Strategy+Business Magazine Spring 2011

Post-Recession Consumers by John Gerzema

The MobileCommerce Challenge to Retail

Cisco’s Virtual Management Lab by Inder Sidhu

The Rise of the Connected Generation

Thought Leader: France Télécom’s Didier Lombard

Published by Booz & Company

DON’T  BLAME  YOUR  CULTURE jon katzenbach and ashley harshak on building a high-performance organization Issue 62, Spring 2011 US $12.95 Canada C$12.95

also: using neuroscience to change culture

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comment editor’s editor’sletter letter comment

Illustration by Lars Leetaru

Coming to Terms with Culture Nothing distinguishes a company like its culture. An organization’s culture is the shared sensibility of its people. It encompasses their common attitudes and beliefs, their perception of the nature of success, their preferred methods of getting work done, and their view of the right way to treat one another (and everybody else). Culture is powerful because we all take our cues from people around us. We are courteous or sharp-tongued, innovative or bureaucratic, argumentative or accommodating, at least in part because we unconsciously tend to imitate the behavior of those nearby. This immutable aspect of human nature can be irritating to many leaders — especially when the culture is oriented away from high performance. Hence the title of this issue’s cover story, “Stop Blaming Your Culture,” by Jon Katzenbach and Ashley Harshak (page 34). Instead of trying to change your company wholesale or pretending that culture isn’t important, look for those elements within your corporate culture that can give you the leverage you need to shift behavior. Companies such as Aetna, Bell Canada, and Royal Dutch/Shell

have done exactly that. We also feature an interview on page 11 with MIT’s expert on culture, Edgar Schein. And there is further support in a piece by a remarkably diverse group of coauthors: neuro­scientist Jeffrey Schwartz; Cargill’s director of corporate learning, Pablo Gaito; and “financial intelligence” expert Doug Lennick. Titled “‘That’s the Way We (Used to) Do Things Around Here,’” it lays out a step-by-step process for reframing a company’s way of thinking (page 44). Culture is also shaped by demographics. In “The Rise of Generation C” (page 54), Booz & Company experts Roman Friedrich, Michael Peterson, and Alex Koster explain why companies need to prepare now for the technologically enabled and socially connected workers and consumers of 2020. Three other articles with Booz & Company bylines — “The Coming Wave of ‘Social Apponomics’” (page 8), “The M-Commerce Challenge to Retail” (page 20), and our Thought Leader interview with France Télécom chairman Did­ier Lombard (page 72) — show how the tools and practices of the

digital age are rapidly transforming the telecommunications and retail businesses. New forms of innovation are also affecting management practice at leading high-tech companies. For an example, see “Cisco’s Virtual Management Lab” (page 24), by the global networking company’s senior vice president of strategy and planning. Finally, we offer two differing views about the changing consumer culture. John Gerzema of Young & Rubicam and Michael D’Antonio argue on page 28 (“The Power of the Post-Recession Consumer”) that people have permanently shifted their buying predispositions in favor of more empathetic, socially responsible companies. Timothy Devinney of the University of Technology in Sydney and his colleagues argue on page 14 (“Values vs. Value”) that they haven’t. Both articles are based on strong bodies of data. Which makes sense to you? The culture of strategy+business is one of perpetual curiosity, and we’re always interested in what you think. Art Kleiner Editor-in-Chief [email protected]

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LEADING IDEAS

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The Coming Wave of “Social Apponomics” Matt Anderson, Henning Hagen, and Gregor Harter The secret to profitability on the Internet has finally arrived in an innovative blend of social media, Web mobility, and creative e-commerce applications.

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A Corporate Climate of Mutual Help Art Kleiner and Rutger von Post Edgar Schein, MIT’s sage of organizational culture, explains why the quest for accountability should start with interdependence.

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Values vs. Value Timothy Devinney, Pat Auger, and Giana M. Eckhardt New research revealing a disparity between what shoppers say and what they do debunks the myth of the ethical consumer.

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Using Influence to Get Things Done

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Perry Buffett Convincing senior management colleagues to follow your lead requires a blend of skills that add up to influential competence. DATA POINTS

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Why Air Travel Is Bound to Boom

IT Matters

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The M-Commerce Challenge to Retail Matt Anderson, Nick Buckner, and Stefan Eikelmann As smartphones change shopping, merchants face a stark choice: Fall in behind their newly enabled consumers or fall behind altogether. The Innovators

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Cisco’s Virtual Management Lab Inder Sidhu How one of the world’s most innovative companies discovered the value of focusing its R&D attention on its own business practices. All Consuming Behavior

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The Power of the Post-Recession Consumer John Gerzema and Michael D’Antonio An analysis of attitudes and spending reveals a return to traditional values, driven by consumers searching for quality, affordability, and connection.

Cover illustration by Michael Klein

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features

conversation

Cover Story: Organizations & People

Thought Leader

Stop Blaming Your Culture

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Art Kleiner and Pierre Péladeau The chairman of the board of France Télécom says telecommunications companies must outpace — or be inundated by — the coming explosion in data traffic.

Jon Katzenbach and Ashley Harshak Start using it instead — to reinforce and build the new behaviors that will give you the highperformance company you want. Management

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“That’s the Way We (Used to) Do Things Around Here”

Knowledge Review

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Some executives and scientists are calling for a radical rethinking of chemicals, cars, farms, and our future. Books in Brief

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The Rise of Generation C Roman Friedrich, Michael Peterson, and Alex Koster How to prepare for the Connected Generation’s transformation of the consumer and business landscape.

On Grabbing Power David K. Hurst Plus: management basics, the “drive theory” of leadership, and your brain on the Internet.

Technology

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Getting beyond Green: Envisioning an Industrial Reboot Nancy A. Nichols

Jeffrey Schwartz, Pablo Gaito, and Doug Lennick With a little knowledge of neuroscience, reframing behavior can be the essence of organizational change.

Didier Lombard

End Page: Recent Research

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Getting a New Job? It Pays to Speak Up about Salary Matt Palmquist In a soft economy, collaborative negotiation may be the winning strategy.

The Creative Mind

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Stan Ovshinsky’s Solar Revolution Lawrence M. Fisher His inventions from 50 years ago enabled cell phones, laptops, and flat-screen TVs. Now, at age 88, he’s aiming to make solar power cheaper than coal.

Issue 62, Spring 2011

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Thank you for your annual review of the year’s Best Business Books. With so many books being published every year, the process of identifying those that communicate the year’s salient points and developments gets more challenging. However, since 2003, my purchase decisions have been based entirely on the books covered by your reviews. [Editor’s Note: s+b began publishing the section in 2001.] Moreover, the essays hold their freshness. They provide a cogent snapshot of what was important at that time; reading the 2005 Best Business Books section now, for example, is as informative as it was back then, for the historical perspective it provides. Thank you for a wonderful seven years. Ahmed Qadir Director Competition Commission of Pakistan Islamabad, Pakistan

The Value of Volatility

The ongoing research into innovation spending by Barry Jaruzelski and Kevin Dehoff (“The Global Innovation 1000: How the Top Innovators Keep Winning,” Winter 2010) has overlooked one critical element: volatility. In our own research on innovation management (to be published in Research Policy this year), Tim Swift and I have found that firms with highly volatile R&D spending (those whose spending changes a lot from year to year) significantly outperform those with smooth spending profiles. This finding holds even when other variables are controlled, including firm profitability, R&D intensity, sales volatility, and industry. These results are based on panel data covering 11,000 firm-years of activity between 1997

and 2006. This is one more piece of evidence that it’s not how much you spend but how you manage your innovation efforts that produces better performance. Ram Mudambi Professor, Fox School of Business Temple University Philadelphia, Pa.

Stop Hoarding the Silver

I noticed that Krisztina “Z” Holly chose The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion, by John Hagel III, John Seely Brown, and Lang Davison, as one of 2010’s best books on innovation (“Innovation as a Social Act,” Winter 2010). One message in that book is relevant for management consulting firms and anyone engaged in thought leadership. The traditional world in which business writers “push” articles and reports at people will be very different from one in which business readers (such as clients) “pull” the content they need. “In the push world,” writes Holly, “knowledge is an asset to be closely guarded.” In a pull world, firms will make far more of their best thinking publicly available. Few thought leaders have adjusted to this reality. In my role as an evaluator of thought leadership in management consulting, I’m commonly asked about the right balance between giving ideas away (which competitors can replicate and clients might use for free) and keeping them hidden. Frightened that they’re handing over the family silver, many business innovators say they’re reluctant to put their best ideas into print. That doesn’t stop them from publishing what’s left — which is one charitable explanation for why so much thought leadership

strategy + business issue 62

Letters to the Editor

comment letters to the editor 6

High Praise for “Best Books”

is so bad. This hoarding mentality will be even more out of place in a pull world. Why would you ration your production when there is so much available from elsewhere? Fiona Czerniawska Sourceforconsulting.com London, U.K.

A Better Service Experience

While reading “A Better Choosing Experience,” by Sheena Iyengar and Kanika Agrawal (Winter 2010), it occurred to me that consumers used to have fewer options, but better retail service to help them make choices. Consumers are much more on their own today, and I think that contributes to their feeling overwhelmed. In solving this problem, we need to find a happy medium between the number of choices and the level of service. John E. Wurl Grayslake, Ill.

Corrections, Issue 61

Two exhibits in “The Global Innovation 1000: How the Top Innovators Keep Winning” showed incorrect data. The correct data for 2009 Spending by Industry (Exhibit 6) and Spending by Region (Exhibit 8) can be found at www.strategybusiness.com/article/10408. Interact with Us E-mail: editors@strategy-business

.com Facebook: www.facebook.com/

strategybusiness Mail: 101 Park Ave., 20th Floor, New York, NY 10178 Letters may be edited for length and clarity before publication.

The secret to profitability on the Internet has finally arrived in an innovative blend of social media, Web mobility, and creative e-commerce applications. by Matt Anderson, Henning Hagen, and Gregor Harter

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he short history of the Internet can be summed up in a few words: Attracting a crowd is relatively easy. Monetizing that crowd? Not so much. Earlier it was (the now nearly forgotten) Netscape and (the barely memorable) Friendster that drew the big audiences. Then, MySpace surged in popularity. Now this distinction belongs to Facebook and YouTube, with their billions of active visitors. But despite the extraordinary numbers of enthusiasts they can claim, many of today’s Web giants are confronted with the same problem: no clear path to profits. Google, Amazon, eBay, and to some degree Facebook are the rare exceptions among a sea of unprofitable websites. Still, the emergence of vastly popular community-driven sites offers a glimpse into a new business model for smart retailers and consumer goods companies that bygone Internet ventures didn’t offer: an approach we call social apponomics. By enhancing the sheer magnetic power of social media with community-based marketing and tailored applications, social apponomics affords companies a pathway for breaking down the barriers

to profitably commercializing online activities, not just for individual transactions but as part of an ongoing customer relationship. Three elements of social apponomics are critical to success. The first is social media. These interactive sites, where people can congregate to share information, ideas, and things that they’ve discovered (mundane and newsworthy) or that they have in common, are replacing broadcast channels as the primary way many people learn about products and services. It’s a perfect Internet format for companies that want to attract a “sticky” audience, particularly when Web mobility is exploited. For one thing, consumers themselves can be used to generate content and interest in products and services, as occurs with Foursquare, a smartphone application that lets people automatically alert friends to their location with GPS technology and win rewards — discounts, Tshirts, and other prizes — for recommending products and stores to their circle of online acquaintances. Retailers can best take advantage of Foursquare by offering coupons and other promotions for purchases and by providing special offers to the most loyal customers. Consumer goods companies can tap into social media in equally intriguing ways. For example, product place-

strategy+business issue 62

Leading Ideas

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The Coming Wave of “Social Apponomics”

Image courtesy of Zynga

Product placement in FarmVille

has an additional revenue stream: the sale of add-ons that enhance the experience of playing the game.) The second element, community-based marketing, is driven by keen insight into customer behavior on retailer-created social media sites. This insight is generated not just by surveys and studies of customers, but by analysis of how consumers engage with products and services online, as well as their Web connections to other individuals. Customized offers and campaigns, supported by sophisticated data mining and customer relationship management (CRM) analytics, ensure that site visitors receive advertisements or messages of interest to them and

thus are more likely to click through to a sale; this is one of the most promising sources of revenue. Finally, tailored applications attract people by offering easy-to-use online environments that speak directly to individuals according to their interests and needs — either on websites or, increasingly, via customizable applications for smartphones, netbooks, and tablets such as the Apple iPad. Support and advice, including product reviews and recommendations, can be generated by experts on a site, but they more often (and less expensively) come from customers themselves. Overlaying these elements is trust, without which any company will quickly lose its connection to its customers. By living up to promises, offering generous return policies, avoiding scams and bad-faith encounters, and eliminating exploitive behavior (including the actions of other customers), companies can build consumer confidence and loyalty. The most important factor in creating trust is transparency: Sites such as financial information ag­ gregator Mint.com, the New York Times, and Amazon are diligent about explaining policies they have instituted (such as when and why they remove offensive comments and how they use personal information). The most profitable online retailers have deftly combined the disparate aspects of social apponomics, applying those elements to the unique needs of their business models and customers. For example, Netflix, a US$1.3 billion online movie rental service with more than 15 million subscribers, offers a fully personalized social site where individual recommendations are offered in a wholly transparent way — for example, by showing the logic un-

derlying the choices (“because you enjoyed [a related movie]”) or by displaying ratings of the “members’ average” versus Netflix’s “best guess for you.” In addition, there is a substantial focus on community: Advice is drawn from tens of thousands of customer reviews and top 10 lists. And Netflix subscribers can filter through movie opinions by finding other customers similar to them. Technologically, Netflix takes advantage of the Web’s multimedia and multichannel capabilities by allowing subscribers to watch movies online and on demand and to manage their movie lists through smartphones and other devices. In addition, individuals who learn about films through other online media — such as RottenTomatoes.com (the review site) or the New York Times online movie reviews — can add them directly to their Netflix queues via those other sites. Amazon is the global e-tail leader, with more than $31 billion in sales in the 12 months ended October 2010. The key to its success lies in its personalized customer experiences — a constant flurry of recommendations, related items, and new product ideas — driven by Amazon’s proprietary CRM system that enables cross-selling and upselling based on real-time sales data and consumer browsing activities. Features include a large and active community that provides trusted customer reviews and a vast marketplace that seamlessly integrates thousands of third-party sellers. Amazon’s wish list feature (allowing users to add products found anywhere on the Web), prime membership (providing unlimited two-day shipping for a yearly fee), and oneclick checkout offer maximum ease of use, and mobile access is provid-

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ment in online games like the hugely popular FarmVille on Facebook, where some simulated fields have been planted to resemble McDonald’s golden arches and a zeppelin advertising Farmers Insurance Group was recently seen gliding across the screen. As a follow-up to their successful venture, FarmVille’s creator — a gaming innovator named Zynga Game Network Inc. — has just released CityVille, which may attract advertising from more urban companies such as Starbucks or major hotel chains. (Zynga

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cost. This use of the “wisdom of crowds” gives large amounts of realtime feedback directly to developers, enabling rapid improvement of products and services. Intuit has also fostered an active and growing online community through its Leaderboards, which recognize the top 10 current and top 10 all-time

Social apponomics companies report higher sales conversion rates and higher repeat purchase rates. threaten Amazon’s own offerings. In 2009, for example, Amazon purchased Zappos.com Inc., a footwear and apparel e-tailer whose outsized consumer loyalty is a result of its personalized customer experience, its trustworthiness, and transparency built on social media and excellent customer service. Almost 500 Zappos employees, including CEO Tony Hsieh, are active on Twitter, ensuring an ongoing conversation with customers. In addition, Zappos uses existing multimedia sites such as YouTube to facilitate word-of-mouth marketing, and it has created an active internal community with extensive use of blogs, including one on which its senior executives post. (See “At Zappos, Culture Pays,” Dick Richards, s+b, Autumn 2010.) Intuit, a $3 billion developer of financial and tax preparation software (such as Quicken, TurboTax, and QuickBooks) and related services for small businesses, accountants, and individuals, has built trust through its social domain Intuitlabs.com, where customers can experiment with early versions of new products and services at no

contributors, and through Meetup .com, where Intuit brings together local small business and entrepreneur groups. In addition, the Intuit website features specialized information tailored to accountants, women, and educators; a wiki on taxes written and moderated by financial experts; and classified ads. These and other social apponomics companies enjoy benefits that elude many other businesses. They report higher sales conversion rates, reflecting the impact of customized offers, peer recommendations, and crowd-voting, as well as higher repeat purchase rates and larger average sales, the result of sophisticated database marketing and up-selling driven by personalized applications. For example, Target’s online-only consumers — many of whom use the retailer’s smartphone app that offers daily deals, storespecific promotions, and ways to share wish lists and product reviews with friends — spend on average one-and-a-half times as much as their physical store–only counterparts. Multichannel consumers using both online and offline channels spend twice as much.

In addition, customer acquisition costs are lower in the social apponomics environment, as are customer care expenses. Word-of-mouth from the online community continuously attracts new consumers, whose participation at the site elevates its best features, expanding the number of reviews, recommendations, and conversations and providing a surfeit of consumer data for the marketing machines. Meanwhile, users take over onsite troubleshooting and respond to general product questions. Social apponomics is in its infancy. The companies that are succeeding at this approach are few and

CityVille: your logo here

far between, and are especially innovative and forward thinking. Many of the most creative social apponomics strategies have yet to be fully developed. But even at this early stage, seven useful lessons from initial social apponomics adopters have emerged. 1. Focus on partners, not competitors. Winners should not com-

pete with social giants like Facebook or Twitter, but rather ally with existing social media whenever possible. 2. Think local. Online solutions should be location-specific to leverage the benefits of the mobile Web, using location-based services to at-

Image courtesy of Zynga

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ed through iPhone and BlackBerry apps as well as through the company’s own Kindle handheld electronic reader. Amazon is particularly active in developing new capabilities through acquisition of other companies, often buying out emerging social apponomics competitors before they

3. Target each customer in mul-

Consumers are complex; they have identities, preferences, product histories, and social data that generate broad “cloud profiles,” and they increasingly use the same mobile devices in both their personal and business lives. Armed with the rich data available from consumers’ Web activities, companies must deftly separate the masses of information that they collect about individuals and target offers and enticements to match the specific persona that a consumer inhabits at any given time. tiple segments.

sage boards, providing purchasing recommendations and solutions to product problems. Offer preferential rewards and status to the most involved users. 6. Humanize your company “virtually.” Allow employees to be fre-

quent posters on social media websites in an effort to decentralize the company’s message so that it increasingly comes from the rank and file rather than only from the executive suite. Avoid giving the impression of being a command-and-control company, which is anathema to the loose-knit, unstructured, ad hoc nature of the Internet. 7. Develop forms of online credentialing of your goods and servic-

4. Transform pricing into a dy-

es. Your own company’s expert

namic conversation. The obvious examples are sites such as Priceline .com and Kayak.com, which offer people travel deals based in part on how much they are willing to pay. But other, e-tail–oriented sites are taking this approach in more creative directions. Groupon.com offers local discount coupons determined by retailers and consumergoods companies, among others, that go into effect only after a specific number of people have agreed to buy the product. In this way, companies can base how much they charge on a minimum sales volume, normally an unknown quantity. As a result, an e-tailer might decide to cut the price of an item by 20 percent or more, certain that the company will sell five times as many at that price as at the regular price and will improve its margins.

guidance is good and employee

5. Make use of the wisdom of crowds to build more compelling Web apps and to improve customer service. Enlist users to share feedback

on beta versions of applications and to be active on self-help and mes-

voices are better, but your customers’ recommendations are best. + Reprint No. 11101

Matt Anderson [email protected] is a partner with Booz & Company based in Houston. His areas of expertise include customer experience, online strategy, social networks, multichannel retail and content, and B2B services. Henning Hagen [email protected] is a Booz & Company principal based in Houston. He specializes in the mobile industry, including corporate strategy, consumer electronics supply chain management and retail operations, and e-tail and retail marketing and sales productivity. Gregor Harter [email protected] is a partner with Booz & Company in Munich. He specializes in strategy development, go-to-market strategies, operations, and green initiatives across multiple sectors.

A Corporate Climate of Mutual Help Edgar Schein, MIT’s sage of organizational culture, explains why the quest for accountability should start with interdependence. by Art Kleiner and Rutger von Post

C

ulture is back on the corporate agenda. As leaders deal with the demands of increased complexity — whether managing financial and environmental risk, navigating new markets, assimilating new types of technologies, or building a strategy for organic growth — many recognize the momentum that comes with a responsive, energized culture. That has led to a renewed appreciation for the work of Edgar H.

Schein. Since the 1950s, when he studied the effects of Chinese brainwashing on American servicemen returning from the Korean War, he has been one of the world’s leading authorities on the link between culture and behavior. For most of that time, he has been on the faculty of MIT’s Sloan School of Management, where he is now a professor emeritus. Schein’s perspective, tempered by intensive work with groups, corporations, and governments, is one of deep respect for the power and

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tract customers in the vicinity of stores where products are sold or services are offered.

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S+B: Even the best-intentioned companies can get tripped up when trying to alter their organizational culture. Why? SCHEIN: Because they think that to

change culture, you simply introduce a new culture and tell people to follow it. That will never work. Instead, you have to conduct a business analysis around whatever is triggering your perceived need to

change the culture. You solve that business problem by introducing new behaviors. Once you’ve solved your business problems this way, people will say to themselves, “Hey, this new way of doing things, which originally we were coerced to do, seems to be working better, so it must be right.” S+B: Issuing a new array of cultural tenets — like quality, agility, and accountability — will not work? SCHEIN: Precisely. All you’ve done

is stated the obvious, like “We’re for motherhood.” Who wouldn’t be for those things? They’re obvious. But

of electrical workers said, “That’s not me. I’m not a janitor. I splice big, heavy cables.” Alpha responded that this was an order, not an option, and that workers would be trained in cleaning up spills safely. Some electrical workers quit, but most were retrained. After about five years, the workers were asked, “How do you feel about Alpha’s environmental policies?” They answered, “It’s the right thing to do. We should be cleaning up the environment.” That wasn’t what they’d said five years earlier. But once they embraced the behavior, the values caught up. S+B: Cultural change can’t be as easy as just demanding that people change their behaviors. What if people only pretend to comply? SCHEIN: That’s why the role of

Edgar H. Schein

what does it mean in that environment to be more agile or accountable? Someone has to say what these really mean: The next time you put a bad product out there, you get fired. It has to be concretized for real change to occur. One electric utility company I studied, Alpha Power — I can’t reveal its real name — was under pressure from regulators to improve its environmental record. Management told employees, “Every oil spill on every sidewalk must be reported immediately and cleaned up.” A lot

management is so critical. Culture is multifaceted, and every company has many subcultures. At the top, there might be an executive subculture, trained in finance, which wants good numbers above all else. There’s also probably an engineering subculture, which assumes that crises can be prevented only with fail-safe, redundant systems that kick in automatically. There are other subcultures for middle management, supervisors, the union, and marketing. Every company combines those subcultures in very different ways that have become ingrained over decades. In any change program, when you encounter resistance, you have to then ask, “Is this just an individual resisting, or are group norms at play, based in a particular subculture?” For example, when a transformer exploded at Alpha, tests showed high levels of airborne PCBs [polychlorinated biphenyls], a dan-

Photo courtesy of Edgar H. Schein

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legitimacy of ingrained assumptions and attitudes that people develop together gradually. (Among the organizations he has studied over time are Digital Equipment Corporation and the government of Singapore.) The Schein approach to changing a culture — and to developing better ways of helping others within organizations — is one of observation, inquiry, and leverage. This means observing the ways in which an organization’s employees act; deducing (or inquiring about) the ways they think; and putting in place small behavioral changes that lead them, bit by bit, to think about things differently. We met with Schein in his apartment in Cambridge, Mass., to talk about his two recent books for managers and corporate practition­ ers on this theme: The Corporate Culture Survival Guide (JosseyBass, 2009), an updated version of an earlier book, and Helping: How to Offer, Give, and Receive Help (Berrett-Koehler, 2009). Given Booz & Company’s work on culture through the Katzenbach Center (see “Stop Blaming Your Culture,” by Jon Katzenbach and Ashley Harshak, page 34), we also thought it was timely to check in on the broadening impact of Schein’s ideas as more and more companies seek to teach their old cultures new tricks.

from other cultures, including that of the top executives. In some crises, like the Challenger space shuttle disaster in 1986, I’ve heard people argue that the engineers weren’t competent. In fact, they raised concerns in advance about the O-ring at least twice, but they were overruled, and stopped squawking. Should they have held their ground? Marc Gerstein, who wrote Flirting with Disaster: Why Accidents Are Rarely Accidental [with Michael Ellsberg;

gated, if he or she sees something unsafe, to pull out and display a time-out card located near each station. That stops the job until somebody with expertise comes in and looks it over. But some employees say, “If I pull the card too often, my supervisor will give me lousier jobs.” To make a company genuinely safe, behavior needs to change at all levels. The entire hierarchy has to feel good about the card being pulled,

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gerous chemical to which firefighters, health workers, and others in the community were exposed. Alpha was criticized for not revealing these high PCB levels upon first discovering them. But an engineer had tested that transformer every year for 20 years and never found PCBs. When the explosion occurred, he didn’t immediately believe the data. As an engineer, he wanted to be certain that the data was accurate, since it ran counter to his decades of testing. So he waited for the samples to come back from the lab before he said anything. It turned out that there were PCBs in the transformer’s sealed sound protection struts. The PCBs were released during the explosion but would have been undetectable otherwise. Alpha may have looked malfeasant — failing to rapidly report an environmentally dangerous situation that the company clearly knew about — but in reality the delay was a consequence of a strong engineering subculture. It could have punished the engineer, but that wouldn’t have changed the culture. If Alpha wanted to be safe and environmentally responsible, it had to demand behavioral change. So the company sent out a strong, coercive message that spoke to the heart of the engineering subculture: “You are required to report any observed environmental event or unsafe situation immediately, before analyzing it. Sound the alarm the minute you think there is a dangerous situation. Don’t wait until you’ve figured it out.” Alpha’s leaders got very specific about what environmental responsibility and safety meant in terms of the behavior they expected from their employees. Resistance might also come

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“Better teamwork requires perpetual mutual helping, within and across hierarchical boundaries.” Union Square Press, 2008], argues that the fault was not with the engineers, but with the NASA culture. People need to be able to raise concerns, and persist in raising them, in a way that cultures like NASA, aimed at results, can accept. S+B: Are most managers capable of this? SCHEIN: Probably not. They would

need a culture that rewards them for raising concerns, and in most organizations the norms are to punish it. It’s the very nature of authority to say, “Don’t be a squeaky wheel. You made your point, but we’re going to go ahead anyway. I don’t want to hear any more.” So let’s say you want a company to be genuinely safe. It’s not enough to have an empowering process. The supervisors, middle managers, and senior executives all have to actively work to create behaviors that encourage a climate of safety. Alpha, for example, now has a “timeout program.” An employee is obli-

instead of regarding it as a nuisance triggered by a few employees. Meanwhile — and this is important — work in many companies is getting more complex, and subordinates have more relative power by virtue of their specialized expertise. If they choose to not tell the boss about problems, the company will never know that there’s an issue until it’s too late. The answer is to create a climate in which superiors and subordinates have a mutual helping relationship. S+B: In your book Helping, you talk about learning to give and receive assistance more effectively. Why does this matter? SCHEIN: It’s pivotal to the future of

organizations. The types of teams that we need in organizations today are like cardiac surgical units. The surgeon, the anesthesiologist, the perfusionist, and the nurse are in immediate, here-and-now interdependence. In that kind of team, subordinates have to help superiors reg-

much more profound and essential: knowing how to work with one another as equal partners in an operational setting. + Reprint No. 11102

Art Kleiner [email protected] is the editor-in-chief of strategy+business

and the author of The Age of Heretics (2nd ed., Jossey-Bass, 2008). Rutger von Post [email protected] is a principal with Booz & Company based in New York. He specializes in organizational change and leadership for the financial-services and healthcare industries, and is a fellow of the Katzenbach Center.

Values vs. Value New research revealing a disparity between what shoppers say and what they do debunks the myth of the ethical consumer. by Timothy Devinney, Pat Auger, and Giana M. Eckhardt

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uring the last 25 years, there has been debate about the value of corporate social responsibility (CSR), particularly as it relates to the rise of “ethical consumers.” These are shoppers who base purchasing decisions on whether a product’s social and ethical positioning — for example, its environmental impact or the labor practices used to manufacture it — aligns with their values. Many surveys purport to show that even the average consumer is demanding socalled ethical products, such as fair trade–certified coffee and chocolate, fair labor–certified garments, cosmetics produced without animal testing, and products made through the use of sustainable technologies. Yet when companies offer such products, they are invariably met with indifference by all but a selected group of consumers. Is the consumer a cause-driven liberal when surveyed, but an economic conservative at the checkout line? Is the ethical consumer little

more than a myth? Although many individuals bring their values and beliefs into purchasing decisions, when we examined actual consumer behavior, we found that the percentage of shopping choices made on a truly ethical basis proved far smaller than most observers believe, and far smaller than is suggested by the anecdotal data presented by advocacy groups. The trouble with the data on ethical consumerism is that the majority of research relies on people reporting on their own purchasing habits or intentions, whether in surveys or through interviews. But there is little if any validation of what consumers report in these surveys, and individuals tend to dramatically overstate the importance of social and ethical responsibility when it comes to their purchasing habits. As noted by John Drummond, CEO of Corporate Culture, a CSR consultancy, “Most consumer research is highly dubious, because there is a gap between what people say and what they do.” The purchasing statistics on ethical products in the marketplace

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ularly; everyone has to act as if they all have a stake in the outcome. In most team cultures, bosses tend to act as authority figures who are there only to help subordinates, not to listen to and be helped by others. So what happens, for example, if a nurse sees a doctor picking up the wrong instrument? You might expect her to say, “Stop, doctor” and offer help and advice. But in many organizational cultures, the nurse won’t say anything. She’s going to take a chance on the operation failing, because she once tried to help a doctor that way and got blasted. Better teamwork requires perpetual mutual helping, within and across hierarchical boundaries. I don’t see how we’re going to get there unless we create cultural “islands” — situations in which people can go outside the organization’s norms and practices and explicitly create this mutual helping relationship. In the cardiac unit, this means the surgeon saying to the nurse, “First of all, let’s get on a first-name basis, and then I’m going to try very hard to listen to you.” The people with the most authority and established knowledge must make the others feel psychologically safe, so that when they’re back in the heat of operations, everyone will speak up freely when something is wrong. The surgeon must know what questions to ask in order to be more helpful. In any helping situation, “humble inquiry” is a key intervention to equilibrate the relationship between the vulnerable person asking for help and the powerful helper. All this will demand that companies train their teams in the helping process. Most team training that I’ve seen is focused on making people feel good about one another. But what I’m talking about is something

Illustration by Keith Negley

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support this assertion. Most of these products have attained only niche market positions. The exceptions tend to be relatively rare circumstances in which a multinational corporation has acquired a com­ pany with an ethical product or service, and invested in its growth as a separate business, without altering its other business lines (or the nature of its operations). For example, Unilever’s purchase of Ben & Jerry’s Homemade Inc. allowed for the expansion of the Ben & Jerry’s ice cream franchise within the United States, but the rest of Unilever’s businesses remained largely unaffected. Companies that try to engage in proactive, cause-oriented product development often find themselves at a disadvantage: Either their target market proves significantly smaller than predicted by their focus groups and surveys or their costs of providing ethical product features are not covered by the prices consumers are willing to pay. (For a different perspective on these issues, see “The Power of the Post-Recession Consumer,” by John Gerzema and Michael D’Antonio, page 28.) To understand the true nature of the ethical consumer, we set up a series of generalized experimental polling studies over nearly 10 years that allowed us to gather the social and ethical preferences of large samples of individuals. We then conducted 120 in-depth interviews with consumers from eight countries (Australia, China, Germany, India, Spain, Sweden, Turkey, and the United States). We asked them not just to confirm that they might purchase a product, but to consider scenarios under which they might buy an athletic shoe from a com­ pany with lax labor standards, a

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soap produced in ways that might harm the environment, and a counterfeit brand-name wallet or suitcase. They were also asked how they thought other people from their country might respond to these products — a well-established “projective technique” that often reveals more accurate answers than questions about the respondent’s direct purchases. And they were asked about their own past behavior; for example, all the interviewees admitted purchasing counterfeit goods at some point. The interviews asked participants explicitly about the ramifications of these ethical issues, and the inconsistencies between their words and their actions. The participants knew a great deal about the issues, and agreed that good practices involving labor, the environment, and intellectual property are important to society. But most did not consider such issues to be relevant to them personally. Indeed, they often stated that someone other than the individual consumer should be responsible: the law (“the government should protect the environment”), the competitive market (“it’s too bad, but all sneaker companies do this”), the

companies themselves (“advertising should let us know about this”), or the overall system (“I cannot do anything, so why bother thinking about it?”). Another key finding that refutes conventional wisdom on this topic is that most people will not sacrifice product function for ethics. When faced with a choice of good ethical positioning and bad product functionality or good product functionality and bad ethical positioning, individuals overwhelmingly chose the latter. They revealed an astounding reluctance to consider ethical product features as anything but secondary to their primary reasons for purchasing the products in question. “It would take some kind of catastrophe to make me care,” said one respondent. Contrary to other research that has typecast ethical consumers demographically or by their responses to surveys of values, we find little difference between people who take into consideration social aspects of products and those who do not. For example, it has been commonly assumed in the popular media that Europeans, with their strong tradition of social democracy, are more

being a reality. Although some consumers today do take into consideration the social aspects of their purchasing behavior and care about a company’s CSR policies, most do not care enough to pay a higher price. Looking ahead, however, social consumption may have the potential to become a mass-market phenomenon. In fact, we see a parallel between the current ethical consumer market and the early days of e-commerce in the mid-1990s. As Internet usage expanded and capabilities and security grew more sophisticated, consumers learned to integrate technology into their daily lives. Now, Amazon and myriad other online destinations have made e-commerce an integral part of the shopping (and banking) culture. Socially responsible consumption today is a nascent skill. Individuals do not necessarily know how to translate descriptions of ethical activity into judgment. (For example, what is a “good” labor practice? How much of a difference does an “ethical” sneaker purchase make in improving labor conditions?) Nor do they have any reason to trust in the verifiers, which are often the corporations themselves, or biased third-party organizations. For more ethically oriented consumption to really take hold, the consumer needs to become a knowledgeable participant, not a reader of labels. Rather than relying on traditional market research techniques, firms need to help their existing and future consumers become more socially conscious in their purchasing. This will require giving consumers more tangible, reliable information about the health, social, and environmental benefits of their products and services, in the context of the many choices con-

sumers have to make. Product labels will have to explain why a certain company’s production footprint, packaging techniques, or ingredients are better than those of the competition — and have that superiority verified, ideally by independent sources that are accessible through the Web or social media, conceivably through a shopper’s smartphone. Bit by bit, this type of information is becoming more available, and people are starting to bring their values not just to the survey but to the checkout counter. But that movement will be gradual, and such behavior is still far from being second nature. It is possible that 10 or 20 years from now people will be purchasing ethically as a matter of habit, but corporations (along with third-party information providers) must first make the social merit of their products and services tangible to the pragmatic consumers who dominate the market. + Reprint No. 11103

Timothy Devinney [email protected] is a professor of strategy at the University of Technology, Sydney. He is the author of seven books and more than 80 articles in academic journals. Pat Auger [email protected] is an associate professor and the academic director of the executive MBA program at the Melbourne Business School. He has published extensively on ethical consumerism and e-commerce in leading academic journals. Giana M. Eckhardt [email protected] is an associate professor of marketing at Suffolk University in Boston. She has published widely on global branding and consumer behavior in academic journals and books. This article was adapted from Devinney, Auger, and Eckhardt’s book, The Myth of the Ethical Consumer (Cambridge University Press, 2010).

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socially aware than Americans bred on notions of self-sufficiency and individualism. However, we found only weak support for this idea. Simplistic notions about differences influenced by gender, education, income, culture, domicile, basic values, and so on proved similarly unfounded. It is often assumed that individuals from emerging-market countries are significantly less sensitive to social issues, being more concerned about economic development. Again, the reality is more complex; individuals’ responses were more nuanced. We found that although those from Germany, the U.S., or China might rationalize their ethical consumption (or lack of it) differently, the behaviors being justified are remarkably similar. Proponents of ethical consumerism want to believe that people’s socially oriented choices are somehow different — perhaps made at a higher level of consciousness — from their general product choices. This is a delusion. Product ethics are more important only when individuals, comparing such ethics to all the other things that have value to them, determine that they are more important. And our research shows that for many people, this is seldom the case. To some, this will sound like heresy. How can it possibly be that the cost of a bar of soap is more important than knowing that it won’t pose an ecological hazard? Whatever the moral merits of the issue, for many ordinary people in ordinary circumstances, the cost does matter more. Even a factor like the color of a running shoe matters more, to most people, than the conditions under which the shoe was made. The emergence of a true ethical consumer base is a long way from

and often arrive at decisions informally; titles tend not to be a major factor. Even when the CEO makes the final decision, groups of executives almost always play an important role in framing and formulating it. Thus, an executive’s ability to influence peers and superiors as they undertake a broad range of crucial decisions involving such is-

Such people are valued employees, and they are often given challenging and rewarding assignments. Their employers benefit, too. Big problems get solved, executive decision making is enhanced, and the organization is flattened somewhat, making it more flexible and less rigidly tied to a top-down, commandand-control environment.

Using Influence to Get Things Done Convincing senior management colleagues to follow your lead requires a blend of skills that add up to influential competence. by Perry Buffett

Photograph by Opto Design

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ew to her job as a senior vice president of IT at a Fortune 100 healthcare company, Kate faced a challenge that the firm had swept under the rug for a long time. Over many years, the company had installed multiple redundant technology platforms and poorly integrated systems, neglecting fiscal discipline and network efficiency. Since she controlled about US$180 million in corporate IT expenditures, or approximately 20 percent of the company’s total IT budget, Kate was asked to join a council composed of the company’s top executives and the 12 business unit heads who were responsible for the remaining 80 percent of IT costs. Their job was to adopt a plan for bringing the technology budget into line. Kate knew that the only way to drive down the company’s overall costs was to eliminate the legacy IT systems of the business units and move all the software onto one platform. But doing so would cause a great deal of short-term pain and expense for the business unit executives, without generating a real improvement to their individual bottom lines. By recommending this, she would certainly step on the toes of the executives whose fiefdoms

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would be affected; moreover, she didn’t have the power to force any of them to accept her plan. And worse yet, Kate didn’t know the council members very well, and they didn’t know her. Kate was in a tough spot, but not an uncommon one. Contrary to what’s implied by the Trumanesque “buck stops here” image of the CEO, most major decisions in large companies are made collaboratively. Executives work together in collegial small groups such as boards, councils, and committees

sues as strategy, budgets, brand positioning and pricing, and capital investments is a valuable skill — a skill that could be called influential competence. The Japanese may say that “the nail that sticks up gets hammered down.” But every company seems to have one or two executives who are able to avoid the hammer — whose influence far exceeds their job title. When they raise a controversial issue, their colleagues and bosses pay close attention. Their pet topics make it onto the corporate agenda and are often successfully addressed, even when they involve thorny problems and difficult new directions for the organization. These executives get things done, whereas others, often with more formal authority and power, command, cajole, and threaten to no avail. As one would expect, the effectiveness of executives who have achieved this kind of influential competence yields career dividends.

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1. Build up the courage to raise difficult problems. “Most people 18

have difficulty with leading in committees because they don’t want to do anything to damage their careers,” says Larry DeVries, who was a vice president at the McDonald’s Corporation before retiring in 2010 after 40 years of service. “But you can lead from within if you get to the point where you have the guts to say, ‘Here’s what I have identified as the problem. Here’s what I think is a good solution. Here’s what I have already started in motion. If you agree with me, fine. If you disagree with me, now is the time to tell me.’” 2. Leave your personal agenda at the door. Although the ability of ex-

ecutives to influence others often enhances their careers, self-aggrandizement isn’t their primary motivation. Some executives forget this fundamental truth. They become Machiavellian, playing politics in order to build their power base, or in the flush of success, they become drunk with power. They forget that personal success is a by-product of serving their companies well. With few exceptions, these executives lose their credibility with peers. Their motives are questioned and they eventually cannot muster the support on which their influential competence depends.

expert advocates. They enlist the support of their bosses. “You have to give your boss the benefit of your knowledge,” says DeVries, “but you must also give him or her the opportunity to take charge or change direction before you get too far down the line. That helps alleviate the political pressures within the company and the threat of retribution if you make a mistake.” These savvy executives can also identify the formal — and informal — power brokers in a given setting and establish a personal dialogue with them prior to presenting the problem for consideration to the group as a whole. “It really becomes a matter of reading the tea leaves and knowing how much support you can expect,” says Richard Yoo, McDonald’s senior director of new product innovation and marketing, whom DeVries mentored. “You never want to be alone on an island. General Douglas MacArthur completely dismissed a lot of folks, including his commander in chief, Harry Truman. He made enemies out of a lot of people and eventually hit the wall.” Executives who have developed influential competence seek to understand the mind-set of all members of the group. “Never go into a meeting without having prepped your enemies and your allies,” says Suzanne Sinclair, director of leadership talent acquisition at Allstate Insurance. “You also have to recognize that not everyone has pure motives, so you have to understand your colleagues’ agendas and how their agendas fit into the issue you are raising.” 4. Engage the group using emo-

3. Rise above the game, but don’t

tional intelligence. “Go in with a

ignore it. Executives who have de-

humble attitude and a fact-driven presentation,” says DeVries. “These

veloped influential competence are

people don’t report to you. The only thing you have is influence, and if you can’t prove everything that you say to them about the potential costs of the current situation and the benefits of your solution, you are not going to get anywhere.” Executives who have developed influential competence do not dominate discussions. “Actively solicit the thoughts of the group and listen respectfully to all members of the committee regardless of rank or role,” says Sinclair. “In fact, it is often very helpful to raise the areas of strong alignment and dissent without naming names.” This encourages open, critical debates that give the group an opportunity to understand the choices and the trade-offs you are proposing, she adds. “People will not buy in unless they’ve had the opportunity to understand and contribute to the decision at hand.” 5. Be tenacious, because decisions do not necessarily guarantee action. “Silence is something to be very concerned about,” says Sinclair. In other words, if the group reaches a decision but afterward nobody acknowledges it in either positive or negative terms (that is, no action is being taken to implement it), it’s important to figure out which additional levers need to be pulled to actively engage others. “Don’t assume, and always monitor,” advises DeVries. “You have to follow up and reinforce the decision. You have to identify barriers and get people to talk to you about what they are doing to overcome them. You also need to communicate up; your bosses have their own agendas and unless you educate them and inform them about your progress, they could very easily send everyone off on a different tangent.”

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This is an attractive payoff, but how does a manager develop influential competence? To answer this question, we analyzed the methods of executives who are able to convince their peers to take on tough and potentially divisive problems and solve them through consensus and action. We found five factors critical to using influence well.

Kate, the healthcare executive whose story opened this article, made the best of her first opportunity to influence senior managers in a council setting. She took care not to ambush any of her colleagues. Instead, she met one-on-one with the executives who would be affected by her plan to create a single IT platform before the council meeting, so she could explain why her recommendations were critical to the company’s future and why the business units needed to bear the costs. She was fully transparent about the decision criteria that led to her recommendations, and she was consistent in the arguments that she made for her plan privately and publicly. Kate recommended an ambi-

tious solution, but the way she formulated and presented it to the council made all the difference. Mixing candor with openness to others’ opinions, balancing humility and courage, and making a concerted effort to keep top executives on board — before and after the difficult decisions were made — Kate was able to lead the council to adopt her plan of unifying IT systems on one platform. She was so successful in this effort that the council’s members agreed to shut down existing projects that were not well aligned with the new system, even though this incurred unexpected costs for the business units over the short term. Instead, the council invested in an integration initiative that enabled the company to sub-

stantially reduce its overall IT costs and, over the long term, bring its IT spending in line with the industry. Kate, meanwhile, gained a great deal of credibility among her colleagues for wrestling IT costs down to a level that the company could live with and for shepherding a much-needed overhaul of its technology networks. But perhaps as important, her new approach to collaborative decision making provided her co-workers with a model for undertaking difficult decisions in a less contentious and ultimately more successful way. + Reprint No. 11104

Perry Buffett [email protected] is a senior associate with Booz & Company based in Chicago. He specializes in leadership alignment and organizational change.

DATA POINT S

Why Air Travel Is Bound to Boom Few sectors will benefit as much from globalization and economic development as air travel. People in emerging economies typically can’t afford to fly much, but as their income rises (the x-axis), so does their number of airplane trips per capita (the y-axis). Note the inflection point when income passes the US$20,000 mark. As tens of millions of people in populous nations such as China and India move into the middle class, the skies will become a lot more crowded. 7.0 Air trips per capita per year

6.0

Norway Qatar

5.0 Switzerland Denmark

4.0

3.0

Indonesia Philippines Vietnam Egypt Thailand Iran Brazil Malaysia

2.0

1.0

China

Australia U.K. Austria Netherlands Sweden U.S.

Spain Greece Kuwait Saudi Arabia Oman

South Africa Turkey Mexico Russia $10,000

Italy

Canada

Circle size = population 1 billion 300 million 100 million

Germany Belgium France Japan

South Korea

$20,000

$30,000

India Source: Booz & Company (Tom Hansson/Marty Bollinger/Timm Pietsch)

$40,000

$50,000

$60,000

GDP per capita in U.S. $ $70,000

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What Kate Did

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it matters

their aisles while tuning in to their smartphones to check reviews, compare prices, and make deals with competitors on the spot. In short, m-commerce blurs the distinction between websites and bricks-andmortar outlets, linking disparate operations and making the Internet a pivotal sales engine for the first time for many retailers — and highly dangerous for others.

The M-Commerce Challenge to Retail As smartphones change shopping, merchants face a stark choice: Fall in behind their newly enabled consumers or fall behind altogether. by Matt Anderson, Nick Buckner, and Stefan Eikelmann

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ou may not have heard of Shopkick yet, but it’s one of the best examples of the dramatic changes facing retailers now. An application that runs on iPhones, Shopkick pays consumers “kickbucks” — reward coupons — just for checking in when they enter Best Buy, American Eagle, Macy’s, or other participating retailers. Additional kickbucks are available for performing particular actions — for example, scanning a poster on a store’s dressing room wall into the iPhone camera. The kickbucks can be redeemed for gift cards and donations to charitable causes. Moreover, when shoppers at Best Buy show their iPhones running

Shopkick to the cashier, they receive instant discounts. Combining the location-finding power of the global positioning system (GPS), the ubiquity of the cell phone, and the creativity of online marketing, Shopkick and many similar applications are altering the consumer landscape. At a time when retailers are struggling to reach customers, who have become more and more hesitant to spend in a soft economic environment, this new use of technology will divide retailers further. The early adopters of mobile commerce (or m-commerce, as this use of technology is called) will have greater opportunities to influence shoppers in real time as they build “in the moment” customer analytics capabilities. Lagging merchants will increasingly see customers browsing

Although a relatively new phenomenon, m-commerce is already beginning to make its mark. A recent Booz & Company survey of U.S. consumer usage and attitudes toward mobile commerce found that between 15 and 20 percent of consumers currently use their cell phones and personal digital assistants for price discovery and product comparison, and 25 percent expect to do so in the future. Ten to 15 percent of the revenues from retail are expected to be influenced by mobile applications this year, or as much as US$340 billion in total retail sales across the U.S. and the “E.U. 3” (France, Germany, and the U.K.), as the exhibit on the opposite page shows. These numbers will surely grow rapidly, if only because the penetration of smartphones (a category that includes the iPhone, Android, BlackBerry, and others) is expected to increase from 17 percent in the U.S. and 15 percent in the E.U. today to 74 percent and 43 percent, respectively, by 2014. By 2013, as many as half the consumers in a typical retail store will use their smartphones for shopping. Some retailers are already racking up impressive sales from m-commerce. In July 2010, Amazon reported that annual global

Illustration by Lars Leetaru

A Rapidly Expanding Market 20

Retailers can tap into this feature to offer products, sales, and buying ideas. Consumers can vet pending purchases with their online network of friends, compare Web-based re­ views and ratings, and see prices from a competing store down the street. American Apparel, Best Buy, Dell, Macy’s, Sears, and Walmart use Facebook in this way now. In the Booz & Company survey, up­ ward of 85 percent of customers said that retailers should do more to in­ tegrate social networking into their m-commerce offerings. A Synchronized Experience

In a truly mobile, digital market­ place, no channel exists in isolation. Instead, retailers will increasingly design fully integrated shopping ex­

Smartphones in the Shopping Aisle Mobile commerce is already a significant factor in retailing in the U.S., France, Germany, and the U.K., particularly for electronics and apparel shoppers; the biggest users are in the 25–34 age group.

Mobile Commerce, 2011 Forecast BY PRODUCT CATEGORY Electronics

18%

Apparel

17%

Music & video

15%

Food & grocery

14%

Housewares

12%

Books

8%

Health & beauty 6% Do-it-yourself Other

6%

4%

BY AGE GROUP 15–24

24%

25–34

31%

35–44

24%

45–54 55+ Source: Booz & Company

14% 8%

periences to cater to well-informed, digitally enabled consumers — cre­ ating, in effect, a new electronic retail ecosystem. Amazon’s mobile offering provides an apt illustration. The online retailer offers real-time cart synchronization across elec­ tronic and mobile channels; if you put a CD in your cart when shop­ ping via smartphone, the CD will be there when you log in later from your desktop. On the mobile home page, Amazon provides personalized rec­ ommendations, shopping histories, easy access to product ratings and reviews, and product recommenda­ tions. Amazon’s most eye-catching m-commerce accomplishment is an application called Amazon Remem­ bers. Consumers can take a picture of a product at a store (or, in fact, an item in their house), and the retailer will within minutes text them with links to similar products for sale at Amazon. How are the most advanced bricks-and-mortar retailers coping with this kind of m-commerce– driven competition? By providing a mobile experience that keeps shop­ pers focused on the store they are in. For example, Walmart allows customers to search for ratings and reviews by scanning the barcode of in-store products into a cell phone. This tactic underscores another Booz & Company survey result: Conversion rates (turning browsing into sales) increase by as much as 240 percent when consumers view ratings and reviews while shopping — in this case, it was for orders un­ der $200. Looked at from a more negative perspective, retailers that don’t give customers a way to get the purchasing insight they need from their own ecosystem and that don’t offer jazzy mobile shopping features will only drive their consumers to

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revenues from mobile devices, in­ cluding its Kindle reader, had reached $1 billion. Likewise, eBay expects its 2010 mobile commerce revenue to be between $1.5 and $2 billion; one item is sold via eBay Mobile every two seconds. The in­ centives for fence-sitting retailers to join this movement are high, be­ cause m-commerce builds loyalty, and returning m-commerce cus­ tomers purchase items three to four times as often as their e-commerce counterparts. Meanwhile, new players such as the enormously popular Facebook are entering the field. In August 2010, Facebook launched its “Places” service, which allows the site’s 500 million users to disclose their cur­ rent location on their home page.

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Matt Anderson [email protected] is a partner with Booz & Company based in Houston. His areas of expertise include customer experience, online strategy, social networks, multichannel retail and content, and B2B services. Nick Buckner [email protected] is an associate with Booz & Company based in Houston. He supports growth strategies and transformation initiatives for retail consumer and digital clients. Stefan Eikelmann [email protected] is a partner with Booz & Company based in Düsseldorf. He focuses on information and communication technologies and leads the firm’s related engagements in Germany, Switzerland, Austria, and eastern Europe. Also contributing to this article were Booz & Company Partner Joseph Sims and Senior Associate Fabian Seelbach.

stay on top of customer preferences from any number of sources of data — pictures, video, chat, and who knows what else — and serve up highly targeted offers at the right price to coax the consumer to buy a new blouse that she has been thinking about or that she just took a picture of while sitting at a café enjoying an espresso. As the apps grow more sophisticated, anything that transpires on a smartphone — purchases, preferences, products viewed, and reviews — will become part of an ongoing digital log that influences the decisions consumers make and the types of catalogs and offers they receive. Bricks-and-mortar retailers will also synchronize e- and m-commerce activities with in-store point-of-sale systems, creating new levels of potential up-selling, cross-selling, and customer service.

with the impact of those features on their final purchase decisions. The most commonly used application in homes and offices was taking a picture of a product to share with friends. In stores, consumers most frequently used their smartphones to view mobile ads, ratings, or reviews. They stated that ads changed their purchase decisions 38 percent more often in stores than at home or in the office. Also popular is the ability to compare product prices among stores via smartphone. Consumers compare prices more often in stores than in the home or office, but the influence of this feature over the final purchase decision is consistent in all contexts. Researching product information via smartphone was also high on the list, regardless of the shopper’s location. Play to Your Strengths

Loyalty and Context

Currently, the least used multichannel strategy is a well-integrated loyalty program. Best Buy’s “Reward Zone” program, which offers consumers points for purchases and targeted promotions that can be redeemed at stores or online, is one of the few that can be freely accessed in any sales channel. Yet according to the Booz & Company survey, 54 percent of consumers would like to have a mobile loyalty account that provides credit, points, and promotions across a variety of physical and virtual outlets. With m-commerce just getting off the ground, retailers have many options. The Booz & Company survey offers some relevant insight. Respondents were asked to provide information on the mobile commerce features that they use — in homes, offices, and retail stores — along

If you are a retailer seeking an mcommerce strategy, your first step should be to make a solid assessment of your own business. There is no universal, one-size-fits-all path. Rather, a successful strategy should take into account the relevant core technical capabilities of your company, the commercial channels in which you operate (big box or small format retail, e-commerce, kiosks, etc.), the competitive dynamics in your sector, and the current state of the art of m-commerce itself. (Remember, mobile technology is advancing almost daily.) In other words, a mobile strategy needs to adopt the face and persona of the business behind it. Most retailers begin by leveraging their existing e-commerce capabilities (honed through product websites and supply chain experience) onto mobile channels with

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find reviews and offers someplace else, creating a chance for a competitor to, in effect, enter their store. Best Buy has a still more ambitious approach. Its “twelpforce,” founded in 2010, is a large group of employees who answer customer questions posed on Twitter about brands and models. Most of these tweets are sent by consumers while they are in Best Buy stores. The most innovative uses of mcommerce have yet to be invented. A high-end clothing retailer, for example, could develop a mobile app that allows customers to take pictures of outfits they like on the street or at work, mix and match items in virtual closets showing photos of the clothing in their physical closets, combine this set of information with recommendations from the retailer, and share possible purchases with friends via social networks to collect instantaneous buzz that will help them make their decisions. As this illustrates, the retailer of the not-too-distant future will have to

the chances that they will browse the mobile Web for alternatives. In either case, a set of critical capabilities must be developed to enter this arena, including being able to work with third-party service providers such as Shopkick, Facebook, and Web ad placement and analytics firms AdNetwork, DataXu, and AdMob. In addition, there is the very real need to integrate these outwardfacing m-commerce solutions with your own internal IT and marketing systems — the systems that currently gather customer information

M-commerce will strain traditional marketing analytics and systems, which are generally not prepared to act decisively on real-time data. consumer shopping decisions. For example, outdoor equipment and apparel maker North Face uses GPS and cell phone location data to create “geo-fences” in some areas of the United States. These virtual zones provide special purchasing incentives when consumers are near a retail store that sells its brand. In other situations, a more service-oriented posture is appropriate to protect market share and enrich an already top-flight customer experience. Take IKEA’s use of augmented reality technology, which allows customers to create a virtual model of the room they are buying furniture for (by entering the dimensions) and then furnish it with 3-D models of items to see how well the pieces fit. Providing an experience like this not only is useful for shoppers but also keeps their attention on the store’s products and minimizes

and analyze business intelligence. Indeed, m-commerce will strain traditional marketing analytics and systems, which are generally not prepared to act decisively on realtime data. As the early adaptations show, mobile commerce implementations will be as different as the businesses that launch them. But there is a common end game of all m-commerce implementations that is as critical as the technology itself: Give customers an enjoyable, rewarding, and inventive channel in which to purchase your products and increase their loyalty. If that goal remains firmly in sight, your recently launched mobile application will soon become as ingrained in your customers’ habits as a 50-year-old catalog or a 20-year-old website. + Reprint No. 11105

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little customization. This, at least, gets you into the game and achieves some parity in the market. The next phase is the development of advanced m-commerce capabilities to drive revenue growth: attacking key categories, influencing shopper decision making, and shifting purchases away from competitors to claim market share. In some cases, retailers should take an offensive strategy: injecting offers and product information into smartphone formats that crowd out competitors and directly affect

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Cisco’s Virtual Management Lab How one of the world’s most innovative companies discovered the value of focusing its R&D attention on its own business practices. by Inder Sidhu

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ohn Chambers, the CEO of Cisco Systems Inc., first realized his company had a problem reaching the consumer market in 2002, when his son in­ stalled a wireless network in the family’s home. “I assume you used Cisco products,” said Chambers. But his son hadn’t — because he couldn’t find any appropriate de­ vices made by Cisco at the consumer electronics store where he shopped. Nor could he find them at a suitable price online. Cisco’s gear was too expensive and technically advanced for his needs. That didn’t sit well with the CEO. At the time, there was a US$20 billion global market for home and small-office network

connectivity products, which was projected to grow into a $74 billion gold rush within a few short years. There was simply no way Cisco, the world leader in networking equipment, could ignore that mar­ ket. If consumers by the millions were networking their living spaces with inexpensive, easy-to-use rout­ ers, Cisco ought to be at the center of this communications revolution, Chambers believed. But how? Cisco, founded in 1984 by a group of Stanford Uni­ versity scientists, had become the world’s most successful manufactur­ er of computer networking equip­ ment, a distinction that this com­ pany (for which I serve as senior vice president of strategy and planning) still maintains. We provide the bulk of the infrastructure that powers

the Internet and other networks, both public and private. When you send an e-mail, visit a Web page, connect to a secured corporate net­ work, or, increasingly, make a simple phone call, chances are Cisco equip­ ment and software make it hap­ pen. The company does business in more than 140 countries and has a market capitalization of roughly $140 billion. But we are also keenly aware that when a company is large and successful, it can grow complacent. Somewhere along the way, Cisco had started acting less like a hun­ gry startup with everything to gain and more like an established market leader with too much to lose. By the early 2000s, we began to wonder whether our company was losing its edge. The more we studied the issue, the more concerned we be­ came, especially about our innova­ tion decision-making processes. We were green-lighting only those ideas that produced immediate returns. In many instances, this yielded gains in profit and market share. But it also meant that our company was missing opportunities — the consumer networking market and many others. Since then, we have made de­ liberate efforts to pioneer inno­ vative management practices at Cisco: designing and implementing new, unconventional approaches for taking advantage of market transi­ tions and preparing for competitive threats. Our efforts are not limited to a specific program or team; they represent a commitment by decision makers from across the company to consider alternative ways of doing business. It’s as if we set up a virtual management laboratory, part cul­ ture initiative and part best practic­ es, to make use of every asset Cisco

Illustration by Lars Leetaru

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Beyond the Business Model

Consider our foray into the consumer market — where at first, even the CEO’s son wouldn’t buy our products. That was because our business model didn’t match our customers’ needs. For most of its existence, Cisco had generated the bulk of its profits by producing high-value, high-margin networking products sold to corporate customers through high-touch sales engagements. In return for reliable, secure technology provided with generous support, customers rewarded Cisco handsomely. Gross margins on most products topped 60 percent, leaving the company with the returns needed to continue developing and refining the large-scale products that were sold in relatively low quantities. But in the consumer market, the combination of high quantities, low prices, and steep competition gave us margins in the 30 percent range. Try as we might, given the systems we had in place for operations and R&D, we simply could not stretch our existing business model sufficiently to cover this market. We needed to build a new operations base and business model from scratch, expressly tailored to the growing consumer segment. We had to introduce this model as soon as possible, and make it fully operational, so our company wouldn’t miss out on a great wave

of customer buying. Given these realities, we recognized that the right approach would be to acquire a business already pursuing this model. We selected Linksys, the maker of the equipment that Chambers’s son had bought for the family home. Founded in a garage in Irvine, Calif., in 1988 by the husbandand-wife team of Victor and Janie Tsao, Linksys was already a consumer networking leader when

were eager to learn from its expertise in consumer technology. The hands-off approach worked. Since the acquisition, Cisco’s consumer business has maintained or improved upon its business metrics. Annual sales have doubled. Linksys has also diversified its business and entered new markets. Today, one-quarter of the sales of Linksys products come from outside the United States — more than

Linksys enabled Cisco to become more consumer-friendly, with a better understanding of branding and the retail channel. Cisco came calling in 2003. It earned more than $400 million in annual revenue and employed more than 300 people. We understood that we were getting into a very different business. Never before had Cisco sold products in stores that offered Bubblicious chewing gum or Britney Spears CDs. Cisco was known for its skill in integrating acquisitions; the company has made more than 130 such deals. But most of our acquisitions were rapidly integrated into our existing business model. In this case, to keep a separate business model alive and prevent it from imploding, we handled the acquisition differently. We kept much of Linksys independent, at least at the onset. We integrated common business functions, such as human resources and finance, but preserved many of Linksys’s distinctive components, including its engineering, sales, and marketing functions. Linksys was, after all, a market leader, and we

doubling the percentage of a few years ago. Linksys has also enabled Cisco, as a whole, to become a more consumer-friendly com­pany, with a better understanding of branding, the retail channel, and the consumer market supply chain. We are inching closer to our vision of selling devices, software, and services as an integrated solution. Putting in place a separate business model has not been easy for us. We had to continually remind ourselves that we were not giving up control; we were creating an opportunity for significant gains. But if not for this acquisition, Cisco might have missed out on this large and growing opportunity in the home networking market. Moreover, the Linksys experience provided convincing proof, for us, of the value of explicitly looking at our management practices, and deliberately experimenting with them. Thus, in the mid-2000s, the company’s management team turned its atten-

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has. We have relied on this “lab” to help overcome a variety of challenges over the years. Three of the most powerful examples of its work have been embracing complementary business models, developing disruptive innovations (the kinds of gamechanging products and services that open up new businesses), and overcoming go-to-market obstacles.

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Managing Disruptive Innovation

Though recognized primarily for core networking equipment, Cisco has a product line that spans handheld digital cameras, sophisticated security solutions, microprocessors, and even routers for use in outer space. To maintain its lead in some product categories and catch market leaders in others, Cisco invests between 13 and 15 percent of revenue in research and development each year. This is in line with other leading technology companies, including Intel (16.4 percent) and Microsoft (13.5 percent). We are immensely proud of our innovations; our most advanced CRS-3 router, for example, can download every motion picture ever made — from The Great Train Robbery to Avatar — in just over four minutes. At the same time, we recognize that the more we focus on optimizing existing products, the less attention we have available for disruptive breakthrough innovation. The management and engineers at Cisco recognized that disruptive breakthroughs required different people, processes, and in­centives for motivating employees. For example, Inder Sidhu twitter: @indersidhu is the senior vice president of strategy and planning for worldwide operations at Cisco Systems, and a member of the company’s operating committee. Between 2006 and 2010, he co-led Cisco’s Emerging Countries Council; between 2006 and 2009, he co-led its Enterprise Business Council, which is responsible for its corporate business, representing about half of the company’s total revenue. This article is adapted from Sidhu’s Doing Both: How Cisco Captures Today’s Profit and Drives Tomorrow’s Growth (FT Press, 2010).

we created a new team called the Emerging Technologies Business Group (ETBG). Its primary mission is to pursue new ideas that could grow into $1 billion market opportunities within seven years of being launched. Because of the amount of effort required to take an idea from zero to $1 billion, the ETBG was given a unique charter within the company’s primary product-development division. We set it up as an incubation center for translating innovative ideas into business opportunities, not as a smaller R&D unit judged by its patents or scientific breakthroughs. Despite its small size in comparison to the rest of the Cisco Development Organization, the ETBG is responsible for some of the company’s highest-profile engineering projects. This includes Cisco TelePresence, a video collaboration system that provides an experience so real that participants have been known to offer a handshake at the end of a meeting, momentarily forgetting the virtual environment. The creation of the ETBG required a major cultural shift at Cisco. The composition of the team, the way its performance was evaluated, and even the processes the team used to develop products were distinct from the rest of the com­ pany. For example, the development of Cisco TelePresence began with cardboard boxes and foam blocks, not digital cameras, computers, and high-definition screens. The ETBG considered aspects never before incorporated into Cisco technology, including furniture and paint color for the walls in TelePresence rooms. If the creators had not thought through these design-oriented “softer” aspects, the TelePresence value proposition — the ability to conduct

a virtual meeting with multiple people located in different places around the globe as though they were all assembled in the same room — would have been lost. Cisco does not sell nascent ETBG products to every customer. Customers must be prequalified on the basis of their understanding of the limitations of early-stage products. That’s because we recognize that these products won’t have all the features needed to satisfy all customers. Rather than selling to tire kickers, Cisco looks for what it calls lighthouse accounts — customers whose experience will provide guidance to others. ETBG-related sales increased nearly ninefold between 2007 and 2009, despite the recession. Three of the team’s products are already in the market today and achieving significant success, at least judging from early sales. In keeping with the goal, each represents a $1 billion-plus opportunity within seven years. Four more are staffed and in the early stages of incubation (we are gathering customer feedback, refining the market focus, and developing the appropriate solutions). Only one has been terminated. Not a bad track record. New Math for Sales Partners

At Cisco, one of our most difficult challenges was to transform the way we engaged with our third-party sales channel — the thousands of partner organizations that sell our products and services. In the late 1990s, Cisco bought a company called Selsius Systems Inc., which produced phone systems that worked over the Internet for a fraction of the cost of traditional landline technology. Eager to extend our reach in the telecommunications

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tion to other challenges, including innovation.

didn’t work for resellers in the traditional voice world. For them, margins were typically 20 to 25 percent. Worse still from their perspective, our new technology virtually eliminated a lucrative revenue stream for traditional voice resellers: the charges for “moves, adds, and changes” to enterprise phone systems. We realized that unless we changed the math, there was no reason for voice resellers to give up their traditional business to help us. Nor could we count on existing nonvoice partners to jump in. They just weren’t familiar with voice customers and voice technologies. Cisco was effectively blocked from gaining traction in the market,

Rather than allow our sales partners to suffer and miss a market opportunity, we reduced Cisco’s own return on investment. grow. Revenues totaled approximately $100 million per quarter by late 2002. But then they plateaued. After engaging early adopters and tech-savvy enthusiasts, we found no mass market of follow-up buyers waiting in the wings. The company had single-digit market share and was stuck in the number six position among vendors. That’s when we identified the culprit: profitability for our sales partners. The company’s traditional programs provided margins of 8 to 12 percent to resellers of data products. Given the additional money they could charge for value-added services in the information technology market, these margins were acceptable. But those same numbers

so we needed to move — and fast. First, the company voted to increase spending to recruit voice consultants and analysts who could help influence voice customers on Cisco’s behalf. Then we did something unprecedented: We gave 20 percent of the revenue from every voice product sale back to the partnering company that helped Cisco secure that business. It was a tough choice. But rather than allow our sales partners to suffer and miss a major market opportunity, we reduced Cisco’s own return on investment. This policy meant asking internal business managers to accept a lower contribution margin in exchange for jump-starting sales. After some discussion, the leader-

ship team decided that its long-term need for partners far outweighed any short-term gain in profitability. So Cisco created its Value Incentive Program, which paid resellers a fee for every VoIP deal they successfully closed. In most cases, partners could double, if not triple, their profit­ ability on any VoIP deal. Overnight, Cisco’s management innovation lab changed the dynamics of the voice market. In the two years that followed, Cisco phone sales rose 40 percent per year. Some traditional reseller partners volunteered to invest in training so they could sell the new technology. Eventually, more than 2,000 partner companies signed on to deliver voice solutions around the world. Cisco, which had once languished as sixth in a crowded market, moved to the number one position, with more than 30 percent market share. Once again, as with consumer products and disruptive technology, we learned how powerful management innovation can be. To be sure, not all of the ideas that spring from our virtual management laboratory produce results like this. But even when they don’t pan out, they keep our company young and hungry — like a startup with everything to gain and not much to lose. + Reprint No. 11106

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market, we paid $145 million for the Dallas-based maker of voice over Internet protocol (VoIP) phones. But there was a problem. Cisco lacked a channel for going to market with voice communications equipment. For a company that generates more than 80 percent of its revenue through partner organizations, this was a major concern. Market share growth seemed like a tenuous proposition at best. Undaunted, we did our best to use marketing and advertising to convince customers to try our products. Within a year of having launched our own reliable product with business-critical features, we found our VoIP sales beginning to

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The Power of the PostRecession Consumer An analysis of attitudes and spending reveals a return to traditional values, driven by consumers searching for quality, affordability, and connection. by John Gerzema and Michael D’Antonio

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he wave of hyper-consumerism that propelled the U.S. economy through the last decades of the 20th century and into the first years of the 21st century has passed. Say good-bye to all the signs of easy wealth we knew from the recent past: McMansions, SUVs, and recreational shopping. Consumer spending patterns are changing as part of a trend that has been quietly gathering strength over the past 10 years. Say hello to a lifestyle more focused on community, connection, quality, and creativity. People are returning to old-fashioned values to build new lives of purpose and connection. They also realize that how they spend their money is a form of

power, and are moving from mindless consumption to mindful consumption, increasingly taking care to purchase goods and services from sellers that meet their standards and reflect their values. This change in consumer attitudes — visible not only in the United States but also in other countries affected by the Great Recession — is not a fad or whim. It is, in part, a reaction to economic hard times. But it is also closely related to the civic dissatisfaction that is rocking the political establishment, and additionally has some roots in environmental awareness and changing aspirations. That is why this Spend Shift movement, as we call it, is here to stay. It will create opportunities for businesses that heed its message, and penalize those that do not. (For

another perspective, see “Values vs. Value,” by Timothy Devinney, Pat Auger, and Giana M. Eckhardt, page 14.) Our view of the Spend Shift is based on two years of gathering and analyzing data, and traveling around the U.S. to discover how the recession has affected people’s lives. We started with Young & Rubicam’s BrandAsset Valuator (BAV), which is a poll of consumer values, attitudes, and shopping behaviors that goes back nearly 20 years. (Although the data sample we focus on in this article is from the U.S., we found that there are similar dynamics in Europe and other industrialized countries.) The BAV holds data on more than 40,000 brands in more than 50 countries, and every quarter it is supplemented with new results — on purchasing and social attitudes — from 16,000 respondents in the U.S. alone. In all, we have queried more than a million consumers in 50 countries on some 70 brand metrics, which include the general awareness consumers have of a brand, the particular ways it makes them feel, and many others. (See “The Trouble with Brands,” by John Gerzema and Ed Lebar, s+b, Summer 2009.) The BAV data revealed that even before the recession took hold in mid-2008, there were dramatic shifts in what people expected in the consumer marketplace and how they defined and pursued what they considered the good life. As a factor in decision making, sheer desire for the goods themselves has been declining sharply for the past decade. More recently, the BAV surveys show sharp increases in the number of consumers who want positive relationships with marketplace vendors and who focus more on cor-

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ALL CONSUMING BEHAVIOR

most important economic statistics supporting this trend come from the U.S. Bureau of Economic Analysis reports on personal savings. The reports show that ordinary Americans began raising their deposits in savings accounts and other secure investments a full two years before the start of the recession. Even as unemployment surged past 10 percent, U.S. consumers socked away more money every month. By the

Between 2005 and 2009, U.S. consumers expressed a fourfold increase in their preference for companies that show kindness. (down 20 percent). On the opposite side of the scale, the brand attributes Americans found more important as they began to sense the impending recession and then suffered through the crisis were: “kindness and empathy” (up 391 percent), “friendly” (up 148 percent), “high quality” (up 124 percent), and “socially responsible” (up 63 percent). The reference to “kindness” is not a typo. Between 2005 and 2009, U.S. consumers expressed a nearly fourfold increase in their preference for companies, brands, and products that show kindness in both their operations and their encounters with customers. This desire for companies to be more empathetic toward consumers is the biggest shift in any attitude that we have ever seen during the BAV survey’s twodecade history. The BAV data told us that at the grass roots, people were well ahead of the pundits, corporations, and political leaders. Some of the

middle of 2009, people were saving about 7 percent of their disposable income — a figure that hadn’t been seen since 1995. We also know that people cut back on spending many months before the recession began. In fact, Americans reduced consumption so sharply that in the middle of 2008, it dropped below their disposable income and just kept falling. This reversal of earlier trends in saving and spending continued throughout all of 2009. Without being scolded, lectured, or led from above, U.S. consumers had quietly changed their behavior. Regardless of companies’ size or their target market, they must understand the significance of the Spend Shift to compete in the postrecession economy. From the scores of interviews we conducted and thousands of data points we accumulated, we can identify a wide array of ways that the shift in attitudes, values, expectations, and behaviors will change the way we buy, sell, and

live. We have distilled our findings into four defining principles that together offer a comprehensive look at the origins and impacts of the Spend Shift. 1. United by Change

The Spend Shift is a far-reaching and inclusive phenomenon that can’t be defined by any particular demographic. According to our data, 55 percent of all Americans are part of this movement; in addition, about one-quarter of the U.S. adult population embraces many of the Spend Shift attitudes and characteristics (we call them Fast Followers). Although the word values tends to polarize U.S. citizens, the Spend Shift is blind to geography, education, age, and income. Spend Shifters can be found across the nation: 17 percent are in the Northeast, 23 percent are in the Midwest, 36 percent are in the South, and 24 percent are in the West. Although we’ll limit our discussion to what’s happening in the U.S., it is worth noting that the BAV data shows that the Spend Shift is a global trend. For example, we found that 53 percent of French consumers are Spend Shifters, as are 45 percent of German and Italian consumers. Members of the movement have varying education backgrounds: 23 percent have a high school diploma, 21 percent have a college degree, and 11 percent have completed postgraduate studies. Spend Shifters also represent diverse income brackets; for example, 28 percent earn less than US$40,000 a year, but 18 percent earn between $75,000 and $100,000. They represent Republicans, Democrats, and Independents (28, 31, and 41 percent, respectively). Millennials (the generation born between 1980 and 1995) lead the

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porate behavior. Between 2005 and 2009, a growing number of people rejected status-driven values such as snobbishness and exclusivity, and embraced attributes related to bringing people closer together or making the world a better place. Among the once-prized brand attributes that declined in this period were: “exclusive” (down 60 percent), “arrogant” (down 41 percent), “sensuous” (down 30 percent), and “daring”

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2. The New Thrift

Prior to the Great Recession, the American dream was defined by largeness and acquisition. Yet as a result of the crisis and its lingering presence in the economy, more than two-thirds of U.S. respondents to our survey now prefer a pared-down lifestyle with fewer possessions and less emphasis on displays of wealth. (The figure rises to 77 percent among millennials.) John Gerzema [email protected], twitter: @johngerzema is president of Brand Asset Consulting, a Young & Rubicam Brands company. He is a pioneer in the use of data to identify social change and to help companies both anticipate and adapt to new consumer interests and demands. Gerzema oversees the BrandAsset Valuator, the world’s largest database of consumer insights. Michael D’Antonio [email protected] is a Pulitzer Prize–winning journalist based in New York. He is the author of more than a dozen books, including Forever Blue: The True Story of Walter O’Malley, Baseball’s Most Controversial Owner, and the Dodgers of Brooklyn and Los Angeles (Riverhead Books, 2009).

Consumer spending will no longer be able to grow faster than personal income, as it did during the 30 years leading up to the crisis. Greater savings coupled with less borrowing is not a value that is foreign to Americans. We would argue this is not a “new normal,” but an old one: If you look at historical savings rates in the U.S., people have on average saved 10 percent of their income going back as far as six decades. It was only in the mid-1980s that availability and promotion of consumer credit, as well as sustained economic growth, first encouraged ordinary people to get out over their skis. In only 20 years, average American households swung from being net savers to being net borrowers. Now, however, consumers are returning to traditional values that have long defined the U.S. ideal. In the same vein, people want to do more on their own. In the postrecession economy, resourcefulness and self-sufficiency are viewed as virtues, and excessive consumption as a sign of weakness. In our surveys, 84 percent agreed with the following statement: “These days I feel more in control when I do things myself instead of relying on others to do them for me.” We examined the 2009 performance of a basket of “retooling” companies — those that are in the top 10 percent of our data on being “helpful,” “reliable,” “educational,” and “durable,” such as LeapFrog, Weight Watchers, Craftsman, and DeWalt, because they help people help themselves. The performance of these companies against all others is notable: They performed 249 percent better than other companies when respondents were asked whether they would recommend these brands to a friend, 234 per-

cent better when respondents were asked if they used the products regularly, and 210 percent better on whether the products were worth a premium price. Instead of seeking status through acquisition, many people, we discovered, are seeking ways to experience a sense of competence, self-sufficiency, and accomplishment. Look, for example, at Etsy .com, a craft and vintage item website that serves as a retail and trading marketplace for millions. Beginning in 2005, Etsy founder Rob Kalin and his partners began developing an online place where any artisan could display work and sell to any buyer in the world. Within five years, Etsy had 300,000 vendors — the majority were women in their 20s and 30s — the site was visited by millions of shoppers every month, and the company grew to be worth an estimated $300 million in 2010. Etsy’s mission resonates in today’s marketplace: “to enable people to make a living making things.” If you have an idea for helping people learn new skills and connect with others, your business has a good chance of success. 3. Transparency Breeds Trust

Today the buying public is savvy about marketing, search, and social media. Companies serving these customers, who know more and expect more, will need to continuously listen, respond, and innovate. They are in for a challenge: Our data shows that confidence in all types of big organizations, including big government and big business, has declined by nearly 50 percent in the past two years. Consumer confidence has dropped especially in the financial and automotive sectors, but also in retail, packaged goods, consumer electronics, and 20 other

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movement, with 58 percent of 22to 28-year-olds participating, yet nearly half of all seniors belong, too (including 55 percent of adults age 68 and above). What unites all these Spend Shifters is a common sense of optimism and newfound purpose. As the shock of economic loss wears off for many people, they are redefining what it means to be successful and happy. They are living with less and yet feeling greater satisfaction. Seventy-eight percent of those surveyed reported they are happier with a more back-to-basics lifestyle. Eighty-eight percent reported they buy less-expensive brands than they used to.

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product and service categories. Wary consumers are going beyond just reading labels to get the best products and the best deals. The most tech-savvy are using online services as they stand in the supermarket aisle to get instant access to information on prices and on a company’s social or environmental record. GoodGuide, for example, a California company that tracks, tests, and publishes research on the basic “goodness” of products people buy, has reviewed more than 65,000 products and posted findings online for consumers since 1997. Shoppers are also relying on one another for information, via Facebook, Twitter, and online rankings. Twentieth-century companies were in the information arbitrage business. They knew more about their product than customers did, and they used that information

advantage to create profits. Today, however, customers have equal (and sometimes superior) access to data. As a result, transparency becomes all the more crucial. Today’s stakeholders can see through a glossy cover-up. They crave a true, authentic story. They will be interested in how a company thinks and how it makes decisions. One company that has recognized this is Patagonia Inc., evident by its launch of the Footprint Chronicles in late 2007. This online feature reveals how the manufacturing and delivery of Patagonia’s products affect the environment. A visitor to the site can click on any product and track its environmental and social impact along its path to the store. As a product crisscrosses the globe, pop-up videos explain each stage of production, from design creation to sewing to distribution, giving sta-

tistics for each item’s energy consumption, distance traveled, carbon emissions, and waste generated. Although the Footprint Chronicles have demonstrated that some Patagonia products have negative environmental impacts that are nearly impossible to upend, the company’s presentation of fact rather than message has helped establish it as an honest, trustworthy company. In today’s marketplace, successful companies will practice complete transparency, letting customers see their supply chains, management strategies, and values. 4. Companies That Care

As we noted earlier, our data suggests that kindness and empathy are now dominant discriminators in commerce, and are valuable attributes of the best companies. The ability of a company to identify with

shared discourse. Consumers will be looking for signs that companies care about their impact on communities and are investing in making things better. Selling to your customers will require investing in your customers. Generosity opens up networks, provides access to talent pools, and creates future customers. The vanguard

Today’s stakeholders see through a glossy cover-up. They will be interested in how a company thinks and makes decisions. is on being more human and humane in transactions with others, and people will set these same standards for the businesses with which they deal. Spend Shifters are buying artisanal food because they trust companies that reveal how their food is produced and handled. They patronize cooperative small businesses because such businesses use their profits to build up their local regions. Passionate customer groups will also band together to fund niche offerings that speak directly to the areas about which they feel most strongly. Because 71 percent of U.S. consumers are now aligning their spending with their values, businesses that practice in a new way will find a vibrant marketplace. Instead of selling shoes, such businesses sell empathy and respect. For each pair of Toms Shoes that a customer buys, for example, the company sends a pair to a child in the developing world. Instead of serving food, companies create communities of hope. Instead of making cars, they promise fairness, openness, and

companies understand that showing kindness and humanity is now a competitive advantage. Microsoft is a telling example. Although Apple’s ads make it seem as though all the cool kids hate Microsoft and favor Apple, the two companies aren’t even close when it comes to the sentiments of the public at large. In our BAV survey, Microsoft always scores high on measures of its reputation, exceeding Apple by a wide margin. How does Microsoft do it? Despite its massive size, Microsoft is still widely associated with the single personality of its founder, Bill Gates. He gives Microsoft a human face and, more important, his philanthropy gives the company a heart. In February 2009, Microsoft launched a program called Elevate America to provide 2 million people with free training in information technology to help them find jobs in the postindustrial economy. By August 2010, Elevate America was running in more than 30 states and serving 900,000 people. When we talked to Akhtar

Badshah, Microsoft’s senior director of global community affairs, he told us that in its response to the recession, Microsoft pursued three main areas of focus: education, innovation, and jobs and economic opportunity. Those choices are good for Microsoft, because they create an opportunity for the company to demonstrate its strengths to current and future customers. The key point is that Microsoft uses both its money and its true areas of expertise to maximize the good it can do as a citizen corporation, showing how a company can be charitable by redeploying its existing assets and infrastructure as tools for social and economic development. The Consumer Connection

The Conference Board’s Consumer Confidence Index was at 50.2 in October 2010, up from an all-time low of 25.3 in February 2009, but still far from 90, the indicator of a stable economy. (In May 2000, it reached a high of 144.7.) Although the growth of consumer spending appears to be slowing, we believe that people are simply reallocating the way they spend — looking for a connection to the creator of the product; banding together to get better deals; and pushing service and product creators to do more, price better, and connect more deeply to their wants and needs. Even as people find themselves less rich, they are deploying their dollars in a more calculated and strategic way to influence institutions such as corporations and government. This desire to use money to express values stands out in our BAV data, and was expressed by many of the people with whom we spoke. Nearly two-thirds of all the people who responded to the BAV

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its customers is now a prerequisite for any brand in the post-crisis age. Today, openness, humility, and understanding are critical. Generosity binds a company to its community and its stakeholders. The rising importance of generosity reflects the fact that the postcrisis era will be defined by inclusion rather than exclusion. The emphasis

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felt they could affect corporate behavior through their purchasing habits, and the same proportion avoided companies whose values contradicted their own. The most successful companies will respond to this shift by adopting a business model in which all three parties — the business, the customer, and the community — win in every transaction. Although the Spend Shift will dampen domestic demand for some products, the market for values-oriented goods and services offers opportunities for growth in what might otherwise be considered mature categories. We examined the performance of a group of companies and brands that scored in the top 20 percent in the BAV survey on the values we had noted were becoming increasingly important — self-reliance, adaptability, honesty, quality, and community. And we found that in aggregate they enjoyed nearly three times as much usage and preference as brands that did not represent these values. We believe that the future face of capitalism will be defined by delivering value and values. Those that embrace this reality and adapt will find extraordinary opportunities. Those that ignore it will do so at their peril. +

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by Jon Katzenbach and Ashley Harshak



Start using it instead — to reinforce and build the new behaviors that will give you the high-performance company you want.

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STOP  BLAMING  YOUR  CULTURE

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Illustration by Michael Klein

When Alfred M. (Al) Gray Jr. became commandant

(the highest-ranking officer) of the U.S. Marine Corps in 1987, most knowledgeable observers believed that the Corps’s fabled “warrior spirit” culture was already damaged beyond repair. During the Korean and Vietnam Wars, the Corps had grown from its historic level of 75,000 regulars to more than 200,000, and its values and discipline had eroded. It would have been easy for Gray to blame the damaged organizational culture for the problems he inherited, and to launch a formal, fullscale change initiative. But instead, he began to praise and seek out elements of the old Corps culture, such as its ethic of mutual respect. For example, he regularly slipped into the mess halls without insignia, so he would be served the same meals as the privates. To this day, Al Gray is the only Marine Corps commandant portrayed

in battle fatigues in his formal portrait in the Pentagon. He is one of the most respected leaders in the Marines’ 250-year history. Leaders like Gray understand the value of an organization’s culture. This can be defined as the set of deeply embedded, self-reinforcing behaviors, beliefs, and mind-sets that determine “how we do things around here.” People within an organizational culture share a tacit understanding of the way the world works, their place in it, the informal and formal dimensions of their workplace, and the value of their actions. Though it seems intangible, the culture has a substantial influence on everyday actions and on performance. Organizational cultures don’t change very quickly. Therefore, if you are seeking change in your company or institution, you are most likely to succeed using your

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Ashley Harshak [email protected] is a London-based partner with Booz & Company. He is part of the firm’s organization, change, and leadership practice, with a focus on the public sector and financial services.

existing culture to help you change the behaviors that matter most. Bit by bit, as these new behaviors prove their value through business results, the culture you have can evolve into the culture you need. Blame and Its Alternatives

When a new leader’s strategy puts the culture of a company at risk, the culture will trump the strategy, almost every time. There are good reasons for this. Every company’s identity — the body of capabilities and practices that distinguish it and make it effective — is grounded in the way people think and behave. Deeply embedded cultural influences tend to persist; they change far more slowly than marketplace factors, and cause significant morale problems when not addressed effectively. When your strategy and culture clash visibly, more likely than not, the culture is trying to tell you something about your own leadership philosophy. But many leaders overlook this message. They blame the company’s culture for the resistance they encounter. In the most extreme cases, they assume an explicit mandate for wholesale cultural change. This leads them to remove key leaders and old practices, restructure operations, set in place new rewards and promotions, and announce other across-the-board programmatic changes. This approach is costly, disruptive, and risky. Moreover, it takes years to accomplish. Working in a culture that is under attack reduces employees’ energy and de-motivates them. It may require a major marketplace or economic disruption to get people to buy in. Clearly, this is not a game for the faint of heart. Worst of all, it is rarely successful; few major corporate transformations, especially those involving a wholesale change in the culture, achieve their

intended performance goals. Alternatively, leaders may try to ignore their culture and act as if it isn’t important. But when overlooked, the hidden power of a company’s culture can thwart any leader’s strategic aspirations. No matter how many top-down directives you issue, they will rarely be executed, at least not with the emotional commitment and consistency needed to make them successful. This is not to say that your existing culture is sacrosanct. Indeed, many companies need some kind of culture change. There are passive-aggressive cultures where people routinely fail to follow through on their agreements, creative but undisciplined cultures where talented people pull in different directions, and highly politicized bureaucratic cultures that must bear the expense of their heavy-handed management style. But when you fight your culture head-on or ignore it altogether during a change initiative, you lose the chance of reviving some of the attitudes and behaviors that once made your company powerful — and might do so again. Several studies (including one conducted by Booz & Company and the Bertelsmann Foundation in 2004) suggest a correlation between financial results and a strong, inspiring organizational culture. The correlation is hardly surprising; after all, cultures influence and energize the behaviors that matter most. Procter & Gamble, Southwest Airlines, Apple, Tata, Starbucks, and FedEx are among the household-name companies noted for unique cultures that contribute significantly to their competitive advantage. Fortunately, there is an effective, accessible way to deal with cultural challenges. Don’t blame your culture; use it purposefully. View it as an asset: a source of energy, pride, and motivation. Learn to work with it

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Jon Katzenbach [email protected] is a senior partner with Booz & Company. Based in New York, he leads the Katzenbach Center, which focuses on innovative ideas in leadership, organization, culture, and human capital. He is the author or coauthor of nine books, including Leading Outside the Lines: How to Mobilize the (In) Formal Organization, Energize Your Team, and Get Better Results (with Zia Khan; JosseyBass, 2010).

Myths of Culture Change

Why don’t corporate leaders naturally respond to culture in this productive way? Because of several myths about culture change that have become prevalent in the business world. Each of these assumptions leads to treacherous pitfalls. • “Our culture is the root of all our problems.” This becomes an all-purpose, convenient excuse for performance shortfalls. “Our process-oriented culture inhibits collaboration,” managers say. Or “our long-standing beliefs about nurturing people make us coddle weak performers.” Underlying this myth is a view that attitudes and beliefs shape people’s behavior. This view ignores

the realities of organizational culture. As we’ll see, behavior can influence beliefs at least as much as the other way around. • “We don’t really know how to change our culture, so let’s escape it.” There’s a long tradition, going back to

Lockheed Aircraft’s Skunk Works in the 1940s, of creating pockets of entrepreneurial activity for high-performance results. These are explicitly intended to operate outside the prevailing culture. They may thrive for a few years, but they are typically treated as outliers by the rest of the company. Eventually, they are either spun off or absorbed back into the mainstream, succumbing to the company’s cultural malaise. “Our culture kills even our most innovative efforts” thus becomes a selffulfilling prophecy. One of the most famous of these efforts was General Motors’ ill-fated Saturn brand, modeled after the culture of Japanese automakers and set up to run separately and independently — but eventually overtaken by GM’s culture. • “Leave culture to the people professionals.” Executives with an engineering, finance, or technology background often feel ill-equipped to deal with cultural issues. They delegate them to their human resources, organizational development, or communications teams. “It’s all about the ‘soft’ side,” say the executives. “We have to improve our employee engagement scores.” But the quality of the culture is as much a product of the “hard” side of the organization (strategies, structures, processes, and programs) as it is of the soft side (beliefs, opinions, feelings, networks, and communities of common interest). Although your internal professionals can measure and monitor behavior as well as advise line management on culture issues, they cannot motivate, execute, or implement strategic or performance imperatives. Ensuring behavior change that drives competitive advantage is the role of line leaders at multiple levels. • “Culture is the job of the top leaders.” It is very powerful when the CEO and other top executives take explicit personal accountability for the company’s culture. But senior leaders cannot change cultures by themselves. They operate at such a large scale, and with such broad visibility, that they cannot directly motivate people to implement the specific practices and behaviors that are required. To succeed with a culture intervention, top leaders need the support of many leaders down the line — particularly those who have daily contact with the people whose behavior change is most critical. Sometimes, this myth manifests itself at the board level. Directors assume that the only way to improve

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and within it. Discern the elements of the culture that are congruent with your strategy. Figure out which of the old constructive behaviors embedded in your culture can be applied to accelerate the changes that you want. Find ways to counterbalance and diminish other elements of the culture that hinder you. In this way, you can initiate, accelerate, and sustain truly beneficial change — with far less effort, time, and expense, and with better results, than many executives expect. Edgar H. Schein, author of The Corporate Culture Survival Guide (rev. ed., Jossey-Bass, 2009) and a leading authority on organizational culture, tells a story that illustrates the unexpected leverage this approach offers. (See “A Corporate Climate of Mutual Help,” by Art Kleiner and Rutger von Post, page 11.) Three senior executives of a large manufacturing company — the CEO, chief operating officer (COO), and head of organizational development — visited him, seeking advice on building a more dynamic culture. “Just yesterday,” said the COO, “I had my regular meeting with subordinates. We have a big circular room, and everybody sits in the same place each time. But get this — only four people were present this time, and they still sat at the far ends of this great big table. Do you see what I’m up against?” “What did you do about it?” asked Schein. The executives responded at first with blank stares. Then they realized they were part of the system they were blaming. The COO could have made a small but significant change simply by asking the four of them to move their chairs. Better yet, he could ask the full team to vary their seating at the next meeting. The executives spent the next several hours figuring out other minor actions of that sort, which they put in place the following week, with great success.

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performance is to replace the current CEO with another top leader who can bring forth a new and better culture. Because they are looking for someone who promises major change, the company inevitably gets a full-scale culture overhaul — with all the expense, risk, disruption, and likely failure involved. Working with and within Your Culture

Each of these myths plays out differently. But underlying all of them is a big dose of defeatism. Culture is thought to be too big to ignore, too tough to conquer, and too soft to understand (at least by typical managers). Thinking this way, especially when there have been previous culture change disappointments, is enough to sap your energy and enthusiasm for change. It can squelch any realistic effort toward high performance before you gain the momentum necessary for sustainable success. By contrast, working with and within a culture is sensible, practical, and effective. Thus, it is inherently energizing. When leaders learn to operate this way, their employees tend to become more productive and their own efforts become more rewarding. The first thing to change is the view that, as a leader, you can fix your culture by working on it directly. Rarely is that the case. Just as you typically can’t argue someone out of a deeply held belief, you can’t force people to change the way they think and feel about their work. Instead, you need to focus on specific behaviors that solve real problems and deliver real results. This, in turn, enables people to experience the results of thinking differently. Experience becomes a better teacher than logical argument. Imagine that you were an advisor from an industrialized nation, sent to a remote island village to help lo-

cal farmers improve their productivity. Would you start by trying to overhaul their culture to be more like your country’s culture? Or would you set out to learn more about the way they thought, looking for connections to your ideas, giving them reasons to feel confident about trying something new? The former approach might make you feel more important at first, but it would likely fail — or at best, take years to accomplish. In contrast, offering a few new methods might generate an approving early response, and those practices would spread as they produced results. The same is true in your company. As Schein puts it, “Always think first of the culture as your source of strength.” Tapping into the emotionally gripping aspects of your existing culture can accelerate performance. For example, a deep commitment to customer service may exist, even in companies that are losing customers. This can be drawn upon in efforts to improve customer retention rates. The ability to diagnose the beneficial attributes of a culture, and then use them to motivate strategically important behavior, is one of the key factors that differentiate peak-performing organizations from the also-rans in their field. A corporate culture takes some of its attributes from the professional and educational background of participants. An electronics engineering–driven company like Hewlett-Packard has a very different cultural ambiance from a pharmaceutical firm like Pfizer, a bank like JPMorgan Chase, or a “metal-bending” manufacturer like GM. Culture is also influenced by the attitudes of the founders, the location of the headquarters, the types of customers that the company serves, and the experiences people have together. That’s why different companies in the same broad industry, such as HP, Apple,

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Senior leaders cannot change cultures by themselves. They need the support of many leaders down the line.

Turning Around Mother Aetna

One executive leader who worked expertly with his existing culture was John W. (Jack) Rowe, CEO of Aetna Inc. from 2000 through 2006, chairman from 2001 through 2006, and currently on the faculty of Columbia University’s Mailman School of Public Health. A former gerontologist at Harvard Medical School, Rowe

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Microsoft, Intel, Acer, IBM, and Dell, can succeed with such different cultures. Within an overarching corporate culture, there are generally several subcultures, each with its own unique elements. Schein writes that these can include an operational culture, spurred by line managers eager to get the most out of their people; a senior executive culture, grounded in financial insight and training; and an engineering culture, in which attention is focused on the technology. To understand your culture, you need to pay close attention to its quiet, sometimes hidden, manifestations, such as the side conversations in the hallways, the informal consultations behind closed doors, and the incisive guidance that people get when they ask one another for advice. It is also evident in the formal lines of the organization chart and the ways in which directives are worded. Cultures can be diagnosed best by the work behaviors they promote. Do people collaborate easily? Do they make decisions individually or in groups? Are they open with their information? Do they reflect on successes and failures and learn from them? As you move from diagnosing to improving behaviors, focus first on the few critical changes that matter most and support getting the work done, thereby accelerating the results you want. Make use of both formal and informal mechanisms.

— along with Aetna’s then president, Ronald Williams, who became CEO upon Rowe’s retirement and is now the company’s chairman — led one of the most successful turnarounds in U.S. corporate history. In five years, Aetna went from losing $1 million per day to earning $5 million per day. The Rowe/Williams effort was the fourth attempt to transform Aetna’s strategic performance in 15 years. The previous three efforts were derailed by the culture, which was known within the company as “Mother Aetna.” This mind-set pitted the 40,000 employees of Aetna against everyone else the company had to deal with, for example, doctors, patients, medical providers (such as hospitals), and the employers who bought insurance. This “us-against-them” attitude had given Aetna a reputation as the most suspicious, recalcitrant, and bureaucratic health insurance company in the United States. All three previous top-down change interventions tried to increase the staff’s empathy for customer organizations, sensitivity to doctors, and responsiveness to patients. Two efforts basically ignored the culture, and the third tried to smash it apart. All failed. Rowe often describes himself as the least likely person for the Aetna board of directors to pick as CEO. “I never ran a business,” he says. “I had never been to business school, or had any commercial management experience. The only thing I’d ever done was take care of patients and try to make hospitals do better.” That willingness to admit he didn’t know everything served him well. He started by identifying about 100 people throughout Aetna as “nonhierarchical influencers.” He sought them out informally, asking them to help him understand how employees felt — about customers and patients, about their own work, and about the goals of the company. These people acted as what anthropologists call key informants: cultural guides who could help him get to know the company more intimately than he ever would through purely formal channels. He stayed in touch with them continually, through e-mail, one-on-one visits, and group discussions. They gradually became the core of a group of people who shaped and supported Aetna’s new strategic direction. Second, he set out to reconsider the company’s

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The Power of Behavior Change

The notion that behavior change leads to attitude change can be traced back to the 1950s, to psychologist Leon Festinger and his theory of cognitive dissonance. Festinger argued that when people are induced to act in new ways, even if those new behaviors feel unfamiliar or wrong at first, their need for consistency will gradually affect the way they think and feel. They will seek out reasons to justify their new actions — both rationally and emotionally. Behavior change affects attitudes most powerfully when it is supported by empirical evidence and real-life observation of better results. Direct experience trumps the old beliefs of an established culture. If that experience is reinforced by a group of people, then it is far easier to change a culture than most people believe. But you must focus on changing the behavior rather than engaging with the culture directly. In emphasizing behavior, you are looking for those few actions, conducted again and again, that will lead to better values (and thus to better results). Make clear the distinctions among the values you want to develop, the one-time actions you are changing, and the recurring behaviors you hope to instill. A commitment to service, for example, is a value. When a retail salesperson expresses that value by helping a customer exchange a purchase, that’s an action. When the salesperson does this routinely, knowing that over time it will help solidify customer loyalty to the store, it’s a behavior.

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shared values. Aetna had been in business since 1819 (in its current form, since 1853), and its company statements about such values as honesty, caring, truthfulness, and teamwork were long established. But they weren’t congruent; he uncovered at least a dozen different formal values statements that various leaders had put forth over the past decades. So Rowe set up dialogues in Aetna offices around the U.S., on the subject “Why aren’t our shared values practiced in interactions with our customers?” People discussed this question in groups of about 30, defining specific ways in which they (and others) might act differently. After 20 or more such events, Rowe worked with several of his colleagues to write up a new statement of values and behaviors. He also set up what came to be called purpose-driven councils — cross-functional groups designed to find ways to make critical changes happen. Rowe and his team designed these councils with three distinctive characteristics. First, they assigned each an explicit purpose, such as organizational effectiveness (developing a plan for restructuring the company) or strategic direction (developing a plan for prioritizing customer opportunities). Second, they enlisted members who were well respected by their colleagues and who had many informal connections. Third, they gave the councils decision authority over the areas they were investigating. The strategy council’s efforts eventually led Aetna to spin off its financial-services businesses and discontinue some unprofitable offerings, such as health insurance in certain countries. The new formal practices were congruent with the values in the culture. For example, the executives laid off about 15,000 people, or almost one-third of the workforce. But they did it in a relatively transparent,

compassionate way, with a clear rationale for those chosen to leave, and with pay increases and stock options (along with an increased work week) for those who remained. Rather than worrying that their jobs might be next, the remaining staff at Aetna now had a culture that they had helped define, in which they felt more a part of the growth direction. Rowe and Williams also commissioned a crossorganizational effort to build motivational capability among the most respected frontline supervisors in the company. These “master motivators” were respected by their peers; they connected widely and virally in ways that energized many of the changes.

Repeated behaviors have cultural impact because they are contagious. People unconsciously imitate what they see others do.

In moving people to change behaviors, you will need to rely on both rational arguments and emotional appeal. On the rational side, you need to make a case for change: Here’s why this particular behavior is needed. Help people recognize, for example, how the new behaviors will support the firm’s business strategy, will improve customer retention rates, or will be received by Wall Street analysts. But emotional factors will undoubtedly matter even more. Compassion, fairness, and environmental responsibility are very convincing motivators. So are relief from anxiety and the opportunity to work more congenially with other people. Many employees will likely be concerned about how the changes will affect their peers, their own ability to take pride in their work, their work–life balance, and their family’s and community’s reactions, as well as the firm’s reputation. These issues must be addressed at a gut level, to ensure that acceptance of the change will be genuine, enthusiastic, and widespread. Understanding without acceptance and commitment will not suffice. Nor will acceptance and commitment suffice without discipline, alignment, and the right capabilities. The rational and emotional elements need to align to yield sustainable change. Pragmatic Practices

Numerous principles for changing culture through behavior have become evident through ongoing practice. • Start pragmatically. Don’t try to change everything at once. Focus on a few critical behaviors that resonate with your current culture, but that will raise your organization’s performance. Explicitly identify the target group — the employees whose behavior needs

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Similarly, frugality in government is a value. When a prime minister flies on a commercial airline once (as U.K. leader David Cameron did to the U.S. in July 2010, shortly after his election), that’s an action. When the prime minister does this consistently, as Singapore leader Lee Hsien Loong does, that’s a behavior — and it is likely to have much more cultural impact. Thus, if you are seeking more accountability, identify the types of ongoing behavior that embody that value. You might have to be specific: “I expect you to read, record, and respond to every customer complaint — and I will reward or penalize you accordingly.” These new behaviors can be startlingly simple. Years ago, Shell Oil Company (a subsidiary of Royal Dutch/ Shell PLC) had a reliability problem in the global refinery system. It was traced back to the safety and quality control processes, which were designed at the central office but not followed consistently at the refineries. Instead of launching a broad accountability initiative, a peer group of managers convinced the executive leaders to institute one new behavior. Before initiating any new process, central office managers had to ask local people how they could best introduce it. That simple behavior change, conducted by just a handful of corporate executives, ensured consistent implementation of the new process. Repeated behaviors have cultural impact because they are contagious. People unconsciously imitate what they see others do. This is particularly true among respected colleagues; mutual respect is a powerful source of influence. Even small changes in behavior, if they are picked up by more than one individual, can ripple through an organization as others see their value and begin to act accordingly.

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• Reinforce the new behaviors through formal and informal means. Provide formal metrics, incentives, and

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process guidance that lead people to practice these new behaviors again and again, until they experience their value. For example, set up appraisals, salary reviews, and training to reinforce and reward the new behaviors you seek. At the same time, develop informal connections that foster the responsiveness and emotional commitment needed to deal with the unexpected. When there’s a challenging situation, like Shell’s reliability issue, cultivate support networks of people who can assess it and put in place actions not prescribed by process and procedure. • Seek out role models for the new behavior. Start with the most effective practitioners, the people who distinguish themselves by the way they act. We often call these individuals pride builders because their example helps instill pride about the behavior change. They can also help you find ways to get others to adopt the same behavior. This work is sometimes known as looking for positive deviance. Several years ago, Bell Canada — a 35,000-employee telecommunications company owned by BCE Inc. — started with a dozen such pride builders. They rapidly became exemplars for others, and they helped explain to the executives why people did not always adhere to the critical behaviors. The CEO then asked the group to help develop at least 1,000 more exemplars by the end of the year. Each member of the first group identified 10 or more other pride builders, and the group took off exponentially. With several more iterations, this effort directly touched more than 15,000 employees — more than a third of the entire workforce — by the end of the year. • Enlist your current “cultural carriers.” These are the people who are well positioned to transmit behaviors to others, and who can be developed to spread the positive elements of the existing culture. In the early 2000s, Reliant Energy recognized the value of cultural carriers during an operational performance improvement program. After defining a small set of behaviors for collab-

orative work across functional silos, Reliant identified the people who had to act differently in order for the new behavior to take hold. Then, through a combination of training, incentives, and peer-to-peer reinforcement, Reliant induced these individuals to change first. This effort enabled the company to capture $600 million of value during the first nine months. Any leader can do something similar, but take care that the effort is simple, clearly focused, collectively reinforcing, and not threatening to those who aren’t included. Suppose that you’re the head of strategy, frustrated at the way such new directives are executed. Have the top leadership identify 10 people who are linchpins of strategy execution — whose participation is critical to any serious strategic effort. Bring them together to talk about the barriers they face when trying to execute new ideas, and the ways that they might overcome those boundaries. Look for places where resources can be organized differently, and develop an agenda accordingly. • Use the culture you already have. Take pains to stay within the most essential tenets of the existing culture. Make sure you understand clearly the reasons that current practices exist before you try to change them. In the wake of the Deepwater Horizon oil spill of 2010, many oil companies are being forced to change their safety and environmental practices. It can be surprisingly difficult to do so, because the existing performance contracts include strict requirements about timing and deadlines. The only way around this is to explicitly rethink those restrictions, taking on the difficult challenge of designing new behaviors that can improve safety while maintaining an acceptable pace. What is required here is an integration of process discipline and individual initiative and the courage to step up when the unexpected occurs. • Model what matters most. Be a visible and consistent role model of the behavior change you want to see in others. When he was interim CEO of General Motors leading the company’s remarkable transformation after the U.S. government bailout in 2009, Fritz Henderson repeatedly admonished his staff to be “individually and collectively accountable,” which meant focusing only on activities directly linked to business

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to change — and bring the necessary changes to life by demonstrating them.

results. Henderson’s remarks didn’t have much impact until he provided examples. He posted e-mails with typos, showing that quick decisions were more important than painstaking attention to appearances. There were also more dramatic examples, like making nearly every major decision on the spot himself rather than waiting for consensus. Perhaps the most telling moment came when Henderson was handed a 300-page binder of backup information as part of his preparation for testifying before the U.S. Congress. The next day, he asked his chief of staff to tell the research team to stop. “It must have taken 20 people a month to produce this report. And I’ll never use it. I’d rather have incomplete information [than this unnecessary work].” • Clarify the specific implications of the new behavior.

Culture Consciousness in Times of Change

Every corporate culture has behaviors that will help you enable the change you want and others that will hinder it. As you become skilled at picking the enablers out and developing them, this kind of adaptability will become part of your own distinctive corporate identity. This is critical to the lasting success of peak-performing enterprises. Your culture can thus become a major factor supporting your strategy. Its overall strengths are one of your company’s intangible assets, and it should be fac-

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Resources Joel Cooper, Cognitive Dissonance: Fifty Years of a Classic Theory (Sage, 2007): Solid introduction to Leon Festinger’s grand idea and its relevance to today’s conflicts. Jon Katzenbach and Zia Khan, Leading Outside the Lines: How to Mobilize the (In)Formal Organization, Energize Your Team, and Get Better Results (Jossey-Bass, 2010): Integrating formal and informal measures (with more on the Aetna story). Jon Katzenbach and Zia Khan, “Leading Outside the Lines,” s+b, Summer 2010, www.strategy-business.com/article/10204: How StockPot, a division of Campbell’s Soup, used metrics to shift cultural behavior. Richard Pascale, Jerry Sternin, and Monique Sternin, The Power of Positive Deviance: How Unlikely Innovators Solve the World’s Toughest Problems (Harvard Business Press, 2010): Changing behavior by championing people who get better results. Edgar H. Schein, The Corporate Culture Survival Guide (rev. ed., JosseyBass, 2009): Realistic, masterful handbook for diagnosing your culture and raising its tacit assumptions to the surface. The Katzenbach Center website, www.booz.com/global/home/what_ we_think/katzenbach_center: Ongoing source of research and insight on culture change theories and methods. For more thought leadership on this topic, visit s+b’s website at: www.strategy-business.com/organizations_and_people.

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The new CEO of a large financial-services institution announced one of his highest priorities: a new approach to managing the trade-offs on uncertain deals, which he called taking measured risks. Although he talked about it constantly, and employees understood its importance, many people still needed more guidance. “I work in legal,” someone might say, “and I’m not sure what this means to me. Am I supposed to be taking more risks, or am I supposed to help others by pulling on the reins when they go too far?” The answer might well have been “a bit of both,” but it needed to be spelled out. Similarly, in the midst of any cost reduction exercise, people need guidance about new behaviors. How will they monitor expenses from now on? How should they call attention to wasteful activities that they do not control? If a utility shifts from being a governmentowned enterprise to a privately held company, the culture may need to become more focused on customer service. What kinds of things could people do differently? What kinds of regular reminders can be put in place to reinforce key behaviors? Which aspects of subscriber outreach matter most?

tored into where you decide to compete, how you intend to win, and what operating model you work within. As you continue to work with and within your culture, you will find it continually changes, keeping pace with the changes in the marketplace. Your operating model and the execution of your strategy will change accordingly. To be sure, deeply embedded cultures change slowly — far more slowly than the business environment. But some cultural elements can adapt more rapidly, particularly if you encourage your pride builders, culture carriers, and leading-edge thinkers to experiment with new ideas, such as digital media or new forms of customer service, and spread their experience through the networks that you have fostered. Whatever happens in the outside world, however, keep your internal focus on the few critical behaviors that matter most — those that determine your strategic and operating performance. Find ways to measure both the behavior change itself, and the results it produces. Resist the temptation to attempt changes in the behaviors, attitudes, and values of the system all at once. Remember, it is much easier to act your way into new thinking than to think your way into new actions. +

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With a little knowledge of neuroscience, reframing behavior can be the essence of organizational change.

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“That’s the Way We (used to) Do Things Around Here” by Jeffrey Schwartz, Pablo Gaito, and Doug Lennick

Illustration by Guy Billout

When corporate leaders talk about change, they

usually have a desired result in mind: gains in performance, a better approach to customers, the solution to a formidable challenge. They know that if they are to achieve this result, people throughout the company need to change their behavior and practices, and that can’t happen by simple decree. How, then, does it happen? In the last few years, insights from neuroscience have begun to answer that question. New behaviors can be put in place, but only by reframing attitudes that are so entrenched that they are almost literally embedded in the physical pathways of employees’ neurons. These beliefs have been reinforced over the years through everyday routines and hundreds of workplace conversations. They all have the same underlying theme: “That’s the way we do things around here.”

This phrase (and others like it) typically refers to the complex, subtle practices that become ingrained in an organization’s culture, to the point where they become part of its identity. Habitual thoughts and behaviors are not bad in themselves; indeed, they are often the basis for what a company does well. But when circumstances shift or the company becomes dysfunctional, those habits may need substantive change. We teamed up to write this article, despite our disparate backgrounds — in neuroscience (Schwartz), learning and development in a major international corporation (Gaito), and ethics and leadership in the financial-services industry (Lennick) — because during the past six years, we each came to recognize the power of conceptual focus in organizational change. Altering habits is difficult enough for individuals. Studies suggest that the number of people who voluntarily shift

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Pablo Gaito [email protected] is the vice president of learning and development at Cargill, an international producer and marketer of food, agricultural, financial, and industrial products and services, based in Minneapolis, Minn.

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away from addictive or obsessive-compulsive behavior, even when they know their lives are at stake, is staggeringly low, perhaps one in 10. At corporations, the complexity of collective behavior makes the challenge even greater. Furthermore, as with repairing a ship while it is at sea, these changes must be made at the same time that the company continues to operate. But there is a particular type of highly charged conversational process that leads to changes in the neural patterns of people throughout an organization — a process that works with, not against, the predisposition and capability of the human brain. Cargill’s Strategy Transformation

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Consider, for example, the way that Cargill, a major agricultural and food products company, applied knowledge of the human brain to raise its game in collaboration and innovation across business units. Cargill had already undergone one major shift, starting in 1999, toward becoming a more agile, solutions-based organization. The company’s executives had defined the “heart of leadership” for their company as integrity, conviction, and courage. They had also set out to create a “culture of freedom,” empowering and encouraging employees at every level to act with decisiveness and accountability on behalf of customers. But some elements of the company’s culture and practice still did not fully support the customer-focused culture that they were developing. One customer, a large packaged-foods manufacturer, told a Cargill executive, “You send 15 different people to our offices each week from different businesses, and they all ask us some of the same questions, but they never try to understand exactly what we do with all of your ingredients. If you

Doug Lennick [email protected] is the author of Financial Intelligence (with Kathleen Jordan; FPA Press, 2010) and the coauthor, with Fred Kiel, of Moral Intelligence (Wharton School Publishing, 2005). He is an advisor to Ameriprise Financial and many other companies, the CEO of Lennick Aberman, and a former executive vice president of American Express.

brought all those people together, you could potentially offer much more to us.” The situation clearly called for new behaviors. Better collaboration among Cargill employees, for example, would not just solve the problem of redundant sales calls. It could lead to new logistics, risk management, and quality assurance practices. But that type of collaboration, especially across Cargill’s 70-plus businesses operating in 66 countries, would be a stretch — particularly since in Cargill’s culture, it would require bottom-up commitment. In 2006, the company renewed its commitment to move to the next level in fulfilling its strategic objectives in serving customers more effectively. Corporate leaders described some major behavioral, structural, and cultural changes that were needed — in effect, a major shift in “the way we do things around here.” This initiative sparked a new interest in understanding and working with the realities of the human brain. Ameriprise: Cultivating the Counterintuitive

Around the same time, the leaders of Ameriprise Financial — a US$7 billion company that is the leading source of financial advice in the United States — began taking a fresh, dispassionate look at their own behavior. In 2007, an annual investor performance study from the research firm Dalbar showed that most investors consistently did less well as individuals than the market as a whole. Their instincts led them to miss some of the gains inherent in a volatile market. For example, when stocks fall sharply, a fully rational investor should step back and wait for a signal of what is going to happen next. But many investors rush to sell, fearing a further downturn, and move their money into cash or related

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Jeffrey Schwartz [email protected] is a research psychiatrist at the School of Medicine of the University of California at Los Angeles. His books include You Are Not Your Brain (with Rebecca Gladding; Avery/ Penguin, 2011), The Mind and the Brain (with Sharon Begley; Regan Books/HarperCollins, 2002), and Brain Lock (with Beverly Beyette; HarperCollins, 1997).

The Principles of Change

A viable approach is emerging today that applies neuroscience to organizational change at dozens of companies like Cargill and Ameriprise. Specific practices vary from one workplace to the next, but they are always based on principles grounded in brain research:

• Habits are hard to change because of the way the brain manages them. Many conventional patterns of

thinking are held in circuits associated with deep, primal parts of the brain that evolved relatively early. These include the basal ganglia, or the brain’s “habit center,” which normally manages such semiautomatic activities as driving and walking; the amygdala, a small, deep source of strong emotions such as fear and anger; and the hypothalamus, which manages instinctive drives such as hunger, thirst, and sexual desire. Information that is processed in these parts of the brain is often not brought to conscious attention. The basal ganglia’s processing, in particular, is so rapid compared to other brain activity that it can feel physically rewarding; people tend to revert to this type of processing whenever possible. Moreover, every time the neuronal patterns in the basal ganglia are invoked, they become further entrenched; they forge connections with one another and with other functionally related brain areas, and these neural links (sometimes called “action repertoires”) become stronger and more compelling. This helps explain why when people in a workplace talk about the way to do things, they often reinforce the link between their own neural patterns and the culture of the company. If an organizational practice triggers their basal ganglia, it can become collectively ingrained and extremely difficult to dislodge. Similarly, if you want to create permanent new patterns of behavior in people (including yourself), you must embed them in the basal ganglia. Taking on new patterns (also known as learning) often feels unfamiliar and painful, because it means consciously overriding deeply comfortable neuronal circuitry. It also draws on parts of the brain that require more effort and energy, such as the prefrontal cortex, which is associated with deliberate executive functions such as planning and thinking ahead. In financial services, for example, when the market goes down, selling equities feels reassuring, because the news about the market has triggered habitual attitudes about risk (stored in the basal ganglia) and fears (generated by the amygdala). Holding on to the stock may be more prudent, but that decision requires activity in the

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interest-bearing products. This exacerbates their losses, because stocks often rise again soon afterward. Ted Truscott, CEO of U.S. asset management at Ameriprise, stated it this way: “Remember, when you have the price, you don’t have the proof, and when you have the proof, you don’t have the price.” In other words, by the time investors felt comfortable with a stock (the “proof”), it was probably already priced too high to be a good investment. By seeking reassurance, investors were undermining their own portfolios. The Ameriprise leaders prided themselves on building a better future for their customers, and the study results suggested an opportunity to enhance their own practices. Their advisory teams (either on staff or franchise holders) were not consistently giving clients the advice that would have helped them avoid this trap. “Being a great financial planner and advisor requires not only technical expertise,” concluded Kris Petersen, then the Ameriprise senior vice president of financial planning, “but an understanding of how people make decisions. Our clients are misbehaving with their money, and we have to do a better job of helping them.” Jeff Marshall, a franchise leader in the Pacific Northwest, moved rapidly to put in place a new training program to change the company’s approach. But response was very limited at first. Of the 12,000 Ameriprise advisors, only several hundred signed up for that first round of training in 2007. Even many who were initially enthusiastic expressed doubt when they discovered that the training would take several months. Interest grew broader in late 2008, of course, after the financial crisis began. By then, Ameriprise leaders had recognized that they needed to confront deeply ingrained habits of thought, which required a thorough understanding of the limits and capabilities of the human brain.

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“Every organization wants to be in a groove,” says venture capitalist Jeff Stiefler. “But nobody wants to be in a rut. The problem is when grooves become ruts.”

uncomfortable at first, can rewire people’s thinking hab-

• Despite the seeming inflexibility of the brain,

its. The name given by neuroscience to this phenom-

neural connections are highly plastic; even the most en-

enon is “attention density.” When a person repeatedly pays conscious attention to desired thoughts and related goals, the processing of these thoughts and goals stabilizes and moves to the part of the basal ganglia called the caudate nucleus, which lies deep beneath the prefrontal cortex and processes a massive number of neural signals from it. MIT neuroscientist Ann Graybiel has referred to the basal ganglia–caudate nucleus complex as the habit center of the brain. It shifts circuits into place so that ways of thinking and acting that at first seemed unfamiliar soon become habitual. The power of focused attention is enhanced further by the “quantum Zeno effect”: just as quantum particles become more stable when observed, neuronal patterns solidify more rapidly

trenched thought patterns can be changed. The kind of

mindfulness that accomplishes this combines metacognition (thinking about what you are thinking) and meta-awareness (moment-by-moment awareness of where your attention is focused). Adam Smith, the 18thcentury economic philosopher, understood this. He described self-directed reflection as an “impartial spectator” and commented on its importance. A growing body of neuroscience research confirms the power of the impartial spectator. For example, a person with obsessive-compulsive disorder (OCD) might ruminate on a single belief, such as “I have to wash my hands to make sure they’re clean.” Day after day, this

• Paying attention to new ways of thinking, however

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thought reinforces neural connections in parts of the brain such as the basal ganglia, gaining influence over the individual’s behavior. But MRIs show that asking people to observe their own thinking process as they ruminate can cause activity to move to more deliberate, conscious brain regions such as the prefrontal cortex. Research at the University of Toronto shows that moment-by-moment self-observation activates executive planning areas in the prefrontal cortex and deactivates areas involved in attention-distracting rumination. Working in any corporation may lead people to adopt repetitive patterns of behavior. But the neural connections remain plastic. Once people know how to bring the impartial spectator into play, they can recognize when their old habituated neural patterns no longer serve them (or their company) well, and reshape those patterns in new directions.

prefrontal cortex, which requires extra effort and energy. Similarly, if people at a company such as Cargill find it difficult to innovate in teams across business units, they may be collectively protecting their basal ganglia– and amygdala-driven instincts (the attractions of habit and the fear of change) at the expense of the new goals of the organization. At work, being forced to try something new can trigger fear and anger (sometimes called the “amygdala hijack”), the urge to flee, or exhaustion disproportionate to the actual provocation. In the grip of such emotions, people resist change. Their capacity for rational and creative thinking is also diminished; they revert to their rote behaviors, such as arguing, passive-aggressive compliance, or covert resistance. To overcome this reversion, people need to prepare for organizational change in advance — they must train to recognize the source of a strong emotion even as it is triggered, and to find more effective ways of responding.

This cycle shows six steps for producing deep-seated change (the outer circle) and the new organizational values they engender (the inner circle). The cycle starts when step 1 triggers a deliberate focus on “the way we do things around here.” As the steps progress, participants gain a stronger sense of shared meaning, leading to specific forms of practice, and ultimately to more tangible contributions and better performance.

1 Recognize the need for change 6 Revalue your choices in real time

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FO

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5 Respond with repetition

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capability for focused attention. For that reason, we suggest a path for getting there. The six steps that follow are a synthesis of work the authors conducted separately:

The Virtuous Cycle of Focused Values

S CU

built over time. Few companies have established a strong

“Every organization wants to be in a groove,” says venture capitalist Jeff Stiefler. “But no one wants to be in a rut. The problem is when grooves become ruts. The key is to be able to recognize when you’re in a rut and then [figure out] how to get out of it.” That’s the essence of this first step, which is particularly important for leaders of a change initiative. You cannot expect others to reflect on their behavior if you have not started to look dispassionately at yourself and to recognize where you need to change. After all, you are one of those responsible for painting a positive vision of the future, articulating the new possibilities in the collective mind, and calming the sense of upheaval. Your behavior therefore gives employees a highly

AC

• The capability for focusing attention needs to be

Step 1: Recognize the Need for Change

PR

right. Most brain activities don’t systematically distinguish between an activity and the avoidance of that activity. When someone repeatedly thinks, “I should not break this rule,” they are activating and strengthening neural patterns related to breaking the rule. Therefore, to engender change among people in an organization, it’s important to keep attention focused on the desired end state, not on avoiding problems. This goal-directed positive reinforcement must take place over and over. The most effective way to achieve this is to set up practices and processes that make it easy for people to do the right thing until it becomes not only second nature, but an ethic taken to heart (and to the brain) by the entire company. • Cultivate cognitive “veto power.” Veto power is the ability (among both individuals and groups) to rapidly consider outside provocations and choose to stop dysfunctional impulses before they lead to action. In one of the most discussed experiments in the history of neuroscience, preeminent researcher Benjamin Libet used electroencephalographic equipment to measure the brain functions underlying simple finger movements. He discovered that three-tenths of a second before people are aware of the will to move their finger, there is a brain signal related to a desire for finger movement. A person may have the desire to move, but then choose not to move; these two thoughts — the desire and the choice — are separate. Many people believe that their control over their impulses is limited, particularly in the face of such strong emotions as anger, frustration, enthusiasm, or grief. To an extent, that is true, but Libet’s work shows that people can always constrain (or choose not to follow) a particular impulse. People may have only limited free will, but they have powerful “free won’t.” In organizations, when a strong impulse reflects “the way we do things around here,” there is always the option to veto the action, especially if people have practiced this ability. Even as simple a response as counting to 10 when stressed opens up possibilities for responding in more functional ways.

A

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• In focusing attention, don’t tell people what they’re doing wrong. Instead, accentuate what they’re doing

Schwartz in helping OCD patients and then organizations, Gaito in leadership development work at Cargill, and Lennick at Ameriprise and other companies. These steps, which we have seen applied in practice, allow you to build a company’s capacity to refocus its attention on its most desired goals. They also create a virtuous cycle. (See the exhibit below.)

CON TR IB

when repetitive attention is paid to them.

ME

2 Relabel your reactions

3 Reflect on your expectations and values

4 Refocus your behavior

Source: Gaito (the inner circle); Schwartz and Lennick (the numbered steps)

Step 2: Relabel Your Reactions

This step is an analogy to a necessary process in cognitive therapy for obsessive-compulsive disorder. By giving a new name to maladaptive behavior, an individual with OCD can override the content of dysfunctional thoughts (“I have to wash my hands to make sure they’re clean”) with the knowledge that they are merely thoughts (“Here comes that urge again, but it is simply a thought that my OCD condition produces”). The mental act of relabeling enhances your ability to make this distinction and thus decreases your personal attachment to what you are thinking. This improves your abil-

ity to clear-mindedly assess the content of the thought. By relabeling these thoughts, you can break the cycle of rumination, emphasizing that these thoughts are driven, not by some external factor, but by the patterns in the brain itself. Relabeling means giving a new name to something, and though the idea of applying a mental label may seem simple, it has often been shown to have the power to calm emotions and engage the rational centers of the brain. Neuroscience researchers Kevin Ochsner and James Gross, for example, connected people to brain imaging devices and showed them photographs of horrific traffic accidents. There was an immediate rush of anxiety and fear — a classic amygdala hijack. But then Ochsner and Gross asked their subjects to think differently about these upsetting images: for example, to tell themselves, “I’m an emergency medical technician coming on the scene. I have to be calm and clear in my thinking about this.” Subjects in the experiments then found it easier to maintain a clear, calm perspective. In general, the act of relabeling changes the way the brain processes information in such emotion-related and instinct-related areas as the amygdala and hypothalamus. Activity shifts rapidly to the prefrontal cortex. In this organizational step, you conduct a similar reframing of the collective impulses that don’t work well. “The way we do things around here” may have been unquestioned for years, but now you communicate an accurate assessment about why it no longer works. Cargill’s articulation of its “future state” and Ameriprise’s stated intent to do a better job helping clients were both good examples of reframing. Step 3: Reflect on Your Expectations and Values

In this step, you set out the nature of the new conditions you believe you can create. You replace old expectations with a new image of the desired state you are trying to achieve. In management circles, this is known as a vision. But unlike some corporate vision exercises, the reflection in this step must result in something specific, tangible, and desirable enough to capture people’s attention. At Cargill, there is an evolving idea of what the

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charged impression of the changes you espouse, directly affecting many circuits of the brain. But participation in this step is not limited to leaders. Anyone enlisted for change, at both an individual and a group level, should take part. For individuals, this means reflection. You must build greater awareness of your thoughts, emotions, and actions and their connection to real-life outcomes. After a difficult exchange or episode, you can step back and ask yourself: “What was I thinking? How am I feeling now? Was my behavior aligned with my goal at hand and with the big picture?” You can begin to recognize the effect that high-energy emotions have on your rational judgment and decision making — and the changes worth making in your own thinking and behavior. At a group level, the recognition step involves bringing a group of self-aware people together to talk about the possibilities for change, with the premise that the current approach — “the way we do things around here” — cannot continue. Practice of this step can send an emotionally charged signal to others, because it often means rejecting or abandoning some convenient but counterproductive actions. For example, Jim Cracchiolo, the CEO of Ameriprise, recognized the need for change in the financial-advice industry, which influenced him to decline TARP funding in May 2009. Government funding, he said, would hinder the company’s pursuit of its potential. This explanation resonated strongly with the people of the firm.

During the worst of the economic crisis, the Cargill leadership encouraged employees to “hunker down wisely” — a phrase that helped calm anxiety.

carefully executed series of experiments with volunteers who had a medical condition that made them particularly sensitive to certain kinds of pain. He gave some subjects a placebo along with a specific suggestion that led them to expect a reasonable chance of pain relief. This expectation, in itself, was enough to relieve pain as effectively as real medicine would. It also calmed down the brain’s pain and visceral centers — the thalamus and insula. For neuroscientists, this is a fascinating finding because the thalamus is a primitive part of the brain, and both it and the insula are often considered centers of “automatic” sensation, beyond conscious control or thought. But Price’s experiments — and those of other researchers, such as Robert Coghill of Wake Forest University — suggest that effectively communicating that “things will feel better if we change” can produce a powerful range of assuaging reactions. (In fact, expectations of relief can have a calming effect akin to a 6 milligram dose of morphine.) Financial advisors at moments of economic crisis have experienced this phenomenon firsthand. When they field calls from panicked clients, they routinely open the call by saying, “It is going to be OK. Let’s not forget the big picture. Don’t forget that we have prepared for uncertainties like this crisis. Let’s stay focused on your values and what really matters.” After reflecting on the fact that it is possible to navigate the storm, clients are more prepared to make the necessary counterintuitive moves, and advisors are more prepared to suggest them. Similarly, during the economic crisis in late 2008, the Cargill leadership encouraged employees to manage for the future by “hunkering down wisely” — cutting

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“heart of leadership” means in practice. Recently retired executive vice president Dave Larson points out, “Our good leaders are those who focus on others, give undivided attention, and build trust. Leaders can either give energy to people or drain energy from people.” Many leaders within the company instinctively know how to translate this into their own day-to-day behavior. For others, including some who have been at the company for 15 years or more, this concept requires a major shift. Your new expectations and values could reflect aspirations for your company as the leader of a shift in your larger industry. Don Froude, president of the Personal Advisors Group (which coordinates franchisees at Ameriprise), raised the stakes for the firm in 2009 when he said: “The [financial-services] industry needs to consolidate to regain client trust. We can’t pretend the financial crisis, the problems with derivatives, and the TARP bailout haven’t happened. We have to be proactive — to take advantage of the dislocation in the industry to bring more advisors and more clients to Ameriprise. We believe we can do [financial advising] better than others, and better than we’ve ever done it before.” Both Cargill and Ameriprise offer internal sessions on the skill of collective reflection. Participants talk about the type of company they are trying to create and the leadership behavior that will foster it, as well as the needs and values of their clients and customers (individual investors for Ameriprise, and food manufacturers and other customers at Cargill). In this reflection, the company uses the expectation of better conditions as an effective tool for reinforcing productive neural patterns. The power of expectations has been demonstrated in neuroscience, notably by Donald Price at the University of Florida. Price set up a

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problems, predicaments (impasses), and polarities (situations with conflicting goals). “If it’s a problem, we work on solving it,” explains a Cargill executive. “If it’s a polarity, it’s not an ‘either-or’ situation but an ‘and’ issue that requires management. And if it’s a predicament, you have nothing to solve or manage; you can only accept and endure.” In companies navigating traumatic situations (such as an economic crisis), refocusing may mean pursuing deliberate practices for triggering people’s impartial spectators. If you’re a leader in such a situation, you can start by talking openly about how you feel, ask others to talk about how they feel, and then help others take a broader perspective: They are still OK, they still have jobs, their families are intact. Next, try to engender an emotional state that is calmer, and that draws people back to more effective frames of mind and more deliberate thinking. At American Express, Chenault did exactly this after one of the most shocking moments of his professional life: the terrorist attacks of September 11, 2001. He called the company together at Madison Square Garden, told people how he felt, acknowledged how they must feel, and then drew the conversation to the things that they might think about as they moved forward. The refocusing step provides the most powerful change of the entire sequence: It has the greatest impact on the prefrontal cortex, where new behaviors must be processed and integrated into complex response patterns. When people focus repeatedly and bring this part of the brain into play, their new neuronal connections can become stabilized by attention density and the quantum Zeno effect; as a result, a more productive set of brain functions are put into play, and the potential for developing new action repertoires is established. This is often experienced as having one’s beliefs open up, and as becoming more capable and productive. When practiced regularly and consistently, the change rewires the basal ganglia and becomes a set of adaptive new habits. A prefrontal cognitive process has become internalized into deeper parts of the brain. People can now do the right thing without having to think consciously about it.

Step 4: Refocus Your Behavior

In this stage, you bring your habits in line with your goals. You identify the practices you need to follow and begin to set them in motion. For example, Cargill executives have been trained to refocus (although they don’t call it that) by classifying difficult situations as

Step 5: Respond with Repetition

Hold yourself and others accountable for responding consistently with the needed new or improved behaviors. One example at Cargill is the use of metrics to set leadership priorities and track the day-to-day behaviors that

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expenses with confidence that it would make life better for them. This phrase helped calm anxiety about Cargill’s ability to weather the crisis, and it empowered people to come up with creative ways to save money for the company. Reflection led to a far greater sense of ownership and effectiveness than would have been produced by across-the-board budget cuts or other topdown directives. In the reflection stage, you may find yourself rethinking the purpose of your business. Is it making money by any means necessary? Or are you seeking to make some other contribution — through what you create, what you protect, or the wealth you hope to engender around you? For example, you might decide that in your current cultural and economic environment, enhancing the stability of society and the free enterprise system is particularly important. In the spring of 2009, Ken Chenault, the chairman and CEO of American Express, set a pattern for that type of reflection at his company. The company’s first-quarter earnings had not yet been posted, but the 2008 results, like those for most other companies, were dismal. It was late on a rainy afternoon, and as Chenault looked out from his 51st-floor office in the World Financial Center in lower Manhattan, he could see much of New York harbor. “There has not been a compelling articulation of the importance of capitalism to a wellfunctioning society since Adam Smith,” he said. “What’s the role of business in society? We need some renewed thinking, and we need to update our view of capitalism.” Statements like this might seem cause for anxiety themselves — business is difficult enough without setting out grandiose new purposes — but the act of reflection calms people down and improves access to more rational thought. It reduces the chances of either amygdala hijack or habitual, basal ganglia–style response to the need for change. The real-world results are evident, particularly when CEOs and other leaders channel reflection into a recurring gesture, reminding employees, day after day, of their goals and aspirations. This repetition helps people create new neural patterns and sets the tone for the all-important next step.

Step 6: Revalue Your Choices in Real Time

The sixth step is the step of progressive mindfulness. Individuals gain the capacity to recognize their own thoughts in the moment, resist the amygdala hijack, and take crises in stride. In organizations, instead of automatically reverting to the idea that “that’s the way we do things around here,” people begin to think, “That’s how we used to do things around here. Now, we do things better.” When these automatic responses change in enough people, a new way of operating is instilled in the ethic of the company. More productive values become the basis of management decisions, especially at times of stress. Over time, in the same way that individuals who change their health habits gradually come to crave healthier foods and exercise, people in an organization will come to choose and expect higher-performance forms of operation. Change then becomes truly generative: It is no longer something imposed on the brain or on people’s desire, but something chosen and instilled by the participants. They may have wanted to change before, but only now does the new way seem the natural way to operate. The Way We Will

The initiatives at Cargill and Ameriprise have been in place since the late 2000s, and they are starting to show results. At Ameriprise, for example, 85 percent of the

advisors who participated in the new program training report that they are becoming more effective at advising clients. Client acquisition, client retention of assets, financial planning fees, and referrals of new business from existing clients are rising, in ways that are linked to the new training. Setting this type of cycle in motion is not easy in real life. The probability of falling back into old habits and old ways of doing things is very high. But for those who can follow the practice, the payoff is enormous. The concept of organizational reframing is still relatively young. The potential impact of neuroscience on management practice is mostly unrealized. But processes like the steps we have outlined represent a starting point, focusing attention where it should be focused: “From now on, that’s how we’re going to do things around here.” + Reprint No. 11109

Resources Douglas Lennick, Financial Intelligence: How to Make Smart, ValuesBased Decisions with Your Money and Your Life (FPA Press, 2010): Similar reframing principles applied to personal finance. Jeffrey Schwartz and Sharon Begley, The Mind and the Brain: Neuroplasticity and the Power of Mental Force (Regan Books/ HarperCollins, 2002): Explains how human thinking and behavior changes through processes like this one. Jeffrey Schwartz and David Rock, “The Neuroscience of Leadership,” s+b, Summer 2006, www.strategy-business.com/article/06207: How to develop far more effective leadership practices by taking the nature of the human brain into account. Adam Smith, The Theory of Moral Sentiments (1759): Smith’s masterwork (as he considered it) explicates the development of morality through the “impartial spectator”; people building awareness of themselves in the context of a larger community. For more thought leadership on this subject, visit the s+b website at: www.strategy-business.com/organizations_and_people.

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managers are expected to demonstrate. As Cargill CEO Greg Page puts it, “As leaders at Cargill, we measure our collective efforts in terms of engaged employees, satisfied customers, enriched communities, and profitable growth. In this very deliberate way, we’re telling people we’re focusing not only on their sales and profits, but also on other key drivers of business performance.” It takes discipline to develop new habits; they feel difficult at first. Once again, if you are a leader, your behavior makes all the difference. Other people closely watch what you say, what you do, and where you pay attention. Of course, leading requires a high level of self-awareness, which is one reason the recognition step (step 1) is so important.

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How to prepare for the Connected Generation’s transformation of the consumer and business landscape.



Generation C by Roman Friedrich, Michael Peterson, and Alex Koster

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The Rise of

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Illustration by Doucin Pierre

Colin is a 20-year-old computer science student

living in London with two other students in the year 2020. He enjoys backpacking, sports, music, and gaming. He has a primary digital device (PDD) that keeps him connected 24 hours a day — at home, in transit, at school. He uses it to download and record music, video, and other content, and to keep in touch with his family, friends, and an ever-widening circle of acquaintances. His apartment is equipped with the latest wireless home technology, giving him superfast download speeds of up to 100 Mbps. Colin’s parents are divorced and live in different cities, and he has one sister, who lives abroad. He is close to his family, but his physical contact with them is minimal. Instead, he prefers to stay in touch virtually through his PDD, which allows him to communicate

through multiple channels via voice, text, video, data — either separately or all at once. His parents would prefer that he visit more often, of course, but they are finally beginning to get used to being a part of his digital life. Still, sometimes Colin feels he is too digitally connected. A recent surprise visit to his mother was ruined because she knew he was in town — he had forgotten to disable the location feature on his PDD. Colin’s social life is also arranged via his PDD. He always knows the location of his friends — even what they are doing — and can communicate with them instantly. Much of Colin’s experience at school is mediated by his PDD. He can attend lectures, browse reading material, do research, compare notes with classmates, and take exams — all from the comfort of his apartment. When he goes to campus, his PDD automati-

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Michael Peterson [email protected] is a Booz & Company partner based in Düsseldorf and London. He specializes in corporate strategy and business model transformation for communications companies and in convergence and customer-facing processes in the broader media and telecommunications environment.

cally connects to the school’s network and downloads relevant content, notices, and bills for fees, for which he can authorize payment later, at his leisure. Although he prefers to shop online, when he visits a retail store, his PDD automatically connects to the store’s network, guiding him through product choices, offering peer reviews, and automatically checking out and paying for items he purchases. Colin’s real passion is traveling, preferably with a backpack. On his recent trip to Australia, his PDD kept him occupied throughout the long plane ride with music, video, and Internet access, and helped him through customs by automatically connecting to the Australian government’s network. Then he used it to pinpoint the location of the Australian friends he was planning to travel with (he had met them online through one of several social networks he uses). Once they met up, they used their PDDs to plan their route, a relatively easy task, given that with all of Australia (and most of the civilized world) mapped and modeled on the Web in 3-D, they could see every twist and turn on their path. What Makes Gen C Special

Who is Colin? He is a member of a new generation that will be coming into its own over the next decade. Its members are typically realists and materialists. They are culturally liberal, though not necessarily politically progressive. They are upwardly mobile, yet they live with their parents longer than earlier generations ever did. Many of their social interactions take place on the Internet, where they feel free to express their opinions and attitudes. They’ve grown up under the influence of Harry Potter, Barack Obama, and iEverything — iPods, iTunes, iPhones. Technology is so intimately wo-

Alex Koster [email protected] is a Booz & Company principal based in Zurich. He focuses on strategy, revenue growth, and business model transformation opportunities across communications, technology, and Internet companies.

ven into their lives that the baby boom–era concept of “early adopters” is essentially meaningless. We call them Generation C — connected, communicating, content-centric, computerized, communityoriented, always clicking. As a rule, they were born after 1990 and lived their adolescent years after 2000. In the developed world, Generation C encompasses everyone in this age group; in the BRIC countries (Brazil, Russia, India, and China), they are primarily urban and suburban. By 2020, they will make up 40 percent of the population in the U.S., Europe, and the BRIC countries, and 10 percent of the rest of the world — and by then, they will constitute the largest single cohort of consumers worldwide. This is the first generation that has never known any reality other than that defined and enabled by the Internet, mobile devices, and social networking. They have owned various handheld devices all their lives, so they are intimately familiar with them and use them for as much as six hours a day. They all have mobile phones, yet they prefer sending text messages to talking with people. More than 95 percent of them have computers, and more than half use instant messaging to communicate, have Facebook pages, and watch videos on YouTube. Their familiarity with technology; reliance on mobile communications; and desire to remain in contact with large networks of family members, friends, business contacts, and people with common interests will transform how we work and how we consume. We expect that, in keeping with expectations for long-term economic development, the world that Generation C will make theirs in 2020 will be a better place, with a brighter future for a much larger proportion of the population in both the developed and the develop-

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Roman Friedrich [email protected] is a Booz & Company partner based in Düsseldorf and Stockholm. He specializes in strategic and technology transformation, and marketing and sales challenges in the communications, media, and technology industries.

Connected Consumers

The trends outlined above will have a wide range of effects on how members of Generation C — and, by extension, other generations as well — use communications technology, how they access and consume information and entertainment, and how they interact. These effects will be determined in part by the progress of technologies over the course of the next decade. On the grid 24/7. Being connected around the clock will be the norm in 2020 — indeed, it will be a prerequisite for participation in society. Currently, there are 4.6 billion mobile users (67 percent of the world population) and 1.7 billion Internet users globally. By 2020, the number of people using mobile phones will reach 6 billion (nearly 80 percent of the world population) and 4.7 billion people will access the Internet, primarily through their mobile devices. Among younger Europeans, 52 percent already say they feel disconnected from the world if they don’t have their mobile phones with them, and 91 percent of all mobile users keep their

phones within arm’s reach, waking or sleeping. The Internet’s power will develop not just through its online economic might, but also offline, as a result of its cultural and political influence. At the same time, personal and business activities will mingle seamlessly, as the day fragments into a flexible mix of personal and business activities — work, commuting, shopping, socializing, and entertainment. The inevitable corollary: As “offgrid” time becomes rarer, it will become more valued. Social animal 2.0. Thanks to the popularity and performance of social collaboration technologies and mechanisms, including social networks, voice channels, online groups, blogs, and other electronic messaging systems, the size and diversity of networks of personal relationships will continue to grow. These networks will include acquaintances ranging far beyond the traditional groups of family, friends, and work colleagues to include friends of friends, online acquaintances, and anonymous members of interest groups. Already, 49 percent of 16- to 24-year-olds in Europe are savvy users of social networks. One result will be the rapid creation of fast-moving political and business pressures — such as the tidal wave of electronic interest created by Barack Obama’s 2008 presidential campaign. The average person in 2020 will live within a web of 200 to 300 contacts, maintained daily through a variety of channels. Even within the family, the need for physical proximity will be reduced through increased digital interaction. Just as Facebook’s “Connect” buttons are already distributed across 80,000 websites and devices, social networks will accompany people throughout their daily activities. Digital information osmosis. People will dramatically increase their consumption of digital information, much of which will be unverified. The vast pool of information available will allow consumers to pick and choose the information they want, as well as how they want to consume it. “Nonlinear” information consumption will become the norm. And the supply of digital information itself will explode. Walmart already handles more than 1 million sales transactions every hour, feeding databases estimated at more than 2.5 petabytes (2.5 million gigabytes), according to a recent study by the Economist. Cisco has estimated in a much-cited study that it expects Internet traffic to increase 10-fold by 2013, to 667 exabytes (that’s 716 billion gigabytes). Right now, much of this information is pure exhaust — unanalyzed and unanalyzable — but it will soon be put to material economic use.

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ing world. Following the lull that has taken place during the recent, persistent, worldwide recession, there is reason to believe the world will revert to the economic mean of steady growth, with globalization picking up speed again. As populations in Western countries age, powerful new consumer segments will be created, including a relatively wealthy retirement segment and a rising young middle class. The pace of innovation will accelerate, creating an ever more digital world, even as wireless devices become the dominant tool for trade, entrepreneurship, and Internet access. Indeed, the very rise of Generation C will help create a virtuous circle that will help stimulate economic growth, which in turn will encourage both the public and private sectors to continue to invest in faster and more widespread communications infrastructure, thus enabling even greater growth. Although climate change and energy security will remain major concerns, stable electric power will likely be available to a substantially larger part of society, and energy inefficiency will no longer represent a hurdle to progress. High-speed broadband, whether fixed or mobile, will be pervasive and affordable. Secure online identity systems will allow reliable user authentication. It is likely that increasingly rational regulatory schemes will open up commercial activity worldwide, and that companies and individuals will be able to profit fairly from the intellectual property they generate.

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How the Tech Future May Unfold

I

low presents a plausible chronology

which the cloud will help trigger.

of the next 10 years. We see a series

Above the time line is a series of spe-

of “eras” triggered by the sequen-

cific events keyed to and dependent on

tial rise of critical new technologies.

the arrival of the various eras; thus the

The Era of the Smart Cloud, for in-

Era of the Internet of Things will en-

stance, will enable significant por-

able motor vehicle manufacturers to

tions of the Generation C lifestyle in

build cars with full machine-to-ma-

t is notoriously difficult to project

the coming years, to be succeeded

chine (M2M) connectivity.

the future; still, the exhibit be-

by the Era of the Sensor Economy,

Time Line of Events for the Coming Decade First insurance discounts for sensor health monitoring in risk groups

Standards in place for worldwide seamless mobile communication

First digital university alliance

Connectivity suite standard in new homes

Reading replaced by gaming for third place in media consumption

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The world is fully modeled in 3-D More than 50% of labor force “flexible” in some way 2010

2011

2012

2013

2014

Digital passport introduced in China Machine-to-machine (M2M) interfaces standard in new cars 2015

2016

M2M car connectivity mandatory in some megacities First national election with e-voting 2017

2018

2019

2020

Era of the Working Nomads: flexible working times, teleworking, flexible employment relationships Era of the “On” Life: ubiquitous and seamless connectivity at no incremental cost or effort Era of the Smart Cloud: remote data storage, software as a service, distributed computing Era of the Sensor Economy: environment-aware devices, location-aware services, near-range ad hoc communication Era of the Internet of Things: proliferation of M2M interfaces and interaction

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Era of Semantic Networks

Broadcast privacy. Concerns about privacy and

iEverywhere. As privacy concerns dwindle, people’s

the security of personal data will decline as consumers come to perceive the benefits of transparency as outweighing the risks, and as mechanisms to secure and process personal information become more sophisticated. The result: The availability of an abundance of real-time, personalized information on people’s presence, online status, physical location, preferred communication channels, friend networks, interests, passions, and shopping habits. Facebook, for instance, already hosts 40 billion photos of its members. The use of social networking increasingly will determine consumption patterns. Viral marketing and positive peer reviews will become essential to commercial success, which will in turn erode the value of traditional marketing and of bricks-and-mortar outlets, and ultimately the concept of brand value itself.

personal data, such as identity, payment details, shopping preferences, interests, and membership in social communities, will become widely available. Members of Generation C will be able to access their digital life from a multitude of digital interfaces and devices, because they will live in a fully interconnected world in which services and data reside online — in what’s known as cloud computing — rather than on those devices themselves. Today’s consumer electronics already show the way: smartphones, iPads, iPods, netbooks, laptops, PCs, and watches, and the list is sure to grow in the next decade. At the same time, prices for such devices will continue to fall. Netbooks subsidized by telecom operators go for as little as a penny, and they are approaching the US$200 mark in retail outlets. Wireless broadband services, however, will still cost

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Source: Booz & Company

more than $50 per month. Continuing generation gap. The upper age limit of the digitally literate will rise, as the 50-plus age bracket broadly migrates online. At present, the average 65-yearold spends just two to three hours online in a typical week; in 2020, 65-year-olds will spend closer to eight hours online weekly — though they will remain far below the 16- to 24-year-old group, which already spends 13 hours online weekly. Older people will also continue to lag in the intensity of their digital behavior. Generation C will distance itself further, particularly in the development of its own pervasive culture of communication. That culture has led some observers to dub this group “the silent generation,” as digital communication channels have replaced much of the physical interaction typical of prior generations.

The digitization of everything will have an equally profound effect on how businesses operate, and on how work gets done. Among the changes that will be wrought by the arrival of Generation C in the workplace will be the continuing consumerization of corporate IT. More than half of the CIOs in a recent Booz & Company survey said that in the next three to five years, most employees will bring their personal computers to work rather than using corporate resources. The trend of redefining employees as resident consumers will be led by Generation C, given its familiarity with technology and its expectation of always-on communications. This trend will, in turn, encourage the increasing virtualization of the organization. As 24/7 connectivity, social networking, and increased demands for personal freedom further penetrate the walls of the corporation, corporate life will continue to move away from traditional hierarchical structures. Instead, workers, mixing business and personal matters over the course of the day, will self-organize into agile communities of interest. By 2020, more than half of all employees at large corporations will work in virtual project groups. These virtual communities will make it easier for non-Western knowledge workers to join global teams, and to migrate to the developed world. As they do, they will bring with them the innovative ideas and working behavior developed in their home territories. Moreover, the proliferation and increasing sophistication of communication, interaction, and collaboration technologies and tools, and the economics of travel itself, will result in knowledge workers’ traveling much

The Developing World

The trends that are already transforming life and work in the developed world are beginning to be felt in emerging economies as well, although the path such countries take to digitization will be significantly shortened. As the developing world increases in connectivity and sophistication, a huge new audience of people who have not yet been exposed to the consumer economy will develop outside the already connected urban centers. Between 1990 and 2005, more than 1 billion people worldwide entered the middle class, and the rate of entry is rising quickly. Their consumption of media and other kinds of content will transform the media industry. As with prior technology adoptions, these new audiences will leapfrog years of technological development and quickly emulate the behavior of Generation C in developed economies. The experience of the rapidly developing middle class in China will become typical: A member of the Chinese urban middle class spends almost 30 hours per week online but watches TV for just 12 hours. Three out of four regularly download music, two out of three watch online videos, and almost half play games online. This increasing technological sophistication will promote the emergence of skilled and innovative digital entrepreneurs in massive numbers throughout the developing world. The rise of these entrepreneurs has the potential to significantly disrupt traditional Western business models. And they will have the attention of a large, newly connected audience that can benefit from their new ideas. In urban China, for instance, 76 percent of people are already online, and 61 percent have broadband at home. Western countries currently lead the world in just two critical online services, ecommerce (Germany) and online advertising (the U.K.), whereas non-Western countries are ahead in several others: broadband (South Korea), social networking (Brazil), online gaming (China), mobile payments (Japan), and microtransactions via SMS (the Philippines). Industry Effects

As Generation C enters the workforce over the next decade, the manner in which it consumes information, communicates at work and play, and uses technology will transform many major industries. The most affected sector will be telecommunications, which is at the

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Generation C at Work

less frequently. The opportunity to meet face-to-face will be accorded primarily to top management, and business travel will become a valued luxury.

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very center of how this new generation will live their lives; other sectors apt to greatly change include healthcare, retail, and travel. How will these industries evolve over the next decade? Telecommunications. Just as the telecom industry is heading toward a strict separation between infrastructure and services and applications, customers are shifting their consumption patterns, and their loyalties, away from the traditional telecom operators and toward application and service providers such as Google, Apple, and Facebook, as well as any number of smaller players. In this world, telecom players that remain vertically integrated will come under substantial pressure. Indeed, it is likely that the industry will evolve to include two types of players: The efficient utility, driven by fiber-optic and wireless access technology, and the fast-moving, customer-centric software innovation provider. At the same time, the information and communications on which the world of 2020 will depend, and the intelligence needed to manage that information, are moving quickly into the online computing cloud. The convergence of these technologies in the cloud will only be the start, however. As more and more services migrate online, telecom, IT, technology, and Internet service companies themselves will begin to encroach on one another’s territory, as they all move toward highermargin and differentiating applications. The general outlines of the future created by the arrival of Generation C are clear. The question is whether telecom operators are ready for the changes already on the way and are planning now to create the strategies and business models they will need to keep growing in this more competitive future. Too many telecom operators appear to be focused on preserving sources

of revenue, such as voice telephony, that are likely to decline in the future, rather than on developing new sources of revenue and opening up new markets. As a whole, telecom industry players need to rapidly change their operational and business models, the ways they interact with customers, the access and price points they establish to generate revenues, and the way they manage innovation. We see three primary new revenue opportunities arising from the changes that the emergence of Generation C will bring about. First, the demand for ubiquitous connectivity will ultimately create the need for universal broadband access in developed economies. As a result, operators that hope to grow by offering services dependent on broadband must support national efforts to build out this next-generation infrastructure. Second, vast segments of the world’s population in emerging markets are still unconnected, and operators looking to grow their customer bases thus need to expand in those markets. Third, the ways that Generation C behaves and collaborates, and the technologies it prefers, will create opportunities in other industries; telecommunications operators should be considering how to promote the use of their services to capture some of the new value created. (See “The Thought Leader Interview: Didier Lombard,” by Art Kleiner and Pierre Péladeau, page 72.) Healthcare. As information about doctors and hospitals, medical treatments, and costs floods the Internet, consumers will gain real power, performing their own research; writing reviews of physicians, hospitals, and drugs; and forcing the players to compete more actively. Online services, some featuring user-generated content, will become a primary channel for medical advice, sub-

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In 2020, drivers will have better information on the roadside environment, sensors that check for sleepiness, and simplified car maintenance based on remote diagnostics.

Is Your Company Ready?

There is already evidence of some of the changes that will be brought about by the coming generation of workers and consumers, and increasing speculation about the path of future change. Few businesspeople, however, have fully grasped the implications for every industry. The arrival of Generation C will have an impact comparable to that of the Industrial Revolution, but it will take place much more quickly. For managers, it is no longer sufficient to plan for the next few quarters, or even the next few years. Companies that aren’t willing to determine their strategies for the longer term — 10 to 15 years out — are putting their business models and value chains at risk. Executives must begin now to develop an agenda that includes an analysis of the capabilities and workforces they will need in the next decade and beyond. A critical step will be to make sure that the organization as a whole understands the coming changes, and that there are already people within the organization who are living these changes now, who don’t perceive them as a threat, and who can help integrate them into the organization’s business plan. The world of 2020 will be set and governed by the members of Generation C, as they mature and grow in numbers and power. How businesses choose to cater to this coterie will determine their success — and even their ability to survive — in the coming decades. +

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stituting in part for traditional support channels. Widespread connectivity will boost electronic diagnosis, helping to reduce costs; digital health monitoring will become accepted practice; medical R&D will come to rely on social media such as crowdsourcing. The personalization of medicine will lead to new insurance models, and electronic medical records and national ehealth infrastructures will connect with online identity and digital passport technologies. Retail. Ubiquitous connectivity will continue to transform the retail industry, seamlessly integrating the online and offline worlds, and ultimately leading to a form of augmented reality that allows a more elaborate presentation of retail goods. Peer reviews will become a real-time decision-making tool in physical stores as well as online, and social networks will become critical for brand awareness and customer preferences. This will lead to a winner-take-all dynamic among retailers, already typical of commerce on the Internet. Electronics retailers will lose ground as consumers purchase software and services from the cloud rather than in their current shrink-wrapped store format. Social media techniques such as crowdsourcing will be used to further product innovation, and increased connectivity will generate new monetization models driven by new partnerships among retailers and manufacturers. Travel. By 2020, business travel will decline in the face of costs and alternative meeting technologies. In the leisure segment, traditional intermediaries such as travel agents have already been largely cut out, and peer reviews have become a dominant form of deciding on vacation destinations. This will lead to increasingly individualized travel, online advice and information dictating travel plans in real time. The distinction between travel and home will blur (as the distinction between the office and home already has), and the off-the-grid getaway will become a luxury. Even the concept of distance will be transformed, as the world becomes fully modeled in 3-D, and open for inspection by prospective visitors. The digital world will also further invade the car. For the driver, this will lead to better information on the roadside environment — another instance of augmented reality — along with improved safety through the presence of sensors that check for drivers’ sleepiness or drunkenness, and simplified car maintenance based on remote diagnostics. It will also improve the efficiency of the street network, allowing for instant data on traffic and providing the ability to determine traffic flow.

Reprint No. 11110

Resources Roman Friedrich, Michael Peterson, Alex Koster, and Sebastian Blum, “The Rise of Generation C,” Booz & Company white paper, March 2010, www.booz.com/media/uploads/Rise_Of_Generation_C.pdf: The paper from which this article was adapted. Michael Peterson, Volkmar Koch, Florian Gröne, and Kiet Vo, “Online Customer, Digital Marketing: The CIO–CMO Connection,” Booz & Company white paper, August 2009, www.booz.com/media/uploads/ Online_Customer_Digital_Marketing.pdf: Why information and marketing officers must work together to develop a marketing architecture for an increasingly digital and connected future. Daniel W. Rasmus, “Keeping Up with Workforce 2020,” s+b, 2/24/2009, www.strategy-business.com/article/li00113: How organizations can adopt and internalize the technology and skills needed to thrive in an increasingly virtual and flexible work environment. Clay Shirky, Cognitive Surplus: Creativity and Generosity in a Connected Age (Penguin Press, 2010): How the Internet and its tools will change leisure time, society, and the process of innovation. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/organizations_and_people.

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His inventions from 50 years ago enabled cell phones, laptops, and flat-screen TVs. Now, at age 88, he’s aiming to make solar power cheaper than coal.

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Stan Ovshinsky’s Solar Revolution by Lawrence M. Fisher

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Photographs by Greg Ruffing

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“The Institute for Amorphous Studies,” reads the

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simple black-on-white sign at a former elementary school in the leafy Detroit suburb of Bloomfield Hills. The sign represents a bit of nerdish humor: The scientists and engineers working here know that it might prompt a visitor to imagine a new-age Silicon Valley– style think tank. But this is southeastern Michigan, and the sign is also serious, reflecting Stanford R. Ovshinsky’s discovery half a century ago of amorphous materials, the science at the core of such diverse products as nonvolatile memory chips, flat-panel displays, and rewriteable optical discs. That discovery created an entirely new field of materials science, and Ovshinsky’s achievements have continued over the subsequent decades. Although his formal education ended with high school, he has written some 300 scientific papers; has more than 400 patents to his name for technologies that have improved daily life in myriad ways; and has been awarded dozens of honorary degrees, awards, and academic accolades. Now, at age 88, he has formed Ovshinsky Solar, a company with an audacious goal: to drive the unsubsidized cost of solar power below that of coal — to create, in effect, a Moore’s Law for energy. The automatic response to a man late in his ninth decade announcing such an objective is disbelief, perhaps tinged with amusement. Certainly the doors of venture capital firms do not open readily to octogenarians, no matter how accomplished. But Ovshinsky has spent his entire career ignoring the naysayers, and time after time he has proved them wrong the best way he knows: by overturning conventional scientific wisdom, creating breakthrough technologies, and building things that work. In this new endeavor, feeling he

has no time to waste, he has assembled a small team of scientific and engineering talent to make low-cost solar power a reality as rapidly as possible. The Economist once called him “the Edison of our age,” and he has also been compared to Einstein. But Ovshinsky sees himself less as an inventor or a theorist than as a pragmatic problem solver. He views complex problems not as existential dilemmas or subjects for detached study, but as fundamentally comprehensible tasks lacking only an obvious solution. So global warming and foreign oil dependence are not cause for dissertations or despair, but simply tough equations to solve for multiple unknowns. It was perhaps coincidental that amorphous materials science, Ovshinsky’s pivotal discovery, was equally suited to energy technologies, such as the nickel–metal hydride batteries in the Toyota Prius, and to computer applications, such as memory chips that retain their data after the electricity is turned off, both of which are his inventions. But that duality inevitably shaped his career and his world view. “I picked energy and information as the twin pillars of our economy very early on, when I was quite young,” Ovshinsky says, touching on past times as a prelude to a proximate future. “If you change the energy equation to no use of coal and no climate change, you’re ending one era and opening an entirely different one. I’m an activist, but what I do is go out and do it, if I know how.” Ovshinsky keeps his office in the former school’s library, and sits at a wooden desk surrounded by scientific texts and the scholarly journals he still reads and contributes to avidly. Pride of place here, and in nearly every room at the company, is given to a large chart of the periodic table of elements, which colleagues say

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Lawrence M. Fisher [email protected] is a writer and consultant based in San Francisco. A contributing editor to strategy+business, he covered technology for the New York Times for 15 years.

knowing that you may have tough questions, but that he has the answers and the data to back them up. Birth of a New Science

Ovshinsky grew up in Akron, Ohio, the elder son of working-class Jewish immigrants who fled eastern Europe in 1905. His father, Benjamin Ovshinsky, made his living collecting metal scrap, but he was also a liberal social activist who introduced his son to the Akron Workmen’s Circle, an organization focused on labor rights, civil rights, and civil liberties. In later years, Stan Ovshinsky marched in civil rights protests and hosted activists in his home. His first jobs were in machine shops around Akron, and his first inventions and first company, Stanford Roberts, were devoted to machine tools. The Benjamin Center Drive, an automated lathe he named for his father, was used to manufacture artillery shells for the Korean War effort. Accepting an offer from the Hupp Motorcar Company, he moved to Detroit in 1951, where he invented a technology for electric power steering. But Hupp’s president blocked negotiations with General Motors to complete the project, and it was shelved as the industry moved toward hydraulic power steering. But Ovshinsky was already moving on, pursuing his fascination with human and machine intelligence. He read deeply in the research literature of neurophysiology, neurological disease, and cybernetics. Despite his lack of formal education, he came to comprehend and make strides in these seemingly disparate and arcane disciplines with the same intuitive and iconoclastic bent he brought to precision machine tools. His own publications in peer-reviewed journals confirmed his insight and innovation in these fields. With his younger brother, Herb, a mechanical engineer, he established a small company called General Automation to research and develop energy and information technologies. Together they built, in 1959, a mechanical model of a nerve cell, a semiconductor switch they called the Ovitron, in the process pioneering the use of nanostructures. A year later, Stan and Iris opened the Energy Conversion Laboratory. The Ovitron itself had no practical application, but in developing it, Ovshinsky made a breakthrough that would define his career, and make the “Ovshinsky effect” a science textbook phrase. He discovered that certain types of glassy thin films, known as amorphous or disordered materials, turn into semiconductors upon

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Ovshinsky knows the way a master pianist knows the musical scales. Time after time, when those colleagues have reached an impasse, he will point to the table and remind them that the answers to their questions are all there. He points to it today to explain why all his work, including his current focus on low-cost solar power, ultimately comes back to the primacy of the hydrogen atom. “We have a universe, and the first thing out of the Big Bang, which created it, was hydrogen, some helium, and a little bit of lithium. The hydrogen atom is what the whole periodic table is made out of. All matter that we know is, by far, hydrogen: a gas out in the universe that condenses into stars, and gives out energy by fusing hydrogen into helium. That creates the photon light particles that are absorbed onto photovoltaics to generate electricity.” Decades before green became a modifier for technology, Ovshinsky and his second wife, Iris, opened the doors of Energy Conversion Laboratory in a small Detroit storefront. This was his third company in less than 10 years, but it would be his primary focus for the next half century. It was 1960, yet already the Ovshinskys dreamed of a world free of the wars and pollution caused by dependence on carbon-based fuels and petrochemical products. Iris had the academic training that Stan lacked, including a Ph.D. in biochemistry from Boston University. Working as a team, they created breakthroughs in energy generation, energy storage, information systems, and atomically engineered synthetic materials, now known as nanotechnology. Indeed, when the clean-energy economy comes to pass, it will owe much to the holistic, practical, and dogged way Ovshinsky and his colleagues have pursued it over the decades. In Ovshinsky’s view, inexpensive solar power will make energy both plentiful and clean, eliminating the scarcity-driven conflicts and carbonbased pollution that have dogged humankind for centuries. Furthermore, he is confident that this transition, once begun, will occur rapidly, with the same relentless acceleration that has driven computers from mainframes to iPads in a scant four decades. Ovshinsky has a touch of vanity — he clearly delights in the svelte figure he still cuts in a well-tailored suit, and he takes a similar pleasure in countering skeptics by displaying patents, peer-reviewed publications, and functioning prototypes that prove his concepts work. The wispy-haired gentleman with the modest manner awaits your interrogation with a kind smile,

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ters data by changing the physical characteristics of the semiconductor material, from amorphous to crystalline and back again, and that change remains in effect even without electrical current. When a cell phone user’s battery dies, but the phone retains her contact list, she has Ovshinsky’s invention to thank. The same basic technology underlies rewriteable optical discs, enabling consumers to download music onto CDs. Driven by the joy of discovery and their stated intention to use science and technology to solve serious global and societal problems, Stan and Iris kept the company small and nimble by licensing their technologies to major manufacturers. Profits were poured back into research, and growth came almost despite the founders’ intentions. Energy Conversion Laboratory licensed its phase change technology to Intel and STMicroelectronics NV, both of which continue to develop and improve such chips. The big change to the company came when Ovshinsky applied amorphous materials technology to solar energy. In 1983, when he first began to explore the field, photovoltaic cells were still the size of a thumbnail, and made of costly crystalline silicon in small volumes. To considerable skepticism, even within his own company, Ovshinsky insisted that photovoltaic materials should be made of amorphous silicon deposited on flexible plastics by the mile, like newsprint rolling off a press. The deposition process requires high vacuum and absolute isolation from outside contaminants that the manufacturing equipment of the day could not achieve. But Ovshinsky was first and foremost a machinist, so he designed and produced his own tooling. Reflecting its move into mass production, the company changed its name to Energy Conversion Devices, or ECD. With the success of its solar panels, ECD entered a rapid growth phase that took revenues from a few million dollars a year into nine figures, and the employee roster from perhaps two dozen close associates to more than 1,000. Ovshinsky was now a manufacturer and manager of a large corporation, two roles he had never sought, and for which his iconoclastic temperament proved an awkward match. Although his company had gone public two decades earlier, in the 1960s, its small size and relatively slow growth had kept it below Wall Street’s radar. With the growth and profitability of solar products came increased attention from securities analysts, as well as pressure to concentrate on cash generation. Ovshinsky simply ignored the pressures.

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application of a low voltage. Semiconductors, the foundation of modern electronics, are materials that conduct an electrical charge but can be regulated, unlike common conductors such as copper. At the time, in the early 1960s, scientists believed that semiconductors could be formed only from crystalline materials, such as purified silicon, in which all the atoms are arranged in a long-range order. Ovshinsky demonstrated that it was possible to form semiconductors from amorphous or disordered materials, like common glass or silicon alloyed with less-costly elements. Amorphous silicon made possible the production of devices that are now inexpensive and ubiquitous in computing and energy applications. “He invented the field of disordered materials,” says Hellmut Fritzsche, former chairman of the physics department at the University of Chicago. “It was so revolutionary at the time that people at Bell Labs and other major research labs said, ‘This man is crazy.’ Stan’s contribution was to say that [crystalline material] is not necessary, and it is too restrictive. You can make semiconductor materials in many ways when they are not crystalline, when they are disordered. Then you have a great freedom to alter their properties by chemical modification.” Soon a phalanx of physicists, chemists, and engineers were making a pilgrimage to the Ovshinskys’ modest Detroit lab, including a young Robert Noyce and Gordon Moore, who were then planning a company to produce computer memory products, the future Intel Corporation. Many who came to scrutinize Ovshinsky’s work stayed on to collaborate, captivated as much by Stan and Iris’s lively warmth as by the novelty of the science. Fritzsche and others who have known him over the years say he always exuded a remarkable confidence in his own abilities. Ovshinsky made his major discovery while trying to develop an artificial neuron as the first step toward developing a cognitive computer, a working model of the cerebral cortex that he still dreams of completing one day. But he soon put the discovery to work. In September 1966, he filed the first patent on phase change technology, which enabled a new type of computer memory. The most common type of computer memory is dynamic random access memory, or DRAM, which replaced the magnetic core memory of the earliest digital computers. But DRAM chips lose their data when the power is switched off. Phase change memory, which Ovshinsky called ovonic unified memory, regis-

Stan Ovshinsky in 1969 at the Energy Conversion Laboratory in Detroit, Mich.

Batteries and Betrayal

Consortium selected the Ovonic Battery Company, a subsidiary of ECD, to scale up its NiMH technology for electric vehicles. Ovshinsky’s battery technology still powers the Toyota Prius and Honda Insight hybrid cars, though more recent electric vehicles like the Tesla Roadster and Nissan Leaf use lithium-ion batteries, a newer technology developed for cell phones and laptops. In December 1996, GM began a limited launch of its EV1 pure electric car. The California Air Resources Board (CARB) then agreed to delay implementation of the first phase of a zero-emissions vehicle mandate that had been scheduled to go into effect in 1998, ordering that the seven biggest carmakers — the largest of which was GM — would need to make 2 percent of their fleets emissions-free by 1998, 5 percent by 2001, and 10 per-

cent by 2003. Powered by lead-acid batteries, the firstgeneration EV1 had a range of 70 to 100 miles. What should have been Ovshinsky’s greatest triumph came when General Motors selected his tiny company over 60 other bidders to provide batteries for the second-generation EV1 in 1999. His battery doubled the EV1’s range to 140 miles. GM acquired a majority stake in the company, changing the name to GM Ovonics, and the future looked bright. Robert Stempel, who wrapped up a 37-year career at GM as chairman and CEO in 1992, joined ECD Ovonics as an advisor in 1993, and became chairman in 1995. Time magazine called Ovshinsky “a hero for the planet.” But General Motors was ambivalent about the EV1, and its small base of early adopters. As shown in the documentary film Who Killed the Electric Car? oil industry groups lobbied successfully to end California’s zero-emissions mandate. In the meantime, GM sold its stake in GM Ovonics to Texaco, which in turn was acquired by Chevron. Despite candlelight vigils by EV1 owners, GM recalled all its leased electric cars and crushed all but a few, which were donated — minus their drivetrains — to museums. “It’s a maze of betrayal,” says Ovshinsky. “We had an agreement that if Texaco was bought out, we could withdraw, but they lied to us. They said, ‘We’ll support you, make it happen.’ Within months it was obvious they weren’t going to do that. As soon as possible they got me off the board.” In fairness to GM, which has clearly made its share of mistakes, the arithmetic supports the company’s argument that the EV1 was not commercially viable at the time. GM based the leases for the EV1 on an initial vehicle price of US$33,995, with lease payments ranging from $299 to $574 per month, depending on state rebates. Industry analysts estimated the production cost of the car at as much as $100,000. In justifying its decisions, GM said some EV1 parts suppliers had quit, making it hard to guarantee future repairs and safety. Nonetheless, with the benefit of hindsight, and given the subsequent volatility of gasoline prices, some GM executives’ opinions of the EV1 have changed. Former chairman and CEO Rick Wagoner told Motor Trend

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Photograph © Time & Life Pictures/Getty Images

For Ovshinsky, a clean-energy source begged for a cleanenergy storage solution, but the batteries of the time were highly toxic, endangering workers’ health and the environment. He responded by inventing a rechargeable nickel–metal hydride (NiMH) battery, made of nontoxic and recyclable (and less expensive) materials. NiMH rapidly displaced nickel-cadmium cells in portable electronic devices, and in 1992 the U.S. Advanced Battery

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bustion engine on low-pressure hydrogen. Colleagues recall a visiting Toyota engineer looking on in disbelief until he finally cupped his hands beneath the exhaust pipe and tasted the pure water it emitted. Interest in hydrogen fuel cells has waned with the reduction in U.S. government research funds and with the industrywide move toward electric vehicles and hybrids. However, some auto executives still insist the fuel cell is the technology with the greatest future potential. In the midst of his technological advances, Ovshinsky ran headlong into an obstacle not described by the laws of physics: corporate governance regulation in the post-Enron age. He had always packed ECD’s board with Nobel Prize winners and world-renowned thinkers in diverse fields whose attendance was clearly more related to mutual intellectual stimulation than legal and regulatory compliance. After the passage of the Sarbanes-­Oxley Act in 2002, he had to take on additional outside directors with government-mandated skill sets, who then pressured him to emphasize quarterly earnings at the expense of experimentation. He was also forced to impose a reporting hierarchy on the company, which had never known titles or more than two levels of separation between the lowest-paid employee and the CEO. The culture of the company, which had always been collegial, became more conventionally corporate. Longtime colleagues began to leave, and Ovshinsky found himself dreading days filled with meetings and administrative duties. When Iris died suddenly in 2006 at 79, after an apparent heart attack, he abruptly retired. It was not necessarily the board’s fault. ECD’s technological lead had never translated into sales leadership, and companies not distracted by forays into hydrogen research or other intriguing technologies claimed a greater share of the photovoltaic market. Although ECD’s sales continued to grow at a steady pace, its 2009 revenues of $302.8 million pale in comparison to the $2.1 billion of market leader First Solar. Ovshinsky says ECD would not have fallen behind had the board listened to him, and notes that the company’s share price has fallen only since his departure. In the later years, he says, he not only had to fight to preserve his research budget, but also had to battle his own executives to develop the 30-megawatt production lines that are now ECD’s greatest asset. “The ECD machine I developed is larger than a football field, runs 24/7, and makes miles and miles of photovoltaics,” Ovshinsky says. “When I said I was going to do that, we had only 5-megawatt machines. I lost

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magazine in 2006 that his worst decision during his tenure at GM was “axing the EV1 electric-car program and not putting the right resources into hybrids.” The rest is history. Japanese automakers seized the lead in hybrid gas/electric vehicles using NiMH batteries, although only after Panasonic EV, a joint venture between Matsushita and Toyota, settled a patent infringement suit brought by Cobasys, the successor company to GM Ovonics. His treatment by “Big Oil” chastened Ovshinsky and made him wary of corporate partners, but he pressed on to develop the missing components of what he came to call the hydrogen circle, by making it possible to use hydrogen to power automobiles and other vehicles. Hydrogen is the most common element in the universe and the most abundant potential source of clean energy; a car fueled by hydrogen is completely emissions-free. But on earth, all hydrogen is bound to other molecules. Separating hydrogen from carbon in fossil fuels, most commonly natural gas, requires reformation, which consumes energy and releases carbon dioxide into the atmosphere, exacerbating the global warming that hydrogen-based energy is supposed to ameliorate. Transporting hydrogen requires chilling it to liquid form, which is energy-intensive and expensive, or compressing it under high pressure, which is potentially dangerous and requires heavy tanks. To produce abundant hydrogen gas that could be used to power vehicles, Ovshinsky invented a technology he named Ovonic BioReformation. It is a singlestep reaction that produces carbonate, a solid widely used in industry, instead of CO2; takes place at low temperatures requiring less energy; and can be performed using a variety of fuels, including biomass. To tackle the transport issue, he developed low-pressure metal hydride containers, which absorb and release hydrogen like a sponge, and, for the U.S. military services, demonstrated a mobile refueling system requiring no costly infrastructure. This was typical Ovshinsky: No single invention stands alone. The next step was to develop a new type of hydrogen fuel cell, a device that generates electricity through reactions between a fuel and an oxidant, triggered in the presence of an electrolyte. Ovshinsky’s fuel cell operated at lower temperatures than others, and without the costly platinum catalysts commonly used in these technologies. For those not willing to wait for fuel cells, he installed one of his metal hydride canisters in an ordinary 2002 Toyota Prius and ran the internal com-

Ovshinsky ran headlong into an obstacle not described by the laws of physics: corporate governance regulation in the post-Enron age.

A Cultural Innovator

Stan Ovshinsky always made a point of giving Iris equal credit for his insights and inventions, and longtime colleagues say she was also at least as responsible as he for the remarkably collegial corporate culture at ECD. Before Sarbanes-Oxley, formal titles, reporting hierarchies, and standardized appraisals were nonexistent. A promotion simply meant taking on more responsibilities, and new hires were constantly encouraged to work outside their specialties or to take on tasks that challenged their skill sets. Many a chemist discovered a flair for physics, and a clerical worker could rise to senior management. Although the Ovshinskys did not use the rhetoric of participative management or nonhierarchical organizations, ECD embodied both concepts. “My mom joined as a secretary when she was 35, after being a housewife forever,” recalls Joichi Ito, CEO of the Creative Commons, whose parents both worked for ECD for many years. (See “The Ambassador from the Next Economy,” by Lawrence M. Fisher, s+b, Autumn 2006.) Ito himself, now a globe-trotting venture capitalist and digital activist, began working at ECD as a teenager, and says that Stan Ovshinsky became a combination mentor and surrogate father to him after his parents’ divorce. His mother “quickly became head of personnel, then vice president of international sales and licensing, and then was sent to Japan to be president of the Japanese division, and became the chief negotiator with the Japanese clients who were the biggest slice of the royalty fees for the technology.”

Although ECD’s growth over the decades gave many employees a comfortable nest egg, it was slow and steady and never generated the kind of intense, instant wealth that rewarded employees at firms like Microsoft, Google, or Facebook. Headhunters often recruited the company’s multitalented engineers with promises of rapid riches, and some accepted lucrative offers only to find they missed the ECD culture. “ECD was a reflection of Stan and Iris’s personalities, and each one of us was an integral part of the firm,” says Boil Pashmakov, who left ECD to work in the semiconductor industry and has now returned to work in Ovshinsky’s new company. “In Silicon Valley, it is all about the money.” But notwithstanding Sarbanes-Oxley, Ovshinsky sometimes showed a side of his character that suggests he should not have been at the head of a publicly traded company. Like many a high-tech entrepreneur, he might have prospered more by taking the role of chief scientific officer while handpicking a cadre of professionals to manage the company. “He truly has a different set of beliefs. He’s out to change the world, and he doesn’t care about the money,” says Patrick Klersy, another ECD veteran who has joined the new venture. Starting Over

After his retirement, Ovshinsky languished for a year. He says he felt he was waiting for his life to end. Then in 2007, in short order he married Rosa Young, a Ph.D. physicist who had worked at ECD since 1986, and launched his fourth company. Rosa says that Ovshinsky’s proposal of marriage came as a surprise. She had already resigned from ECD herself, accepted a professor’s position in Sich-

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Iris and I lost the company at about the same time. The company I could have absorbed, but Iris was a deep, deep part of me.”

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Ovshinsky’s goal is a machine capable of producing a gigawatt per year of solar capacity, which is more than the output of a typical nuclear plant.

conversion efficiency of the semiconductor materials used or increasing the coating rate in production. It is presently impossible to have both high efficiency and high speed, and current manufacturing processes can be improved only incrementally.

Rosa Young and Stan Ovshinsky in 2010

Characteristically, Ovshinsky says he has found a way to push both parameters at once, and by significant amounts. “Our technology is a transformational advance in photovoltaics, combining higher conversion efficiency with 100-fold faster deposition rates,” he says. Indeed, his tiny pilot plant recently achieved this milestone, sustain­ ing a deposition rate of more than 300 angstroms per second, compared with 1 to 5 angstroms per second in state-of-the-art commercial photovoltaic processes. That increase alone would allow the building of a 1-gigawatt

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uan province in southwestern China, where she was born, and purchased a small apartment there. But, she adds, Ovshinsky has been surprising her for nearly 25 years now, never more than when he hired her in the first place, and then put her in charge of projects far re­ moved from her academic background. Few of Ovshinsky’s old colleagues were surprised, however, when he announced plans for a new com­ pany. Considering the spotlight on global warming and renewed concerns about dependence on petroleum products, he simply could not remain on the sidelines. President Barack Obama’s appointment of Steven Chu, a Nobel-winning physicist, as secretary of energy ap­ peared to signal a fresh opening for sustainable energy development, and Ovshinsky felt he had to contribute. Ovshinsky bootstrapped Ovshinsky Solar with $3.5 million of his own funds, and is now seeking $16 million in new capital to move from proof of concept to a small production facility. He says he will need an ad­ ditional $350 million to reach full-scale manufacturing by 2012. The goal is a machine capable of producing a gigawatt per year of solar capacity, which is more than the output of a typical nuclear power plant, and more than 30 times the output of the largest current produc­ tion lines at any photovoltaic manufacturer. “Other people’s idea of a gigawatt is to do it serially — build one machine and then another and another,” says Ovshinsky. “If you look at all the cost and time of doing that, you are never going to get there. You can actually put a couple of our gigawatt machines in an ordinary factory. My costs will be lower than burning coal. That means pennies per watt. And that’s the world revolution that’s needed.” Increasing solar capacity requires improving the

Spring Ventures, a San Francisco–based fund that invests in and incubates clean-energy technologies and companies. “But Stan does have this complicated reputation; you want him to be Edison, but there’s a risk he’ll end up being Buckminster Fuller.” For longtime participants in the solar industry, Ovshinsky’s ability to deliver a breakthrough technology is not in doubt, despite the magnitude of the advance he is claiming. They say the economic and environmental case for low-cost solar power is so compelling that it is almost inevitable but building a 1-gigawatt machine is only the first step in a long road to market. “I don’t know what technology he’s using, but it’s not something we know anything about,” says Travis Bradford, author of Solar Revolution: The Economic Transformation of the Global Energy Industry (MIT Press, 2006). “It’s not a current-generation technology. And that next gen is five to 10 years away. Then there are business model problems, even if he can build a gigawatt line.” At 88, Ovshinsky is well aware of the actuarial tables, and though he plans to go on working for years, he has structured the new company so that it can function without him. But it’s also clear that he cannot function happily without a group of like-minded souls striving to take his concepts forward. “I never did this for awards, money, power,” Ovshinsky says. “I did it because it had to be done, and because of my social drive to make a better and more beautiful world. That’s what I started doing when I was knee-high, and I don’t expect to stop now.” +

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capacity plant, but Ovshinsky says he will also soon announce a commensurate increase in conversion efficiency from the current level of about 10 percent. Ovshinsky Solar currently has eight employees, all of whom had been at ECD for 25 years or more. They work in a tiny unmarked lab packed with elaborate instrumentation and prototype vapor deposition equipment of their own devising. A convoluted maze of stainless steel, the apparatus looks like a science fair project on steroids. The company has 14 patents pending, with more in the pipeline, but until they issue, Ovshinsky explains that he has to remain circumspect about exactly what he is doing. The breakthrough, he says, rests on the invention of an entirely new amorphous material — not a refinement of something he has done before — adding that his aha! moment came when he looked beyond the narrow science of solid-state physics as practiced today, much the way he did 50 years ago with the discovery of amorphous materials. “If you’re going to do something new, you have to overlap fields,” he says. “God didn’t make disciplines; man did.” The capital sums Ovshinsky is seeking are not big relative to the billions that venture capitalists are throwing at green energy startups, but he says he is not looking to them as investors. “Why don’t I go to the venture capitalists? They don’t care about the achievement; they care about getting out of it at the right time,” he says. “I think countries are better. All they want is for you to build the machines. I prefer to get money from groups that want to answer the problem, and that understand that it has to be revolutionary.” Ovshinsky won’t say which governments he is talking to about funding, but a glance at his calendar shows that he has been traveling a great deal, particularly to China. Chinese solar panels accounted for about half of total worldwide shipments in 2009, and that share is expected to grow. “China is doing the right things,” Ovshinsky says. “They have lots of good people, and they have a plan for energy. We do not have a plan for energy.” Silicon Valley venture capitalists say that although Ovshinsky’s achievements are well known to them, so is his reputation as a difficult partner for investors. And they caution that he would find Beijing and Sichuan investors no easier to work with than venture capitalists in northern California. “No matter what he’s come up with, people will pay attention because he has a track record of some pretty impressive breakthroughs,” says Sunil Paul, founder of

Reprint No. 11111

Resources Hellmut Fritzsche and Brian Schwartz (editors), Stanford R. Ovshinsky: The Science and Technology of an American Genius (World Scientific, 2008): An introduction to Ovshinsky’s key innovations and inventions, plus a selection of his most important scientific papers and a listing of his patents by subject. George S. Howard, Stan Ovshinsky and the Hydrogen Economy: Creating a Better World (Academic Publications, 2006): A detailed account of Ovshinsky’s quest to make hydrogen practical as a transportation fuel. Eric Spiegel and Neil McArthur, Energy Shift: Game-Changing Options for Fueling the Future (McGraw-Hill, 2009): An overview of the sweeping changes under way in power generation and transportation, and the challenges and opportunities that governments and businesses will face over the next two decades. Stan Ovshinsky’s Facebook page, www.facebook.com/pages/ Stan-Ovshinsky/320093792727 For more on this topic, see the s+b website at: www.strategy-business.com/energy.

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thought leader

The Thought Leader Interview: Didier Lombard The chairman of the board of France Télécom says telecommunications companies must outpace — or be inundated by — the coming explosion in data traffic.

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A

formidable transformation is taking place in the global telecommunications industry. Over the past few years, the operating margins for many telecom companies have shrunk rapidly, as mobile phone service has overtaken fixed-line service, data traffic has outpaced voice traffic, and the old bread-and-butter phone service has become commoditized. Meanwhile, global demand for data services has increased massively, especially with the emergence of video streaming and downloading on the Internet.

This “data tsunami,” as it’s been called, has grown in intensity with the proliferation of data-enabled smartphones. Cisco Systems Inc. estimates that the total volume of data circulating on mobile networks will grow from 0.09 exabytes (97 million gigabytes) per month in 2009 to 3.6 exabytes (3.9 billion gigabytes) in 2014, roughly doubling every year. Even with new technologies for compressing data, the ability of mobile networks to absorb this traffic remains limited. The net result is a major challenge for telecommuni-

cations companies: finding the capital to build all the networks needed to handle this data while still maintaining the loyalty of customers and the goodwill of regulators, and fending off new Internet-based competitors such as Google, Skype, and Facebook. In Europe, one major telecommunications company facing this challenge is France Télécom SA. Known for its Orange brand, it offers voice, Internet, and mobile services. France Télécom is the third-largest European telco (after Deutsche Telekom AG and Telefónica SA), with about 193 million customers worldwide in 2010 and approximately 180,000 employees (roughly half of them located outside France). Its annual revenues are about US$80 billion, of which it invests more than 10 percent in building new infrastructure. Didier Lombard, the chairman of France Télécom since 2005 (and CEO from 2005 to 2010), has championed a vision that might have seemed unthinkable several years ago: Large, incumbent telephone companies as pioneers of digital enterprise. In his years leading the company, he has stepped up innovation in services and content de-

Photograph by Stephan Gladieu

by Art Kleiner and Pierre Péladeau

velopment, expanded service into eastern Europe and Africa, and cre­ ated Orange Labs, a global network of R&D facilities. These all repre­ sented dramatic moves for a com­ pany that had been a governmentcontrolled organization before 1998, and part of the French postal, tele­ phone, and telegraph ministry be­ fore 1990. To some observers, they were also unusual moves because Lom­ bard had spent most of his career in the French government. Having

pay-for-access Internet services, in­ cluding various forms of video on demand; it will also mean new ap­ plications in healthcare, financial services, and many other industries as digital telecommunications inun­ date them. It will almost certainly mean new types of partnerships with other technology companies; for example, France Télécom recent­ ly began selling the Apple iPad in its retail stores. Lombard’s stance has landed him in the middle of the debate over

“All sectors that use telecom will have to transform. Some have already been drastically affected: video, music, and publishing.” Net neutrality — the idea that Inter­ net access providers must offer equal access to all sites, without favoring them on the basis of either the type of content or the business relation­ ship. Although he acknowledges the importance of open access for Inter­ net users, he is also a leading propo­ nent of value-added businesses, which he says are needed to generate revenues to pay for the continuing rollout of new infrastructure. In 2008, his book The Second Life of Networks (coauthored with Georges Nahon and Gabriel Sidhom) was published by Odile Jacob, in French and English editions. Lombard met with strategy+business in New York last autumn. S+B: What are the essential issues confronting information and communications companies right now? LOMBARD: I think we are living

through an exceptional period of

S+B: Is this shift really that much more drastic than the changes we’ve already seen over the past decade? LOMBARD: Each time in the past,

the change was focused on one sec­ tor, it took a reasonably long time to shift, and it was not as disturbing as it is now. This time, the transition will be very rapid. This time, in­ cumbent telco players will have to adapt, because the new players are not waiting. And the transformation of the business model will be painful for many of us. The old business principles will no longer work in the new context. Many people tend to consider the future as a continuation of the past. They believe, for example, that the new generation of networks will simply bring more capacity online

conversation thought leader

started in 1967 at France Télécom as an engineer, he moved in 1988 to the French Ministry of Research and Technology, where he became scientific and technical director. In 1991, he took a post as managing di­ rector of industrial strategy at the Ministry of the Economy, Finance, and Industry; in 1999, he became the founding chair of the French Agency for International Invest­ ments, making him in effect the government’s chief ambassador to potential investors in his country. He rejoined France Télécom as a se­ nior vice president in 2003, became CEO and chairman of the board in 2005, and was succeeded by Sté­ phane Richard as CEO in 2010. (Lombard remains chairman.) Lombard, who is 68, believes that telecommunications companies will have to cope with the data tsu­ nami by finding new business mod­ els. In some cases, this will mean

economic transition, and we are ex­ actly in the year zero of this new era. The pivotal moment is not last year or next year; it’s right now. The ex­ plosion of data on the networks, and especially in mobile applications, has multiplied by 200 to 300 per­ cent since 2009. In that time, most people have begun to use their mo­ bile phones and the Internet in a completely different way in their day-to-day life. Previously, voice communica­ tions represented the majority of telecom usage. Data use was mar­ ginal. Now, some telcos — in Asia, for instance — have seen the pro­ portion of voice drop to 20 percent of the traffic. The rest is data. All sectors that use telecommunica­ tions, which in fact means all eco­ nomic sectors, will have to trans­ form their business model. Some have already been drastically affect­ ed: for example, music, video, and publishing. But this change will be more widespread.

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Pierre Péladeau [email protected] is a Booz & Company partner based in Paris. He specializes in communications and technology business development.

within each of the existing infrastructures. But in fact, the impact of this explosion is not only felt in the amount of high-speed data traffic. It is also causing a rapid, permanent change in the ways people are interconnected through broadband integrated networks. Transforming Every Sector S+B: How does this affect telecom providers like Orange [France Télécom’s brand]? LOMBARD: In two ways. First, it

conversation thought leader 74

forces us to expand capacity. At Christmastime 2008, there was a major crash in networks in New York and London, because the traffic had increased so quickly. We had no problem at Orange, because we had anticipated that we would need the capacity and we had invested in it. But the explosion in demand will continue, and we have to take care of it. The main part of the investment to serve mobile phones, paradoxically, must be in the fixed network. Even the mobile networks with the best coverage require capacity behind their transmitters, or they fail. Some countries have installed 3G networks where custom-

ers can’t reach any servers, because there is too little capacity on the trunk lines. We will need a huge investment in fiber optics. We also probably have to accelerate our “long-term evolution” [LTE] and fourth-generation mobile service rollout. [LTE/4G is a mobile data platform that will be launched in many countries in 2011.] The second impact is in customer behavior. Customers will use their mobiles almost exactly as they use personal computers, and in other ways that change the business model for a lot of activities. For example, when they read books on their iPads, that puts pressure on publishers to change their business models. France Télécom has to get involved in more aspects of the media business, or else we become merely the provider of capacity on our channels — a utility company. And that doesn’t give us enough margin to build out the new-generation networks. The best response is to adapt: to try to understand the situation, invent new business models, and create new activities. That’s why the traditional media providers are a little bit afraid. The publishing people are transferring their activity to elec-

tronic books, but they’re not sure they can continue to conduct the same kind of business. The same is true for motion picture producers. And companies in our industry as well. My outlook on this is optimistic. If you take steps now to move, you can be very successful. S+B: What other sectors besides media will have to transform? LOMBARD: Healthcare is one.

Healthcare expenses are increasing every year because the population is living longer. But the insurance system, which in our country is managed by the public sector, can no longer afford to pay all the healthcare costs of elderly people. Developing powerful IT systems for medical information saves a lot of expense and leads to better healthcare. For the time being, people think this healthcare IT business is marginal. But it will not be marginal forever. In the end, telecom revenues from healthcare will be higher than those from video. Having Internet access to government services and documents is another example. Still another is retail. Already, the success of electronic commerce is very high. In Europe, more than 10 percent of the turn-

strategy+business issue 62

Art Kleiner kleiner_art@ strategy-business.com is the editor-in-chief of strategy+business and the author of The Age of Heretics (2nd ed., Jossey-Bass, 2008).

rope, the growth of connected TV services will explode in 2011. In this world of abundance, someone will create a search engine applicable to videos, and that will change everything further — and create a very good situation for the company that does it. A Balanced Business Model S+B: How do you pay for the bandwidth investment? LOMBARD: The costs, for the terri-

over of goods and services is realized through e-commerce, and almost 5 percent of all the purchases made by French households take place on the Internet. S+B: The majority of the new traffic is video, isn’t it? LOMBARD: So far, yes, but not just

S+B: How does that square with the demand for Net neutrality? LOMBARD: The basic issue is not

Net neutrality, but making possible the accommodation of all the signals that are needed in the future world. To do that, we must restructure our business model. Of course we are ready to guarantee equal access to all the Internet players on our networks; we have no intention of filtering anybody. At the same time, we have to find a way to finance everything. And this means that our approach has to be balanced. We cannot make everything free of charge, and stay on the old model with free data. And I think a lot of people are starting to understand that. S+B: What is your view of the business model of a telecom operator down the line? After a few years, how will the distinction between managed services and the open Internet be handled? LOMBARD: Of course, we are at the

very beginning of the examination of this new equilibrium. We know we will need to draw revenues from the broadband connection itself, and we will need to participate in some of the services that are delivered on it, in partnership with the content providers. In the end, we will need a revenue model that balances what we get from the open Internet with what we get from more managed services. Our major asset right now is our link to the customers. Orange

conversation thought leader

the type of video we’ve carried in the past on cable TV. Two or three years ago, the quality and accessibility of amateur-produced videos changed; they are now downloaded or viewed as much as professional videos. This was observed first in California, but now it’s valid almost everywhere. People video their lives and broadcast the videos to their friends. Meanwhile, they have access to all the professional videos produced worldwide — and to college courses, concerts, sports events, and everything else. The demand for this is growing exponentially, and the interconnections among mobile devices, TV screens, and computers introduce more and more possibilities. In Shanghai, for example, a customer can have one service, delivered by the telcos, with videos plus games plus cable channels plus the Internet, all on the same screen, with a flexible way to navigate among them. In Eu-

tories we serve, are more than € 3 billion [$4 billion] annually. And of course we need to find the appropriate revenues to fund it. If we don’t invest, the quality will decline. In the past, telecom economics were based on voice. The subscriber paid for each hour of voice traffic, and the data traffic — including the Internet and video — was considered marginal. We offered it more or less free of charge. Now it represents a much larger percentage of our total traffic. One of the problems we have with Skype or Google Voice is that it is billed as free, but the subsidy is artificial. We cannot go on with this version when voice becomes a minority of the traffic and data costs and usage are no longer marginal. We have to reshape the tariff; data cannot continue to be marginal in price. The problem is of course to persuade consumers to accept this change. One move toward a solution was made in mid-2010 with the Google/Verizon joint venture agreement [to offer premium content and services over a separate managed network]. For Google, this is a fundamental step: It recognizes that in using a majority of the capacity, the company has to participate in the cost. If we follow this direction, the

problem may be solved — provided that we can manage the rules precisely. In the end, there will be both managed services and an open Internet, and we will have to take care that everyone finds what they are looking for in this context.

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The Role of Government S+B: Talk a bit about the trajectory of your own career, from the French government to leading France Télécom, and now being a spokesman for the evolution of the digital world. LOMBARD: I have had a very fortu-

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nate career, with a rich variety of experiences over the years. I was very lucky to start out as a young engineer at the France Télécom labs, which was one of the top three laboratories in the world (along with Bell Labs in the U.S. and NTT Labs in Japan) in my field. There, I was involved in some of the major technology changes in the telecom industry — such as satellite communications, fiber optics, and the Global System for Mobile Communications (GSM). When I moved to the French Ministry of Research and Technology in the mid-1980s, I became engaged with many other industries, such as health, transportation, and energy. Today, these same industries are confronting the same issues that we face in telecom; they all have to integrate into the new Internet world. Then in 1998, through another posting as the ambassador in charge of foreign investment, I had a great opportunity to experience the economic and industrial stakes of national commercial policy at

an international level. In 2002, when Thierry Breton was appointed CEO of France Télécom, he asked me to help him build the strategy of the company. So after a 20-year absence, I returned to the company where I had started my career. When Thierry Breton left the

LOMBARD: Yes. Even in France,

there is always a debate about the interference of the state with the economy. My own view is that the government can make many legitimate moves to help the economy, but it cannot substitute its planning for market choices.

“Our major asset is our link to the customers. They want ease of use, protection against irritants, trust, and access to the entire Internet.” company to become the French minister of finance, in 2005, I succeeded him as CEO of France Télécom for the next four years. S+B: What did you try to accomplish during that time? LOMBARD: It was a fascinating peri-

od because I understood how much our business was changing. Previously, we had separate businesses for fixed lines, mobile phones, and the Internet. I had to persuade our managers to integrate them. We also set out to increase the number of subscribers for France Télécom, and they went up by 50 million. Then, in 2010, we separated the functions of CEO and chairman. Stéphane Richard is now the CEO and, as chairman, I am no longer involved in day-to-day operations but can focus on the company’s major strategic issues. S+B: As head of industrial affairs, you must have learned a great deal about the role of the state in governing the private sector. Does that influence your views on regulation and digitization now?

When government works with entrepreneurs who have skills, ability, and a reasonable goal, but who need some help, it works. A good example is what the French government did with STMicroelectronics [a French–Italian semiconductor and computer component manufacturer headquartered in Geneva]. In the 1990s, I was persuaded that if we didn’t help this company, it would disappear, and there would be no more microelectronics industry in Europe. Therefore we decided to recapitalize STM, to help it fund R&D and so forth, and the company survived. Today, it is the fifth-largest microelectronics company worldwide. Not every case worked as well, but this showed us that intervention can be effective, as long as it is in line with the market. In the telecommunications sector, the best model of industrial policy is China. China has systematically covered the steps for establishing a new economy, including subsidizing R&D and universities. Now it is subsidizing large companies to win market share in Africa

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has more than 190 million customers worldwide. We know them, and they trust us because we don’t disclose information about them, and we can block most types of irritants and cybercrime. If we don’t give our customers everything they want — ease of use, protection against irritants, trust, and access to the entire Internet — they will be tempted to move to other platforms.

and Europe. In the past, China produced low-cost products. Now, the best equipment available on the market — not always, but most of the time — is Chinese. That type of systematic industrial policy is the way to approach a changing infrastructure technology.

have been forbidden to merge different types of metals. I think we will go through a crisis of some sort before we find a solution to this. Meanwhile, telecommunications companies will innovate as much as they can within the parameters of the regulations.

S+B: What would be the optimal form of regulation for the telecom and media industries? LOMBARD: It would be oriented to

The Innovative Telco

ple Play, which is our response to convergence. During the past 15 years, we had to split up the services we delivered — between the fixed line, Internet, and the various mobile lines. It was a nightmare for customers; they pay different rates and have different contracts for each service. In France, regulation did not allow us to link these services, because that was perceived as an unfair competitive advantage. Now we are on our way to consolidating all these services. Soon, our customers will get packages that incorporate everything in a flexible way. They will carry their Internet access from office to home to a house they’re visiting, and to pay for all their family mobile and landline calls with a single arrangement. It will be simpler and cheaper for them, and for us it will be better, because we can optimize the network. Any voice call may travel on mobile lines or conventional landlines; sometimes on Wi-Fi; and sometimes on some more advanced system that we haven’t yet established. This in itself will solve much of our capacity problem, because in each situation people will use the most efficient system. The present situation, where people use mo-

S+B: What other innovations are significant? LOMBARD: We introduced our own

content with our sports channel. Of course, this is expensive, but we can provide a lot of new services. For example, if customers want to focus on some part of a game or to rewind, they can do it themselves. We also offer a channel broadcast in 3-D. We have not publicized our business-to-business service, but we have targeted big corporations more aggressively than the individual consumer. Voice over IP was operational with all our big networks five years ago. Videoconferencing is in our package for corporations. We have made many efforts in the health sector. Innovation here is complex, because there cannot be any failure in the system. Very simple systems must be used by medical people, who are not necessarily technicians. There must be a lot of R&D behind this. We have worked with a manufacturer of terminals to introduce electronic terminals near hospital beds, on which patients can watch TV, but the most important part is the data it shows about the patient: medical imaging, the health records, and so on. The medical staff don’t have to go to another part

conversation thought leader

global competition and rapid adaptation. Most regulation, by its nature, is old-fashioned, because it takes years to move from the initial discussions to defining the rules to hiring the commissioners who will enforce it. Then, when major changes like digitization and convergence occur, the regulations don’t take them into account. For example, in Europe we have 27 national regulators, plus one for the European Union, and the rules have been established by, let’s say, old-world thinking. Regulations governing television, publishing, and copyright are often designed to protect the local media players. In general, they’re focused on separate markets. But the new digital system has no national borders; the Internet is worldwide. No country can protect its media from global change and competition. Google, Apple, and Facebook will all be global media players. Facebook has 500 million subscribers, which is much larger than our subscriber base. Regulators have not incorporated this reality into the design of their regime. I sometimes think that if we had had our current regulatory regime at the beginning of the world, we would have a perfect market in flint. But we’d never have gotten to the Bronze Age, because it would

S+B: What kinds of innovations do you see as critical for telecom companies to experiment with? LOMBARD: Let’s start with Quadru-

bile phones at home, is stupid. It uses up the wireless phone frequencies, while the fixed line remains empty. If you want to optimize, you would rather be flexible, connecting through Wi-Fi and packet switching [Internet protocols], where the quality is better.

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activity there, with the mobile telephone, is widely recognized. But there will also be a rapid second wave. As soon as you put up a 3G network, people can use the Internet. And the African population is very smart at this.

S+B: What role will France Télécom play in providing more fundamental Internet B2B services? Will you be competing with Google and Microsoft on this? LOMBARD: We are proposing cloud

S+B: They’re ahead in mobile banking, for example. LOMBARD: We have installed mo-

computing services, which we developed with another company on our network for the big corporations.

bile banking in the Ivory Coast, Egypt, Kenya, Uganda, and many other countries — both French- and

In the future, “any voice call may travel on mobile lines, on conventional landlines, or on Wi-Fi.” This puts us already in competition with the companies you mentioned. Yet the sort of computing proposed by all the different players is very different. We have tried first to understand the basic needs of our big corporate customers, to create very simple services that clearly improve day-to-day operations. We are not going after sophisticated systems at the beginning because the leading customers are afraid of our expanding too quickly in this area.

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English-speaking. We will continue our expansion in Africa because the market’s growth rate is high. And we are participating in laying digital cables on both sides of the African continent. This doesn’t mean we will ignore opportunities in other parts of the world, but from an operational point of view, it’s better to have our territories near one another, because we can introduce local roaming and keep costs down. After the Transition

S+B: A number of telecom companies are seeking to expand their mobile footprint. In the past, you declared that Africa is a priority. Where do you see the greatest global opportunities today? LOMBARD: We are currently present

in western and eastern Europe, Africa, and the Middle East. Our expansion, for the time being, will be mainly in Africa, because this continent will be a big player in the new digital economy. The first wave of

S+B: There has been a great deal of consolidation in the telecom industry. Do you see more major mergers and acquisitions coming? LOMBARD: Right now, there is not

much opportunity for large-scale consolidation. And as always, big consolidation is a big challenge because the synergies must be realized in a very short term. We have been very prudent. We have developed partnerships

with other companies to share networks, develop parts of the Internet, and rationalize day-to-day operations. It’s a way to gain some of the advantages of restructuring while remaining efficient. S+B: How do you manage the shifting partnerships and alliances? LOMBARD: Everybody in this indus-

try is working cooperatively, with a genuine attitude of partnership. Nobody wants to build a cathedral all alone, because if you try to do everything yourself, it will take too long. We cooperate with many players, and we disclose all alliances. With each, sometimes we compete and sometimes we collaborate. For example, we use Google’s search engine on our network, and both companies make a lot of money from it. At the same time, we compete with some of their services. S+B: Say something about the future of your company. Do you think that France Télécom is ready for the challenges you have described? LOMBARD: France Télécom has al-

ready demonstrated its capability to anticipate and respond to change — for example, in facing market deregulation in France, in our precursory move to build a convergent operations model, and in anticipating the disruption of voice over the Internet. I am highly confident in the capacity of our company to respond to future challenges in the same way. + Reprint No. 11112

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of the hospital to look at the data. It took two years to develop and stabilize this system, incorporating experience from early users.

knowledge review

Getting beyond Green: Envisioning an Industrial Reboot Some executives and scientists are calling for a radical rethinking of chemicals, cars, farms, and our future.

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peaking in Boston in May 2010, Fisk Johnson, the fifth-generation family member to lead S.C. Johnson & Son Inc., the Wisconsin-based maker of consumer goods such as Pledge and Ziploc, urged his business colleagues to get off the incrementalist path. “We need disruptive progress,” GreenBiz.com reports Johnson saying. “We as businesses squeeze a little bit of waste here, reduce energy use there. But are we really making fast enough progress to head off the resource crunch?”

The simple answer, of course, is no. “Even if every company on earth emulated the practices of the best companies,” said Johnson, “it would not be enough.” He should know. Johnson, a Cornell University–trained engineer, led his company to a Presi­ dential Green Chemistry Award for Greenlist, a trademarked process that the company developed to identify and evaluate the environmental footprints of its products and processes. (See www.scjohnson.com/en/ commitment/focus-on/greener-

products/greenlist.) The company’s engineers and designers use this process to explore the trade-offs involved in removing dangerous ingredients from its products. For example, the company removed polyvinylidene chloride (PVDC) from Saran Wrap — a move that health and environmental activists applauded, but one that rendered the product less useful. Without PVDC, the plastic wrap is less clingy and less effective at containing moisture and odors. “Today,” Johnson told the packed ballroom of executives in Boston, “this product, which was around from my childhood, is almost gone. We still feel this is the right decision. However, there are [only] so many of those decisions you can make before you put yourself out of business.” Smart businesspeople like Fisk Johnson as well as environmentalists are converging on one new truth: The degree of change delivered by incremental solutions is not enough to address some critical environmental problems — including toxins in our soil, water, and air; climate change; and our dependence on fossil fuels. What’s needed is transformational change that enables leaps

Illustration by Heads of State

by Nancy A. Nichols

in policy, procedure, and the very way we do business — the kind of change necessary to move from business decisions that are environmentally correct, but that devastate product lines and profits, to decisions that deliver business value, yet don’t damage the environment. In order to make progress on several critical environmental fronts, a radical rethinking of the basic building blocks of business is required, as is an entirely pragmatic eco-redesign of many products. Perhaps a sea change in the way we think about business and the environment is already under way. A

chemicals have traditionally been judged almost solely on their cost and performance, both in the manufacturing process and in the finished product or service. This has led to a host of environmental and health problems, including lead in paint, asbestos in homes and schools, and bisphenol A in baby bottles and water bottles. “Of the 30,000 or so chemicals currently in common commercial use, the environmental and health impacts of only about 4 percent are routinely monitored,” writes Elizabeth Grossman in her powerful book, Chasing Molecules: Poisonous

Many chemicals persist in nature even though their usefulness — as sealants, waterproofers, flame retardants, and so on — is over.

Nontoxic Chemistry

It seems as though it should be common practice for companies to analyze their products and processes to determine their potential to harm the environment or human health. Yet only in the last few decades have the majority of companies begun to think about these impacts. For the most part, materials and

Products, Human Health, and the Promise of Green Chemistry. “Some 75 percent have not been studied for such impacts at all.” Nor were these chemicals designed with any thought to whether they might accumulate in human blood and tissues — a now common occurrence. In her book, Grossman delivers an engaging and detailed history of the use and effects of chemicals as we most often encounter them: in the form of pollution that has spread to a wide variety of places, from mother’s milk in most countries to the farthest reaches of the Arctic. “If you are getting a Ph.D. in chemistry and you are going to make a life creating new products, you are never required to take a class in environmental science or

conversation knowledge review

number of books have made the welcome shift from the endless rehashing of environmental threats to a new set of visionary solutions. They add up to a sort of industrial reboot that ambitiously promises to solve our most pressing environmental problems with a new set of innovations, reform even the most basic disciplines (such as chemistry), and ignite whole new industries.

toxicology,” Grossman told me recently. Even as scientists continue to document the many adverse effects of common chemicals, the American Chemical Society, which accredits academic chemistry programs in the United States, has no requirement that chemists be educated regarding chemicals’ environmental and health effects. The green chemistry movement is out to change that. As Grossman relates it, green chemistry got its start when John Warner, a chemist at Polaroid, became interested in the possible dangers of chemical contaminants after his second child was born with a fatal birth defect. He realized that he had synthesized more than 2,500 chemicals yet had never had a class in toxicology. We have been like “monkeys typing Shakespeare,” he said. With a colleague from the U.S. Environmental Protection Agency, Paul Anastas, Warner set out with a mission: Chemicals should be safe when they are designed; no waiting until they are in products and landfills to discover their dangers. He went on to found the nation’s first doctoral program in green chemistry at the University of Massachusetts at Lowell. Many chemicals persist in nature even though their usefulness — as sealants, waterproofers, flame retardants, and so on — is over. One of the goals of green chemistry is to create molecules that break apart easily and then recombine, like the most common molecules in nature. In other words, green chemists seek to create molecules that do not endure beyond their intended use. As Warner told Grossman, “In nature, weak molecular bonds — bonds that come together and apart again, that assemble and reassemble,

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and are reversible — dominate…. If we can learn what they do in nature, we should be able to make better, less toxic products.” In searching for a better alternative, scientists and businesspeople are looking to nature — a concept called biomimicry. Biomimicry was introduced to the broader reading audience in a seminal book of the same name published in 1997 by Janine Benyus. (See “The Thought Leader Interview: Janine Benyus,” by Amy Bernstein, s+b, Autumn 2006.) But the book that most businesspeople will remember is Natural Capitalism: Creating the Next Industrial Revolution, by Paul Hawken, Amory Lovins, and L. Hunter Lovins (Little, Brown and Co., 1999). One of the most relevant ideas in the book is simple to state, but extremely difficult to execute: Make things the way nature does, in closed-loop systems that minimize or eliminate waste and toxicity. As Grossman so convincingly explains in Chasing Molecules, green chemistry involves changing the established mind-set in many companies so that what goes into products won’t have to be scooped out of lakes and landfills later. It involves avoiding potentially dangerous chemicals

so they don’t ever get into products in the first place. For example, Grossman tells the story of the winner of the 2007 Presidential Green Chemistry Award, Kaichang Li, a research scientist at Oregon State University, who developed a soybased adhesive that is replacing the potentially hazardous formaldehyde-based adhesive used in plywood and veneer products. The new safer alternative, called PureBond, was developed to mimic the workings of the liquid protein that mussels use to attach themselves to rocks. It costs less to make than formaldehyde-based adhesive. Farming Up

Another example of biomimicry is the vertical farm, in which crops are grown in a water and nutrient mix (hydroponics) or in a nutrientladen mist (aeroponics) in specially constructed, sunlight-maximizing high-rise buildings. As proposed by Columbia University professor Dickson Despommier, a vertical farm would behave like a functional ecosystem in which waste is recycled and the water used is recaptured by dehumidification and recycled in a closed-loop system. Despommier estimates that by

the year 2050, 80 percent of the global population will live in cities. But climate change and a dearth of farmland could make it increasingly difficult to grow enough food for urban dwellers, and the environmental and financial costs of shipping food great distances are already apparent. The vertical farm, which could produce the equivalent of as many as 20 traditional soil-based acres per floor depending on the crop, could be a breakthrough solution for providing food to ever-growing and everdenser urban populations. (Designs for a prototypical vertical farm can be seen at www.verticalfarm.com.) In his book The Vertical Farm: Feeding Ourselves and the World in the 21st Century, Despommier lists a host of advantages to growing food in city high-rises. Crops would be protected from weather and the vagaries of climate change. The use of fossil fuels would be reduced. The agricultural runoff of pesticides, herbicides, and fertilizers would be eliminated, and the land now used for farming and other purposes could be used less intensively, allowing the soil and nearby rivers to recuperate. Indoor farming lies at the root of a concept for a chic new food

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Nancy A. Nichols [email protected] is a journalist, editor, and former broadcaster whose writing has appeared in the Chicago Tribune, Harvard Business Review, and the Nation. She is the author of Lake Effect: Two Sisters and a Town’s Toxic Legacy (Island Press/ Shearwater Books, 2008).

Electric Cars, Smart Grids

Consider the paradigmatic car. Reinventing the Automobile: Personal Urban Mobility for the 21st Century, by the late William J. Mitchell, an MIT professor, and Christopher E. Borroni-Bird and Lawrence D. Burns, two General Motors executives, argues that the 120-year-old conceptual model of the automobile is no longer tenable. Emissions, congestion, rising gas prices, and prob-

able fuel shortages are all problems that can be traced back to cars as they are currently conceived. (See “The Thought Leader Interview: Lawrence Burns,” by Scott Corwin and Rob Norton, s+b, Autumn 2010.) The automobile, as the authors point out, was created in the vein of

should be left with the impression that an intelligent electric-drive vehicle is a dull but worthy ‘econobox.’” To that end, they propose entirely new designs for vehicles. The driver may enter from the front, control the motion with a joystick, and slide the vehicle sideways to park it like a book on a shelf.

“Future vehicles must have the look and feel of a new, desirable product. Nobody thinks of an iPod as a shrunken stereo system.” an even older tradition — the horse and carriage. There is no law dictating that the engine be in the front of the car; the fact that horses pulled carriages was simply too strong an image for early inventors to ignore. They also calculated their new invention’s performance in terms of “horse power.” In this thoughtful and beautifully designed book, the authors make a compelling case for a new approach to fitting automobiles into society: not as stand-alone cars, but as “personal urban mobility systems” that are fueled by electricity and hydrogen, and that function as nodes in a connected transportation network in which they communicate with one another wirelessly, thereby avoiding crashes and traffic jams. Moreover, the authors assert that these new vehicles must appear completely different from the car. “Future vehicles must have the look and feel of a new and desirable kind of product,” they write. “Nobody thinks of an iPod as a shrunken home stereo system, and nobody

The success of their design, however, is based on something else entirely: a new grid to distribute the electricity needed to power such vehicles. “During the twentieth century, industrialized nations built two kinds of massive but disconnected energy conversion systems — gasoline-powered light vehicle fleets and electric grids,” write the authors. “But that situation is about to change. There is, now, an emerging convergence of electric-drive vehicle and smart-grid technologies. They are maturing within the same time frame; each will be beneficial to the efficient operation of the other; each will facilitate the large-scale deployment of the other; and they are likely to be increasingly closely integrated with one another.” In his exceptionally clear and easy-to-understand book, Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities, Peter Fox-Penner, the former chairman of the Cambridge, Mass.– based consulting firm the Brattle Group, argues for a new kind of utility grid that can power electric cars,

conversation knowledge review

mart developed as a summer project by a team of graduate students at Singularity University, which was cofounded by futurist Ray Kurzweil. At Denmark’s Nordic Exceptional Trendshop 2010, the students promoted their concept for a selfserve grocery store/indoor farm/café, in which food is grown on shelves that line the wall and fish are farmed in a stream that runs underneath the store and is visible beneath a glass floor. If it can get funding, the team plans to collaborate with NASA on robotics, explore genetically modified food, and integrate new advances in LED lighting into the facility. (See http://agropolisfarm.com.) Of course, enticing people to buy and eat food grown indoors will require that it live up to the popular paradigm of healthy food — pastoral farms and harvests rich with color and smell. “Paradigms hold immense sway over our minds,” Amory Lovins, chairman and chief scientist of the Rocky Mountain Institute and coauthor of Natural Capitalism, said in a recent interview in the MIT Sloan Management Review. “We all struggle with this, but as...[Polaroid founder] Edwin Land used to say, ‘People who seem to have had a new idea have often simply stopped having an old idea.’ That’s the hard part.”

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Industrial Reboot Resources Works mentioned in this review.

Elizabeth Grossman, Chasing Molecules: Poisonous Products, Human Health, and the Promise of Green Chemistry (Island Press/Shearwater Books, 2009) Dickson Despommier, The Vertical Farm: Feeding Ourselves and the World in the 21st Century (Thomas Dunne Books, 2010) William J. Mitchell, Christopher E. Borroni-Bird, and Lawrence D. Burns, Reinventing the Automobile: Personal Urban Mobility for the 21st Century (MIT Press, 2010) Peter Fox-Penner, Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities (Island Press, 2010) Vinnie Mirchandani, The New Polymath: Profiles in Compound-technology Innovations (Wiley, 2010) Matthew E. Kahn, Climatopolis: How Our Cities Will Thrive in a Hotter Future (Basic Books, 2010)

finding a business model that promotes much more efficiency,” he writes, “...together will define the future of power.” The transition has already begun. General Electric recently teamed up with a group of venture capitalists and offered US$200 million in startup money for the best ideas for transforming the grid. (See http://challenge.ecomagination .com/ideas.) When the contest closed on September 30, 2010, it had attracted more than 3,500 ideas from around the globe and registered almost 74,000 voters. General Electric and its partners will decide who gets the money, but a startup company named Solar Roadways won the popular vote for its concept of roads that recharge electric vehicles as they drive. Another top contender is Nextek Power Systems, whose popularity may be

due in part to an engaging promotional video that makes a case for direct-current grids as a way to connect renewable energy sources and high-tech devices without as much wasted power. (See it at http://vimeo .com/15004808.) Progress and Profits

The New Polymath: Profiles in Compound-technology Innovations, by Vinnie Mirchandani, a blogger and former Gartner analyst, is a book that seems to be about everything and nothing at the same time. In it, Mirchandani uses examples from dozens of companies to argue that we will soon be experiencing a renaissance of new technologies and sustainability that will meld together and yield new ways of living and working. Although the book lacks a compelling logical order and it is often hard to understand how the dif-

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conversation knowledge review 84

among many other things. To describe the workings of an electric grid, Fox-Penner uses the analogy of a system of linked ponds in which all the ponds must be kept at the same level despite gushing waterfalls, heavy rains, and intermittent and unexpected water drawdowns. In the grid, electrical power is the water and digital controls run the system that keeps the “ponds” in equilibrium, avoiding the kind of service disruptions that occurred in California in 2000–01. In most countries, the electric system is based on large, centralized sources of power generation. FoxPenner envisions a system with many smaller sources of power and decentralized control. This new electric grid would more closely monitor supply and demand, and set flexible pricing based on how much power is being used at any one time. In addition, digital controls would allow homes and businesses to produce energy at certain hours and consume power at other times. The grid would also monitor energy use and adjust pricing to curtail demand in an effort to limit carbon emissions. How the changeover to this new grid will occur, who will fund the massive investment necessary, and which companies will benefit are major questions in this scenario. Fox-Penner, who is both an engineer and an economist, does a good job of laying out many possible options and obstacles. “Creating a decentralized control paradigm, retooling the system for low-carbon supplies, and

For instance, when he examines the Great Chicago Fire of 1871, he sees the development and growth that occurred in its wake and how the fire eventually made the city stronger. Those trained in economics will see that he has been influenced by Joseph Schumpeter’s notion of creative destruction. Although he acknowledges that capitalism and global industrial expansion have contributed to climate change, Kahn holds firm in his belief that it is also capitalism that will save us. He reminds us that a key theme in modern economics is that our scarcest resource is not natural capital, but human ingenuity of the kind that fueled the original Renaissance — think Leonardo da Vinci and Galileo. With the billions of educated, ambitious individuals in the workforce today, Kahn reasons, the best adaptations and innovations ought to be pretty good. As he says, “A small cadre of forward-looking entrepreneurs will be ready to get rich selling the next generation of products that will help us adapt.” He’s probably right. The entrepreneurs and companies that undertake the industrial reboot will participate in the creation of new industries and the rebuilding of the infrastructure on which we all depend. In the end, profits remain quite a compelling reason to stave off some of our worst environmental nightmares. + Reprint No. 11113

conversation knowledge review

ferent stories are connected, it does get one thing right: Everything is going to have to change at once if this renaissance is to be realized. The same is true for a successful industrial reboot. The electric grid will have to change to support personal mobility units. These vehicles will need to be built without that “new car” smell — which some contend is emitted by chemicals that are harmful to our health — possibly using the kinds of green chemistry that Grossman tells us about in her book. We will have to change our notion of how and where food is grown, and that will require new notions about how we power our cities and use and reuse water, among many other things. If the comprehensive interconnection of all this seems too daunting, consider Climatopolis: How Our Cities Will Thrive in a Hotter Future, by Matthew E. Kahn, an urban and environmental economist at UCLA. This book, which looks at how cities will cope with climate change, is remarkable for its sheer pragmatic optimism. (For a practical guide to “green city” opportunities, see “Reinventing the City to Combat Climate Change,” by Nick Pennell, Sartaz Ahmed, and Stefan Henningsson, s+b, Autumn 2010.) Those who follow the news have already had their fill of stories about the worst possible environmental outcomes. Kahn readily admits the potential dangers we face, but he stands out both for his commonsense approach to looking at the problems and for his hopefulness.

books in brief

On Grabbing Power Plus: management basics, the “drive theory” of leadership, and your brain on the Internet.

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Power: Why Some People Have It — and Others Don’t

by Jeffrey Pfeffer HarperBusiness, 2010 Power is a prerequisite of management, but business schools mostly subscribe to the belief that knowledge should be the only form of power. As a result, other, more primitive types of power are rarely taught explicitly. Jeffrey Pfeffer’s popular elective course “The Paths to Power” at Stanford University’s Graduate

School of Business is a notable exception to the rule. And in Power: Why Some People Have It — and Others Don’t, the Thomas D. Dee II Professor of Organizational Behavior offers a look at how he prepares MBAs to get and use power. Pfeffer’s opening proposition is that although we might wish otherwise, the world is an unfair, unjust place, where raw power trumps performance, self-promoters get rewarded, and most people look out for number one. If that’s the case, the author argues, aspiring manag-

ers should get over their qualms about being seen as manipulative, learn the principles of power, and exercise them in the pursuit of their personal advancement. In his view, much of the existing leadership literature is unhelpful in this regard, because it deals with what leaders ought to do rather than what they actually do. In 13 chapters, Pfeffer lays out in exemplary fashion the steps to obtaining and practicing power, buttressed by sound management research. He demonstrates the weak link between performance and job outcomes, and their loose correlation with intelligence. He shows that flattery is an effective strategy for gaining influence and cites examples of those who have used it constantly to advance their careers. Accumulating power takes will, in the form of ambition, energy, and focus, and skill, in the form of self-knowledge, confidence, empathy, and the ability to persist through conflict, according to Pfeffer. He cites President Barack Obama’s former chief of staff, Rahm Emanuel, as an example of someone having this final skill. Emanuel’s take-noprisoners style and volcanic tirades effectively intimidated opponents

Illustration by Ross MacDonald

by David K. Hurst

and advanced his agenda. Pfeffer also shows why managers must use care in choosing the functions in which they work, ensuring that they are critical to the organization at that time. No power

one chapter is devoted to the personal costs associated with the pursuit of power, including a short section on its addictive nature. Compared with its pleasures, however, the downside to the pursuit of

Aspiring managers should learn the principles of power and exercise them in the pursuit of their personal advancement. power sounds rather mild — like an addiction to chocolate. Pfeffer mentions one potential drawback for organizations with overt cultures of power: Their leaders become invested in the status quo and crush creativity and innovation. But he does not fully consider the implications of that pattern for organizations, let alone societies. As for whether the pursuit of power is good for organizations, Pfeffer writes, “I’m not sure you should worry about the effect of your behavior on the organization, because there is lots of data to suggest that organizations don’t care very much about you.” Power is a how-to man­ ual addressed to an elite, and its lack of balance between means and ends exposes all management academics to the risk of being seen as what historian Loren Baritz called “servants of power” — people who offer powerful tools without concern for the ends to

The Wall Street Journal Essential Guide to Management: Lasting Lessons from the Best Leadership Minds of Our Time

by Alan Murray HarperBusiness, 2010 The Wall Street Journal Essential Guide to Management, by WSJ deputy managing editor Alan Murray, is a helpful distillation of current management thought, at least as expressed by senior executives of large American organizations. Positioned at what the author calls “the end of an era,” a conservative politico-economic cycle that began with Thatcherism and Reaganism, the book sets out to be a simple guide to the best management practices. With Murray’s high vantage point and WSJ’s unparalleled access to CEOs, it is also a valid snapshot of what top managers currently say they do, although that is, as Pfeffer points out in Power, not necessarily what they actually do. The book is well laid out in 12 chapters, each with a helpful summary. They cover a broad range

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seeker can flourish in a backwater. The author explains why it helps to be physically located close to the powers that be and gives instructions on how to make better use of resources, build social networks, and so on. It is difficult to disagree with the steps Pfeffer outlines. It seems likely that a manager who followed them and practiced the recom­ mended behaviors would accumulate power within an organization. But what’s missing is any sense of a value system and of the distinctions among different kinds of power. As a result, in his advocacy of realpolitik, Pfeffer comes perilously close to endorsing a kiss-up/kick-down style of management. There are some largely unanswered questions here, such as, What are the costs of top-down, power-based management, and to what ends will power be used? Just

which they are put. In preparing managers to be rulers of hell, this provocative book is an antidote to the Panglossian preaching of so many gurus that counsels them, in effect, to be servants of heaven. If the management academy’s mantra, like that of the medical profession, should be “first, do no harm,” this medication, without more careful prescription, needs a warning label.

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David K. Hurst  [email protected] is a contributing editor of strategy+business. His writing has also appeared in Harvard Business Review, the Financial Times, and other leading business publications. Hurst is the author of Crisis & Renewal: Meeting the Challenge of Organizational Change (Harvard Business School Press, 2002).

strategy — the book is too homogeneous. Although the chapter on strategy features sources as diverse as Sun Tzu, Michael Porter, and Chan Kim and Renée Mauborgne, the idea that strategy is consciously formulated predominates. There is no mention of the importance of learning and emergent strategy. The book has other weaknesses. Relationships among team members are discussed in the either/or language of the marketplace, with recognition and meaning treated rather strangely as the “least costly” forms of currency. One whole chapter is devoted to ethics and cites the prevalence of unethical managerial behavior, ranging from corporate-funded golfing junkets to the backdating of stock options. But Murray largely ignores the systemic causes of such behavior. On the vexing issue of soaring executive pay, he questions market-based justifications and points to a few systemic sources of the problem, but instead of suggesting solutions that address them, he concludes, rather weakly, that executives should exercise some restraint to forestall political action. The book concludes with an ex-

cellent chapter on management as a calling and the importance of continuous learning. Murray contends that one of the “great conceits” of the 20th century is that human behavior and institutions can be understood via the methods of the physical sciences. Yet despite the fin de siècle preface, the implications of this conclusion for neoclassical economics and its management frameworks are not discussed, and the author offers no suggestions as to how management could be better understood using the social sciences. Perhaps it’s a larger conceit that the essentials of management can be addressed from the narrow popular base selected by the author.

Driven to Lead: Good, Bad, and Misguided Leadership

by Paul R. Lawrence Jossey-Bass, 2010 The overly ambitious objective of Driven to Lead: Good, Bad, and Misguided Leadership is no less than the synthesis of the multiple theories of human behavior under the umbrella of what Paul R. Lawrence, the Wallace Brett Donham Professor of Organizational Behavior Emeritus

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of topics: management, leadership, motivation, strategy, execution, teams, change, going global, ethics, managing yourself, and more. The author even devotes a chapter to financial literacy, outlining the basics of the balance sheet, income statement, and cash flow; its inclusion suggests that the book is aimed in part at readers who have not had formal training in business finance. For the most part, the excerpts and paraphrased content cover the North American stalwarts, with Peter Drucker’s work seen as foundational, and academics such as Michael Porter and Clayton Christensen, business practitioners such as Jack Welch and Larry Bossidy, and consultants such as Tom Peters and Jim Collins providing the superstructure. Murray does not always reconcile the differences among his subjects. He makes a distinction between managing and leading and suggests that effective leaders must be humble and willful at the same time. He also invokes both Theory X and Theory Y in the discussion of human motivation. Unfortunately, where contradiction might be most useful —

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at Harvard Business School, calls Renewed Darwinian (RD) theory. Supported by the most recent work on neurophysiology, Lawrence declares that leadership, which is essentially a kind of decision making, is as natural to human beings as flying is to birds. Although the potential for bad leadership is part of the human condition, he argues that given this new perspective, together with tests to detect the potential for bad leadership, we need no longer tolerate such leadership in practice. At the heart of RD theory is Lawrence’s theory of drives, developed with Nitin Nohria (now dean of Harvard Business School) and described in Lawrence and Nohria’s book Driven: How Human Nature Shapes Our Choices (Jossey-Bass, 2002). The theory of drives and the evolutionary brain biology on which it depends form the first of three parts of Lawrence’s new book. It suggests that there are four independent, unconscious drives that constitute the human survival mechanism: the drive to acquire resources, to defend ourselves, to bond with other people, and to make sense of the world around us. We share the first two with all animal species; the last two are unique to humans, and their

some evidence, concludes controversially that their psychopathy is genetic and not subject to significant

Digital technology is expanding our power and control over the world, but in the process it is changing the way our minds work.

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All these drives operate by using emotions as lobbying devices to get the attention of the conscious mind. The resulting impulses are checked, balanced, and ultimately integrated in the region of the brain known as the prefrontal cortex. In the second part of the book, Lawrence begins to explore patterns of leadership drawn from history and the consequences of the existence of so-called free riders, psychopathic people who lack the drive to bond. His examples include political leaders, such as Napoleon and Stalin, and business leaders, such as Jay Gould, the 19th-century robber baron. He calls them “people-w/o-conscience,” and after citing

alteration through nurture and socialization. In leadership positions in the past, he contends, these “immoral” people have wreaked havoc by fulfilling their drives to acquire resources by any means possible and without regard for others. Given what we now know about the structure of the brain, Lawrence argues, we should be able to turn what has been seen as a moral issue into a scientific proposition. From this perspective, he calls out the presence of people-w/o-conscience in positions of leadership as a “massive public health problem.” In the third section of the book, Lawrence continues applying RD theory to big issues, such as how to

design corporate structures that encourage good/moral corporate behavior in the banking sector and the global economy, via widespread reform of societies’ institutions and a world governance system. He even suggests that the effectiveness of business schools could be improved by the teaching of RD theory as a framework for analyzing cases. The book concludes with an urgent appeal for research on RD theory, and especially on his contention that psychopathy is genetic and on the implications that such a discovery might have for public policy. Lawrence is a distinguished management academic, and his provocative book is highly critical of the economic frameworks that have dominated management thinking in recent times. But like many academics, he seems to assume that new ideas can be substituted for old without changing people’s habits — what early-20th-century management writer Mary Parker Follett called their “action tendencies.” She wrote: “As this cannot be done, revolution after revolution fails.” Many readers will be uncomfortable with the speculative second half of the book, which has the feel of a young horse being set by its rider

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presence vastly expands the scope and meaning of the first two by allowing their play in broad contexts.

at some high fences. The risks of damage to both the horse and its rider are considerable, which is a pity given the potential of the horse and the esteem in which its rider is held.

The Shallows: What the Internet Is Doing to Our Brains

by Nicholas G. Carr W.W. Norton, 2010

reading” might become the province of a small elite. Although many commentators agree that something has been lost with the advent of the Web, most argue that its benefits far exceed its drawbacks. Certainly, at least one primary enabler of creativity — the ability to make connections across many fields — is greatly enhanced by the Internet. Carr criticizes millennial visions of the Internet, especially Google’s, for their assumption that our brains function like computers, when they clearly don’t. But his argument is also skewed. Our brains have evolved to make sense of what William James called the “great blooming, buzzing confusion” that is reality. Doing this requires both depth and breadth in thinking, and Carr’s suggestion that one is better than the other distracts us from the question of how they are best used and integrated for a purpose. It is purpose that cuts through the confusion, allowing us to distinguish springboards from obstacles and to separate both from irrelevance. If we lack that powerful sense of purpose, then both the shallows and the depths of knowledge are just perennial distractions. +

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The Shallows: What the Internet Is Doing to Our Brains is an expanded version of writer and polemicist Nicholas Carr’s 2008 cover story in the Atlantic, “Is Google Making Us Stupid?” In it and the book, he applies Marshall McLuhan’s most famous aphorism, “the medium is the message,” to the Internet. The effect of this medium, argues Carr (an s+b contributing editor), is to alter our patterns of perception, spreading our flickering attention across the broad surface of knowledge at the expense of our ability to plumb its depths. Spurred on by his own introspective conclusions (and the conclusions of a variety of other people) that the Internet itself is making

it more and more difficult for people to read in a meditative way and concentrate their minds, the author surveys the hard evidence that might support these conclusions. Carr finds that the brain and its connections are indeed plastic and can be changed by our experiences; he cites psychologist Donald Hebb’s well-known rule: “Cells that fire together wire together.” But plasticity does not equal elasticity and bad habits can be learned as easily as good ones. Carr thinks this is what is happening with digital technology: It is expanding our power and control over the world, but in the process it is changing the way our minds work. The extent to which this happens is hotly debated, with determinists like McLuhan insisting that we are like bees, pollinating the reproduction of machines (until they can do it themselves and dispense with us), and the instrumentalists, perhaps like techno-evangelist Don Tapscott, arguing that these are just more tools for us to use and that we are completely in charge. The author comes down firmly on the side of the determinists, even suggesting that “deep

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Getting a New Job? It Pays to Speak Up about Salary In a soft economy, collaborative negotiation may be the winning strategy. BY MATT PALMQUIST Title: Who Asks and Who Receives in Salary Negotiation Authors: Michelle Marks (George Mason University) and Crystal Harold (Temple University) Publisher: Journal of Organizational Behavior (Subscription or fee required.) Date Published: Forthcoming

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Have you been offered a new job and are now wondering what to do about the starting salary? Or are you starting to hire others, and wondering how much to offer in an uncertain economy? A study of the negotiating strategies of new employees, conducted before the recession took hold, suggests that the best deal is the most well-rounded one. A survey of 149 employees in a variety of jobs and industries found that those who opted to negotiate, rather than simply accept the initial salary offer, boosted their annual pay by an average of US$5,000. Over time, that can make a big difference: An employee who enters the workforce making $55,000 stands to earn $600,000 more than a colleague who starts at $50,000, assuming 5 percent annual raises dur-

ing a 40-year career. Not surprisingly, the biggest salary increases went to those who negotiated in the most competitive manner, acting purely out of self-interest. This could mean trying to use a job offer from another firm as leverage or even misrepresenting some facts. This type of negotiation often left both sides feeling on edge. But it’s not all about the money, the study’s authors found. Those who were willing to cooperate with their new employer and sacrifice some monetary compensation for non-salary benefits felt better about the outcome and their role at the company. They also gained in other ways. “When they collaborate, they raise their salary a bit; get some nonsalary benefits like more vacation, better healthcare, or help with education expenses; and walk away thinking it’s a win-win,” says one of the study’s coauthors, Crystal Harold, an assistant professor at Temple University’s Fox School of Business. When companies don’t have a lot of money to offer, the collaborative approach is an especially useful tool at the negotiating table. The study also identified less-

successful strategies for job seekers: avoiding negotiation altogether (a tendency of risk-averse people) and accommodating or compromising — similar approaches in which the new hires yielded too quickly to the company’s wishes, leaving them feeling dissatisfied. If this disappointment leads to a lower level of commitment, it may be a problem for both the employer and the employee. The researchers found that although men generally got more than women in the negotiations — which could reflect historical gender imbalances in workforce pay — there were no significant differences in the strategies they employed. Bottom Line: In setting a starting salary, both sides benefit from a comprehensive negotiation. The winners, especially in a weak economy, are those who work with the company to find a mix of benefits likely to engender commitment. +

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