavior and the outcome. Gary Hamel and Liisa Valikangas describe the power o f inn ovative ex pe rimentation in advancing strategy (see "The Quest for Resilience," HBR September 2003) , and my colleagues and I have frequently emphasized its role in operational improve men t, in these pages and elsewhere. But only recently have we begun to understand its potential to free managers from the behavior traps that block so much potential. Take the iron plant whose largest customer was furious over qual ity failures. The general ma nager stopped talking about "solving the quality problem." He asked his operating managers to name a couple of places where, wit h focused effort, they could reliably achieve quick results. They generated a formidable list, which they narrowed down to the five that seemed most promising. For each, the general manager named one person to be responsible for arhieving a specific quality improveme nt in 100 days, with the assistance ofa small cross-functional team. The teams were asked to declare in advance the precise gains (not just the activities) they intended to pursue go Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

and to prepare a road map of how they pla nned to succeed. One objective was "Increase greenball dry crush strengt h by a minimum of 5% on Line 16." Anot her was "Increase from 80% to 90% the proportion of samples where moisture variation is wit hin limits." You don't need me tallurgical so phisticatio n to see that these are clear, measurable goals. In each case the team lead was held accountable for achievi ng the needed res ults even though doing so entailed ma king improvements ou tside the bounds of his own job. All five projects succeeded an d were extended to the rest of the plant. Within the 100 days, the quality problems eased up, and in a few more months, they were virtually eliminated. Equally important, the experi ment was a rransformative experience for the general manager. He grasped, as never before, the power of communicating a clear demand to an accountable manager. It all sounds so elementary that many managers assert, "Oh yes, ofcourse that is what we do." But in fact, the much more typical programma tic attacks, like this mining company's se ries of vague quality initiatives, obscure what's missing from organizations' demand-response dynamic. Here is how experimentation helped two of the companies I described earlier: Accele rating innovation. At the telecom company with lagging new-prod uct development , the division general manager liked the idea of experimenting, but simply trying lots of new things over the entire 15- to is -month cycle would not fit the de fi nition of "ra pid" or "confined." To illustrate his dilemma, he revealed that oneofthe company's new products had just missed its announced de livery date. It had been repromised for sodavs late r,but he was not confident abo ut the revised time frame. We suggested that his experiment could be meeting the

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new date, to avoid breaking another promise. The product developme nt manager assembled a team composed of engineering, design, tool room, production, and a few othe r fu nctions and announced that he was making one person -t he engineerresponsible for getting the product out in 90 days. That seemingly mod est step was qu ite radical in a culture where each function was an island of specialized expertise. Toget her, t he team members created a plan. (Previously, each funct ion would have worked out its own plan, supposed ly coordinating wit h the others.) They set regular work sessions to track progress. Not only did they meet the deadline, but the company institutionalized a number of the innovat ions tested in the experiment-such as ass igning a cross· functional team, led by one person, to be responsible for the developme nt of a new prod uct through every stage. Ramping up productivity. The aluminum company set aside the consultant's proposal for more systems refinement. Instead, it put together a group of supe rvisors and employees to organize an experiment for increasing productivity. No new systems. No new equipment. No new people. The aim was to get better results from what the business already possessed. The group set a target of 15% improvement, wellbeyond any that had been achieved, and actually hit 17%. That opened everyone's eyes to the possibilities of managing for improvement rather than trying to buy it. It also gave executives the courage to turn dow n the IT manager's recommendation to insta ll an order-tracking system. To address the problem of late d eliveries, the VP of operations organized a "model wee k" experiment. He selected a week that was about a mo nt h ahead and attached a simple goal to it : Ship 100% of orders on time. The idea was to learn from success. Everybody in the pla nt was enlisted in p reparing for the model week. For example: One small team developed a new schedule for loading furnaces during pea k periods. The process for mak ing delivery-date p romises to customers was made more explicit to the sales force. Senior managers pushed themselves to exten d the plant prod uction sc hedule out a few weeks. They also asked the president of the union local to help in the experiment. During the model week, 100% of orders went out on time. After the experiment, the company held on to the innovations that seemed to contribute to that

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The Seven Deadly Sins of Setting Demands The first behavioral trap-failing to set proper expectationsincludes the following transgressions:

1 Establishing t oo many goals

2 Not requ iring a plan for how a nd when goals will be achieved

3

Failing to push for significant Improvement for fear that people are al ready overwhelmed

4

Not assigning d ear one-person accountability for each key goal

5

Signaling an unspoken " if you possibly can" at th e end of a statement of expectation

6

Accepting reverse assignments ("Sure, boss, I can get it done if you wit! see h ") tc .rt tnat...

7

Stating goals in ways that may not be definable or measurable

accomplishment. In the inte rveni ng years- the experiment was conducted more than a decade agoon-time shipments have never dro pped below 95% and have often exceeded 98%.

Multiplying Success The reason the behavior traps remai n so damaging, despite allwe've learned about organizations, is that, whatever price they extract, they do satisfy certain psychological n eeds. To escape the traps, managers have to do battle with their ow n resistance, as they would in trying to change any well-entrenched habit. Each person needs to experience viscerally the dra matic imp rovement that is possible, which is why individuals should start with their own modest, low-risk experiments. Once you do venture and succeed, you can rapidly expand your goals. Here's an example: One of Mexleo's leading banks, Banorte, became frus trated trying to increase the availability ofits automatic teller machines th roughout the country. So it assigned a cross-functional team to improve the service of just 44 ATMs in one ne ighborhood of Mexico City in 30 days. When the team succeeded, the bank replicated the process quickly in ot her areas. The result? In less than 20 weeks, Banorte reduced the downtime of all 2,500 ATMsby 40%. Or consider Avery Dennison, whic h conducted 13 experiments geared toward accelerating sales in three divisions in the Cleveland area. In each case, an ad hoc, cross-funct ional team took on the job of gett ing an order or submitting a proposal within 100 days for a new product that was othe rwise moving slowly through the lengthy development cycle. One team, for example, designed a consumer version of an industrial adhesive tape an d got it to market within the compressed time frame. Over the course of two years of such experiments around the world, the company brought in an additional $150 million per year in incremental sales. Breakthrough experiments create a kind ofdynamism through focus and success. Ifcarefully selected and designed, they nearly always deliver. Once that happens, their fru its multiply rapidly. But every orga nization needs a few venturous managers togive it a try. I::' HBR Reprint R1009G " Robert H. Schaffer ([email protected]) W is the founder of Schaffer Consulting in Stamford. Connecticut. This is his seventh HBR article. He is also a coauthor of Rapid Results! How loo-Day Projects Build the Capacity for Large·Scale Change (Jessey-sass. 200S).

September 2 0 10 Harvard Business Review

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Kaiser Permanente's

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hris McCarthy shows up for an early-

morning interviewwearing raspberrycolored scrubs. Later he' ll head to one of Kaiser Permanente's Bay Area hospitals to watch nurses at work. McCarthy, a KP innovation specialist, is just beginning a projec t aimed at optimizing the time nurses spend with their patients. He's often in clinical settings, ob-

servinghow health care providers do their jobs; how theyinteract with one another, with technology, and with patients; and how patients respond . McCarthy is part of the Innovation Consultancy, a small team within Kaiser Permanents that was born of the com pany's involvement w ith the design firm IDEO. In 2003 KP hired IDEO to help it develop better, more-effi cient ways of performing certain highvalue activities, and gained a distinctive innovation methodology in th e process. What McCarthy will do all day is watch people, take notes, snap pictures, and make sketches. (He's a fly on the wall, but a very active fly.) Some of what matters to him w ill be physical or logistical: Who stands whe re, does w ha t, communicates most or least or best? What tools are used? Are they used easily, effectively, gracefully? How are they carried ? If they're not carried , are they conveniently positioned? But McCarthy is also interested in subjective 92 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

Simply stepping back to observe how you work can yield gamechanging insights. by Lew McCreary

evi dence. He will ask nur ses ho w they feel about what they're doing and pat ients how they feel about what's being done. He w ill try to get so me sense of the atmosphe re - color, light, energy, m ood . He knows that information that may at first seem unimportant can later mean a lot. So there's an un known cost to overlooki ng anything. Or anyone. After a day spent watching other people wo rk, McCarthy tries to capture experiences from th e points of view of eve ryone involved. It's a combination ofant hropology, journalism, and em pathy. The goal is to find hidden clues to the nature of the problem at ha nd and some line ofinq uiry for progress ing toward possible solutions. The Innovation Consultancy takes on carefully chosen projects thro ug hout Kaiser permanente, whi ch is based in Oakland, California, and se rves the health needs of more than 8.6 million members in ni ne sta tes and the Dist rict of Colu mbia. Tha t 's a huge laboratory for tackling opportunities to improve healt h care practice. McCarthy and h is colleagu es purs ue an ex pa nsive, service-focused version of innovation, not th e conventional one that by definition excludes everything bu t new technologies or tangible products. Surprisi ngly little attention has yet been paid to thi s version. But , as Kaiser is discovering, the bucks are relatively few and the bang

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KAISER PERMANENTE'S INNOVATION ON THE FRONT LINE S

can be disp roportio nately big. Compared with costly, long-horizon , research- drive n innovation, servicefocused innovation can be done both rapidly and econom ically. Ifthe Innovation Consultancy can be said to have a larger social purpose, it is to improve the quality of health care even beyond Kaiser Permanente's corporate boundaries. Its work is still in a relat ively early stage-one in which there may be an abundance of low-hanging fruit. And given the depth and breadth ofthe pro blem, widespread improvements may be slow in coming. That's why McCarthy-eager to accelerate the pace of knowledge trans fer among peers in the not-for-profit health ca re space-fou nded the Innova tion Learning Network, a consortium of 16 health care orga nizations that meet regul arly to share ideas and the results of their respective innovation efforts. It remains to be seen whether his goals will be ach ieved. But the innovators' experimental approach bears watching- no matter what your industry. Consider, for example, the return on invest ment from a project called KP MedRite, an effort to reduce medication errors in KP hospitals. Developing it cost about $470,000. The project was designed and piloted in 2007 and had bee n implemented in 75%ofKP's hospitals by early2008. Since then it has yielded $965,000 in cost avoidance (for care associated with treati ng the consequences of medication errors). The process has also produ ced intangible, hard-to-measure benefits such as greater em ployee satisfaction and patient peace of mind. Savings are bound to grow as MedRite is implemented in the rest of the com pany's hos pitals, with little additional investment required.

Nurse Knowledge Exchange IDEO mad e its reputation by practicing "humancentered design" (see "Design Thinking;' HBR June 2008).The firm's idea was that you can't successfully innovate in a vacuum; you need to explore the ways people live, what they think, and how they feelabout things before you can understand the problem your new product or service should address. One of the first projects KP d id with IDEO was meant to imp rove how n urses exchanged patient information between shifts-a process that typically took 45 minutes or more and delayed the arriving nurses' fi rst contact wit h their patients. Not surprisingly, the project revealed that patients felt a "hole in their care" during shift changes. Worse , nurses 94 Harvard Business Review Septem ber 2010 Scan & PDF: worldmags & avaxhome

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L Patienu' participation makes it less likely that anything Important relating to their care will fall through the cracks.

compiled and exchanged patient information in idiosyncratic and unreliable ways (some even scrawled notes on their scrubs). Important details were often left out, or care that had already been provided was needlessly repeated. What came to be called Nurse Knowledge Exchange created a process for passing on higherquality information more quickly and reliably. Now the exchange occurs at the patient's bedside rat her tha n at the nurses' station. Patients are encouraged to participate, making it less likely that anything important relating to the ir care will fall through the cracks. New software helps nurses compile information in a standard format throughou t their shifts. And they are less likely hours later to experience a jolt of panic that they've forgotten to communicate somethi ng important. Nurse Knowledge Exchange has since been rolled out to all ofKP's hospitals. As the relationship between KP and IDEO progressed, what had been conceived as a three-month immersion turned into an eighteen-month apprentices hip. "We were trying to mold the DNA of IDEO into Kaiser permanente, to create a kind of IDEO outpost here;' McCarthysays. "Bythe end of tha t period it was pretty clear that the methodology worked really well for us." The In novati on Consultancy was created to help institutionalize what KP had learned from its work with IDEO. At first, says McCarthy, the team supposed it would "sprinkle t he met hod all over the organizat ion," propagating in novation clusters that were familiar with the IDEO way and could initiate projects on their own. He now admits that assumption was naive. First, the met hodology isn't so easy to master-after six years ofusing it, McCarthy says, his group is st ill learning and perfecting. And, of course, not everyone has the temperament or wants to be an innovator. It's more important for the team to sprinkle something else: an eagerness to try new things. That can be accomplished in part by deputizing line sta ffers to act as "codesigners" on a projec t basis.

Uncovering the Untold Story In too many enterprises, innovation is treated as a sideshow. It may get its due in lip service without being appropriately supported or well understood. Worse, it isn't integrated into the fabric or behavior ofthe business. Potential breakthroug h ideas st ruggle to survive amid entrenched systems and values. In a 2007 McKinsey Global Survey of more than

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In health care, the mother

of all service industries, Kaiser Permanente is taking innovative approaches to des igning better ways of delivering care. KP's relatively modest up-front investments ca n yield dramatic cost and quality benefits more quickly t han any whizbang tec hnology.

To achieve t hese benefits, Kaiser has adopted a " human-cente red design"

methodology that enlists health ca re providers and pat ients as collaborato rs in the innovation process.

Sta keholde r participation helps direct the creative inquiry toward better questions, which lead, in tu rn, to more shar ply defin ed problems. That reduces the level of innovation risk while producing superior-often breakth rough-solutions.

"One nurse trying to give medication to one person was interrupted 17 times during a single medication pass," says an Innovation Consultancy team member. 1,400 executives, 70% cited innovation as crucial to their com panies' future grow th, yet only 35% were "very" confident that they could exec ute innovation successfully. Imagine if 65% of CEOs doubted their company's ability to plan a winning strategy, run its supply chain, or manage its fi nances. Kaiser Permanenre is among a minority of enterprises that take innovative ap proaches to innovation itself. Within its industry, Kaiser enjoys some advantages; • It's a self-contained, fu ll-service health care provider with its own hospitals and other facilities, its own network of salaried physicians, and its own insurance plans and administration infrastructure, meaning it can exert relatively frict ionless control over all aspects ofcare for its 8.6 million members. - It has always rejected the now dominant fee-forservice model that is often blamed for ra mpaging growth in health care costs. Premiums fund whatevercare members need. Because KP's physicians are salaried, rather than paid on the basis of how ma ny tests they order or procedures they perform, care is untainted by any economic conflict otfnrerest. • Its enormous member population and the cooperative interlinking of its components enable it to compile massive amounts of evidence for the superiority of ce rtain treatment regimens-and to do so at a level that approaches the ideal of personalized med ical care. • It is cu rre ntly the largest and most advanced private-sector adopter of electronic medical record (EMR)systems. Anymember can enter any KPhealth care facility knowing that all his or her medical data

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are readily accessible by local clinicians. The database fueled by the EMR system constitutes a rich asset for nearly limitless Jines of resea rch. In this context the Innovation Consultancy flourishes. One key to its success is a form ofinvestigation that McCarthy calls "uncovering the u ntold story." For exa mple, when as ked to say what's wrong with the way medications are dispensed to their hospital patients, nurses will usually answer "nothing." But when they're asked to draw pictu res of themselves in the mids t of the task, "their frazzled hair is standing up on end," McCarthy says. "So you sta rt exploring with them: 'Why doyou draw yoursel fwit h a sad face and frazzled hair?' Then they start pouring out what the issues are: 'I'm overworked . I need hel p during the process. It's chaotic, it's full of interrup tions, it' s unclear: " That' s what u nfolded d ur ing t he KP MedRite project. Dispensing med s correctly means giving the right prescribed drug in the righ t dose to the righ t patient at the right time. The consequences ofrnedication error can be catastro phic for the patient and very costly for both the institution's reputa tion and its bottom line. A 1999 report by the Institute of Medicine ("To Err Is Human; Building a Safer Health System") documented the extent of the problem; Medication errors were causing measura ble harm to 1.5 million people a year, costing $3.5 billion in additional treatment for resulting injuries, and leading to some 7,000 preventable deat hs. The observation phase of the MedRite project strongly suggested that interru ptions and distractions were the lead ing cause of Sept em ber 2 010 Harvard Business Review 95

KAISER PERMANENTE'S INNOVATION ON THE FRONT LINE S

I I

One of Med Rite's key physical innovat ions is "no-int erruption wea r," which signals t hat it s wearer is not t o be disturbed.

errors. "One nurse trying to give one medication to 400 ideas, ranging fro m inc re mental to ou tlandish . One team proposed a "Med Bed" -a hospital bed one person was interrupted 17 times duri ng a single equipped with an auto mated, patient-personalized medication pass," McCarthy says. For nurses, interruptions are a regular feature of dispensary uni t. hospital life. And they're generally not for idle ch it"It was like the Ferrari ofbeds;' says McCart hy. " It chat abou t the previous night's Giants game or Grey's had a re frigera to r built in. It had a m icrowave bu ilt Anatomy episode. Important in form ation is co n- in. I mea n, it was a prett y crazy bed. But they proto sta ntly being asked for and given ou t. Urgent tasks typed it at the Garfield Center-stripped down a bed ebb and flow unpredictably, so dist raction ca n't or and taped all these devices onto it." The Med Bed sho uld n't be eliminated entirely. The challe nge for was n' t ultimately adopted, but the prototype demMedRite was to create situational "interrup tion-free ons tration clarified desirab le features that were incorporated into the eventual solu tion. "In showing zones" for nurses. As th e project progressed, nur ses, physicians, us the process of using the Med Bed,"McCarthy says, pharmacists, and patients were enlisted in what is "what they were really asking for was to have everyknown as the deep-dive p hase of KP's in novation thing wit hin reach:' process. This typically occurs at the Sidney R. Gar At the deep dive, he says, "a nurse came u p with field Health Care Innovation Center, Kaiser's brain- the idea of a smock that said 'Leave me alone' on it." sto rming and prototyping facility in Oakland. Fortwo Numero us proto types led to one of MedRite's key physical innovations-"no-i nterruptio n wear"-a days agroup orzc de putized codesigners tackled the problem ofmedication errors. They produced about brigh t-yellow reflective sash that signals that it s

How to Package Change Every Innovation Consultancy project includes a "change package"- a set of detailed, clearly writte n guidebooks that fully describe t he innovation, the reasoning behind its creation, th e process by which it was developed (with shoutouts to staffers who participated), the benefi ts it's meant to produce for patients and sta ff atike, user testimonials gathered during pilot implementations, and the metrlc s

that wiLL be used to evaluate its performance over time. Three different versions of the package target business lead ers, project managers . and frontline staff members. The Institute for Healt hcare Improvement- cofounded by the Bosto n pediatrician and health care reformer Donald Berwick, President Obama's pick to head t he Centers for Medicare and Medicaid Services in the Department of

96 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

Health and Human Servicescited Kaiser Permanente's change packages as best practices in their own right . KP's Chris McCarthy says his company leans on IHI to help it with the back end of innovation. IHI's emphasis is, in part. on making sure that change is well executed and fuLLy embraced. No matter how brilliantly conceived, projects often go awry through neglect of the back-end work.

KP's change packages convey a real-world respect for the challenges and difficuLties any innovation can bring. They not only provide sensi ble instructions for getting on with the program but also reinforce the cultural imperative that change is an important part of work life and innovation ultimately touches every corner of the enterprise .

HBR.ORG

wea rer is not to be dis turbed. Another physical innovation involved color on the floo r arou nd the central medication dispensary to indicate a "sacred zone" that no one may enter if someone else is already wor king there. But the ma in innovation was a five-step process for ensuri ng that medications are dispensed correctly.

Care Coordinators KP's emphasis has been on designing better means of delive ry, which can improve the quality of care much more dramatically and quic kly than any whizbang technology. Such reforms can also save money, by off-loading from expensive clinicians duties that lower-paid staffers can perform. (Kaiser is not without critics who question some of its motives and practices- sometimes alleging that its emphasis on cost control crosses the line into rationed care. ) Lyle Berkowitz is a Chicago primary-care physician who also ru ns the Szollosi Healthcare Innovation Program, a charitable foundation that belongs to the Innovation Learning Networ k. Berkowitz has worked with the ILN on a process to hel p patients who've received a frightening diagnosis more easily negotiat e the ensuing flurr y of necessary activity: follow-up tests, visits to specialists, decision making about treatment and care. The process is called Inflect ion Naviga tor, because a diagnosis ofcancer or serious cardiacdisease, for exam ple, presents the patient with a profound inflection point. At such times many patients feel too overwhelmed to ask important questions or u ndertake important tasks. Inflect ion Navigator assigns to each patient a care coordinator, who explains, assists, sets u p ap pointments, anticipates questions, and provides answers. The care coordinator seque nces activities to minimize the inconvenience to patients and max imize the value of the time they spend wit h doctors. For example, a patient's visit to a specialist might be scheduled only after the necessary tests have been done and the results ca n guide a recom me ndation. " It decreases the burden on both the patient and the doctor," Berkowitz says. It also bends the cost curve down. Care coordinators don't have to be highly trained and heavily compensated. They depend on a database of medical protocols reflecting best practices for diag nostic procedures and the latest treatments for various diseases. This frees physicians to spend more time where their expertise makes the greatest difference.

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Injecting Genius into the Process The Indian cardiac surgeon Devi Shetty has shown t hat t he speed and efficiency of coronary bypass can be increased with out sacrificing the qualit y of outcomes. His surgeons have done many more operations t han oth ers t heir age who perform conventional bypass surgery. t hus enhancing t heir p roficiency. Fu rthermore. Shetty's approach- al most in t he tradition of time-andmotion studies-parses surgical pr ocedures into t heir basic elements and actions. The mythicheroic notion of surgeons as uniquely gifted artists becomes a manufacturing model consisting of choreograph ed st eps performed by a highly skilled team. The hospitals in India's nonprofi t Aravind Eye Care System drive cost out of eye surgery in t he same way Sh etty dri ves it out of coronary bypass-by creating surgical assembly lines and innovating processes, techniques, and materials. Revenue from th e 30% of t heir customers who can afford mar ket rates subsid izes free care for the rest .

The process bends the learning curve, too. If, say, the standard treatment for atrial fibrillation changes, "the cool thing is I don't have to go and try to educate all my doctors," Berkowitz says. "Because it can take years to do that. All I have to do is change the protocol that's already built into the system." The physician makes the diagnosis and then hands the patien t off to the care coordinator.

Democratizing Health Care LyleBerkowitz mans one corner of a small booth on the modest show floor of a conference and expo in Boston. The event is a joint production of the Innovation LearningNetwork and the Center for Integration of Medicine & Innovative Technology, a nonprofit consortium of Boston-a rea teaching hospitals and engineering schools. The proceedings might best be described as a festival for health care geeks. Berkowitz is busy explain ing Inflection Navigator to interested attendees. The emphasis here is on sharing, not selling. Nobooth bunnies, blaring music, flashing lights, or branded tc hotchkes, ju st conversation -enough conve rsation that superior listening skills are needed to hear above the din. The exhibitors have zeal in com mon. Theywant to make health ca re better, smar ter, cheaper, and more accessible. Chris McCarthy hovers and circu lates. It's the last day ofthe event, and he has the semi-relaxed look of someone who has either dodged or dealt with whatever might have gone wrong and is finally surrendering to satisfaction. Sharing real-world evidence of what works-ideas, practices, protocols- exhilarates people like McCarthy and Berkowitz. To them, there's nothing odd about 16 independent organizations coming together to imp rove more quickly than they could if they were left to themselves. It simply makes sense to spread improvement as broadly as possible. This is not the vision of health care that emerged in the grinding yet cartoonish debate lead ing u p to the passage of what is now called Obarnacare. It was easy then to imagine that the whole system was willfully com mitted to cruelty, greed , vanity, and ineptitude. Beyond the fray, however, creat ivity flourishes. McCarthy and others, by democratizing the methods of innovation, are democratizing health care, giving patients and nonphystcian caregivers a louder voice HBRReprint R1009H in designing the future. " . , . l ew McCr eary is a contributing editor at Harvard ..:l Business Review. Se pt em ber 2010 Harvard Business Review 97

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The Globe

ifteen years ago, Japanese companies accounted for 141 of t he companies and 35.2% of the revenues of Fortune's then brand-new Global 500 list . By 2000 their share of revenues had fallen to 20.8%, and by last year it had shrunk to 11.2%, with only 68 Japanese compa nies making the list. During the same period, u.s. firms' portio n of Global 500 revenues, which was 28,4% in 1995, grew slightly, to 30%. Firms from the European Union and Switzerland, meanwhile, inc reased their portion from 31% to 36%. Much of Japan's loss has been a gain for firms from emerging markets. Since 1995 companies from the BRIC nations (Brazil, Russia, India, and China) have seen their combined share of Global 500 reve nues leap fro m 0.9% to 10,4%. But will those count ries lose their edge in the years ahead, as Japan did? Or will they find ways to remain globally competitive and protect their share-as the U.S. and Europe have done? To a nswer those questions, we first need to u nderstand why Japan was unable to continue the meteoric rise it saw in the 1970S and 1980s, because the new ge neration of emerging-country mult inationals bears a dist urbing resemblance to corpo rate Japa n in the 1990s. Over the past quarte r ce ntury, we have tracked the rise and fall of Japanese business, and our research reveals that the very factors that enabled Japan's early success led to its later failure. What gets you to the top is not what keeps you there. The problem for Japanese companies is t hat they've been u nable to transform the cultures and processes that propelled their early exportled growth int o t hose needed for global leadership.

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A Cautionary Tale for Emerging Market Giants !

How leadership failures in corporate Japan knocked its companies off the world stage by J . Stewart Black and Allen J. Morrison

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September 2010 Harvard BusinessRev iew 99

THE GLOBE

If the emerging giants are to avoid Japan's mistakes, they will need to dramatically change their business models, reduce their reliance on protected domestic markets, learn to cope with increasingly diverse labor forces, and, most important, shake up their homogeneous leadership.

Devotion to The Way Because Japan is a large, unvaried market, Japanese corporations were able to develop substantial asset bases that allowed them to ach ieve economies of scale and drive down costs while maintaining the high quality that finicky Japanese customers demanded. Over time this provided a powerful export value proposition, and by 1986 an amazing 95% of all goods sold by Japan ese companies around the world were made in Japan. In building these efficient man ufacturingplatforms, Japanese fums created strong corporate policies, practices, thinking, and behaviors, which improved and reinforced their business models. These became so entrenched that when asked to explai n them, company executives would simply

this, Japanese corporations typically sent large teams of experts in The Way overseas rathe r than hire executives with experience in th ose markets. In fact , on average they sent twice as ma ny expatriates to foreign operations as their peers from the U.S., the UK, Germany, and Fran ce did. These expatriates tended to seek ou t local managers who were willing to learn and conform to The Way. As one Japanese executive told us, "I do not wa nt to hire someone who is too American or German. They will simply not fit our company and way of doing th ings." With such na rrow hiring criteria, Japanese compa nies understandably made errors. Look at wha t happened in mobile telephony. Arou nd 2000 the ha ndset divisions of Sha rp, Panasonic, Fujitsu, NEC, Toshiba, and Sony tried to expand outside Japan. With the exception of Sony, which formed a joint ventu re with Ericsson, they all failed. In eac h case, Japanese expatriates tried to apply what had worked in Japan (and with arguably technologically superior products) in key markets such as the u.s., France, and Germany. They didn't

Japanese executives assumed that the key to success abroad was replicating the Toshiba, Toyota, or Takeda Way in their foreign affiliates. say, "This is the Toshiba, Toyota, Takeda, or Tomen Way." Insiders understood The Way pe rfectly. It provided purpose. unity. and rules governing relationships and expectations of behavior. Years of success reinforced the correct ness and even the superiority ofThe Way in each company. During one five-year period in the 1980s, Harvard Business Review published no fewer than 36 articles praising Japanese companies or frett ing about their power. While their Ways helped Japanese companies grow exports, they hurt the fi rms' new operations in foreign ma rkets. Many Japanese execu tives ass umed that the key to success abroad was replicating The Way in their foreig n affiliates. To achieve 100 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

ask for or listen to local insights. As a result th ey en ded up foisti ng hardware-heavy, stand-alone flip phones with relatively few applications on consumers who didn't like flip phones and who wanted more software features and PC connectivity. Is it a risk? Many companies from today's emerging markets are at risk of develop ing Ways that will hinder their international expansion. In China, for example. four of the 10 largest firms are ba nks tha t have built business models in which lending decisions are based more onguanxi, or social and personal relationships, than on formal credit analysis. This works well in a system in whichguanxi can be used to encourage the repayment of nonperforming

loans but may be less effec tive in markets where such problems are resolved through formal legal processes. Russia's emerging giants face a similar challenge. o f the eight Russian firms on the Global 500 in 200 9, five were in natural resources, mostly oil and gas. These firms have built cult ures and processes that leve rage govern ment relationships to play hardball with foreign partners in Russia while squeezing export cus tomers. But their approach may backfire as they expand into cou ntries where gia nts like Shell and Total alread y have relat ionships with both private an d stateowned organizations.

An Isolated Domestic Market Over the decades, Japanese co mpan ies have faced little competition from foreign rivals inside Japan. Foreign direct invest ment (FDI) in Japan was between - 0.2% and 0.3% ofGDP from 1970 through 1995. In 1976 the number of foreign firms in Japan was 1,101; in 1995 it was 1,421 - an increase of just 320companies. This domestic market isolation had its drawbacks as Japanese compan ies moved overseas. Competing pr ima rily with foreigners at arm's length via exports provides few insights into what capabilities are needed for direct "hand-to-hand" combat with them. For example, Japanese investment banks such as Nomura had little idea of how to deal with the likes of Goldman Sachs, J.P. Morgan, and UBS in New York and London. In areas such as M&A, those competitors possessed a level of exper tise and sophistication that was unknown in Japan. As a consequence, Nomura struggled for more than a decade to capture significant ma rket share outside Japan. Although the bank increased its foreign revenues, it continued to trail on the rank ings of lead advisers. (Its late 2008 acquisition ofLehma n's European, Midd le Eastern, and Asia Pacifi c operations may help the bank eventually fulfill its am bitions of global leadership.) Is it a risk? It certai nly is. Unt il re cently, Russia was also isolated , and altho ugh FDI in that country has reached

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Corporate J apa n, which accounted for the largest percentage of Global 500 reve nues in '995, has steadily lost groun d. SHARE OF TOTAL REVEIIIUE

has grown dramaticallysince 1990, it is still less tha n 3% ofIndia's $1.25 trillion GOP.

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nearly 5% of GDP-a level simila r to the UK's- much of the investment is in the extractive industries. From 1975 to 1995, FDI in Brazil was less than 1% of GDP on average. By aoosthat ratio had ticked up to only 2.2%. In 1990 there were 1,116 foreign fi nns operating in Braziland, by 2000, only 1,196. Thus, for a significant period of time, mos t of the cou ntry's firms competed primarily against one another, in industries such as nuclear energy, health services, media, fishing, mail and telegraph services, aviation, and aerospace. While Brazil is home to a few international players (notably Embraer), it remai ns to be seen if Petrob ras, Banco Bradesco, and Vale can take on the likes of Exxon, HSSC. and BHP Billiton outside its borders. China's situation is more com plicated. FDI in China increased from less than 1% to 5%of GOP in the 1990s, but from 2000 through 2009 the Chinese economy grew even fas te r. The FDI/GDP ratio actually shrank during that time. to aroun d 2% of China's by now nearly $4.8 trillion economy. India has been perhaps the most protected of the large emerging economies: From 1970 to 1990, FDI there was less tha n o.l%of GOPon average, and Indian firms suc h as Tata Steel, Reliance Industries, Indian Oil, Bharat Petro leu m. and Hind ustan Petroleum had little d irect expos ure to competition with foreigners. While FDI

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A Docile Labor Force

but also the primary language of more than goo million of China's 1.3 billion citizens. China has dosed the door to immigrants over the past 100 years, and they make up only 0.1% of the population. For the other BRIC countries, homogeneity is less of a problem. While 99.8% of Brazilians speak Portuguese, the country has a rich h istory of immigration. From 1833 to 1933, nearly 5 million people migra ted to Brazil. The majority were from Italy and Portugal, but sizable groups also came from Spain, Germany, and Japan. In India, though the Indo-Aryan ethnolinguis tic group constitutes 72% of the total po pulation, the cou nt ry has two official languages (English and Hindi) and recognizes 20 other national languages. Russia is perhaps the most diverse. Even though the Russian ethnic group accounts for 80% ofthe pop ulation, the country comprises some 170 other groups, and while Russian is the only offi cial language, 27 others are formally recognized. Like Brazil, Russia also has a long history of foreign immigration. Today the country's estimated 12 million foreign-born residents constitute 8.7% of its population-slightly below the level of immigrants found in France an d far ahead ofthat found in Japan.

When yo u're working to standardize products an d p rocesses, improve quality, reduce defects, and cut costs, a homogeneous and u ncontentious workforce is a great advantage. Japanese labor is nothing if not homogeneous. The country has no significant subethnic groups or local dialects and very litt le immigration. Foreignborn residents made up less than 1%of the population in 1960 and, even 50 years later, constitute only about 1.7%. In comparison, foreign- born res ide nts in Germany rose from 1% to approximately 13% over the same period. In the U.S., th e percentage jumped from about 5% to 13%. Moreover, the union st ructure in Japan, which is enterprise-based in contrast to the industry- based and national union structures typical in the U.S., Canada, an d Europe, has kept union interests aligned with those of companies. But a uniform and cooperat ive labor force at home does nothing to pre pare a company for managing the divers e and often combative workforces in foreign countries. For example. most Japanese companies were not prepared for the differences in workplace norms regarding sexual ha- A Homogeneous Team rassment or for the litigation that followed at the Top when laws were broken. Several Japanese Japanese companies' ability to build st rong fi rms ran into problems and had to pay big busi ness models an d cultures owes a lot fi nes. In 1998, Mitsubishi Motors agreed to to cohesive and homogeneous leadership. pay $34 million to settle charges brought For instance, at top exporter Matsushita by the u.s. Equal Employment Oppo rtu - Electric (now Panasonic) during the 1980s nity Commission, which conclud ed t hat and 199os, senior management teams were more than 300 women had been sexually entirely Japanese. Virtuallyall those execuharassed at Mitsubish i's Normal, lIlinois, tives had graduated from one of fOUT uniplant . Several other majo r Japanese com- versities and then spent their entire careers panies h ave experienced sexual- harass- at Matsushita. ment or other gender-related claims in the In the 68 Japanese firms on the 2009 United States. Global 500, nearly 98% of the listed corIs it a ris k? In a sense. China is per- porate officers were Japanese. Only Nissen haps the closest to Japan in terms ofworker and Sony have increased the role of nonhomogeneity. Although China recognizes Japanese execut ives over the past 20 years. 55 ethnic groups, Han Chinese constit ute And arguably Ntssan's diversity was forced more than gl% of the total popu lat ion. on the company about 10 years ago, when, Mandarin is no t only the official language as a condition for an in fusion of cash by September :1010 Harvard Business Review

101

THE GLOBE

---------------- - - The four strengths that propelled the s uccess of Japanese companies in the 1990S turned into weaknesses when the firms ventured abroad. Here's how some of today's emerging giants- and one Western rivaL- measure up in eac h risk factor.

France's Renault , it was compelled to ta ke a foreigner, Carlos Ghosn , as its chief operating office r and a year later as its preside nt. Similarly, a fi nancial crisis inside Sony force d it to bri ng in a fore ign CEO, Britishborn Howard Stringer, who had turned around its u.s. movie and entertain ment operations. Europea n and U.S. com pan ies have done a much better job ofdiversifying their leadership. When French retail giant Carrefour bega n a major international pus h in the mid-1990S, many members ofi ts then mostly French top team had extensive experience in Carrefour's established foreign operations in Spain, Brazil, Portugal, and Argentina. 'rhose executtves led Carrefour 's expa nsion into Taiwan, Greece, China, Malaysia, Thailand , Korea, Hong Kong, Singapore, Indonesia, and Japan . The company was not successful in all its international efforts and has had to withdraw fro m or dial down some, induding those in Japan. Still, as it expanded, Carrefour worked hard not only to identify and develop local leadership talent but also to move that talent around the world and bring it back to the home office. By 2005, halfthe top leadership team, including CEO Jose-Luis Duran, came from outside France. Duran's successor is also a foreigner, Lars Olofsson, from Sweden. Under such leadership, Carrefour climbed from #95 on the Global 500 list in 1995to #25 in 2009. Our research suggests that if your com pany's internationa l revenu es approac h 50% of the total, but fewer than 25% ofyour top leaders come from foreign ma rkets, it's time to get nervous about your firm's ability to make the leap from plucky challenger to global lead er. In large European compan ies, roughly 20% of the corporate execu tives are not home-count ry na tionals, and international sa les re present 40% of thei r revenues . American firms are a bit behind. UNCTAD data show that on average, about 50% ofthe largest U.S. firm s' sales are in tern ational, and roughly 17% oftheir top executives are foreigners. However, many are in line with our 2:1 ratio. For example, IBM generates about 60% of its reve nues 102 Harvard Business Review Septembe r 2010 Scan & PDF: worldmags & avaxhome

RISK HIGH LOW VERY LOW

Brazil vate (CVRD)

Russia Lukoil

India Reliance Indust ries

China Hale r

France carrefour

Isolated Domestic Market

Docile Domestic Labor Force

Homogeneous Senior Leaders

Operations outside Brazil and large global competitors (such as BHP) keep Vale f rom getting t oo insular in its way.

Major competi tors d id not make big FDI in Brazil until the past five years, which means Vale has had limited direct battles with strong foreign competitors.

Eighty percent of all Vale employees are Brazilian, but Brazil has a multicu ltural immigration history.

AU are Brazilian, and few seem to have significant int erna tional experience.

Only 4% of Lukoil's petroleum reserves are out side Russia; however, a stra tegic partnership with ConocoPhillips (which owns 20 % of Lukoil) is introducing some Western best practices.

The sector is dominated by Russian companies. The Russian government has pressured foreign MNCs to reduce hold ings.

While Lukoil's employees are almost all Russian , they represent various ethnic minorities. The company peri od ically deals w ith t rade union activism .

Decision making is dominated by Vagit Alekpe rov, tukcil's founder. AU other ma nagement committee members are Russian nationals: only one has broad international experience.

A heavy focus on domestic operations and exports, limited presence of foreign MNcs, and few local competitors reinforce The Reliance Way.

Major competitors (such as Shell and Exxon) have relative ly small FDI in India, so direct battles have been limited.

The vast majority of Reliance employees are in Indi a. Employees are somewhat diverse but lack power relative to labor in other countries.

All are of Indian origin, but several have significant international experience.

Relations with government, competitors, and customers are unique and embedded, and will not travel well.

Seventy percent of sales are domestic. FDI in China has boomed in the past decade but still represents a small portion of overall economy.

Haler's p rimarily domestic labor force is fainy homogeneous and lacks power compared with unions in the EU and other regions.

AU are Chinese, and few seem to have significant international experience.

Carrefour has adapted many aspects of its product offerings and processes to fit t he different consumer demands in various countries .

France is not as open as other count ries such as the U.S. and UK but still enjoys substantial FOI inflows and t he presence of many foreign firms.

The labor mar ket in France is eth nically diverse (nearly 10% foreign born), and France's unions are some of t he most forceful in t he world.

The CEO is Swedish wit h significant international experience (including wor k at Nest le), and two-t hirds of the t op t eam are not French.

Devotion to The way

HBR.ORG

outside the U.S., and nearly 30% ofi ts top executives are foreigners. Is it a risk? Undoubtedly. Many BRIC companies lack leadership diversity. China's white-goods giant Hater wants to increase its proport ion of international sales from 30% to 60% by 2015, but since it has a completely Chinese board and manageme nt team, we wonder how successful it will be. India's third -largest firm by revenues is Reliance Industries, a petrochemical company with sales of$31.8 billion, of which 62% comes from exports. AlI 13 of the com pany's board members are Indian, although at least three do have 10 years or more of experience abroad. Brazil's Vale earns more than 80% of its reven ues outside Brazil, but 80% of its employees are based in the country. Its en tire executive team is Brazilian, as are virtually all the members of its board.

Priming Your Launch Pad There's a limit to what companies can do to pre pare for th eir launch as global players. They cer tainly can't do much to alte r their local demograph ics or affect the competitive realities of their domestic ma rkets in the short term. But they can take steps to ensure that when it's time to go global, they have a leadership team that is more open-minded abou t strategy and business models an d has experience dealing wit h diverse workforces. Whe n we compare companies that took off afte r moves overseas with those that fell back to earth, we see that the successes are set apart by their extensive use of three leadership development practices: Early expat riat io n. Some companies, such as PepsiCo, help young high-potential leaders learn about talent, customers, and opportunities ou tside their home market by deliberately sending them out into the wo rld on ove rseas assignments. ColgatePalmolive has gone so faras to make international experience a requirement for young employees hired into its marketing function. One caution: To save costs, finns may be tempted to send people abroad for sho rt periods (six months or less). While this can

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Many BRIC companies lack leadership diversity. White-goods giant Haier has a completely Chinese board and management team. make sense for certain technical transfers, our research shows that it does not generally broaden and deepen managers in ways that will help the m make more-enlightened decisions about international challenges. If people know that they'll be in a foreign locale for onlysix months, they tend to stay in a kind of "home-country cocoon:' Inpatriation . Because power will always reside at world h eadquarters, you have to "inpatriate" foreign executives if you want to ensure tha t those in leadership positions know and trust them. And you have to bring in a good number of them. Phone, fax, videoconference, and e-mail interactions are not and will most likely never be rich enough to build strong trust. Rubbing shoulders works far better. Nestle is one multinational that recognizes this. Tho ugh the countryside surrounding t he company's headquarters in Vevey is very Swiss,the officeenvironment feels like the United Nations. Nestle brings in people from around the world, from the mos t junior to the most senior, to ens ure that top execu tives get to know the compa ny 's best talent. The inpat nated ind ividuals also build relationships with one another, which they can leverage wherever they end up. Education . Successful competitors have serious global lea dership develop· ment p rograms. Shell, for example, has tea med up with the Insead interna tional management sc hool to ru n a customdesigned, mul timodule program focused on high·potential middle managers from every region. It includes individual assessme nt and coach ing, challenging business projects, activ ities that keep participants connected even when they return home, and content designed to build global and cross-cult ural competencies. Other companies augment their internal development efforts with public programs.

At Nestle participation in the Program for Executive Development , run by the Swiss business school IMD, is a prerequisite for advancement to the senior ranks. Because peo ple from a wide variety of companies and cou ntries attend the program, it exposes ma nagers to best practices and approaches outside the world ofNestle. To get the benefits of both cus tomization and exposure to people and practices outside their organizations, more and more companies are joining consortium-based programs, in whic h six or seven non competing firms collaborate to design the structure and content and commit to sending a certain number of pa rticipants each year. Sadly, these sorts of intense global development programs are not common in Japanese fi rms, and when they are cond ucted they're often filled only with Japanese employees. THE PARADOXof globalization is that in i· tial success can set up an organization to fail once it reaches the final hurdle. Great performers who manage a team ofpeople who think and act like them are rarely successful when the environment changes and their colleagues all look and act different. Long-te rm commitments to develo p and motivate talented people from all cu ltures and put them into meaningful roles are essential tothesuccess of even the most mod est global strategies. The world's economy may be globalizing; that doesn't mean it is becoming any less diverse. 0 HBR Re print R1009J J . Stewart Bla ck (stewart .blac k@insead . edu) is the associate dean of executive development programs in the Americas at rnsead. an international bus iness school in France. Singapore. Abu Dhabi. and the United States. Allen J . Morrison (a [email protected]) is a professor of global ma nagement at Insead. They are the authors of Sunset in the Land of the Rising Sun (Palgrave Macmillan, 2010).

Sept em be r 2.010 Harvard Business Review

103

SPEC IAl. ADvERTISING SI,IPPll'Ml'NT

Investing in Your Next Generation of Leaders? PUT YOUR MONEY WHERE IT MATTERS --,.--_ ... _--------_ ... _-------_.

is one of t he most valuable inves tments any business can make. Research by Oakland . California -based firm Bersin & Associates shows t hat compa nies w ith top-notch leadersh ip development clearly outperform companies w ith generic o r inconsistent development prog rams.

LEADERSHIP DEVELOPMENT

THE FI RM'S 2009 research on more than 700 organi zations shows that those organizations in the strategic stage ofleadership development (the top II percent of the Leadership Maturity Level Comparison chart) experienced clear and measurable business benefits. These included improved financial performance, higher levels of employee engagement and retention, and a greater ability to adapt to business cha nges. According to Josh Bersin. president of Bersin & Associates, companies are "gettin g" the value and business impact tha t come with cultivating leaders at all levels of the organization. After a

decline in aoog-c-when only half of all leaders within surveyed U.S. com panies participated in development and the other half received no development at ,II-the percentage of training funds directed toward leadership development has rebounded from 17 to 24 percent. "This tells me that companies are movin g beyond a short-term crisis mana gement mode and are looking to strengthen their leadership teams for future success," he said. As the economy rebounds, Bersin added , organizations are facing new challenges: fostering globalization, driving product innovation, improving

customer focus, and absorbing a new generation of younger workers. "Leaders at all levels must deal with these changes. High-performing com panies know that continuous leadership development across the enterprise is critical to success," he said. Bersin pointed out that today's world-class leadership development is new and different. His fi rm's November 2009 study, Leadership Development Faetbook 2009: Benchmarks and Analy.;is of Leadership Development Spe nding, Staffi ng and Programs, looked at more than 352 U.S. companies in a broad cross section of industries and sizes. Analysis of their leadersh ip developme nt programs revealed these key trends:

Le a d ership Ma tu rity Le ve l Com pariso n

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A MI X OF MEDIA, CO NT ENT, AND TRAINING

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Strategic Leader ship Development Championed by

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Foc used Leadersh ip Development CU/ture·sNt,ng. tvture-to<:used. developing Offldnizi3tion

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individuals

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process or benefit

Source: Bers!n & Associates. 2009, http!/wwwbers in.com

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Today's business leaders exist in a world of mobile devices, laptop computers, and a wide range of online resources. Modern leadership development must go far beyond traditional, formal classroom activities to include relevant reading, videos, courseware, and in ternally developed ma terials-all arranged in an easy-to-find environment. Today's best programs feature an online portal that provides a wide range of mate rials that

SPEC.........OVERT1SING SUPPLEME NT

How Lead ership and Developm ent Have Shift ed Toward Leemer-n rfven. Social. and Talent-D ri ven Learning .- "

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tremendously valuable, it is no longer

include problem-solving tools, business principles, leadership and management

enough, High-impact leadership

tips, and even au dio and video materials from experts and leaders. Executives and

development programs directly incorporate a focus on com pany-specific

managers may use this information as

leadership culture. business strategy, and

part of a formal program, for thei r own personal development. or to solve specific

participation and support of company executives.

problems. A COLLABORATI VE EXPERIENCE

Leaders at all levels need to meet, collabora te, and share information with peers. Traditionally, collaboration was accomplished th rough structured, onsite courses or a series of face-to-face m eetings. Today, collaboration often starts traditionally but continues for years through online groups, facilitated virtual

To deliver, organizations should look for a strong content and consulting partner with a base level of content, the ability to deliver in a wide variety of formats and media, and the ability to build business-specific elem ents to customize the program. Content providers must offer strategic consulting . a wide variety of competency models, and open platforms to ma ke this possible.

sessions, and internal social ne tworking

Organizations with strategic leadership development programs are

tools that let leaders find and share information with others easily.

simply better com panies. They deliver

A CUSTOMIZED. BUSINE SS· RELEVANT. AND STRATEGIC PROGRAM

In the past. organizations looked for standardized leadership programs designed for people at various levels. Today, while such content can be

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markedly greater financial returns, they adap t m ore rapidly to business change. and they endure tumultuous business cycles. These companies are not jus t developing leaders. They are also creating high-performing, susta inable organizations poised to thrive as the economy Improves,

> To leam more, visit; www.harvardmanagementor.org

EXPERIEN CE

CRUCIBLE 110

A NASCAR team owner on coming back from tragedy

Managi ng Your Professional Growth hbr.org

MANAGING YOURSELF

The Boss as Human Shield

I

Good leaders protect their employees from lengthy meetings, meddlesome superiors, and a host of other roadblocks to doing real work. by Robert I. Sutton illiam Coyne headed research and development at 3M-the company be hind Acebandages, Post-it notes, Scotch tape, and other inventions - for over a decade. Shortly after retiring, Coyne spoke to a group of hundreds ofexecutives about innovation at 3M and his own management style. He

W

106 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

said he'd started at 3Mas a researcher and learned firsthand how well-meaning but nosy executives who proffer too many questions and suggestions can und ennine creative work. Sowhen he became head of R&D, he was determined to allow his teams to work for long stretches, u nfettered by int rusions from higher-ups. Coyne

und erstood his colleagues' curiosity; if successful, an R&Dproject could generate millions in new revenue. But he limited their interference (and his own) because, he said. "After you plant a seed in the ground, you don't dig it up eve ry week to see how it is doing:' Coyne knew that the performance of his employees-as wellas his career and the company 's success-depended on shielding them from threats. This no tion that management "buffers" the core work ofthe company from uncertainty and external perturbations is an old theme in organizational theory, going back at least to James D. Thompson's 1967 classic Organizations inAction. The best bosses are committed to letting their workers wo rkwhe ther on creative tasks such as inventing new products or on routi ne thi ngs such as assembling computers, making MenonaId's burgers, or flying planes . They take pride in being human shields, absorbing or deflecting heat from inside and outside the company, doing all manner of boring and silly tasks, and battling idiots and slights that make life harder than necessary on their people. As a boss. you can protect your people's backs in seven ways.

Resist Your Worst Instincts Great bosses fret about the load they heap on others. The late theater director Frank Hauser said, in his book Notes on Directing, that during rehearsals he didn't keep "ac-

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"

I

HBR.ORG

Il

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HBR.ORG Do you have questions or comments about this article? Robert I. Sutton will respond to reader feedback at hb r.org through September.

tors hanging abo ut needlessly" because "it demoralizes the entire cast....If they have to wait a half-an-hour, that's life. But if you are really behi nd, offer them the chance to go away and come back later. And apologize." Hauser advised focusing on the play, not yourself: "Guard against the director's first great vice- rabbittng on, maki ng the same point again and again, gett ing laughs from your inimitable (and interminable) anecdotes." Meetings are infamous time wasters. Yes, some are necessary, but bosses bent on self-glorificat ion often run them in dis respectful ways. If you want to grab power and show little regard for your people, arrive late to most meetings. And now and then, show up very late or send word after everyone has gat he red that, alas, you are a Very Important Person who is in demand. But if you want your charges to be proud to do good work for you, then start and end meetings on time. You may miss the thrill of petty power dis plays, but you will earn more prestige by leading productive and grateful followers. Will Wright, designer ofcom puter games The Sims and Spore, used Ocean Quigley-a creative, impatient artist who worked for him -as his "canary in the coal mine" at meetings. Wright noted in the New York Times that when Quigley asked to be excused, "that was the point at which wealways knew that the meeting had hit dimi nishing returns." So Wright would simply end it at the canary's cue. He also used a trick to make his designers thin k harder about calling unnecessary meetings. When someone booked one, he charged tha t perso n a dollar. Wright and his designers still went to many meetings, but he said "it did ma ke them think twice ...eve n though it was only a dollar?'

Make It Safe to Fight Right When people have mutual respect, argume nts over ideas are productive and creative. The best bosses orchestrate constructive battles- enabling people to feel safe to speak their minds, even to the leader. Pixar's Brad Bird, who wo n Acad-

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emy Awards for directing Thelncredibles and Ratatouille, is a vigorous advocate ofconst ructive conflict. After a string of blockbusters, starting with Toy Story, he was hired by Pixarwith a mandate from bosses Steve Jobs, Ed Catmull, and John Lasseter to "mess with our heads, shake it up," as Bird no ted in an interview for McKinsey Quarterly. He took theirwords to heart and assembled a team of "rnaicontents" to make Thelncredibles. The team me mbers clashed wit h one another- but these were good fights , built on mutual trust. Indeed , Bird tells his teams, "I want you guys to speak up and drop your drawers. We're going to look at your scenes in front ofeverybody. Everyone willget humiliated and encouraged together." Bird'slncredibles team me mbers shook things up as inst ructed. Pixar's technical experts initially told them it would take 10 years and cost $500 million to render the realistic hair, wa ter, and fire they wanted. But Bird and his malcontents pushed the tec hnical team and themselves to invent new methods, which enabled the m to com plete the film for abo ut $100 million. It had great commercial success, got rave reviews, and was a source ofim mense pride for Bird 's team and everyone else at Pixar.

Protect Them from External Intrusions and Time Sinks In his 1975HBRclassic "The Manager's Job;' Henry Mintzbergwrote: "Someone, only halfi n jest, once define d the manager as that person whosees visitors SO that everyone else can get his work done." Mintzberg'sobservation showed that management work entails dozens- sometimes hundreds-of fragmented tasks per day. If you are a boss, protec ting yourself from intrusions may be a lost cause, particularly in the era ofe-mail, RSS feeds, and Twitter. But you can run inter ference for employees, especially those whose work requires concentra tion, such as engineers, lawyers, nurses , writers, and other knowledge wo rkers. Some companies are implementing programs to reduce inter ru pt ions and

dis tra ctions. In 2008, 300 engineers and managers at Intel joined a pilot program in which, for four hours every Tuesday morn ing, they set their e-mail and 1M clients to "offline," directed phone calls to voice mail , avoided scheduling meetings, and isolated themselves from visitors by putting "Do Not Disturb" signs at the en trances to their wo rkspaces. This "t hinking time" program was run by engineer Nathan Zeldes, who reported that it enhanced "effectiveness, efficiency, and quality ofl ife for numerous employees"; 71% of participants recommended that it be extended to other gro ups. Good bosses also relieve people of burdensome organizational practices. Consider Bonny Simi, a three-time U.S. Olympic luger, a commercial pilot, and now a director at JetBlue.ln 2008, as head ofairport planning and ind ust rial engineering, s he and her tea m overhauled their performance-review process. With support from senior leaders, they scra pped the team's old evaluation form, which took two hours to complete and required much back-and-forth between boss and employee. They replaced it with a form that takes 20 minutes to fill out. Similarly, un der new CEOEd Whitacre, GM slashed the number of regular reports prepared by its research group from 94 to four. Now the group can spend more time on resea rch.

Defy Idiocy from On High Sim i had backing from her superiors at Jet Blue. But sometimes good bosses face senior leaders and powerful groups that cram bad ideas down everyone's throat. When your people's performance or well-being is threatened by idiocy from on high, you need to decide whet her to comply or resist, depending on what will help them-and you -most. Sometimes the political costs ofdefiance are too high , and sometimes seemingly idio tic directives tum out to be useful. That said, defiance can occasionally be the best strategy. In the mtd-issos, I saw this tactic used in a large retail chain that was closing ove r 100 stores. Septem ber 2010 Harvard Business Review 107

EXPERIEN CE

The Retail Action Team that oversaw the process- jokingly called the "Rat Patrol" by its members- asked me to study eight closings: four deemed "good" and four "bad," dependi ng on how much business the company retained. When I conducted interviews at these stores, I found tha t managers res ponsible for "good" closings rarely followed the Rat Patrol's procedures. One "good" manager held up his thick corporate manual and bragged that the secret to his success was ignoring it and ot her instructions from the Rat Patrol. When people at his branch planned a party tosay good-bye to one another. the Rat Patrol instructed the manager to cancel it, but he approved it anyway. All the hugs, promises to stay in touch. and stories at the party lifted their spirits and gave them a sense ofclosure. Managers ofthe "bad" closings. in con trast, tried to follow the Rat Patrol's guidelines closely. All complaine d that doing so demoralized employees and made it difficult to persuade customers to tra nsfer accounts to other stores. The upsho t was that managers who ignored and defied their superiors' instructions were judged as most effect ive by those same superiors.

Practice Creative Incompetence and Malicious Compliance Your parents probably taught you that anything worth doing is wort h doing we ll.

The best bosses shield th eir people from dis rupt ion a nd distress. but th ey aren't ma rtyrs who always put e mployee performance and happiness first . Wise leaders balan ce th e need to protect their people against ot her, so metimes more crucial, considerations. 108 Harvard Scan & PDF: worldmags & avaxhome

a cu rsory manner and encouraged his colMine did . Yet at times good bosses do a halt-assed job on purpose and encourage leagues to do the same. M alicious compl iance, in contras t, followers to join them. Creat ive incomrefers to following idiotic orders from petence was popularized by The Peter Principle, a brilliant business parody from on high to the lett er, the reby assuring the work will suck. One manager at an the 1960s. The authors, Laurence 1. Peter electronics firm described how his team and Raymond Hull, we ren't joking when they argued for the virtues ofdoing lousy had built an ugly, cumbersome product prototype as ordered by his boss, the VP wor k intentionally, albeit in small doses of engineering. After it was savaged by and wit h proper precau tions. Good bosses the CEO, the manager explained (with focus their people's effort on what matters documentation) that he had adamantly most. When relatively trivial demands can't be ignored, the best option is someopposed the idea but had given up battling the VP. When the VP lost his job, the times to do a quick, cru mmy job and move on to mo re-crucial issues. manager's team members redesigned the product "the right way" and created Jeffrey Pfeffer and I encountered a commercial success. Beware, however, multiple examples of creative incompetence whe n we gathe red material at a large that malicious compl iance can be destrucbank for our book The Knowing-Doing tive. But it does work, as a last resort, Gap (Harvard Business Review Press, un der the right conditions. 2000). We had an especially me morable Slay-or SLOW-Their Enemies chat with a branch manager whom senior My previous book highlighted how meanexecutives had identified as among the top performers in New York City. This ma nager spirited, abus ive people can underm ine believed that the balanced scorecards he attitudes and performance. A good boss and others in his branch had to complete protects followers from these destructive for direct reports we re useless- after all, characters. Conside r an incident that they were rewarded for short-ter m fi nana Texas police se rgeant told me about: "I was given your book by my su pervisor cial performance, not the 25 or so dimensions on the form. But bala nced scorecards to read so we could 'd iscuss' leadersh ip were among the CEO's pet projects, and ideas. I tho ught this was a little odd, as compliance was closely monitored. So the I could best describe my boss's style as ma nager simply completed the cards in leadership by oppression. I began to read

POLITICAL POWER

Ifyour immediate reaction is to fight for your people without considering the effect on your inftuence and rep utation, you're undermining your own power. That, in tu rn, does you and your team a disservice. One boss, a director of sports medicine at a large university, took pride in battling misguided proced ures and vindictive senior administ rators to shield his people. Yet he picked his fights carefu lly, because if he

Business Review September 20 10

developed a reputation as a chronic complainer-or, worse, got fired -he could n't protect anyone. He asked his peopLe to heed the ruLes and ad ministra tors unless defi ance was crucial to maintaining t heir performance or dignity. As he put it. "My job is to open the umbrella when the crap rains down from above. Your job is to keep me from having to open it too often."

ROTTEN APPLES

A

fact of organizational

Life for most bosses is that no matter how hard you work to buiLd a great team, you will hire or be assigned some weak and de structive peopLe. Your job is, of course, to help them Learn and improve. Ifthey don't change, however, it's best to send them packing. Research by w ilt FeLps and his colleagues on "bad apples " boLsters this point. They identi·

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the book and realized that he had made a colossal mistake ....[I ended up] telling him, in front of eight of my subordinates that I supervise, that his behavior of verbally berating officers was not acceptable on my shift. I actually said to him, 'It's your fault!You gave me The No Asshole Ru le book!'" By the way, if you do something like this, you had better have rock-solid job security, powerful friends, or ano ther job offer. Good bosses also protect their people from demeaning, overly demanding, and frustrating clients and customers. Executives from several airlines, including Southwest and JetBlue, have told me that their companies ban consiste ntly or outrageously abusive passengers from buying tickets. Ann Rhoades, former head of "People" at Southwest, described how a fellow executive earned the loyalty of several gate agents by interrupting a nasty customer, telling the jerk that he wouldn't permit his people to be treated that way, and then marching him to an American Airlines coun ter to buy him another ticket.

The best bosses orchestrate constructive battles-enabling people to feel safe to speak their minds, even to the leader.

"I let him hide behind my skirts because when you are the boss, part of your job is to protect your people when they screw up," she explained. For a similar reason, former New York Yankees manager Joe Torre was beloved by his coaches and players. When the late owner George Steinbrenner became too pushy or critical, Torre deflected the pressure from them to himself. As Torre reports in The Yan kee Years, Steinbrenner invited himselfto a meeting of the coaches the afternoon before a playoff game and was driving them nuts by second -guessing decisions. Torre ended these anticsby shouting, "Get out of there, George! Don't fuck them up." Steinbrenner laughed and left, but he warned Torre: "You just better be ready?' As usual, Torre took the heat for his coaches and players. He responded, "I'll be ready, George. I'll be ready." Covering for employees can be Take the Heat painful and risky for a boss, but it can be One female executiveI know had a suborremarkably effective. It engenders loyalty dinate who made a mistake that cost the by demonstrating that you aren't just company a lot of money. Yet when the spewing out hollow rhetoric about trying board lambasted her, she didn't blame him. to protect them.

fi ed three kinds of destruct ive characters, whom Icall dead beats ("withholders of effort"), downers (who "express pessimism, anxiety, insecurity, and irritation"), and assholes (who violate "interpersonal norms of respect"). Felps estimates that , compared to teams without bad apples, those with just one suffer a performance disadvantage of 30% to 40%. Rotten apples sap time and energyt hat could be devoted to usefu l tasks. Their negativity

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is also contagious- it infects coworkers, turning them into deadbeats, downers, and assholes just like them. YOUR OWN WELL-BEING

Good bosses balance t heir followers' needs for protection with their own needs. They treat t he job like a marathon, not a sprint . Bosses who never tend to their own mental and physical health, families' needs, and careers are doomed to failure. If you don't take time away

Self-Awareness Is the Key Good bosses shield thei r employees from distress and distraction in diverse ways, whether behind the scenes or publicly, They workday after day to enhance their self-awareness; stay in tune with followers' worries, hot buttons, and quirks; and foster a climate ofcomfort and safety. They also learn to identifywhich battles their people consider crucialto fight, and which they see as unimportant. When bosses can't protect people-for example, from layoffs, pay cuts, or tough assignments-the best ones convey compassion, do small things to allay fears, and fi nd ways to blunt negative consequences. Operating in this way helps bolster your people's performance and well-being. And a nice by-product is that they will have your back, too. I::' HBR Reprint Rl009 K

Robert I. Sutton is a professor of mana.J agem ent science and engineering at Stanford University, whe re he cofounded the Hasso Plattner Institut e of Design and t he Stanford Technology Ventures Progra m. He is the author of Good Boss, Bod Boss (Business plus. 2010), on which this article is based.

"

from work to recharge, you will eventually burn out. My wife, Marina Park, a hardworking boss for decades, fi rst as managing partner of a large law fi rm and now as CEO of Girl Scouts of Northern California, uses the airplane safety

analogy; Secure your own oxygen mask before helping others. After all, if you're choking for air, you can't save someone else. Similarly, if you as a boss are not breathingfreely, you can't clear the air for others.

r

September 2010 Harvard Business Rev iew 10 9

EXPER IENCE

Crucible Transformative events that shape leaders

ick Hendrick was driving hom e from lunch on a Sunday afternoon in 2004 when his cell phone rang. A longtime employee was on the line, and he nervously asked the boss to pull over so they could talk. Hendrick was 55 yea rs old. He owned a $3 billion chain ofautomotive dealer ships and a aso-emplovee NASCAR racing operation . As he eased his BMW x s offthe road, he figured there'd been a wreck at that afternoon's race and that one ofhis drivers was injured. In fact, the news was far worse. A company pla ne en rou te to the race had disappeared from the radar. Initial reports said it carried 10 passengers, including Hendrick's only son, Ricky, age 24; his

A New Will to Win R NASCAR team owner Rick Hendrick lost his senior management group-and his son-in a 2004 plane crash. Here's how he got his company back on track. by Daniel McGinn

" 0 Harvard Business Review Septembe r 2.010 Scan & PDF: worldmags & avaxhome

I i I ,•

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brother, Joh n, 53, who was the racing com- over several teams- a practice that's now pany's president; two nieces; two of his standard. top managers; and two other employees. Hend rick had faced serious adversity "At first I thought they just had to fly some be fore. In 1996 he was dia gnosed with leukemia; doctors didn't expect him to where else to land because ofthe weather, survive. Only days later he was indicted on and they were OK;' Hendrick says. So he federal bribery charges in a case involving began dialing the passengers' cell phones. "That's when I knew some thing was payments to Honda executives. Rather wrong-eif they'd been on the ground, they than enduring a trial wh ile undergoing would have answered." He drove ho me, treatment for an illness that might kill him, he pled guilty to mail fraud and told his wife, Linda, what had happened, served a year of home confi nement as he and waited. By m idafternoon aut ho rifought the cancer into remission. He was ties had located the crash and no tified pardoned by President Clinton in 2000, at the Hendrick family that there we re no survivors. "They're very strong Christia n which point he'd ret urned to run ning his people-they we re devastated, but eve rybusinesses. By 2004, Ricky, who'd driven body prayed;' says Felix Sabates, a close in NASCAR's Craftsman Truck and Busch series, had retired from driving and was friend and rival NA5CARteam owner who learning to ru n the Motorsports company. was with them. "It was a tough day:' For the fam ily, the eve nts of Octo"Mygoal was to start weaning myself away and to let Ricky move up," Hendrick says. be r 24, 2004, we re a personal tragedy. The mo rning after the plane crash, And for the racing business, Hendrick employees we re paralyzed. There was a Motorsports, the accident ha d farrace in six days, but no one knew if Henreaching business consequences. Aside drick's teams wou ld eve n compete. Ken from Hendrick, who served as CEO, the company's entire leadership group was on Howes, the company's chiefof competiboa rd the plane when it hit Bull Mountain, tion, gathered the shaken employees and delivered a simple message: "We're going and Ricky was being groomed to take over the operation . The next morning everyto race, because that's what we do." On one wondered if it would survive. "It's Wednesday hu ndreds of people s howed up for a pub lic memorial service; the next just human nature to ask yourself that two days we re consumed by funerals. question;' says Mike Helton, NA5CAR's president. "How could his organization Aweek afte r the crash, Hendrick driver Jimmie John son wo n the Bass Pro Shops get through this?" MBNA 500 while Rick Hendrick watched Hendrick had grown up around racing. on television at home. His father worked on race cars, and in his Eight days after the plane crash, Henteens and twenties Rick raced stoc k cars drick returned to the racing operat ion'S and powerboats. At 22 he became a car too-acre campus for the first time. "When salesman, by 26 he'd become the youngest I left ho me that morning, I wasn't sure if Chevrolet dealer in the U.S., and by the I could get over what happened and walk early 1990s Hend rick Automotive was one of the country'S largest dealership groups. in here:' he says. In front ofemployees, Along the way, Hendrick had created a however, he was resolute. "For him to successful NASCAR franchise by pioneersta nd in front ofclose to 500 employees at ing the idea that one owner could support that time and say, 'Listen, we're going to multiple drivers, spreading fixed costs get through this, and we're going to do it

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together'- it was unbelievable," says Jeff Gordon, the four-t ime NASCAR Cup Series cha mpion who's driven for Hendrick since 1993."That moment made us as a gro up stronger than we've ever been." The crash caused the company to replace a centralized management structure wit h a more collaborative culture led by a joint leadershi p team. Previously, Hendrick Motorsports operated informally, with critical technical knowledge carried mostl y in key employees' heads. Hendrick decided that a triumvirate ofold and new

Since the crash, Hendrick has become fanatical about contingen cy planning. In meetings, he now routinely asks, " What's th e backup?" talent should take the business forward. He appointed his son-in-law, Marshall carlson, a company veteran, to be general manager-providing prooftha t the family was still committed to it. He promoted Howes, who'd taken charge in the ho urs after the crash, to vice president and hired Doug Duchardt, who oversaw General Motors' racing program, as another VP. To overcome the gaps in their knowledge, the three leaders set up offices a few steps apart- and spent much oftheir days in a conference room, hashing out decisions. Howes provided valuable his torica l con text, and Duchardt brought a fresh set ofeyes. "We spent a lot oftime making sure we were on the same page;' Duchardt '12 Harvard Business Review September 2010 Scan & PDF: worldmags & avaxhome

says. The owner was a distant presence in the first mont hs after the accident, but friends say that was a smart move. "He was able to separate his grief from the business," says Sabates. "Rick has great people, and he let those people run with the ball until he was able to come back and take over." Managers say the new setup forced them to become more collaborat ive. While each ofHendrick's four teams has its own cars, driver, and crew chief, the teams share resources (like engineering talent) and information (like technical data on tire pressure or suspension), eve n though the drivers race against one another. Hend rick has long tried to incentivize cooperationfor instance, all the teams get a bonus if any of the four drivers wins a race-but ma nagers say the cultu ral s hift aft er the crash made them work together eve n better. "Th at's been our secret weapon- the fact that Rick can get extremely talented, motivated, driven, competitive people to communicate, support each other, and share best practices:' Carlson says. Since the crash, Rick Hendrick has become fanatical abo ut conti ngency planning. In meetings, he now routinely asks, "What's the backup?" He's especially concerned that technical, legal, and fi nancial information is shared among multiple ma nagers. "We definitely think about how many people are going to un derstand what's going on in here. We don't want it to be only one person," Carlson says. When it comes to travel, top ma nagers no longer fl y together on the same airc raft, and everyone is extremely cautio us abo ut flying in dicey weather. In addition to a

standard estate plan, Hendrick now keeps a written succession document, detailing how res ponsibilities will be divided in both the automotive and the racing groups upon his death. He updates it wit h his lawyers every 90 days. "Wecall it our bible;' Hendrick says. "I know from experience- you have to be prepared." He says the crash has made him more conservat ive in setting strategy. "I used to throw for the end zone all the time;' he says. "Today I'm more selective. You try to prepare for the things you can't control:' That attitude helped when the global economic crisis hit. Though overall auto industry revenue dropped sharply, revenue at Hendrick's dealership group dipped just 2.8%, to $3.67 billion, in 2009, and by early 2010 the dealerships we re again posting record months. Meanwhile, the racing group has been racking up trophies : Since 2006, driver Jimmie Johnson has won a record four straight NASCAR championships. Hendrick says that if things had worked out the way he'd intended, he'd have probably turned the operation over to Ricky by this point. "We had a plan, but God had other plans," he says quietly. "It's your faith, your family, and your friends who get you through these deals." But he looks back on the crash as a galvanizing eve nt. "It just made everybody want to fight harder. We immediately turned something that was a tragedy into a motivation to do well, to honor them, to pull together:' 0 HBR Repri nt Rl009L

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se nior editor at Harvard

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What can you learn about success from a robot? Why shouldn't you take a test while wearing red? And how can it be that people who perform poorly on a task often see t hemselves as being the best? In the new bo o k

Th e Winner's Brain, H ar vard -tr ained brain experts D r: Jeff

Brown and Dr. M ar k Fenske ex plo re the surprising science beh ind motivation, fo cus and extr ao rd inar y achievement -

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in yo ur head, Fenske and Brown are among the co ntributors to the new Yo ur Health at W o r k blog on H BR.o rg. Fenske talked with

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neuroimaging stud ies are revealing new insights about t he human brain and how its neural circuits can be fin e-tuned to enhance performance. You say that contrary t o po pu lar belief, high achievement has little to do with your IQ, circumstances, fi nancial resources or even luck. You say in st ead it's a par t nership between your brain and behavio r. W hat do you mea n! Your neuro-circuitry is crit ically involved every t ime you t hink a thought feel an emot ion or execute a behavior. The good news is you can take charge by guiding how these circuits work. Earlier. we thought brain development ended w ith adolescence, leaving you stuck with what you had. Now we know that Isn't true: the brain retains the capacity to change throughout adulthood. And what you do with your brain can reshape it s physical landscape and underlying neural connect ions. But it takes work - what you put in is typ ically w hat you get out. By leaming a little about how your brain works, you can be strategic in choosing the thi ngs you do with your brain t o make it better. It isn't just doing brainteasers or crossword puzzles. You may get better at crossword puzzles but not necessarily any better at remembering your keys. There are th ings, however, t hat can Improve brain function in areas more directly related to success. These can help enhance self-awareness and resilience, and your control over attention and emotional responses.

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H o w have science and technology given us new insights int o t he brain!

What kinds of strategies can we use, starting today!

The big difference is the recent development of neoroirnaging t echniques that provide unprecedented views of the structure and operation of t he human brain. Before. we had to see wh ich brain region was damaged and what someone was no longer able to do as a result, Now we can look at healthy brains and identify areas more active when people are engaged in specific tasks. We can also see t he impact that certa in activities have on the brain and how these may enhance different brain functions. We use this science to ident ify the mental activit ies most helpful in literally fine-tuning your brain t o be more successful.

For example, the research has shown that meditation for stress relief can affect visible changes in key brain regions, which in tum will have a big impact on our ability to control attention and our emotional response. That's important on the job.

W hat do you mean when you say w e can improve o ur bra in power t ools? Brain power tools are essential elements of success. Brain power tools are the t hings that must be in place for you to be successful, like having motivation or having a talent meter - your awareness of your strengths and weakness. If you want to improve yourself, you have to know which areas you need to focus on. W e know some people are stronger in certain areas than ot her people, but everyone can Improve and strengthen those tools.

We also know that the bigger the task, the more likely you are to procrastinate. So practice reframing t he problems and breaking them into small, concrete steps. This ability to change the way you look at a task or problem is very Import ant. The more you do th is, the more success is likely. A nd we're leaming a lot about brain funct ions t hat provide focus and how they break down when faced w ith multitasking and distractions. To work opt imally at tasks like writing, you can't multitask. The brain has fundamental limitations when doing multiple th ings. So you need to eliminate salient distractions, But not all distraction. To work optimally. you may need to reduce activity in the parts of t he brain involved in self-monitonng and selfcriticism. So try a gentle distract ion like a little music or some ambient background norse to keep your critical self-conscious occupied so you can focus and work easily. Just make sure you don't have demanding, abrupt distractions like phones ringing or emails popp ing up.

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Case Study

----'-____''

Jimmy Gut erman is a senior editor at Harva rd Business Review.

Th e music busi ness has changed radically. Can an employee who's been an industry legend keep up? by Jimmy Guterman

"

The Experts

Pete r Cappelli is the George W. Taylor Professor of Ma nagement and deectcr of the Cente r fo r Human Resources at the Uni versity of Pennsylvania's Wharton School. Bill Nove lli is the CEO of AARP.

Tama ra J. Eric ks on is t he head of consulting, research, and education for the Concours Group and general manage r of collaboration services for nGenera .

I

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

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hen • the Lon rrne Star Fa es d then there's the time the Rolling Stones left me behind at a truck stop outside Ama rillo:' It never took Bob Antice long to grab a crowd. Thirty-six years into his career at Powerful Entertainment, he was a legend in the recording industry, the most successful salesman in the company's history, friend and me ntor to generations of performers, and a sought-after speaker at industry events like the one in this Santa Monica hotel. Every ta le was funnier than the one before; every anecdote s howed how deeply Bob loved his work. Unlike many of his contemporaries, Bob at 61was a decent, humb le ma n who didn't use his time in fron t ofa microphone to boost his own ego or settle any scores. He didn't mind being the butt of the stories he told, wh ether they were about the Stones at the truck stop or the aging R&B superstar who had knocked down his hotel room door at 5 AMand accused him of stealing a Mars bar. Bob's work from the mtd -iszos to the early 1990s, first as a regional sales assistan t and eventually as a senior manager, had put Powerful on top: The company

fX..

had outsold all its competitors for eight straight years in the 1980s. And when he wasn't finding new ways to sell records, Bob was discovering performers that the label's talent-and-repertoire staff had somehow missed (though back in 1981 no one had listened when he suggested signing a newcomer named Madonna). His perso nal relationships wit h wholesalers, retailers, pro mo ters, manage rs, and pe rformers made him indispensable. He was trustworthy and indefa tigable. After his talk, Bob took questions from the audience. Most ofthem were about wh at wor king with this singer or that producer had been like. He answered them wa rmly and informatively. "We've got time for one more," he said, and pointed to a young woman in back with her hand up. "Thanks, Bob," she said. "I'm in marketing over at EM!. I love hearing about the good old days, and I could listen to these stories all night, but I'm wondering: Am I gonna get to be you when I grow up- or is the gig over for all of us?" For the first time that evening, Bob seemed confused. "What do you mean?" he asked. Septe mber 2010 Harvard Business Review 117

EXPERIEN CE

"The record business. Our business. Does our audience need it anymore?Or can people get to the music without us now? How do you compete with the internet, with streaming media, with free?" Aftera brief pause, Bob replied, "No, no. The record industry is in some sort of transition, anyone can see that. But people love music. They can't live without it. Our audience would never let us fade away. It's unimaginable."

He's Still a Guy in Sales Noel Klein, Powerful's CEO, sent his salad back to the kitchen (too many capers) and turned to Rita Leigh, his VP for sales. "You heard about Boblast night?" "I was there:' she said. "Hesays it's 'unimaginable' that we're in trouble. Doesn't he read his own sales reports?" Noel studied the back of his fork. "You're his boss. What do you think we should do?" "He and I have a regular Mondaymorning sit-down. I'm going to spend the next few days thi nking it over." "Rita, it's 2010. Over the past 20 years the entertainme nt business has changed dramatically, but Bob hasn't. He was head of sales when I started. NowI'm CEO and he's still what he's always been :a guy in sales-except he isn't selling things anymore. He knows nothing about digital distribution. He still tells stories about Flock of Seagullsand expects people to get the references:' "Didn't you hear? We'redoing the reunion record:' "I'm being serious," Noelsaid. He usually enjoyed such jousting, but not today. "The world that made Boba superstar-that world of handshakes-it doesn't exist anymore. Powerful isn't the same company it used to be. It's been sold, what, three times? And Bob'sbasically been pushed further to the side at each stage while st ill getting paid top dollar. He has considerable people skills, I know. But the guy's expensive, and I'm not sure he's worth it in the age of'il'ads, Shazam, Live Nation, and whatever came out today that we haven't " 8 Harvard Business Review Sept ember 2010 Scan & PDF: worldmags & avaxhome

heard about yet. He knows he hasn't been hitting his numbers. Everyone knows. Hell, you probably don't give him numbers anymore. I've always told you, it's your P&L. But I'm not going to tolerate it ifI don't meet mynumbers because Bob is taking up space a real salesma n could use. What is his value to us? Really, what is it?" Rita began, "He's a link to..." "No, let's leave out the history. What is he doing for us now?" "He's keeping Mark Sender on the label." Noelhad to concede the truth in that. In the long-ago 19905, when record companies still paid enormous advances to lure performers from other labels, Sender had turned down mind-boggling offers from Warner and Sony in large part because of the relationship he and his manager, Ben Roth, had with Bob. They had worked out a precursor to the "360" deals now common in the industry; it offered the singer far more creative autonomy than he would have had elsewhere and gave Powerful a slice oflucrative revenue streams, such as concert proceeds and merchandise, that record labels usually couldn't access. Not only were Sender's records still going platinum at a time when million-copy awards were increasingly rare, but Powerful was getting nearly 30% more from him than from other performers. "That's one artist," Noel said. "We have many, many more. I respect you, so I'm not rejecting you out of hand. But you've got to give me a lot more to work with than that Sender likes him. Figure somet hingout. Once you've thought about it, I'll back you up either way. Let me know by Monday." He turned to the waiter who had arrived with his salad replacement. "Could Ihave a small bowl of capers with this, please?"

Everyone Loves Him Rita's Wednesday brunch appointment at Ben Roth's compound had been planned far in advance, but it couldn't have come at a better time ifshe was to figure out what to do. Asshe drove down the long dirt road to Ben's sprawling ranch house, she considered her situation- and Bob's. He was a

"The young guys tell me they can learn from him. But he's not producing the way he used to." legend and a public face for Powerful. Plus everyone at the company loved him; he made them feel good about their work. But was there a way to quantify tha t? Could it be turned into a justifiable job? It was a nice enough day that Ben's staff had set up the patio for brunch. After a bit ofsmall talk over the huevos rancheros, Ben said, "Congratulations." "Huh?Why?" "I just saw this week's SoundScan numbers." "What? How'd wedo? Mark's record isn't out for..." "It's not just us. It's everyone. The industry that pays our mortgages just had its worst week since 1994.And SoundScan didn't start counting until 1994. It probably goes back further tha n that." "Thanks," Rita said, in no mood for gallows banter. "I feel much better now." ''Another drink?" "Better not. Listen, can we talk a bit about BobAntice?" "Howis Big Bob?" Ben asked. "I haven't spoken to him in a while." "Still the same. Listen, you've been giving me good advice for years, and I really need some now. I don't know what to do. Bobhas brought a lot of value to Powerful. The label would n't exist without him." "But you and Noel are wondering what he's done for you lately?" "I know you and Mark adore him," Rita said. "He's endlessly imaginative and his enthusiasm is contagious. It's hard to get people excited about the music business these days, and he can do that. The young guys tell me they learn from him. But he's not producing the way he used to. " "Why not just keep him on until he decides to retire?That can't be far off." "I'm not so sure about that. And Idon't know if we can wait. Album sales went down more tha n 20%for the industry last

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Tell us what yo u'd do about Bob.

year, and digital isn't coming close to filling the gap. I need to ask: If we ma de a move with Bob, would we still have you? You know how much Mark means to Powerful." Ben poured himselfsome more sangria. "I understa nd tha t a company has to do what a company has to do. We don't have a keyma n clause with Bob, and we're certainly not going to go to court to get out ofa deal if you let him go. But I can't say for certain that this won't be on Mark's mind when we look at the option next year. Bob may be the only person on your payroll people actually love. It's not just Mark and me. That must count for...something." "I appreciate your honesty: ' Rita said. "And I've changed my mind abo ut that drink."

ARTICLES INCLUDE:

The Power of Talkl Who Gets Heard and wh,. Deborah Tannen

" I Don't Have Good News" On Sunday afternoon Rita worked out to a Pflates DVDto clear her head. Around 6 PM she went downstairs to her home office but didn't turn on the computer. Instead she spent the next three hours in front ofa mirror, sticking Post-it notes all over it and perfecting two four-minute talks, one of which she wo uld deliver to Bob the nex t day. Both of them began with "I don't have good news:' In one, she told Bob how much he meant to the com pany and then, as gently as possible, tha t it was time for him to move on. In the other, she told him she'd give him "one last chance" to join the rest of Powerful in the twenty-first century. She ke pt going bac k and forth in her mind about which was the right approach. When she fi nished practicing, she tu rned on her com puter. She had an e-m ail from Noel Klein. The subject line was "Well?" The message read, "What did you decide abo ut Bob?"

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FALL ISSUE ON NEWSSTANDS

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Peter Cappelli and Bill Novelli, authors of Manag ing the Older worker: How to Prepare for the New Organizationa l o rder (Harvard Business Review Press, 2010) Let's assume t hat Bob can't or wo n't solve his performance p roblem, especially IF THE fact t hat Bob Ant ice is 61 seems

appears to be greate r against older work-

important to you in this case, you're preju di ced. It should n't matter how old Bob is

ers th an against any other group.

when assessing his performa nce. Rit a Leigh is wringi ng her hand s about whether t o fire

fro nt more-experienced subo rdinates about

Younger supervisors are afraid t o con -

if th e cause is an industrywide issue. If he has te rrific people skills, is a great ambassador for th e company, and has passion th at energi zes everyone around him , surely t here is someth ing he can do for Powerful

him, but as far as we know, no one has told

performance issues. Rita's fear of simply having a conversation with Bob about his

Bob t hat his current level of production is unaccept able. It's possib le th at he can't or

p roduct ivity comes from insecurity: How can she criticize a guy who is a legend in

wo n't d o anything to improve, but it is irre sponsible t o be talking about firing some-

t he industry? How can she possibly teU him t o do someth ing differently?

what he's earning now. We routinely see older execut ives becoming t eachers, bankers becoming tour guides. Often , older

one without at least telling t he employee what the p rob lem is and t rying t o fix it. We frequently see situations like t his

Managers often try to base t heir leadership on superior knowledge and experi -

workers don't need as much money as t hey did when t hey w ere younger, and doing

ence: " My subordinates should do what

when you nger supervisors manage older and more-experienced subordinates. They

I say because I know more t han they do." That approach j ust doesn't work wi t h older

something t hat is meaningful to t hem may well trump higher pay. The only way to find

assume t hat performa nce problems come

empLoyees, and t he managers know it-so

out is to ask th em. Bob may surprise Rita by seeing a solution t o t he performance

wi t h age, when in fact st udies of job performance show t hat on average, older workers

t hey panic: They won't hire qualified candi-

prob lem or a new role for himself t hat

dates who are otd er and more experienced t han t hey are, and t hey wo n't manage such employees when t hey get th em.

work s bot h for th e company and for him.

What should Rita do? Meet with Bob and put t he problem on t he table. Ask him

Tamara J, Erickson, author of Retire Retirement (Harvard ..·...:;J.·I Business Review Press, 2008) and What's Next, Gen X? (Harvard Business Review Press, 2010)

perform better t han thei r younger coun te rparts. The supervisors assume t hat old er workers can't or won't change. preju dice

If Bob has passion that • energizes everyone around him, surely there is something he can do for Powerful.

how it should be solved. Managing older empLoyees shouLd invotve acknowtedg-

Ente rtai nment. If he ta kes on a different rote, t hat doesn't mean he has to be paid

~__oj=::A,

ing t heir experience and engaging t hem in ad dressing problems. The supervisor is

still t he boss- she sets t he agenda, and she's responsible for th e solutions. But she doesn't need to com e up with every solut ion herself.

HOW DO you play out an aging b usiness model? How do you manage an aging employee? Rit a is w restli ng with t wo int ertwined issues-and she may not be th inking either one of t hem through cl early.

~WHAT WOU LD YOU DO?

~

SOME ADVICE FROM THE HBR.ORG COMMUNITY

BEFORE RITA has "t he" conversat ion with Bob, she and Noel should identify what's behind the decl ine in sales , Bob's not making his numbers may be only one contributor. In the case, t he industry is having its worst week. Using Bob's people skills to identify new talent and to infl uence current big shots could he lp boost sales, thus helping both Bob and Powerful achieve their numbers. Anjana Karumathil, senior strategy

consultant, tsetoute Tax LLP 120 Harvard Business Review Septembe r 2010 Scan & PDF: worldmags & avaxhome

POWERFUL has allowed its star performer to become redundant through lack of foresig ht and planning. What will up-and-coming stars make of th is treatment, and how will it affect t heir loyalty? The company should update its training and development programs and strive for t he tacit and overt benefits of cond ucting itself as both a financia lly and a morally respon sible enterprise. Rohan Duggan, degree candidate in organizational psychology

BOB SHOULD move on with honors. Creating a n advisory board seat and keeping him on the payroll for two years is a nice way to move him into a soft retirement. Binesh Hangar, head of cards, The

Mauritius Commercial Bank

HBR.ORG

c::r:J Harvard

~ Bu si ness

'0' Review

Rather than taking Bob out of the business, Rita should consider consolidating the album business around him. The album-centric music business is dying. Sales of physical product are falling, Bob's along with all t he rest. It's not clear from the case that his numbe rs a re falli ng faster t ha n his compatriots'-Rita and Noel KLein seem to be primariLy concerned that Bob somehow doesn't "get" t he severity of t he proble m. Bob is not as young as he once waspe rhaps more to the point , not as young as Noel and Rita. He was already a senior sales executive when Noel entered the business. Their relations hip almost certainly crosses a generational divide: Bob is a solid Boomer, whe reas Noel and Rita are qu ite likely members of Generation x . The standard st rategy for a business model that is slowing but not yet dead is to consolidate around a profitable core. Rita needs to thin k sma rtly a bout the best way to strengthen the profitability ofthe albumbased business, rather than trying to push its sates back uphill. Maybe the best future

MOST COMPANIES are, at their core, people; that goes double for a company in the relationship business. Fire Bob, and not only will the key act leave (and he will-I guarantee that as a musician and as a busin essperson) but so win others internally, worried they wilt be next, seeing Powerful turn into Soulless Records. Steven Brant, musician and

songwriter

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niche for albu ms will involve history and nostalgia, pe rhaps targeti ng Boomers who appreciate tangible collections. Rather t han taking Bob out of the business, Ri ta should consider consolidating the albu m business around him, leveraging his deep knowLedge and relationships. The ind ustry is also faced with a major innovation challenge. Rita ac knowledges t hat Bob is endlessly imaginative, with enth usias m for t he music business that is broad ly contagi ous. What better credentials for being part of a tea m to reinve nt Powerful's app roach? His track record includes impressive evidence of his ability to form trust-based relations hips, which are key to successful collaboration a nd innovation. One t hing is clear: "Wait it out until he retires" is a nonstarte r. An e mployee who is 61 is far from th rough working. Bob most likely has ma ny heaLt hy, prod uctive years ahead. And although most employees don't enjoy thei r work enough to stay with it into their 70S if t hey have th e option to move on, Bob see ms to fall into the lucky 20% or so who love what th ey do. He has energy a nd pass ion to devote to Powerful. Rita needs more sticky notes- enough to outline a third speec h. 0

Helping Businesses Help Themselves: The IT Mandate for the Future

Is your organization s pe nd ing too mu ch ti me a nd mon ey supporti ng tod ay's IT infra st ructure - a nd not e no ugh on the innovations the futu re de ma nds? It's time t o rethink the role of IT in s upporti ng your business. in order t o secure the future of your b us iness,

HBR Re print R1009M Reprint Case only R1OO9X Re print Com mentary only R1009Z

THE PROBLEM with Bob isn't Bob at all, nor is it the state of the ind ustry. The ind ustry isn't going to turn around, not even with an a rmy of ao -somethlng salespeo ple . The problem with Bob is t hat t he company he works for lacks direction and vision, and instead of cha nging with t he times, it's grasping at straws to keep a n outdated business model alive. Steve Jones, VP for programming,

Newcap Radio

FREE VIDEO WEBINAR Join a ut hor and IT expert Susan Cram m for this interactive weblnar. Learn how the shift to sim plification a nd self-sufficiency can help your IT organ ization say yes to the fut ure . Thursda y, September 16,2010 Noon EDT

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EXPERIEN CE

~nthesis A review of emerging ideas in the media

Bridging America's Income Gap Five new books consider th e political choices behind rising income inequality, and ways t o fix t he problem, by Just in Fox

I

n the late 1970s, a 50-year trend toward more equal dist ributi on ofincomes in the United States was reversed. At first there was debate over the evidence, but by the 1990Seconomists of almost every stripe agreed that income disparity was rising. When President George W. Bush declared in early 2007 that "income inequality is real- it's been rising for more than 25 years;' the matter seemed settled. But three big questions remained: Why we re incomes becoming less equal? Was this disparity really a problem? And how come inequality of consumption wasn't nearly as great as that of income? The last two questions now seem to have been answered. Americans below the

122 Harvard Business Review Septe mber 2010 Scan & PDF: worldmags & avaxhome

very top income percentiles (where paychecks con tinued to grow) had borrowed to keep spending despite stagnant or declining incomes . For a time, rising asset prices -especially home prices-masked how leveraged households had become. But when ho me prices began to decline in 2006, the result was a global bust. In early accounts ofthe financial crisis, income inequality was no t seen to play a major role. Now it's beginning to get attention. When eve n a professor in the University of Chicago'S market-oriented fi nance department, Raghuram G. Rajan, fi ngers un equal incomes as a key factor behi nd the crash, you know something's up. As Rajan tells it in FaultLines (Prince-

ton University Press, 2010),Washington politicians embraced more lending as the way to counteract the econom ic struggles of the middle class. "Let them eat cred it" is his summation. Wedid not digest it well. Rajan paints the rise of inequality as the product ofthose wit h more education reaping increasingly bigger rewards- the dominant explanation for decades. But while it's certa inly not wrong, it ma y be incomplete. Clyde Prestow itz, Arianna Huffington, Robert B. Reich, Jacob S. Hacker, and Paul Pierson see political choices at work in the ineq uality boom . And political choices can be reversed. Prestowitz, a veteran Washington trad e wa rrior, ma kes a thoughtful case in The Betrayal ofAmerican Prosperity (Free Press, 2010) for a government-led industrial policy aimed at creating and preserving middle-class jobs. Government already

I

HBR.ORG HBR.ORG For more recommendations from HBR contributors and editors, go to blogs.hbr. org/synthesis . Plus, as a matte r of policy, we don't review ou r own books, but we hope you will. Chec k out the MNew Books from t he Press" blog post each month.

intervenes in the economy, he observes. "Our problem is that...it does so without having a sensible economic or industrial st rategy to guide and control it." Why don't we have a sensible economic or industrial st rategy? Because corporate lobbyists keep us from having one!That's what the other fOUT au thors argue, and before you close your ears to this antibusiness propagandizing, be warned: There's meat to it. Not that you'll find much meat in Hu ffington's Third World America (Broadway Business, 2010), a hasty clip job redeemed somewhat by infectious energy, th e occasional bo n m ot, and the author's habit of crediting all those from whom she clips. The prolific Reich , meanwhile, has delivered the busy person 's guide to inequality economics: Aftershock (forthcoming from Knopf this month) is a brisk, intelligent runth rough that you ca n finish in two hours. Hacker an d Pierson, though, are the ones who de liver the goods. In their dense but engrossing book Winner- TakeAll Politics (forthcomi ng from Simon & Schuster this month), the two political scientists sta rt by making the case that economic forces fail to explain why incomes have skyrocketed at the very top ofthe distribution (the highest 0.1%, and even 0.01%) wh ile going nowhere for the bottom 90%. "Those at the top are often highly educated, yes," they write, "but so, too, are those just below them who have been left increasingly behind." They contend that government dec isions encou raged this income explosion at the top. The crucial turning

--_

,..

point, they say, came not in 1980, when Ronald Reagan was elected, but two years before. The business community, reeling after years oflabor victories an d regulatory encroachments, had begun to organize over the course of the 1970s and focus its energy on politics. The Chamber ofCommerce tripled its budget.

Where the conventional wisdom confide ntly declares, ' It 's th e economy: we fin d, again and again, 'It's the politics: Jacob S. Hacker and Paul Pierso n, Winner-Take-AII Politics

The Business Roundtable and the American Council for Capital Formation were born. The first two big legislative wins came in 1978, when the Democrat-con trolled Congress killed off a proposal to create an office of cons umer representation an d a union-backed revisio n ofl abor laws. After that the re was no turning back: Business groups had figu red out how to work the new levers ofpower in Washington, wh ile the mass-membership organizations that had represented working America- not just labor unions but also the likes ofthe American Legion and the Elks- fell into sharp decli ne. More clout for business isn't necessarily bad news, an d Hacker and Pierson could have acknowledged that at least some ofthe tax cuts and ot he r business-frien dly policies ad opted since

--

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~ree

Scan & PDF: worldmags & avaxhome

...... ......

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The Betrayal of American Pro s per ity Clyde Prestowitz Press, ~OlO

_._....-

Illlil icc

PROSP::~

Fault Lines Raghuram G. Rajan Princeton U ni v ers~ y Press.

Jus tin Fox is th e editorial director of Harvard Business Review Group.

\\ ;"'. ....T"...~ I II

BETRAYAL " AMERICAN

-----

the late 1970s made good economic sense. Their desc ription of the organizational dy na mics that have tilted economic policymaking in favor of the wealthy is nonetheless convinci ng. New liberal groups may have arisen, but they focus on the social concerns ofthe affluent. Government-employee unio ns, for their part, look out for government employees. And most private-sector unions focus on de fend ing the interests of their shrinking membersh ips. No big organization has been look ing out for the broader interests ofthe middle and working classes. The result of business's lobbying triumph in Washington is, perversely, a situation that may not be good for business. When all econom ic gains go to those at the top, it's hard to maintain the broad-based growt h in de mand that keeps an economy healthy. This isn't just a challenge for the United States-growing inequality is becoming a big issue in China and India as well. That's what makes Hacker and Pierson's book so important. Hacker has already written one debate-defini ng tract, The Great Risk Shift (Oxford University Press, 2006), which described how ind ividuals were getting stuck wit h health care an d ret irement risks long borne by institutions. Now he and Pierson are trying to shift the discussion ofinequality from the economic realm to the political one, where it could conceivably be addressed by campaign-spe nding restrictions and structural political reforms. Don't be too surprised ifthey succeed.

Third World America

Arianna Huffington Broadway Business, sore

Aftershock Robe rt 8. Reich forthcoming from Knopf, acre

-------------

Winner-Take AU Politics J acob S. Hacke r and Paul Pierson forthcom ing from Simon & SChuster. zero

The Great Ris k Shift Jacob S. Hacker OXford University Press. ~00 6

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Executive Summaries September 2010 SPOTLIGHT ON GLOBAL ENTREPRE NEURSHIP ee

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Can entrepreneurs save the world? They've got a good shot- but only if they learn how to part ner wit h multinationals and NGOs, become experts at experimentation, and succeed in attract ing the support and capital th ey need.

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Philanthropic capital actually costs those seeking it anywhere from 20% to 40% of what they get. pa ge 56

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STRATEGY & COMPETITION

ENTREPRENEURSHIP

STRATEGY & COMPETITION

A New Alliance for Global Change

Making Social Ventures Work

The High-Intensity Entrepreneur

8i11 Drayton and Voleria 8udinich Page 56

James D. Thompson an d Ian C. Ma cMilla n Page 66

Anne S. Habiby and Deirdre M. Coyle, Jr. Page 74

The citizen sector, composed of rnnlions of groups worldwide that are attempting to address critical social needs , has long been regarded as understaffed a nd inefficient. But it has grown and matured over the past three decades, say the authors, both of Asho ka: Innovators for the Public. Citizen sector organizations (CSOs) are attracting talented and crea tive leaders, and their work is changing the game in critical industries such as energy and heal th care . For-profit companies now have an opportunity to collaborate with CSOs to create new markets for reac hing the four billion people who a re not yet part of the world's formal economy. The power of such collabo rations lies in the complementary strengths of the partners: Business offers scale, expertise in manufacturing a nd operations, a nd financing. Social entrep reneurs offer lower costs, strong social networks, and deep insights into pote ntial customers and communities . The authors call this framework the hybrid value c hain. In one example, cotcerae nca. a Colombian manufacturer of kitchen and bathroom tile, collabo rated wit h the human -rights organization Kalros, which rec ruited and manage d a sales force of previously unemployed wome n, to reach a low-income market. Within three yea rs sales ha d grown to nearly $12 million; the living conditions of more than 28 ,0 0 0 families ha d been improved; and 179 saleswomen we re each earning $230 a month .

Entrepre neurs can playa central role in finding solutions to the world's toug hest social problems. The failure rate for start-ups, however, is high. And new ventures in emerging economies fa ce such cha llenges as uncertain prices and costs, nonexistent or unreliable infrast ructure , and unpredictable competitive respons es . The authors offer guidelines for launching successful businesses in uncertain markets. One of those guidelines, discovery-driven planning (a well-known process developed by MacM illa n and Rita Gunther McGrath), helps ma nagers test their assumptions a bout preliminary business models and revise the m on the bas is of emerging data. The remainder were informed by the authors' efforts, with the Wharton Societal Wealth Program, to help launch socially beneficial venture s in Africa and the United States . Those guidelines include outlining t he minimum numbe r of people a venture s hould serve and the minimum level of profitability it should achieve; identifying important stakeholde rs; planning how to terminate the ve nture in an acceptable manner; and anticipating unintended consequences of the enterprise. The lessons aren't just for en tre preneurs. The management teams of multinationals, foundations , and NGOs can apply them to any challenging and highly uncertain business situation. In doing so, they can bett er control their costs, mini· mize the effects of surpri ses , and increase their impact on society.

The popular ta ke on entrepreneurs in the developi ng world is that they a re few in number and run only microbusinesses. But in a two-year study of entrepreneurship in emerging markets, Habiby a nd Coyle, of AllWorld Network, uncovered hundreds of high-potential ventures poised for significant growth. Ma ny were in surprising markets like South Africa, Saudi Ara bia, and Jordan-economies dominated by top-down government policy,large business group s, and social elites. The ventures AllWorld encou ntered were far from mtooanterprises. They included companies like Bayt.com, the lead ing job sea rch site in the Mid dle East, which attracts 4 ,5 millionjob see kers; a nd Airblue, of Pakistan, the world's first totally paperl ess airline. They generate large numbers of jobs, create industries, a nd ope n new markets. When it comes to ed ucational and employment backgrounds, the e ntrepreneurs running these companies look just li ke their Weste rn counterparts. But notable differe nces do exist: The company builders that AllWorld identified in emerging markets launch 25% more businesses; they have higher success rates; and the vast majority are serial entrepreneurs. These ventures re present new channels for growth for multinatio nals a nd investors. For developing nat ions, th ey co uld be the path to progress and prosperity. To rea lize their potential, however, t hese fi rms need global customers, tale nt, and capital, and t hat me ans getting on the global radar screen.

HBR Reprint R1009D

HBR Repri nt R1009E

HB R Repr int R1009C

September 2010 Harvard Business Review 125

EXECUTIVE SUM MA RIES

Features BI G IDEA DECISION MAKING

ORGANIZATION & CULTURE

LEADERSHIP

INNOVATION

The Judgment Deficit

Why Men Still Get More Promotions Than Women

Four Mistakes leaders Keep Mak ing

Innovation on the Front Lines

Herminia Ibarra , Nancy M. Carter, and Christine Silva Page 80

Robert H. Schaffer Page 86

Lew McCrea ry Page 92

Amar Bhide Page 44

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Individual judgment and initiative a re essential to the s uccess of the modern capitalist economy. At the sa me t ime, rules and cen tralized systems are needed to bring order and prevent waste. Balancing decentralization and command-andcon trol modes of dedsion making has always been a struggle, and organizations have experience manag ing the tension. In recent times. though, a new form of centralized control has taken root: mechanistic decision ma king based on top-down statistical mode ls and algorithms. This ha s been especially tru e in finance, where risk mod els have replaced t he judgments of thousands of individual ban kers and investors, to disas trous effect. The problem with the statistical approach is that it cannot adeq uately accoun t for the uncertainty inherent in economic decisions or the idiosyncratic nature of human activity. What finance in particular needs is a retu rn to judgment. The author offers some broad guidelines for this: Computerized controls wor k best with inanimate products an d processes that can be p hysica lly shielded so that the variations of conditions can be minimized. Computers also shine whe n, li ke the configuratio n of pieces on a chess set, the number of possible outcomes is vast-in fact, this vastness often gives the computer its edge-but they all con form to well-s pecified rules. Conversely, human judgment is favored when sh ielding is difficult, outcomes a re ambiguous, and the possibilities are open-ended. Ultimately. however, the "rightsizing" of judgment is itself a matter of judgment. MBR Reprint Rl009B

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Though companies now invest heavily in mentoring and developing their best female talent, all that attention doesn't translate into promotions. A Catalyst survey of over 4,000 high potentials shows that more women tha n men have mentors-yet women are paid $4,600 less in their first post- MBA jobs, hold lower-level positions, and feel less career sa tisfaction. To better understan d why, the authors conducted in-depth interviews with 40 participants in a mentoring program at a large multinational. All mentoring is not created equal, they discovered. Only sponsorship involves advocacy for advancement. The interviews and survey alike indica te that , com pared with their male peers, highpotential women are overmentored, undersponsored, and not advancing in the ir organizations. Without sponsorship, women not only are

Often the best mentors are not

the highfliers with the influence to pull people up. less likely than men to be appointed to top roles but may a lso be more reluctant to go for t hem. Organizations such as Deutsche Bank, unjlever, sooeo. and IBM Eu rope have established sponsorship programs to facilitate the promotion of high-potential wome n. Programs that get results clarify and comm unicate their goals, match sponsors and mentees on the basis of those goals, coordinate corporate and regional efforts, train sponsors, and hold those sponsors accountab le. HBR Re print Rl009F

126 Harvard Business Review Septembe r 2010 Scan & PDF: worldmags & avaxhome

the Front Lines ...

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1

Again and again , senior managers fall into four behavioral traps that thwart organizational change. The behaviors are difficult to recognize and reverse because they serve to protect egos and prevent an xietybut executives can overcome them . First, managers fail to set proper expectations . When they announce major dr-ecttcnat changes or new goals, they don 't spell out credible plans or specify who's accountable. Second , they excuse subordinates from the pursuit of overall goals, allowing people to re main preoccupied with their own units. Third, executives essentially collude with staff experts and consultants by going along with a deeply flawed contract: The experts ag ree to deliver and implement a "product" (a new system, for instance) but don't include measurable ga ins as part of the deal. Fourth, managers wait while associates overprepare. After challenging thei r employees to make needed improvements, they accept the response " Yes , but first we have to ..." Finish the sentence: Train our people. Set up focus groups. Bring in Six Sigma. And so on. The best way to confront the traps is to conduct small personal experiments that rapidly produce tangib le results, incur little risk of failure, and are confined e nough to demonstrate a clear link between trial and outcome. For example, one iron plant addressed quality problems by targeting five areas for improvement, setting clear and measurable goals for each, and hold ing team leaders accountable for outcomes. All five experiments succeeded and were extended to the rest of the plant. Quality problems eased up within 100 days and virtually disappeared a few months later. MBA Re print Rl009G

The Innovation COnsultancy, a small team within the health ca re provider Kaiser sermanente. practices all expansive, service-focused version of innovation that is both ra pid and economical in comparison with the convention al version . The team's members observe how health care providers interact with one another, with technology, and with patients, and how the patients respond. They take photographs, draw pictures, write stories, and try to capture experiences from the point ofview of everyone involved. During KP Med Rite, a project to red uce the error rate in dispensing med ication to hosp ital pa tients, the team as ked nurses what they thoug ht was wrong with the dispensing process. The nurses usually replied, " Not hing." But when given a chance to make self-portraits, they would draw themselves with sad faces an d frazzled hair. Interruptions appeared to be the leading cause of errors-so one of the resulting innovations was a brightye llow sash signaling that its wearer was not to be d isturbed. KP's Chris McCa rthy founded the Innovation Learning Netw ork to accelerate knowledge transfer among peers in the nonprofit healt h care industry. One promising process that has emerged, Inflec tion Navigator, helps patients who've received a frightening diagnosis hand le the consequent urgent tasks-follow-up tests, visits to specialists, decis ion ma king about treatment a nd care-with the aid of care coordinators. This innovation and others li ke it arise from a brand of creativity that transcends the med ia version of the health care debate. MBAReprint Rl009H

HBR.ORG

Managing Yourself THE GLOBE

STRATEGY

LEADERSHIP

The Boss as Human Shield

ACautionary Tale for Emerging Market Giants

Timberland's CEO on Standing Up to 65,000 Angry Activists

Robert I. Sutton Page 106

J. Stewart Black and Allen J. Morrison Page 99

Jeff Swartz Page 39

Competitors from the developing world are rising fast. Will they come to rule the global economy? Not necessarily. say Insead's Black and Morrison. who argue that tod ay's emerging giants look an awful lot like Japanese co rporations in the 1990s. Japan's star has since fallen, and t he country no longer dominates the Globalsoo as it once did . Drawing on 25 years of research, the authors found that fou r factors drove Japanese firms' early export growth: strong corporate models and cultures: a domestic market isola ted from competit ion; an agree able labor force; and cohesive, homogenous leadership. But when the firms moved into foreign markets, those strengths became downfalls . Entrenched in their corporate ways, they were too narrow-minded to look for local insights, and they lacked leaders who had int ernational knowledge. They were also unprepared for contentious overseas labor relations and t he sopbettcation and expertise of their global compet itors. To avoid Japan's fate, emerging giants must change their business models, reduce their reliance on protected domestic markets,learn to cope with diverse la bo r, and sha ke up their leadership. HBR Reprint Rl009J

Swartz awoke on June 1, 2009, to find the first of what, over time, would amount to 65 ,000 angry e-mails accusing Timberland of destroying Amazon rain forests and exacerbating global warming. The senders were rea ct ing to a Gree npeace report alleging that Brazilian cattle farmers were illega lly clearcutting forests to create pastures, and leather from t he ir cows might be winding up in Timberland's boots. Swartz and his team had to craft a respo nse immediately: The brand's re putat ion was at stake. He realized that the undertying question -Where did Timberland's leather come from? -was legitimate, and that he didn't know the answer. The idea of tracing hides back from tannery to pasture was daunting, but he saw the issue as a battle for th e hearts and minds of enviro nmental activists . The company opened a dialogue with creenpeace and worked with its Brazilian supplier to get t he gin of its hides ce rtified . Meanwhile , Swartz made sure that all those a-matts received replies . In the end, Timberland pra ised Greenpeace for bringing t he issue to the industry's attention, and e reerceace ac knowledged that Timberland had ta ken a leadership position on it. HSR Reprint RlOO9A

on-

POSTMASTER Send domestic address changes, orders, and inquiries to: Horvard Business Review. Subscription Service. P.O. Bo>c 62270, Tampa. FL33662. GST Registration NO. 124738434S. Periodical postage paid at Boston, Massachusetts. and additiona l mailingoffices. Printed in the U.S.A. Harvard Business Review(ISSN 0017-8012: USPS 0236-S20), published monthly (which may include double issues in January-February and July-August) for professional managers, is an education program of Harvard Business School, Harvard University; NitinNohria, dean . Published by Harvard BusinessSChool PublishingCOrporation, 60 Harvard Way. Boston. MA02163. Copyright t: 2010 Harvard Business SChool Publishing Carporatian. All rights rese rved. volume sa, Number 9

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AS employees strive to do their jobs, they face threats to produc tivity from all quarters-disruptive technology, meddlesome superiors, senseless organizational practices, and abusive clients a nd custom ers. Sutton, of Stanford University. rem inds us that the best bosses identify and slay those dragons, thereby protecting the time and the dignity of th eir people and e nabling them to focus on rea l work . Self-awareness is the key to defending employees effectively. Good leaders resist their own te nde ncy to exercise po wer: They kee p me et ings short, listen to their followers, and make it safe to disagree with the boss. They also work to reduce outside distractions by, for example, championing mornings free of e-mail or streamlining performance review processes. When their own bosses are the problem, they occasionally defy orders. Once in

a while, they encourage their people to overtly comply with misguided demands from on high without actually buying in to them. Good bosses fight enemies. They take the heat for their teams . They have their employees' backs. Stepping on to this battlefield requires humility, intelligence, and bravery. In leading the charge to make the workplace safe and productive, however, you may risk martyrdom. Don't lose sight of t he need t o retain your own political power as you defend against the institutional forces that threaten you r employees. And re member that preserving your own well-being will ensure that you have the energy to fight the good fight. HBR Reprint Rl009K

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J\ I'

I

"That's Maxwell, sir. He likes to thin k outside th e building."

Se ptember 2010 Harvard Business Review 127

EXPERIENCE

Life's work

HBR.ORG To read t he

extended e t ervlew, go to hbr.org/bradlee.

What's your man agement sty le? Everybody knew I had an overpowering interest in fi nding out the truth and getting it in the paper. They saw what made me tick, what made me smile, what tu rned me on. I su rrounded myself w ith people who sha red my fervor. I knew all the reporters who were any good at covering na tional affairs, and I had a good idea, maybe better than anybody else in town, ofwhich youngsters were going to make it. And we got them because Katharine gave us the dough. I had lunch with David Broder the other day, and he reminded me that I hired him away from the New York TImes at 19,000 bucks a year. We also created a sense of excitement, so the right people wanted to come. The Post grew expone nt ially und er your Leade rship. Did you plan th at? Of course not. In those days, once the pa per was finally making money, Katharine would say, "You want to do this? Here." We would add 20 to 30 reporters a year sometimes. We learned what the foreign bureau ofa newspa per really should be. On sober second thought, I think we probably expanded too far, too fast. At one point, I thought quality followed quantity. But that bears real examination. I'd hate to work at a company tha t had SOWoodwards and Bemsteins in a room. It's just too complicated.

HBR: Why did you let Woodward and Bern stein, two cub reporters, run wit h the Watergate story? Bradlee: They were right. In the whole series, except for one small fact error, no body stood up and said, "That's a lie, that's a lie, that's a lie" -which is remarkable. We reexam ined the reporting day after day, an d we felt more and more confident. And maybe some senior reporters wondered why the Bobbsey tw ins had th e story and they didn't. But I told th em to screw off. I said, "It's their story. The time to change that will be when they're wrong:' What mad e Katharine Gra ha m a great publisher? She loved the newsroom. She was dow n two, three, four times a day. She couldn't go home at nigh t without coming dow n and saying, "Whaddya got? Whaddya got?" That is a wonderful thing for reporters-to see the superboss down there. 128 Harllard Business Review Septem ber 2010 Scan & PDF: worldmags & avaxhome

What did you learn when Janet Cooke's Pulitzerwinning story was proved faLse? I had not considered the possibility that someone would lie to me, and that someone could fabricate an entire story. Icouldn't get my arms around that until too late. But we all agreed there was only one way to handle it- to admit it and go public with it. Is print jou rnalism a dying indust ry? Loo k, whe n I started in th is business, I think there were close to 2,000 da ily newspapers in America, which is ridiculous. Some ofthe m weren't any good. But this country has a ha nd ful of pa pers that are the best in the world . The reporters are working hard and really, really searc hing for the tru th . And I guaran-dam n-tee you that a lot of the people putting ou t the television news an d the inte rnet news are getting it from the papers. I don't know what generation you are, but sometimes I thin k I can't read wit hout my arms wide open. " H BR Reprint R1009 N

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