WHEN YOUR CORE BUSINESS IS DYING…page 66
www.hbr.org
Y GE 53 SE PA I N DS CK R M WA A
TOP-TEAM POLITICS…page 90
April 2007
58
What Your Leader Expects of You Larry Bossidy
66
Finding Your Next Core Business Chris Zook
78
Promise-Based Management: The Essence of Execution Donald N. Sull and Charles Spinosa
90
The Leadership Team: Complementary Strengths or Conflicting Agendas? Stephen A. Miles and Michael D. Watkins
100
Avoiding Integrity Land Mines Ben W. Heineman, Jr.
20
FORETHOUGHT
33
HBR CASE STUDY
Why Didn't We Know? Ralph Hasson 45
FIRST PERSON
Preparing for the Perfect Product Launch
THOU
SHALT
James P. Hackett 111
TOOL KIT
The Process Audit Michael Hammer
…page 58 124
BEST PRACTICE
Human Due Diligence David Harding and Ted Rouse 138
EXECUTIVE SUMMARIES
144
PANEL DISCUSSION
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APRIL 2007
Features 58
What Your Leader Expects of You Larry Bossidy
58
A longtime CEO reveals the behaviors that leaders should look for in their subordinates – behaviors that drive individual as well as corporate performance and growth – and what those subordinates should expect in return.
66
Finding Your Next Core Business Chris Zook It may be hidden right under your nose. Here’s how to evaluate your current core and where to look for a new one.
78
Promise-Based Management: The Essence of Execution Donald N. Sull and Charles Spinosa 66
The most vexing leadership challenges stem from broken or poorly crafted commitments between employees and colleagues, customers, or other stakeholders. To overcome such problems and foster a productive, reliable workforce, managers must cultivate and coordinate promises in a systematic way.
90
The Leadership Team: Complementary Strengths or Conflicting Agendas? Stephen A. Miles and Michael D. Watkins When members of a leadership team play complementary roles, the whole is often greater than the sum of its parts – but such relationships may also result in confusion, especially when members move on. Organizations can learn to enjoy the advantages and minimize the risks of complementarity without sowing the seeds of disaster during succession. 100
100
Avoiding Integrity Land Mines Ben W. Heineman, Jr. How do you keep thousands of employees, operating in hundreds of countries, as honest as they are competitive? General Electric’s longtime general counsel describes the systems the company has put in place to do just that. continued on page 8
90
4 Harvard Business Review
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Cover Art: Joshua Gorchov
78
avard B usinesss R eview, ou w ant tto og et llinks inks ffor or llatest atest H IIff yyou want get Havard Busines Review,
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APRIL 2007
14
Departments 53 2006 MCKINSEY AWARDS AND
12 COMPANY INDEX
2007 MCKINSEY JUDGES
20
14 FROM THE EDITOR
What the Boss Wants from You
88 STRATEGIC HUMOR
What should CEOs and their direct reports expect from each other? When Larry Bossidy laid out his views to a group of young executives, they couldn’t take notes fast enough. You don’t have to write down what he said, though, because Larry has done it for you here. And it will be on the exam.
20 FORETHOUGHT Firms from developing countries are making a global mark…McDonald’s isn’t afraid to bite off more than it can chew…Women at Fortune 1,000 companies are securing top jobs faster than men…Make your employees prove their ideas’ worth…Work with Chinese firms to build respect for IP…Alchemists turn bad feedback into gold…Don’t discount the power of the Q&A…Consumers are slow to notice changes in product quality, for better and for worse…How outside directors can reduce their legal risk.
33 HBR CASE STUDY
Why Didn’t We Know? Ralph Hasson A whistle-blower sues Galvatrens for wrongful termination. The lawsuit triggers a much larger discussion about the company’s system for uncovering misconduct. How should the company strengthen that system – and what roles should the board and management play? Commentators include Stephen R. Hardis, Hal Shear, Mary Rowe, and Jackson W. Robinson.
45 FIRST PERSON
The Process Audit Michael Hammer Redesigning business processes can generate dramatic improvements in performance, but the effort is notoriously difficult. Many executives have floundered, uncertain about what exactly needs to be changed, by how much, and when. A new framework can take the mystery out of reengineering business processes and help you comprehend, plan, and assess your company’s process-based transformations.
33
124 BEST PRACTICE
Human Due Diligence David Harding and Ted Rouse Most companies do a thorough job of financial due diligence when they acquire other firms. But the success of most deals hinges on people, not dollars. Here’s how to diagnose potential people problems before a deal is completed.
45
132 LETTERS TO THE EDITOR Social responsibility and global competitiveness are all well and good, readers say, but not if they emerge from companies that are simultaneously corrupting the political process.
111
138 EXECUTIVE SUMMARIES 144 PANEL DISCUSSION
Preparing for the Perfect Product Launch
Satisficing Don Moyer
James P. Hackett How come some projects fail while others succeed? This is the story of a CEO who refused to accept failures as inevitable and set up a system to prevent them.
8 Harvard Business Review
111 TOOL KIT
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Optimizing – the art of finding the best choice among all choices – is a luxury we can seldom afford. 124
Xerox Global Services professionals can transform your firm’s document processes to create revenue while driving up productivity. Result? Improved top and bottom lines. There’s a new way to look at it.
Organizations waste millions on managing the flow of documents from digital to paper and back again. Xerox Global Services professionals create efficiencies by streamlining those processes, upgrading document technologies and finding better ways for people and their resources to work together. For example, our document assessments examine workflow and technology
compatibility across your enterprise. Once our analysis is done, we offer a comprehensive range of document services and outsourcing to optimize your assets and improve business performance. Our methods have helped Owens Corning, InterContinental Hotels Group (IHG) and others realize millions. For a complete portfolio of our services and case studies, visit us today at xerox.com/millions.
xerox.com/millions 1- 800 - ASK-XEROX ©2007 XEROX CORPORATION. All rights reserved. XEROX® and There’s a new way to look at it ® are trademarks of XEROX CORPORATION in the United States and /or other countries.
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APRIL 2007
G
O TO HBR.ORG, AND YOU’LL NOTICE SOME CHANGES. We’ve rolled out our first stage of Web site enhancements, the culmination of which will be an entirely revamped site this fall.
1. BETTER NAVIGATION
Each article online now has its own table of contents, making it easy to find the sections most relevant to you. We’ve included a link to the executive summary, so you can quickly decide if the article is of interest. You’ll also find a list of related articles at the bottom of the screen. 2. ANSWERS WHEN YOU NEED THEM
Managers often must think in terms of problems and solutions. To address this need, we’ve created HBR Answers, a Web tool you can use to find answers to the questions you are asking – or should be asking – about your biggest business challenges. For instance, “How can my company maximize the value of its brand(s)?” The editors of HBR have posted questions on several topics and selected articles that can help you find the answers you need. Please let us know if there are any additional questions or topics that you would like to see.
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ONLINE WORKSHEET
Use the two charts that accompany “The Process Audit,” by Michael Hammer, to figure out how well your organization’s processes are functioning and whether you need to make adjustments. Just click on the article title and then on the links to the charts for versions you can print out and fill in yourself.
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COMPANY INDEX
|
April 2007
Organizations in this issue are indexed to the first page of each article in which they are mentioned. Subsidiaries are listed under their own names. AB Electrolux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
IBM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 124
Siemens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Adelphia Communications . . . . . . . . . . . . . . . . . . . . . . . . 100
Ideo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Starbucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Adobe Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
IKEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Steelcase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
AlliedSignal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
IMC Global Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
STMicroelectronics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Alstom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
InBev . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 78
Sun Microsystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
AmBev . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Institute for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Synopsys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
American Express . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Institutional Shareholder Services . . . . . . . . . . . . . . . . . . 100
Syrus Global . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Anheuser-Busch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Interbrew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Tetra Pak. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Apple . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
International Ombudsman Association . . . . . . . . . . . . . . . . 33
Toyota. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Applera. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 90
U.S. Marine Corps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Applied Biosystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Johnson Wax Professional . . . . . . . . . . . . . . . . . . . . . . . . 124
Valspar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Arcelor Mittal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
JPMorgan Chase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Voith Siemens Hydro Power Generation . . . . . . . . . . . . . . . 78
Archipelago Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Kmart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Wal-Mart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Arthur Andersen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Lenovo Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 124
Wipro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Bank One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Logitech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
WorldCom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Bausch & Lomb. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
The London School of Economics and
Xerox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Becker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Political Science . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Boeing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 100, 124
Lowe’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
BP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
McDonald’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
McDonnell Douglas . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
AlliedSignal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Canon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Medtronic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Bain & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 124
Cargill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Mercedes-Benz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Board Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Celera Genomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Merck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Eaton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Cemex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Michelin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
ETH Zurich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Ceridian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Microsoft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 90
GE Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Cetus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Mittal Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
General Electric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 100
Citibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
MMC (Marsh & McClennan Companies) . . . . . . . . . . . . . . 100
Genesis Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Citigroup. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Mosaic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Guanghua School of Management . . . . . . . . . . . . . . . . . . . 20
Clorox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Motiva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Hammer and Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Coca-Cola . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Motorola. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Hankamer School of Business. . . . . . . . . . . . . . . . . . . . . . . 20
Compaq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
National Westminster Bank . . . . . . . . . . . . . . . . . . . . . . . . 78
Harvard Law School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
CSAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Nestlé. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Heidrick & Struggles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Danaher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Netac Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Honeywell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
De Beers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
New York Stock Exchange . . . . . . . . . . . . . . . . . . . . . . . . 124
Insead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Dell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Nokia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Instituto de Empresa Business School . . . . . . . . . . . . . . . . 20
Disney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Novozymes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Interminds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DiverseyLever . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Onset Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Kennedy School of Government . . . . . . . . . . . . . . . . . . . . 100
Dometic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Parmalat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Leonard N. Stern School of Business . . . . . . . . . . . . . . . . . 20
EG&G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
PepsiCo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 90
London Business School . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Embraer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PerkinElmer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Massachusetts Institute of Technology. . . . . . . . . . . . . . . . 33
Emerson Electric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Philips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Merck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Enron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Pixar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Pay By Touch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exxon Mobil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PNY Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Segafredo Zanetti. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
First Chicago NBD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Polaroid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Spartech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
GE Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Port of Singapore Authority . . . . . . . . . . . . . . . . . . . . . . . . 66
Stanford Law School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
General Dynamics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Rezidor SAS Hospitality . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Steelcase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
General Electric . . . . . . . . . . . . . . . . . . . . . 20, 58, 66, 78, 100
Royal Bank of Scotland. . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Thunderbird, the Garvin School of
General Motors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 78
Royal Dutch Shell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
International Management . . . . . . . . . . . . . . . . . . . . . . . 20
Global Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Royal Vopak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
University of Texas at Austin . . . . . . . . . . . . . . . . . . . . . . . 33
Goldman Sachs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
SABMiller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Vision Consulting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Harman International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Saudi Aramco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Warrington College of Business Administration . . . . . . . . . 20
Home Depot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Schneider National . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Wilmer Cutler Pickering Hale and Dorr (WilmerHale) . . . . 100
Hyperion Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Seagate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Winslow Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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A U T H O R A F F I L I AT I O N S
Saving lives will mean refrigerating blood and vaccines where no power grids exist. Are you ready?
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FROM THE EDITOR
What the Boss Wants from You sit in on a meeting of a group
called the G50, which comprises youngish executives who report to a CEO and who might legitimately aspire to be a CEO. Larry Bossidy was there with them. I’ve known Larry for more than 15 years, from when he was vice chairman of General Electric, then as CEO of AlliedSignal, and now in his highly productive “retirement.” Once when I was interviewing him, I confessed to having “forgotten” what working capital is. Larry positively lit up, scooted around his desk, grabbed a piece of paper, and taught me. He is like that; he’s a loosen-your-tie-and-let’s-fix-this kind of guy. With the G50 group, Larry shared what he described as the compact between a boss and a direct report. The compact is about behavior, not character traits. As far as he’s concerned, such traits as integrity and fairness are so important that they are table stakes, and leadership thinkers need to focus more on the reciprocal actions between a leader and a follower. He got right down to business: “If I were your boss,” he said, “here are eight behaviors I would expect of you.” Then he went on, “And here is what I think you should expect from your leader.” I’ve never seen a group of executives react as we did. Every one of us bent over our notebooks, writing furiously, as if a professor had said, “Here is what will be on the exam; you might want to write it down.”
issue, is a major advance in the field. For the last five years, Hammer has been working with a consortium of companies to develop a framework for creating and sustaining high-performance processes. How, the group asked, can process management move beyond experimentation, anecdote, and lessons learned to become a more fully grown management discipline? The answer Hammer and his colleagues developed, and then tested on themselves, is a “maturity model,” which allows companies to evaluate business processes in terms of specific attributes of their design, management, staffing, measurement systems, and infrastructure. The result of a process audit is, first, that business leaders can truly and objectively understand how capable a given process is and where the process is strong and where weak. Second, of course, a process audit is a blueprint for change and improvement. “The road to process management is essentially unmapped,” Hammer told me last summer. No more. Every organization walks strategic fine lines. At HBR, we try to balance timeliness and timelessness. That is, we want to help you solve your toughest problems, the ones vexing you now, but we want to do so by publishing work of tested and enduring value. To support that goal, we and the McKinsey Foundation honor the best article published in HBR each year, as determined by a panel of distinguished judges from the ac-
A couple of days later, I wrote Larry and suggested we develop his talk into an article. He said yes; senior editor Ellen Peebles said yes, too. The result, “What Your Leader Expects of You,” is the lead article in this issue. You don’t have to write down what he said because Larry did it for you. But it will be on the exam.
ademic and business worlds. For 2006, the 48th McKinsey Award goes to ”Strategy and Society: The Link Between Com-
At AlliedSignal, Bossidy was one of the first big-company CEOs to experiment with the then-newfangled notion of process management: the idea that horizontal processes (such as the sequence of steps from accepting an order to fulfilling it) could be managed just as functions are and, indeed, that companies might even be managed along process lines. Process management has come a long way since then, and no one has played a greater role in its development than Michael Hammer. “The Process Audit,” Hammer’s article in this
you can read the articles themselves in 2006’s December and February issues, and subscribers can read them online at www.hbr.org.
14 Harvard Business Review
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petitive Advantage and Corporate Social Responsibility” by Michael E. Porter and Mark R. Kramer, with Gary Hamel’s “The Why, What, and How of Management Innovation” as runnerup. You can read about these articles on page 53. Even better,
Thomas A. Stewart
Robert Meganck
L
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A survey of ideas, trends, people, and practices on the business horizon
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Companies based in small or developing countries tend to earn their success the hard way, and that rough schooling has made them formidable competitors. These aggressive firms are making a big impression on global markets. Mittal Steel, for example, is the world’s number one steel producer, and its Indian owner, Lakshmi Mittal, is one of the world’s richest men. Cemex (Mexico) is number three in cement. AmBev (Brazil) merged with Interbrew (Belgium) and became InBev; today, InBev and SAB (originally from South Africa) are the two largest suppliers of beer in the world. The trend goes
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beyond these mature industries: Embraer (Brazil), Wipro (India), and Lenovo (China) are all leaders in their high-tech fields – airplanes, software and IT services, and personal computing, respectively. The strong performance of nontraditional multinationals from large developing nations such as Brazil, China, and India shouldn’t come as a surprise. In the recent past, other international firms have emerged from equally unlikely places. Who would have thought that a Finnish lumber and rubber company would become the world’s number one cell phone manufacturer?
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by José Santos
These nontraditional companies are very different from the big, developed-country multinationals like GE and Siemens, which owe their high-ranking position in the global market to their country of origin’s leadership in their industries, and which became global precisely to exploit the success of their domestic formula. By contrast, Nokia and other nontraditional multinationals such as French–Italian-born STMicroelectronics and Swiss Logitech had to go global to build a successful formula in the first place. The fact that these companies were “born in the wrong place” forced them to grow outstanding worldwide innova-
Aaron Leighton
Strategy Lessons from Left Field
tion and integration capabilities. Nokia, for example, had no choice but to look outside Finland for the technologies and skills it didn’t have at home – which meant it could go anywhere. From its earliest days, the company went to California for mobile phone–design ideas. Did GM think of hiring car designers from Italy 30 years ago? Nontraditional multinationals have also had to fight harder to win recognition from investors. In the absence of developed local capital markets, these firms have had the difficult job of persuading skeptical investors in London or New York that, yes, Italy can create a semiconductor business as good as any in the United States or Japan and that a South African company can compete with the likes of Anheuser-Busch. A company like Siemens, on the other hand, enjoys high esteem in Germany and cozy relationships with large banks, which undoubtedly reduces its cost of capital. Nontraditional multinationals face unique challenges when it comes to leadership, too. Executives in conventional multinationals tend to get to the top by moving up the ranks in their home country. (Though only some 20% of Siemens’s sales are in Germany, 80% of the company’s top managers are German.) But the leaders of nontraditional multinationals have usually studied and worked outside their home base, developed strong professional networks, and may be fluent in several languages. Nokia’s CEO, Jorma Ollila, from Finland, was educated at the London School of Economics and Political Science and worked eight years at Citibank before joining Nokia. Italian native Pasquale Pistorio, who helped build STMicroelectronics, was at one point a member of Motorola’s top executive team in Phoenix. Mittal’s top management is a veritable United Nations of talent. Founder Mittal himself started his career as an entrepreneur in India. Today, the company is under Dutch ownership (not Indian), is head-
quartered in Rotterdam and London (not Calcutta, where Mittal grew up), and its top executives nearly all live outside their home countries. So what lessons can be drawn here? First – and this is particularly relevant to would-be multinationals of the developing world – global success comes from smart management rather than from the nature of the industry you compete in or your ability to exploit a low cost base. Second, for the managers of smaller, domestic firms in large developed country markets, it’s not too late to expand globally yourselves: If Mittal and Nokia could take on
the big multinationals, so can you. By the same token, it’s nontraditional multinationals like these that you should look to for best practices and inspiration, not the GE and Siemens of your industry. José Santos (
[email protected]) is an adjunct professor at Insead in Fontainebleau, France, and the former CEO of Italian coffee manufacturer Segafredo Zanetti. He is a coauthor, with Yves Doz and Peter Williamson, of From Global to Metanational: How Companies Win in the Knowledge Economy (Harvard Business School Press, 2001).
Reprint F0704A
S T R AT E G Y
The Upside of Falling Flat by Stefan Michel
off the lobby was open 24 hours (a rarity in Switzerland). The guest accommodations, for $120 to $160 a night, featured a patented curved wall and a cylindrical, see-through shower stall that protruded into the bedroom. The decor was spare and brightly colored. A colleague of mine who stayed there in 2001 recalled frankly that “the entire feeling was one of oddity and discomfort.” The second hotel was similar. The hotels clearly didn’t deliver the expected results. The worldwide economic contraction – and the appreciation of the Swiss franc – that followed the attacks of September 11, 2001, contributed to their demise, but there were other factors, both minor and major. The showers, for one thing: Families and business travelers rooming together complained about the lack of privacy (the glass was later frosted as a result). Another issue was that the English phrase “golden arches” isn’t associated with McDonald’s in Germanspeaking countries. Even worse, as the owner of a hospitality consulting firm pointed out, was that the word “arch,” when pronounced by German speakers,
In the end, the decision by McDonald’s to build a couple of four-star European hotels, with arch-shaped headboards for the beds and fast-food restaurants onsite, wasn’t as bizarre as it seemed. The Golden Arch venture in Switzerland ended in 2003 after two and a half years, when the pair of McDonald’s hotels closed. But as I tell my MBA students and executive-education participants, the foray can be thought of as an inexpensive “real option” that provided the innovationhungry company with an opportunity to learn valuable lessons from a controlled failure. Relatively few travelers ever stayed in – or heard of – the hotels, which opened within a few weeks of each other in the spring of 2001, one near the Zurich airport, the other in Lully near the A-1 interstate. They were the brainchild of Urs Hammer, chairman of McDonald’s Switzerland, who was responding to the parent company’s push for diversification and new ideas. The Zurich Golden Arch hotel opened first, and it was unlike any other hotel around. The McDonald’s restaurant just
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shifted focus in 2003 away from such brand extensions and toward an ultimately better strategy of trying to get more customers into existing restaurants. But the McDonald’s board knew what it was doing when it green-lighted Hammer’s project in 1999. Its decision was a real option: a fixed investment for an uncertain but potentially high return. Diversifying into the hotel business gave the company a shot at entering a billion-dollar industry. Because diversifications are generally more likely to fail than succeed, companies need to constrain the costs of
sounds a lot like a vulgar word for a person’s posterior. Beyond all that, the strategy itself was questionable. Although the venture related to the company’s food business and relied on many of its core competencies, such as franchising and real estate management, the McDonald’s brand doesn’t square with the image of a four-star hotel. A financial analyst quoted in the Wall Street Journal noted, “I’ve just come back from lunch at McDonald’s. But I can’t imagine staying at a McDonald’s hotel on a business trip.” Indeed, the company
D ATA P O I N T
Younger Women at the Top Women may be scarce in senior management, but here’s an intriguing finding: Those who do make it into the executive ranks get there faster than men. So conclude researchers from Dartmouth’s Tuck School of Business and Loyola University who analyzed data on nearly 10,000 Fortune 1,000 executives to create one of the most granular pictures we have of companies’ executive makeup. Though nearly half of Fortune 1,000 firms still have no female executive officers, those that do seem to be aggressively hiring and promoting them into the top ranks. As the chart shows, a much larger percentage of Fortune 1,000 women have made it to executive officer posi-
Three-quarters of Fortune 1,000 women executive officers are 50 or younger.
tions in their thirties, forties, and fifties than have men their age. What’s more, these women achieved their executive positions at a younger average age than the men did (46.7 versus 51.1) and have less tenure on average than men in their current positions (2.6 years versus 3.5 years). These data confirm and expand on work reported by Peter Cappelli and Monika Hamori in “The New Road to the Top” (HBR January 2005) and spotlight a trend that half of America’s biggest companies seem to have missed. Reprint F0704C
Percentage of male and female Fortune 1,000 executive officers in each age category (relative to the total number of male and female Fortune 1,000 executive officers)
30%
20%
10%
moving forward with them. McDonald’s did just that. It made a relatively small investment and limited its risk. By publicizing the venture mainly inside Switzerland and using the name Golden Arch rather than McDonald’s, the company avoided damage to the corporate brand. Moreover, the real estate investment did not result in a significant loss: The two hotels are now managed by Rezidor SAS Hospitality, which runs them under its Park Inn brand. While a P&L statement was never made public, the estimated operational losses were insignificant to the McDonald’s portfolio. The decision to exit the hotel business after less than three years represents a further limitation of the company’s risk. The venture also offered insights – or at least reminders – about diversification and globalization. First, even for a company with deep pockets and billion-dollar brand equity, it is extremely difficult to take a name that is well established in one category (McDonald’s is fast food) and achieve success with it in a different, if related, category. Second, for companies going global, the more complex the service offerings, the more important the cultural context (unlike a fast-food restaurant, a four-star hotel is full of individualized customer interactions, for which guests have diverse and high expectations). But there’s another point that’s perhaps even more important. Hammer was one of the company’s most successful franchisees, an entrepreneurial manager with a long history of fruitful business venturing. By supporting him, McDonald’s was reinforcing and nurturing its bottom-up innovation culture. In the words of a McDonald’s manager who participated in one of our executive education programs, “We try hundreds of things every year, and only a few turn out to be successful. But those initiatives make our business grow and keep our spirit alive. Not trying is not an option.” Stefan Michel (
[email protected]) is a services management expert and an assis-
0
28–40 41–45 46–50 Executives 50 or younger
51–55 56–60 61+ Executives 51 or older
tant professor of international marketing at Thunderbird, the Garvin School of International Management, in Glendale, Arizona.
Adapted from C.E. Helfat, D. Harris, and P.J. Wolfson, “The Pipeline to the Top: Women and Men in the Top Executive Ranks of U.S. Corporations,” The Academy of Management Perspectives, November 2006.
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Reprint F0704B
associate dean for graduate business pro-
I N N O VAT I O N
grams at Baylor University’s Hankamer
$152,000 for Your Thoughts
School of Business in Waco, Texas. Bill Townsend (bill.townsend@paybytouch .com) is the executive vice president of Pay
by Gary Carini and Bill Townsend
By Touch, a biometric authentication and
To draw out employees’ creativity, get tougher on them. Don’t let them get away with summarizing their ideas on simple forms. Make them prove their concepts’ viability, right from the start. That advice may sound counterproductive, considering the dearth of worthwhile innovations that are emerging from the rank and file. In our interviews over the past 12 years with more than 300 managers in technology, media, venture capital, and other fields, executives have said that employees don’t come close to filling the need for workable ideas. So why would we recommend raising the bar? Because putting the burden of proof on the proposers results in well-formed ideas and knowledgeable, motivated employees who understand the value of their innovations. Raising the bar won’t stifle innovation as long as the company couples that policy with the right support and incentives for encouraging employee entrepreneurship. Companies must give workers the tools to prove their ideas’ worth – in other words, firms must teach the economics of innovations. Managers must repeatedly instill in employees’ minds the concept that ideas are valued. The process for reviewing proposals must move quickly. Companies must also put serious rewards on the table. All too often, bonuses don’t inspire employees to shape and articulate their ideas. We estimate that in most companies, the ratio of employee reward to savings or increased revenue from innovation is about .001%, or $100 for that $10 million idea. Firms should establish specific and trackable rewards or bonuses, preferably a set percentage of the savings or the increased net, and should publicize success stories internally. Companies that required employees to present business cases for their ideas and offered substantial rewards saw the number of workable innovations rise significantly. (We’ve found increases in the 20% to 40%
transaction company in San Francisco. Reprint F0704D
I N T E L L E C T UA L P R O P E R T Y
Nurturing Respect for IP in China by Georg von Krogh and Stefan Haefliger
Why should multinationals doing R&D in China be pleased that a Chinese firm recently sued an American company for patent theft? Because it suggests that Chinese businesses are gradually acknowledging the importance of intellectual property rights. China is attractive as an R&D site because of its increasing supply of top talent and the low cost of doing research. By the end of 2004, there were more than 600 R&D centers in China built with foreign investment. But in the minds of many global executives, the Chinese market is synonymous with the disrespect, and sometimes theft, of intellectual property. For example, piracy of computer applications, while a serious problem everywhere, is particularly widespread in China, where an estimated 96% of the software that is in use has never been paid for. Pulling out of the vast and booming China market isn’t an option for most companies. Moreover, faced with effective reverse engineering, foreign firms have found that attempts to keep sensitive technologies out of China or to use traditional IP protection mechanisms are all but futile. The best approach, in the long term, is to invest in improving local attitudes toward IP by stimulating innovation within Chinese partner firms and letting those partners participate in the gains that stem directly from locally generated knowledge. The shared gains then become incentives for protecting proprietary knowledge. It’s
range, depending on a variety of factors and baseline conditions.) Firms that had implemented such programs but discontinued them, usually as a short-sighted cost-cutting measure, observed a significant decline in workable innovations, our research shows. Interminds, the consulting firm that one of us (Bill Townsend) founded, is a good example of a company that puts its money where its mouth is. An employee who comes up with an idea to save money while promoting the company’s vision gets half of the first year’s savings. The policy was instrumental in drawing a great idea from a $38,000-a-year executive assistant. Her process improvement was to automate the laborious system of manually tracking 900 field representatives. She built the business case with an individual in the finance department. The company implemented her plan and saved $304,000 in the first year. She earned a $152,000 bonus. This was a success story for Interminds’ employee entrepreneurship program, which proved its value in generating a money-saving idea and in energizing an employee to think more creatively about her job. This new attitude became contagious at the firm. It can happen at your company, too. Gary Carini (
[email protected]) is a professor of strategic management and the
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of intellectual property, and competence in using IP properly and effectively. If Chinese and foreign organizations continue to make a concerted effort, the IP environment in China will improve considerably in the next ten years.
important to foster the creation of a network of local partner firms that respect other companies’ choice to keep knowledge proprietary. Eventually, such a group may become the kernel of an entire business culture that respects IP. Microsoft has followed this strategy, pledging $750 million to the Chinese State Development Planning Commission for training engineers and for setting up regional software colleges that develop talent and foster entrepreneurship. Philips, which runs 15 Chinese R&D centers employing more than 900 people, uses an open-innovation strategy that involves extensive R&D collaboration with suppliers, customers, and other partners. The company cooperates closely with, and transfers knowledge to and from, Chinese companies, R&D centers, and universities in fields ranging from medical technology to environmental products. Philips also has established three IP academies, which bring Chinese scholars to the Netherlands and send Dutch experts to China in a program designed to exchange knowledge about intellectual property. These and other efforts are starting to have an effect. In 2005, more than 4.8 million patent applications were filed in China, up nearly 35% from 2004, according to the Chinese government. The U.S. Patent and Trademark Office reports that the patents granted to companies of Chinese origin nearly doubled between 1998 and 2005. The result of all those patents is that Chinese corporations themselves are seeking to enforce intellectual property rights. The Chinese company we mentioned that sued an American firm is Netac, a Shenzhen-based maker of flash drives. In 2006, it took PNY Technologies to court in the United States, claiming that PNY had infringed a U.S. patent, thus hurting Netac in the $2 billion U.S. flash drive market. Foreign corporations doing business in China should not abandon their attempts to enforce intellectual property rights in the short term. But in the long term, multinationals must help generate respect for IP by working with Chinese partners to build technical and business knowledge, an understanding of the value
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Georg von Krogh (
[email protected]) is a professor of strategic management and innovation at ETH Zurich in Switzerland. Stefan Haefliger (
[email protected]) is a researcher and lecturer at ETH Zurich. Reprint F0704E
S E L F- M A N AG E M E N T
Find the Gold in Toxic Feedback by Fernando Bartolomé and John Weeks
Managers need feedback, even if it’s biased, rude, off the mark, or irrelevant – and much of it is. The trick is learning to extract and decode the meaningful stuff and turn it into something usable. Through our work with hundreds of executives, we have uncovered a number of “alchemists”: rare individuals who are
adept at transforming the base minerals of low-quality feedback into pure gold. Their behavior follows a few patterns that other managers can learn from. (See the exhibit “The Philosopher’s Stone.”) Whether it’s personally offensive, unclear, incomplete, pointless, exaggerated, or nonactionable – and whether it comes from superiors or subordinates – lowquality feedback can be toxic if it’s taken to heart. It can be powerfully demotivating, damaging to managers’ confidence, and paralyzing. It can prompt managers to waste time on the wrong issues by, for example, addressing weaknesses that are unimportant in their current roles. Feedback almost seems to hypnotize some people. They become obsessed with it. Other managers deal with low-quality feedback by ignoring it or becoming defensive. Ignoring it can lead them to dismiss all negative opinions about themselves; ultimately, they become cut off from what people around them really think and feel. Defensiveness can be even more dangerous because it angers and alienates those who would continued on page 26
The Philosopher’s Stone Alchemists, who are skilled at turning toxic feedback into useful information, consistently react differently from most managers.
When the feedback is:
Most managers:
But alchemists:
Personally offensive
Allow anger and defensiveness to cloud their understanding
Listen carefully to the message while managing their emotions
Provide explanations, which speakers usually dismiss as excuses
Don’t immediately try to explain their actions
Allow the emotional tone to escalate
Maintain a neutral tone
Reflexively question the feedback’s accuracy
Postpone accuracy considerations until later
Focus on the feedback’s inaccuracies
Focus on the accuracies
React to the literal meaning
Look beyond the literal meaning to learn about people’s perceptions, assumptions, and attitudes
Irrelevant
Focus on all of the feedback, pertinent or not
Focus on just the information that can help them deal with the problems they face
Unbalanced
Lose touch with their own strengths and so remain vulnerable to obsessing about their weaknesses
Place negative feedback in the context of prior positive feedback from others, as well as generate their own internal positive feedback messages
Inaccurate
(exaggerates the negative and ignores the positive)
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MICHAEL SHEEHAN ON THE ART AND SCIENCE OF THE Q&A
Stay on the Q&A Offensive ooking for advice on speech making? Bookstore
I see 75 PowerPoint slides, I ask,“What’s the story line?”
shelves are groaning with it. But you’ll find pre-
Inevitably, we can cut the presentation by a third. Then
cious little help for the part of your talk that peo-
we can strategize about how to use the Q&A as the sec-
ple actually listen to: the Q&A. Michael Sheehan,
ond tier of communication. How do you take advantage
the renowned communications consultant who
of the heightened attention in the Q&A to amplify, to drill
worked with Bill Clinton throughout his presidency, says
down, to extend your case?
the speaker must have a strategy for the question and answer segment – it shouldn’t be just an afterthought. Here’s
What if you know what an audience is going to ask
his advice (in Q&A format, of course) for nailing the Q&A.
but don’t want to answer?
Stay on the offensive. Bless all the lawyers, they’re very How can you be strategic about the part of the speech
nice people, but don’t let them be your speech coaches.
that’s out of your control?
They’ll admonish you,“Don’t say this, don’t say this, and
You’re mistaken if you think you can wing it. CEOs tell
whatever you do, don’t say this. Now, go get ’em!” My
me,“I’m great in the Q&A; it’s the formal presentation
approach is “Say this, say this, and whatever you do, say
I’m not comfortable with.” They’ve held on to that notion
this.” The energy you display sends its own message. I was
because no staffer has been willing to level with them and
struck by current Exxon Mobil chairman and CEO Rex
say,“You’re really boring.” Or “You took eight minutes to
Tillerson’s recent network interview during a time of sky-
make a ten-second point.”
rocketing gas prices. He looked as though he wanted to be
You have to prepare – and in the right way. Executives
there and explain things. Bill Gates often radiates an atti-
tend to have a three-ring binder with 500 questions they
tude in his Q&As that makes him seem to be thinking,
might be asked. They take it home and study it like the
“Oh, that reminds me of a big idea I wanted to share.”
Baltimore Catechism. But the staff who created those
That positive aggression is half the battle.
binders rarely anticipates the real questions from the analysts (if that’s the audience) or the way they’ll be posed.
Is there a perfect length for an answer?
That inevitably puts the executive in a defensive position.
No.
He’s up there scratching his head, thinking,“Was that question 177 or more like question 491?” My approach is
Pardon?
to throw out the binder and replace it with an index card
If all your answers are too short, it’ll sound like a deposi-
that outlines a three- to four-point aggressive framework.
tion, and you’ll get questions of increasing hostility. Make them too long, and it’ll sound like a filibuster. Vary your
Is that a way of telling a speaker to stay on message?
length. Then you can splurge on answering one question
That’s a sore point with me. Next to “brand,” “message”
in greater depth.
Mark Finkenstaedt
is the most misunderstood word in corporate America. Businesspeople think their message is expressed by their
Any takeaway advice?
mission or value statements – all of which sound alike. (I
Bottom line: “LIE.” “L”: Listen to each word of the question
suspect there’s a company in Ann Arbor mass-producing
rather than answering before the questioner finishes.“I”:
these in needlepoint.) Or they think their message is a set
Identify the opportunity to answer simply or more deeply
of talking points to be repeated, like a doll whose string
or to expand to adjacent arguments.“E”: Enhance your
you pull and hear the same statements over and over.
reply with something memorable, such as a specific exam-
I start with developing a brief, linear story line for the
ple, analogy, personal experience, or colorful phrase.
presentation itself. I show them it’s possible to summarize
– Julia Kirby
even Hamlet in a paragraph (yes, it can be done). When
Reprint F0704G
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.edu) is an assistant professor of organiza-
give feedback and reinforces their negative views. Alchemists are able to avoid those traps and learn from even the most noxious or apparently useless comments. Their method has an emotional component that enables them to be aware of and manage their visceral reactions and a cognitive component that allows them to extract the useful information intelligently. They neither become obsessed with the feedback nor ignore it. The result is that they distinguish the message from the medium and focus on the information they need for the problems they face. They are able to look beyond the literal meaning and find valuable second- and third-order data about people’s perceptions, assumptions, and attitudes. They are able to focus on their strengths and place negative messages in the context of the positive feedback they have received in the past. One such alchemist – we’ll call him Tom – is the customer service director of a large U.S.-based electronics firm. A subordinate repeatedly complained about Tom’s apparent blindness to another direct report’s poor performance, eventually telling him that “some people” considered his inaction to be a sign that he didn’t “have the guts to confront tough situations.” The feedback, Tom says, “was an insult to my leadership.” Tom, in fact, was working behind the scenes to coach the underperformer, who required special handling because of his connections to the board. “Despite all that,” Tom notes, “the feedback really helped me.” He says it taught him to examine more carefully the potentially negative effects of actions he didn’t take. Although he was upset by the accusations, Tom mastered his feelings and didn’t react defensively. The feedback contained important information about other people’s perceptions of his actions. He extracted the usable message and was able to change his behavior.
tional behavior at Insead. Reprint F0704F
MARKETING
Quality Is in the Eye of the Beholder by Debanjan Mitra and Peter N. Golder
As companies look to cut costs and widen margins, product quality often suffers. You might think that consumers acutely sense changes in a product’s quality and vote quickly and accordingly with their wallets. But new research shows that their perceptions often lag years behind the actual changes – for better and for worse. We studied the relationship between actual and perceived quality for 241 products in 46 categories over a period of 12 years, using Consumer Reports ratings to gauge actual quality and Total Research’s annual surveys of more than 30,000 consumers to measure perceived quality. When product quality changes – either improving or declining – consumer opinions about the product begin to shift within that same year, but not by much. Most of the perception catch-up, in fact, happens after the second year following the quality change. For consumers’ perceptions to fully adjust and accurately re-
continued on page 28
Fernando Bartolomé (fernando.bartolome @ie.edu) is a professor of management at the Instituto de Empresa Business School in Madrid and an adjunct professor of organizational behavior at Insead in Fontainebleau, France. John Weeks (john.weeks@insead
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flect products’ true quality takes five to seven years, on average, depending on many factors, including the type of product, the strength of its brand, and how often it’s purchased. For example, consumers in this study were relatively quick to gauge changes correctly in the quality of toothpaste (3.9 years) compared with gauging changes in refrigerators (7.1 years) and tires (9.5 years). While people were quicker to sense quality declines than improvements, they noticed improvements faster and declines more slowly in brands with good reputations. This work has several strategic implications. First, managers should track and compare both actual and perceived quality measures for their products to reveal any gaps and determine how those gaps might be changing. Second, they should carefully integrate their marketing strategy with their product quality strategy. A quality improvement that will be profitable for one product may not be so for another if the perception gap will take a decade to close (indeed, other studies have found that it takes five to ten years for quality improvements to translate into higher profits). Finally, managers should exploit asymmetries and lags in consumers’ perceptions of quality as they attack and defend in the marketplace. Knowing how long it will take perceptions to catch up to reality – for your own products and
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© 2007 United Parcel Service of America, Inc. UPS, the UPS brandmark, and the color brown are registered trademarks of United Parcel Service of America, Inc. All rights reserved. Avery, Marks-A-Lot, the Crown Cap Design, and all other Avery brands are trademarks of, and used here under license from, Avery Dennison Corporation.
for those of your competitors – can help you time your competitive maneuvers. Debanjan Mitra (
[email protected]) is an assistant professor of marketing at the University of Florida’s Warrington College of Business Administration in Gainesville. Peter N. Golder (
[email protected]) is an associate professor of marketing at New York University’s Leonard N. Stern School of Business and a visiting professor at Peking University’s Guanghua School of Management in Beijing. Reprint F0704H
L AW A N D G OV E R N A N C E
factors led to out-of-pocket payments: an insolvent corporation, inadequate directors’ and officers’ (D&O) liability insurance, and a violation of the disclosure rules that govern a public offering. In nine of the ten oversight cases, the corporation was insolvent. When officers or directors are held liable, their companies are as well, and the firms can and nearly always do pay for the full settlement amount. Moreover, companies are typically obligated to indemnify directors for their own legal fees and settlement payments, if they are required to make them. But since firms can only make these payments if they have the funds to do so, insolvency eliminates this key source of protection for directors. In seven of the nine cases, the company either had a D&O policy that had a low dollar limit on coverage, a gap in coverage, or no coverage at all. And an eighth case involved a company whose insurer itself was insolvent. Finally, six of the oversight cases involved material misstatements or omissions in documents related to a public offering of securities – as opposed to a misstatement in an annual report, for example. This is a key point, because the rules concerning directors’ liability for inaccurate statements are more strict in the context of a public offering than in other situations. There are two ways that outside directors can reduce the already low likelihood of bearing personal liability. First, they should be aware that their risk increases when their company makes a public offering of securities. If called to account for
Reducing Directors’ Legal Risk by Michael Klausner
The recent spate of shareholder lawsuits over option backdating has outside directors reflecting, once again, about their own liability risk. How vulnerable are they if, despite their honest oversight efforts, management breaks the law? The good news is that unless outside directors engage in self-dealing (which seems to have happened in some backdating cases), they are at far lower risk than most would imagine, and they can take steps to reduce their exposure even further. In an extensive study of outside directors’ liability risk, Bernard Black of the University of Texas at Austin School of Law, Brian Cheffins of Cambridge University, and I found just 13 cases since 1980 – out of several thousand filed – in which outside directors made an out-ofpocket payment of any sort. In three of them, there were no payments to the plaintiffs, but the directors had to pay for their own lawyers until the case was dropped. Of the ten cases in which outside directors did make payments to plaintiffs, all but one settled prior to trial – as shareholder suits nearly always do. Three of the 13 cases involved selfdealing. But liability for personal lawbreaking isn’t what troubles most directors. They are more worried that they’ll be held liable for failing to stop management from breaking the law. In the ten cases we uncovered involving this concern, three
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misstatements or omissions in their company’s offering documents, outside directors will want to be able to show that they questioned management and the company’s auditor sufficiently to conclude that the disclosures were complete and accurate. At the time of the offering, directors should apply this level of care not only to documents prepared for the current offering but also to past U.S. Securities and Exchange Commission filings that are incorporated by reference into the offering documents. Second, outside directors should seek independent advice on the terms of their company’s D&O policy. Directors’ interests don’t always coincide with those of management in this area. For example, outside directors will want a policy with a “severability” provision: one that covers them in the event that an officer of the company has engaged in misconduct that would otherwise allow the insurer to deny coverage to all directors and officers. Though outside directors can be very well protected through traditional D&O policies that cover the officers, directors, and the company itself, they may also want to consider asking the firm to buy an independent directors’ liability policy that applies only to them – especially if policy prices drop. Michael Klausner (
[email protected]) is the Nancy and Charles Munger Professor of Business and a professor of law at Stanford Law School in California. This article is based on research reported in Stanford Law Review, vol. 58 (2006).
Reprint F0704J
“Novartis drove my cancer into remission in 35 days. Now I’m going for my PhD.” Suzan was fighting a losing battle against a deadly form of cancer. She dropped out of school. She lost weight, her hair, and at times, her will to live. Then, with a Novartis medicine, Suzan and her doctor put her cancer into remission in just 35 days. No one can promise what the future holds for any cancer patient, but today Suzan is back—into life and into a PhD in biology. Think what’s possible.
www.us.novartis.com
Deep Economy: The Wealth of Communities and the Durable Future Bill McKibben (Times Books, 2007)
The Halo Effect…and the Eight Other Business Delusions That Deceive Managers
The emerging science of happiness has sobering news for companies: Once people
Phil Rosenzweig (Free Press, 2007)
have a modest income, adding more does nothing for their level of satisfaction. In-
If a company is making a lot of money and you ask its employees to rate its performance on other dimensions – talent management, customer orientation, innovation, and so forth – they will give it high marks across the board. If a company is struggling financially, the ratings will be low across the board. This is due to the “halo effect,” a term coined decades ago by psychologist Edward Thorndike to describe people’s tendency, having already formed a conclusion about something’s merit, to attribute other qualities to it that are in line with that assessment. With regard to organizational performance, it isn’t just the workforce that falls into this trap. The halo effect also distorts the judgments of analysts and journalists – and, in turn, the findings of management researchers. Phil Rosenzweig, a professor of strategy and international management at IMD in Switzerland, explains this problem and others in The Halo Effect…and the Eight Other Business Delusions That Deceive Managers and shows how these biases have undermined efforts to answer the “mother of all business questions”: What leads to high performance? That’s what Jim Collins famously examines in Good to Great and William Joyce and coauthors ponder in What Really Works. Rosenzweig shows, for instance, why we can’t trust John Kotter and James Heskett on the matter of how culture drives performance. They surveyed employees and found that successful companies have strong cultures. That, says Rosenzweig, is a classic halo finding, as well as a probable muddling of cause and effect. Since people love being on winning teams, it may be that it’s the great financial results that are creating positive vibes in hallways, rather than the reverse. The Halo Effect is immensely readable and will find an audience among management practitioners – no small feat for a text on research method. Rosenzweig crafts his narrative well, getting readers on board with his argument before putting their most beloved gurus in his crosshairs. By the end of the book, he’s getting away with borderline snarky comments he couldn’t have made in chapter one. He’s become a friend who rants but is right. To say that this is a book for managers, though, is stretching it. The author says his goal is “to help managers become…less vulnerable to simplistic formulas and quick-fix remedies.” That’s noble, but managers are plenty skeptical about such claims. Indeed, when Rosenzweig decries the harm done by delusional research, he doesn’t put much heart into it. “Pursuing a dream of enduring greatness may divert attention from the pressing need to win immediate battles,” he notes. And “believing that performance is absolute can cause us to take our eye off rivals.” It’s all theoretically true – but just as clearly not happening. The people who are really being saved here are management scholars. For the ones who want to do rigorous research but don’t know how, this is as concise and memorable a text as they’ll get. For those who’d like to get away with less, it’s fair warning. Enough of us will have read Rosenzweig to call them on it. – Julia Kirby
stead, family and friends make the difference. As McKibben, a social critic, points out, the Western economic culture of “more is better” may have run its course. It made sense in earlier centuries, when most people had few things and plenty of companions. Now we have the opposite situation – with global warming and resource depletion to boot. What’s a customercentric company to do? Much of the book describes the growing movement of “buying local”: consumers willingly accepting limited choices and multiple-stop shopping because they crave connections to people nearby. The book has few details on big companies adapting to the trend toward community. But it offers insights for executives who see social responsibility not as a burden but as a strategic opportunity. Hot Spots: Why Some Teams, Workplaces, and Organizations Buzz with Energy – and Others Don’t Lynda Gratton (Berrett-Koehler, 2007)
The growing body of work on teams shows that the very characteristics that drive creativity and productivity undermine teamwork. A trusting, harmonious team of likeminded people rarely accomplishes great things, but rough-edged, diverse groups have trouble cooperating for long. Gratton, a longtime researcher in this area, concedes that managers cannot establish effective teams on their own and that success usually depends on the pressures of a crisis or other inspiring purpose. But managers can lay the groundwork with a variety of steps, especially by promoting wide-ranging relationships among employees – from meeting off-site to banning impersonal slide presentations. The book covers too much ground to fully resolve the contradictions, but it makes a useful case. – John T. Landry
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HBR CASE STUDY
Why Didn’t We Know? A whistle-blower’s lawsuit alerts Galvatrens to deep flaws in its system for uncovering misconduct. How should management and the board respond?
by Ralph Hasson
Daniel Vasconcellos
I
T WAS 9:30 IN THE EVENING of what had been a very long Friday when the phone rang in Chip Brownlee’s home study. On the line was Arch Carter, the lead director of Galvatrens, the Houston-based consumer products company that Chip had led as chairman and CEO for the past ten years. “I just got your voice mail,” Arch said. “The parts about a lawsuit and accusations that we manipulated our sales numbers certainly got my attention. What’s going on?” “At this point, I don’t know much,” Chip responded, “but I wanted to give you a heads-up. A former divisional sales manager has filed a lawsuit against the company, charging he was wrongfully terminated because he tried to report an illegal scheme to inflate sales.” Chip had received a copy of the lawsuit that afternoon. As he’d read through the complaint, he’d gotten a whole new perspective on the multiple departures that had rocked Sales during the past four weeks. The plaintiff was Mike Fields, who had left Galvatrens three weeks earlier. He claimed that he’d come across a plan devised by Greg Wilson, another divisional sales manager. According to Mike, Greg had proposed shipping goods
HBR’s cases, which are fictional, present common managerial dilemmas and offer concrete solutions from experts.
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HBR CASE STUDY
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Why Didn’t We Know?
“We don’t know at this point,” Chip said. “At the very least, it looks like he found out from Mike about Greg’s plan. We don’t even know yet whether Greg followed through on it.” “What about this Greg guy?” Arch asked. “He resigned about a month ago. He took a job in California. When Terry left so suddenly last week, I was beginning to wonder if the turmoil in Sales was more than unhappy coincidence.” “Oh, man,” Arch muttered. “That’s not all,” Chip added. “Mike also says our channels for confidential reporting of misconduct don’t work very well. He claims that, as a company, we made it easier for Terry to retaliate.”
to a few of his bigger customers, billing them, and booking the sales – but with a side agreement that they wouldn’t have to take ownership, could return the shipments at any time, and would get a 2% discount on any goods they accepted and paid for in the following quarter. The purpose of the channelstuffing scheme was to meet quarterly sales targets and trigger bonuses, Mike contended. “So what’s the wrongful termination charge about?” Arch asked. “Mike says he found out about the scheme by accident and, since he didn’t know who else might be involved, contacted Harry about it,” Chip said. In the lawsuit, Mike claimed that he had left
“Mike says our channels for confidential reporting of misconduct don’t work very well. He claims that, as a company, we made it easier for Terry to retaliate.” a confidential voice mail for Harry Mart, Galvatrens’s COO, asking to speak with him about a matter of the utmost urgency involving possible misconduct by a company manager. He said Harry never followed up with him and instead referred the matter to Mike’s boss, Terry Samples. Until a week ago, when he left abruptly to take another job, Terry had been the senior vice president of sales. “Mike alleges that Terry subsequently told him his performance was not up to snuff and that he’d have to accept a demotion and a transfer to Indianapolis if he wanted to stay with the company,” Chip continued. “Mike says the demotion and transfer were in retaliation for exposing the channel-stuffing scheme – and Terry knew that Mike, as a divorced father with joint custody of his kids, couldn’t leave town.” “Yikes! So Terry could have been involved in this?”
“How could that be? I thought we had everything in place,” Arch said. “Well, as I’m sure you’ll agree, the board should know about this. Can you set something up?” “I’m already working on it.”
Changing the Guard The board, employees, and Wall Street had rejoiced when Chip agreed to become the chairman and CEO of Galvatrens in January 1997. He had previously led Paloreq, a pharmaceutical and medical devices company, during a period of tremendous growth, building businesses in medical devices and diagnostics and broadening the firm’s pharmaceutical offerings through shrewd acquisitions. He had attracted a team of stellar managers and scientists through the same sorts of “people” initiatives he would launch at Galvatrens.
Ralph Hasson (
[email protected]) is a fellow at the University of Texas at Austin’s IC2 Institute, a research organization devoted to the acceleration of wealth and job creation, where he focuses on corporate governance. He has helped a number of major U.S. corporations design systems for uncovering misconduct and managing conflict. He is a coauthor of Controlling the Costs of Conflict (Jossey-Bass, 1998). 34 Harvard Business Review
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The year before Galvatrens’s board hired Chip, it had reached an impasse with longtime CEO Walter Nikels over strategy and management style. Walter, who had taken the helm when Galvatrens was a midsize firm, had run it in an authoritarian, hierarchical fashion. As the company grew larger and more complex, the board urged him to delegate more and inject some fresh blood into the executive team, but he resisted. As a result, top-performing employees were defecting to the competition, and Galvatrens recruiters were having a hard time getting MBA students to sign up for interviews. The word was out that Galvatrens was not the place to be. With earnings deteriorating, the directors finally decided they had to act. Walter announced his plans to retire at the end of 1996, and Chip stepped right in. Chip had lived up to his reputation. Expanding beyond Galvatrens’s core businesses in home health care and personal beauty, he took the company into nutritional and wellness products, medical diagnostics and devices, and products for infants and the home. Revenues, earnings, and the share price rose steadily. So that Chip could focus on developing strategy and building relationships with customers and business partners, he had sought a COO who would concentrate on the company’s day-to-day operations. Harry Mart, whom Chip had lured away from a competitor, had fit the bill nicely. Once on board, he modernized the management of Galvatrens’s supply chain, greatly improved manufacturing efficiency, and increased capacity. In addition to dramatically expanding Galvatrens’s product portfolio, Chip worked hard to change the company’s culture. Early in his tenure, he announced an ambitious initiative to make Galvatrens an organization that excelled in listening to and learning from its employees and its customers. He combined the initiative with a diversity campaign in an effort to achieve preferred-employer status in the consumer products industry. He replaced
the general counsel, a member of the old guard, with Sydney Baydown. She had been Chip’s general counsel at Paloreq, where she had played a central role in a number of people initiatives that had enhanced the company’s ability to attract and retain talent. At her urging, Galvatrens took steps to upgrade its procedures for uncovering misconduct and solving conflicts in
to go to their immediate supervisors whenever possible, it emphasized that they could approach any manager at any level for assistance. The policy included a specific ban on retaliation. The company also added a toll-free, 24-hour hotline for reporting violations of the code of conduct, added an ethics officer to its ranks, and launched an ethics awareness campaign. The ethics
the workplace – reforms Syd had championed at Paloreq. Chip gave Syd the go-ahead to have a consulting firm review the existing system. Following the consultants’ advice, Galvatrens instituted an open-door policy for raising workplace concerns or problems, formalizing rules and practices that some operations had adopted on their own. While the policy encouraged employees hbr.org
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HBR CASE STUDY
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Why Didn’t We Know?
Getting the Lowdown
officer, who was responsible for ethics training and enforcement of the code of conduct, reported to the general counsel. After the passage of the SarbanesOxley Act, the company mandated that the ethics officer inform the board’s audit committee of any allegations of financial wrongdoing or other possible code violations that involved company executives. Two of the consultants’ recommendations, however, were not adopted: proposals that the company should hire
On Monday, three days after Mike’s lawsuit had been filed, Chip opened a conference call with the eight directors he’d been able to round up. “Okay, I think we’re all here – or at least everyone we could get on such short notice,” Chip said. “The negotiations for the Aletha Products acquisition are at a critical stage, and Harry couldn’t break away,” he said, referring to Galvatrens’s COO.“And Dan Richardson is on a trek in the Himalayas.”
“How does battling with a guy who attempted to raise some serious allegations square with our mission and values? I see giant reputational risks on every front here.”
When Chip asked Syd to brief the group, she said, “We’ve confirmed that Greg Wilson pitched a channel-stuffing scheme to two of his biggest customers. However, we don’t know at this point whether he got any further than that. “We’ve also determined that Mike’s performance declined considerably in his last ten months here,” she continued. “Records show that his team missed sales targets by a growing amount during that period.” Syd noted that Mike had been unreachable during business hours with increasing frequency and had missed important meetings. Prior to that period, though, he had been a solid producer. In an initial phone conversation with Galvatrens’s outside counsel, Mike’s lawyer hadn’t disputed the change in performance but claimed it was due to a nasty custody fight between Mike and his ex-wife. Terry’s reaction to the slide in performance had been brutal, contributing to Mike’s emotional stress, the lawyer said. “Given this information, we intend to file a response to Mike’s lawsuit, denying his charges of wrongful termination,” Syd said. “We’re also having an independent investigation of the channel-stuffing allegations. Chip has asked me to be the liaison between the outside investigators and the board.
an ombudsman and that the board should make a director or a committee of directors responsible for ethics oversight. Focus groups and interviews had revealed that many employees would not feel comfortable raising concerns through formal management channels. Having a truly impartial ombudsman who reported to the CEO and had access to the board would make employees much more likely to come forward. The ombudsman would allow people to report issues anonymously or confidentially and could offer a range of informal means for helping them resolve issues, the consultants said. Dale Willis, the senior vice president of HR at the time and a holdover from the Walter Nikels era, had opposed both of these recommendations. Anything that operated outside management’s chain of command, he argued, might let serious problems slip through the cracks and was therefore a recipe for disaster. With some reservations, Chip agreed not to create the ombudsman role. Chip also acceded to Dale’s request to delay training related to the new open-door policy until HR had completed existing programs. Then other priorities arose, and the training initiative was forgotten. 36 Harvard Business Review
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We’ll try to delay discovery in the lawsuit to give the investigators time to do their job.” “This is Sheila,” interjected Sheila Cruse, the chair of the board’s audit committee and an accounting professor at Valhalla University.“What should the board’s role in the investigation be? To whom should the investigators report? Do we need a special committee for something like this?” “We do need to sort that out,” replied Arch, the lead director, “but first let’s focus on how we’re going to respond to the lawsuit. How does battling with a guy who attempted to raise some serious allegations square with our mission and values? I see giant reputational risks on every front here. If we don’t handle this well, we could hurt ourselves with employees, customers, and shareholders.” “Arch, this is Syd. We do have to respond to the lawsuit. Denying Mike’s claims while we also investigate and negotiate is just standard procedure.” The other directors acknowledged that while Arch had raised some good points, it still made sense to proceed as Syd had outlined. They agreed to take up the issue again in six weeks at a scheduled board meeting. By then, they should have more facts and would be in a better position to weigh their options.
Preventing a Repeat The board met six weeks later at the Houstonian. Located on sprawling, heavily wooded grounds in the center of Houston, the hotel and spa complex was a popular choice for off-site Galvatrens meetings. Arch and Chip stood outside the conference room as the directors filed in, complaining about Houston’s legendary humidity. Dan Richardson, a software entrepreneur and a friend of Chip’s from the Paloreq days, was back from his trek in the Himalayas; he was sunburned and noticeably leaner. But Harry, the COO, was absent again – this time because of continuing problems at factories damaged by hurricanes Katrina and Rita,
the ongoing merger talks, and a labor dispute. The independent investigators had reported to the board the previous week. They found that the customers had simply ignored Greg Wilson’s channelstuffing proposal. It appeared that Terry had forced Greg out when he learned about the plan, but he’d allowed Greg to resign and hadn’t told anyone else about the scheme. Greg had not responded when the investigators tried to contact him. Terry’s only reply had been a terse note, delivered through his lawyer, saying that Terry was reviewing their questions and would respond appropriately. The investigators had also confirmed the decline in Mike’s performance, although Terry’s role was still murky. What was clear was that Mike had done his best to raise the alarm about Greg’s scheme. The judge had allowed discovery to begin, and the company had initiated settlement discussions with Mike. “For the life of me, I still do not understand why we didn’t hear about all this sooner and why no one except Mike Fields came forward,” said Dan, who served on the board’s corporate governance committee.“It’s disappointing enough that Terry didn’t report this, but I can’t help wondering if others in Sales knew about it, no matter what the report says. And why didn’t we hear about it from our customers? It doesn’t seem like we have a handle on these kinds of problems.” Syd pointed out that extensive research over the years had demonstrated that, in many cases, employees who see misconduct in their organizations don’t come forward.“And in our own defense, Dan, we’ve come a long way since Chip took over,” she added. “That may be the case,” Sheila said, “but clearly the good things we’ve already put in place – the open-door policy and the code of conduct – aren’t working. Harry didn’t take the original complaint seriously and just passed the buck. Nothing came in through the hotline. And no one contacted the ethics officer or HR.”
“Is it realistic to expect Harry to deal with something like this?” Arch asked. “After all, he’s the guy responsible for making the trains run on time – it’s not like he’s lying around drinking cocktails on the beach.” Sheila shook her head in disagreement.“I know we don’t expect Harry to personally investigate and resolve complaints that come directly to him, but we do expect him to follow up and refer a problem like this one to the ethics officer. He didn’t do that.” “A lot of this is at my doorstep,” Chip said.“I’ve kept Harry’s plate full. He realizes now that he should’ve given this more attention. I’ve asked Syd to think about how we can ensure that something like this doesn’t fall through the cracks again.” Arch and Sheila exchanged skeptical looks. Later, when they were walking to their cars, they agreed to meet for breakfast the next morning at the Four Seasons.
Sheila wholeheartedly agreed.“Once we got into this thing, it seemed clear to me that we as a board didn’t know what our role was supposed to be,” she said. “And I certainly took it for granted that Chip and Syd had established the channels for anonymous reporting that the audit committee – and the full board, for that matter – needs in order to provide oversight.” “That’s on us,” Arch said. “It’s got to show up in our self-evaluation this year. And I think we have to take several aspects of this into account in evaluating Chip and deciding what we should ask of him in the future. After we put all these procedures in place, why did only one guy come forward – and he ends up suing us? Why did Chip keep Dale Willis on so long and let him get in the way of some of the very changes we brought Chip in to make? When the new employee survey comes out, I’ll be curious to see if we’re really improving morale – especially in Sales, where we’ve had so much turnover.” Sheila hesitated. “I agree with you about Chip, but the person who worries me the most is Harry. I know you’re a big fan of his, but I am troubled by his failure to respond appropriately when Mike Fields called him. Harry may be
Taking Charge When Arch walked into the hotel restaurant at 7 am, the summer sunlight was pouring into the beautiful room, which was elegantly set with white
“After we put all these procedures in place, why did only one guy come forward – and he ends up suing us?” technically strong, but he has got to be able to take care of people, and he’s just no good at it. I think we have to look at the consequences for him as well as new expectations for Chip.” “I’m thinking we’ll need a full day,” Arch suggested. Sheila nodded. “Let’s get the ball rolling.”
linens and flowers. It was Arch’s favorite place for breakfast meetings. He spotted Sheila standing at the buffet table, admiring the glistening berries. He joined her. After they sat down at their table and the waiter poured them coffee, they compared reactions to the meeting the day before. “I’m thinking that we need a board retreat to deal with this situation,” Arch said. “We’ve got a lot to chew on. We should look at ourselves first. I don’t feel we’ve met our oversight responsibilities. We were not ready for something like this.” hbr.org
How should Galvatrens strengthen its system for uncovering misconduct – and what roles should the board and management play? Four commentators offer expert advice, beginning on page 40. |
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HBR CASE COMMENTARY
How Should Galvatrens Strengthen Its System for Uncovering Misconduct?
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HIS CASE STUDY HIGHLIGHTS a major danger. Because boards of directors are under so much regulatory and legal pressure
today, they can lose sight of the need for an appropriate boundary between their responsibilities and those of management. A board crosses this boundary when it acts as if it has to solve a problem itself rather than hold management accountable for the solution. Stephen R. Hardis is the nonexecutive chairman of Marsh & McLennan, a former chairman and chief executive of the Eaton Corporation in Cleveland, Ohio, and a board member of several major corporations.
Boards should demand that senior managers have plans for complying with rules like those imposed by Sarbanes-Oxley; for meeting moral obligations such as fostering ethical behavior and creating a diverse workplace; and for achieving business objectives that are critical to success in highly competitive markets – new-product development, productivity improvements, global expansion, and so on. But if a board is going to hold management accountable, the board should not take on the creation or the execution of such policies. Chip Brownlee, the CEO of Galvatrens, and Syd Baydown, the general counsel, are clearly
blower complaints and how they have handled Mike Fields’s lawsuit. Management should have two main priorities. First, the CEO must make sure that the COO never again ignores a complaint of this type. Chip has to tell Harry: “Next time there’s a whistle-blower event, you must follow the procedures outlined by corporate policy, regardless of what your workload is like. You must set the proper example for the organization.” Second, the senior managers need to decide how they should deal with the lawsuit filed by Mike, who is a genuine whistle-blower. Whether or not Terry was justified in punishing Mike for his decline in performance, Mike will probably have to be given some sort of compensation, because the whole affair was handled so badly. But again, these are management issues. The board should monitor how they are handled, but it should not get directly involved. The independent directors’ concerns about the COO are understandable. Today, a com-
The board should monitor how management issues are handled, but it should not get directly involved.
is no evidence of a pervasive problem that would raise fundamental questions about their values or the company’s ethical culture. The channel-stuffing scheme was limited in scope and never got off the ground. Greg Wilson, its architect, and his boss, Terry Samples, who failed to disclose the scheme, are no longer with the company. Although Harry Mart, the COO, and Terry, the departed senior vice president of sales, didn’t behave appropriately, their actions appear to have been isolated management lapses rather than patterns of bad behavior. The independent directors should not interfere in management issues that the CEO clearly has taken responsibility for addressing. Instead, the board should evaluate how the CEO and the general counsel have dealt with the breakdown of policies regarding whistle40 Harvard Business Review
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pany cannot have any senior executive who is not fully committed to ethical practices, even if he generates a great deal of shareholder value. The consequences of improper behavior can be catastrophic. However, by calling for an all-day retreat without consulting the CEO, lead director Arch Carter has crossed the line between his responsibilities and management’s. An all-day retreat is an extraordinary event – especially if the outside directors are the only participants. It risks causing employees and other stakeholders to wonder whether the CEO has the board’s confidence. Instead of holding the retreat, the directors should privately tell Chip, “We want to be assured that Harry will abide by our code of conduct in the future, and we want to know what you are going to do if he doesn’t.” The directors should also make it clear that they will support the CEO’s actions to reinforce compliance with ethical practices, no matter what effect this may have on corporate profits.
Wendy Wray
committed to reform and best business practices and have explicitly accepted responsibility for dealing with the situation at hand. There
G
management–should be the ultimate authority that oversees ethics. Toward that end, the board should move aggressively to make
Mike to be rewarded for coming forward. Perhaps he could be offered the option of rejoining the company, with reduced hours and compensation until his personal problems are
three things clear to everyone at the company: (1) ethics matter, (2) every employee and manager is expected to comply with the company’s
resolved. Even if Galvatrens reaches a settlement with Mike, the company should press ahead
code of conduct, and (3) the board is in charge of ethics oversight. Providing oversight is one of a corporate board’s primary duties, along
with the independent investigation of the channel-stuffing scheme. A thorough investigation will ensure that the full dimensions of
with providing strategic guidance and recruiting, evaluating, and compensating the CEO. How Galvatrens’s board should oversee ethics was not spelled out clearly enough. Either a special committee for ethics or the audit committee should have unambiguous authority. Galvatrens’s ethics officer should report directly to the chairperson of that committee. Although the ethics officer is an employee of the company, the committee chairperson and a member of management (normally the CFO or the general counsel) should jointly hire the ethics officer, assess his performance, and determine his compensation. In addition, the anonymous hotline function should report directly to the committee to assure employees who know of wrongdoing that they have nothing to fear if they come forward and that the problems they disclose will be addressed. Galvatrens should consider joining the growing number of companies that are outsourcing their hotlines to services like Syrus Global’s Listen Up, Global Compliance’s AlertLine, and
the problem are known, identify any flaws in the firm’s procedures for uncovering misconduct, and ensure that control systems are in place and in use. Under no circumstances, however, should the general counsel or one of her subordinates be the point person for the investigation. The inherent conflicts of interest are just too great. The board should oversee the investigation. Under the Sarbanes-Oxley Act and U.S. stock exchange listing standards, boards can hire outside counsel or advisers to lead such investigations without management’s approval. Clearly, Chip Brownlee, Harry Mart, and Terry Samples dropped the ball. Chip should not have allowed Dale Willis, the head of HR, to stall the training initiative; a program for teaching managers and employees how to apply the company’s policies for raising workplace concerns should be carried out as soon as possible. Harry was at fault for not immediately ensuring that the tip about the channelstuffing scheme was handled appropriately. And Terry should have informed Chip of the
ALVATRENS’S BOARD of directors – not
Hal Shear (hals@boardassets .com) is the managing director of Board Assets, a firm that provides governance expertise to boards and CEOs in the United States, Europe, the Middle East, and Latin America; he is based in Annapolis, Maryland. Shear is also a professor of management and corporate governance at Hult International Business School in Cambridge, Massachusetts.
Galvatrens’s board of directors – not management – should be the ultimate authority that oversees ethics. Ceridian Ethics Hotline. Such services have responders who are trained to filter issues that need board-level attention from those that belong in management’s bailiwick. A service can also provide the board with a regular, comprehensive report that summarizes the information submitted to the hotline while preserving employee anonymity. Now let’s turn to Mike Fields. The whistleblowing actions he took need to be valued, not demeaned. Accordingly, the board should make it clear to management that it wants
scheme and of Mike’s role in exposing it – even if Mike deserved punishment for inadequate performance. While some may blame the board for not playing a stronger and more active role in oversight, the collective actions of Chip, Harry, and Terry were clearly failures in execution. Moving forward, the board should communicate to senior managers that it considers an active, comprehensive ethics program to be a priority–and that their execution in this area will affect their bonuses. hbr.org
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HBR CASE COMMENTARY
How Should Galvatrens Strengthen Its System for Uncovering Misconduct?
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Mary Rowe has been an ombudsperson for the Massachusetts Institute of Technology in Cambridge for many years.
OW CAN THE MANAGERS of an organiza-
confidants – ultimately, they must share infor-
tion learn about serious problems? In many ways, but no one way will work by itself. That’s because people are afraid to come for-
mation about those who come to them. This is why Galvatrens needs an ombudsperson who follows the standards of practice devel-
ward to report unacceptable behavior, for a number of different reasons. Mainly, they fear losing relationships inside
oped by the International Ombudsman Association (posted at www.ombudsassociation.org) and reports to the board of directors or to the
and outside the company. In addition, they hesitate to report wrongdoing if they lack conclu-
CEO, with access to the board. That individual would be designated as an independent, neu-
sive proof – people hate the “his word against
tral, confidential, and informal point of contact
mine” scenario. They worry that nothing will be done (especially if there is no conclusive proof). And even if there is a no-retaliation pol-
for all employees and managers. She would help bring any concerns to light – especially anonymous concerns about unethical or illegal
icy, people fear retaliation. At a time when bullying is common, most believe that an organization can at best prevent overt retaliation by managers. They do not believe it can prevent covert retaliation: a weak reference, a so-so performance review, slashed tires, shunning or even injury by coworkers, or an apparently legal layoff. Most managers and employees lack the skills to handle ethical problems that arise at
behavior – while maintaining confidentiality. Ombudsmen who adhere to the IOA standards do not accept notice for the organization. (This means that people who talk with them about suspected wrongdoing are not in any way “registering” complaints. If a visitor to the ombuds office is willing to make the organization aware of an apparent problem, that person can be referred to the appropriate manager or presented with other options.) Nor do ombudsmen investigate formally. Instead, they serve as stepping-stones for people who need to discuss their options for coming forward in a safe fashion or anonymously. Ombudsmen keep statistics (but no case records) about concerns that come in. They hold frequent discussions with managers about new concerns, exceptional problems, and new and old tensions, patterns, and trends. Had Galvatrens hired an ombudsperson, she might have helped Mike Fields make an effective presentation to the COO. She might have helped the exhausted COO understand that he could not ignore Mike. And she might
An ombudsman would help bring to light any concerns about unethical or illegal behavior while maintaining confidentiality. work and have no idea how to report or discuss unacceptable behavior. So an organization needs several paths for bringing information to the surface, ranging from formal compliance processes to informal coaching sessions and help with problem resolution. The most important channel for bringing problems out into the open is line management. Galvatrens did well when it brought in an ethical CEO and established a code of conduct. However, it also needed the CEO and senior managers to talk regularly and openly with people throughout the company about integrity and to insist on training all employees so they know the code and the various options for resolving serious issues. Competent line managers, as well as ethics officers and HR staff, usually field lots of concerns and deal well with many issues. (Hotlines, by contrast, generally receive few calls.) But these people are often not seen as safe 42 Harvard Business Review
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have helped Mike deal with his decline in performance by referring him to an employee assistance program. She would have had easy access to the audit committee, the ethics office, the general counsel, HR, and the CEO, and could have helped Mike get to any of them if other channels failed. Ombudsmen are no substitute for line management or compliance offices. They are checks and balances, fail-safes, backups and supports, problem solvers, and finders of options – for employees, line managers, compliance officers, or even the board.
B
EFORE OUR FIRM invests in a company,
we consider its governance, because we have found a correlation between governance and shareholder returns. If we learned that a former employee had accused the company of forcing him out for blowing the whistle on a scheme to inflate revenues, that would be a huge red flag for us. The first thing that struck me about the Galvatrens story was the lack of a way for whistle-blowers to communicate directly with independent directors. I know firsthand the importance of having such a mechanism in place for all stakeholders. Before I became the nonexecutive chairman of Spartech – while I was a director–I received an anonymous letter from someone who appeared to be an employee, accusing an executive of a serious conflict of interest. This person contacted me because he feared retribution if he notified someone in management. That communication led me to call a special meeting of the independent directors and then a session of the full board to talk about the accusation and how we should go about addressing it. In the course of our investigation, we discovered other issues, which resulted in a clarification of the company’s disclosure policies. The executive eventually left Spartech. Another thing that surprised me about the Galvatrens case study was that the COO,
should spend more time on fixing what they’ve got before they do another deal. I also have questions about the CEO. It sounds as though Chip prefers to focus on strategic, big-picture issues and, as a result, wasn’t paying enough attention to administrative aspects of the business. When Chip allowed the HR guy to stonewall critical parts of the initiative to surface and resolve ethical issues, something was wrong. It should never have reached the point of litigation. Especially given Chip’s and Harry’s performance, holding a special board meeting is definitely the right thing to do. There should first be an executive session of the independent directors to ensure that all of them are fully apprised of the situation. That should be followed by a session with the CEO and possibly other executives that focuses on management’s plans for fixing the system. When the board awards the next round of executive bonuses, it should take into account the shortcomings that the lawsuit exposed and the CEO’s and COO’s progress in remedying them. Finally, Galvatrens should try to reach a reasonable out-of-court settlement with Mike Fields. I strongly agree with Arch Carter, the lead director, who thought that the company’s values and concerns about its reputation should heavily influence its response to the lawsuit. The company could offer Mike his old
Jackson W. Robinson (
[email protected]) is the founder and president of Winslow Management, a Boston-based investment management firm that specializes in “green” companies. He is also the nonexecutive chairman of Spartech, a manufacturer of plastics and engineered plastic products based in Clayton, Missouri.
If the company does nothing to change the perception that Mike was terminated for whistle-blowing, why would anyone else who spotted wrongdoing try to expose it? Harry Mart, didn’t participate in the board dis-
job or one equivalent to it. I doubt he would
cussions about the lawsuit. Questionable or illegal schemes to boost revenue and issues that affect employee morale are critically important. They concern the operation of the
want to return, but the offer would still send a powerful message to employees, all of whom probably think he was terminated because he blew the whistle. If the company does nothing to change that perception, why would anyone else who spotted possible wrongdoing try to expose it?
company, which is Harry’s responsibility. If he isn’t making time for these kinds of issues, maybe he’s not the right guy for the job. I don’t accept Chip Brownlee’s excuses for him – that he has had an exceptionally heavy workload. We’re told that one reason the COO gave the complaint short shrift is that he was out trying to acquire another company. Chip and Harry
Reprint R0704A Reprint Case only R0704X Reprint Commentary only R0704Z To order, see page 143.
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I N N O VAT I O N S FO R T H E
What will we put our stamp on next?
Pitney Bowes mailstream solutions manage the flow of confidential medical records, making customers feel more secure – even the smallest. His medical history is just beginning. But should this information ever fall into the wrong hands, it’s more than a clerical mix-up, it’s a legal nightmare. Using our file-based processing solutions, healthcare service providers can deliver government-mandated patient communications with rigorous accuracy. So everyone breathes easier. This is just one of the ways Pitney Bowes is merging the boundaries of mail and data into mailstream solutions that are helping many Fortune 500 companies stay compliant, competitive and profitable. What’s next? Visit pb.com/whatsnext and see for yourself.
©2007 Pitney Bowes Inc. All Rights Reserved.
FIRST PERSON
Preparing for the Perfect Product Launch A failure of execution forced Steelcase to ramp up the critical thinking that goes into product development.
by James P. Hackett
Chris Howell
I
in my head. On one are projects I think are going pretty well. On the other are projects I wish were going better or could have gone better. The latter list is distressing for, like most CEOs, I have always believed that performance is everything. We may not always execute perfectly, but since the market is so competitive and the cost of failure so high, both my training and my experience tell me, we must get as close as possible every time out. Shortly after I became CEO of Steelcase in 1994, we launched two products. These experiences led me to deeply contemplate the difference between good and poor execution. In both cases, the technology was revolutionary, the vision was innovative, the market was ready. We had in place solid designs, goals, budgets, time lines, and what we thought were all the other necessities for proper execution. One product, the Leap office chair, was an CARRY AROUND TWO LISTS
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Preparing for the Perfect Product Launch
ure. One area of research that caught my fancy was complexity theory. At the risk of oversimplifying the influence this very abstract stream of research had for me, complexity theory interested me because it taught me how to look for patterns in systems or groups that might not seem immediately evident. The theory also exposed an intriguing paradox: The variables that
immediate home run. Launched after a lengthy R&D process, the chair had a patented technology that could be extended to future applications in the automotive and airline industries. Mom would have been proud. The other product, called Pathways, was an office cubicle system that ran into trouble from the outset. Two different R&D groups feuded over fundamental ideas. Misunderstandings arose over its design, the size of the capital investment needed to build it, and its impact on our dealer organizations. We even had a product recall involving its panel surfaces. The concept was a breakthrough, but the development process was a breakdown. Mom would not have been proud. We fixed Pathways, and the product line is flourishing today. Still, it troubled me that we as an organization were capable of missing as well as hitting the mark. I believed that we would either get better at what we do, as my old college football coach, Bo Schembechler, used to say, or we would get worse – we would not stay the same. And if we were going to get better, I had to lead the way. Only by dealing directly with the root of the execution problem could we achieve the kind of performance we hoped for.
When people told me the one thing they could use more of was time, what they were really saying was that they needed more time to think.
allow an entity to rise to a level of dominance in a certain context tend to trap it later, preventing it from competing successfully in a future context. What, I asked myself, were the patterns and attributes I was missing, the ones embedded in my good and bad lists? It seemed to me that we, as a company, had unwittingly fallen into a common trap. We expected things to go well simply because they usually did. We were not alert enough to the things that could now go wrong with our original approach or to what would be required for us to continue to dominate in the future. Because our innovation process worked 90% of the time, we were not prepared for the 10% of the time when it could falter. In pondering these things, I understood that the real moment of failure occurred long before the first R&D teams ever set to work, when the idea of the new project was first formed. Simply put, we made the same mistake that most organizations make when they undertake an ambitious project – having come up with a fine notion, we put all our energy into execution before we had thought the idea through. When people told me that the one thing they could use more of was time, what they were really saying was that they needed more time to think. What’s more, by moving into execution too early, we had set ourselves up
Closing the Doing-Thinking Gap If you ask most people what it means to execute well, they usually say “getting things done.” Boards tell CEOs that they want us to get things done. We tell our managers to get things done, and they make sure everyone who reports to them gets more things done. Companies celebrate their “can-do” culture. Later on, after the errors show up, we all wish we had been more rigorous in scouting out the territory before we sprinted down the execution path. I began reading widely and thinking deeply about the causes of systems failJames P. Hackett (
[email protected]) is the president and CEO of Steelcase, in Grand Rapids, Michigan. 46 Harvard Business Review
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for one of the classic cognitive traps – what Harvard Business School professor Max Bazerman calls “bounded awareness.” In the January 2006 HBR article “Decisions Without Blinders,” he explains that cognitive blinders “prevent a person from seeing, seeking, using, or sharing highly relevant, easily accessible, and readily perceivable information during the decision-making
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process.” In rushing into a business plan before all the facts were in, we had created hypotheses and started seeking to confirm them, rather than first discovering what the correct idea should be. I started to sense that we needed to inject a new, deeper discipline into our development work at its very first stage. I now knew what I wanted to attack. We would have to change from a merely “doing” culture to a “think-beforedoing” culture. Here’s what we did.
Thinking About Health Care In business development, people start with a business plan framework, which seems sensible enough. But in reality it tends to narrow their thinking at the outset, setting in place those cognitive blinders. I decided to develop a methodology that could be used to get around that problem by teaching Steelcase managers to combine execution with deep thinking. Critical thinking, Steelcase style, has four phases. In the first phase of a project or product development, long before we ever set about getting the right answer, we think deeply about the problem or opportunity we’re after. In the second phase, we develop a point of view – a specific approach to the problem. In the third phase, we work out the launch strategy, and in the final phase, we implement the strategy.
The process is a systematic way to direct teambrainstorming efforts. It makes sure our teams cast a wide net to thoroughly research a topic, that they make the right connections, and that they synthesize each individual’s thinking into a coherent whole. Along the way, teams discover patterns that might not otherwise have been apparent, and they emerge with a clear direction for execution. In the all-important think phase, team members first consider a specific company project or problem individually. They read as much as possible about the topic so that they become educated about its essence. Then they must make sure they ask the right questions about the matter. A great deal of time is spent on this; as Tim Brown, CEO of our subsidiary firm Ideo is wont to say,“Most innovation comes from being able to ask the right questions.” Team members also talk to experts, leveraging a vast network of connections to speak with the smartest people in the world about the related issues. Throughout, they document the depth and breadth of their research to assemble information into a sensible whole. Documentation is critical; the kinesthetic work cements their thinking and creates tangible evidence of their efforts, which is important to people proud of their ability to get things done. Consider the example of one small, diverse team, consisting of individuals from general management, marketing, research, and finance, working under the auspices of a mentor and a sponsor from senior management. In November 2004, this team began exploring how the company could expand beyond the doctor’s office into patient examination rooms. (Although Steelcase sup-
Relieved from nearly all other daily responsibilities, each team member entered the think phase with the stance of a naive beginner (a concept borrowed from The Ten Faces of Innovation by Ideo design guru Tom Kelley). The object was not to come in as an advocate of a given position or to defend a preconceived notion based on anyone’s experience or expertise. Instead, each person had to learn everything possible about the practicalities and problems of patient-site health care delivery. This required team members to do what a good investigative journalist does–read articles, books, research reports, analysts’ reports, and so on, dividing research areas according to their skill sets, interests, and networks. For example, they delved into the causes of and cures for medical errors and even looked at the impact of the way surgery lights are hung in operating rooms. They looked at staff-to-patient ratios and investigated population shifts
plies desks, chairs, and other materials for doctors’ offices, we had never been a player in the clinical side of the health care industry.) Team members immersed themselves in such basic questions as: What are the current and long-term trends in clinical practice? Who makes and influences buying decisions in the health care industry? What would the competition be if we moved into this new market? We could have followed common practice by hiring an outside industry expert to aid us in answering such questions. But an outsider would not have helped us generate the kind of insights we required. We needed to find our own patterns and develop a very deep internal understanding so we could form a cohesive, uniquely Steelcase, point of view. Only by immersing ourselves in all the available knowledge about health care settings could we begin to see subtle patterns that could help the company develop a breakthrough product. hbr.org
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FIRST PERSON
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Preparing for the Perfect Product Launch
The Rules The purpose of Steelcase’s critical-thinking course is to teach managers how to balance doing with thinking. The course curriculum lays out general rules for each of the four phases: “think,” “point of view,” “plan to implement,” and “implement.”
Think Ponder. Consider the problem, issue, or project in question deeply on your own. Compare your thoughts with those of the other team members and listen openmindedly to their perspectives. Question and challenge one another collegially. Query. Make sure you and your team ask the right questions about the problem. Spend as much time as you need to arrive at these. Read and research. Divide the topic among team members, read and research as much as possible about it, then compare notes and educate one another. Look for patterns. Network. Tap into the company’s vast network of connections to talk to the smartest people in the world about the related issues. Verify patterns. Document. Write down what you discover in a document summarizing the research, conclusions, and possible options.
Set the Point of View Conduct a collegial, open-minded discussion about the options generated in the think phase. Be wary of one person gaining influence over the group’s decisions. At the same time, do not aim for compromise but rather for the emergence of a single, intelligent direction. Determine the direction. As a team, be able to state the mission simply, and define what constitutes success. Assign an owner for the point of view. The person who holds the point of view is typically the one who has P&L responsibility for the project; in cases of disagreement, though, the group can designate that the individual be a supervisor or even the CEO. Stay the course. Once set, the point of view can’t change in the absence of new evidence. Commitment to a course must be clear; further discussion, backtracking, and second-guessing must cease.
in various hospitals around the country. They learned about medical-purchasing processes and even about medicine delivery protocols. Their humble notion was to know more than anyone else who was thinking about the same issue. Walking into their project room, you felt as if you were surrounded by one of the most intense studies of health care facilities anywhere in the world. After team members had absorbed the literature, they began networking with experts to see whether they could confirm the patterns they were beginning to see in the way medical professionals and patients interacted. The Institute for the Future, for example, concurred that the doctor-patient interaction would be enhanced by technologies Steelcase had already developed through its PolyVision division. Our studies had shown that a doctor and patient could view and discuss information together using our PolyVision digital board, which would not only display the digital information but also allow either the doctor or the patient to annotate the information and retrieve it later over the Internet. In February 2005, with the patterns confirmed, the team felt secure in its knowledge and confident in its conclusion: We could indeed design a differentiated offering for the health care market. Now the team was ready for the next step.
Plan Implementation
The Road to Execution
Clarify, refine. With the direction set, make the mission understandable to everyone outside the team who will be involved in the project.
As the think phase came to a close, the team was ready to embark on the three remaining phases. Point of view. Roger Enrico, former CEO of PepsiCo, once declared that “Leadership is having a point of view.” To me, a point of view is a conviction and a concrete mission. The point of view is not only more believable after a thorough think phase, but the chosen option is less controversial. The point of view also assures critical closure of debate. In the point-of-view phase, the health care–development team held collegial
Consider all stakeholders in the effort and determine what part they will play in the implementation process. Practice, practice, practice so everyone will perform perfectly at implementation.
Implement Select a spokesperson so only one voice comes from the company on this initiative. Play to win. Do not allow half measures. Celebrate the victory. People thrive when they know they are making a difference. Give credit liberally where credit is due.
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discussions about the options for approaching this new market that were generated in the think phase. They wanted to make sure everyone had thoroughly considered and understood all the possible variables involved. Their goal in formulating a point of view was not to reach consensus; the team didn’t want to dilute what it had learned. Consensus is often about finding middle ground because people want to feel good about their colleagues and maintain friendly relations. This doesn’t necessarily lead to the best decision, which was what this team was after. In the end, what they decided was this: We would move deeper into the health care market by launching a new health care brand. It would expand our current effort “on carpet” – work areas in hospitals that are like the office spaces we already serve (nurses stations, for instance) – but we would also expand “off carpet”–to entirely different areas of the hospital (patients’ rooms, examining rooms, café lounges). Housed in a separate business unit, the brand would draw on technology and products we already had, as well as new products we would manufacture and new customizing services we would provide. Once the team had developed the point of view, the next task was to present it to senior management. Two rules in this phase, designed to prevent second-guessing and ongoing debate, assisted the team in its work. The first rule is that a single person has to be selected to represent the point of view of the team to senior management. The individual chosen to do this was Jan Carlson, a director of North American strategy, as she was the team member who would ultimately work for the executive holding P&L responsibility for the project, Mike Love. We borrowed the other rule from the court system: Once set, the point of view cannot be changed unless significant new evidence indicates that it should shift. Following the team’s presentation, senior management concurred that Steelcase indeed had a significant op-
portunity to deliver customized work environments for the health care marketplace. In March, with that go-ahead, the team was ready to move to the last two phases. Plan to implement. In this stage, in which the team planned the business launch, members clarified and refined the mission statement so that all the people involved could understand how it applied to them. The team then put together a business plan and a time line of deliverables. Before launching the new health care brand, everyone who would be involved practiced the rollout. No one needs to be sold on the benefits of practice, but few organizations ever create the conditions that allow for it. By building practice into our formal process, we make sure everyone is given the time and resources they need to do it and do it thoroughly. As I like to say, even the basketball star Shaquille O’Neal starts his preseason with ball-
handling drills; if the effort is worth our collective time and we are playing to win, then we need to practice to perform. Practice, in this case, meant training everyone from the line workers who had to adapt their production protocols
The bickering led to much mistrust. What we had was your proverbial “goat rodeo.” to the sales force and order management people to the board members who would be asked about the product line once it went public. Taking the time to teach implementation is the epitome of respect in our organization. When implementation is poor, people are taken by surprise. But by making practice integral to our plan-to-implement phase, we have created a unifying, aligning experience
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FIRST PERSON
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Preparing for the Perfect Product Launch
point of view, what might Charlie have done differently, I asked? (Through these assignments, I learn a great deal about what is and isn’t working in our business.) Charlie remembered having found himself in the midst of trying to close a multiyear, multimillion-dollar deal. He had spent two years trying to get a complicated contract signed, but pricing became a sticking point. The contract involved a number of interested parties: our legal department, our dealer,
that builds trust in the organization, and trust speeds innovation and execution. Implement. In May 2006, the project entered the final stage, as we launched our new business and brand, which we call Nurture. In this phase, Jan Carlson retained her position as head of business development planning and product strategy. Mike Love, as president of Nurture, is responsible for assuring that Steelcase succeeds in the health care market in the traditional way by assigning resources, holding people accountable, and continually measuring progress. So far, so good: In less than a year, we’ve sold to a number of significant customers, including large hospitals, outpatient centers, and clinics. They tell us that we are providing the kind of clinical environment they’ve been wishing for, and the Nurture product line has garnered several awards. We’re celebrating the success of Nurture at company gatherings and industry conventions, and all our employees enjoy the feeling that they are making a difference to medical patients. Mom’s proud.
the customer’s legal department, and the ultimate buyer. The failure to agree on a single point of view muddied the plan, as each party sought different protections. Despite the professionalism that everyone tried to muster, the bickering led to much distrust. “What we had was your proverbial ‘goat rodeo,’” Charlie wrote in his analysis. “Team members were making assumptions independently, not communicating, and leaving the process without adequately being briefed on what had transpired. There was no aligning point of view to govern the process and no one to own it.” Charlie told me he realized that the various parties had not laid all the facts out on the table (the rough equivalent of the think phase). Had such a protocol been followed, he said, it would have become clear what the point of view needed to be: the dealer’s position, as it turned out. “By missing the think phase and establishment of the point of view, it was nearly impossible to gain alignment or execute effectively,” he wrote. Lest this sound like Negotiation 101, Charlie reminded me that when the stakes are high and much is invested, even the most rational human beings can wind up in a fight. He now knows
The critical-thinking process – which I now teach to a different group of managers each month in an hour-long course at our corporate university – is not just for people involved in new product development. (For more on Steelcase’s critical-thinking course, see the sidebar “The Rules.”) It helps managers, in any kind of project in which they must work with others, reach decisions and come to an informed agreement. The course does not render us mistake proof; rather, it enables us to learn as we go and avoid making the same mistakes in the future. When Charlie Diez, a senior sales strategist and ten-year veteran of the company, took the course, I asked him and the other “students” to e-mail me a written analysis of a problem they had actually encountered in the past. Knowing the importance of thinking a project through and developing a |
April 2007
•••
One might ask why I don’t hire a training company to teach managers to do this or send people off to a Stephen Covey–style course on the habits of effective management. The answer is simple: The lesson sticks better when the CEO teaches it. Though it takes time for me and a few other top executives to
Why don’t I hire a training company to teach managers critical thinking? The answer is simple:The lesson sticks better when the CEO teaches it.
Learning from Mistakes
50 Harvard Business Review
that by preventing controversy, secondguessing, recrimination, finger-pointing– what we at Steelcase call “swirl” – the think process saves time in the end.
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teach our managers to go through this process, the investment is worth it. As a company, we are making fewer mistakes, and things are running much more smoothly. There is a significant cultural effect as well. In a corporation as large as ours, with thousands of employees, it can be difficult for managers to feel that they get my attention, and the course helps to address that. It also has the benefit of flattening the organization; as more managers discover the process, they become intellectually aligned with corporate headquarters. To date, some 600 Steelcase managers have taken the course, more than 100 of whom are International Steelcase Leaders. It takes a great deal of courage and confidence for people anxious to take the world by storm to slow down, think, explore all the possible options, and be ready to pull the plug if the information points away from success. At Steelcase, people are beginning to understand the difference between getting things done and getting things done right. By bringing thinking and doing into proper balance, we feel much better prepared to meet the future. Reprint R0704B To order, see page 143.
Northern Trust Banks are members FDIC. © 2007 Northern Trust Corporation.
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Jess Jackson, Upper Hawkeye Mountain Estate, Alexander Valley
Terroir can be defined as that mystical melding of light, water, soil, air and human touch. It is a definition I often use. The simple fact is, you must have a world-class grape in order to make a world-class wine. And when it comes to grapes, their source, the land is what matters. Precious few places exist on this Earth that will produce grapes of this caliber. We have been fortunate to find several of those places in California’s cool coastal mountains, hillsides, ridges and benchlands. It is some of the best land in California. And why you will see the Jackson Estates Grown designation proudly displayed on our labels.
My family and I have made it our life’s work to seek out these special places, have the knowledge and respect to work in concert with Mother Nature, then commit to the hard work, expense and patience to steward the wine into the bottle. It is a commitment many in our industry are either unwilling or unable to make. But we are convinced you can and will taste the difference because , ultimately, the wine’s distinct personality will reflect its source, the special terroir. I understand that many of you enjoy the taste of our wines but you aren’t sure why. My goal is to help with A Taste of the Truth.
kj.com/truth ©2007 Kendall-Jackson Wine Estates
The
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2006
th Annual
McKinsey Awards
WINNERS
RECOGNIZING EXCELLENCE IN MANAGEMENT THINKING
Longtime readers of Harvard Business Review will know that the McKinsey Awards, now in their 48th year, recognize the articles most likely to have a lasting influence on management. Every year, a panel of judges – distinguished leaders from business, the nonprofit sector, and the academy – select the two best articles out of a field of around 90. While there are no specific criteria for “best,” history shows that McKinsey judges favor articles that offer both original theoretical insights and direction for their practical application. These articles simultaneously expand the thinking on a topic and inspire action. The winners of this year’s first- and second-place McKinsey Awards are no exception. And the authors themselves are no strangers to the awards. The three of them have now been honored 11 times for articles that have launched some of the most famous and influential ideas in business.
TO LEARN WHO THIS YEAR’S WINNERS ARE, TURN THE PAGE.
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The
48
2006
th Annual
McKinsey Awards
WINNERS
RECOGNIZING EXCELLENCE IN MANAGEMENT THINKING
Harvard Business Review is pleased to announce that Michael E. Porter and Mark R. Kramer, the coauthors of “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility,” have won the first-place 2006 McKinsey Award. Gary Hamel, the author of “The Why, What, and How of Management Innovation,” is the second-place winner. Since 1959, the McKinsey Foundation for Management Research has presented awards recognizing the two best articles published each year in Harvard Business Review. The awards, judged by an independent panel of business leaders and scholars, commend outstanding works that are likely to have a major influence on executives worldwide.
F I R S T- P L A C E W I N N E R HBR
Making a Real Difference
Spotlight
by Michael E. Porter and Mark R. Kramer
MICHAEL E. PORTER AND MARK R. KRAMER
& Society
Strategy
“Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility”
The Link Between Competitive Advantage and Corporate Social Responsibility overnments, activists, and the media have become adept at holding companies to account for the social consequences of their activities. Myriad organizations rank companies on the performance of their corporate social responsibility (CSR), and, despite sometimes questionable methodologies, these rankings attract considerable publicity. As a result, CSR has emerged as an inescapable priority for business leaders in every country. Many companies have already done much to improve the social and environmental consequences of their activities, yet these efforts have not been nearly as productive as they could be – for two reasons. First, they pit business against society, when clearly the two are interdependent. Second, they pressure companies to think of corporate social responsibility in generic ways instead of in the way
December 2006 Corporate social responsibility has become an inescapable priority
78
DOUG FRASER
G
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for business leaders across the globe. Governments, activists, and the media now hold companies accountable for the social consequences of their actions, and favorable publicity is often bestowed
cisions, companies will discover that CSR can be much more than
on companies with prominent CSR programs. Yet for all the hype
a cost or constraint – it can be a potent source of innovation and
surrounding CSR efforts, they are frequently counterproductive.
competitive advantage. Reprint R0612D
Michael Porter and Mark Kramer propose a new way to view the relationship between business and society that allows companies
Michael E. Porter is the Bishop William Lawrence University Professor
to make valuable contributions to social welfare without sacrificing
at Harvard University; he is based at Harvard Business School in Boston.
corporate success. They introduce a framework that companies
Mark R. Kramer (
[email protected]) is the managing direc-
can use to identify the social consequences of their actions, deter-
tor of FSG Social Impact Advisors, an international nonprofit consulting
mine which problems to address, and find the most effective ways
firm, and a senior fellow in the CSR Initiative at Harvard’s John F.
to do so while simultaneously strengthening the competitive con-
Kennedy School of Government in Cambridge, Massachusetts. Porter
text in which they operate. By analyzing their opportunities for
and Kramer are the cofounders of both FSG Social Impact Advisors and
CSR using the same guidelines that direct their core business de-
the Center for Effective Philanthropy, a nonprofit research organization.
SECOND-PLACE WINNER THE WHY,
WHAT,
GARY HAMEL
AND HOW OF
MANAGEMENT
INNOVATION Over the past century, breakthroughs such as brand management and the divisionalized organization structure have created more sustained competitive advantage than anything that came out of a lab or focus group. Here’s how you can make your company a serial management innovator.
February 2006 To most people, innovation means new products, new ways of marketing, and new technologies. But management itself, writes
by Gary Hamel re you a management innovator ? Have you discovered entirely new ways to organize, lead, coordinate, or motivate? Is your company a management pioneer? Has it invented novel approaches to management that are the envy of its competitors? Does it matter? It sure does. Innovation in management principles and processes can create long-lasting advantage and produce dramatic shifts in competitive position. Over the past 100 years, management innovation, more than any other kind of innovation, has allowed companies to cross new performance thresholds. Yet strangely enough, few companies have a wellhoned process for continuous management innovation.
A
72
GREG MABLY
“The Why, What, and How of Management Innovation”
harvard business review
Gary Hamel, is a fertile ground for innovation. In fact, Hamel argues, managerial innovations like brand management or the divisionalized corporation have created greater value and longer-lived
processes. “So far,” Hamel writes, “management in the twenty-
competitive advantage than anything that came from a focus
first century isn’t much different from management in the twen-
group or a laboratory.
tieth century. Therein lies the opportunity.” Reprint R0602C
The key to managerial innovation is looking for powerful ideas in unusual places and challenging management orthodoxies. Draw-
Gary Hamel (
[email protected]) is a visiting professor at
ing on rich examples from companies such as General Electric,
London Business School and a founder of Strategos, an international
Visa, and Google, Hamel shows how “serial innovators” gain ad-
consulting company based in Chicago. He is also the director of the
vantage over rivals. He also offers a methodology that executives
Woodside Institute, a nonprofit research foundation based in Woodside,
can use to identify their own opportunities to reinvent management
California.
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McKinsey Awards 2006
HBR wishes to thank this year’s panel of judges for their hard work on behalf of the 2006 awards:
[
JUDGES
Kim B. Clark President Brigham Young University – Idaho Rexburg, Idaho
Michael J. Critelli Chairman and Chief Executive Officer Pitney Bowes Stamford, Connecticut
THE 2006 PANEL OF JUDGES
Lee C. Daley Chairman and Chief Executive Officer Saatchi & Saatchi UK Group London
Anand G. Mahindra Vice Chairman and Managing Director Mahindra & Mahindra Mumbai, India
Dermot Mannion Chief Executive Aer Lingus Dublin, Ireland
Michael E. Marks Senior Advisor Kohlberg Kravis Roberts & Co. Menlo Park, California
]
Anne M. Mulcahy Chairman and Chief Executive Xerox Stamford, Connecticut
Walter J. Salmon Stanley Roth, Sr., Professor of Retailing, Emeritus Harvard Business School Boston
Linda G. Sprague Professor of Manufacturing and Operations Management China Europe International Business School (CEIBS) Shanghai, China
Dorothy A.Terrell President and Chief Executive Officer Initiative for a Competitive Inner City Boston
HBR is pleased to announce the distinguished panel of judges for the 2007 awards:
[ Vikram Akula Founder and Chief Executive Officer SKS Microfinance Hyderabad, India Antonio Borges Vice Chairman Goldman Sachs International London Beth Comstock President, Digital Media and Market Development NBC Universal New York
2007
THE 2007 PANEL OF JUDGES
Robert J. Dolan Dean and Stephen M. Ross Professor of Business Stephen M. Ross School of Business University of Michigan Ann Arbor, Michigan Kathleen M. Eisenhardt Stanford Warren Ascherman Professor Department of Management Science and Engineering Stanford University Stanford, California
Helene Gayle President and Chief Executive Officer CARE USA Atlanta Jeff Hicks President and Chief Executive Officer Crispin Porter + Bogusky Miami Charles F. Knight Chairman Emeritus Emerson Electric St. Louis
]
Susan Lyne President and Chief Executive Officer Martha Stewart Living Omnimedia New York
Sheryl Sandberg Vice President, Global Online Sales and Operations Google Mountain View, California
Jonathan Schwartz President and Chief Executive Officer Sun Microsystems Santa Clara, California Loh Khum Yean Chief Executive SPRING Singapore Singapore
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What Your
LEADER Expects of You And what you should expect in return
I
T’S WELL UNDERSTOOD THAT the relationships between a boss and his or her direct reports are important ones and figure strongly in the success of a team. Yet while much has been written about character traits and issues of openness and trust, the leadership literature has had strikingly little to say about what a leader should be able to expect from his people. Over the years, I’ve observed that certain behaviors, on the part of both the
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Joshua Gorchov
by Larry Bossidy
What Your Leader Expects of You
subordinate and the boss, are conducive to productive and rewarding relationships. Indeed, I’ll favor someone who exhibits the behaviors I expect over someone who doesn’t, even if the latter’s numbers are slightly better, because I know the former has the potential to contribute more to the organization over time. In sharing the lists below – what I’ve come to think of as the CEO compact, a set of expectations both from and for a leader–I hope that I can help other leaders and teams improve their relationships and, as a consequence, their performance.
What I Expect from My Direct Reports The following behaviors are powerful individually, but taken together they drive performance and growth in a way that has a significant effect on long-term results. Get involved. Good executives know how to delegate. But more important, they know when a situation calls for their immediate involvement, whether it’s in redirecting resources to a product that’s suddenly taking off in the market, helping to resolve a breakdown in quality, or visiting a plant to discover why its productivity has faltered. There’s no excuse for not taking responsibility when you see a problem
generally applauded in organizations. They’re frequently at the periphery, because people think they’re off the wall. But I want to hear what they have to say; it’s my job to sift through ideas and decide which ones have merit. Often the best ideas sound crazy at first. For instance, when I got to AlliedSignal, people were very dispirited by the company’s lagging performance, and I was looking for a way to raise morale. Somebody suggested that we hire a band, put out hamburgers and hot dogs at midday, and make lots of noise, so the employees would feel there was a reason for optimism. A lot of people said it was corny and wouldn’t work – but it did, and it became an annual event. Another example: When sales of a particular liquid we offered declined, one manager proposed we paint the canisters bright colors instead of the industrial gray we had been using. The idea was met with derision, but we tried it, and it made a difference. Sales recovered. As for more mainstream executives, they can come up with good ideas too, but often they are reluctant to speak out. I’m willing to give them a little push. If I’m in a meeting and people aren’t volunteering anything on a controversial subject, I tell them we’re going to be there for a while. The subsequent silence gets uncomfortable – eventually enough so that people start to talk. In one case, I came to a meeting
I expect people to read, to watch the news – not just because it makes them more interesting but because what happens in the world affects what happens to us, to our marketplace, and to our competition. growing. I count on my reports to take the blame for things that go wrong and give credit for positive developments to their employees. And I expect them to have the courage to deliver bad news. If you’ve got to close a plant, go to the plant and tell those employees yourself. While there are no hard-and-fast rules about when your involvement will have the most impact on the business (that’s a judgment call), I’ve found that good managers generally step in under three types of circumstances: when somebody is falling behind in her commitments; when important personnel matters arise, particularly if there is conflict; and in a crisis. Just because you’re an executive vice president doesn’t mean you don’t have to work anymore. Generate ideas. A common frustration in corporate America is a lack of ideas. A person who is innovative and creative is a pearl to be treasured. Unfortunately, idea people are not Larry Bossidy was the chairman and CEO of AlliedSignal from 1991 through 1999 and the chairman and CEO of Honeywell from 2001 to 2002. He has also served as the COO of General Electric Credit Corporation (now GE Capital) and as the vice chairman of General Electric. 60 Harvard Business Review
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to discuss a management problem we’d noticed in a customer organization. I listed three or four reasons why it was important for me to speak with the customer’s CEO about it. People resisted, but they weren’t offering any alternatives. We waited for quite a while, and finally somebody spoke up. After some dialogue we decided that a person lower in our organization would speak to a person lower in the customer organization, rather than risk the flap that would come out of elevating the issue to the highest level. Be willing to collaborate. It’s surprising how many people still resist collaboration or sharing credit, even though we know how much more we can achieve when we bring everyone to the table at once. There can be very practical reasons for this – for example, it may not be in someone’s financial interest to cooperate. But I expect people to trust that I will notice when they take an action that, say, costs their unit $2 million in the short run but will benefit the company overall in the long run. This is something I take very seriously. Some years ago I was running a big business that was functionally structured. The person who ran manufacturing and the one who ran
marketing and sales did not get along well; they just wouldn’t communicate. And because they didn’t work together well, neither did their organizations. As a consequence, our inventories were always out of balance. The three of us met, and I told them that it didn’t matter whether they liked each other or not, but the way they worked together had to change. They left the meeting with instructions to overcome their differences, but three months later, nothing had changed. I called them back into my office and gave them both separation packages on the spot, telling them that although I thought they were good performers individually, their failure to collaborate was hurting the enterprise. An imposing guard was waiting at the door to take their badges and escort them from the plant. At about 3:00 that afternoon the telephone rang. It was the two of them, asking to gain entrance to the plant. The first thing they said upon arrival was “We get it.” They came back to work, and I don’t know that they ever learned to like each other, but they learned to work well together – and more important, so did their organizations. Our overall performance improved considerably.
Be willing to lead initiatives. There’s no way of knowing how a challenging new project will turn out, so people are often reluctant to be associated with an untested idea, particularly if it crosses functional or unit boundaries. They duck under the radar screen rather than risk going up in flames. But I want people to raise their hands. When we started with Six Sigma at AlliedSignal, some people didn’t like it or weren’t sure about it, but I’ll never forget the people who took a chance, who assumed leadership roles even though they didn’t know much about the program. That’s an attribute I prize in my employees. The ones who led the Six Sigma efforts were told that their careers would be accelerated if they succeeded, and those who made a contribution beyond unit boundaries did in fact climb the ladder faster than those who didn’t. Develop leaders as you develop. Too many people are selfish about their development. I want my direct reports to take as much interest in their subordinates’ development as they do in their own – if not more. Early in my career, when I was at GE, I had a boss, a midlevel manager, who was a good performer but knew that he had gone as far as he was going hbr.org
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If it isn’t in your DNA to anticipate, you don’t. You can find ways to compensate, but you can’t change your nature. to go. He called me in one day and said he felt I had a chance to be a lot better than he was and that he was going to do everything he could to help me reach my potential. From that moment on, he was more interested in my development than in his own. He went out of his way to criticize or praise me when I needed it. I’ll never forget him; he played a very meaningful role in my career. A strong signal that executives are committed to developing their direct reports is involvement in performance appraisals. I expect my people to be personally involved in reviews – not to hand them off to someone in Human Resources – and to supply their employees with specific and useful feedback. When I was at GE and Allied, I regularly reviewed the goals my direct reports were setting for their subordinates. If they were vague, I asked them to keep working until they’d achieved an appropriate level of specificity. For instance, someone might list “improve interpersonal skills” when what he really meant was “be more willing to collaborate.” The goals have to be specific enough that people know how to approach the issue and whether or not they’ve made progress.“Improve interpersonal skills”doesn’t tell an employee what to do. Stay current. There’s nothing more depressing than sitting in a business meeting with people who don’t know what’s going on in the world. I expect people to read, to watch the news – not just because it makes them more interesting but because what happens in the world affects what happens to us, to our marketplace, and to our competition. We make decisions in the context of world events, so people need to pay attention to them. I also expect people to know what’s going on with customers – how they’re changing, how their competition is changing, how technology and world events are affecting their strategies. Customer relationships are an asset; people should bring them to the table. Anticipate. One consequence of failing to stay current is that you risk a setback you ought to have anticipated – and you either recover more slowly than you should or never recover at all. Political events often trigger strategic threats. I’m a board member at Merck. With the Democrats in control of Congress, Merck is thinking about how to address that party’s longtime platform on pharmaceutical pricing. It would be foolish to wait for new regulations; far better to get ready now. A talented executive who once worked for me was perpetually caught off guard by adverse events – a new competitor, 62 Harvard Business Review
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a negative regulatory development, an unforeseen customer problem. He worked very hard and he was smart, but he was frenetic and reactive, and never looked up to see the iceberg ahead of him. He even brought in a consultant to help him think through where the business would be in a couple of years, which culminated in a nice book that went up on the shelf while he went right back to his in-box. Eventually I began to spend the first 20 minutes of every meeting with him asking what he thought was about to happen. We went over competitors, customers, the regulatory environment – anything that might have an impact on the business. He improved, and he went on to become a CEO at another company, but anticipating change remained a struggle for him. The fact is, if it isn’t in your DNA to anticipate, you don’t. You can move the bar a little and find ways to compensate, but you can’t change your nature. The people who are constantly looking around corners are best suited to leadership positions. Drive your own growth. I expect people to seek perpetual education and development – not necessarily by going back to school but by exposing themselves to new people and ideas. Ask your boss for feedback, and if he or she isn’t willing to give it, then turn to peers and subordinates, or find a mentor. Accept demanding assignments; you learn much more from them than you do from cushy projects. This takes some courage, because the outcome may not be as good, but it demonstrates that you’re interested in your own development. It also prepares you for difficult challenges in the future. I’ll promote somebody who has stretched his limits in tough assignments with sometimes disappointing results over somebody who met his targets by taking less taxing roles. Be a player for all seasons. It’s one thing to sustain the behaviors I’ve described in good times. It’s easy to collaborate, to stick up your hand, to offer ideas, when sales and earnings are growing by 20% a year. But how do you behave when they’re in decline? I expect positive behaviors no matter what, and people who can live up to that stand out in my eyes. I can think of several people who were leading businesses, beating their forecasts, able to attract quality people – as long as the market was good. In a downturn they’d lose their ability to motivate and inspire people, their selfconfidence would begin to wane, and I’d have to take them off the job. On the flip side, some people are well suited to containing costs and keeping a business afloat when opportunities for
A Simple Assessment I consult to a number of companies, and the first thing I look at is performance appraisals. Often I’ll find three pages of the vaguest, most uncommunicative language imaginable. People write and write and write – and say nothing. Appraisals ought to be half a page that says what your boss likes, what you can improve, and what the two of you are going to do about it – simple and to the point, like the form shown here.
PERFORMANCE EVALUATION Name: ____Joe _________Swift __________________________________________________
6/09/07 Date: _____________________________________
What I Like
What Can Improve
Ambitious __Inconsistent __________________________communicator _______________________________________________ _Team _____________player ____________________________________________________________ __Impetuous _________________________________________________________________________ __Volunteers _________________________to _____lead __________initiatives ________________________________ __Often _____________fails ___________to _____anticipate ____________________________________________ ___Innovative _______________________________________________________________________ __Vague _______________in ______appraising ________________________performance ____________________________ __Meets _____________commitments ___________________________________________________________ _____________of ______others ________________________________________________________ ___Interested _____________________in ______the ________development ____________________________of ______others __ ___________________________________________________________________________ ___Stays ____________current ___________________________________________________________ ___________________________________________________________________________ __Quashes ___________________bureaucracy _____________________________________________________ ___________________________________________________________________________ __________________________________________________________________________
__________________________________________________________________________
___________________________________________________________________________
Comments
Joe, it’s great to have you and your talents, but we need to decide how to __progress __________________on _______your ___________development. ______________________________Let’s ____________meet ___________on ______Tuesday, ______________________after ___________you’ve _______________had __________a___ __chance ________________to _____consider ____________________an ______action ______________plan. _______________________________________________________________________________________________
______________________________________________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________________________________________________
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growth are minimal, but are so perpetually paranoid that they can’t take advantage of an upswing. I always look for someone who can thrive in either circumstance, and I’m amazed at the number of people who can’t.
What My Direct Reports Can Expect from Me The CEO compact has two sides, of course, and I know my subordinates will do their jobs most effectively if they can expect a few things of me as well. Provide clarity of direction. If I’m the leader, it’s my job to communicate clearly where the business is going, why, and what the benefits will be if we accomplish what we set out to achieve. Every quarter the boss should get up in front of her team and explain the financial results and the progress of any operational or strategic initiative. This provides a crucial context for the work. If I simply tell someone, for instance, that he needs to improve cash flow, that’s not terribly motivating.
If Joe gives a presentation, I owe him feedback right on the spot. I might say, “You came prepared, you seem to know your stuff, but I heard five ‘um’s in the first two minutes, and that distracts your audience.” If he did particularly well, it’s helpful to point out why, so he can repeat the behavior: “Great job, Joe, because you did your homework and made your point clearly in less than five minutes.” When the annual review comes, it should be simple. Forget HR jargon that attempts to disguise reality. An effective performance review tells the employee what he does well, what he could do better, and how he and his boss can work together to fill any gaps – no complicated forms or ambiguous language. (See the exhibit “A Simple Assessment.”) Be decisive and timely. Decisiveness isn’t useful if it isn’t timely. People should expect me to make decisions as soon as I have the information I need, and not to be careless or impetuous but to give clear, unambiguous answers. When a big contract is on the line, the time for the boss to pitch in is not
As a CEO, I never felt uncomfortable when somebody came to ask me why I had put one person into a role rather than another. If I couldn’t explain my decision, then shame on me. If I show him the actual numbers, he has some perspective on why and to what degree cash flow is an issue, and a better sense of how his job contributes to the enterprise as a whole. Set goals and objectives. An executive may assume he’s doing a good job, but he can’t know for sure that his boss would agree if he has no specific goals and objectives to strive for. In addition to team goals, each person should know exactly what individual goals he or she is going to be measured on over a given period and where to invest precious time. When goals and objectives are clear, promotion and bonus decisions can be based on merit. Morale suffers if people think there’s some mystery to the process, some behind-thescenes explanation. They’re much happier and more comfortable when they know they’re working in a meritocracy. As a CEO, I never felt uncomfortable when somebody came to ask me why I had put one person into a role rather than another. If I couldn’t explain my decision, then shame on me. Give frequent, specific, and immediate feedback. When I give feedback, I’m signaling to people that I’m interested in their growth and that I see a path for their future. Employees shouldn’t have to wait for an annual review to learn how they are doing, and if the feedback is going to help drive their growth, then it needs to be as specific as possible. I hate it when a boss says simply, “Great job, Joe.” Joe may have done a great job, but possibly he could have done even better, and if I point out how, maybe he will do better next time. 64 Harvard Business Review
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the last minute, it’s a month earlier. At Allied, a salesperson who was working on a deal with Boeing, say, might ask me to place a phone call–not because I could sell the job any better but because I represented the organization. I shouldn’t be making the call at the eleventh hour; I should make it well before the deal is set to close, when I can have more impact. The problem is, people are often reluctant to get the boss involved for fear that asking for help will be perceived as a sign of weakness. They end up asking just when they think they’re going to lose the deal. I consider asking for help a sign not of weakness but of self-confidence. Be accessible. If I expect people to keep me informed about what’s going on, then I need to be available when they need to see me. It’s certainly in my interest. Frequently a boss doesn’t learn that someone is leaving the company until he’s about to walk out the door. If she’d known the employee was contemplating a move a month earlier, she could have taken him to lunch, talked to him about opportunities within the company, and maybe changed his mind. And people should know that I’m not going to come down on them if they bring me bad news. In fact, I’m quite aware that if they’re coming to me, more often than not the news is bad. Most people can handle good news on their own; they turn to the boss when they need some help. Demonstrate honesty and candor. People spend far too much time figuring out how to tell others something un-
pleasant – how to deliver the news in a diplomatic way. This is common in performance appraisals. When I visit companies that I consult to, the first thing I ask leaders for is copies of their appraisals of subordinates, and I am continually amazed at the avoidance in their language. Look at the difference between vague and specific characterizations: Vague Hard worker Attentive Detail oriented Good listener Watches over his people Amiable
Specific Results oriented Anticipatory Analytic problem solver Great communicator Holds people accountable Team player
Scott Arthur Masear
The language on the left means nothing. Masking the truth doesn’t help people develop. If I can say something sensitively and diplomatically, so much the better. But if I can’t, I owe it to my employee to say it anyway. Offer an equitable compensation plan. People want to be compensated fairly, in a way that reflects their contributions, and they want to understand how the compensation plan works. Employees should be able to estimate the size of their bonuses at the end of the year, because if the boss has also set clear goals and objectives, they know whether they have lived up to them, and they have a good idea of how the
company did overall. The process shouldn’t be shrouded in mystery or overly complicated. •••
Much of what I’ve described here has to do with keeping bureaucracy at bay. Bureaucracy is self-perpetuating, and cutting through it is a constant battle; because it’s a fact of organizations, you can never truly get rid of it. You can tell it’s creeping in when decision making slows to a crawl, or when the battery of forms needed for performance reviews begins to obscure meaningful feedback. Maintaining these behaviors helps to show when red tape is encroaching on productivity – and helps to minimize the effect. Of course, it’s much easier to live up to the first of the lists I’ve outlined if you have a boss who lives up to the second. But you won’t always be blessed with such a boss. If you aren’t, the best thing to do is create a CEO compact with your own subordinates, and demonstrate by example. These behaviors will make you a better employee and may help you get promoted. They will certainly serve you well should you leave for another job. The purpose, after all, is to improve team and company performance, which should accelerate your own growth. Reprint R0704C To order, see page 143.
“Previously, I was on top of the television. Before that, I was on a stack of towels in the linen closet.”
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What if you’ve taken your core as far as it can go?
Finding Your Next
C RE BY CHRIS ZOOK
Business I
fail to exploit, or even perceive, the full potential of the basic businesses they are in. Company after company prematurely abandons its core in the pursuit of some hot market or sexy new idea, only to see the error of its ways – often when it’s too late to reverse course. Bausch & Lomb is a classic example. Its eagerness to move beyond contact lenses took it into dental products, skin care, and even hearing aids in the 1990s. Today B&L has divested itself of all those businesses at a loss, and is scrambling in the category it once dominated (where Johnson & Johnson now leads). And yet it’s also true that no core endures forever. Sticking with an eroding core for too long, as Polaroid did, can be just as devastating. Both these companies were once darlings of
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Christoph Niemann
T IS A WONDER HOW MANY MANAGEMENT TEAMS
Finding Your Next Core Business
Wall Street, each with an intelligent management team and a formerly dominant core. And in a sense, they made the same mistake: They misjudged the point their core business had reached in its life cycle and whether it was time to stay focused, expand, or move on. How do you know when your core needs to change in some fundamental way? And how do you determine what the new core should be? These are the questions that have driven my conversations with senior managers and the efforts of my research team over the past three years. What we’ve discovered is that it is possible to measure the vitality remaining in a business’s core – to see whether that core is truly exhausted or still has legs. We’ve also concluded from an in-depth study of companies that have redefined their cores (including Apple, IBM, De Beers, PerkinElmer, and 21 others) that there is a right way to go about reinvention. The surest route is not to venture far afield but to mine new value close to home; assets already in hand but peripheral to the core offer up the richest new cores. This article discusses both these findings. It identifies the warning signs that a business is losing its potency and offers a way to diagnose the strength remaining in its core. It recounts the efforts of managers in a variety of settings who saw the writing on the wall and succeeded in transforming their companies. And, based on these and other cases, it maps the likely spots in a business where the makings of a new core might be found.
When It’s Time for Deep Strategic Change Not every company that falls on hard times needs to rethink its core strategy. On the contrary, declining performance in what was a thriving business can usually be chalked up to an execution shortfall. But when a strategy does turn out to be exhausted, it’s generally for one of three reasons. The first has to do with profit pools – the places along the total value chain of an industry where attractive profits are earned. If your company is targeting a shrinking or shifting profit pool, improving your ability to execute can accomplish only so much. Consider the position of Apple, whose share of the market for personal computers plummeted from 9% in 1995 to less than 3% in 2005. But more to the point, the entire profit pool in PCs steadily contracted during those years. If Apple had not moved its business toward digital music, its prospects might not look very bright. General Dynamics was in a similar situation in the 1990s, when defense spending declined sharply. To avoid being stranded by the receding profit pool, it sold off many of its units and redefined the company Chris Zook is the author of Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth (to be published next month by Harvard Business School Press), from which this article is adapted. Based in Amsterdam, he leads the Global Strategy Practice of Bain & Company. 68 Harvard Business Review
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around just three core businesses where it held substantial advantages: submarines, electronics, and information systems. The second reason is inherently inferior economics. These often come to light when a new competitor enters the field unburdened by structures and costs that an older company cannot readily shake off. General Motors saw this in competition with Toyota, just as Compaq did with Dell. Other wellknown examples include Kmart (vis-à-vis Wal-Mart) and Xerox (vis-à-vis Canon). Occasionally a company sees the clouds gathering and is able to respond effectively. The Port of Singapore Authority (now PSA International), for example, fought off threats from Malaysia and other upstart competitors by slashing costs and identifying new ways to add value for customers. But sometimes the economics are driven by laws or entrenched arrangements that a company cannot change. The third reason to rethink a core strategy is a growth formula that cannot be sustained. A manufacturer of a specialized consumer product – cell phones, say – might find its growth stalling as the market reaches saturation or competitors replicate its once unique source of differentiation. Or a retailer like Home Depot might see its growth slow as competitors like Lowe’s catch up. A company that has prospered by simply reproducing its business model may run out of new territory to conquer: Think of the difficulties Wal-Mart has encountered as the cost-benefit ratio of further expansion shifts unfavorably. The core business of a mining company might expire as its mines become depleted. In all such circumstances, finding a new formula for growth depends on finding a new core. For most of the companies my team and I studied, recognition that the core business had faltered came very late. The optical instruments maker PerkinElmer, the diamond merchant De Beers, the audio equipment manufacturer Harman International – these were all companies in deep crisis when they began their redefinition. Is it inevitable that companies will be blindsided in this way? Or can a management team learn to see early signs that its core strategy is losing relevance? With that possibility in mind, it would seem reasonable to periodically assess the fundamental vitality of your business. The exhibit “Evaluate Your Core Business” offers a tool for doing so. Its first question looks at the core in terms of the customers it serves. How profitable are they–and how loyal? Arriving at the answers can be difficult, but no undertaking is more worthwhile; strategy goes nowhere unless it begins with the customer. The second question probes your company’s key sources of differentiation and asks whether they are strengthening or eroding. The third focuses on your industry’s profit pools, a perspective that is often neglected in the quest for revenue and market share growth. Where are the best profits to be found? Who earns them now? How might that change? The fourth examines your company’s capabilities – a topic we shall soon turn to – and the fifth as-
sesses your organization’s culture and readiness to change. At the least, managers who go through this exercise tend to spot areas of weakness to be shored up. More dramatically, they may save a business from going under. Note, however, that no scoring system is attached to this diagnostic tool – there is no clearly defined point at which a prescription for strategic redefinition is issued. That would lend false precision to what must be a judgment call by a seasoned management team. The value of the exercise is to ensure that the right questions are taken into account and, by being asked consistently over time, highlight changes that may constitute growing threats to a company’s core.
Recognizing the Makings of a New Core
Evaluate Your Core Business Five broad questions can help you determine when it is time to redefine your company’s core business. For most companies, the answers to these questions can be found by examining the categories listed next to each one. If the answers reveal that large shifts are about to take place in two or more of these five areas, your company is heading into turbulence; you need to reexamine the fundamentals of your core strategy and even the core itself.
Question
Take a close look at
1
core customers?
> profitability > market share > retention rate > measures of customer loyalty and advocacy > share of wallet
2
What is the state of our core differentiation?
> definition and metrics of differentiation > relative cost position > business models of emerging competitors > increasing or decreasing differentiation
3
What is the state of our
> size, growth, and stability
What is the state of our
> share of profit pools captured industry’s profit pools? Management teams react in differ> boundaries ent ways when they reach the con> shifts and projections clusion that a core business is under > high costs and prices severe threat. Some decide to defend the status quo. Others want to > inventory of key capabilities What is the state of our transform their companies all at > relative importance core capabilities? once through a big merger. Some > gaps vis-à-vis competitors and vis-à-vis leap into a hot new market. Such future core needs strategies are inordinately risky. (Our analysis suggests that the > loyalty and undesired attrition What is the state of our odds of success are less than one in > capacity and stress points culture and organization? ten for the first two strategies, and > alignment and agreement with objectives only about one in seven for the > energy and motivation third.) The companies we found to > bottlenecks to growth be most successful in remaking themselves proceeded in a way that left less to chance. Consider, the patent rights. The division responsible for absorption refor example, the transformation of the Swedish company frigerators later became the independent Dometic Group. Dometic. By 1973 Dometic was still a small company, with revenues Dometic’s roots go back to 1922, when two engineering of just 80 million kronor (about U.S. $16.9 million). Worse, it students named Carl Munters and Baltzar von Platen apwas losing money. Then Sven Stork, an executive charged plied what was known as absorption technology to refrigwith fixing the ailing Electrolux product line, began to eration. Whereas most household refrigerators use combreathe new life into the business. Stork, who went on to bepressors driven by electric motors to generate cold, their come president and CEO of the company, moved aggressively refrigerator had no moving parts and no need for electricity; into the hotel minibar market, where the absorption refrigonly a source of heat, as simple as a propane tank, was reerator’s silent operation had a real advantage over convenquired. So the absorption refrigerator is particularly useful in tional technology. Fueled by those sales, Dometic grew and places like boats and recreational vehicles, where electric was able to acquire some of its competitors. current is hard to come by. In 1925 AB Electrolux acquired
4 5
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The real breakthrough came when Stork’s team focused more closely on the RV market, which was just then beginning to explode. The point wasn’t to sell more refrigerators to the RV segment; the company’s market share within that segment was already nearly 100%. Rather, it was to add other products to the Dometic line, such as air-conditioning, automated awnings, generators, and systems for cooking, lighting, sanitation, and water purification. As Stork explains,“We decided to make the RV into something that you could really live in. The idea was obvious to people who knew the customers, yet it took a while to convince the manufacturers and especially the rest of our own organization.” These moves fundamentally shifted the company’s core. Dometic was no longer about absorption refrigeration: It was about
gravity along an existing vector of growth. To do this, it relied on hidden assets–resources or capabilities that it had not yet capitalized on. In Dometic’s case, the treasure was its understanding of and access to customers in the RV market. Leadership economics is a hallmark of almost every great strategy; when we see a situation in which the rich get richer, this is the phenomenon at work. Consider that most industries have more than six competitors, but usually more than 75% of the profit pool is captured by the top two. Of those two, the one with the greatest market power typically captures 70% of total profits and 75% of profits above the cost of capital. When Dometic focused on a defined market where it could stake out a leadership position, enormous financial benefits followed.
The importance of overlooked, undervalued, or underutilized assets cannot be overstated. In 21 of the 25 companies we examined, a hidden asset was the centerpiece of the new strategy. RV interior systems and the formidable channel power gained by selling all its products through the same dealers and installers. That channel power allowed Dometic to pull off a move that enhanced its cost structure dramatically. The company streamlined its go-to-market approach in the United States by skipping a distribution layer that had always existed and approaching RV dealers directly. “We prepared for the risks like a military operation,” Stork recalls, “and it was a fantastic hit. We were the only company large enough to pull this off. It let us kill off competitors faster than they could come out of the bushes.” By 2005 Dometic had grown to KR 7.3 billion, or roughly U.S. $1.2 billion. No longer part of Electrolux (the private equity firm EQT bought it in 2001 and sold it to the investment firm BC Partners a few years later), the company was highly profitable and commanded 75% of the world market share for RV interior systems. Dometic’s story of growth and redefinition is especially instructive because it features all the elements we’ve seen repeatedly across the successful core-redefining companies we’ve studied. These are: (1) gradualism during transformation, (2) the discovery and use of hidden assets, (3) underlying leadership economics central to the strategy, and (4) a move from one repeatable formula that is unique to the company to another.“Gradualism”refers to the fact that Dometic never made anything like a “bet the company” move – often tempting when a business is on the ropes, but almost always a loser’s game. As in the other cases of strategic renewal we studied, it redefined its core business by shifting its center of 70 Harvard Business Review
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Its new growth formula offers the same kind of repeatability the old one did. Recall that Dometic’s first focus was on applications for absorption refrigeration, which it pursued product by product, one of which was for RVs. The new formula angled off into a sequence of interior components for the RV customer base. Recently, as RV sales have slowed, Dometic has moved into interior systems for “live-in”vehicles in general, including boats and long-haul trucks.
Where Assets Hide The importance of a company’s overlooked, undervalued, or underutilized assets to its strategic regeneration cannot be overstated. In 21 of the 25 companies we examined, a hidden asset was the centerpiece of the new strategy. Some of their stories are well known. A few years ago, a struggling Apple realized that its flair for software, userfriendly product design, and imaginative marketing could be applied to more than just computers – in particular, to a little device for listening to music. Today Apple’s iPod-based music business accounts for nearly 50% of the company’s revenues and 40% of profits – a new core. IBM’s Global Services Group was once a tiny services and network-operations unit, not even a stand-alone business within IBM. By 2001 it was larger than all of IBM’s hardware business and accounted for roughly two-thirds of the company’s market value. Why would well-established companies even have hidden assets? Shouldn’t those assets have been put to work or dis-
Where Does Your Future Lie?
In an undervalued business platform?
In an untapped insight into customers?
In an underexploited capability?
undeveloped adjacencies
unrecognized segments
hidden corporate capabilities
organizations that support the core
privileged access or trust
noncore capabilities in different divisions
noncore businesses
underutilized data and information
underleveraged core capabilities in different divisions
orphan products
If the core of your business is nearing depletion, the temptation may be great to venture dramatically away from it – to rely on a major acquisition, for instance, in order to establish a foothold in a new, booming industry. But the history of corporate transformation shows you’re more likely to be successful if you seek change in your own backyard.
posed of long since? Actually, large, complex organizations always acquire more skills, capabilities, and business platforms than they can focus on at any one time. Some are necessarily neglected–and once they have been neglected for a while, a company’s leaders often continue to ignore them or discount their value. But then something happens: Market conditions change, or perhaps the company acquires new capabilities that complement its forgotten ones. Suddenly the ugly ducklings in the backyard begin to look like swans in training. The real question, then, is how to open management’s eyes to the hidden assets in its midst. One way is to identify the richest hunting grounds. Our research suggests that hidden assets tend to fall into three categories: undervalued business platforms, untapped insights into customers, and underexploited capabilities. The exhibit “Where Does Your Future Lie?” details the types of assets we’ve seen exploited in each category. For a better understanding of how these assets came to light, let’s look at some individual examples. Undervalued business platforms. PerkinElmer was once the market leader in optical electronics for analytical instruments, such as spectrophotometers and gas chromatographs. Its optical capabilities were so strong that the company was chosen to manufacture the Hubble Space Telescope’s mirrors and sighting equipment for NASA. Yet by 1993 PerkinElmer,
its core product lines under attack by lower-cost and more innovative competitors, had stalled out. Revenues were stuck at $1.2 billion, exactly where they had been ten years earlier, and the market value of the company had eroded along with its earnings; the bottom line showed a loss of $83 million in 1993. In 1995 the board hired a new CEO, Tony White, to renew the company’s strategy and performance and, if necessary, to completely redefine its core business. As White examined the range of product lines and the customer segments served, he noticed a hidden asset that could rescue the company. In the early 1990s, PerkinElmer had branched out in another direction – developing products to amplify DNA–through a strategic alliance with Cetus Corporation. In the process, the company obtained rights to cutting-edge procedures known as polymerase chain reaction technology – a key life-sciences platform. In 1993, the company also acquired a small Silicon Valley life-sciences equipment company, Applied Biosystems (AB) – one more line of instruments to be integrated into PerkinElmer’s. White began to conceive of a redefined core built around analytical instruments for the fast-growing segment of lifesciences labs. The AB instruments in the company’s catalog, if reorganized and given appropriate resources and direction, could have greater potential than even the original core. White says,“I was struck by how misconceived it was to tear hbr.org
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original instrument company was sold to the Massachusettsbased EG&G. (Soon after, EG&G changed its corporate name to PerkinElmer–and has since prospered from a combination that redefined its own core.) The PerkinElmer-to-Applera transformation offers several lessons. The first is that a hidden asset may be a collection of products and customer relationships in different areas of a company that can be collected to form a new core. The second lesson is the power of market leadership: Finding a subcore of leadership buried in the company and building on it in a focused way created something that started smaller than the original combination but became much bigger and stronger. The third lesson lies in the concept of shrinking to grow. Though it sounds paradoxical and is organizationally difficult for companies to come to grips with, this is one of the most underused and underappreciated growth strategies. (See the sideAB apart and distribute its parts across the functions in the organization. I thought, ‘Here is a company whose management does not see what they have.’ So one of the first steps I took was to begin to reassemble the parts of AB. I appointed a new president of the division and announced that I was going to re-form the core of the company over a threeyear period around this unique platform with leadership in key life-sciences detection technology.” Over the next three years, White and his team separated PerkinElmer’s original core business and all the life-sciences products and services into two organizations. The employees in the analytical instruments division were given incentives to meet an aggressive cost reduction and cash flow target and told that the division would be spun off as a separate business or sold to a strong partner. Meanwhile, White set up a new data and diagnostics subsidiary, Celera Genomics, which, fueled by the passion of the scientist Craig Venter, famously went on to sequence the complete human genome. Celera and AB were combined into a new core business organization, a holding company christened Applera. While Celera garnered the headlines, AB became the gold standard in the sequencing instrument business, with the leading market share. Today it has revenues of $1.9 billion and a healthy net income of $275 million. Meanwhile, the 72 Harvard Business Review
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bar “Shrinking to Grow.”) Creating a new core based on a previously overlooked business platform is more common than one might think. General Electric, for instance, like IBM, identified an internal business unit–GE Capital–that was undervalued and underutilized. Fueled by new attention and investment, the once sleepy division made more than 170 acquisitions over a tenyear period, propelling GE’s growth. By 2005 GE Capital accounted for 35% of the parent corporation’s profits. Nestlé discovered that it had a number of food and drink products designed to be consumed outside the home. Like the original PerkinElmer, it assembled these products into a new unit, Nestlé Food Services; developed a unified strategy; and effectively created the core of a new multibillion-dollar business. Untapped insights into customers. Most large companies gather considerable amounts of data about the people and businesses that buy their wares. But it’s not always clear how much they actually know about those customers. In a recent series of business seminars I held for management teams, the participants took an online survey. Though nearly all came from well-regarded companies, fewer than 25% agreed with the simple statement “We understand our customers.” In a 2004 Bain survey, we asked respondents to identify the most important capabilities their companies could acquire
to trigger a new wave of growth.“Capabilities to understand our core customers more deeply” topped the list. For just this reason, insights into and relationships with customers are often hidden assets. A company may discover that one neglected customer segment holds the key to unprecedented growth. It may find that it is in a position of influence over its customers, perhaps because of the trust and reputation it enjoys, and that it has not fully developed this position. Or it may find that it has proprietary data that can be used to alter, deepen, or broaden its customer relationships. All these can stimulate growth around a new core. Harman International, a maker of high-end audio equipment, redefined its core around an unexploited customer segment. In the early 1990s it was focused primarily on the consumer and professional audio markets, with less than 10% of revenues coming from the original-equipment automotive market. But its growth had stagnated and its profits were near zero. In 1993 Sidney Harman, a cofounder, who had left the company to serve as U.S. deputy secretary of commerce, returned as CEO in an attempt to rejuvenate the company. Harman cast a curious eye on the automotive segment. He realized that people were spending more time in their cars, and that many drivers were music lovers accustomed to highend equipment at home. Hoping to beef up the company’s sales in this sector, he acquired the German company Becker, which supplied radios to Mercedes-Benz. One day when Harman was visiting their plant, some Becker engineers demonstrated how new digital hardware allowed the company to create high-performance audio equipment in a much smaller space than before. That, Harman says, was the turning point. He invested heavily in digital to create branded high-end automotive “infotainment” systems. The systems proved to have immense appeal both for car buyers and for car manufacturers, who enjoyed healthy margins on the equipment. Based largely on its success in the automotive market, Harman’s market value increased 40-fold from 1993 to 2005. It is somewhat unusual, of course, to find an untapped customer segment that is poised for such rapid growth. But it isn’t at all unusual for a company to discover that its relationships with customers are deeper than it realized, or that it has more knowledge about customers than it has put to work. Hyperion Solutions, a producer of financial software, was able to reinvent itself around new products and a new sales-and-service platform precisely because corporate finance departments had come to depend on its software for financial consolidation and SEC reporting.“We totally underestimated how much they relied upon us for this very technical and sensitive part of their job,”says Jeff Rodek, formerly Hyperion’s CEO and now the executive chairman. American Express transformed its credit-card business on the basis of previously unutilized knowledge of how different customer segments used the cards and what other products might appeal to them. Even De Beers, long known for its
Shrinking to Grow When a company uncovers an underutilized source of leadership economics, sometimes the best response is to “double down” on its investment in that area. A bold version of this is actually shrinking to grow. Consider the example of Royal Vopak. If you are not in the oil or chemicals business, you may not be familiar with Vopak, but it is the world leader in independent tank storage of bulk oil and chemicals, operating in 75 port locations from Rotterdam to Houston to Singapore. Vopak traces its roots back to a time when the Netherlands was the wealthiest and most powerful country in the world, owing to its role as a center for shipping and trade with the Far East. The origins of Vopak lie in a company that was founded in 1616, by a group of porters on the docks of Amsterdam, for the purpose of loading and unloading ship cargoes. By 2000 Vopak was enjoying sales of €5.6 billion, with positions in shipping, chemical distribution, and port storage facilities. Its storage business was the most profitable. When Vopak’s profits suffered and its stock price came under severe pressure, plummeting from €25 per share in June 1999 to €12 in July 2002, the company took decisive action. It spun off everything but the storage business, reducing the sales volume of the company to €750 million. But Vopak did not stop there: It even sold some of its storage portfolio, further reducing its size. What was the result? Amazingly, the company’s market value increased beyond its original level, as the stock price rebounded to €30 in May 2006. Furthermore, the stronger, well-funded business began to grow again – both organically and through acquisitions and new port locations. During the first half of 2006, Vopak’s revenues grew by 17% and its earnings by 28%, in an inherently low-growth industry. John Paul Broeders, the chairman of the executive board, says, “Without shrinking first, we would never have created the resources, the management focus, and a stable platform to begin to grow again as we have.” Shrink-to-grow strategies are not an end in themselves, but they can pave the way for redefinition. These moves have a very high success rate when it comes to increasing a company’s value and liberating one of the cores to strengthen and grow, provided it’s given additional resources. Indeed, another three of our 25 case studies in successful core redefinition relied on this tactic: PerkinElmer, Samsung, and GUS.
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monopolistic practices in the diamond industry, recently redefined its core around consumer and customer relationships. De Beers, of course, had long-standing relationships with everyone in the industry. When its competitive landscape changed with the emergence of new rivals, De Beers leaders Nicky Oppenheimer and Gary Ralfe decided to make the company’s strong brand and its unique image and relationships the basis of a major strategic redefinition. The company liquidated 80% of its inventory – the stockpile that had allowed it for so long to stabilize diamond prices – and created a new business model. It built up its brand through advertising. It developed new product ideas for its distributors and jewelers, and sponsored ad campaigns to market them to consumers. As a result, the estimated value of De Beers’s diamond business increased nearly tenfold. The company is still in the business of selling rough diamonds, but its core is no longer about controlling supply–it’s about serving consumers and customers. Underexploited capabilities. Hidden business platforms and hidden customer insights are assets that companies already possess; in theory, all that remains is for management to uncover them and put them to work. Capabilities – the ability to perform specific tasks over and over again – are different. Any capability is potentially available to any company. What matters is how individual companies combine multiple capabilities into “activity systems,” as Michael Porter calls them, meaning combinations of business processes that create hard-to-replicate competitive advantage. IKEA’s successful business formula, Porter argued in his 1996 HBR article “What Is Strategy?,”can be traced to a strong and unique set of linked capabilities, including global sourcing, design for assembly, logistics, and cost management. An underexploited capability, therefore, can be an engine of growth if and only if it can combine with a company’s other capabilities to produce something distinctly new and better. Consider the Danish company Novozymes, now a world leader in the development and production of high-quality enzymes. When it was spun off from its parent corporation in 2000, Novozymes was still largely dependent on relatively low-tech commodity enzymes such as those used in detergents. Steen Riisgaard, the company’s chief executive, set out to change that, and the key was Novozymes’s underutilized scientific capability. Riisgaard focused the company’s R&D on the creation of bioengineered specialty enzymes. Its scientists worked closely with customers in order to design the enzymes precisely to their specifications. If a customer wanted to remove grease stains from laundry at unusually low temperatures, for instance, Novozymes would collect possible enzymeproducing microorganisms from all over the world, determine which one produced the enzyme closest to what was needed, remove the relevant gene, and insert the gene into an organism that could safely be produced at high volume. Riisgaard likens the process to finding a needle in a haystack, except that Novozymes uses state-of-the-art technology to single 74 Harvard Business Review
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Seven Steps to a New Core Business
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Define the core of your business. Reach consensus on the true state of the core.
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Assess the core’s full potential and the durability of its key differentiation.
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Develop a point of view about the future, and define the status quo.
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Identify the full range of options for redefining the core from the inside and from the outside.
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Identify your hidden assets, and ask whether they create new options or enable others.
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Use key criteria (leadership, profit pool, repeatability, chances of implementation) in deciding which assets to employ in redefining your core.
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Set up a program office to help initiate, track, and manage course corrections.
out the haystacks and accelerate the search. Such capabilities have shortened product development from five years to two and have set Novozymes apart from its competitors. Of course, a company may find that it needs to acquire new capabilities to complement those it already has before it can create a potent activity system. Apple indisputably capitalized on its strengths in design, brand management, user interface, and elegant, easy-to-use software in creating the iPod. But it also needed expertise in the music business and in digital rights management. Once it had those, Apple gained access to content by signing up the top four recording companies before competitors could and developing the iTunes Music Store. It also created a brilliantly functional approach to digital rights management with its Fairplay software, which ensures that the music companies obtain a highly controllable revenue stream. This combination of existing and new capabilities proved transformational for Apple. The highest form of capability development is to create a unique set of capabilities – no longer hidden – that can build one growth platform after another, repeatedly giving a company competitive advantage in multiple markets. Though difficult, this is a strong temptation; indeed, it has proved to be a siren song for many. But a few companies, such as Emerson Electric, Valspar, Medtronic, and Johnson & Johnson, have managed to avoid the rocks. A lesser-known example is Danaher, which only 20 years ago was a midsize company
with $617 million in revenues and almost all its business concentrated in industrial tool markets. Danaher developed a set of procedures whereby it can identify acquisitions and then add value to the acquired companies through the so-called Danaher Business System. The system has several phases and dimensions, including cultural values, productivity improvement, sourcing techniques, and a distinctive approach to measurement and control. It has allowed Danaher to expand into six strategic platforms and 102 subunits spanning a wide range of industrial applications, from electronic testing to environmental services. The company’s stock price has risen by more than 5,000% since 1987, outpacing the broader market by a factor of more than five. It’s somewhat maddening how the assets explored here – PerkinElmer’s undervalued business platform, Harman’s untapped customer insights, Novozymes’s underexploited capabilities – can be so obvious in hindsight and yet were so hard to appreciate at the time. Will you be any better able to see what is under your nose? One thing seems clear: Your next core business will not announce itself with fanfare. More likely, you will arrive at it by a painstaking audit of the areas outlined in this article.
companies had either gone bankrupt or been acquired, and another 130 had engineered a fundamental shift in their core business strategy. In other words, nearly six out of ten faced serious threats to their survival or independence during the decade, and only about half of this group were able to meet the threat successfully by redefining their core business. Why do so many companies face the need to transform themselves? Think of the cycle that long-lived companies commonly go through: They prosper first by focusing relentlessly on what they do well, next by expanding on that core to grow, and then, when the core has lost its relevance, by redefining themselves and focusing anew on a different core strength. It seems clear that this focus-expand-redefine cycle has accelerated over the decades. Companies move from one phase to another faster than they once did. The forces behind the acceleration are for the most part well known. New technologies lower costs and shorten product life cycles. New competitors – currently in China and India – shake up whole industries. Capital, innovation, and management talent flow more freely and more quickly around the globe. The churn caused by all this is wide-ranging. The average holding period for a share of common stock has declined from three years in
In 2004 my colleagues and I surveyed 259 senior executives around the world. More than 80% of them indicated that the productive lives of their strategies were getting shorter. The first step is simply to shine a light on the dark corners of your business and identify assets that are candidates for a new core. Once identified, these assets must be assessed. Do they offer the potential of clear, measurable differentiation from your competition? Can they provide tangible added value for your customers? Is there a robust profit pool that they can help you target? Can you acquire the additional capabilities you may need to implement the redefinition? Like the four essentials of a good golf swing, each of these requirements sounds easily met; the difficulty comes in meeting all four at once. Apple’s iPod-based redefinition succeeded precisely because the company could answer every question in the affirmative. A negative answer to any one of them would have torpedoed the entire effort.
A Growing Imperative for Management Learning to perform such assessments and to take gradual, confident steps toward a new core business is increasingly central to the conduct of corporate management. Look, for example, at the fate of the Fortune 500 companies in 1994. A research team at Bain found that a decade later 153 of those
the 1980s to nine months today. The average life span of companies has dropped from 14 years to just over ten, and the average tenure of CEOs has declined from eight years a decade ago to less than five today. Business leaders are acutely aware of these waves of change and their ramifications. In 2004 my colleagues and I surveyed 259 senior executives around the world about the challenges they faced. More than 80% of them indicated that the productive lives of their strategies were getting shorter. Seventy-two percent believed that their leading competitor would be a different company in five years. Sixty-five percent believed that they would need to restructure the business model that served their primary customers. As the focusexpand-redefine cycle continues to pick up speed, each year will find more companies in that fateful third phase, where redefinition is essential. For most, the right way forward will lie in assets that are hidden from view – in neglected businesses, unused customer insights, and latent capabilities that, once harnessed, can propel new growth. Reprint R0704D To order, see page 143.
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By examining the commitments people make to colleagues and customers, executives can figure out why work stalls and how to get it moving again.
Promise-Based
Management THE ESSENCE OF EXECUTION
Adam Niklewicz
by Donald N. Sull and Charles Spinosa MANAGERS HAVE A FULL SET of tools for translating strategy into action. They can redraw their organization charts, redesign their business processes, realign employee incentives, or build sophisticated IT systems to track performance. Nevertheless, critical initiatives stall, and important work goes undone. Emerging business opportunities fall by the wayside or, even worse, into the hands of more agile competitors. Execution fails for a variety of depressingly familiar reasons: Employees disengage because they don’t buy in to the company’s priorities; they become dissatisfied and unproductive.
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Functional silos hinder the coordination necessary for companies to seize new business opportunities. Matrix organizational structures obscure accountability for projects and initiatives. Indeed, execution becomes especially difficult when executives are charged with managing the activities not only of their direct reports but also of a far-flung network of suppliers, partners, knowledge workers, and colleagues in different time zones around the world. Managers cannot overcome these and other obstacles to execution by doing more of the same; instead, they must fundamentally rethink how work gets done. Specifically, they must acknowledge that a company is more than a bundle of processes or a set of boxes and lines on an org chart. At its heart, every company is a dynamic network of promises. Employees up and down the corporate hierarchy make pledges to one another – the typical management by objectives. Employees also make commitments to colleagues in other divisions and to customers, outsourcing partners, and other stakeholders. Promises are the strands that weave together coordinated activity in organizations. Most of the vexing challenges leaders face–improperly executed strategy, lack of organizational agility, disengaged employees, and so on–stem from broken or poorly crafted commitments. Executives can overcome some of their thorniest problems in the short term and foster productive, reliable workforces for the long term by practicing what we call “promise-based management”: cultivating and coordinating commitments in a systematic way.
Why Promises, and Why Now? Promise-based management builds on a tradition that extends back at least to the emergence of contract law in the Roman Empire. It draws on the tenets of speech act theory, a branch of linguistic philosophy that explores how people commit themselves to action through assertions, questions, requests, promises, declarations, and other speech acts. (See the sidebar “A Primer on Speech Act Theory.”) Promise-based management is particularly relevant to today’s executives as they increasingly specialize in their core businesses, divest noncore units, and outsource peripheral activities. It also helps executives to capitalize on business opportunities outside their core competencies and to engage and retain employees within a highly mobile workforce. Let’s examine each of these business challenges in turn. Increase coordination and collaboration. It’s fairly straightforward for managers to get things done when all the relevant people and resources fall within the same P&L or functional division. There is a clear hierarchy, and positional power motivates people to honor their promises – bosses
wield carrots and sticks. But the drift toward corporate specialization has been steady in recent years. Executives struggle to make things happen in matrix organizations or networks of loosely allied firms when the people they’re relying on don’t share their assumptions or objectives. A researcher in a pharmaceutical company, for instance, may define success as a breakthrough drug developed over decades. Meanwhile, an outside sales rep may focus on units sold in the short term, rarely looking beyond the next quarter’s quota. Well-made promises can help bridge the gap between such individuals, who may be literally and figuratively miles apart. The dialogues that are central to promise-based management allow people from disparate backgrounds to achieve a common understanding of what needs to be done. Promises also foster a mutual sense of personal obligation to deliver the goods. Increase agility. Companies with well-honed business processes usually do a good job of executing on high-volume, routine activities. However, those same processes can prevent firms from taking advantage of opportunities that fall outside their core capabilities – say, entering an emerging market, rolling out a large-scale IT system, or managing an ecosystem of partners to create and capture value. The very standardization that generates continuous improvements in traditional business processes limits companies’ flexibility – and agility matters. In a recent McKinsey survey on building nimble organizations, 89% of the more than 1,500 executives polled worldwide ranked agility as “very” or “extremely” important to their business success. And 91% said it had become more important for their companies over the past five years. Promise-based management can help organizations act more quickly and flexibly. When putting out a request for help with a project or an initiative, for instance, employees can cast their nets wide, within the organization and beyond, to find the right person for the job. Each party to the promise can establish terms to suit his or her specific circumstances and can renegotiate as new information comes to light or as priorities shift – and that’s much less cumbersome than reengineering a well-oiled business process. Because both sides have voluntarily agreed to the commitment – and have put their reputations on the line – they are likely to act with urgency and discipline. Increase employee engagement. Many managers attempt to rein in today’s fragmented workforce by creating rigid processes that dampen employees’ initiative and engagement. But organizations that engender well-made, reliable promises create a sense of community among workers – that is, people promise to do things because they buy in to the company’s overall mission and priorities and see their part in making things happen. Promise-based management empowers individuals to act like true entrepreneurs within the or-
Donald N. Sull (
[email protected]) is an associate professor of strategy and international management at London Business School in England. He has written or cowritten six other HBR articles, including “Managing by Commitments” (June 2003). Charles Spinosa (
[email protected]) is a group director at Vision Consulting, based in Dublin, Ireland. 80 Harvard Business Review
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A PRIMER ON SPEECH ACT THEORY Most executives prefer doing to talking, but they also spend between two-thirds and three-quarters of the workday in formal or casual discussions. So how do they get things done with words? Speech act theory – a branch of linguistic philosophy that explores how people use words to coordinate action – says that talking is doing. For centuries, philosophers viewed language as a tool for describing external reality. Sentences such as “It is raining” were considered true or false on the basis of how well they corresponded to real-world conditions. But in the 1950s, Oxford philosopher John L. Austin argued that many statements are intended to get things done rather than describe reality. When an umpire calls a strike, a military officer issues an order, or a supplier promises to provide a service, that individual is not describing reality but changing it through his or her utterances. Austin argued that speech always falls somewhere along a wide spectrum between purely descriptive statements, such as scientific equations, and purely active statements, such as a priest’s declaration that a couple is married. University of California philosophy professor John Searle later introduced a taxonomy of speech acts based on the roles that different statements play in getting things done. Commis-
ganization–to spot opportunities, assemble the resources required to seize those opportunities, and adjust on the fly. Within the bounds of the firm’s objectives, employees can own and run their own personal networks of promises. This sense of ownership, when coupled with wide latitude in managing the negotiations around individual promises, dramatically increases employees’ engagement and therefore boosts overall performance. Although promises are critical to business success, too often they fail in practice. To a large extent, these breakdowns result from managers’ and employees’ imperfect understanding of how to make effective commitments.
Conversations for Commitment A promise is a pledge a provider makes to satisfy the concerns of a customer within or outside an organization. For our purposes,“customer”and “provider”refer to roles, not individuals, and these roles can vary depending on the situation. The CIO, for example, is a customer when requesting financial data from the CFO or soliciting a commitment from a subordinate. But she is a provider when supplying technical support to the finance department or making promises to her boss.
sives bind the speaker to a future course of action and include not only promises but also offers (I will do this if you accept) and counteroffers (I can’t do that but could do this). Directives attempt to induce the listener to do something; they include entreaties, requests, and commands. Declarations are authorized pronouncements that change the state of affairs in the world, as when a boss fires a subordinate. Expressives commit the speaker to feeling a certain way about the current state of affairs, as when someone apologizes for doing something. Assertives commit the speaker to a truth and imply future actions consistent with it. Searle’s student Fernando Flores argued that most corporate conversations are waylaid by attempts to unearth absolute truths that everyone can agree on and that will produce a clear agenda for all to follow. Like philosophers, Flores argued, managers have been seduced by the belief that talking is about describing rather than doing. Requests and promises are the basic units of coordination in commercial organizations, and assertives should be used primarily to clarify those requests and promises. Consciously or not, managers (through their utterances) create an intricate web of requests, commitments, assertions, and declarations that affect how people in their organizations act.
A promise rarely occurs in isolation: In order to deliver on a promise, a provider must solicit and oversee a network of supporting commitments from colleagues, subordinates, partners, vendors, and so on. Having to weave this web of pledges makes it that much more complex for the provider to deliver the goods and underscores the importance of managing commitments effectively. People often take a legalistic view of promises, defining them according to the terms of a deal, much as lawyers might focus on specific clauses in a contract. More important than the actual content of a promise, however, are the discussions that give it life. Both sides must explicitly thrash out what the customer wants and why, how the provider would go about satisfying the request, and any constraints or competing priorities that could derail fulfillment of the promise. Specifically, the customer and the provider should rigorously go through three phases of conversation to develop and execute an effective promise. The first is achieving a meeting of minds, which is easier said than done. This phase typically starts when the customer requests something from the provider. The two parties will have different takes on what should be done to fulfill the request, why, how quickly it can be done, and which resources should be used. Because of divergent worldviews – across divisions, companies, hbr.org
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countries, and languages – people often end up talking past one another. The customer and the provider must therefore sit down and explore the fundamental questions of coordinated effort: What do you mean? Do you understand what I mean? What should I do? What will you do? Who else should we talk to? The customer and the provider should strive to obtain a common and realistic understanding of what it will take to satisfy the customer, possible obstacles to delivery, and what the customer can do to help if difficulties arise or other priorities compete for the provider’s time and attention. This phase of discussion concludes when the provider makes a promise that the customer accepts. In the next phase – making it happen – the provider executes on the promise. Regardless of what the provider may think, now is not the time to take the phone off the hook. Conversation is more critical than ever. Even well-crafted promises remain fragile, susceptible to shifts within the organization or in the broader business environment that prompt executives to reshuffle priorities and reallocate resources. In light of such shifts, the customer and the provider
The Five Characteristics of a Good Promise In more than a decade of research on commitments, we’ve asked hundreds of managers to evaluate the quality of promises made within their organizations. We’ve asked them what percentage of all commitments made to them they could actually rely on. The typical response is about 50%. When promises are unreliable, managers waste a lot of time checking progress, exerting political pressure, or duplicating work. Organizational efficiency and effectiveness suffer. If managers and employees understand how to solicit and make good promises, they can minimize this kind of friction. More important, they’ll be able to overcome the execution challenges thrown at them. We’ve found that well-made promises share the following five characteristics. Good promises are public. Promises that are made, monitored, and completed in public are more binding–and therefore more desirable – than side deals hammered out in private. When employees make promises out in the open, in front of their peers and bosses, they can’t conveniently forget what they said they would do, recall only a few conditions of a promise, or back out of an uncomfortable commitment
Conversations should comprise offers, counteroffers, commitments, and refusals rather than endless assertions about the state of nature. will need to continue interpreting and reinterpreting the promise. Indeed, if the provider realizes he cannot satisfy the promise he made to the customer, he should immediately renegotiate the terms of delivery. Likewise, the customer is obliged to initiate renegotiations if her priorities or circumstances change in ways that affect what she has asked the provider to do. This phase ends when the provider declares the task complete and submits it to the customer for evaluation. In the final phase – closing the loop – the customer publicly declares that the provider has delivered the goods (or failed to do so). Closing the loop gives the customer and provider a chance to offer each other feedback on how they could work more effectively in the future, thereby building continuous improvement into the quality of other promises they make. Note that the customer and the provider must come not only to a meeting of minds but also to a common purpose. A provider may be reluctant to enter into a commitment for good reasons–such as keeping her options open and protecting her reputation for delivering the goods. It’s critical that conversations about what to do go hand in hand with discussions about why it matters for both sides. In their haste to get things done, many managers rush through these important dialogues or skip them altogether. 82 Harvard Business Review
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entirely. Nor will they want to, in all likelihood: Psychologists have found that most people strive to make good on declarations they’ve made in public. After all, their reputations for competence and trustworthiness are on the line. A good example of the power of public promises comes from Royal Bank of Scotland. In the past decade, RBS has moved from the number two bank in Scotland to one of the top ten banks in the world. It broke into the big leagues through its 2000 acquisition of England’s NatWest, a bank three times its size. RBS did not make the first or the highest bid for NatWest, but it won the prize by promising to improve the target company’s operating performance. RBS didn’t make vague statements about projected synergies or scale efficiencies; instead, its leaders publicly promised to deliver on 154 specific initiatives that, combined, would grow revenues by £390 million and cut costs by £1.2 billion. Moreover, RBS pledged that its managers would take personal responsibility for delivering on those initiatives. A promise made in public should remain public throughout the life of the commitment. The managers at the Brazilian brewer AmBev each year publicly promise to accomplish five individual goals, all of which are linked to the company’s overall objectives. They pledge to hit target numbers for, say, increasing company margins, improving service levels, or cut-
ting costs. The managers’ performance against these stated objectives is tracked weekly, and the data are posted in the office for all to see. The resulting culture of transparency and execution has helped propel AmBev from the number two brewer in Brazil to the largest brewer in the world (by volume) through InBev, its joint venture with the Belgian company Interbrew. Good promises are active. In many organizations, customers hurl requests at providers like paperboys cycling through a neighborhood chucking newspapers onto doorsteps. Providers catch the requests, throw them on a pile, and go back to work. Requests like these rarely elicit good promises. As we discussed earlier, negotiating a commitment should instead be an active, collaborative process. Misunderstandings will inevitably occur when providers and customers come together from different disciplines, business units, organizations, or countries, or when they are pursuing a novel initiative. Even worse, when an organizational promise is broken, people often believe that the other party has acted in bad faith. Business unit managers complain about the idiots in IT, while software engineers grumble about managers who don’t know what they want. No one gets the benefit of the doubt, and every miscommunication is interpreted as further evidence of evil intentions. This downward spiral of distrust poisons relationships and impedes performance. In such situations, probing discussions can unearth the different assumptions customers and providers are making. In many organizations, the active negotiation of a promise turns into an exploration of multiple assertions and scenarios, leading everyone to engage in time-consuming rebuttals and “gotcha” questions designed to demonstrate the inquisitor’s cleverness rather than get closer to a good promise. These discussions often start out productively but stall when the participants seek complete certainty before hammering out a deal. The top executives of one biotech firm were caught in exactly this trap. The senior team consisted of brilliant scientists who spent all their time trying to prove they were right. The discussion was insightful and erudite, but in the end nothing got done. Active conversations should comprise offers, counteroffers, commitments, and refusals rather than endless assertions about the state of nature. In the biotech company, the
senior executives eventually agreed to make clear requests of one another and provide only the background information necessary to flesh out those requests for potential providers. (One of the executives was tasked with interrupting those who went overboard explaining their rationales.) Potential providers were allowed two rounds of questioning for clarification. They were then required to get back to the customer within 48 hours with a refusal, a commitment to act, or a counteroffer. In a matter of weeks, the team’s discussions shifted from endless debates about reality to clear requests for action and promises to deliver. Good promises are voluntary. In many organizations, people feel compelled to comply with each and every request in order to be seen as team players, please their bosses, or avoid looking like jerks. For instance, in the past, employees at General Motors made liberal use of the “GM nod” – a polite yes to every request. But when the response to every request is yes, what does it really mean? It might mean “yes”– but it might mean “no” or “Is it time for lunch yet?” or “I have a pulse.” hbr.org
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The most effective promises are not coerced; they are voluntary. The provider has viable options for saying something other than yes. Contracts signed under duress are not binding in a court of law. Similarly, psychologists have found, people assume little personal responsibility for promises made under threat (although they may comply out of fear). By contrast, people feel deeply obliged to follow through on a promise if they exercised free will in making it. While providers shouldn’t be expected to fulfill every request, they also cannot be allowed to avoid making promises. Instead of automatically saying no, a provider can respond to a customer’s request with a counteroffer–for instance,“What you’re asking is not possible, but this is what I can do for you.” A thoughtless yes and a reflexive no are both passive responses to a customer’s request, but a counteroffer signals the provider’s active interest and voluntary engagement in helping the customer succeed. Senior executives must therefore give providers the space to decline customers’ requests or to make counteroffers. An executive in one information technology company we
A large hydroelectric engineering joint venture we worked with recognized the need for clarity of organizational promises and created a system for making sure the lines of communication stayed open between customers and providers. From its inception in 2000, Voith Siemens Hydro Power Generation battled upstart Chinese and Indian manufacturers at the low end of the market and established rivals, including GE and Alstom, at the high end. Voith Siemens decided that the best way for it to compete would be to offer its customers integrated solutions – entire power houses, including turbines, generators, and other components. To make this strategy work, however, managers needed to re-create the way employees in different disciplines, departments, and regions coordinated their activities. CEO Hubert Lienhard and his team initiated a program to improve the quality of commitments people in the organization were making. The engineers in the various disciplines, for instance, created and widely distributed a set of checklists and memo templates to be used as guides for making requests and promises. The checklists specified a half-dozen or
Renegotiation of promises may not always be pleasant, but it is critical. People on both sides must have the scope to recalibrate in order to seize emerging business opportunities. worked with gave his direct reports a set of cards in which most were marked “yes” or “counteroffer” and three were marked “no.” Using those cards, subordinates could decline three requests per quarter, provided they publicly offered a clear explanation why. Of course, managers should recognize that some team members may abuse an opt-in philosophy toward making promises. Keeping commitment-phobic employees on the team degrades the power of promises for everyone else. Good promises are explicit. Customers and providers should clearly acknowledge who will do what for whom and by when. The need for explicit negotiation increases in situations in which a new party replaces an established one, a company’s employees are culturally diverse, or an abstract construct (optimization or innovation, for example) gives rise to multiple interpretations. Implicit promises are quick and easy to establish but often result in misunderstandings. The customer and the provider must be explicit about their promise throughout its life cycle. Requests must be clear from the start, progress reports should accurately reflect how the promise is being executed, and success (or failure) should be outlined in detail at the time of delivery rather than after the fact, during a quarterly performance check-in or through annual 360-degree feedback. 84 Harvard Business Review
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so aspects of any request or promise that must be explicit to both parties. These included names, dates, underlying rationales for requests, the skills necessary to fulfill promises, and so on. The engineers also established periodic design freezes, during which design coordinators, referring to their checklists, would ensure that customers and providers maintain identical understandings of their requests, promises, and counteroffers. Explicit promises foster coordination and execution across an organization. They keep customers satisfied and providers on point. But that doesn’t mean the terms of a promise should be etched in stone; they can and will evolve as circumstances change, priorities shift, or new information emerges. Renegotiation of promises may not always be pleasant – it can be risky, time-consuming, and resource intensive – but it is critical. Customers and providers must have the scope to recalibrate in order to seize emerging business opportunities. Onset Ventures, in California, has cultivated more than 100 early-stage technology start-ups since 1984, and nearly 80% of them (compared with the industry average of about 20%) have gone on to higher rounds of financing. Like most venture capital companies, Onset stages its funding in rounds. At the start of each round, the entrepreneur and Onset negotiate a small set of explicit objectives to meet
APPLYING PROMISE-BASED MANAGEMENT Our research on commitments suggests that work stalls in organizations when people fail to make or deliver on promises. As the chart below indicates, managers who systematically cultivate and coordinate promises can jump-start critical projects and initiatives.
Obstacles to Getting Things Done Organizational silos hinder coordination.
Root Causes
Remedies
Requests and promises are honored within units but considered optional across units.
Publicly monitor progress of requests and promises made across units.
Requests and promises made across units are viewed as political struggles for power, breeding distrust.
Train employees to make and fulfill requests across the organization and to manage their networks of promises. Rigorously make and deliver on a succession of small but highly visible promises to rebuild trust. Explicitly link requests and promises to an overarching mission that all can agree on.
Employees are disengaged.
Employees fail to see the link between corporate strategy and their own activities.
Ensure that employees understand how their promises support the firm’s overall mission and priorities.
Employees feel they can’t decline or renegotiate requests, and they end up overcommitting.
Empower employees to decline unreasonable requests, make counteroffers, and renegotiate promises when circumstances change.
The organization lacks clear accountability.
Promises are made in private, progress isn’t tracked openly, and managers refuse to express their dissatisfaction publicly.
Ensure that promises are made publicly, track progress toward delivery in a transparent manner, and publicly declare satisfaction or dissatisfaction with the results.
The organization lacks agility.
Managers are slow to capture emerging opportunities because they try to come to complete agreement in their assessments and strive for perfect solutions.
Empower people to seek out the right providers within or outside the organization to secure the resources required for seizing emerging opportunities.
Publicly celebrate delivery on promises.
Introduce a “good enough” prototype and refine it over time through ongoing dialogue, renegotiating promises as circumstances and priorities change. Focus on honoring promises rather than checking off boxes to demonstrate compliance.
Stakeholders don’t trust executives to honor their commitments.
Customers, investors, NGOs, regulators, and other stakeholders call for cumbersome monitoring mechanisms and withhold their cooperation.
Make promises to stakeholders publicly; invite credible third parties to monitor progress on delivery.
The organization is trapped in the status quo.
Senior executives articulate a new strategy, but the firm continues in its old ways. Or the firm executes well in crisis mode but lapses into old routines once the crisis has passed.
Recognize that a change in strategy requires a new set of promises.
Rigorously make and deliver on a succession of small but highly visible promises to rebuild trust.
Articulate the promises necessary to execute the new strategy, and assign customer and provider roles where absent. Aggressively publicize when providers deliver on new promises.
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the commanding officer wants and why, while leaving the methods of implementation to the discretion of the subordinate officer closest to the situation on the ground. Each order includes an explanation–known as the commander’s intent– of why the objective matters to the commanding officer and to his superior as well. Business leaders can apply a similar discipline by explaining to providers why requests matter to them. They can gauge whether providers understand and support the overall rationales for a request by asking them to articulate in their own words why the request matters. •••
Promises are the fundamental units of interaction in businesses. They coordinate organizational activity and stoke the passions of employees, customers, suppliers, and other stakeholders. While they hold an organization together, they are as fragile as they are crucial. Individuals’ divergent worldviews and objectives tug constantly at the filaments of promises, and unexpected contingencies can tear precarious agreements. Leaders must therefore weave and manage their webs of promises with great care – encouraging iterative conversation to make sure commitments are fulfilled reliably. If they do, they can enhance coordination and cooperation among colleagues, build the agility required to seize new business opportunities, and tap employees’ entrepreneurial energies. If they don’t, they will lose out to rivals who do. Reprint R0704E To order, see page 143.
In the end, fate wasn’t totally unkind to Bill Davis.
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before moving on to the next round – for instance, develop a working beta product, sign five reference customers, and survey 100 potential customers to determine demand. The promises are ironclad within a round, but they are expected to change (and do) in subsequent rounds. Throughout the rounds, the entrepreneur and the VC firm reassess the situation and agree on new promises to accommodate shifting business needs. Good promises are mission based. Often, a customer will solicit a promise from a provider without offering any explanation for why the request matters. As a result, the provider infers that the request isn’t critical or that the customer doesn’t consider the provider important enough to deserve an explanation or smart enough to understand it. In any case, the outcome won’t be pretty. The most effective promises are mission based – that is, the customer explains the rationale for the request and invests time to ensure that the provider understands the mission. Sure, it can be cumbersome to explain where a division fits in the corporate strategy and where a particular request belongs within that division. But when providers understand why their promise matters, they are more likely to persist in executing even when they encounter conflicting demands and unforeseen roadblocks. They can also exercise creativity in addressing customers’ underlying concerns rather than blindly fulfilling the letter of the stated request. The U.S. Marine Corps, for instance, uses what it calls mission-based orders. These requests clearly articulate what
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O R N O T.
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Tools of the Trade Everywhere, people rely on their cell phones, e-mail, and digital assistants in the race to gather and transmit data, plans, and ideas faster and faster. Edward M. Hallowell “Overloaded Circuits: Why Smart People Underperform” Harvard Business Review January 2005
“I’m going to have you talk to Hargraves. Whatever he decides is OK with me.”
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Dave Carpenter, Leo Cullum, Mike Lynch, Harley Schwadron, and Mike Shapiro
“Uh, oh...something tells me my blog has been discovered.”
“Could you bring us some laser pointers?”
“And, for the global executive, a belt that accommodates the latest in high-tech communications hardware.”
“I hope you realize you’re interrupting my midmorning podcast.”
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THE
LEADERSHIP TEAM Complementary Strengths or Conflicting Agendas? SENIOR LEADERSHIP TEAMS whose members play complementary roles have been chronicled as far back as Homer’s oral history of the Trojan War. Though the Greeks were led in their quest for retribution against Troy by the powerful King Agamemnon, their victory would not have been possible without Achilles, the mighty warrior; Odysseus, the wily tactician; and Nestor, the wise elder. Each had a crucial, distinct role to play in the Greek high command. Achilles rallied the troops in
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by Stephen A. Miles and Michael D. Watkins
The Leadership Team: Complementary Strengths or Conflicting Agendas?
the heat of battle. Odysseus provided sound strategic advice during and between engagements. Nestor was a source of cool-headed counsel and diplomacy, mediating between the titanic egos of Agamemnon and Achilles. No one of them could have played all the varied roles necessary to guide the enterprise to victory; collectively they prevailed and won their place in history. Not much has changed at the top of large organizations in the past 3,000 or so years. Today, complementary-leadership structures are common and, in some cases, even institutionalized. Think, for example, of the chief executive officer and the chief operating officer, a pairing in which one leader is concerned mainly with external issues and the other focuses on internal matters. Even though most complex organizations are run, formally or informally, by teams of two or more, far more attention is paid to CEO performance and succession than to such issues as how complementary teams should be designed and what happens when their membership changes, especially during a succession process. While acknowledging the symbolic and actual importance of an organization’s ultimate leader, we need to expand our focus beyond this unitary position. The two of us have studied numerous complementaryleadership structures, often at very close range in consulting
team, the greater the potential for difficulties when it comes to a change of command. Fortunately, the board of directors and the CEO can avoid problems like these. With a good understanding of complementary leadership, they can create an effective team and ensure a stable and productive succession when the membership changes. While this article applies broadly to leadership teams, including relatively large groups such as the senior executive committee, it is particularly relevant to relationships involving the top two or three people in an organization.
The Promise of Complementary Leadership The pervasiveness of complementary leadership in large organizations results in part from the obvious differences between various roles – the CEO and the COO, for example, or the heads of different functional areas. Sometimes complementary-leadership teams are designed into an organization. (For a description of one firm’s experience with coleaders, see the sidebar “A Commitment to Complementarity.”) More often, however, such teams emerge from a process akin to natural selection, in which leaders – through a mixture of succession planning, unexpected opportunities, personal capabilities, and self-selection – over time come to perform complementary functions. These are distinct because of
One person can rarely assume more than one social role; it is difficult, for example, for a leader to be both feared and loved. relationships we’ve each had with companies (including several mentioned in this article). We’ve sought to understand why these structures emerge, what purposes they serve, and what challenges they create. Our study supports the case for complementarity: Such teams by their very nature are able to do things that individuals and noncomplementary teams can’t. At the same time, we’ve seen that with the benefits come risks. Because of members’ different strengths and styles, they may pursue incompatible ends or employ inconsistent means to achieve their goals. Succession also presents particular challenges. What happens when members of complementary teams move on, as they inevitably do? When succession looms, the logic of complementarity can get turned on its head – that is, the more complementary the
the fundamental limits on a single person’s ability to focus attention, acquire new capabilities, process information, and play diverse social roles. Indeed, the limitations of people’s information-processing capacity, which are well documented, make it impossible for one individual to manage a large and complex enterprise. Bruce Chizen, CEO of the software and technology company Adobe Systems, says of his own position,“The job is simply too big for any one person.” Bringing together two or more people with complementary strengths not only compensates for the shortcomings of each but also results in a team in which the whole is much greater than the sum of the parts. Complementary leadership generally manifests itself in four ways. Increasing demands on the CEO’s attention and
Stephen A. Miles (
[email protected]) is an Atlanta-based managing partner in the Leadership Consulting Practice of the executive search firm Heidrick & Struggles and a coauthor of “Second in Command: The Misunderstood Role of the Chief Operating Officer” (HBR May 2006). Michael D. Watkins (
[email protected]), based in Newton, Massachusetts, is a partner in the leadership development consultancy Genesis Advisers and the author of The First 90 Days: Critical Success Strategies for New Leaders at All Levels (Harvard Business School Press, 2003). 92 Harvard Business Review
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T
he benefits and challenges of running
an organization with leaders who play complementary roles can be seen at Goldman Sachs, where for decades many parts of the business – and sometimes the firm itself – have been headed by teams of two coleaders. The practice emerged almost by chance. In 1976, when the senior managing director died, the firm decided to fill his position with two partners and
A Commitment to Complementarity members of the management committee, John Weinberg and John Whitehead, who had worked closely together for years. “As friends, they were able to collaborate in a noncompetitive way,” recalls Jonathan Cohen, a Goldman Sachs advisory director who started at the firm in 1969. “It was natural for them to come together.” Weinberg and Whitehead ran the firm for eight years, and a precedent was set. Over time, the notion of coleadership became ingrained in the firm’s culture. Although no formal policy mandates that certain businesses be run by more than one person, when a position opens, Cohen says, “you look over the best people for the job, and often there are two with complementary strengths.” The practice has extended to the top. Before leaving to become U.S. treasury secretary in July 2006, chief executive officer Henry Paulson, Jr., worked in a close complementary
in such a complementary relationship,
fashion with then president and chief operating officer Lloyd Blankfein, who is now CEO. Earlier, Paulson headed a three-person team comprising himself and copresidents and COOs John Thornton and John Thain. The benefits of such arrangements are several. Coleadership can act as a restraint on the naturally strong egos found at a top-tier investment bank. It can help assimilate senior hires into the organization’s culture by pairing the newcomers with veterans of the firm. It also allows the leadership to be in two or more places at once – something that proved beneficial after the attacks of September 11, according to Steven Kerr, a former chief learning officer at Goldman Sachs who is now a senior adviser to the firm (and a director of Harvard Business School Publishing). At the time of the attacks, Kerr says, Paulson and Thornton were out of the country, but Thain was in New York and could thus oversee efforts to restore order at the firm. Perhaps the greatest benefit of coleadership is diversity of thought and talent. Decisions, while they might take slightly longer to reach, often are better because two different minds have been at work on them. Coleaders can play to their individual strengths. When Paulson and Blankfein worked together, Paulson,
Blankfein has had to work to raise his public profile and increase his involvement with clients since becoming CEO. The success of coleadership at Goldman Sachs reflects both personal and institutional commitment to the concept, Kerr says. He notes that when he reported to both Thain and Thornton, “I would say something to one, and ten minutes later the other would know it. If they had disagreements, and I’m sure they did, I saw none of that.” Cohen recalls that Weinberg and Whitehead set ground rules for the relationship early on, including an agreement that if one person felt very strongly about something, they both would head in that direction. Kerr says such semiformal agreements continue to this day. He and others often interview both members of a new leadership team, map each one’s view about who will be responsible for what, and then bring the two together to work out differences. Of course, not all relationships between coleaders succeed. After all, Kerr says, “people marry for love and half of them don’t make it – and these guys aren’t always in love when they are put together.” But the successes outweigh the failures, in large part because the firm has learned, sometimes painfully, from its mistakes over the past 30
who had spent his career building client relationships, was Mr. Outside; Blankfein, who had a background in the technical intricacies of financial instruments,
years. “If we had known what the full cost would be, maybe the practice would never have started,” Kerr says. “But that cost is now sunk. We’ve paid our dues.”
was Mr. Inside. Faced with the succession challenge that is often embedded
time have led to the fairly straightforward task complementarity. Faced with unmanageable levels of complexity and uncertainty, leaders divide management responsibilities into coherent blocks of tasks. As we noted above, one familiar split assigns one leader (usually the CEO) the job of managing the external environment, while her counterpart (often the COO) concentrates on internal management issues. Another way to divvy up tasks is to designate executives to take primary responsibility for different businesses or groups of businesses.
A second fairly clear-cut division of responsibilities is expertise complementarity. Before becoming general managers, executives usually get their training and experience in one or at most a few business functions, such as sales, marketing, finance, operations, or R&D. Although effective general managers acquire a good working knowledge of other functions, their original areas leave indelible imprints on them. The resulting differences in expertise among general managers naturally lead to the formation of teams with complementary expertise. One common configuration in consumer brands hbr.org
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companies is a CEO with a sales and marketing background and a COO with expertise in finance or operations. In technology companies, the COO often has deep technology expertise. For example, Chizen, Adobe’s CEO, has a background in sales and marketing, and Shantanu Narayen, the company’s president and COO, came up through the engineering and product ranks. A third, less sharply delineated type of synergy – what we call cognitive complementarity – involves differences in how individuals process information. It is extraordinarily rare, for example, to find leaders who are equally good at dealing with the big picture – creating and communicating compelling visions and crafting breakthrough strategies – and at driving execution through an intense focus on tactics, details, and follow-through. Both Aart de Geus, the founder and CEO of Synopsys, and Chi-Foon Chan, the company’s president and COO, have immense technical expertise – which is crucial to their credibility in their highest of hightech industries, electronic design automation. Despite this
pany as a “wolf seeking its prey”– in this case, a sheep called Pepsi. According to Warren Buffett, then a member of CocaCola’s board, Ivester would take it as a personal insult “anytime anyone swigs any beverage other than a Coca-Cola product.” Another division of roles occurs during times of wrenching internal change: One leader plays the “guardian,” the preserver of what is good in the organization, and another plays the “entrepreneur,” the destroyer of what is bad. (For a description of how these complementary roles have played out conspicuously in a political context, see the sidebar “Complementary Leadership and the Quest for Peace.”)
Mapping Team Complementarity The extent to which senior teams exhibit complementarity varies considerably. In some cases, leaders play complementary roles along all or most of the four dimensions we have described. In extreme instances, a deeply complementary relationship effectively becomes a kind of shared leadership.
How does a company avoid ending up with a group of leaders who, in the words of the adage, sleep in the same bed but dream different dreams?
overlap, however, they play very different roles: De Geus is the idea-a-minute visionary, while Chan stays grounded in realistic goals and the details of achieving them. Finally, leaders often play discrete and complementary social roles in organizations – a phenomenon we call role complementarity. One person can rarely assume more than one social role; it is difficult, for example, for a leader to be both feared and loved. Agamemnon could not inspire the troops as Achilles could, nor could Achilles formulate an overarching battle strategy as the king could. Rather than sacrifice one or the other of these powerful motivating forces, senior teams naturally evolve into configurations in which one leader provides the “pull” through rewards and inspiration and another provides the “push”through disciplined goal setting and sanctions. A common example of role complementarity is when one leader plays “diplomat” (similar to the traditional “good cop” role) and another plays “warrior” (the “bad cop”) in dealing with external constituencies. When Roberto Goizueta and Douglas Ivester were, respectively, CEO and COO of Coca-Cola, Goizueta was the urbane diplomat championing the Coca-Cola brand with such stakeholders as regulators and bottlers. Ivester, by contrast, described the com94 Harvard Business Review
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There are few examples of this so-called “two in a box” leadership structure. Bill Gates and Steve Ballmer at Microsoft are a well-known pair. After more than 20 years working together, plus a stint as hall mates in a Harvard undergraduate dorm, the chairman and the CEO augment their complementary areas of expertise (the creation of visionary technical architectures for Gates, hard-driving sales and marketing for Ballmer) with a shared passion for the company. The relationship will be tested as Gates continues his retreat from day-to-day duties and the recently named COO Kevin Turner – in the tradition of technology company COOs, an operationally focused former chief information officer (in his case, at Wal-Mart)–tries to create a similar if perhaps less intense dynamic with Ballmer. A complementary-leadership relationship that has survived the stress of several changes exists at Starbucks. In 2002, when Jim Donald joined the company from Pathmark Stores (where he had been president and CEO), he became the newest member of a “three in a box”leadership team that had previously been known as H2O – a reference to the first names of Starbucks founder and chairman Howard Schultz, head of international operations Howard Behar, and CEO Orin Smith. Sustaining this successful setup wasn’t easy.
Disk drive maker Seagate is run by a four-person team that successfully exploits expertise complementarity. CEO Bill Watkins, president and COO David Wickersham, and two executive vice presidents – Brian Dexheimer, who is in charge of marketing and strategy, and Charles Pope,who heads up finance– work well together because they draw on one another’s different functional strengths. As we will discuss, however, overlap in the expertise of Watkins and Wickersham initially threatened the team’s success.
The Perils of Complementary Leadership
Partly through his efforts to assure rank-and-file employees that they could count on continuity in the company’s leadership approach, Donald helped ensure the success first of the new three-person team (he took Behar’s place, creating a group in which Schultz was the visionary, Smith the administrator, and Donald the merchant) and then of a two-person version (he became CEO when Smith retired). Deeply complementary relationships like these are unusual; teams with some complementary aspects are quite common. Steven Reinemund, formerly the CEO and now the chairman of PepsiCo, had a strong partnership as COO with his CEO predecessor, Roger Enrico. When Reinemund became the chief executive, he fostered a similarly productive relationship with his ultimate successor, CFO Indra Nooyi, based mainly on task complementarity. Giving Nooyi the additional title of president while she was CFO, he let her take an increasingly public role with external constituencies, which was good preparation for her ascension to CEO but also a way to balance Reinemund’s operational strengths.
The advantages of complementarity – which, after all, are rooted in differences among leaders – don’t come for free. For one thing, teams risk squandering the potential benefits through the confusion that complementary leadership can spawn. “People, especially those lower down in the organization, would sometimes wonder when they should talk to me and when they should talk to him,” recalls Adobe CEO Chizen, speaking of his close complementary relationship with Narayen. Over time, employees came to understand the semiformal division of labor: Chizen was solely responsible for presenting financial proposals to the board and for strategy decisions, but beyond that the two shared duties, with Chizen focusing on marketing, brand, and customer issues and Narayen tackling product and operational matters. Another challenge involves achieving and sustaining agreement about organizational priorities. What happens, for instance, if Agamemnon decides to attack the city and Achilles stays in his tent? Given that the team will intentionally include people with significant differences – in terms of their assigned tasks, areas of expertise, mind-sets, or social roles – how does a company avoid ending up with a group of leaders who, in the words of the adage, sleep in the same bed but dream different dreams? The risk that team members will head off in different directions is all too real, especially as organizational environments become increasingly complex and ambiguous. A less obvious problem is that team members’ similarities in certain areas may interfere with the team’s overall complementarity. That is, if there is too much overlap in the Venn diagram depicting members’tasks, areas of expertise, mind-sets, or social roles, the problem may be more than redundancy: hbr.org
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In the overlapping areas, people may compete to do things their own way. This need not happen, of course. Recall how Aart de Geus and Chi-Foon Chan of Synopsys complement each other, even though they share deep technical expertise, because they enjoy the breathing room provided by their different cognitive roles: De Geus’s visionary approach and Chan’s down-to-earth way of processing information. But in such situations, conflict can overshadow what would otherwise be a productive relationship. Consider the recent history of the leadership at Seagate. CEO Watkins, who has a strong interest and expertise in operational matters, remembers working hand in glove as COO with former chief executive Steve Luczo, who focused primarily on corporate strategy. When Luczo became chairman and Watkins became CEO, Watkins filled the COO spot with Wickersham, an executive with a similar passion for operational excellence – a crucial element in a vertically integrated business that moves some 86 million parts in its supply chain every day. Initially, the relationship was somewhat strained.“When I first came into the CEO job, I wouldn’t give him responsibility for the part of the organization that oversees product
quality,” Watkins recalls. “Then I realized I was messing up, using my ownership of quality to hammer operations. It wasn’t so much an issue of his not being ready; it was an issue of my not being ready to give up responsibility.” As a result of Watkins’s decision to pull back from day-today operations and give Wickersham some freedom to maneuver, Seagate has been able to benefit from their complementary social roles–Watkins as the emotional keeper of the company’s culture, Wickersham as the data-driven executive who gets the job done.
The Four Pillars of Effective Complementarity
The risks inherent in complementary leadership can’t be avoided. But organizations can manage them by heeding the four pillars of alignment in successful complementary teams: a common vision, common incentives, communication, and trust. As a team’s complementarity increases, so does the importance of these pillars. The failure to craft and commit to a shared vision and supporting strategy is at the root of some notable senior team collapses. Ed Zander, who is now chairman and CEO of Motorola, says he knew it was time to leave his position as president and COO of Sun enior leadership teams whose members have complementary Microsystems – thus dissolving what had been a strengths abound in government as well as in business. The successful complementary relationship with then partnership between Israeli politicians Yitzhak Rabin and Shimon CEO Scott McNealy – when the two began to diPeres – and the way their complementary roles led to the 1993 verge in their visions for the company. “Scott and signing of the Oslo Accords – provides a classic example of comI had a really good relationship,” he recalls, “but I plementarity in a governmental context. could see us start to philosophically move apart – In the early 1990s, Rabin was prime minister and Peres was not in a negative fashion but in an honest disforeign minister of Israel’s Labour government. The two politicians agreement about the company’s priorities.” At were longtime rivals, representing the hawk and dove wings of that point, Zander says, it was clear the relationthe Labour Party. In ship would no longer be productive. the partnership, Rabin, Commitment to a common vision and strategy, a former general in the Complementary Leadership while necessary, will not be sufficient if members Israeli Defense Forces, of the team have competing incentives. People and the Quest for Peace played the role of won’t work in concert and make sensible trade“guardian,” preserving offs if their rewards depend on achieving different national identity and ensuring the country’s security. Peres, who goals. For example, one member of the leadership lacked the credibility associated with military service and was team might be pursuing short-term results while viewed as soft on security, acted as the “entrepreneur,” developanother is focusing on the long term. Or one ing new approaches to engaging with the Palestinians and aggresmight be rewarded for driving top-line growth sively pushing those ideas forward. Together, the two men did and another for driving earnings growth. Their what neither could have done alone, pursuing and completing differing incentives could lead them to take acnegotiations that laid the foundation for the Oslo Accords, for tions that, while advancing their individual goals, which the two, along with Palestinian leader Yasser Arafat, reare suboptimal for the business as a whole. ceived the Nobel Peace Prize. Making complementarity work also requires After the assassination of Rabin in 1995, Peres’s history of playoutstanding coordination and communication ing the entrepreneur role hindered his candidacy for prime minisamong the team members. The deeper the comter when he ran against Benjamin Netanyahu: Many Israelis worplementarity, the denser this communication ried that he couldn’t step into Rabin’s role as trusted guardian of must be. The most effective complementary the nation’s future. teams are in near constant communication and have well-established protocols so that potential
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divergences can’t take root.“The danger is that you’ll get into something like a parental situation, where people in the organization think they can go to one person to get an answer that the other one won’t give them,” says former PepsiCo CEO Reinemund, recalling his relationship with then CFO and president Nooyi.“I’m sure it happened occasionally. But on big issues it never happened because Indra and I were connected enough to avoid it. People knew we talked all the time.” Jim Donald, the Starbucks CEO, puts it another way: “I bug the heck out of Howard Schultz just to stay in touch.” The fourth pillar, which may be the most crucial for a team’s stability, is trust among team members. Common vision, aligned incentives, and close communication enable purposeful and powerful cooperative action, but they have no value unless team members know that their counterparts can and will further the best interests of the enterprise. Members of successful complementary teams describe the phenomenon in different ways. Reinemund says it involves not questioning your teammates’ motives and caring about their personal well-being in a way that “supersedes day-today results.” Donald talks about giving others on the team “a free runway” to do what they need to do. Watkins characterizes trust as “knowing that when things hit the fan, we will try to do the right thing for Seagate – and that we’ll stick together to get it done.” This kind of trust yields tremendous benefits.“If you have it, you can screw up, as we all do on a regular basis, and still make things work,” says Reinemund. “Without that, when the first tough storm comes, things just fall apart.” According to Watkins, his team’s deep confidence that it ultimately won’t make many mistakes “gives us the freedom to have some pretty good conflicts before agreeing on a plan.”
The Challenges of Succession Making complementarity work is a challenge even for teams that are intact; when the composition of the team is altered, especially in the case of leadership succession, the challenges become more substantial. Researchers have repeatedly identified succession as one of the most worrisome issues for corporate boards, partly because it’s one of the areas in which companies most frequently fall short. With a complementaryleadership team, succession is particularly problematic and becomes more so the more extensive the team’s complementarity. The classic case is when a COO or president who has worked in a complementary fashion with the CEO moves into that top role. Consider Ivester’s move from COO to chairman and CEO at Coca-Cola in 1997, when Goizueta died unexpectedly. As we have described, the two men had an unusually effective complementary relationship. Many predicted continued success for Ivester: Fortune dubbed him the “prototype boss for the 21st century.” Coca-Cola’s board confirmed his accession to CEO in a 15-minute meeting.
But the successful pairing of Goizueta and Ivester contained the seeds of Ivester’s downfall. An accountant by training, Ivester had spent nearly 20 years rising through the ranks to become Goizueta’s right-hand man. He had been named Coca-Cola’s CFO in 1985, at age 37, and made his mark in 1986 by orchestrating the successful spin-off of the company’s bottling operations. He also succeeded in his first operating role, as president of European operations, overseeing the company’s expansion into Eastern Europe in 1989. But Ivester failed as CEO. He refused to name a new COO, even when strongly pressed to do so by Coca-Cola’s board. Instead, he continued to act as a “super-COO,” maintaining daily contact with 16 direct reports. His extraordinary attention to detail, a virtue in finance and operations and an effective foil to Goizueta’s big-picture approach, proved to be a hindrance in his new position, preventing him from taking on the strategic, visionary, and statesman roles of an effective CEO. He made a series of mistakes, from the ham-handed treatment of European regulators ruling on Coca-Cola acquisitions to the belated acknowledgment of a festering racial discrimination suit in the company’s Atlanta headquarters. He had little chance of recovering from such setbacks because by the end he had alienated nearly everyone who might have saved him. Ivester’s unfortunate story vividly illustrates why leadership succession can be so risky in complementary teams: The strong leadership traits that make someone a successful member of a complementary team may limit his ability to adapt to a different role–because of his inherent capabilities and because of what the organization, comfortable with him in his old role, will permit him to do in his new one. For example, making the move from COO to CEO requires substantial changes in the four dimensions of complementarity we described earlier. To succeed in the chief executive role, Ivester needed to shift his focus to different tasks (by spending more time on external matters), draw on different areas of expertise (particularly sales and marketing), exercise different cognitive capacities (particularly the development of vision and strategies), and play a new social role in the organization (one that would build personal relationships and trust). He made a common but disastrous mistake in his failure to “promote himself”into the role of CEO, continuing instead in what was essentially a COO role camouflaged by a new title. Of course, the magnitude of the leap to CEO would tax anyone’s adaptive capacity. While hard work may help someone learn new tasks or acquire new expertise, the ability to adopt new cognitive capabilities or play different social roles may be limited by who that person is. To use an analogy from the theater, some actors have a narrow range – they are extremely effective in a few types of roles – while others can perform a broader repertoire. But even the most versatile actor can’t change her inherent talents, and few can convincingly play all roles, just as few executives will be able to excel in all leadership positions. hbr.org
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The Leadership Team: Complementary Strengths or Conflicting Agendas?
Even if a leader has a tremendous ability to adapt to a new role, he still has to deal with the legacy of the roles he has previously played in the organization. Just as audiences may not like to see a typecast actor in a different kind of role, people in organizations may hold entrenched attitudes that make it extremely difficult for someone to undertake a major role shift. Having played the bad cop to Goizueta’s good cop for so many years, Ivester was typecast as the hard-edged disciplinarian. Even if he had been capable of playing a softer, more diplomatic role at Coca-Cola, it is far from clear that people in the organization would have accepted the transformation.
Ensuring a Smooth Transition Companies that come to understand the potential pitfalls of complementary leadership teams should not, of course, give up on complementarity and stock their leadership pipelines with clones. Rather, the challenge is to enjoy the advantages of complementarity without sowing the seeds for disaster during succession, particularly to the top job. An organization’s board of directors and CEO can take various steps to manage the short-term benefits and longer-term risks of complementarity. The first step is to recognize the inherent tension between creating complementary leadership teams and laying the foundation for smooth succession processes. This can mean, for example, deciding to put in place a COO whose experience and talents partially overlap with those of the CEO and who therefore might make the transition into the top role more easily. Another option is to extend the life of the complementary CEO-COO relationship by appointing as COO someone who will take time to grow into the number two job. Giving that person a stretch assignment will ensure that he has time not only to learn his own job but to prepare, with the CEO’s help, for the top position. More-formal procedures can also help. The board can, for example, broker an explicit agreement between the CEO and the COO outlining the gradual transfer of responsibilities. The COO can take increasing responsibility for dealing with external constituencies such as analysts, shareholders, and the press; become more involved in strategy setting or meetings with key customers; or assume greater responsibility through a seat on the board or a new set of reporting relationships. Many of today’s successful complementary leaders – like Jim Donald at Starbucks, Bill Watkins at Seagate, and Indra Nooyi at PepsiCo – have benefited from that kind of preparation as part of an earlier complementary team. Such a grooming process requires a CEO who is willing to transfer power in both real and symbolic ways. “It became clear to me that certain aspects of the CEO job were not my strong suit,”says Chizen at Adobe.“Yet these were things that Shantanu was really good at. He wanted more responsibility, and I was more than happy to give it to him. He continued to do a good job as COO, which confirmed for me that I could 98 Harvard Business Review
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safely give him even greater responsibility.” Jim Donald, speaking of the responsibility he was given as Starbucks COO when Orin Smith held the top spot, says, “If you don’t have a great number one, you are not going to have the latitude and longitude to do what it takes to become a great number one yourself.” Of course, handing over the reins is not easy: Consider Watkins’s reluctance to turn over responsibility for quality at Seagate when Wickersham became COO. One way to sidestep the challenges of a complementary COO’s transforming himself into a CEO is to ignore the traditional definitions of the two positions – that is, don’t worry about which roles the CEO and the COO play as long as they maintain the logic of complementarity. Such a “role-swapping” strategy could mean, for example, that a COO who is strong at playing the “insider”role would continue to do so after becoming CEO, complemented by a new COO who would play the “outsider” role. We saw a version of this strategy at PepsiCo, where CFO Nooyi continued to deal with external constituencies, such as analysts, when she took on the role of president, while CEO Reinemund continued to play to his operational strengths. But that kind of approach won’t work in all situations. The CEO must be comfortable sharing the spotlight with the second in command, and important stakeholders – investors, analysts, the media – must accept the division of responsibilities. Instead of trying to manage the sometimes difficult ascension of the number two executive to the top position, a board can orchestrate a complete changing of the guard, selecting a highly complementary CEO-COO pairing–or even a trio of leaders – and then replacing both people when the time comes. That was the pattern for several generations of top executives at Johnson & Johnson. From 1976 to 1989, chairman and CEO James Burke shared leadership responsibilities with president David Clare. In 1989, the two passed the baton to Ralph Larsen, who became chairman and CEO, and Robert Wilson, who became president. They, in turn, passed it in 2002 to William Weldon, who became CEO and was also the worldwide chairman of the pharmaceuticals group, and James Lenehan, who was worldwide chairman of the medical devices and diagnostics group. When Lenehan interrupted this orderly succession process by resigning suddenly in 2004, the company expanded its complementary-leadership structure, appointing in the next year both CFO Robert Darretta and global chairman of pharmaceuticals Christine Poon to the position of vice chairman in the office of the chairman, a move that made them part of a new complementary team headed by Weldon. Whatever the mechanism, the aim is to realize the enormous potential of complementarity in senior leadership teams while avoiding the perils that come with it. The stakes in getting this right could not be higher. Reprint R0704F To order, see page 143.
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An inside look at how GE has worked to build a culture that sustains both high performance and high integrity
Avoiding Integrity Land M!nes by Ben W. Heineman, Jr.
S THE CHIEF LEGAL OFFICER AT GE for nearly 20 years, I was part of the senior management group that sought to fuse high performance with high integrity. No one was more demanding about hitting financial targets than Jack Welch or his successor, Jeff Immelt. But both knew that employees up and down the ranks face the temptation to make the numbers by fudging the accounts, cutting corners, or worse. Unconstrained, these internal pressures – made more intense by corruption in emerging markets, demanding customers, and unscrupulous competitors – can lead to corrupt capitalism. The changes in laws, regulations, stakeholder expectations, and media scrutiny that have taken place over the past decade can now make a major lapse in integrity catastrophic. Fines, penalties, and settlements are counted in the hundreds
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Sally Wern Comport
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Avoiding Integrity Land Mines
of millions (or billions) of dollars, not the millions or tens of millions of a decade ago. And worse, in some cases (as Enron and Arthur Andersen demonstrated) – a company can actually implode. Performance with integrity has been a central concern of governance reforms but, almost exclusively, the focus has been on the board’s role. Certainly, when the rot is at the top, governance checks and balances must come from the board of directors. But, for GE, as for most companies, governance is not solely about the board’s selection and compensation of the CEO or about its periodic oversight of major risks and
ically not only because they are afraid of being caught and punished but because the company’s norms and values are so widely shared and its reputation for integrity is so strong that most leaders and employees want to win the right way. By forcefully communicating guiding principles, company leaders help create that culture. But it’s also necessary to implement a set of practices that have real consequences and use significant resources to drive the message home. In our efforts, we recognized that we weren’t about to repeal human nature, but by learning from our missteps we could continually try to reduce improprieties to a minimum. Based
A thunderous message is sent when a senior leader is removed not for failing to follow key rules but for failing to create the right culture. opportunities. The more pervasive governance issue is the responsibility of the CEO on down: How does top management drive a demanding performance culture built on unyielding integrity throughout a complex enterprise? The integrity land mines that can blow up in the face of most companies are all across the globe, not just in the corner office. It is now time to shift this debate about corporate integrity from board oversight of the CEO to how the CEO and top company leaders can most effectively fuse high performance with high integrity at all levels in a challenging, fast-changing, and at times hostile world. This is a grinding, complex, dayin, day-out task that is difficult in the best of circumstances to do well. GE has certainly learned its own hard lessons along the way, sometimes dealing with integrity violations that went unnoticed and unreported for far too long. This article highlights how GE has tried to build a culture that fuses high integrity and high performance using a series of core principles and key practices. In it, I outline how the company has attempted continually to improve its systems and processes and to build a culture where executives and employees are motivated to do the right thing, even in GE’s famously high-pressure business environment.
Core Principles and Key Practices Ultimately, it is a company’s culture that sustains high performance with high integrity. Leaders and employees compete ferociously and meet tough economic goals lawfully and eth-
on my experience at GE and many discussions I’ve had with executives at other multinationals, I believe the following principles and practices–especially as they interrelate and reinforce one another – are essential to creating a high performance–high integrity culture. Demonstrating consistent and committed leadership. In no area of corporate life is leadership commitment more important than in creating an integrity culture. And nothing is more effective in manifesting that commitment than a seamless consistency between leaders’ personal attributes, their public and private statements, and their direct and indirect actions. Companies are preternaturally attuned to leadership hypocrisy. The stirring call for performance with integrity at the large company meeting can be eroded by the cynical comment an executive makes at a smaller meeting, by the winks and nods that implicitly sanction improprieties, by personal actions (dishonesty, lack of candor) that contradict company values. It is fundamental: A culture of high standards for employees requires high standards from the CEO and the senior operating and staff officers. There is no more important task for the CEO than demonstrating that the top executives will be held just as accountable for lapses in integrity as they are for missing their numbers – and that the generals will be held to higher standards than the troops. Jeff Immelt began and ended each annual meeting of GE’s 220 officers and of its 600 senior managers by restating the company’s fundamental integrity principles: GE’s business success is built on our reputation with all stakeholders for lawful and ethical behavior. Commercial consid-
Ben W. Heineman, Jr., is a distinguished senior fellow at Harvard Law School’s Program on the Legal Profession, in Cambridge, Massachusetts; a senior fellow at the Belfer Center for Science and International Affairs at Harvard’s Kennedy School of Government; and a senior counsel to the law firm of WilmerHale. From 1987 to 2003, he served as GE’s senior vice president and general counsel. From 2004 until his retirement at the end of 2005, he was GE’s senior vice president for law and public affairs. 102 Harvard Business Review
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erations never justify cutting corners. Upholding this standard is the specific responsibility of the leaders in the room. For any serious lapse, the warning was clear: “One strike and you’re out.” GE’s senior managers and officers knew the CEO was serious because, as it turned out, every year or so, a senior manager who had knowingly or recklessly violated company rules for commercial or personal reasons was terminated. For example, in one emerging nation, an individual was let go for failing to conduct required diligence on shady third-party distributors that had a reputation for improper payments. People were dismissed even when the business consequences were painful–when, for example, the local national in question had extensive knowledge and experience in a tough market. An even more thunderous message is sent when a senior leader is removed not for failing to follow key rules but for failing to create the right culture. During my time, there were two seminal examples. Both involved acts hidden for a number of years that were clearly understood by many in the respective business units to be suspicious or wrong but had been tolerated to keep difficult customers satisfied. The first involved fraud in a Middle East procurement contract financed by U.S. government funds in the late 1980s and early 1990s. The second, early in this decade, had to do with acquiescing to an Asian customer’s request that GE falsify supplier documents included in regulatory submissions. In both cases, when the lapses came to light, the first thing top GE leaders did was to determine the facts, resolve the matter with the governments, fix the broken systems (specifying how to deal with improper pressure, instituting better process checks), and discipline lower-level employees clearly engaged in wrongdoing. But the hardest issue to resolve – and one of the most important integrity questions we ever faced – was how to sanction the leaders of the respective business units. They had no personal knowledge of the acts, and they were widely seen as “good guys” by senior managers. But in the end it was decided that they had failed because improprieties within their organizations had gone unreported for too long (more than five years) and had involved too many people (20 to 30). At the core of these major compliance failures was a deepseated cultural failure. Accordingly, both executives were asked to leave the company. The message was clear: Top leaders indifferent to an integrity culture would be gone. Going beyond formal financial and legal rules. Rigorous compliance with the financial and legal rules of specific na-
tions is the foundation of integrity in a multinational company. But on some core matters, that isn’t good enough. Instead, for a number of reasons, the organization must adopt a global standard that is higher than the financial or legal rules in place in particular jurisdictions. A simpler, clearer standard for conflicts of interest, for example, is easier for employees around the world to understand and follow, despite the vagaries of their location. Global standards spelling out how to prevent money laundering increase employees’ effectiveness in assessing customers. Ethical sourcing practices (checking suppliers’ environmental record and working conditions in addition to their technical qualifications and financial health) address some objections to outsourcing like worker exploitation or environmental degradation. Establishing single, global standards that anticipate trends in law and government policy–for, say, consumer finance disclosure and collection practices – may be not only simpler but also wiser in order to reduce future risk. hbr.org
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Companies can best decide when and where to impose global standards by identifying which issues are most important for key stakeholders. For example, higher governance standards or rebalancing short- and long-term debt might be the most important issues for shareholders and creditors. New facilities around the world built to global – not just local – environmental standards might be critical to employees and communities where GE does business. Instituting the most rigorous of nondiscrimination rules across the globe might be an imperative for employees. Deciding when to adopt global standards is not some abstract, philosophical exercise requiring the services of a senior vice president for political and moral philosophy. It is a basic risk-reward analysis rooted in the company’s operations and culture. What is the cost (time, money, resources) compared to the benefit (simplicity, effectiveness, enhanced reputation with key stakeholders)? Immelt has formed a corporate risk committee of top officers, which meets quarterly. For each meeting, the CFO and general counsel develop an agenda that includes issues about global standards. The committee decides, among other things, whether a standard is needed and, if so, what that GE standard should be. Issues with significant operational or reputational implications, such as ethical standards for supplier qualifications, are vetted with the board. Elevating these issues to the highest levels is important: Such decisions are frequently based on judgment because the costs and benefits cannot always be compared quantitatively. They will often turn on an assess-
ment of the company’s enlightened self-interest. (See the sidebar,“The Business Case in Brief.”) Staying ahead of the sheriff. To update global standards and avoid ugly surprises, GE has sought systematically to gather information on financial, legal, and ethical developments. This task occurs at all levels of the company – from P&L centers to large business units to the CEO’s risk committee. The key is to present the findings on a regular basis, to make them part of a consistent business rhythm – which, in turn, ensures that the company makes timely decisions about whether to adopt new standards and practices. At various levels of GE, experts regularly scour media stories, proposed laws and regulations, specialized reporting services, academic papers, filed cases, and reported legal decisions to track early-warning signs and global trends in finance and law. For example, in reviewing the Enron, WorldCom, and Parmalat scandals, GE’s financial services arm recognized the emergence of an “aiding and abetting” theory, which was leading to huge liabilities (in the billions of dollars) in the financial services industry. Prosecutors and regulators were charging banks as “secondary wrongdoers,” alleging that they knowingly provided material assistance to customers who were engaged in tax or accounting fraud (“the primary wrongdoers”). As a result, GE’s financial services businesses have a significant effort under way to educate employees about the application of the aiding and abetting theory, to define red flags, and to institute new routines to prevent questionable actions.
The Business Case in Brief Conventional arguments against extensive efforts to fuse high performance and high integrity are that they cost too much, require too much management time, or lose deals, contracts, and procurements. But I believe a strong business case can be made for the significant advantages the efforts hold for corporations. The benefit of avoiding harm. The impact of recent scandals on corporations is eye-popping. Ask any business leader who has lived through the time, effort, expense, and distraction of a serious government investigation about the adverse effect on the company. Moreover, there is ample evidence to show that over the past decade, the
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ramifications of serious wrongdoing have increased dramatically. Integrity lapses can now have catastrophic financial consequences (liabilities in the hun-
and communities – also suffer serious, if not grievous, harm, leading to calls for ever more regulation. (Whether particular rules are necessary or cost-effective
dreds of millions or several-billion-dollar range for Citigroup, JPMorgan Chase, Adelphia, and Computer Associates; bankruptcy proceedings for WorldCom and Parmalat; and the ultimate penalty – collapse – for Enron and Arthur Andersen). A company’s reputation and
is a matter for public policy debates, but adherence is obviously required until rules are changed.) Affirmative benefits. Implementing uniform global standards can make it simpler for employees to understand
morale, which may have been built over decades, can be shattered in months. Corporate officers can be indicted and face jail time and severe personal financial penalties. Stakeholders – from shareholders to creditors to employees to pensioners to customers, suppliers,
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their responsibilities and therefore make adherence more efficient. What’s more, compliance with both formal rules and self-imposed global standards can create a deservedly strong company reputation for integrity that will complement and enhance a brand. That strong reputation, in turn, can help re-
GE has also systematically sought to identify ethical issues raised by the increasing chorus of voices in the stakeholder and NGO communities and to prioritize them according to either intrinsic merit or amount of public attention they might generate. Sometimes, these voices make a strong point that leads to change. For example, in recent years, shareholder groups presented proposals stipulating that GE’s directors should be elected by a majority, rather than a plurality, of votes. The risk committee and then the board agreed. GE is careful, however, never to adopt sweeping codes of conduct often urged on companies by third parties (such as detailed lists of environmental precepts); it makes much more sense to consider specific changes one at a time in light of our history and our culture. A separate process for highlighting ethical issues – the socalled commonsense review – was instituted as a result of insurance broker Marsh & McLennan’s past difficulties in failing to disclose adequately that it was receiving contingent commissions when it was on both sides of some insurer/ insured transactions (a problem affecting other major brokers, too). There were those who claimed MarshMac’s incomplete disclosure of a potential conflict of interest was lawful. But in the light of day, there was little question that Marsh’s long-standing incomplete disclosure was a bad business practice. In annual legal and financial compliance reviews, GE now looks at its own ingrained business practices relating to customers, competitors, and suppliers, and asks not just whether they are legal but whether they are still rea-
cruit and retain high-performing employees. A meaningful performancewith-integrity culture can raise a company’s estimation in the eyes of investors, creditors, and rating agencies, which now, for purely economic reasons, have added integrity risk to their analyses of companies. For example, BP’s Texas plant explosion in 2005 and its Alaskan oil field problems in 2006 were not by themselves catastrophic for the company. But by raising serious doubts about BP’s overall safety and management systems, they drove down market cap by about 20% and have forced the early retirement of iconic CEO John Browne. A reputation for integrity can also differentiate a firm
sonable and ethical (for example, whether disclosure of interest rates on loans and credit card balances are hidden in credit-babble rather than expressed in plain English). Building standards into business processes. Who should own the job of fusing performance with integrity? A common business response is to assume it is the sole province of the finance and legal staffs. “I’m too busy with customers and product development and manufacturing and productivity and….” is a typical businessperson’s lament. GE addresses this problem, through the CEO’s repeated oral and written communications, by explicitly and unmistakably giving business leaders in the field the lead responsibility in their divisions for performing with integrity. And GE reinforces that message by building global integrity standards into business processes wherever possible. GE has sought, for example, to make plant managers and manufacturing leaders formally responsible for environmental, health, and safety issues in their divisions. For each facility in each business, quarterly reports track key parameters (spills, accident rates, notices of violation). These are rolled up into a master matrix that compares each plant with all the others, and the cross-business comparisons are sent to the CEO. Being in the bottom quartile is a great goad to improvement. Similarly, consumer finance leaders are charged with embedding legal and ethical requirements into the highly automated processes for selling (using scripts), making credit decisions (by instituting nondiscrimination protections), and collections (through random call monitoring). Sourcing
from competitors and help sales to governments in emerging markets that want to deal with a “clean” company and avoid taint to themselves. An integrity culture can, in the end, be a significant morale builder and spur to productivity for those who wish to serve, to use Jeff Immelt’s phrase, in a great and good company. The fundamental costs of systems, processes, and talented people focused on performance with integrity pale in comparison to the benefits, especially the benefit of avoiding catastrophic integrity minefields. Indeed, sound practices in areas like environment, health and safety, and consumer finance can simplify basic business pro-
cesses and make them more effective and less costly. Similarly, the cost of rejecting corrupt payments, deals, or contracts, in my judgment and experience, is far outweighed by the benefit of avoiding the risks of external exposure – which are especially consequential for transnational enterprises – and by the benefit of preventing internal corrosion. Certain actions, like ethical sourcing, are taken by business leaders in the enlightened self-interest of the company to enhance reputation or culture. Even though the benefits cannot be precisely compared to the costs, common sense tells us that reputation, like brand, is a significant corporate asset.
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leaders in individual businesses are responsible for finding, qualifying, and requalifying global suppliers not only under financial, technical, and quality standards but also according to the company’s detailed ethical-sourcing guidelines. They are held accountable both by the chief executive of their business unit and by the companywide sourcing leader, through corporate auditing. No business process is more important than conducting thorough due diligence on potential mergers and acquisitions according to the acquirer’s global integrity standards. GE has spent significant resources to make due diligence on integrity issues as robust and detailed as possible to minimize post-closing integrity surprises (like huge environmental costs or past criminal behavior by the target’s employees) that could blow up the underlying deal economics. This is important because regulators may hold acquiring companies accountable for the target’s criminal problems, and a best practice is for the target to resolve issues before the closing, if possible. Because such resolution may not occur, GE has also sought to make sure there is significant overlap between the diligence and acquisition-integration teams so that integrity issues flagged before the closing are dealt with promptly. Any delay would turn the target’s problem into GE’s problem. Encouraging finance, legal, and HR to be both partner and guardian. The financial, legal, and human resource functions,
at both the corporate and the business unit levels, have central responsibility for developing the tools, systems, and processes for preventing and remedying integrity violations. They also are a crucial part of the corporation’s basic checks and balances. But these functions – and especially the corporation’s chief financial officer, general counsel, and head of human resources – cannot be effective unless they are also deeply involved in helping to develop and execute commercial strategies. And there can be a fundamental tension between these dual roles of partner and guardian. CEOs need to accept this tension and encourage the top staff leaders to assume this dual role. Day to day, this may be easier said than done, which is why it needs to be addressed explicitly as a key element of a performance-withintegrity culture. In most companies, the CEO will not explicitly sanction crossing the bright line that demarcates legal from illegal conduct. But most hard problems in fluid situations come clothed in shades of gray, and the business leader often wants to act swiftly. In such cases, the CFO or general counsel may need time to get facts and assess any financial, legal, or reputation risks for the business leaders. The CFO or GC may need to lay out a number of options with varying degrees of risk and to justify a multifaceted recommendation. In such ambiguous situations, which arise frequently, the CEO makes the ultimate decision (perhaps with board consultation). The CEO invariably tests presentations by pushing back strenuously, asking hard questions, and forcing peo106 Harvard Business Review
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ple to defend their positions. For their part, the CFO and the GC must play the guardian role equally strenuously, being unafraid to answer candidly or to argue back, remaining undaunted by personal or group pressures. Their views must be on the table and discussed, not summarily dismissed in the heat of the moment. In dysfunctional companies, when business leadership improperly decides to cross financial, legal, or ethical lines or to stifle debate, the CFO, GC, and HR leader have to stand up to the CEO, go to the board – or quit. But the larger problem in such companies is that these gatekeepers may be weak or even complicit (witness the CFOs guilty of crime in the accounting scandals or the CFOs and GCs implicated in the option-backdating proceedings). Business leaders serve their companies well when they make clear to the organization that, while they retain ultimate decision-making authority, they really want candid, unvarnished discussion of financial, legal, ethical, and reputational precepts, even though exchanges on specific issues may be contentious. More important, they show their approval and encouragement of the partner-guardian role by hiring strong, independent people in these critical leadership positions. Giving employees a voice. One of the trickiest – but most important–aspects of fusing high performance with high integrity is educating and training employees, especially in emerging markets and in acquired companies, so that they intuitively understand and follow global integrity standards when making everyday decisions. Such understanding also gives employees the capacity to articulate on-the-ground concerns about possible improprieties by peers or superiors. Giving voice to employees is key to ensuring a self-cleansing culture of openness and accountability. GE employees have four major channels through which to report issues. • The ombuds system allows employees to lodge concerns, anonymously if they wish, without fear of retaliation. More than 500 people serve in a full- or part-time ombudsperson capacity around the globe. Receiving reports in 31 languages, the ombudspersons act as neutral intake points, referring concerns to financial, legal, and HR staffs for investigation. They also are responsible for following up on all of the issues brought to their attention to ensure prompt resolution and to keep the reporting employees apprised of the status of their concerns. The key to the system is that all reports are examined without fear or favor and that retaliation is, itself, an explicit integrity violation that will lead to severe discipline. But employees also have a duty to report. A failure to report into the system or up the line, when red flags are snapping in hurricane force winds, can be – and has been – a firing offense. Approximately 1,500 concerns have been lodged annually in the last few years, with about 20% leading to serious discipline (and 50% just seeking information).
• Each business unit’s annual assessment of its compliance performance begins with a bottom-up review. Employees on the ground floor of the organization in every country are asked to identify issues or problems in systems, processes, or practices. Then employees higher in the organization are given the same opportunity. The review process builds up through localities, countries, and regions, culminating in a report on results for the global division as a whole. Concerns about particular individuals must go through the ombuds system, and employees may also use that system to report on a superior’s failure to respond to a broader compliance concern. Employees and leaders are rewarded in any number of
diate notification when the wrong thing is being done. This stands in sharp contrast to the “culture of silence” cited by Boeing’s general counsel in a blistering January 2006 speech to company leaders, given at the request of CEO Jim McNerney, about the root causes of document theft and conflict-ofinterest scandals. This collective voice of the company does not just detect, it deters. Even an unethical business leader facing a tough quarter has to think twice about asking his or her staff if the books can be cooked, for fear of becoming the subject of an ombuds report. I have investigated many concerns and read many investigative reports, and in my experience these
Institutional Shareholder Services has more than 60 rating categories, and not one relates to the CEO’s governance of the company. ways–financially, with promotion, or with recognition, for instance – for finding and resolving important issues. • The internal corporate audit staff is one of the most important assets of the company. Its 400-plus people spend about 80% of their time auditing for adherence to global financial, legal, and ethical standards and acting as a check on the business’s own bottom-up and compliance reviews. About half of the audit staff is made up of non-U.S. citizens, reflecting GE’s huge international operations. Many GE leaders learn the fundamentals of performance with integrity early in their careers because the audit staff service is an important gateway into GE’s leadership ranks–about 20% of GE’s 220 officers are audit staff alums. • Business units’ financial, legal, and HR staff at GE have a strong dotted line to the company CFO, the GC, and the HR leader. There is a powerful expectation that they will consult with those corporate functional heads when they have questions about commercial, reputational, or compliance risks. Both the business unit CEO and the company CFO have to agree on the person hired to be business CFO, but either the business leader or the company CFO can fire that person. The same practice applies for business unit general counsels and HR leaders. Failure of a business finance manager, general counsel, or HR leader to alert corporate headquarters of high-risk issues is cause for serious sanctions, including termination. For their part, the company CFO and GC have to earn trust by not running to the CEO every time their counterparts in the field raise issues. All four channels are part of an attempt to create an open and candid company. In doing so, business leaders from the CEO on down send a potent message about the importance of a self-cleansing culture that demands immediate discussions about what the right thing is to do–and requires imme-
channels were rarely misused over the years and did not create a climate of fear and backbiting because we tried to ensure employees’ concerns would be handled independently, reviewed professionally, and decided fairly, based on facts, not internal politics. Cheap shots simply wouldn’t work. Holding business leaders accountable with integrity metrics. Compensation and promotion are, of course, the com-
mon methods for ensuring accountability. And it is a corporate cliché that, in making these decisions, companies evaluate performance in the context of integrity issues. GE has tried to move beyond the cliché by applying real metrics and tools to evaluate integrity performance – not just for the 220 officers but also for the top 4,000 executives who are either P&L leaders or key contributors on business teams. The primary method is to evaluate how leaders carry out their own integrity responsibilities. Have they set appropriate goals and built the right systems? Have they instituted effective controls and thorough auditing practices? Have they built high ethical standards into all of their business processes? How do they handle integrity crisis management? How do they conduct country-, regional-, and globalcompliance reviews? How do they make integrity resource decisions in tough markets? Do they place “A” players in the jobs in which it is critical to fuse high performance with high integrity? These evaluations, often focusing on year-over-year trends, are conducted in a variety of ways, including corporate audits; on-site compliance reviews by corporate leaders; statistics from the ombuds system; personnel reviews; and formal, annual reviews of the businesses by the corporate compliance board (the CFO, the senior vice president for HR, the head of the corporate audit staff, and the general counsel). hbr.org
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A second, potent method is to compare the performance of one business unit with other GE businesses and, where information is available, with peer companies. These comparisons can arise during audit staff reviews of the whole company (which might uncover, say, which business has the most open-audit issues or which has the most problems with controllership in emerging markets). Comparisons may be made through external metrics (like customer complaints or private lawsuits stemming from integrity issues or formal proceedings brought by governments). In addition, evaluations of GE businesses by former regulators are compared against regulatory standards and peer performance. Another key comparative tool for assessing leadership is the employee survey. In 2006, fully 95% of the more than 127,000 professional employees throughout the company responded when they were asked, in an anonymous survey, if they had a favorable or unfavorable view of the statement: “There are no compromises around here when it comes to conducting business in an ethical way.” For GE as a whole, 85% agreed with the statement, 10% had no opinion, and only 5% disagreed, but the numbers across business units and within smaller P&Ls varied, raising important questions about the intensity and effectiveness of leadership down the line.
Governance on the Front Lines
Reprint R0704G To order, see page 143.
Randy Glasbergen
The principles and practices top management follows to drive a performance-with-integrity culture deep into a company is a vital third dimension of governance. But the other two dimensions – the relationship between shareholders and the company and the relationship between the board
and the CEO – have received far more attention in the governance debates of the past decade. Especially on the issue of performance with integrity, many directors and observers are now realizing that we cannot pile more and more responsibility on a board that has a vital but limited role in choosing the CEO, setting compensation, and overseeing the strategy for addressing key risks and opportunities. The importance of and different approaches to this vital third dimension of governance from the CEO on down are not yet receiving appropriate discussion and debate within the senior ranks of the business community and within the burgeoning governance community of investors, analysts, academics, advocates, and interest groups. It is telling that Institutional Shareholder Services – the best-known governance rating agency – has more than 60 rating categories, and not one relates to the CEO’s governance of the company. Many business leaders, like those at GE, are seeking the best ways to achieve performance with integrity at an operational level deep inside the company. Beneath the headlines and the current governance debates about directors’ roles and shareholders’ prerogatives, there is in leading corporations an intense engagement with this bedrock management issue. I have offered here my personal perspective on key principles and practices to fuse high performance with high integrity. But my larger point is that there should now be a dramatic shift in governance analysis and debate away from board responsibilities to the least-discussed and, arguably, most important dimension: governance on the front lines.
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BE PART OF THE SEARCH
TOOL KIT
The Process Audit A new framework, as comprehensive as it is easy to apply, is helping companies plan and execute process-based transformations.
by Michael Hammer
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process management as a way of life. New and controversial when I first described the concept 17 years ago in the pages of this magazine (see “Reengineering Work: Don’t Automate, Obliterate,”HBR July–August 1990), the process-based approach to transformation is now used routinely by enterprises all over the world. Few executives question the idea that redesigning business processes–work that runs from end to end across an enterprise–can lead to dramatic enhancements in performance, enabling organizations to deliver greater value to customers in ways that also generate higher profits for shareholders. In virtually every industry, companies of all sizes have achieved extraordinary improvements in cost, quality, speed, profitability, and other key areas by focusing on, measuring, and redesigning their customer-facing and internal processes.
Tomasz Walenta
USINESS HAS EMBRACED
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line personnel, and redirect reward systems to focus on processes as well as outcomes. As if that weren’t enough, enterprises also have to reshape organizational cultures to emphasize teamwork, personal accountability, and the customer’s importance; redefine roles and responsibilities so that managers oversee processes instead of activities and develop people rather than supervise them; and realign information systems so they help cross-functional processes work smoothly rather than simply support departments. In most of the companies I studied, executives were floundering. They realized that they needed to change many things to harness the power of processes, but they were unsure about what exactly needed to be changed, by how much, and when. Their uncertainty was manifest in hesitant decisions and confused planning, in endless debates and unproductive discussions, in unwarranted complacency and equally unwarranted despair, in errors and rework, in delays and abandoned efforts. People kept asking one another questions such as, Did we start with the right thing? How do we know we are making progress? What will the organization look like when we finish? Moreover, executives, especially when they work in different functions, often disagree about the factors that aid process-based transformations. Each has a pet idea based on his or her expertise. Like the six blind men and the elephant, one focuses on technology, another on human resource issues, a third on organizational structure, and so on, creating confusion and conflict. Managers also have a tendency to swing from wild optimism that developing new processes will be painless to unremitting gloom that the task is hopeless. Without knowing what they must concentrate on and when, executives have been unable to master the science of transforming business processes. Five years ago, I started a research project in conjunction with the Phoenix Consortium – a group of leading companies with which I work closely –
Sadly, however, casualties litter the road. Since 2000, I have personally observed hundreds of companies try to rejuvenate themselves by creating or redesigning business processes. In spite of their intentions and investments, many have made slow or little progress. Even businesses that succeeded in transforming themselves have found the endeavor arduous and harrowing. All change projects are tough to pull off, but process-based change is particularly difficult. Contrary to widespread assumptions, designing new business processes involves more than rearranging work flows – who does what tasks, in what locations, and in what sequence. To make new processes work, companies must redefine jobs more broadly, increase training to support those jobs and enable decision making by front-
Article at a Glance Redesigning work as business processes that run from end to end across an enterprise leads to radical improvements in performance, but it is terribly tough to manage. A new framework, based on extensive research and tested by a consortium of large companies, helps executives plan process-based transformations, track their progress, and identify roadblocks. The framework, called the Process and Enterprise Maturity Model (PEMM), centers on five characteristics that enable any process to perform well on a sustained basis and four enterprise capabilities that allow processes to take root in organizations. PEMM doesn’t specify what a particular process should look like. Therefore, companies can use this standard approach across their organizations and make meaningful comparisons of results. Pioneers of the model, which applies to companies in any industry, have used PEMM in different ways and at several stages of process-based transformations.
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to develop a process implementation road map. My aim was to create a framework that would help executives comprehend, plan, and assess processbased transformation efforts. Over time, I identified two distinct groups of characteristics that are needed for business processes to perform well and to sustain that performance (see the exhibit “The Process and Enterprise Maturity Model”). One set of features applies to individual processes. These process enablers determine how well a process is able to function over time. They encompass the comprehensiveness of a process’s design, the abilities of the people who operate the process, the appointment of a top-level process owner to oversee the process’s implementation and performance, the match between the organization’s information and management systems and the process’s needs, and the quality of the metrics that the company uses to measure process performance. My research shows that not all organizations are equally prepared to put these enablers in place. Companies that are able to do so possess important enterprisewide capabilities: Their senior executives support a focus on processes; their employees greatly value customers, teamwork, and personal accountability; they employ people who know how to redesign processes; and they are well organized to tackle complex projects. Together, the enablers and capabilities provide an effective way for companies to plan and evaluate process-based transformations. I presented the model’s first version to the Phoenix Consortium’s members in 2004, and they tested and revised it extensively. In 2006, I finalized the framework, which I call the Process and Enterprise Maturity Model (PEMM). In the following pages, I discuss the five process enablers and four enterprise capabilities in detail. I also show how companies that use PEMM can take the task of process transformation out of the arena of intuition and mystery and subject it to measurement, evaluation, improvement, and replication.
Can Your Processes Deliver High Performance?
The Process and Enterprise Maturity Model
My two decades of experience Companies need to ensure that their business processes become more mature – in other with business processes have words, that they are capable of delivering higher performance over time. To make that haptaught me that form influences pen, companies must develop two kinds of characteristics: process enablers, which perfunction – that is, process detain to individual processes, and enterprise capabilities, which apply to entire organizations. sign determines performance. By design, I mean the specificaThere are five process enablers… tion of which people must perform what tasks, in what order, Design: The comprehensiveness of the specification of how in what location, under what the process is to be executed. circumstances, with what inforPerformers: The people who execute the process, particularly mation, and to what degree of in terms of their skills and knowledge. precision. Certainly, companies can use techniques such as Six Owner: A senior executive who has responsibility for the Sigma and TQM to ensure that process and its results. employees execute processes Infrastructure: Information and management systems that support correctly. However, redesigning the process. processes is often the only way to improve their performance Metrics: The measures the company uses to track the process’s dramatically. Doing so elimiperformance. nates many of the nonvalueadding activities that are the …and four enterprise capabilities. source of costs, errors, and deLeadership: Senior executives who support the creation of lays and helps companies come processes. up with process innovations (see my article “Deep Change: Culture: The values of customer focus, teamwork, personal How Operational Innovation accountability, and a willingness to change. Can Transform Your ComExpertise: Skills in, and methodology for, process redesign. pany,” HBR April 2004). Although process redesign is Governance: Mechanisms for managing complex projects and no longer the terra incognita it change initiatives. once was, one issue stubbornly persists: Most companies tend Companies can use their evaluations of the enablers and capabilities, in tandem, to plan to overlay new processes on aland assess the progress of process-based transformations. ready established functional organizations. However, the appurtenances of a traditional organization – such as job definitions, performance measurement sys- mon outcome; if the organization mea- context in which they work, they will be tems, and managerial hierarchies – sures performance as it has always prone to making decisions that aren’t don’t always support high-performance done, it will reward people for focusing in the best interests of the entire proprocesses. For instance, senior execucess. Similarly, leaders will try to create on narrow, functional goals. How can tives might encourage managers to cre- the process live up to its potential processes without altering managerial ate a cross-functional process but then under those circumstances? Companies responsibilities. That’s problematic, too. prevent them from altering the comA high-performance process extends will invest in retraining employees to pany’s performance measurement sys- work in a new process, but they balk at across functional boundaries, so a setem appropriately. That’s shortsighted. footing the bill for helping people un- nior executive must supervise it. WithThe revamped business process needs derstand how the process works as a out such a person, the process won’t employees to focus on a broad, com- whole. If employees don’t know the gain traction within the organization. While studying organizations that were implementing new processes, I Michael Hammer (
[email protected]) is the founder of Hammer and Comkept track of their errors of omission. pany, a management research and education firm based in Cambridge, Massachusetts. hbr.org
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a process design doesn’t mean it’s a good one. I have witnessed repeatedly how missing enablers can derail processes. At a well-known electronics giant, for example, a team designed a new orderfulfillment process and conducted a successful pilot. However, the process owner didn’t have the authority to force unit heads to implement it, so the effort floundered. In another instance, a major consumer goods manufacturer created a new process and trained its workers to perform new jobs. However, it didn’t educate them about the overall process. As a result, some employees made decisions that inadvertently created problems for colleagues, which hurt performance and morale and forced the company to abandon the effort. In yet another case, a pharmaceutical manufacturer transformed its sales and marketing processes but didn’t
I also analyzed the various factors that were necessary to sustain business processes. I tested both lists over several years and winnowed them down to the five characteristics that I find are essential for any process to perform well. A process must have a well-specified design; otherwise, the people performing it won’t know what to do or when. The people who execute the process, the performers, must have appropriate skills and knowledge; otherwise, they won’t be able to implement the design. There has to be an owner, a senior executive who has the responsibility and authority to ensure that the process delivers results; otherwise, it will fall between the cracks. The company must align its infrastructure, such as information technologies and HR systems, to support the process; otherwise, they will impede its performance. Finally, the company must develop and use the right metrics
ceding level, as shown in the exhibit “Assessing the Maturity of Your Processes.” In the case of performers, for instance, the P-1 level denotes that employees are merely aware of the process and its metrics. At the P-2 stage, people must be able to describe the process and where they fit into it. At the P-3 level, employees can express how their work affects the company’s performance. Finally, at the P-4 stage, performers must know how their work affects customers and suppliers. The stronger the enablers, the better the results the process can deliver on a sustained basis. The enablers’ strengths determine how mature a process is–that is, how capable it is of delivering higher performance over time. If all five enablers of a process are at the P-1 level, the process itself is at the P-1 level; if all five enablers are at the P-2 level, the process is at P-2; and so on. If only four out of the
How can a process live up to its potential if an organization measures performance as it has always done and rewards people for focusing on narrow, functional goals?
make the effort to realign its metrics and reward systems. That sent conflicting signals through the organization, elicited inconsistent behavior from employees, and eventually derailed the project. What makes overhauling processes particularly tricky is the fact that these enablers are present in organizations at different levels of intensity, so they vary in the degree to which they support a process. For instance, the question is seldom as clear-cut as whether or not organizations appoint process owners; many companies, after doing so, don’t give the process owners the authority to implement all the changes that are necessary to make processes work. I’ve identified and defined four levels of process enabler strength (P-1, P-2, P-3, and P-4), each of which builds on the pre-
to assess the performance of the process over time; otherwise, it won’t deliver the right results. These enablers give a process the potential to deliver high performance. The enablers are mutually interdependent: If any are missing, the others will prove to be ineffective. A weak owner can’t implement a strong process design, poorly trained performers can’t carry out the design, a bad design cannot optimize the process metrics no matter how well thought-out they are, and so on. A process that is missing an enabler might deliver results in the short term through superhuman performance or executive intervention, but those results won’t last. Of course, having all the enablers in place doesn’t guarantee that a process will perform well; for instance, the mere existence of 114 Harvard Business Review
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five enablers rise to a particular level, however, the process cannot be said to have achieved that level; it will belong to the one below. In particular, if any enabler is so weak that it doesn’t meet even the P-1 level, the process is by default at P-0. That’s the natural state of affairs when organizations haven’t focused on developing their business processes, and at this P-0 level, processes work erratically. At the P-1 level, a process is reliable and predictable; it is stable. At P-2, a process delivers superior results because the company has designed and implemented it from one end of the organization to the other. At the next level, P-3, a process delivers optimal performance because executives can integrate it, where necessary, with other internal processes to maximize its contribution to the company’s perfor-
mance. Finally, at P-4, a process is best in class, transcending the company’s boundaries and extending back to suppliers and forward to customers. The exhibit displays the four levels of process maturity, with the rows showing the enablers and the columns indicating the strength levels. (There are 13 rows because I broke the five enablers down into more finely grained components.) Companies using this table to evaluate the maturity of their processes find it effective to treat the propositions regarding the enablers (the cells of the table) not as true or false statements, but as largely true, somewhat true, or largely untrue. Where quantitative assessments are possible, largely true means that the statement is at least 80% correct, somewhat true suggests that the statement is between 20% and 80% correct, and largely untrue means the statement is less than 20% correct. Executives often color the cells green, yellow, or red, respectively, depending on their responses. The green cells indicate the things that aren’t impeding a process’s progress and don’t need a great deal of focus; the yellow cells show areas where the company has considerable work to do; and the red cells represent roadblocks that keep the process from achieving a higher level of performance. Companies usually face red cells when they are ignoring problems or handling them the wrong way, and so, they must tackle them urgently. Let me show you how useful it can be for managers to know the state of a company’s process enablers. In 2004, Michelin launched a process redesign effort to help increase customer focus and reduce costs. At the time, the global tire manufacturer’s order fulfillment process forced customers to deal with multiple departments and to go back and forth repeatedly with the company. To tackle the problem, Michelin created a new high-performance process, which it named Demand to Cash (D2C). A year later, a streamlined process design – which provided large customers with single points of contact, with personnel who knew them, and with accu-
rate information – was ready. During pilots, executives found that in some cases, the new process slashed the order fulfillment time from four hours to 20 minutes. Michelin decided to deploy the new process in 30% of its North American operations by 2006 before rolling it out across the entire region. The company’s process redesign team had learned from my research that before it could implement a new process that would deliver superior performance – that is, a P-2 process – all its enablers had to be
expertise, and governance. First, a company’s senior executives must be committed to the business process approach. Redesigning processes requires extensive organizational change that often provokes resistance down the line. This can sink efforts that don’t have the backing of senior executives. Second, only organizations whose cultures value customers, teamwork, personal accountability, and a willingness to change will find it possible to move forward with process-led change projects. Business processes, which cut
Stronger organizational capabilities make for stronger enablers, which allow for better process performance.
at the P-2 level. When the team, led by the process owner, undertook an assessment to confirm that was the case, it found that the human resource systems that supported the new process were below P-2. Michelin hadn’t redefined managers’ jobs and the scope of their activities clearly enough. Before rolling out the new process, the company kicked off a series of workshops to clarify managers’ new roles and departmental charters and to align them better with the D2C process. Michelin’s enabler analysis also suggested that the D2C process might run into trouble because performanceimprovement projects had proliferated in the company. Senior executives therefore placed the process owner in charge of all the projects that affected the D2C process to ensure that they wouldn’t interfere with its execution or companywide rollout.
across functions, must be operated by people with those values. Third, businesses must have some people with skills in, and knowledge of, process redesign; this is not work for amateurs or improvisers. And fourth, enterprises must be sure to have ways of governing projects and change initiatives if they don’t want chaos and conflict to bog them down. Unless all these capabilities are in place across a company, it will be impossible for the organization to institutionalize the enablers and sustain the performance of its processes. Executives may be able to force some enablers into place even if the capabilities aren’t present, but the performance of their processes won’t endure. Organizations need basic competence in all the enterprise capabilities to get started on process redesign projects; they need greater competence if they are to progress with them. Just as there were four levels of process enabler strength, there are four levels of enterprise capability: E-1, E-2, E-3, and E-4. If an enterprise has E-1 capabilities, it is at the first level of enterprise maturity. That means different things in the case of each capability. For instance, an organization at
Is Your Enterprise Ready for HighPerformance Processes? In order to develop high-performance processes, companies need to offer supportive environments. They must possess or develop organizational capabilities in four areas: leadership, culture, hbr.org
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Assessing the Maturity of Your
Processes
Design
Performers
Owner
You can evaluate the maturity of a business process and determine how to improve its performance by using this table. Decide how the statements defining the strength levels, from P-1 to P-4, for each enabler apply to the process that you are assessing. If a statement is largely true (at
least 80% correct), color the cell green; if it is somewhat true (between 20% and 80% correct), shade the cell yellow; and if it is largely untrue (less than 20% correct), make the cell red. For companies trying to advance to the next level of performance, the green cells indicate the enablers
P-1
P-2
Purpose
The process has not been designed on an end-to-end basis. Functional managers use the legacy design primarily as a context for functional performance improvement.
The process has been redesigned from end to end in order to optimize its performance.
Context
The process’s inputs, outputs, suppliers, and customers have been identified.
The needs of the process’s customers are known and agreed upon.
Documentation
The documentation of the process is primarily functional, but it identifies the interconnections among the organizations involved in executing the process.
There is end-to-end documentation of the process design.
Knowledge
Performers can name the process they execute and identify the key metrics of its performance.
Performers can describe the process’s overall flow; how their work affects customers, other employees in the process, and the process’s performance; and the required and actual performance levels.
Skills
Performers are skilled in problem solving and process improvement techniques.
Performers are skilled in teamwork and self-management.
Behavior
Performers have some allegiance to the process, but owe primary allegiance to their function.
Performers try to follow the process design, perform it correctly, and work in ways that will enable other people who execute the process to do their work effectively.
Identity
The process owner is an individual or a group informally charged with improving the process’s performance.
Enterprise leadership has created an official process owner role and has filled the position with a senior manager who has clout and credibility.
Activities
The process owner identifies and documents the process, communicates it to all the performers, and sponsors smallscale change projects.
The process owner articulates the process’s performance goals and a vision of its future; sponsors redesign and improvement efforts; plans their implementation; and ensures compliance with the process design.
Authority
The process owner lobbies for the process but can only encourage functional managers to make changes.
The process owner can convene a process redesign team and implement the new design and has some control over the technology budget for the process.
Fragmented legacy IT systems support the process.
An IT system constructed from functional components supports the process.
Human Resource Systems
Functional managers reward the attainment of functional excellence and the resolution of functional problems in a process context.
The process’s design drives role definitions, job descriptions, and competency profiles. Job training is based on process documentation.
Definition
The process has some basic cost and quality metrics.
The process has end-to-end process metrics derived from customer requirements.
Uses
Managers use the process’s metrics to track its performance, identify root causes of faulty performance, and drive functional improvements.
Managers use the process’s metrics to compare its performance to benchmarks, best-in-class performance, and customer needs and to set performance targets.
Infrastructure Information Systems
Metrics
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that aren’t impeding the process’s progress; the yellow ones show areas where the company has
case, the context of the process design and the
a lot of work to do; and the red cells represent obstacles to a process’s attaining greater maturity. The colored table to the right shows the results of
process’s attaining the P-1 level. At www.hbr.org, you can download a blank version of this table to assess the state of your
such an exercise at a large U.S. company. In this
company’s processes.
P-3
One U.S. Company’s SelfAssessment of a Process
performers’ knowledge are the roadblocks to the
largely true
P-4
P-1
The process has been designed to fit with other enterprise processes and with the enterprise’s IT systems in order to optimize the enterprise’s performance.
The process has been designed to fit with customer and supplier processes in order to optimize interenterprise performance.
The process owner and the owners of the other processes with which the process interfaces have established mutual performance expectations.
The process owner and the owners of customer and supplier processes with which the process interfaces have established mutual performance expectations.
The process documentation describes the process’s interfaces with, and expectations of, other processes and links the process to the enterprise’s system and data architecture.
An electronic representation of the process design supports its performance and management and allows analysis of environmental changes and process reconfigurations.
Performers are familiar both with fundamental business concepts and with the drivers of enterprise performance and can describe how their work affects other processes and the enterprise’s performance.
Performers are familiar with the enterprise’s industry and its trends and can describe how their work affects interenterprise performance.
Performers are skilled at business decision making.
Performers are skilled at change management and change implementation.
Performers strive to ensure that the process delivers the results needed to achieve the enterprise’s goals.
Performers look for signs that the process should change, and they propose improvements to the process.
The process comes first for the owner in terms of time allocation, mind share, and personal goals.
The process owner is a member of the enterprise’s most senior decision-making body.
The process owner works with other process owners to integrate processes to achieve the enterprise’s goals.
The process owner develops a rolling strategic plan for the process, participates in enterprise-level strategic planning, and collaborates with his or her counterparts working for customers and suppliers to sponsor interenterprise processredesign initiatives.
The process owner controls the IT systems that support the process and any projects that change the process and has some influence over personnel assignments and evaluations as well as the process’s budget.
The process owner controls the process’s budget and exerts strong influence over personnel assignments and evaluations.
An integrated IT system, designed with the process in mind and adhering to enterprise standards, supports the process.
An IT system with a modular architecture that adheres to industry standards for interenterprise communication supports the process.
Hiring, development, reward, and recognition systems emphasize the process’s needs and results and balance them against the enterprise’s needs.
Hiring, development, reward, and recognition systems reinforce the importance of intra- and interenterprise collaboration, personal learning, and organizational change.
The process’s metrics as well as cross-process metrics have been derived from the enterprise’s strategic goals.
The process’s metrics have been derived from interenterprise goals.
Managers present the metrics to process performers for awareness and motivation. They use dashboards based on the metrics for day-to-day management of the process.
Managers regularly review and refresh the process’s metrics and targets and use them in strategic planning.
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somewhat true
P-2
P-3
largely untrue
P-4
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TOOL KIT
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The Process Audit
ties. A team led by Greg Tucker, CSAA’s vice president of business transformation, uncovered shortcomings in the organization’s governance and expertise, particularly in process owner training, which prevented its processes from operating consistently at the P-2 level. The team also discovered that crossfunctional teamwork wasn’t strong in the company’s culture, so processes that resided largely within a single division, such as claims processing, were doing better than those that cut across functions, such as customer billing and payment. These insights led the organization to kick off several efforts, including providing process owners with more responsibility, integrating process priorities into strategic planning exercises, and rolling out a new leadership model
the E-1 level for culture must have some experience with teamwork. In order to get ahead, however, the enterprise must have an E-2 culture, in which it commonly uses cross-functional project teams and its people are familiar with teamwork. To achieve the E-3 level, teamwork must be the norm inside the company. To attain the highest capability level, E-4, teamwork with suppliers and customers must be routine. Stronger organizational capabilities make for stronger enablers, which allow for better process performance. Thus, when an enterprise has E-1 capabilities in leadership, culture, expertise, and governance, it is ready to advance all its processes to the P-1 level; when all four capabilities reach E-2, the company can move along its processes to P-2; and so
One unit’s pioneering experiences can energize an entire organization.
that emphasized process capabilities. These initiatives helped CSAA boost its enterprise capabilities and stabilize its processes’ performance. In some cases, a company as a whole may be unprepared to embark on a process redesign program, but some of its divisions may be ready to do so. In such situations, executives must assess the strength of enterprise capabilities not at the corporate level but at the level of the business unit. Indeed, one unit’s pioneering experiences can energize the entire organization, boosting its enterprise capabilities to a level at which work on redesigning processes can start all over the corporation. For instance, at Tetra Pak, the packaging equipment and materials giant, the task of redesigning processes began in 2001 at the company’s Carton Ambient business unit, which makes equipment and materials that allow perishable products such as milk and juices to be stored at room temperature. The unit’s capa-
on. The exhibit “Evaluating the Maturity of Your Enterprise” presents the four levels of enterprise maturity with the four capabilities broken into 13 elements. (The match with the number of elements in the process enablers table is pure coincidence.) Executives can assess enterprise maturity levels much the same way they can assess process enabler levels: by evaluating whether each proposition is largely true, somewhat true, or largely untrue of their organizations. They can then use colors to identify those aspects of the company that welcome processes (green), still need work (yellow), and are positively hostile to them (red). Many companies take their enterprise capabilities for granted. For instance, when CSAA (the AAA club for northern California, Utah, and Nevada) conducted an analysis to figure out why some of its processes were performing better than others, it found that the problem lay in its enterprise capabili118 Harvard Business Review
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bilities were more mature than the company’s, partly because of the passionate commitment of the unit’s then head, Dennis Jönsson, to process-based transformation. When the unit redesigned its processes, its performance picked up; for instance, the accuracy of new products’ delivery dates rose sharply, from 13% to 85%. The unit’s success emboldened Tetra Pak to develop new processes throughout the company–efforts that got a boost when Jönsson took over as Tetra Pak’s CEO in 2006.
Using the Framework Process enablers and enterprise capabilities create a comprehensive framework that allows companies to evaluate the maturity of their business processes and the receptiveness of their organizations to process-based change. The span of the model dispels the commonly held notion that proceeding with processes is easy. At the same time, the presence of several maturity levels signals that companies needn’t plan to go from nowhere to perfection in one fell swoop. The stepwise structure indicates that there is a path to becoming a process enterprise, which allays people’s anxieties and eliminates confusion. PEMM is different from other process maturity frameworks, such as Carnegie Mellon’s Capability Maturity Model Integration (CMMI) framework, which applies to specific processes like software development and acquisition. The CMMI model identifies the best practices for specific processes and evaluates the maturity of an organization in terms of how many of those practices it has implemented. By contrast, PEMM applies to companies in any industry and doesn’t specify what a particular process should look like. It identifies the characteristics that any process and every enterprise should have in order to design and deploy high-performance processes. A company can apply PEMM to all its processes, which allows the use of a standard approach across the organization, easy sharing of experiences, and quick comparisons of results. In ad-
dition, every organization can develop processes that meet its own needs since PEMM doesn’t insist that the design contain specific features. PEMM is also easy to administer. After a brief introduction, even personnel who are new to processes can create and interpret the two matrices. The model’s simplicity allows people to apply it themselves rather than rely on experts or consultants; employees are more likely to believe in and act on such assessments. At the same time, the model’s objective character – it uses testable propositions rather than opinions – helps factor out emotion and avoid needless arguments. Asking employees to evaluate a process or an enterprise is a subtle way of engaging them, and as they become more involved with processes, their commitment to change increases. Participating in PEMM assessments is educational without the formality and sensitivities usually associated with such activities. The structured nature of the model, its basis in company experiences, and its intuitive plausibility make senior executives as well as frontline personnel more comfortable with process-based change. Through PEMM, people learn about processes and process-centered organizations by doing rather than by listening. Companies have used PEMM in many ways and at different stages of processbased transformation projects. When enterprises start redesigning business processes or seek to rise from one level to the next, it is imperative that they conduct a maturity analysis first. In 2001, Tom Purves, now Shell’s vice president of manufacturing operations for the Americas Gulf Coast, took over as the manager of the Motiva refinery, a joint venture between Shell and Saudi Aramco, in Port Arthur, Texas. He and his leadership team used process-based techniques to redesign two core processes (Ensure Safe Production and Reliability-Centered Maintenance) and improve the refinery’s operations. The results were impressive: In 2001, Port Arthur’s unbudgeted production loss,
metric of the Ensure Safe Production process, is now the lowest in Shell’s manufacturing system, and the mean time between failures of key equipment has shot up. These changes have contributed significantly to the refinery’s bottom line. On the basis of the Port Arthur experience, Shell is using PEMM to assess its refineries and chemical plants all over the world. Site leaders use the results, which the company has linked to strategic business reviews, to find out where their plants stand on critical issues and to identify the steps needed to develop both enterprise capabilities and process enablers. The ease of using the PEMM framework and the model’s low overhead cost have made it feasible for Shell to conduct these evaluations every six months. PEMM often helps companies tackle the difficult problem of sustaining highperformance processes. Clorox, for example, has been working on its Order to Cash (OTC) process since 2002, and by redesigning several of its subprocesses, the company had achieved impressive results: By 2006, late shipments fell by more than 70%, aged receivables declined by two-thirds, and the percentage of perfect orders skyrocketed from 19% to 70%. Yet, the leaders of the effort weren’t sure that the process could sustain those results. Rick Magoun, a vice president of logistics at Clorox and the process owner of OTC, asked the owners of the four subprocesses to assess their maturity. He also asked the tenperson logistics leadership team to assess the enterprise capabilities of those parts of the organization involved in performing the OTC process. Each member conducted an evaluation and the group then discussed the results. They arrived at a consensus, not by splitting differences or going for averages but by debating each evaluation until some people–not necessarily those in the minority – reconsidered their appraisals. This proved to be a powerful way for the team to create a shared understanding of what the transformation
the key metric of a refinery’s performance, was 7.0%; in 2005, the loss fell to 2.4% – lower than the then best-in-class figure of 3.0%. Purves was determined to improve the refinery’s performance even more by increasing the strength of the process enablers from P-2 to P-3. His team used PEMM to identify areas that would need improvement. Process owners and senior executives evaluated the process enablers and enterprise capabilities, and frontline personnel, independently, did the same. Unsurprisingly, the executives’ visions were much rosier than the workers’. Instead of glossing over the differences, Purves made the two groups focus on the areas of disagreement. By avoiding the temptation of averaging and by harnessing the power of the conversation, the two groups came up with an accurate assessment.
There is a path to becoming a process enterprise.
For instance, senior executives rated Port Arthur’s expertise in designing processes higher than their subordinates did. That’s because other employees didn’t know how senior executives had evaluated process design methodologies or established standards for them. The senior team persuaded employees to accept its assessment of this area but acknowledged the need to improve communication about the issue. Purves and his team found that several enablers were at the P-3 level, but the assessment showed weaknesses in performers’ knowledge and the use of metrics for goal setting. PEMM identified some governance gaps as well. These insights led the team to launch efforts to increase the understanding of processes by performers, to use a more structured approach to setting performance targets, and to create a program management office. As a result, performance has continued to improve. For instance, Port Arthur’s alarm rate, a key hbr.org
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Evaluating the Maturity of Your
Enterprise Leadership
Culture
Expertise
Governance
To determine if your organization is ready to support a process-based transformation, evaluate the statements in this table. They show the strength levels, from E-1 to E-4, of the capabilities that en-
processes. If a statement is at least 80% correct, color the cell green; if it is between 20% and 80% correct, shade it yellow; and if it is less than 20% correct, make it red. Companies must focus on
terprises need in order to develop their business
tackling the red areas at that level first, then the
E-1
E-2
Awareness
The enterprise’s senior executive team recognizes the need to improve operational performance but has only a limited understanding of the power of business processes.
At least one senior executive deeply understands the business process concept, how the enterprise can use it to improve performance, and what is involved in implementing it.
Alignment
The leadership of the process program lies in the middle management ranks.
A senior executive has taken leadership of, and responsibility for, the process program.
Behavior
A senior executive endorses and invests in operational improvement.
A senior executive has publicly set stretch performance goals in customer terms and is prepared to commit resources, make deep changes, and remove roadblocks in order to achieve those goals.
Style
The senior executive team has started shifting from a topdown, hierarchical style to an open, collaborative style.
The senior executive team leading the process program is passionate about the need to change and about process as the key tool for change.
Teamwork
Teamwork is project focused, occasional, and atypical.
The enterprise commonly uses cross-functional project teams for improvement efforts.
Customer Focus
There is a widespread belief that customer focus is important, but there is limited appreciation of what that means. There is also uncertainty and conflict about how to meet customers’ needs.
Employees realize that the purpose of their work is to deliver extraordinary customer value.
Responsibility
Accountability for results rests with managers.
Frontline personnel begin to take ownership of results.
Attitude Toward Change
There is growing acceptance in the enterprise about the need to make modest change.
Employees are prepared for significant change in how work is performed.
People
A small group of people has a deep appreciation for the power of processes.
A cadre of experts has skills in process redesign and implementation, project management, communications, and change management.
Methodology
The enterprise uses one or more methodologies for solving execution problems and making incremental process improvements.
Process redesign teams have access to a basic methodology for process redesign.
Process Model
The enterprise has identified some business processes.
The enterprise has developed a complete enterprise process model, and the senior executive team has accepted it.
Accountability
Functional managers are responsible for performance, project managers for improvement projects.
Process owners have accountability for individual processes, and a steering committee is responsible for the enterprise’s overall progress with processes.
Integration
One or more groups advocate and support possibly distinct operational improvement techniques.
An informal coordinating body provides needed program management while a steering committee allocates resources for process redesign projects.
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yellow ones. That’s what a large U.S. company, whose assessment is shown alongside, did. For instance, it realized that by focusing on developing its process improvement methodologies, it could
One U.S. Company’s Self-Assessment
At www.hbr.org, you can download a blank version of this table to evaluate your enterprise capabilities.
move up to the E-1 level. largely true
E-3
E-4
The senior executive team views the enterprise in process terms and has developed a vision of the enterprise and its processes.
The senior executive team sees its own work in process terms and perceives process management not as a project but as a way of managing the business.
There is strong alignment in the senior executive team regarding the process program. There is also a network of people throughout the enterprise helping to promote process efforts.
People throughout the enterprise exhibit enthusiasm for process management and play leadership roles in process efforts.
Senior executives operate as a team, manage the enterprise through its processes, and are actively engaged in the process program.
The members of the senior executive team perform their own work as processes, center strategic planning on processes, and develop new business opportunities based on high-performance processes.
The senior executive team has delegated control and authority to process owners and process performers.
The senior executive team exercises leadership through vision and influence rather than command and control.
Teamwork is the norm among process performers and is commonplace among managers.
Teamwork with customers and suppliers is commonplace.
Employees understand that customers demand uniform excellence and a seamless experience.
Employees focus on collaborating with trading partners to meet the needs of final customers.
Employees feel accountable for enterprise results.
Employees feel a sense of mission in serving customers and achieving ever-better performance.
Employees are ready for major multidimensional change.
Employees recognize change as inevitable and embrace it as a regular phenomenon.
A cadre of experts has skills in large-scale change management and enterprise transformation.
Substantial numbers of people with skills in process redesign and implementation, project management, program management, and change management are present across the enterprise. A formal process for developing and maintaining that skill base is also in place.
The enterprise has developed and standardized a formal process for process redesign and has integrated it with a standard process for process improvement.
Process management and redesign have become core competencies and are embedded in a formal system that includes environment scanning, change planning, implementation, and process-centered innovation.
The enterprise process model has been communicated throughout the enterprise, is used to drive project prioritization, and is linked to enterprise-level technologies and data architectures.
The enterprise has extended its process model to connect with those of customers and suppliers. It also uses the model in strategy development.
Process owners share accountability for the enterprise’s performance.
A process council operates as the most senior management body; performers share accountability for enterprise performance; and the enterprise has established steering committees with customers and suppliers to drive interenterprise process change.
A formal program management office, headed by a chief process officer, coordinates and integrates all process projects, and a process council manages interprocess integration issues. The enterprise manages and deploys all process improvement techniques and tools in an integrated manner.
Process owners work with their counterparts in customer and supplier enterprises to drive interenterprise process integration.
E-1
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E-2
E-3
largely untrue
E-4
Harvard Business Review 121
entailed and to learn what more it needed to do. The analysis provided several unexpected findings. First, it showed that the Order to Cash process wasn’t as mature as many people believed it to be. This was surprising because the process had been the target of concerted redesign efforts, but it reinforced the idea that age is not the same as maturity. Second, Clorox’s enterprise capabilities were more mature than were the enablers of the OTC process. The assessment indicated that executives needed to focus more attention on performer skills, knowledge, and behavior. What’s more, the process designs didn’t adequately reflect the customer’s voice, so that needed work as well. Third, the OTC metrics were in better shape than the other enablers were, so the team could defer work in that area. In the same way, the team found some weaknesses in its enterprise capabilities, including a shortfall in process expertise and insufficient readiness for change. The Clorox team used all these findings to shape an action plan for the following year. Among other things, the team documented process revisions and used those documents to prepare people for change. It also involved more people in redesign efforts, broadening the company’s skills. Since the enterprise capabilities were at a higher level than the process enablers were, executives knew that the organization was ready to invest time and resources to address any outstanding issues. The PEMM application provided Clorox with several additional benefits. For instance, the analysis took the guesswork out of planning; the process owner’s team hadn’t addressed certain issues simply because it hadn’t thought of them. The framework allowed team members to decide where to focus their resources instead of forcing them to rely on intuition and flashes of inspiration. Moreover, the PEMM analysis gave Clorox’s leaders answers they could offer the many employees who had become enthusiastic about the company’s focus on business processes and
were asking what they could be doing to help. Finally, when high-performance processes break down, companies can use PEMM to find out what ails them. That’s what Schneider National, one of the largest trucking companies in the United States, recently did. Five years ago, in order to counteract a slowdown in growth, the company identified five core processes. One of them, the Acquire New Business process, encompasses all the work Schneider performs from the moment a sales representative hears of a potential opportunity to winning a contract. A key metric of this process’s performance is how long it takes
cally, the team found gaps in governance and culture. The process owners and Schneider’s process council, which served as a forum for process owners and business managers to resolve outstanding issues, weren’t powerful enough to prevent line managers from tinkering with processes. The enterprise also hadn’t embedded the commitment to solve problems in a structured fashion, rather than an ad hoc manner, deeply enough. Doug Mueller, then the vice president of business transformation and now the head of the Sole Source business unit, had raised those issues but had been unable to get much attention. The PEMM analysis pinpointed
When high-performance processes break down, companies can use PEMM to find out what ails them.
to respond to a customer’s request for proposal. Prior to the redesign, Schneider typically needed between 30 and 45 days to put in a bid. In 2003, the company created a new process that allowed it to get back to a customer in less than three days – an improvement of greater than 90%. As a result, Schneider’s win rate, the percentage of sales opportunities that it converted into contracts, increased by 70%. In early 2005, however, the company started to experience problems. The redesigned process centered on “market owners,” experienced leaders with responsibility for guiding pricing and other decisions regarding RFPs. In an effort to relieve pressure on market owners, some business units started involving more managers in these decisions. Other work-arounds cropped up, and soon, the process’s performance began to deteriorate. When a Schneider team used PEMM, it determined that although the enablers of the process were at the P-2 and P-3 levels, the enterprise capabilities were lagging. Specifi-
areas of weakness, helped get buy-in from the senior management team, and served as a catalyst for developing programs to upgrade Schneider’s process governance system and focus its culture more squarely on business processes.
“If you don't
get the magazine from the Rotman School of Management, aptly called Rotman, you're making a mistake.” — Bruce Nussbaum,
Assistant Managing Editor, BusinessWeek (online blog, Sept.27, 2006)
•••
The PEMM framework doesn’t make the road to process transformation easy to traverse. Executives must do a lot of difficult, even painful, work to design high-performance processes and create an environment in which those processes flourish. In fact, organizations are often taken aback by the results of PEMM analyses; they feel they have made more progress than the model shows. However, in process transformations, as in life, knowing where you stand and having a road map to follow beats stumbling in the dark. Go to www.hbr.org to download and fill in two blank tables for evaluating your processes and enterprise capabilities.
Reprint R0704H To order, see page 143.
Subscribe to Rotman Magazine today:
www.rotman.utoronto.ca/subscribe One Year (3 issues): $95 US Two Years (6 issues): $135 US
BEST PRACTICE
Human Due Diligence The success of most acquisitions hinges not on dollars but on people. Here’s how to analyze potential people problems before a deal is completed.
by David Harding and Ted Rouse
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Paul Wearing
T
of Bank One’s 1998 acquisition of First Chicago NBD was clear. According to the Cincinnati Post, the deal would make the Columbus, Ohio– based acquirer, then the United States’ eighth-largest bank, “the dominant bank in the Midwest,” ensuring its survival in a rapidly consolidating industry. But three years after the deal, none of the 16 top executives picked to run the merged company remained on the job. One M&A firm included the deal in its list of the top ten M&A bloopers for 1999. Bank One eventually recovered its momentum, but the acquisition reflects a common business problem. Too often, deal makers simply ignore, defer, or underestimate the significance of people issues in mergers and acquisitions. They gather reams of HE STRATEGIC LOGIC
financial, commercial, and operational data, but their attention to what we call human due diligence – understanding the culture of an organization and the roles, capabilities, and attitudes of its people–is at best cursory and at worst nonexistent. The most obvious consequence of making a deal without conducting human due diligence is a significant loss of talent right after the deal’s announcement. Less obvious is the problem of long-term attrition: Research shows that companies continue to lose disproportionate numbers of executives years after their merger deals have closed (see Jeffrey Krug’s Forethought article “Why Do They Keep Leaving?” HBR February 2003). For those who remain, confusion over differences in decision-making styles leads to infighting. Managers postpone decisions or are blocked from making them. Integration stalls and productivity declines. Nearly two-thirds of companies lose market share in the first quarter after a merger. By the third quarter, the figure is 90%. That’s the bad news. The good news is that human due diligence can help acquirers avoid these problems. When they have done their homework, acquirers can uncover capability gaps, points of friction, and differences in decision making. Most important, they can make the critical people decisions – who stays, who goes, who runs the combined business, what to do with the rank and file – when a deal is announced, or shortly thereafter. The value of addressing these issues early is highlighted in detailed interviews Bain & Company conducted with managers involved in 40 recent mergers and acquisitions. The research compared people-related practices in successful and unsuccessful deals. In the 15 deals classified as successful, nearly 90% of the acquirers had identified key employees and targeted them for retention during due diligence or within the first 30 days after the announcement. By comparison, this task was carried out in only one-third of the unsuccessful deals.
Human due diligence lays the groundwork for smooth integration. Done early enough, it also helps acquirers decide whether to embrace or kill a deal and determine the price they are willing to pay. In hostile situations, it’s obviously more difficult to conduct due diligence. But there is still a certain amount of human due diligence that companies can and must do to reduce the inevitable fallout from the acquisition process and smooth the integration (see the sidebar “In Hostile Territory”). So what does good human due diligence actually involve? In our experience, an acquiring company must start with the fundamental question that all deals should be built on: What is the purpose of the deal? The answer to that
nization after the deal is done. Often they are one and the same, but they don’t have to be. Consider the 2006 merger of the New York Stock Exchange with the all-electronic exchange Archipelago. In making that deal, the world’s largest bourse acquired more than just technology. Archipelago’s management team and governance structure will allow the NYSE to pull itself into the twenty-first century, transforming the closed-circle organization of powerful Exchange seatholders into a company that sells shares to the public. The NYSE is the financial acquirer, but Archipelago is setting the cultural tone of the new company. The big problem with saying that an acquisition is a merger of equals is that
The big problem with saying that an acquisition is a merger of equals is that it allows management to postpone acknowledging which firm is the cultural acquirer.
question leads to two more: Whose culture will the new organization adopt, and what organizational structure should be adopted? Once those questions are answered, human due diligence can focus on determining how well the target’s current structure and culture will mesh with those of the proposed new company, which top executives should be retained and by what means, and how to manage the reaction of the rank and file. Let us turn first to the question of culture. The answer is not as obvious as one would think.
it allows management to postpone acknowledging which firm is the cultural acquirer, which makes predeal human due diligence all but impossible. Before you can evaluate potential people problems, you have to know which culture you want to end up with. Who the cultural acquirer is depends on the fundamental goal of the acquisition. If the objective is to strengthen the existing business by gaining customers and achieving economies of scale, then the financial acquirer normally assumes the role of cultural acquirer. In such cases, the acquirer will be less interested in the target’s people than in its physical assets and customers, though that shouldn’t discourage the acquirer from cherry-picking the best talent the target has to offer. The main focus of human due diligence, therefore, will be to verify that the target’s culture is compatible enough with the acquirer’s to allow for the building of necessary bridges between the two organizations.
Who Is the Cultural Acquirer? In public, deal-making executives routinely speak of acquisitions as “mergers of equals.” That’s diplomatic, but it’s usually not true. In many, if not most, deals, there is not only a financial acquirer; there is also a cultural acquirer, who will set the tone for the new orgahbr.org
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But if the deal is intended to transform the financial acquirer’s business, then the target firm is likely to be the cultural acquirer. In Disney’s acquisition of Pixar Animation Studios, the integration goal was to protect Pixar’s talent and begin injecting that new culture into Disney’s existing organization. In cases like this, the question of organizational structure takes a backseat because the acquirer will not fold the target into its own structure; it may even do the reverse. When deals are very large, the identity of the cultural acquirer may vary across business units. When Boeing acquired McDonnell Douglas in 1997, for instance, Boeing’s objective was to tap into McDonnell Douglas’s strong position with military customers. Boeing therefore viewed McDonnell as the cultural acquirer for the military aircraft and missile business. It created a separate unit to house both McDonnell’s operations and its own military aircraft and missile business. It gave McDonnell executives most of the key posts in that business and took other measures to protect the McDonnell culture. On the commercial side, it was another story. Boeing was more successful in serving commercial airlines, and it acted swiftly to subsume McDonnell’s commercial operation.
In Hostile Territory The rhetoric of hostile negotiations as it plays out in public seems designed to amplify cultural differences between two companies. From the target pours the language of resistance, decrying the poor fit and often questioning the motives and track record of the acquirer, sometimes in highly personal terms. For its part, the acquirer blasts away at the performance of the target’s management team, usually casting it in the worst possible light. Hostile acquirers that win the day often end up alienating at least part of the organization they are taking over, creating cultural terrorists in the process who do everything in their power to resist integration. In this environment, it’s clearly impossible to employ most of the analytic tools we describe in this article ahead of time. Executive teams can’t spend time together, except in highly charged circumstances with lawyers on hand. Acquirers can’t expect to see inside data on questions of employee satisfaction, compensation and promotion processes, or decision-making norms. But companies cannot afford to ignore human due diligence just because the target won’t cooperate. Although hostile bids are rare, they also tend to be large. Hostile deals accounted for about 1% of all deals announced in 2006, for instance, but they accounted for 17% of deal value during the same period. Last year, the 374 uninvited bids made by corporate and private-equity buyers added up to offers worth $700 billion. What’s more, such deals often turn out to be game-changing for the companies involved and their industries. Fortunately, there is a certain amount you can do in a hostile situation in advance. You can analyze published reports and news stories about your target. Senior executives who have moved on from the target company can sometimes provide useful views of their former employer’s culture. Customers and suppliers often have valuable insight into the decision-making processes and capabilities of the organization and may know how these compare with those of the acquirer. Any progress you make with this kind of human due diligence will help to test your investment thesis, determine boundaries for pricing, and identify some of the hot-button issues for the target’s employees. It will also help keep you focused on life after the deal and the critical next steps you will need to take to improve it. Don’t rest on your laurels once the deal is completed. On your first day as boss, launch an aggressive “get to know you” program. As you become ac-
What Kind of Organization Do We Want? It’s rare that two firms can be combined without making hard decisions about whose structure to adopt (should business units be based on our products or their geographies?), who should report to whom, how decisions will be made, and so on. In most cases, executives looking at a deal will have ideas about which structure they prefer, but they
quainted with the people, focus especially on the next generation of leaders, usually two levels below the CEO. These managers have not fought the pitched defensive battles a hostile takeover generates and thus often see the opportunities that a business combination can provide. They will be your key allies as you move to overcome resistance and build support, because they are highly influential down the ranks of the organization. Decisions they make to stay or leave will have a significant ripple effect. You should follow
partner in Bain & Company’s Boston office and
up this program with employee surveys, interviews, and visits, all of which should be framed to protect your investment – the people you acquired. Properly presented, human due diligence can be more than a learning exercise. It can be an important part of the healing process that needs to happen before your hostile acquisition can deliver the value you were so desper-
leader of the firm’s mergers and acquisitions
ate to obtain.
David Harding (
[email protected]) is a
practice. Ted Rouse (
[email protected]) is a partner in Bain’s Chicago office and leader of the firm’s merger integration practice. 126 Harvard Business Review
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need to know whether the proposed structure makes sense given the organizational realities of the target. The first issue to diagnose is whether the target has a coherent, functioning organizational structure that allows it to make and execute decisions effectively. How and where are the business units deployed? What is the reporting structure? How many levels of authority stand between the top of the organization and the front line? How is authority distributed between layers? Think of this as the “hardware” of the organization. The second issue to address is the internal dynamics of the target, or its “software.” What process do the target’s executives use to make strategic and operating decisions? How effective are the checks and balances on the key decision makers? Where will the most significant points of friction emerge in combining the target’s functions or divisions with those of the acquirer? To address these questions, the acquirer’s human due diligence team should begin by looking at the hard data: organization charts, head counts, and job descriptions. From this research, the team should be able to create a profile of the target’s basic organization, identify the reporting lines, lay out flowcharts that track how decisions are made and implemented, and describe the various official mechanisms for controlling the quality of decision making (board reviews, steering committees, and the like). This data-based exercise, however, can take the team only so far. As any manager worth his or her salt knows, the organization chart reveals little about how effective a company’s structure is. In friendly deals, therefore, the human due diligence team should approach decision makers and their reports to compare practice to theory
job descriptions of key areas of the company. What is the scope of the units’ responsibilities, and how well have they delivered? How does the quality of the output of the target compare with that of the acquirer? Team members should supplement these observations with a careful reading of the various units’ management accounts (an exercise that will overlap with financial due diligence). It may also help to approach managers at key customers directly to ascertain their perspective on where the target excels or falls down. When Cargill Crop Nutrition acquired IMC Global to form the Mosaic Company, a global leader in the fertilizer business, the acquisition team quickly saw that the two companies’ organizations had similar structures that seemed to function well. They decided that the structure of the new company would mirror the operations and functional organization of both. With the design principles for the new organization in place, the combined company’s new CEO, who came from Cargill, set out to fill the top boxes. He conducted one-on-one meetings with the top 20 executives from both companies and solicited input from the heads of HR and the CEO of IMC Global. These interviews revealed differences between Cargill’s consensus-driven decision-making process and IMC’s more streamlined approach, which emphasized speed. Because Cargill was the cultural acquirer as well as the financial acquirer, the more consensual approach to decisions prevailed. But armed with an early understanding of the differences in approach, the CEO was able to select leaders who would reinforce this position. Cargill managers also took time to explain the benefits of their decisionmaking system to their new colleagues rather than simply mandating it.
and uncover the strengths and weaknesses of the organization: Are decisions really made through the official channels? Which departments and functions are best at making decisions? The output could consist of a additional set of flowcharts diagramming
the decision-making process. Clearly, this assessment is only feasible in a friendly deal – and usually only after the intention to make the deal has been announced. The final task for the acquirer’s human due diligence team in addressing organizational issues is to take stock of the target’s assets and capabilities and determine which departments and functions possess those capabilities. This, obviously, is especially important for deals where the point is to acquire assets and capabilities. The unit of analysis at this stage is not individuals, but entire business units, functions, or technical departments. The team will begin by reviewing the roles, goals, and hbr.org
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They can talk to the company’s “heroes” and decipher what they stand for. And they can review compensation, performance management, and other systems to get an idea of the values and behavior the company promotes. After an announcement, a company can also start applying a useful cultural assessment tool: the employee survey. In this kind of survey, employees from both companies are asked to rate their own company’s culture along a host of dimensions. They are also asked what they would like the combined company to look like in each of those categories. Along with face-to-face interviews, these survey data can reveal where friction and clashes are likely to spring up. One leading American consumer products company we know (we’ll call it U.S. Goods) used surveys effectively for cultural due diligence. The company was considering the acquisition of a European company (Eurogoods) with a similar product line and clientele. Because the acquisition’s goal was to expand the geographic scope of the core business and achieve greater economies of scale in shared functions, U.S. Goods was both the financial and the cultural acquirer. It knew that the success of the merger would hinge on its ability to integrate Eurogoods into its own organization rapidly, which would, in turn, hinge on the cultural compatibility of the two organizations. Working closely with their counterparts at Eurogoods, the U.S. Goods management team undertook a “cultural audit” of the two organizations. The team surveyed 28 key managers from Eurogoods, as well as 31 from its own organization, asking them a wide range of questions related to their personalities (for instance, their “desire to win” and their “external focus”), their management styles (such as their decision-making process and communications preferences), and their perceptions of organizational norms in such areas as compensation and career development. By comparing the answers, U.S. Goods was able to pinpoint cultural differences between the two orga-
How Will the Cultures Mesh? As we’ve seen, in many deals it isn’t always obvious which firm is the cultural acquirer. Even when it is obvious, changing cultures is not simple. So it’s critical that the acquirer get a sense of the similarities and differences between two organizations’ cultures and just what the cultural transition will involve. This is so, even if the investment thesis downplays the importance of the culture. Human due diligence efforts focused on culture have to begin with a clear understanding of what the target company’s culture actually is. The acquirer should start by looking at the business press to see what the target’s key stakeholders have to say about the matter and supplement that research with interviews with representatives from each group of stakeholders, if possible. The target’s executives can explain how they view their mission, their values, and their own cultural style. The decision-making diagnosis we talked about above is another tool the acquirer can use to identify differences in the two organizations’ processes that actually reflect fundamental cultural differences. For example, is decision making centralized or decentralized at the target company? Customers can shed light on how the target goes to market and responds to change. Competitors and suppliers can provide information on how the target is perceived in its industry. With this information, the acquirer can begin making decisions about the desired culture and put ground rules in place even before the deal is announced. But the really useful cultural work of human due diligence starts after the deal is officially on the table. Then it becomes easier for the companies to work together openly. There’s a lot a human due diligence team can learn simply by spending time at the target. Team members can see firsthand what the company’s norms are about space, communication, meeting management, and dress – all important cultural symbols. 128 Harvard Business Review
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nizations that might lead to leadership conflicts, talent flight, and integration breakdowns. The survey revealed, for instance, that Eurogoods had a more laid-back management culture than U.S. Goods, relying more on informal conversations and less on performance measures and organizational agility. With those results in mind, U.S. Goods formulated a plan aimed at addressing the cultural gaps and educating Eurogoods managers on the numbers-driven management ethic at U.S. Goods. It even had the Eurogoods team sign off on the plan before the deal closed. While it’s helpful for the acquirer to take stock of data from employee culture surveys, it’s even more useful to get the managers from both companies to examine the data together in workshops. Indeed, the process of a joint review is as valuable as the data it produces. Executives participating in such workshops immerse themselves at first in the distinctions between the two cultures highlighted by the data. Then the floodgates open, and they often find they agree on many elements of the culture for the new organization, which becomes a rallying point. Defining the values of the new culture, translating those values into specific expectations for behavior, and coming up with a plan to move both organizations to the new culture goes a long way toward understanding how each side works and what each assumes to be normal. The process also knits together the leadership team, turning its members into role models for the new culture.
Whom Do We Want to Retain? If the financial acquirer is also the cultural acquirer, the company is likely to want to retain its own people in the top jobs. But keeping great talent from an acquired organization not only can upgrade the effectiveness of your company, it can also send a powerful message to those in the target firm about how they will be treated in the merger. What the acquirer really needs to do is
spend their time in conference rooms, focusing on the performance story and numbers. But every visit to a target is also a chance to get out and learn firsthand how the organization feels. The wider the cultural gulf between two companies, the more important direct interaction with the target’s management becomes. That’s particularly true of mergers involving companies based in different countries. To take another example, a U.S. appliance manufacturer (let’s call it Atlantic Appliance) took a quite aggressive – and valuable–approach with an Asian manufacturer (Pacific Appliance) it was considering acquiring. In every key function, senior executives from the two companies got together for intensive, three-day sessions involving business reviews, strategy presentations, questionand-answer periods, and factory and office visits. Participants also dined and socialized together. On one level, the meetings were designed to help the acquirer gather information about Pacific’s processes and practices. For example, the program helped Atlantic realize that the merger integration could break down as a result of the very different financial standards used by the two companies. On another level, however, the meetings provided Atlantic with insights into Pacific’s management style and culture as well as a sense of the skills and attitudes of key managers. This analysis may well have been the primary benefit of the time spent together, becoming the basis for decisions Atlantic made about which Pacific managers to retain in top jobs and which to let go. It ensured, in other words, that the departure of employees occurred where it would do the least harm and potentially even bring benefits. So far, our people discussion has focused on the top jobs. But in many acquisitions, the rationale is as much about the rank and file’s capabilities as the top managers’. Here, the peopleassessment process overlaps with structural human due diligence. The capabilities stocktaking we described earlier
Human Due Diligence: A Checklist Human due diligence – assessing the decision-making roles, culture, capabilities, and attitudes of people in a target company – helps acquirers make fundamental go/no-go decisions, determine the price if the deal goes forward, and create an effective and focused integration plan. Indeed, the information gleaned through human due diligence can form the basis for a human capital balance sheet, showing the assets and liabilities of the company in terms of its people. Integration decisions enabled by human due diligence • Determining the structure of the organization and resolving conflicts in decision-making processes. •
Setting the tone for the combined culture and establishing a process for migrating to a new culture.
•
Filling the top jobs quickly and deciding how to retain other key talent.
•
Implementing programs aimed at winning the hearts and minds of employees in the target organization.
Methods and tools For a fact-based view of a target company’s culture and the strengths and weaknesses of its people, acquirers can draw on organization charts, compensation and promotion processes, job descriptions and responsibilities, employee turnover rates, culture audits, 360-degree feedback, internal satisfaction surveys, and measures of employee loyalty. • For a more qualitative assessment of people issues and capabilities, acquirers •
use interviews with key executives, role plays to determine patterns of response to business situations, reviews of how the management team handled prior crises, and interviews with customers and suppliers.
get to know the management team of the target, so that it can judge who are the most talented leaders and then put the best people in each position. In some situations, the target’s people are precisely what the deal is all about. The Chinese company Lenovo’s acquisition of IBM’s PC business, completed in May 2005, is a case in point. In fact, the board of Lenovo’s controlling shareholder allowed the company to pursue the deal if, and only if, it could recruit IBM’s senior executives to manage the merged enterprise. Lenovo’s interest wasn’t just in the top people. The company offered a job to every IBM employee with no obligation to relocate or accept reduced compensation. That meant the company could continue seamlessly on its way, with minimal disruption of engineering projects or customer relationships.
Not every company, of course, wants to retain all its target’s managers, and most will need to determine who goes and who stays. Working that out requires the same kind of detailed assessment that goes into any high-level hiring effort. Acquisition team members should gather performance reviews, interview third parties (headhunters and former executives, for instance), and assess the executives’ track records. They should probe the executives’ leadership styles and evaluate how they have dealt with difficult decisions. Most of all, acquisition team members should simply spend time with their counterparts in the target company, preferably on the target’s turf, getting to know them as individuals. The investment bankers who entertain an acquisition team at the target company’s facilities will always want team members to hbr.org
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tells the acquirer exactly which departments and functions house the talent the acquirer wants to retain. The acquirer can then make judgments about which individuals in those units to keep on. If it is the people in sales who are essential to the acquisition’s success, the team should talk to customers about which sales reps are the best, possibly combining this with the cultural interviews we described earlier. If the acquirer is buying research and development capabilities, it needs to bring in outside experts capable of evaluating the target’s scientists and engineers. A particularly useful tool for assessing talent at a target is forced ranking. This needs to involve some combination of HR and key senior employees who will be part of the new organization. Using performance reviews and input from senior executives, the acquisition team can usually rank every employee in the critical departments from top to bottom. These results can
be cross-checked against individual bonus awards, which are often a good guide to past performance. Once key people are identified, the acquirer must face the challenge of retaining them. Those at the top may have an ownership stake in the company, which could generate a big payout as a result of the acquisition, and they may feel they can safely leave the company or retire. Even those without an ownership stake may decide it’s time to seek greener pastures. To complicate the situation, the acquirer may want to keep some of its new employees over the long term while retaining others only for six months or a year. The best way to solve this puzzle, typically, is to put your cards on the table: Tell people exactly what you’re hoping they will do, be it stay for a short while or stay on long term, and design incentives to encourage just that. Nonfinancial rewards and aspirations are important as well. If you can convince people that they’ll
now be part of a bigger, more exciting organization, they’ll be more likely to stay on.
What Will Employees Think About the Deal? Intimately linked with the question of whom you want to retain is the question of postmerger morale. The success of pretty much any deal (except perhaps those in which the acquirer is really only after a specific physical asset or patent) depends on what the target’s employees think about the deal. Are they pleased or are they horrified to be acquired? Are they afraid? Will they actively undermine efforts to change the organization? Their attitudes will determine whether the acquirer can retain key employees, how difficult it will be to acculturate them, and whether they will accept new structures and processes. If the deal is hostile, of course, you will not be well placed to gauge employee
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morale. Incumbent management at the target will be telling employees that the deal is a nonstarter and will be bad for the company. For that reason, pulling off a hostile acquisition whose investment thesis is based on the people is extremely challenging. But if the deal is a friendly one, then there’s a lot you can do to gauge and even manage the attitudes of the target’s people. The obvious starting point is employee surveys. Most companies keep track of their employee satisfaction levels, and the results of these surveys can tell you a lot about employees’ attitudes toward their company. Do they feel that there is a free flow of information up and down the hierarchy? Do they believe that they are rewarded on the basis of merit and hard work? You can also find out which units are happy with the status quo and which are not, thereby indicating where the main communication challenges will lie. Units that are happy with the status quo may resist the changes you propose, while those that are dissatisfied may look on you as a white knight. In addition to reviewing past surveys, you can work with the target to directly survey employees about their attitudes toward your company as an acquirer. And you can monitor industry and employee placement chat rooms to see what’s being posted by your employees and by competitors. As you build a picture of employee attitudes at your target, you will probably want to move beyond surveys to spend time with frontline employees on their coffee breaks and lunch hours, walking through plants and offices, talking with people at the operating level. When, in 2002, Johnson Wax Professional was in negotiations to buy DiverseyLever, part of the consumer goods giant Unilever, CEO Greg Lawton spent more than 100 hours talking individually with Diversey executives. From these conversations, he was able not only to identify members of a new management team before the deal was completed but also to map out a comprehensive program for commu-
nicating what the deal would mean for all stakeholders – employees, of course, but also customers, suppliers, and investors. By the time the deal was announced, Lawton and his counterpart at Diversey, Cetin Yuceulug, had prepared a joint vision and values statement, along with a video describing the new company’s direction and plans, which they distributed to the company’s worldwide staff on the day the deal was announced.
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•••
Conducting human due diligence requires both sustained commitment from senior executives and the allocation of the necessary resources. It is particularly hard to do when, as too often happens, executives of a would-be acquirer are hastily responding to an opportunity that has suddenly appeared on their radar screen. There is little time even to create a cogent deal thesis to test, let alone find the time to do the kind of due diligence on people issues that a successful deal entails. But there’s another way to go about it. As we have argued, the most successful acquirers have a strategic rationale behind their deals. They build a pipeline of potential acquisitions that fit the rationale, on which they can conduct ongoing due diligence, both financial and human, before any merger opportunities ever arise (see “Building Deals on Bedrock,” HBR September 2004). With that kind of approach, acquirers usually have plenty of time and opportunity to pursue thorough human due diligence over a period of months or even years. When formal due diligence kicks off, these acquirers already know a lot about the target, including the strengths and weaknesses of its key people. They have a good idea from the outset of who is going to be the cultural acquirer in the deal, reducing the odds of misunderstandings or culture clashes. Done this way, human due diligence can turn people issues from a potential liability into a solid asset. Reprint R0704J To order, see page 143.
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Letters to the Editor Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility Most contemporary analyses of corporate social responsibility (CSR) emphasize the connection between a corporation’s CSR policies and its strategic objectives, a linkage that Michael E. Porter and Mark R. Kramer illustrate with innovative current examples in their article,“Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility” (December 2006). HBR
Making a Real Difference
Spotlight
by Michael E. Porter and Mark R. Kramer
& Society
Strategy
The Link Between Competitive Advantage and Corporate Social Responsibility overnments, activists, and the media have become adept at holding companies to account for the social consequences of their activities. Myriad organizations rank companies on the performance of their corporate social responsibility (CSR), and, despite sometimes questionable methodologies, these rankings attract considerable publicity. As a result, CSR has emerged as an inescapable priority for business leaders in every country. Many companies have already done much to improve the social and environmental consequences of their activities, yet these efforts have not been nearly as productive as they could be – for two reasons. First, they pit business against society, when clearly the two are interdependent. Second, they pressure companies to think of corporate social responsibility in generic ways instead of in the way
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modify the way the marketplace works in order to advance their clients’ interests. For example, the Washington Post (December 10, 2006) reported that corporate dairy companies recently spent well over $5 million to strengthen an anachronistic milk marketing scheme installed in the 1930s to protect small farmers–a scheme said to have cost consumers $1.5 billion a year, and under which small dairy farmers have largely disappeared – in order to penalize one innovative farmer for selling milk at a lower price. Even if the $1.5 billion revenue estimate is significantly inflated, the companies still realized a good return on their expenditure. The concept of corporate social responsibility today needs to include attention to the legitimate interests of many stakeholders, particularly when attempts are being made to change the rules of the game to advance ex parte interests. As Thomas Stewart notes in his December 2006 Letter from the Editor, “Companies cannot thrive in corrupt… societies.” The dairy farmer targeted by this lobbying effort would surely agree. Lee E. Preston
While the top box on their diamond diagram is labeled “Context for Firm Strategy and Rivalry,”the authors fail to mention that manipulation of this context can be an important strategic option, with substantial societal impact. In Washington, DC, and in U.S. state capitals today, a sea of corporate money floats a sizable navy of business lobbyists whose purpose is to monitor and
Professor Emeritus Robert H. Smith School of Business University of Maryland College Park, Maryland
Porter and Kramer’s article on the link between competitive advantage and corporate social responsibility provides a framework for improving the governance architecture of corporations.
We welcome letters from all readers wishing to comment on articles in this issue. Early responses have the best chance of being published. Please be concise and include your title, company affiliation, location, and phone number. E-mail us at
[email protected]; send faxes to 617-783-7493; or write to The Editor, Harvard Business Review, 60 Harvard Way, Boston, MA 02163. HBR reserves the right to solicit and edit letters and to republish letters as reprints. 132 Harvard Business Review
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Establishing adjunct governance forums of strategic stakeholders not only provides a cost-effective way for organizations to establish the multiple and reenforced “outside-in” links the authors describe; it also protects directors. It was because German and Japanese companies obtained these additional advantages from their stakeholder forums that Porter recommended the inclusion of stakeholders in the governance architecture of U.S. firms in his 1992 report, Capital Choices. Stakeholder forums can be designed to provide directors with a systemic process to carry out their most fundamental fiduciary duty: to direct and monitor management. Nonexecutive directors cannot creditably carry out these basic roles with due diligence, vigilance, and care unless they obtain feed-forward and feedback intelligence independent of management. If the stakeholder forums are constituted independently, as is the practice in Germany and Japan, the duties and cost of management could be simplified and the need for auditing stakeholder reports eliminated, yielding further savings. The responsibility for being “attuned to the evolving concerns of stakeholders, and mitigating existing or anticipated adverse effects from business activities”would be shared with the stakeholders to protect the corporate reputation.
ests. We disagree, however, that such efforts are desirable or should be labeled an “important strategic option.” Lobbying may forestall market forces and inflate profits in the short run, but it does not provide a sustainable competitive advantage. On the contrary, preserving artificial conditions frequently leads companies to make the wrong strategic choices. Many industries that successfully delayed regulation in their home countries have since fallen victim to changes in the political environment or to foreign competition. U.S. automakers, for example, lobbied effectively against higher mileage standards for their cars, only to suffer dramatic reversals as they lost touch with the needs of the global marketplace. Manipulating the regulatory environment is a good example of win-lose thinking rather than the shared-value approach we advocate. We agree with Shann Turnbull that stakeholder forums can be a valuable source of guidance for corporations and can contribute to corporate governance. We caution, however, that responding to stakeholders is not enough to enable a company to integrate social considerations with its strategy. Stakeholders may be aware of the harmful impacts of a corporation’s value chain, but they are far less likely to understand the competitive and societal advantages that a company can achieve by integrating social considerations into its core strategy.
tries” (October 2006) present real opportunities for future emerging giants. However, my 35 years of working in developing Asia – as well as my role as a (non-Muslim) member of the International Advisory Panel of the World Islamic Economic Forum, the business and economic face of the 57-member Organization of Islamic Conference, and our recent discussions in Islamabad – suggests that not all voids are created equal, and not all provide a solid foundation for regional expansion. Unfortunately, we see large national firms gaining domestic advantage principally by exploiting their informal access to the host government. In exchange for a range of “favors,” including most commonly “black” or undisclosed payments to the ruling party ahead of elections, these companies use their privileged access to acquire protected market positions in regulated sectors such as financial services and cellular telephony. So-called national ownership is then used to protect corporate underperformance in businesses with both formal and informal links to the government. Even Khanna and Palepu’s premise that national firms can exploit their deeper insights into local product and resource markets (as in the examples of Jollibee and Haier) or their superior access to local resources (witness Infosys, Tata Consultancy, and Satyam Computer Services) may require further research. Examples such as India’s Mahindra and Mahindra’s prize-winning Scorpio SUV and Haier’s tiny washing machines and vegetable cleaners may be on the surface compelling, but when the underlying economics of such businesses are peeled apart–not always a trivial exercise – some clear patterns emerge: First, in many developing countries, accounting systems are not
Shann Turnbull Principal International Institute for Self-Governance Sydney, Australia
Porter and Kramer respond: Lee Preston accurately points out that companies often try to manipulate the regulatory context through aggressive lobbying, which can run counter to society’s inter-
Emerging Giants: Building World-Class Companies in Developing Countries I don’t doubt that the product and factor voids that Tarun Khanna and Krishna G. Palepu identify in their article, “Emerging Giants: Building WorldClass Companies in Developing Counhbr.org
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sophisticated enough to separate the often premium returns of core businesses – those that operate in areas where monopoly rents can be extracted– from the frequently low or even negative returns in sectors open to competition. Second, weak accounting can contribute to misreading the effect of bringing on incremental capacity to export in globally competitive sectors such as automobiles. In one extreme case, for instance, an emerging Asian national auto manufacturer had proposed an export selling price for builtup automobiles that was less than the cost of the completely knocked-down (CKD) kits the factory was buying from Japan!
tional issues. To understand the organizational dynamics, one might focus on the dichotomy between the passivity of Evan and the board and the aggressiveness of the leader they chose. Why does the company believe that Rob’s antidependency, no-coddling, “school of hard knocks” approach is necessary? Do they really believe that leaders with people skills aren’t capable of making tough decisions or, worse, that they are “momma’s boys”who can’t be real businesspeople? It’s possible that Evan brought in a hardball player to overcompensate for what he felt to be his own shortcomings.
Ian C. Buchanan
Hammer Associates
Senior Executive Adviser
Syosett, New York
Bruce Hammer President
Booz Allen Hamilton Sydney, Australia
Khanna and Palepu respond: We have no disagreement with Ian Buchanan. Indeed, he is right that in several emerging markets, rent-seeking has been one route to amass riches. But the purpose of our article is to shed light on economic giants–not the political giants he points to – that have adapted their business models to the institutional voids in their environments and added economic value in the process. These innovators should be lauded, studied, and replicated. Buchanan’s second point, that accounting systems are underdeveloped, is spot on. It reinforces our premise that emerging markets are fraught with information problems, a common cause of institutional voids. If the hapless CKD kit buyer should soon find itself out of business, for example, that would not be a bad thing.
Common wisdom suggests that Rob has a skill deficit in emotional intelligence that can be remedied by means of executive coaching. I would suggest an alternate perspective. A sophisticated coach would find ample evidence in this case that Rob has a psychological problem that requires psychotherapy, not executive coaching. (Such a coach need not by any means be a psychologist; psychology-mindedness might be a core competency for executive coaches but it is not the exclusive province of psychologists.) Rob’s behavior is not only abrasive and offensive but dramatically self-destructive, which suggests that there are powerful psychological forces at play. Specifically, Rob’s gaffes all seem to be directed against
The CEO Who Couldn’t Keep His Foot out of His Mouth The HBR case study by Lisa Burrell, “The CEO Who Couldn’t Keep His Foot out of His Mouth” (December 2006), provides a clear example of how often organizations fail to recognize leadership problems as reflections of organiza134 Harvard Business Review
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what he considers to be signs of dependency and indulgence. He appears to be staking out some macho ground in a maternal field, as if his sense of his own success has been threatened by the very field of endeavor in which it has occurred. Steve Axelrod Principal Axelrod Consulting New York
How Well-Run Boards Make Decisions In “How Well-Run Boards Make Decisions”(November 2006), Michael Useem underlines the importance of deciding what matters are reserved for the board, but gives managers no tool to help make this crucial decision. Focusing on “large-impact decisions” or those that “will change the future” or “any issue that could have a material impact on the company, from either a financial or a public perspective” are rather vague concepts that would not have ensured that Enron’s off-balance-sheet partnerships were brought to the board’s attention. We need a set of criteria for deciding what needs to go to the board and some examples demonstrating why items like off-balance-sheet accounting would make the list. Having spent 20 years studying the relationship between corporate centers and their subsidiary companies, I offer four suggestions. First, the board should authorize all significant governance decisions concerning how the company records what it is doing, presents itself to outsiders, makes decisions, and assesses risks. Given the importance of financial accounting, for example, the board should authorize all accounting changes, specifically those that are not conservative. This category is about the probity and integrity of the company. Second, the board should authorize all decisions with material risks. Third, the board should get involved in other decisions only when the probability that the discussion will add value (result in a better decision) outweighs
the probability that it will destroy value (result in a worse decision, delay, or undue cost). Boards can add value if directors have special knowledge or expertise that is relevant to the decision or if the managers proposing the decision are likely to be biased (consciously or subconsciously) in their thinking. Otherwise, boards are likely to destroy value by wasting time and money or giving bad guidance due to ignorance of the details. Fourth, the board should appoint the CEO and CFO and authorize other senior appointments. Useem’s case studies address the third point but raise some concerns. The board of Universal Investments seems comfortable encouraging its CEO to present the decision about the diamond fund. On what basis does the board believe that it can add more value than it destroys with this decision? Surely the management team is best placed to examine the options and identify the best solution. The role of the board in this kind of decision
should be to review the criteria the CEO is using to choose between options, not make the choice itself. In the Tyco example, the board reviewed the 60 recommended divestments and decided that in six instances the case for divestiture was not strong enough. This would add value only if the board had some special expertise with regard to these six companies or if the directors believed management was biased toward selling too much. Both reasons seem unlikely. Instead, the board might have better used its time to review the 50 businesses that management recommended keeping. Tyco’s history suggests that management would probably be biased toward keeping too much rather than selling too much. Andrew Campbell Director Ashridge Strategic Management Centre London
Useem responds: Andrew Campbell has called for tools to help governing boards
make decisions. That is indeed a useful next step. In my article, I set forward a set of principles to guide directors’ decision making. The principles range from the preparation of a protocol specifying which decisions should be taken up by the directors to the creation of a governance culture that mandates director engagement in the company’s major decisions. Once these principles are in place, boards then need to develop more specific guidelines for deciding what to delegate to management and which issues to reserve for themselves. Campbell helpfully offers four such tools, and they are, in fact, widely recognized as constituting good governance guidelines. While he quarrels with the boards’ decisions at two of the companies described in my article, his commentary reminds us how important it is for directors to become explicit about their principles and tools – and how difficult it can be to reach agreement on them. Corporate boards are
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LETTERS TO THE EDITOR
ress – rising up the ranks, snapping at the heels of men. Then high-level jobs were redefined. They became even more time consuming, even more pressure filled – increasingly beyond the reach of women with significant childcare and eldercare responsibilities. The result: Only 20% of extreme job holders are female, and fully 80% of them have one foot out the door because they feel they can’t keep up a 70-hour week for more than 12 months. The new extreme work model does not augur well for women’s progress. Many organizations see high-octane extreme workers as their “A” team – the bench strength from which they recruit future leaders. So it’s terribly disturbing to see so few women in these ranks. The solution does not lie in celibacy. As a society, we need professional women to continue to have children. The challenge is to re-engineer high-level jobs so that they become doable by ordinary people, not just “saints.”
moving toward greater engagement in major company decisions, and establishing the right principles and tools will require continuing appraisal and debate.
Extreme Jobs: The Dangerous Allure of the 70-Hour Workweek I’ve worked in corporate America for the past 20 years. Prior to that, I was an “officer” in the world’s largest international not-for-profit service organization: I was a priest in the Catholic Church. Many of the characteristics described by Sylvia Ann Hewlett and Carolyn Buck Luce in “Extreme Jobs: The Dangerous Allure of the 70-Hour Workweek” (December 2006) sounded strangely like those shared by Mother Teresa, St. Ignatius Loyola, and St. Francis of Assisi. These dedicated people also put in long hours, worked endless weekends, and were obsessed with results. They often drove others to achieve similar successes. Perhaps when the Divine awards certain people extraordinary talents, there resides a corresponding moral obligation to use them–even to the detriment of society, family, and the individual. However, there is one stark difference between the saints and today’s extreme workers: The saints never neglected their spouses and offspring. Maybe the vow of celibacy has a place for today’s “uber-achievers.” Based on their sexual dissatisfaction, it seems they are embracing this austere lifestyle anyway. Taking the vow would merely ensure that they get some eternal remuneration for it.
Disruptive Innovation for Social Change For-profit companies have a clear mandate: increase wealth and return. This focus drives them to seek out market opportunities, including the type suggested by Clayton M. Christensen, Heiner Baumann, Rudy Ruggles, and Thomas M. Sadtler in their article, “Disruptive Innovation for Social Change” (December 2006). Nonprofit organizations, whether funded by donations or by government subsidy, generally have no such clear focus. Many are founded with only a vague definition of the benefits they exist to create and no method of measuring whether or not they actually create them. Catalytic innovation will work when an organization is motivated to find new and better ways, but if the profit motive does not drive them they need something else. If, as suggested by John Carver in his book Boards That Make a Difference (John Wiley & Sons, 2006), a board defines the purpose of the organization in terms of measurable out-
Kenny Moore Coauthor, The CEO and the Monk (John Wiley & Sons, 2004) Totowa, New Jersey
Hewlett and Luce respond: Women pay a disproportionate price for their extreme jobs and are being left behind in new ways. Over the past 40 years, highly credentialed women flooded into the professional labor market and, at least in some sectors, started to make serious prog136 Harvard Business Review
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comes rather than programs or activities, and names which populations should receive the defined outcomes, management will have that focus. Then they can pursue opportunities that will help them better produce those defined outcomes. Eric Craymer President Growth Management Consulting East Lansing, Michigan
Christensen, Baumann, Ruggles, and Sadtler respond: Eric Craymer is right to cite John Carver’s Boards That Make a Difference, which has been an invaluable guide for many nonprofit directors. Craymer offers some insightful comments about the importance of nonprofit board governance. However, the nonprofit catalytic innovations model will work only when the fee for a product or service is directed by the consumer. Without this, an organization’s ultimate scalability is determined by government agencies or donations, which tend to be influenced more by politics than by the value proposition. For fee-for-service to work, measurable outcomes are natural and necessary guides. In fact, all our nonprofit examples track measurable outcomes, such as the increasing number of students completing virtual courses or graduating from a community college, the number of farmers in Kenya using a KickStart pump, the number of people purchasing health insurance from the Freelancers Union, or the interest and default rates on microlending. Before the creation of innovative business models such as those we described, measuring the degree to which a value proposition addressed pressing needs appeared impossible or irrelevant. It is clear to us now that this is a critical element of scalability and sustainability in the building of enterprises whose purpose is to do good.
Home Depot’s Blueprint for Culture Change I find it interesting that Ram Charan argued that Bob Nardelli had successfully
changed the Home Depot culture in his April 2006 article,“Home Depot’s Blueprint for Culture Change.” Nardelli imposed the GE culture on Home Depot. GE’s authority-centered culture may be highly effective in certain businesses, but time has shown that it is not suited for environments that require sensitivity to and respect for multiple constituencies’ viewpoints. Telling people “When I want your opinion, I’ll give it to you”doesn’t work in settings where others have as much, or more, power than you have. Another lesson can be derived from the recent failure of Nardelli at Home Depot: Publishing company case studies can be dangerous. Unfortunately, today’s success stories often become tomorrow’s case study failures. I would love to see HBR return to being a true “thought leader,” focusing on ideas that have not yet gained acceptance and letting companies, consultants, and others figure out their applicability to their own environment. Pete DeLisi President Organizational Synergies Fremont, California
Firing Back: How Great Leaders Rebound After Career Disasters If Jeffrey A. Sonnenfeld and Andrew J. Ward were to strike the word “new” from their statement that Michael Milken turned his zeal into “a new heroic mission” to cure disease, their article “Firing Back: How Great Leaders Rebound After Career Disasters” (January 2007), would more accurately describe his history of accelerating medical solutions. The mission was not new. Milken had been leading important medical research initiatives for two decades before he was diagnosed with cancer in 1993. By 1982, he had formalized these efforts in the Milken Family Foundation, which organized and endowed programs to speed progress in the fights against breast cancer, pediatric neurological disorders, leukemia, and other diseases. Milken didn’t “survive” to “build a huge foundation” – he built it
years earlier, well before he gained fame on Wall Street. Geoffrey Moore Senior Adviser Office of Michael Milken Santa Monica, California
Sonnenfeld and Ward respond: We apologize to Michael Milken and to Geoffrey Moore if we minimized the former’s interest in health care before his cancer diagnosis or, indeed, in education, which was also clearly a lifelong passion of his. There is only so much detail we could include in the space of an article. For most people who successfully rebound, their new heroic mission involves rediscovery and renewed focus on core values and interests rather than the creation of something completely new. Witness the rebounds of Steve Jobs and Jimmy Carter. The same was true for Milken. What we hoped to convey when we referred to Milken’s “new” heroic mission was that after one of the world’s leading financiers was barred for life from financial markets, he refocused his considerable energy onto other areas. In our book, Firing Back: How Great Leaders Rebound After Career Disasters, we have more room to elaborate on Milken’s great accomplishments since his 1990 conviction. Milken developed his personal formula when he was in college: “Prosperity is the sum of financial technology times the sum of human capital plus social capital plus real assets.” In his former professional life, he concentrated on the financial technology aspect of the equation, but when he rebounded, he turned to human capital. As Moore correctly points out, Milken undertook considerable initiatives in the areas of health care and education while on Wall Street, but only after 1990 did they become his main focus. For example, the Milken Institute began in 1991, and his Prostate Cancer Foundation (previously named CaPCURE) was launched in 1993. We see these initiatives in education and health care as major leaps forward in Milken’s philanthropic activities. Together with the creation of Knowledge Universe, they represent a new heroic mission.
LEADERSHIP
COVER STORY
58 | What Your Leader Expects of You Larry Bossidy
Executive Summaries APRIL 2007
There’s nothing more depressing than sitting in a business meeting with people who don’t know what’s going on in the world. – page 58
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The success of an executive team depends heavily on the relationships the boss has with his or her direct reports. Yet the leadership literature has had little to say about what is expected in those relationships – on either side. Larry Bossidy, formerly the chairman and CEO of Honeywell, and before that of AlliedSignal, shares what he calls “the CEO compact,” detailing the behaviors a leader should look for in subordinates and what they should be able to expect in return. A CEO’s best people, he says, know when a situation calls for them to get involved. They generate ideas – remembering that some of the best ones may sound crazy at first. They are willing to collaborate, putting the long-term good of the company above short-term goals of their divisions. They step up to lead initiatives, even if the outcome is uncertain. They develop leaders among their people, especially through direct involvement in performance appraisals. They stay current on world events and anticipate how those events may affect the company and its competition. They drive their own growth by exposing themselves to new people and ideas and by accepting demanding assignments. And they sustain these behaviors in bad times as well as good. On the other side of the compact, the boss should provide clarity of direction; set goals and objectives; give frequent, specific, and immediate feedback; be decisive and timely; demonstrate honesty and candor; and offer an equitable compensation plan. Executives who aren’t lucky enough to have such a boss can create a compact with their own subordinates, Bossidy says, and demonstrate by example. The result will be to improve team and company performance and accelerate individual growth. Reprint R0704C
IDEAS & TRENDS
ORGANIZATION & CULTURE
FORETHOUGHT
HBR CASE STUDY
20 | Strategy Lessons from Left Field
33 | Why Didn’t We Know?
Rough schooling helps multinationals from small or developing countries become formidable global competitors. F0704A
Ralph Hasson
The Upside of Falling Flat The failed McDonald’s hotel project is a good example of a “real option” – a set investment for an uncertain but potentially high return – and shows that the company is willing to nurture innovation. F0704B
Younger Women at the Top More women than men at Fortune 1,000 firms have reached executive officer positions in their thirties, forties, and fifties – and they’ve done it faster. Still, nearly half of those companies lack female executive officers altogether. F0704C
$152,000 for Your Thoughts Making employees prove their ideas’ worth results in better concepts and more-motivated workers. Executives must give people the tools to stand behind their ideas and must follow up with strong rewards. F0704D
Nurturing Respect for IP in China The best way to foster an appreciation for intellectual-property rights in China is to let partner firms experience the benefits of locally generated knowledge. F0704E
Find the Gold in Toxic Feedback Even rude or irrelevant feedback can be useful, but only a rare few can put ego aside and extract the hidden value. F0704F
Stay on the Q&A Offensive The Q&A should be more than just an afterthought, says communications consultant Michael Sheehan. It may be the only part of your speech people actually listen to. F0704G
Quality Is in the Eye of the Beholder Consumers are slow to notice positive or negative changes in a product’s quality, and that could have important implications for your company’s marketing plan. F0704H
Reducing Directors’ Legal Risk Outside directors are at lower risk of liability than they might think, but they can protect themselves even further. F0704J Reviews Featuring The Halo Effect…and the Eight Other Business Delusions That Deceive Managers, by Phil Rosenzweig.
Galvatrens, a consumer products company in Houston, has a whistle-blower’s lawsuit on its hands. Mike Fields, a former divisional sales manager, claims that he was wrongfully terminated for trying to report an illegal scheme designed by a colleague to inflate numbers. He’d left the company’s COO a confidential voice mail about it, but the COO referred the matter to Mike’s boss rather than following up on it himself. Mike says his boss subsequently told him his performance wasn’t up to snuff and he’d have to accept a demotion and a transfer if he wanted to stay with the company – knowing that Mike, a divorced father with joint custody of his kids, couldn’t leave town. How could all of this have happened? Chip Brownlee, the CEO of Galvatrens, had taken steps a while back to upgrade the company’s procedures for uncovering misconduct and solving conflicts. He and the general counsel had instituted a number of changes, including a new open-door policy for raising workplace concerns. Although the policy encouraged employees to go to their immediate supervisors, it emphasized that they could approach any manager at any level for assistance, and it included a ban on retaliation against whistle-blowers. Chip and the board need to figure out why, with all those channels in place, only one person came forward with information about the sales scheme – and why that person ended up suing the company. How should Galvatrens strengthen its system for uncovering misconduct, and what roles should the board and management play? Commenting on this fictional case study are Stephen R. Hardis, the nonexecutive chairman of Marsh & McLennan; Hal Shear, the managing director of Board Assets; Mary Rowe, an ombudsperson for the Massachusetts Institute of Technology; and Jackson W. Robinson, the founder and president of Winslow Management. Reprint R0704A Reprint Case only R0704X Reprint Commentary only R0704Z
INNOVATION & CREATIVITY
Going Against the Grain
“Howard Gardner is the man who changed our notion of what it means to be clever.”
The Financial Times
“Essential reading for those who chose to thrive in their most important endeavors.”
Edward Betof, Chief Learning Officer, Becton, Dickinson and Company
“Gives thoughtful, timely, and inspirational advice for managers and their organizations.”
Academy of Management Review Available wherever books are sold
www.HBSPress.org
45 | Preparing for the Perfect
STRATEGY & COMPETITION
66 | Finding Your Next Core
Product Launch
Business
James P. Hackett
Chris Zook
Shortly after Jim Hackett became CEO of Steelcase in 1994, the office furniture manufacturer introduced two products. The Leap chair was a great success. But the Pathways office cubicle system ran into trouble from the start, plagued by R&D disputes, distribution misunderstandings, and product recalls. How could a company fail as well as succeed? Hackett traced the root of the matter to something many organizations would see as a virtue: the company’s “can do” attitude. People at Steelcase were not spending enough time thinking things through before they jumped to execute. Hackett set out to transform Steelcase’s “doing” culture into a “thinking before doing” culture. After much research, he developed a four-part process to give development teams at Steelcase the mental tools, intellectual resources, and time they needed to think a project through to completion. In the think phase, the team finds out as much about a potential project as possible. Team members ask questions, contact experts, do research, and come up with a range of options. In the point-ofview phase, they select the option they will pursue. Once the point of view is formed and cleared with the company, all second-guessing comes to an end and, in the plan-to-implement phase, the group determines the process by which the project will be completed. Only after fullscale practice runs with everyone involved does the project actually go forward in the implementation stage. It takes a great deal of courage and confidence for people anxious to storm the world to slow down and explore all their options first, Hackett acknowledges. But by bringing thinking and doing into the proper balance, everyone is much better prepared to meet the future. Reprint R0704B
How do you know when your core needs to change? And how do you determine what should replace it? From an in-depth study of 25 companies, the author, a strategy consultant, has discovered that it’s possible to measure the vitality of a business’s core. If it needs reinvention, he says, the best course is to mine hidden assets. Some of the 25 companies were in deep crisis when they began the process of redefining themselves. But, says Zook, management teams can learn to recognize early signs of erosion. He offers five diagnostic questions with which to evaluate the customers, key sources of differentiation, profit pools, capabilities, and organizational culture of your core business. The next step is strategic regeneration. In four-fifths of the companies Zook examined, a hidden asset was the centerpiece of the new strategy. He provides a map for identifying the hidden assets in your midst, which tend to fall into three categories: undervalued business platforms, untapped insights into customers, and underexploited capabilities. The Swedish company Dometic, for example, was manufacturing small absorption refrigerators for boats and RVs when it discovered a hidden asset: its understanding of, and access to, customers in the RV market. The company took advantage of a boom in that market to refocus on complete systems for live-in vehicles. The Danish company Novozymes, which produced relatively low-tech commodity enzymes such as those used in detergents, realized that its underutilized biochemical capability in genetic and protein engineering was a hidden asset and successfully refocused on creating bioengineered specialty enzymes. Your next core business is not likely to announce itself with fanfare. Use the author’s tools to conduct an internal audit of possibilities and pinpoint your new focus. Reprint R0704D; HBR Article Collection “Growth Strategies That Work – Again and Again, 2nd Edition” 1904
ORGANIZATION & CULTURE
78 | Promise-Based Management: The Essence of Execution Donald N. Sull and Charles Spinosa Critical initiatives stall for a variety of reasons – employee disengagement, a lack of coordination between functions, complex organizational structures that obscure accountability, and so on. To overcome such obstacles, managers must fundamentally rethink how work gets done. Most of the challenges stem from broken or poorly crafted commitments. That’s because every company is, at its heart, a dynamic network of promises made between employees and colleagues, customers, outsourcing partners, or other stakeholders. Executives can overcome many problems in the short term and foster productive, reliable workforces for the long term by practicing what the authors call “promise-based management,” which involves cultivating and coordinating commitments in a systematic way. Good promises share five qualities: They are public, active, voluntary, explicit, and mission based. To develop and execute an effective promise, the “provider” and the “customer” in the deal should go through three phases of conversation. The first, achieving a meeting of minds, entails exploring the fundamental questions of coordinated effort: What do you mean? Do you understand what I mean? What should I do? What will you do? Who else should we talk to? In the next phase, making it happen, the provider executes on the promise. In the final phase, closing the loop, the customer publicly declares that the provider has either delivered the goods or failed to do so. Leaders must weave and manage their webs of promises with great care – encouraging iterative conversation and making sure commitments are fulfilled reliably. If they do, they can enhance coordination and cooperation among colleagues, build the organizational agility required to seize new business opportunities, and tap employees’ entrepreneurial energies. Reprint R0704E
LEADERSHIP
90 | The Leadership Team: Complementary Strengths or Conflicting Agendas? Stephen A. Miles and Michael D. Watkins Senior leadership teams whose members play complementary roles have been chronicled as far back as Homer’s account of the Trojan War: Although King Agamemnon commanded the Greek army, Achilles, Odysseus, and Nestor each played a distinct role in defeating Troy. Today, complementary-leadership structures are common and, in some cases, even institutionalized. Think of a CEO concerned mainly with external issues and a COO who focuses internally. The authors describe four kinds of complementarity: task, expertise, cognitive, and role. The two top executives at the software company Adobe Systems, for example, represent the second kind. As CEO, Bruce Chizen draws on his sales and marketing knowledge, while COO Shantanu Narayen adds his engineering and product development expertise. Roberto Goizueta, formerly the CEO of Coca-Cola, and Douglas Ivester, his COO (who later became CEO), were famous examples of the fourth type: Goizueta, the diplomat, maintained good relations with external stakeholders; Ivester, the warrior, drove the company to defeat the competition. Bringing together two or more people with complementary strengths can compensate for the natural limitations of each. But with the benefits comes the risk of confusion, disagreement about priorities, and turf battles. Leadership succession also presents substantial challenges, especially when a COO or president who has worked in a complementary fashion with the CEO moves into the top role. An organization’s board of directors and CEO can manage the risks by fostering a shared vision, common incentives, communication, and trust. They can also ensure smooth succession processes in various ways, such as brokering a gradual transfer of responsibilities or allowing the CEO and the COO to share duties as long as they maintain the logic of complementarity. Reprint R0704F
STRATEGIC NEGOTIATIONS: DEALMAKING FOR THE LONG TERM MAY 20–25, 2007 CREATING CORPORATE ADVANTAGE: STRATEGY IN THE MULTIBUSINESS FIRM JUNE 10–12, 2007 STRATEGIC MARKETING MANAGEMENT JUNE 17–22, 2007 MANAGING HUMAN CAPITAL: KEY STRATEGIC CHALLENGES JUNE 24–29, 2007 LEADING SCIENCE-BASED ENTERPRISES JUNE 26–29, 2007 STRATEGIC AGILITY: LEADING FLEXIBLE ORGANIZATIONS JULY 15–20, 2007 BUILDING COMPETITIVE ADVANTAGE THROUGH OPERATIONS JULY 29–AUGUST 3, 2007
For more information, visit www.exed.hbs.edu/pgm/uphbr/
OPERATIONS
ORGANIZATION & CULTURE
MERGERS & ACQUISITIONS
100 | Avoiding Integrity Land Mines
111 | The Process Audit
124 | Human Due Diligence
Ben W. Heineman, Jr.
Michael Hammer
David Harding and Ted Rouse
How does a large multinational keep thousands of employees, operating in hundreds of countries, honest in a highpressure business environment? As the chief legal officer at General Electric for nearly 20 years, Ben Heineman was part of the senior management group that sought to do just that – to make sure its executives and employees are moved to do the right thing as strongly as they are motivated to make their numbers. Heineman describes a set of systems that combine the communication of clear expectations with oversight, deterrence, and incentives. Nowhere are the expectations higher – and the sanctions more powerful – than for top executives. Heineman recounts example after example of senior leaders terminated for ethical lapses even when the business consequences of doing so were painful – and even when they had no direct knowledge of the violations occurring on their watch. To make expectations clear throughout the company, GE has systematically sought to set uniform standards that stay well ahead of current legal developments and stakeholders’ changing attitudes about corporate accountability. Responsibility for implementing those standards, which are embedded in GE’s operating practices, rests with the business leaders in the field. Oversight is both methodical and multifaceted. A host of auditing and assessment systems enables GE to compare the performance of its various business units against one another and against industry benchmarks. Perhaps the most powerful is the company’s ombudsman system, which doesn’t just allow but requires employees to lodge concerns. Failures to report into the system or up the line, or retaliation in any form, are firing offenses. The current intense focus on boardlevel governance has missed the point, Heineman argues. It is time to shift the debate from board oversight of the CEO to how top company leaders can most effectively infuse integrity at all levels of the corporation.
Few executives question the idea that by redesigning business processes – work that runs from end to end across an enterprise – they can achieve extraordinary improvements in cost, quality, speed, profitability, and other key areas. Yet in spite of their intentions and investments, many executives flounder, unsure about what exactly needs to be changed, by how much, and when. As a result, many organizations make little progress – if any at all – in their attempts to transform business processes. Michael Hammer has spent the past five years working with a group of leading companies to develop the Process and Enterprise Maturity Model (PEMM), a new framework that helps executives comprehend, formulate, and assess processbased transformation efforts. He has identified two distinct groups of characteristics that are needed for business processes to perform exceptionally well over a long period of time. Process enablers, which affect individual processes, determine how well a process is able to function. They are mutually interdependent – if any are missing, the others will be ineffective. However, enablers are not enough to develop high-performance processes; they only provide the potential to deliver high performance. A company must also possess or establish organizational capabilities that allow the business to offer a supportive environment. Together, the enablers and the capabilities provide an effective way for companies to plan and evaluate process-based transformations. PEMM is different from other frameworks, such as Capability Maturity Model Integration (CMMI), because it applies to all industries and all processes. The author describes how several companies – including Michelin, CSAA, Tetra Pak, Shell, Clorox, and Schneider National – have successfully used PEMM in various ways and at different stages to evaluate the progress of their process-based transformation efforts.
Most companies do a thorough job of financial due diligence when they acquire other companies. But all too often, deal makers simply ignore or underestimate the significance of people issues in mergers and acquisitions. The consequences are severe. Most obviously, there’s a high degree of talent loss after a deal’s announcement. To make matters worse, differences in decision-making styles lead to infighting; integration stalls; and productivity declines. The good news is that human due diligence can help companies avoid these problems. Done early enough, it helps acquirers decide whether to embrace or kill a deal and determine the price they are willing to pay. It also lays the groundwork for smooth integration. When acquirers have done their homework, they can uncover capability gaps, points of friction, and differences in decision making. Even more important, they can make the critical “people” decisions – who stays, who goes, who runs the combined business, what to do with the rank and file – at the time the deal is announced or shortly thereafter. Making such decisions within the first 30 days is critical to the success of a deal. Hostile situations clearly make things more difficult, but companies can and must still do a certain amount of human due diligence to reduce the inevitable fallout from the acquisition process and smooth the integration. This article details the steps involved in conducting human due diligence. The approach is structured around answering five basic questions: Who is the cultural acquirer? What kind of organization do you want? Will the two cultures mesh? Who are the people you most want to retain? And how will rank-and-file employees react to the deal? Unless an acquiring company has answered these questions to its satisfaction, the acquisition it is making will be very likely to end badly. Reprint R0704J
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Libraries offer online access to current and back issues of Harvard Business Review through EBSCO host databases. Postmaster: Send domestic address changes, orders, and inquiries to: Harvard Business Review, Subscription Service, P.O. Box 62270, Tampa, FL 33662. GST Registration No. 124738345. Periodical postage paid at Boston, Massachusetts, and additional mailing offices. Printed in the U.S.A. Harvard Business Review (ISSN 0017-8012; USPS 0236-520), published monthly (with a combined July– August issue) for professional managers, is an education program of the Harvard Business School, Harvard University; Jay O. Light, dean. Published by Harvard Business School Publishing Corporation, 60 Harvard Way, Boston, MA 02163. Copyright © 2007 Harvard Business School Publishing Corporation. All rights reserved. Volume 85, Number 4
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April 2007
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Harvard Business Review
143
PANEL DISCUSSION
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by Don Moyer
Satisficing
O
PTIMIZING, THE ART OF FINDING the best choice among all choices, is a luxury
we can seldom afford. Instead, we settle for the first adequate solution we can find, whether it involve deciding where to have lunch, hiring staff, or defining a career. Nobel laureate Herbert Simon coined the term “satisficing” to describe
decision making that takes the short cut of defining a set of aspirations and then settling on some (usually the first) alternative that meets the minimum requirements. It is a pragmatic and often necessary approach: In situations in which there are many choices or when choices are presented one by one, optimizing can be a hopeless quest. Given our tendency to satisfice, we’re unlikely to end up with anything much better than what we’re willing to accept. So business leaders must set the bar high. As Peter Drucker, making a similar argument, pointed out in “The Effective Decision” (HBR January– February 1967), “The effective executive has to start out with what is ‘right’ rather than what is acceptable precisely because a compromise is always necessary in the end.” Don Moyer can be reached at
[email protected].
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April 2007
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