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Published by Booz & Company
www.strategy-business.com
A.G. LAFLEY • DRONE MAKERS • HEALTHCARE WITH AN I
Summer 2013 $12.95Display until August 27, 2013
CAPTAINS IN DISRUPTIONTHIS YEAR’S study of the incoming class of chief executives
DISRUPTION
-- Emily Cavanagh Program for Leadership Development 2012
“ I HAD VERY HIGH EXPECTATIONS.I CAN TELL YOU THAT THIS PROGRAM MET THEM ALL.”
-- Yannick Hausmann Advanced Management Program 2012
“ I LEARNED TO CONNECT THE DOTSFROM FINANCE TO STRATEGY TO LEADERSHIP TO OPERATIONS AND MORE.”
The world’s top executives often need to step outside their organizations to acquire the skills, knowledge, and leadership to successfully address today’s critical business issues. The Harvard Business School Executive Education comprehensive leadership programs are where they convene. [email protected] | www.exed.hbs.edu/pgm/clp/
-- Emily Cavanagh Program for Leadership Development 2012
“ I HAD VERY HIGH EXPECTATIONS.I CAN TELL YOU THAT THIS PROGRAM MET THEM ALL.”
-- Yannick Hausmann Advanced Management Program 2012
“ I LEARNED TO CONNECT THE DOTSFROM FINANCE TO STRATEGY TO LEADERSHIP TO OPERATIONS AND MORE.”
The world’s top executives often need to step outside their organizations to acquire the skills, knowledge, and leadership to successfully address today’s critical business issues. The Harvard Business School Executive Education comprehensive leadership programs are where they convene. [email protected] | www.exed.hbs.edu/pgm/clp/
We chose the title “Captains in Dis-ruption” for the lead feature story of this issue—by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson (page 40)—explicitly to contrast with captains of disruption. In other words, we’re not talking about the charismatic CEOs who come into office roaring about the dangers of tradition and complacency, promot-ing upheaval as a turnaround strat-egy, gratuitously marginalizing and scapegoating the previous leader-ship, and then burning out, leaving their companies in a state of back-lash and collapse. (The latest promi-nent example, as I write this, is Ron Johnson at J.C. Penney.)
The most effective CEOs today are steady, collaborative chief execu-tives—those who look for stability in all the chaotic places. They face down disruptive events and trends by planning and preparing for the time after crisis, and by acting in harmony with the people of their enterprise.
Several articles in this issue sug-gest that the trends are in their favor. For example, “Portrait of the Incom-ing Class” (page 52), which tracks the proportions of planned to un-planned CEO successions in 2012,
finds that boards of directors on average are less inclined to fire their CEOs reactively, and more inclined to deliberately develop a pipeline of leadership acumen. A similar point is made by the former CEO of Procter & Gamble A.G. Lafley and his long-time advisor, dean of the Rotman School of Management Roger Mar-tin, in “Leading with Intellectual Integrity” (page 60). While at P&G, they redesigned the strategic plan-ning process to cultivate more co-herent and rigorous thinking among fast-track executives.
Jon Katzenbach and DeAnne Aguirre, who lead the Katzenbach Center (which coordinates Booz & Company’s research on organiza-tional culture and change), argue that the CEO’s most important role is as a leader of the company’s cul-ture (page 22). On page 11, CEO Tom Fanning of Southern Compa-ny, an innovative power utility based near Atlanta, explains how he fos-ters collaboration across functional disciplines, and how this has led to many of the firm’s most profitable and intriguing energy initiatives.
This issue also contains a note-worthy Thought Leader interview with David Kantor, the influential
author of Reading the Room (page 90); a list of five principles for “re-imagining” your digital identity, from three leaders of the new team known as Booz Digital (page 34 ); a compelling profile of AeroViron-ment, an idiosyncratic manufacturer of drones and innovative battery sys-tems (page 78); an intriguing asser-tion that driverless vehicle technol-ogy could transform the long-haul trucking industry (page 8); and a look at the consumer-centric busi-ness model for healthcare (page 68) that is emerging as hospitals and healthcare companies address the disruption facing their industry.
Whether you’re standing be-hind it, cheering it on, or facing off against it, disruption can be exhaust-ing. If you’re a CEO—or a business leader of any type—you’ve already learned, at least somewhat, to take it in stride. After the past several years of uncertainty, we’re all learning to do so. Or maybe we’ve just been liv-ing in disruption for so long that it’s starting to look like equilibrium.
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editor’s letter
Turning the Tables on SuccessAdam GrantIn today’s workplace, what goes around comes around faster, sinking takers and propelling givers to the top.
The Next Autonomous Car Is a Truck Peter Conway The obstacles to adoption are significant, but driverless technology now in development could transform long-haul trucking.
Innovating for Energy’s FutureEdward H. Baker and Tom Flaherty The key to clean, reliable, and affordable energy, says Southern Company CEO Tom Fanning, is a bold and balanced approach to R&D.
The Wise LeaderPrasad Kaipa and Navi RadjouPractical wisdom in business comes from combining the broad view with the narrow, and opportunity with constraint.
s+b Trend WatchBig Pharma’s Potential in Emerging Markets
India’s Leadership ChallengeGaurav Moda, Anshu Nahar, and Jai SinhaAt many Indian companies, the development of top management lagged behind the pursuit of technical excellence.
STRATEGY & LEADERSHIP
Culture and the Chief ExecutiveJon Katzenbach and DeAnne AguirreCEOs are stepping up to a new role, as leaders of their company’s thinking and behavior.
STRATEGY & LEADERSHIP
Building a Flywheel BusinessTim Laseter and Jeff BennettBy linking customers and capabilities, companies can generate the momentum for sustainable growth.
MARKETING, MEDIA & SALES
Don’t Reengineer. Reimagine. Jeff Schumacher, Simon MacGibbon, and Sean CollinsTo realize the digital potential of your business, bring the dynamics of a startup to scale.
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SPECIAL SECTION: THE BOOZ & COMPANY 2012
GLOBAL CHIEF EXECUTIVE STUDY
Captains in Disruption Ken Favaro, Per-Ola Karlsson, and Gary L. NeilsonEven when facing a crisis, some CEOs know how to anticipate the worst, plan a response, and navigate to advantage. You can do the same.
“It’s Time for a Change”Ken Favaro, Per-Ola Karlsson, and Gary L. NeilsonCEO turnover is trending high, but in a more planned and stable manner.
Portrait of the Incoming ClassKen Favaro, Per-Ola Karlsson, and Gary L. NeilsonThe newest CEOs have neither the diversity nor the global backgrounds that you might expect.
STRATEGY & LEADERSHIP
Research Perspectives on the New CEOMatt PalmquistAcademic studies of the recruitment of chief executives suggest that those from outside the industry do relatively well, companies pay more for generalists than for specialists, and “shadow emperors” hamper performance.
STRATEGY & LEADERSHIP
Leading with Intellectual Integrity A.G. Lafley and Roger Martin, with Jennifer RielOne skill distinguishes the effective CEO: the abil-ity to make disciplined and integrated choices.
HEALTHCARE
Putting an I in HealthcareGil Irwin, Jack Topdjian, and Ashish KauraThe days of the disengaged health consumer are numbered. Consumerization will transform healthcare systems, involving individuals as never before in the management of their own care.
The Patient Engagement Framework
INNOVATION
Flight of the Drone MakerLawrence M. Fisher How a small firm named AeroVironment is changing the course of airplanes, automobiles, and warfare.
Factors beyond Their Control
THE THOUGHT LEADER
INTERVIEW
David KantorArt KleinerAn eminent systems therapist says that learning to recognize the hidden patterns in conversation is the first step toward more effective executive leadership.
BOOKS IN BRIEF
Toward a Better-Informed CynicismMarvin Weisbord
The Practitioner’s TaleDavid Warsh
Many-to-Many ManufacturingTom Igoe
Skill or Luck?David K. Hurst
END PAGE: RECENT RESEARCH
The Power of “Independent” Senior ExecutivesMatt PalmquistTop leaders appointed by previous CEOs can help rein in the incumbent.
Cover illustration by Gérard DuBois
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lems and manage heavy workloads. Takers, who put their own agenda first, are far less likely to climb the corporate ladder.
The fall of takers and the rise of givers hinges on a third group, whom I call “matchers.” Matchers hover in the middle of the give- and-take spectrum, motivated by a deep-seated desire for fairness and reciprocity. They keep track of ex-changes and trade favors back and forth to keep their balance sheet at zero, believing that what goes around ought to come around. Be-cause of their fervent belief in an eye for an eye, matchers become the en-gine that sinks takers to the bottom and propels givers to the top.
Takers violate matchers’ belief in a just world. When matchers wit-ness takers exploiting others, they aim to even the score by imposing a tax. For example, matchers spread negative reputational information to colleagues who might otherwise be vulnerable, preventing takers from getting away with self-serving ac-tions in the future. On the flip side, most matchers can’t stand to see generous acts go unrewarded. When they see a giver putting others first, matchers go out of their way to dole
Turning the Tables on SuccessIn today’s workplace, what goes around comes around faster, sinking takers and propelling givers to the top.
by Adam Grant
I n the old world of work, good guys finished last. “Takers” (those in organizations who put
their own interests first) were able to climb to the top of hierarchies and achieve success on the shoulders of “givers” (those who prefer to con-tribute more than they receive). Throughout much of the 20th cen-tury, many organizations were made up of independent silos, where tak-ers could exploit givers without suf-fering substantial consequences.
But the nature of work has shifted dramatically. Today, more
than half of U.S. and European companies organize employees into teams. The rise of matrix structures has required employees to coordi-nate with a wider range of managers and direct reports. The advent of project-based work means that employees collaborate with an ex-panded network of colleagues. And high-speed communication and transportation technologies connect people across the globe who would have been strangers in the past. In these collaborative situations, takers stick out. They avoid doing unpleas-ant tasks and responding to requests for help. Givers, in contrast, are the teammates who volunteer for un-popular projects, share their knowl-edge and skills, and help out by ar-riving early or staying late.
After studying workplace dy-namics for the past decade, I’ve found that these changes have set the stage for takers to flounder and givers to flourish. In a wide range of fields that span manufacturing, ser-vice, and knowledge work, recent research has shown that employees with the highest rates of promotion to supervisory and leadership roles exhibit the characteristics of giv-ers—helping colleagues solve prob-
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out a bonus, in the form of compen-sation, recognition, or recommenda-tions for promotions. Of course, these responses aren’t limited to matchers. Givers, too, are motivated to punish takers and reward fellow givers. But I’ve found that in the workplace, the majority of people are matchers, which means that they are the ones who end up dispensing the most taker taxes and giver bo-nuses. In an interdependent, inter-connected business environment, what goes around comes around faster than it used to.
At Google, for example, an en-gineer named Brian received eight bonuses in the span of a single year, including three in just one month. He volunteered his time to train
new hires and help members of mul-tiple cross-functional teams learn new technologies, and his peers and managers responded like matchers, granting him additional pay and recognition. Consistent with Brian’s experience at Google, a wealth of re-search shows that in teams, givers earn more respect and rewards than do takers and matchers. As Stanford University sociologist Robb Willer notes, “Groups reward individual sacrifice.”
Interdependent work also means that employees will be evaluated and promoted not only on the basis of their individual results, but also in terms of their contributions to oth-ers. This reduces the incentives for takers to exploit givers, encouraging them to focus instead on advancing the group’s goals. As a result, takers
engage in fewer manipulative acts—which reduces the risks to givers—yet they still contribute less than givers. This allows givers to gain a reputation for being more gener-ous and group-oriented. And a rich body of evidence has shown that these qualities are the basis for sound leadership.
In fact, when givers become leaders, their groups are better off. Research led by Rotterdam School of Management professor Daan van Knippenberg has shown that em-ployees work harder and more effec-tively for leaders who put others’ interests first. This, again, is a matching response: As van Knip-penberg and Claremont Graduate University professor Michael Hogg
found, “going the extra mile for the group, making personal sacrifices or taking personal risks on behalf of the group” motivates group mem-bers to give back to the leader and contribute to the group’s interests. And a thorough analysis led by
Nathan Podsakoff, a professor at the University of Arizona, of more than 3,600 business units across nu- merous industries showed that the more frequently employees give help and share knowledge, the higher their units’ profits, productivity, customer satisfaction, and employee retention rates.
By contributing to groups, giv-ers are also able to signal their skills. In a study led by researcher Shimul Melwani of UNC’s Kenan-Flagler Business School, members of five dozen teams working on strategic analysis projects rated one another on a range of characteristics and be-haviors. At the end of the project, team members reported which of their colleagues had emerged as leaders. The single strongest predic-tor of leadership was the amount of compassion that members expressed toward others in need. Interestingly, compassionate people were not only viewed as caring; they were also judged as more knowledgeable and intelligent. By expressing concern for others, they sent a message that they had the resources and capabili-ties to help others.
Today, these signals are ever more visible: Givers are aided by the fact that the anonymity of pro-
The strongest predictor of leadership was the amount of compassion that members expressed toward others in need. Compassionate people were judged as more knowledgeable.
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changing the characteristics that we value in people. Two of the defining qualities of great leaders are the abil-ity to make others better and the willingness to put the group’s inter-ests first. Because givers today add increasing value in leadership roles and interdependent work, hiring processes can be modified to assess which candidates are inclined to contribute more than they receive. For development, promotion, and retention, leaders and managers should focus less on individual skills and talents, and more on the extent to which employees use their skills and talents to lift others up—rather than cutting them down. The em-ployees with the greatest potential to excel and rise will be those whose success reverberates to benefit those around them.
Along with investing in people who are already disposed toward op-erating like givers, it will be of para-mount importance to create prac-tices that nudge employees in the giver direction. In many organiza-tions, owing to their tendencies to claim credit and promote them-selves, successful takers are more visible than successful givers. To make sure that employees are aware that it’s possible to be a giver and achieve success, it may be necessary to locate and recognize respected role models who embody an orienta-tion toward others. That way, when what goes around comes around faster than it used to, it will be for the benefit of employees and their organizations. +
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Adam Grant [email protected] Wharton’s youngest tenured professor and the author of Give and Take: A Revolutionary Approach to Success (Viking, 2013).
The Next Autonomous Car Is a Truck The obstacles to adoption are significant, but driverless technology now in development could transform long-haul trucking.
by Peter Conway
E ach year, Wal-Mart Stores Inc. spends hundreds of millions of dollars deliver-
ing its merchandise across the Unit-ed States. The 6,000 trucks in the retailer’s fleet are a common sight on highways, as are those of the many other companies that rely on long-haul trucking to transport their goods from coast to coast. But what if that fleet could be cut by one-third—and be made up of trucks pulled by slimmed-down tractors less than half their current size, with a computer at the helm?
It may be hard to imagine: trucks guided by GPS, radar, sen-sors, and software, hauling much of the nation’s cargo. Yet autonomous vehicle technology has made head-lines for years, and experimental au-tonomous cars are already on the roads today. Google’s driverless cars have logged more than 300,000 miles on California and Nevada highways since 2011. That same year, Chinese carmaker FAW un-veiled its own autonomous car,
fessional life is vanishing. In the past, when we encountered a job ap-plicant, a potential business partner, or a prospective service provider, we had to rely on references selected by that candidate. When takers burned bridges with one contact, they could eliminate that person from their reference list. But now, online social networks offer a much richer data-base of references. Odds are that through a quick search of our LinkedIn or Facebook networks, we can find a common connection with knowledge of that person’s reputa-tion. By reaching out to the mutual contact to obtain an independent reference on the candidate’s past be-havior, decision makers can screen out takers and favor givers. Of the
billion Facebook users around the world, 92 percent are within four degrees of separation—and in most countries, the majority of people are just three degrees apart.
Such tools have made it tough for a taker to hide in the shadows. At Groupon, for example, Howard Lee was heading the South China office, and received a slew of appli-cations for sales jobs. He searched his LinkedIn network for common connections, and located quite a number of them. When he discov-ered that certain candidates had a history of self-serving behavior, he quickly moved on, focusing his time and energy on candidates with track records as givers.
Taken together, these trends are
Are you a taker, giver, or matcher?
Visit www.giveandtake.com for
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in commercial airliners, able to take off and land without human inter-vention. Similarly, the operating system in driverless trucks will eval-uate the road and surrounding ob-stacles, such as cars, trees, or people, hundreds of times a second, and will
decide the best path on which to proceed to its final destination.
These new technologies won’t come cheap. It is hard to put an ex-act cost figure together, given that much of the technology is still in the pre–mass production stage. But the total cost of outfitting a truck with equipment and software could be as much as US$200,000. And although savings will vary from firm to firm, they could exceed $100,000 per truck annually. Over several years, the gains would far outstrip the initial investment and the main-tenance costs. A significant portion of both the cost savings and the efficiency gains would come from eliminating drivers’ wages from the bottom line.
Diesel fuel costs would fall,
which it demonstrated on public roads. Toyota and Audi exhibited their versions of the technology at the Consumer Electronics Show in January 2013.
The use of autonomous vehicle technology in trucks, however, is more of a glimmer. There have been some developments to date, for ex-ample, computer-guided trucks that transport ore around mine sites. Yet, in these and other closed-loop trans-portation ecosystems, it is easy to maintain control and address issues as they arise. The appearance of driverless trucks on a congested highway poses many more challeng-es and will face technical, practical, social, and political hurdles. But despite these significant obstacles, this vision is worth exploring. The
use of autonomous long-haul trucks (ALHTs) could add up to a multi-billion-dollar opportunity for com-panies throughout the trucking val-ue chain, and in turn, lower prices for consumers. Although the trans-formation is still years away, compa-nies should start preparing for an automated future today.
A Technology-Powered VisionALHTs will have all the fundamen-tal mechanics of the trucks we see today, but they will be guided by a suite of sensors acting together to paint a digital picture of the road for a computer positioned where the driver now sits. These sensors will provide the data to support an oper-ating system that one might com-pare to the most capable autopilots
too—as long as other factors, such as oil prices, hold constant—be-cause the technology reduces con-sumption by optimizing accelera-tion and braking. The Center for Automotive Research estimates that driverless trucks would increase fuel efficiency by 15 to 20 percent. Acci-dent-related expenses and insurance premiums also could decline, be-cause automated trucks would be programmed for maximum safety, eliminating the driver errors that cause most crashes.
Along with the savings would come significant productivity im-provements. Currently, restrictions on the number of consecutive hours a driver can stay on the road limit asset utilization. But the software controlling driverless trucks never gets drowsy, and that opens the door to round-the-clock operations. Higher asset utilization rates would reduce the need for capital spending on additional trucks. Retailers, dis-tributors, and manufacturers that ship goods by truck will see addi-tional benefits as competition among trucking companies converts the efficiencies of ALHTs into lower shipping rates. Retailers, in turn, could pass those savings along to consumers. The one-day delivery radius could also expand, enabling
Although the savings created by autonomous vehicle technology will vary, they could exceed $100,000 per truck annually. The gains would far outstrip the initial investment.
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The Road to OpportunityThere are several different scenarios for how the adoption of autonomous trucking could unfold. One is that driverless trucks appear first in large industrial environments, where they can be contained (just like the com-puter-driven trucks already navigat-ing mine sites). As with machines in the early days of factory automation, these trucks would have limited range and capabilities. But just as robots became indispensable to moving parts and goods around plants, autonomous trucks could ex-pand to more open areas and longer distances as the technology is re-fined and proven. We may also see partial adoption. For example, some
companies may opt for “remote- control trucking,” in which a driver pilots a truck hundreds of miles away through a complex environ-ment of local roads until the truck gets onto the highway. At that point, a more basic, less expensive autono-mous system designed for the rela-tively simple environment of high-way driving would take over. This could be a palatable option for legis-lators and the public.
Given the obstacles that loom, it is likely that adoption will be an evo-lution along these lines. We won’t see highways dotted with driverless trucks in the near term. But the eco-nomics suggest that over the long term, the industry will migrate to autonomous vehicles. Trucking companies that deploy these tech-nologies most effectively will secure industry-leading positions, and the
capitalize on new opportunities to supply billions of dollars of auton-omous trucking equipment. But they’ll also see orders plunge for cockpit gear such as steering wheels and other components that won’t be needed if software replaces drivers. More importantly, if existing trucks can be retrofitted as autonomous ve-hicles, the current national fleet could find itself 30 percent over ca-pacity, because of the efficiency gains that can be extracted from ex-isting vehicles.
ALHTs will also face legal ob-stacles: Legislation allowing driver-less vehicles to operate will be need-ed across the country. California, Florida, and Nevada have already
enacted rules allowing testing of driverless vehicles. But a patchwork of varying state standards would cre-ate a difficult environment, which suggests a need for uniform federal rules of the road. To that effect, the National Highway Traffic Safety Administration is working on na-tional standards, due in 2013 for cars and 2014 for heavy vehicles. In addition, autonomous vehicle tech-nology will have to overcome resis-tance from a public frightened by the specter of unmanned trucks hurtling down highways.
Finally, as we’ve seen with auto-mation in other industries, such as manufacturing, the use of driverless trucks is likely to face opposition from unions and their political allies as they are faced with the elimina-tion of hundreds of thousands of truck driving jobs.
businesses to offer overnight ground shipping to more customers.
Society at large will also reap benefits. If truck driving shifted to off-peak periods, which is a viable option in a driverless vehicle, high-ways would be less congested. They would also become safer as the acci-dents involving trucks were reduced by eliminating human error.
Costs and CompromisesAutonomous vehicle technology of-fers advantages across the trucking industry value chain. However, the pace and extent of eventual adop-tion will depend to a large degree on the ability of stakeholders—whether they’re shippers such as Con-Way and Allied or manufacturers such as Freightliner and Mack—to resolve a range of technical, practical, politi-cal, and social concerns.
On the technical front, driver-less trucks could reach commercial viability within a decade, as the manufacturers of their supporting technology components ramp up production and prices, in turn, fall as the industry moves down the cost curve.
These components are still prohibitively expensive today; for example, the 600-rpm spinning light-imaging radar system that crowns most current autonomous vehicles costs upward of $70,000. And ALHT supporters must answer such difficult questions as how to refuel driverless trucks and protect their cargo when trucks break down. Fuel retailers, repair companies, highway patrol, and insurers, among others, will all play a role in finding the solution.
It’s worth noting that for truck manufacturers and incumbent sup-pliers, the impact of autonomous trucks will be mixed. Many will
If existing trucks can be retrofitted as autonomous vehicles, the current national fleet could find itself 30 percent over capacity, because of the efficiency gains.
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Innovating for Energy’s FutureThe key to clean, reliable, and affordable energy, says Southern Company CEO Tom Fanning, is a bold and balanced approach to R&D.
by Edward H. Baker and
Tom Flaherty
S outhern Company is one of the largest utilities in the United States. It is also one
of just a small number of electric power companies with a reputation for cutting-edge innovation and ro-bust, proprietary R&D. Under chair-man and CEO Thomas A. (Tom) Fanning, the company has been deeply committed to a wide range of R&D efforts designed to employ a diverse mix of fuel resources.
Southern Company’s four oper-ating companies—Georgia Power,
OEMs and suppliers that provide the equipment needed by those lead-ing firms will claim more than their fair share of the market. The most transformative addition to the value chain will be the autonomous vehi-cle operating system, a software package likely to cost hundreds of millions of dollars to develop. Google, now testing its system on public roads, may emerge as the sup-plier of a standard operating system for the industry. But car and truck manufacturers are likely already working to develop this critical component as well.
Executives at trucking compa-nies, truck manufacturers, and equipment suppliers should start thinking through how they see this technology emerging, what the im-plications are for their current busi-ness model, and what they should do in response. The best approaches for each company will vary, but one thing is clear: Inaction isn’t an op-tion. Given that heavy truck model changes occur infrequently, some-times not for a decade or longer, ALHTs could be just one design cy-cle away. +
Reprint No. 00176
Peter Conway [email protected] is a principal with Booz & Company’s engineered products and services practice, and is based in Chicago.
Also contributing to this article were Booz & Company associates Antoine Cadoux, Sathya Narasimhan, and Seva Rodnyansky, and consultant Uppili Rajagopalan.
Alabama Power, Gulf Power (oper-ating in northwest Florida), and Mississippi Power—all combine power generation, transmission, dis-tribution, and customer engage-ment. Rather than stifling innova-tion, Fanning says, the company’s integrated business model enables it to make these broad investments in energy innovation. And in doing so, it can better serve its customers and shareholders.
S+B: What drives Southern Com-pany’s R&D strategy? FANNING: Energy innovation repre-sents an enormous advantage for Southern Company. Our efforts have simple goals: to preserve fuel flexibility and increase the value of energy to our customers. We are es-sentially fuel agnostic. We don’t know which fuels are or will be in vogue, and we don’t bet on them. We need to invest in “all the arrows in the quiver”—the full portfolio of energy resources. About five years ago, approximately 70 percent of our energy came from coal and ap-proximately 11 percent from natural gas. Now it’s about 45 percent natu-ral gas and about 36 percent coal. We don’t profit more off one fuel over another. We just want to use the cheapest fuel available for the benefit of our customers. Because Southern Company is so integrated, we can follow this strategy. The problem with separating generation from distribution and delivery is that it sends the wrong economic signals to the industry’s participants [by prioritizing profits over opti-mized costs], without serving the interests of customers. And if the interests of your customers conflict with the interests of your sharehold-ers, you’ve got a major problem.
Besides cost and effectiveness,
Tom Fanning
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The “pull” side involves regular meetings between our innovation people and the marketing and pow-er generation planning teams. This allows the innovation team to dis-cuss the company’s operational chal-lenges and to identify opportunities.
S+B: What about the role of external partners? FANNING: Typically, we work with other companies on one-off or two-off projects, to put big money into big ideas. Examples of this include our scrubber technology work with Chiyoda, the development of our new coal gasification plant in Mis-sissippi, and the CO
2 filter research
we’ve done with Mitsubishi. The goal is to share the significant fixed costs of some of these projects.
Like many other companies, we partner with and support research at a number of universities, working directly with the schools on techno-logical issues. At our carbon capture research center, for instance, we di-vert some of the post-combustion gas streams from an operating coal plant into a series of bays in the re-search shop. Then we invite univer-sities with strong research proposals to plug into the gas streams and ap-ply their technology solutions to capturing the carbon in the streams. We pick out the best ideas, and we get to use some of what they learn during their experiments.
We also hold regular customer forums where we show people our new ideas and gather feedback. Much of this work involves our IT
we also prioritize environmental and regulatory R&D. In fact, since the 1970s, we’ve had a proprietary R&D group working on developing real-world ways to manage environmen-tal issues involving coal. Our initial R&D involved coal liquefaction—taking coal and turning it into an oil derivative, essentially.
S+B: So much has changed since the 1970s: the advent of renewables and now the new sources of shale oil and natural gas. How does that affect your innovation bets? FANNING: One of our most interest-ing efforts today involves the gasifi-cation of coal—transforming low-grade coal into synthetic gas that can be used to generate electricity, with resulting carbon emissions comparable to [those of] a similarly sized natural gas plant. We’re build-ing a clean coal plant in Kemper County, Miss., that uses the gasifi-cation technology we developed in a joint venture with KBR Inc. under the sponsorship of the U.S. Depart-ment of Energy, and we recently announced an alliance to market this 21st-century coal technology to power companies worldwide.
In another project, a joint ven-ture with the Japanese engineering firm Chiyoda, we’ve developed scrubbers for removing sulfur diox-ide from the emissions from our coal-fired plants. And we created our own technology for selective catalytic reduction—a chemical process used to remove nitrates from coal-fired boiler emissions. We have already spent [US]$8 billion on im-plementing these new technologies, and plan to invest even more in the coming years.
Such efforts have given us prow-ess and proficiency. We’ve been able to deploy these environmental con-
trol technologies 10 to 20 percent cheaper than the competition, de-pending on the plant and the tech-nology involved. We can also re-move up to 98 percent of certain emissions, significantly more than the average.
S+B: How centralized are South-ern’s innovation practices? FANNING: They are very central-ized, but we try to maintain what might be called a “push–pull” sys-tem. The “push” side is headed by Chris Hobson, the senior vice presi-dent of research and environmental affairs and our chief environmental officer. Chris is involved with our portfolio of energy solutions for cus-tomers, whether that’s generation or transmission. He convenes his own
meetings with people in the operat-ing companies, which involves both compliance-related and market-re-lated issues.
Another entity on the push side is our R&D group, headquartered in Birmingham, Ala. We also have a large facility in Wilsonville, Ala., that’s dedicated to our gasification and carbon capture technologies. We’re the only power company in the U.S. conducting carbon capture research in this manner, on both a post-combustion and pre-combus-tion basis. We leverage the full range of our technology research, assess-ment, and deployment projects all around the system. Our scientists come to us saying, “Here’s some-thing I’ve got. Where else in the company can we use it?”
“When tornadoes went through Alabama in 2011, we could tell immediately which neighborhoods were out of power, because we could see which smart meters were still working.”
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organization, which has become an integral part of how we deliver en-ergy to customers.
S+B: How do smart grids and smart metering factor into your delivery scheme?FANNING: Southern Company had about 4.4 million operational smart meters by the end of 2012, which is the second-largest smart meter de-ployment in the United States. Those smart meters are already re-ducing the number of vehicles on the road. In fact, Southern Compa-ny has avoided approximately 40 million miles of driving since the program began. It’s good for our bottom line, for the environment, and for customers.
There have also been some re-markable unplanned consequences. When devastating tornadoes went through Alabama in April 2011, we could tell immediately from our electronic map which neighbor-hoods were out of power, because we could see which smart meters were still working. That enabled us to de-ploy our restoration crews more ef-fectively. The use of smart meters contributed significantly to the company’s fast response and success-ful restoration efforts.
In the longer term, smart meters may be the gateway to the so-called smart home. But we’re taking a pru-dent, measured approach. We’re not going to act hastily, because of cy-bersecurity concerns. It is better to move slowly and deliberately, and get it right. Given how important our service is to our customers, we will not expose their personal infor-mation—and the Southeast electric network—to threats. This is an im-portant issue, and we will not take unnecessary chances simply in a rush to be first.
S+B: Where do your best new ideas come from?FANNING: We look across conven-tional boundaries. For example, many people know that one of the big problems with wind generation is that it’s an intermittent resource. We’re developing the next genera-tion of compressed air energy stor-age, or CAES. This technology uses power generated by the wind that blows during the night to compress
air and inject it into the ground. The air is then extracted under exceed-ingly high pressures during peak pe-riods of the day, using turbines to generate electricity.
CAES technology has been around for a while, but we are im-proving its efficiency by exploring more advanced cycles that will help reduce operating costs and make CAES an economically viable op-tion for bulk energy storage. This advanced application of CAES came from the joint efforts of our carbon sequestration group and our renew-ables group. When we put these two teams together, they said, “Let’s not just think about sequestering CO
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underground. Let’s think about how to use wind energy and compressed air underground.”
S+B: Do you kill many ideas?FANNING: Oh, sure. In fact, I would argue that your greatest indicator of success is how many ideas you kill. It proves that you’re developing ideas and pushing the envelope. And it proves that you have the discipline not to pursue just any idea—and sometimes that’s the hardest part of
all, especially once you’ve started down the road.
Sometimes we’ll say, “That just isn’t going to work now, but let’s keep experimenting with it.” The original coal liquefaction idea even-tually morphed into gasification from the ground up. Then we blended that with carbon capture technology, and now we’re on the way to bringing the concept to real-ity in Mississippi. It took some time,
but ultimately it emerged into some-thing really valuable.
Right now, we’re building a nuclear power plant and a 21st- century coal plant, converting other plants to gas, adding environmental equipment, and developing sources of renewable energy. That’s a total commitment of about $20 billion. A little bit of R&D goes a long way if it can raise the efficiency of these assets or reduce the amount of capi-tal investment needed. Even our failures have more than paid for themselves in terms of cheaper en-ergy, and that’s what matters most to our customers. +
Reprint No. 00171
Edward H. Baker [email protected] is a contributing editor to strategy+business.
Tom Flaherty [email protected] a senior partner with Booz & Company’s energy, chemicals, and utilities practice, and is based in Dallas.
“I would argue that your greatest indicator of success is how many ideas you kill. It proves that you’re pushing the envelope.”
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never have too much of it in a com-pany. Smart leaders can see patterns in seemingly random information, enabling them to take decisive ac-tion while their peers are still assess-ing a situation, and to make the stra-tegic choices that bring competitive advantage. But there are two catego-ries of smartness, both of which carry benefits and risks. Most exec-utives favor one or the other, and that makes it more difficult for them to lead.
“Business smart” leaders, like GE’s Jack Welch and Oracle’s Larry Ellison, are big-picture thinkers who recognize that opportunities are un-limited, at least for those ready to seize those opportunities. They are competitive, dynamic, and proac-
The Wise LeaderPractical wisdom in business comes from combining the broad view with the narrow, and opportunity with constraint.
by Prasad Kaipa and Navi Radjou
S martness is the operating currency of organizational culture in the 21st-century.
Whether it’s called cleverness, prac-tical intelligence, or savvy, one can
tive. They relish high-stakes games, and display an aggressive, winner-take-all mentality. Bill Gates exem-plified this form of leadership when he took Microsoft from a college dropout’s startup in 1976 to a com-pany with a market capitalization of more than US$616 billion by 1999. But these leaders’ expeditious and sometimes self-centered approach to decision making can also cause trouble. Gates learned this in 1998, when the U.S. Justice Department (followed by a number of European countries) filed an antitrust suit against Microsoft. By most ac-counts, this was a rude awakening for Gates. Under questioning at trial, he appeared combative and defensive. Although Microsoft set-tled the lawsuit in 2001, these events contributed to the company’s loss of dominance.
“Functional smart” leaders are grounded in the concrete, tangible, and tactical, enabling them to achieve operational and execution effectiveness. Like Genentech co-founder Herbert Boyer and HP founders William Hewlett and Da-vid Packard, functional-smart lead-ers tend to have deep expertise in narrow domains. They understand that constraints are unavoidable, but also know that they can be managed by those willing to design appropri-ate solutions. Tim Cook, for exam-ple, who took over as CEO of Apple after Steve Jobs’s death, brought a new level of operational efficiency and bottom-line productivity to Apple, honed during his years as chief operating officer. Functional-smart leadership may seem like a safer bet, but these leaders are prone to repeating poor decisions or pro-crastinating on tough decisions. They are more likely to be caught in the weeds of habitual practice, ne-
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glecting things outside their pur-view. Cook, for example, in over-looking the poor working conditions at Apple’s Chinese subcontracted factories, damaged Apple’s reputa-tion and some of its profi tability.
Today’s business leaders need to balance narrow and broad views of their business and of the world, and to combine fl awless execution with big-picture thinking. This ability to navigate swiftly and effectively be-tween the two forms of smartness based on the context, coupled with a focus on a higher purpose and en-lightened self-interest—the belief that a rising tide can lift all boats—is what we call “wise leadership.” Practical wisdom gives executives the tools they need to achieve both professional and personal success: the fl exibility to anticipate disrup-tive change, the execution capabili-ties to meet today’s demand, and the opportunity to build their facility in ethics and shared values.
Most people, when they start their careers, have potential for both business-smart and functional-smart leadership. But over time, as they move up the hierarchy, they tend to favor one or the other. They take on what psychologists call a perceptual fi lter. They see what they expect to see—they become con-scious of only one set of possibilities and accept only one type of behav-ior. The perceptual fi lters of business smartness and functional smartness are so prevalent and yet so subtle that it’s hard to recognize the extent to which they govern behavior. They shape executives’ world view; al-though people may have an intellec-tual or intuitive appreciation for both types of smartness, they miss chances to bring them together.
To see the world more clearly, leaders need to become aware of,
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s+b Trend WatchPharmaceutical markets in developed countries may still be quite sizable, but in 2011–12 they were mostly stagnant—or worse. Not so in emerging economies, which are becoming the industry’s best hope for growth.
–5% 1
5%
10%
15%
20%
25%
30%
35%
10 100 1,000
Venezuela
SaudiArabia
Algeria
Thailand
Nigeria
Vietnam
Indonesia
Egypt
Pakistan
South Africa
UkraineJapan
U.S.
GermanyFrance
SpainCanada
U.K.
Italy
Argentina
Poland
South Korea
Circle size=2012 population
Source: Matthias Buente, Stephan Danner, Susanne Weissbäcker, and Christoph Rammé, “PharmaEmerging Markets 2.0: How Emerging Markets Are Driving the Transformation of the Pharmaceutical Industry,”Booz & Company, 2013, booz.com/pharmawatch.
China
Brazil
TurkeyIndia
Mexico
Russia
Pha
rma
Mar
ket G
row
th,
2011
–12
2012 Pharma Market Size, US$ billions (log scale)
The Global Pharmaceutical Market, 2012
MatureMarkets
BRICMT
2nd-TierEmergingMarkets
AfricanMarkets
KEY
0
29 million1.35 billion
down as Microsoft’s chief executive. He took on the role of chief software architect, which emphasized func-tional smartness. In the same year, he embraced a higher purpose by establishing, with his wife, the Bill & Melinda Gates Foundation. Al-though some people initially ac-cused Gates of using his charitable activities to sugarcoat his image, his foundation is today respected and appreciated for its highly effective approaches to combating global challenges. Gates, the successful but polarizing fi gure, has become more
righteous and moral in the eyes of many people.
Tim Cook was driven by Steve Jobs’s advancing illness to change his leadership style. He moved from a narrow form of smartness to a more opportunity-oriented perspec-tive, turning his attention to the big picture and becoming sensitive to the changing context in the world around him. When the factory scan-dal broke, Cook went to China to inspect working conditions fi rst-hand, and he is now striving to improve conditions there and else-where. He also started matching employee contributions to nonprof-its, encouraging commitment to the greater good. Although he has not fully emulated Steve Jobs’s agenda or style—for example, he pays divi-dends, which Jobs avoided—Cook has adopted some important busi-ness-smart approaches. He discusses strategy with investors, reaches out to developers, focuses on top-line growth, and has defended Apple’s position as a leading innovator by winning a patent infringement case against rival Samsung.
A balanced approach also en-ables leaders to lead their companies to sustained growth, even through trying times. Here we can look to Ford CEO Alan Mulally as a model of wise leadership. Long before com-ing to Ford, Alan Mulally was a gen-eral manager at Boeing in charge of developing the 777 passenger air-craft. Even at that time, he deliber-ately cultivated a mix of business-smart and functional-smart actions. Traditionally, Boeing teams operat-ed in silos with little collaboration, leading to project delays and higher costs. Mulally’s job was to coordi-nate multiple teams and integrate their efforts. In every project review meeting, he began by reminding all
and then set aside, their perceptual fi lters. This type of refl ection doesn’t always come by choice—it is typi-cally forced upon people. Bill Gates didn’t wake up one morning and say, “I want to become a wise lead-er.” He must have been compelled, by the lawsuit and other factors, to reconsider his leadership style. Gates, who had been known for his intensely competitive personality and take-no-prisoners strategies, made a major course correction. In early 2000, while awaiting the antitrust court decision, he stepped
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India’s Leadership ChallengeAt many Indian companies, the development of top management has lagged behind the pursuit of technical excellence.
by Gaurav Moda, Anshu Nahar,
and Jai Sinha
A significant number of In-dian companies have expe-rienced impressive growth
during the past two decades. But today, many face a daunting side ef-fect: a nationwide crisis in leader-ship. In some ways, Indian compa-nies are victims of their own success. As one senior HR manager at a large private-sector conglomerate ex-plained, “People have been so fo-cused on growth that they have not invested in developing [the next gen-eration of executives]. There is a strong circle of top leadership in our businesses, but no tag team.”
Recent survey data supports this claim. In a 2010 study by Harvard Business Publishing, an overwhelming 88 percent of top Indian companies cited “gaps in [their] leadership practice” as their top challenge in coming years. The 2012 ManpowerGroup Talent Shortage Survey, a global survey of employers, reported that 48 percent of respondents based in India had difficulty finding qualified candi-dates for their senior managerial po-sitions. And Booz & Company (the
teams that they had to factor in the larger system, the whole plane, when making narrow decisions; then he moved to intensive, detailed review of the technical and design issues.
Mulally took the same decision logic to Ford. When he arrived in 2006, the company was losing mar-ket share and brand equity. Mulally mortgaged all of Ford’s assets to se-cure a $23.6 billion loan, which he said was needed to invest in R&D and serve as “a cushion to protect from a recession or other unexpected event.” This decision, made at a time when the economy seemed healthy, was widely criticized. But Mulally defended it on the grounds that “we have to control our own destiny.” Two years later, this business-smart decision allowed Ford, unlike GM and Chrysler, to avoid government-funded restructuring.
Around the same time, Mulally also made a critical functional-smart decision. Walking through the park-ing lot at Ford headquarters in De-troit, he noticed the plethora of Ford brands, with no common attributes in shape or style. He set about prun-ing the Ford model portfolio. This allowed Ford to concentrate on im-proving the engineering quality of a smaller roster of models, to make life easier for Ford distributors and deal-ers, and to reuse components across brands, reaping big savings on sup-ply chain costs.
Becoming a wise leader is not always a smooth journey—people can easily revert to their familiar smart behaviors. Practical wisdom requires the unlearning of one’s past
success formulas. Even today, Bill Gates becomes intense and defensive when addressing Microsoft’s lack of growth in the past decade. And Tim Cook saw a significant decline in
Apple’s market valuation when he focused more on tangible products and services than on intangible con-nections to the marketplace and end-users. Such struggles are to be expected. But wise leaders are resil-ient, and they learn from failure. They are flexible, enabling them to maintain this crucial balance: The business-smart leader can give voice to aspiration, the functional-smart leader can appreciate limits and exe-cute within them—and the wise leader can do both. +
Reprint No. 00177
Prasad Kaipa [email protected] is a Silicon Valley–based CEO coach and advisor and a senior fellow of the Indian School of Business’s Centre for Leader-ship, Innovation, and Change.
Navi Radjou [email protected] is a Silicon Valley–based strategy consultant and the coauthor of Jugaad Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth (Jossey-Bass, 2012).
This article is adapted from Kaipa and Radjou’s book, From Smart to Wise: Acting and Leading with Wisdom (Jossey-Bass, 2013).
Tim Cook was driven to change his leadership style, from a narrow form of smartness to a more opportunity-oriented perspective.
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population has thus far fallen short of its promise. Nandan Nilekani points out in his book Imagining In-dia: The Idea of a Renewed Nation (Penguin, 2009) that India lacks the educational institutions it needs, from the earliest years to the post-college level. Thus, even though thousands of Indian university grad-uates enter the workforce every year, they are often not “industry ready” or equipped in the skills of global business. This has contributed to a dearth of topnotch candidates and a growing talent war for those few with desirable skill sets.
Young talent needs development and supervision. And as Indian com-panies have expanded their reach both domestically and abroad, the lack of managers capable of provid-ing this guidance has become more acutely felt. The founding executives who built these thriving businesses, and who made the far-reaching stra-tegic decisions in the past, are now approaching retirement. According to the chief executive of a large pri-vate-sector fi nancial-services com-pany in India, the country’s econ-omy is growing at a faster pace than the rate at which the leadership pipe-line is maturing. A decade of rapid expansion and exponential growth has left companies in deep need of talent that is in short supply.
This dynamic is all the more daunting because operating models at many Indian companies have shifted. Traditionally, Indian com-panies operated in a markedly top-down manner—the person with the corner offi ce made the fi nal deci-sions, and senior managers oversaw their specifi c silos. That top-down model was effi cient, but it stifl ed creativity and discouraged autono-mous decision making. Now it is giving way to a more participative
need, putting both potential growth opportunities and the continuity of existing business operations at risk (see Exhibit).
Several underlying causes have contributed to this breakdown in India’s corporate leadership pipeline. Considered together, they explain how Indian companies have arrived at their current precarious position. Understanding these factors can re-veal the opportunities that today’s senior executives can use to set things right. It can also provide helpful insight to executives in other emerging economies, many of whose companies are also suffering from a senior executive talent shortage.
Shifting RealitiesAbout 65 percent of India’s 1.2 bil-lion people are between 15 and 64 years old, and 30 percent of the pop-ulation is made up of those younger than 15. This widely recognized “demographic dividend” should have given Indian companies a sig-nifi cant advantage in the form of a sizable pool of qualifi ed applicants. But the country’s youth-dominated
publisher of strategy+business) fore-cast in a recent in-depth analysis of India’s top 500 companies that by 2017, 15 to 18 percent of leadership positions in those companies will be unfi lled—or will be fi lled by people underprepared for the jobs. This im-plies that companies will be missing almost one of every fi ve leaders they
2012
Projected Gap in Top Management
2022
5%
15%
10%
20%
2017
Exhibit: The Supply–Demand Gap
India's top 500 companies will experience a significant leadership shortfall over the next five years. Although supply will eventually catch up, a gap will remain unless companies take action.
Source: Booz & Company analysis, using data from RBI, the Indian government, Indiastat, and Prowess
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approach, more resonant with the younger generation and more effec-tive for companies that are too big to micromanage. But this new operat-ing model can be effective only if
skilled managers are available to fi ll the ranks.
Looking for LeadersIndia’s young, underprepared popu-lation, its rapid economic growth, and its changing business models are the most visible contributors to its leadership defi cit. But there is a sub-tler yet equally powerful underlying cause: Historically, Indian business leaders have focused on developing
technology rather than people. As a senior manager at a large Indian conglomerate put it, “We have qual-ity technical experts, but can’t con-vert them into business leaders.”
Perhaps the most obvious ex-ample occurs in the C-suite: Few companies have provided human resources a seat on the executive management committee. As a result, the HR department often has a lim-ited role (or no role) in the strategic planning process, leading to a lack of focus on people matters. As U.S. companies did in the early years of the Silicon Valley boom, Indian companies have prioritized achiev-
As a senior manager at a large Indian conglomerate put it, “We have quality technical experts, but can’t convert them into business leaders.”
ing technical excellence, hiring en-gineers who’ve been trained to pur-sue innovation—but not to manage people and lead organizations. Evi-dence of this dynamic can be found in practices prevalent throughout Indian companies.
Insuffi cient training for new re-
cruits. Many Indian companies struggle with new-hire “onboard-ing” programs. Often, the incoming class of MBA recruits is not suffi -ciently integrated into the broader workforce, and companies put too much hope too early on these new hires’ shoulders.
Meanwhile, rotation programs meant to train the new recruits are often ill conceived and seen by line managers as an intrusion into daily work. “Corporate has assigned two MBAs to my department for rota-tion—I don’t know what to do with them,” said a department head at
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one midsized Indian company. “My people are already overworked with their routine work. We do not have the time to train these overpaid young recruits.”
Limited variety of experience at
the top. Without a strong leadership pipeline in place, star functional specialists are typically promoted to top roles. These individuals may have a background focused within one domain, and may not have had the opportunity to develop a broad-er perspective or set of skills.
This experience gap is not a problem just for Indian companies; it is endemic to corporate structures
everywhere. Many global companies compensate with targeted on-the-job experiences and in-depth train-ing, where they bring senior execu-tives together to help develop one another’s skills. But Indian compa-nies have invested little in this type of executive development. Thus, when functional specialists are pro-moted into general management po-sitions, few are well prepared and motivated to handle their new roles.
A lack of succession planning.
Rapidly growing industries, such as those driven by the rise of digital media, often rely on relatively young and inexperienced managers to take on senior positions. By and large, these individuals have not yet devel-oped a leader’s perspective. For ex-ample, the telecom boom over the past decade has led to a flurry of flourishing mobile phone brands in India. But each of these firms has had to draw upon the company’s ex-
isting pool of players to build its se-nior team. The growth of that talent pool has not kept pace with those of the brands. One regional sales head for a mobile handset company point-ed out that “eight to 10 years ago, there were only three or four handset brands in the country. Today, there are over 60. Relatively younger man-agers have had to step up to take on top roles in these companies.”
The ultimate result of this lack of qualified successors? Senior lead-ers are postponing retirement. In-stead of developing and executing a clear succession plan, executives have been extending their tenure,
lacking confidence that the next level of management is up to the task of leading.
The Next GenerationMany Indian executives recognize the challenges, but are unsure what steps to take to overcome them. First and foremost, they need to take a fresh, holistic look at their leadership development practices. Their goal should be to develop a sustainable leadership pipeline throughout the organizational pyramid: a well-rounded leadership team to comple-ment the required skills at the top, a team of successors right behind them, a strong bench of high-poten-tial individuals identified and devel-oped in the middle, and a cadre of young, industry-ready talent. The pipeline should also include ad-vancement opportunities for techni-cal specialists.
This is no small task, and will
require executives and managers to embrace the idea that training young recruits is an essential part of their routine, and will provide the incentives for them to contribute to the organization. Companies will need to invest in replicating and implementing specific interventions that have been successful at global companies (and a small number of Indian companies), instead of ge-neric initiatives. This means making talent management a key compo-nent of HR strategy, and making HR a key participant in the firm’s decision-making processes.
By taking these steps, compa-nies can fill their immediate gaps while building the enterprise capa-bilities necessary to ensure that they thrive in the long run. But only in companies whose leaders endorse this approach wholeheartedly, and where it can become ingrained in the company’s culture, will such changes take hold. Talent is India’s greatest opportunity, but it is also one of its biggest challenges. The same is true for more and more businesses in other developing re-gions around the world. In each of them, it falls to today’s executives to ensure strong leadership for genera-tions to come. +
Reprint No. 00178
Gaurav Moda [email protected] a principal with Booz & Company’s organization, change, and leadership prac-tice, and is based in New Delhi.
Anshu Nahar [email protected] a senior associate with Booz & Company’s organization, change, and lead-ership practice, and is based in Mumbai.
Jai Sinha [email protected] the co-head and managing director of Booz & Company in India, and is based in Mumbai.
“Eight to 10 years ago, there were only three or four handset brands in the country. Today, there are over 60. Relatively younger managers have had to take on top roles in these companies.”
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by Jon Katzenbach and
DeAnne Aguirre
I t is striking to see how many chief executives see their most important responsibility as be-
ing the leader of the company’s culture. According to Ginni Rom-etty, CEO of IBM, “Culture is your company’s number one asset.” Her counterpart at Microsoft, Steve Ballmer, has said, “Everything I do is a reinforcement or not of what we want to have happen culturally.” In another typical remark from the C-suite, Starbucks Corporation CEO Howard Schultz has written that “so much of what Starbucks achieved was because of [its em-ployees] and the culture they fos-tered.” Researchers such as former Harvard Business School professors
John Kotter and James Heskett have also found consistent correlation be-tween robust, engaged cultures and high-performance business results (as described in their book, Corpo-rate Culture and Performance [Free Press, 1992]). But most business leaders don’t need that evidence; they’ve seen plenty of correlation in their own workplace every day.
Recognizing the importance of culture in business is not the same thing as being an effective cultural chief executive. The CEO is the most visible leader in a company. His or her direct engagement in all facets of the company’s culture can make an enormous difference, not just in how people feel about the company, but in how they perform. Schultz described the CEO’s role this way in his book Onward: How
Starbucks Fought for Its Life without Losing Its Soul (Rodale Books, 2012): “Like crafting the perfect cup of coffee, creating an engaging, re-spectful, trusting workplace culture is not the result of any one thing. It’s a combination of intent, process, and heart, a trio that must constantly be fine-tuned.”
A company’s culture is the col-lection of self-sustaining patterns of behaving, feeling, thinking, and believing, the patterns that deter-mine “the way we do things around here.” At its best, an organization’s culture is an immense source of value. It enables, energizes, and en-hances its employees and thus fos-ters ongoing high performance. At its worst, the culture can be a drag on productivity and emotional com-mitment, undermining long-term success. Most companies are so large and complex that the culture acts in both ways at once. Indeed, the cul-ture of a large company is typically made up of several interwoven sub-cultures, all affecting and respond-ing to one another.
If you are the chief executive of a company that is sailing with the wind and leading in its competitive race, that’s a sign that your culture is in sync with your strategy. This makes your company much more likely to deliver consistent and attrac-tive profitability and growth results. You can tell you have such a culture because people are confident and energized. They can justifiably take pride in the results of their work. As CEO, your role is to keep the ship on course and ahead of the competi-tion. This requires generating regu-lar behavioral reminders about the values, aspirations, and engagements that underlie your company’s success and reinforce its strategy.
However, if your company is
STRATEGY & LEADERSHIP
Culture and the Chief ExecutiveCEOs are stepping up to a new role, as leaders of their company’s thinking and behavior.
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heading into stormy waters, facing the kinds of disruptive competition or unexpected market changes that affect every industry sooner or later, then a program of normal reinforc-ing leadership won’t cut it. A cul-ture that no longer aligns with your strategic and performance priorities needs a lot more attention—from you and other senior leaders.
Many CEOs understand in principle that cultures are multi-dimensional, slow to change, and troublesome to control—and thus that influencing them requires care and thoughtful engagement. This is particularly true for global compa-nies led by people of diverse back-grounds. When confronted with a cultural challenge in real life, how-ever, chief executives tend to forget this principle. Instead, they revert to conventional managerial tactics, but with more rigor. They turn up the volume on the inspirational mes-sages. They raise the bar and set stretch goals with new statements of the vision, mission, values, and purpose of the company. They bear down on costs and castigate people for complacency. They may also see culture change as primarily a func-tional responsibility, to be delegated to experts, either inside or outside the company. More often than not, these approaches leave the deeply embedded cultural behaviors largely unchanged. Only an enlightened CEO can break through that kind of cultural inertia.
A better starting point is a real-istic recognition of the culture’s cur-rent status. No company’s collective practices and beliefs are all good or all bad. They have evolved over time for understandable reasons—often to deal with the challenges or mal-functions of the past. Moreover, they are firmly entrenched in mind-
sets and habits. Therefore, it is es-sential to be rigorously selective and disciplined in dealing with cultural issues. There are several things you can do from your highly visible po-sition at the top of the hierarchy to spark and foster the cultural realign-ments you want to see:
• Demonstrate positive urgency by focusing on your company’s aspi-rations—its unfulfilled potential—rather than on any impending crisis.
• Pick a critical few behaviors that exemplify the best of your com-pany and culture, and that you want everyone to adopt. Set an example by visibly adopting a couple of these behaviors yourself.
• Balance your appeals to the company to include both rational and emotional cues.
• Make the change sustainable by maintaining vigilance on the few critical elements that you have estab-lished as important.
In all this activity, avoid dele-gating your culture-oriented actions. Do as much as you can yourself.
The Power of Positive UrgencyTime and again, we hear execu-tives cite the importance of having a “burning platform”—a stress-producing crisis, whether externally
driven or self-induced—to incite a high-performance culture. We once observed a CEO incur several hun-dred million dollars of unnecessary debt for the sole purpose of creating
a sense of urgency for his culture change effort. For many years, we too subscribed to the conventional wisdom that burning platforms were the only way to obtain cultural im-pact. But no longer.
Certainly we understand the logic that underlies this point of view: Companies full of complacent people will rouse themselves only in response to crisis. But experience and common sense argue differ-ently. Consider what people on real burning platforms do. They escape. They barely have time to act, much less change their mind-sets and hab-its with a view toward long-term success. In the business equivalent, which usually involves a rapid drain of cash and profitability, your op-tions will be similarly limited—in this case, to layoffs, plant closures, responses to the press and investors, and other forms of damage control. Like BP’s recovery efforts after the Deepwater Horizon spill, Toyota’s after the Fukushima disaster, or any plant shutdown made in response to a sudden loss of business, these trau-matic activities are typically seen as a one-time event, not as a way of building for the future.
There is a much better way to overcome complacency. As a
CEO or senior executive, the great-est thing you can do is to marshal an authentic sense of urgency, but not one built solely on the logical reasons that change is necessary.
Consider what people on real burning platforms do. They escape. They barely have time to act, much less change their habits.
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but repetitive and demonstrably significant. They signal where the company is going now. For example, early in the General Motors Com-pany (GM) bankruptcy recovery effort of 2009, interim CEO Fritz Henderson and a handful of his se-
nior executives launched a series of informal conversations with front-line leaders, skipping all the levels of the hierarchy in between. These examples triggered dozens of imita-tions, including conversations with customers, among GM employees across North America. Similarly, during a turnaround at the Mobil Corporation in the mid-1990s, then CEO Lucio Noto and five of his se-nior leaders personally conducted career appraisals of people at various levels whom they saw as “managerial bench strength.” This inspired simi-lar assessment efforts throughout the company. Southwest Airlines, for its part, has continually singled out the same three behaviors: hiring people who connect emotionally with cus-tomers and colleagues, volunteering when help is needed at any level, and frugality to the extreme.
Unfortunately, there is no mag-ic formula for finding the right few behaviors that will make a difference in your culture. There are, however, some factors to consider.
First, it is essential to emulate at least some of these emerging key behaviors yourself—to be a living model of the culture you aspire to
lead. People pay rapt attention to what the CEO does, not just what the CEO says. You can’t rely on communications, no matter how inspiring. You, and ideally a few other senior leaders, have to step out by behaving in new ways that both
capitalize on elements in the current culture and demonstrate a key shift in cultural alignment.
No two senior leaders are alike; what works for one doesn’t neces-sarily work for another. So do not seek to revamp your leadership phi-losophy, style, or personality to fit anyone else’s idea of what a leader should be. Instead, as former Camp-bell Soup Company CEO Douglas Conant put it, “It’s hard for leaders to realize that it’s not about show-ing up ‘the way I think I’m supposed to show up.’ It’s about showing up in a way that is ‘authentically me’ and can be helpful” (see “The Thought Leader Interview: Douglas Conant,” by Art Kleiner, s+b, Au-tumn 2012, with video interview by Jon Katzenbach [online only]).
When Conant first arrived as CEO at Campbell’s, the company was beleaguered by poor quality and newly fierce competitors; he was hired to turn the company around. He knew he was not a master of so-cial conviviality. “Every time I take a Myers-Briggs test,” said Conant, “it shows I’m an introvert.” He knew it would not be easy for him to inter-act comfortably with a diversity of
Rather, build an emotional sense of urgency, focusing on the values that the company cares about collec-tively: its way of serving customers, its desire for growth and success, its positive impact on social and com-munity issues, and the attraction and welcome that people felt when they first arrived.
Every sustainable company cul-ture is based, in part, on this intrin-sic attraction to the work—includ-ing the way it challenges people. At some point, your employees chose to be part of the enterprise. For the most part, they liked (or loved) their profession, they felt they could ex-cel, and they wanted to gain the per-sonal benefits of accomplishment. As CEO, you need to capitalize on those feelings, give them voice, and encourage people to spread them vi-rally throughout the company. This may mean discarding some busi-nesses that don’t fit your strategy, your capabilities, or your culture. But it will also mean helping people expand (or recapture) the pride they have felt, all along, in their collective strength.
The Right Behaviors
To help people capitalize on the best aspects of your culture, you have to focus attention on the critical few behaviors that you believe matter most. These are a few positive sourc-es of energy, pride, and interactions that, when nurtured and spread to scale, will improve company perfor-mance significantly. As simple as it sounds, this approach will not only accelerate the behavior change that matters most, but also evolve and align your culture more effectively than forcing a major and potentially disruptive culture change effort on a broadly diverse global organization.
These actions are ideally small
VIDEO FEATURE
Want to Change Your Culture? Run!Douglas Conant speaks with Booz & Company senior partner Jon Katzenbach about connecting with people more effectively by putting on a pair of running shoes.
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early adopters of these behaviors, and working with them directly to sharpen their influence and deploy it more effectively, you will gain far more leverage as a cultural leader.
For example, when Lucio Noto created those new, informal “skip level” staff development opportuni-ties at Mobil, the rumor mill took notice. People all through the com-pany began to do the same. These career appraisals became common practice at multiple levels across the globe. Similarly, when Michael Sabia was CEO of Bell Canada, he started attending small-group working ses-sions of “master motivators” at the front line, and other executives fol-lowed suit. They wanted to see for themselves what he was learning.
Rational and Emotional ImpactMore than 100 years ago, Mary Parker Follett wrote about integra-tion in leadership and organiza-tional situations. She contrasted integration with domination (“a victory of one side over the other”) and compromise (“each side gives up [some of what it wants] in order to have peace”). Integration comes about when “there is no curtailing of desire”—both sides in a dispute get all (or nearly all) of what they really wish for. We have yet to hear a better definition for the kind of integration that a CEO needs if he or she is to have impact on the culture.
When putting together a busi-ness strategy or a case for action, it’s important to integrate the rational arguments from top leaders with compelling emotional appeals at more personal levels. One without the other is unlikely to sustain cul-tural alignment. In other words, in addition to a rational business case for change and other formal mech-anisms, it’s important to develop
emotional impact through such forces as peer approval, the support of colleagues, and the admiration of friends and families.
For most business leaders, a rationally compelling argument is usually much easier to develop than an emotionally compelling one. Executives are used to quantitative analysis and logical reasoning. They understand how to send arguments through well-established formal channels and programs, and they know how to delegate assignments within that system. But emotional energy gets its strength from one’s own intuitive insight and the social support of colleagues. This energy flows through informal networks and cross-organizational interac-tions outside formal channels. The CEO’s role is to ensure integration of the formal and informal dimen-sions, so that the emotional energy generated for change is reinforced by a consistent formal accountability for performance and a willingness to pay attention to the metrics that indicate results.
Douglas Conant calls this be-ing “tough-minded on standards but tender-hearted with people.” Early on in his turnaround chal-lenge at Campbell’s, he realized that he would have to replace more than 300 of the top 350 people in the company because they lacked the necessary skills. In discussions and informal conversations, he held firm to this decision, but also openly acknowledged that those who were being replaced were the friends, colleagues, and teammates of those who were staying. Those leaving were treated with respect and given as much help as the company could afford. “Even through that horrible period,” he later recalled, “our em-ployee engagement scores went up.”
people throughout the organization, but he had to find a way to do it.
At the time, the Campbell’s “people strategy” emphasized em-ployee health, using an American Heart Association program that encouraged people to walk 10,000 steps every day. So Conant began donning a track suit and pedometer and running around the headquar-ters building complex in Camden, N.J., every day. Because of his con-stantly changing schedule, he ran at different times every day, and he made a point of running through different parts of the complex. Peo-ple never knew when they would see him jogging nearby, but they always knew the reason—he wasn’t check-ing up on them, he was just getting his 10,000 steps in. This practice gave an introvert a highly visible, easy way to interact informally with people he would otherwise see only at formal meetings, and Conant’s running soon slowed to a walk. “It got to the point where I was so com-fortable that people weren’t afraid of approaching me,” he said. He even-tually dubbed this practice “man-agement by wandering around.”
We like this example because it shows the importance of enjoying this experience. Most of us will not do something for long if it makes us uncomfortable. It also illustrates the emotional impact that simple changes in CEO behavior can have on others.
You do not need very many senior leaders to start a few critical behaviors rolling through the com-pany. Get several well-known execu-tives to step away from the norms of the past with you. People through-out the workforce will rapidly take notice and do the same, creating an atmosphere of approval and sup-port. In short, by seeking out other
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Eternal but Focused Vigilance
Your role as a cultural leader starts on Day One of your appointment as CEO. It will not end until the last day you hold that office. Indeed, your persistence in emphasizing the right cultural behavior will continue to be influential after you have left.
Because cultures evolve in in-formal ways that are hard to track, they can easily degrade before many people are even aware something bad is happening. Chief executives in peak-performing companies al-most never let this happen; they work hard to keep an eye on the critical few behaviors over time.
You can either keep promoting the same few behaviors, as Southwest Airlines did, or, after the first few have taken hold, pick a few more to model and support.
In many great organizations, a kind of cultural vigilance baton is passed from each CEO to his or her successor. At Southwest Airlines, for example, it passed seamlessly from cofounder Herb Kelleher to incom-ing CEO James Parker and presi-dent Colleen Barrett in 2001, and then to incoming CEO Gary C. Kelly in 2004. Each new chief ex-ecutive is deliberately charged with keeping the company’s fundamental cultural identity intact (while help-ing the company evolve to meet new competitive and market dynamics).
This rich cultural identity is part of the competitive advantage
of leading organizations such as the Mayo Clinic, Apple, Procter & Gamble, and IBM. When it slips, because people grow complacent or lose touch, the CEO is expected to step in and reignite the enthusiasm and vigor that were part of the cul-ture originally—as Conant did at Campbell’s and as Meg Whitman appears to be doing at Hewlett-Packard.
Things Only the CEO Can Do
Most chief executives are master del-egators. Some believe, as one chief executive we know puts it, that suc-cessful delegation is the single most
important skill that a developing leader needs. “It is the only way a rising leader can handle increasing responsibilities, and the best way to develop subordinates.”
For the most part, we agree—except when it comes to the CEO’s cultural impact. The activities de-scribed in this article should not be assigned to others. Leaders who del-egate too much will lose their oppor-tunity to become role models and energizers for the culture they want to shape. For example, you should be personally involved in selecting the new behaviors needed by the company. Your choice should reflect the company’s strategic and operat-ing priorities, in a way that others throughout the company can com-fortably align with. However, get-ting down to a few critical priorities
VIDEO FEATURE
Can Great Leaders be Tender and Tough?Douglas Conant describes why it’s crucial for executives to be tough-minded on standards and tender-hearted on people.
will almost always be a judgment call you need to make, because no choice will be easy to defend.
Only you can interact with oth-ers on your own behalf. Only you can speak regularly for yourself with people throughout the company, in-formally and outside normal chan-nels. When incoming CEO Jack Rowe launched a turnaround jour-ney at Aetna Inc. in 2000, he kept in direct personal contact with nearly 100 leaders in multiple levels and functions. These informal networks not only brought him up to speed on the way people thought about their work and the practices they followed, but became viral spreaders of the culture he wanted to evolve.
Because you, as CEO, have the final word on most strategic and op-erational decisions, the most critical aspects of cultural impact—selectiv-ity, simplicity, and targeted persis-tence—are in your domain. More-over, your role as cultural leader is, more likely than not, the single thing you will be most remembered for. That’s why so many CEOs refer to culture as their highest priority; it is the primary vehicle for establish-ing their legacy. +
Reprint No. 00179
Jon Katzenbach
[email protected] is a senior partner in Booz & Company’s organization, change, and leadership prac-tice, and co-leads the firm’s Katzenbach Center in New York. He is the coauthor, with Zia Khan, of Leading Outside the Lines:
How to Mobilize the (in)Formal Organization,
Energize Your Team, and Get Better Results (Jossey-Bass, 2010).
DeAnne Aguirre
[email protected] is a senior partner with Booz & Company based in San Francisco, and one of the firm’s foremost experts on organization effectiveness and change leadership. She co-leads the Katzenbach Center.
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by Tim Laseter and Jeff Bennett
M any growth opportunities look like bottle rockets. They start with an im-
pressive flash but end with an explo-sion. Most often, this is caused by business leaders’ tendency to chase after the biggest customer segments or the ones with the highest mar-gins—typically the same segments that everyone else chases. Other leaders get lost in their enthusiasm for a new product or in their desire to pursue the next market fad. They fail to consider whether they are at-tempting to solve a customer prob-lem, and how much the solution is worth. Such strategies may result in fireworks, but they don’t create a business of increasing momentum that provides both the stability and
the energy reserve to drive sustain-able growth—in other words, one with a solid flywheel.
Companies that pursue a flywheel-business model focus on building the kind of long-term ca-pabilities that allow them to prevail against rivals and capture new oppor-tunities for growth. This gives them the profits they need to invest more in capabilities, and the insights to do so wisely. Along the way, they target the customers or customer segments that will help them develop these ca-pabilities. It is similar to the flywheel concept from high school physics, typically demonstrated by a heavy disc that is difficult to start up, but that spins easily with limited effort once it reaches full speed. Over time, a simple innovative idea becomes a well-oiled machine, which trans-
lates into a predictable and profitable business.
Two case studies—Johnson Controls Inc.’s Automotive Experi-ence group and Pulte Homes—show how company leaders embraced the flywheel concept to unlock strategic growth opportunities.
Collaborate with SuppliersRevenues at Johnson Controls Inc. (JCI) in 2012 were US$42 billion, nearly half of which came from the largest of its three global business units, the Automotive Experience group. But this group is relatively new. For most of its 110-plus-year history, JCI developed control sys-tems for the regulation of tem-perature in buildings, gradually ex-panding in the 1960s to centralized systems integrating control of tem-perature, fire alarms, lighting, and security. In the late 1970s and early ’80s, it expanded even further from its core building controls business.
The Automotive Experience group began in the early 1980s as the Automotive Seating group. At that time, the automotive indus-try was embracing outsourcing to eliminate the burden of United Auto Workers (UAW) wages. From 1982 to 1984, leading seat frame and foam manufacturer Hoover Univer-sal Inc. had built six seat assembly facilities to serve nearby customer vehicle assembly plants. JCI rec-ognized the outsourcing trend and acquired the Automotive Seating group from Hoover, along with the Ferro Manufacturing Corporation, a seat mechanisms manufacturer, and continued to add plants capable of providing full seat systems to the Detroit Three.
Realizing that wage arbitrage offered no competitive advantage—any competitor could also hire
STRATEGY & LEADERSHIP
Building a Flywheel BusinessBy linking customers and capabilities, companies can generate the momentum for sustainable growth.
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non-UAW laborers—JCI sought to build a sustainable flywheel busi-ness. Although the term lean had not yet consumed the psyche of the automotive industry, former Hoover plant manager John Daly, the newly appointed vice chairman of JCI, rec-ognized its potential. He challenged his managers to embrace Japanese manufacturing methods and target-ed the Toyota Motor Corporation as a customer that could help the com-pany achieve its goal.
In October 1985, Daly informed his Georgetown, Ky., plant workers that a team from Toyota would be visiting in three weeks. Although the plant was viewed as JCI’s best in terms of internal housekeeping—an important consideration in Japa-nese manufacturing—it followed U.S. manufacturing performance standards, which did not match Ja-pan’s. Die changes took four to eight hours, so an average production run lasted 20 days to amortize the setup cost. Inventory levels exceeded a month of supply, and equipment ran only 40 percent of the time. Despite making nascent efforts at statistical process control, the company re-mained focused on volume, leading to substantial rework.
In anticipation of the Toyota visit, the Georgetown plant manager sought to temporarily cut inventory by nearly 70 percent, to a mere 10-day supply. He rented nearby ware-house space and hauled away any inventory he thought he could func-tion without until after the plant tour. Later, he visited a seat supplier in Japan and learned that even 10 days was excessive by Toyota stan-dards: The supplier held so little in-ventory that it did not even require forklifts to move materials around.
Perhaps Toyota saw a diamond in the rough, or maybe JCI just got
lucky—but shortly after the JCI plant visit, Toyota announced that it would build an assembly plant in Georgetown. Over the coming year, Toyota visited JCI regularly, and the Georgetown plant attempted to showcase new improvements every time. Plant leaders started by creat-ing a welding cell staffed by cross-trained workers. Next they attacked die change times, reducing them to half an hour on their own and even-tually to a mere 17 minutes with the help of a Toyota kaizen expert. By the time Toyota production began ramping up in 1988, the dedicated Toyota seat assembly area within the Georgetown plant operated with a mere 7.5 days of inventory, and by 1989 at full scale it held less than a day’s worth.
Over the next four years, Georgetown was the only Toyota supplier among the corporation’s entire U.S. supply base to receive an award every year and was selected as one of four “showcase suppliers”
to demonstrate the potential of the Toyota production system to other U.S. companies. Equally impor-tant, the lessons of Georgetown had spread across other JCI Automo-tive Seating group plants—includ-ing the additional dozen seat plants serving vehicle manufacturers in the United States. At this moment, JCI had completed the first turn of the flywheel; it had developed the ca-pabilities to be a world-class seating manufacturer in the emerging “just-in-time” environment.
The company then sought to become a full partner in design through delivery. Chrysler appeared to be the logical customer to fuel this second rotation of the flywheel. Although it had acquired the Amer-ican Motors Corporation—and the indomitable Jeep brand—in 1987, Chrysler remained subscale in com-parison to its U.S. competitors, and was looking to outsource engineer-ing as well as manufacturing. In 1989, JCI jumped at the chance to take responsibility for the entire seat system in Chrysler’s new Neon model. The innovative compact car designed under Lee Iacocca’s guid-ing hand proved to be a huge com-mercial success for Chrysler—and for JCI, which now had the momen-tum to build its design capability.
JCI’s next step was to establish deeper relationships with the De-troit Three and other automotive manufacturers by creating dedicated “customer business teams.” These new cross-functional groups sought
to expand their scope of responsibili-ties for their respective automotive customers. For example, by 1992, JCI had more than 500 product en-gineers—having started with only a handful at the time of their acqui-sitions in the 1980s. While the in-dividual teams focused on serving the specific needs of their respec-tive OEMs, a common R&D group sought to leverage the company’s growing expertise across vehicle pro-grams by designing materials and components that could be incorpo-
The Neon was a huge success for Chrysler—and for JCI, which could now build its design capability.
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rated into many different designs.In 1994, JCI opened a new
research and development center capable of doing its own prototype testing, expanding its design capa-bilities even further. Independent of the OEMs, the company also be-gan examining car customer views regarding seating. Through sophis-ticated conjoint analysis, JCI devel-oped deep consumer insight into preferences among features, such as motorized versus manual adjust-ments and seat heaters. Rather than simply accepting design guidance from the customer’s vehicle program manager, the customer business teams came armed with data to help them make the inevitable design trade-offs that influenced the entire car. The second revolution of the flywheel was complete.
The third rotation began with JCI’s acquisition of Prince Automo-tive (which made auto interiors) in 1996. Now the company could le-verage its growing capabilities across a larger proportion of the vehicle. It provided instrument display clus-ters, dashboards, sound-cushioning headliners, and trim, in addition to the safety and comfort-critical seat system. Having gained control of all the key aesthetics of a car’s interior, JCI opened a new technology center in 1998 complete with an “idea fac-tory” and “comfort lab.” It expand-ed its conjoint analysis to consider trade-offs among extra cupholders and dashboard features. JCI could now help a program manager make the right decisions throughout the car interior.
JCI continued to increase the momentum of its flywheel by ex-panding its product and geographic scope. In 1998, it added to its port-folio an automotive interior part producer, the Becker Group, with
70 percent of its revenues in Europe, and the Italy-based Commerfin SpA, a maker of door systems. Tak-ing another page out of the Japanese playbook, in 1999 JCI launched a keiretsu-like partnership with Gene-tex, Jabil, and Microchip Technol-ogy to develop integrated electron-ics for car interiors. And in 2000, it expanded into Japan by acquir-ing Nissan’s stake in Japanese seat
manufacturer Ikeda Bussan. By 2005, JCI had renamed the business unit the Automotive Experience group. It was now a global flywheel business with annual revenues of nearly $19 billion.
Create Scale in New MarketsIn 1950, unable to afford an archi-tect, a startup contractor named Bill Pulte used a plan from the Detroit Times’ Home of the Week section to build his first house—which he sold for $10,000. By today’s standards, that may sound cheap, but the me-dian home price in Michigan that year was only $7,500. Over the next decade, his company, which is today called PulteGroup Inc. (of which Pulte Homes is a subsidiary), oper-ated like every other builder in the country. It built individual, custom-designed homes for a particular price niche in a local market—in Pulte’s case, the high-end home market of the Detroit suburbs.
But Pulte recognized an op-portunity to create a flywheel busi-ness of national scale by offering his high-quality craftsmanship at more
affordable prices through modular design and prebuilt components. In 1959, Pulte shared his vision for the future in the plans for Concord Green in Bloomfield Township, Mich., the company’s first subdivi-sion project. He priced the homes at $29,000—well more than double the $12,000 median price in Michi-gan at a time when median family income ran less than $6,000—and
tapped the aspirational dreams of a growing upper middle class.
Pulte created a superior alterna-tive to the then dominant models of suburbia. From experience, he understood that the custom model incurred additional costs for the buyer and uncertainty for the seller beyond the true value of the fin-ished product. He also saw the flaws of the mass-produced subdivision model pioneered by Abraham Levitt and his sons, William and Alfred. Launched in 1947 to target soldiers returning from World War II, the Levitts’ original planned commu-nity in New York consisted of 2,000 rental homes employing a common, single-floor house plan. The homes could be built at the astonishing rate of 30 per day. By 1949, they had expanded the quality of the homes and introduced a new “ranch-style” design for sale at $7,990, well below the statewide median of $10,152. It was offered in five models defined by only slight differences in window placement and exterior colors. By 1951, what had become known as Levittown encompassed more than
Pulte created a flywheel business by offering high quality at affordable prices through modular design.
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material suppliers, not just local dis-tributors. He continued to innovate during the 1970s, turning his focus to the baby boomer market. For ex-ample, Pulte’s in-house architectural team introduced the “quadromin-ium,” a single structure made up of four two-bedroom units with sepa-rate entrances and garages priced at a mere $20,000 per unit (only slightly above the median home price in 1970), targeting first-time buyers with kids. These new capa-bilities provided the momentum for the third rotation of the flywheel, as Pulte built additional national scale across a wider range of price points and markets.
Bill Pulte also recognized a potential disadvantage his business model had in comparison with that of entrenched local builders, who could ensure quality through per-sonal relationships with subcontrac-tors for electrical work, plumbing, and the like. To offset this disadvan-tage, in 1980 the company created “Pulte University” near its head-quarters in Bloomfield Hills, Mich., and began training construction workers from around the country. Over time, the university was ex-panded to include high-performing managers as well. By the end of the 1980s, Pulte was selling homes in 17 markets in 11 states at prices ranging from $50,000 to $600,000.
Continuing to bear in mind the now middle-aged baby boomers, in the 1990s Pulte developed com-munities in Arizona, California, Florida, Michigan, New Jersey, and Virginia, targeting “active adults” age 55 and older. (A merger in 2001 with Del Webb Corporation, a builder of retirement communities, solidified this market.) The compa-ny entered the Fortune 500 in 1999 and won recognition from J.D. Pow-
er & Associates for its high customer satisfaction, praise it continued to garner for five straight years. Along the way, Businessweek named it one of the 50 top-performing companies and Money magazine declared it a 30-year “super stock.”
Today Pulte operates in more than 65 markets in 29 states and the District of Columbia, generating $4.8 billion in annual revenue—roughly a third of its peak revenues in 2005 before the housing crash. Despite being hit hard by the col-lapse of the bubble, Pulte survived, while other builders did not, by con-tinuing to look for new markets and honing its design tools. In 2009, the company acquired Centex Corpora-tion, a leader in the entry-level home market. And in 2011, Pulte drew on consumer research to introduce its trademarked “Life-Tested” designs, which offer innovative features to meet the needs of modern families. That same year, Pulte ranked as the country’s largest home builder (in terms of revenue), and one poised to grow during the housing market recovery.
The Perpetual Motion Machine Both JCI and Pulte created sustain-able, multibillion-dollar businesses that have proven resilient despite the misfortunes of the automotive and construction industries. They built their flywheels in different ways, but still provide common lessons for other companies.
First, both recognized the stag-nation inherent in the status quo, and sought to create a step change in customer value by questioning conventional wisdom or practices. JCI sought to become more than a simple contract manufacturer le-veraging nonunion wage rates, and Pulte sought to break the trade-off
17,000 homes—organized in huge subdivisions full of nearly identical “boxes.”
At Concord Green, Pulte sought to achieve the scale economies of the low-end, mass-production approach while providing the variety demand-ed by the more discerning upper-middle-income customer. His mod-ular designs eliminated the need for expensive architects but, unlike the Levitts’ homes, provided gener-ous variation in design throughout the subdivision. The company also built design tools to allow homebuy-ers to customize where it mattered most, in the interior. Customers could choose from a wide range of paint colors, flooring, countertops, and lighting and plumbing fixtures. The unique capabilities Pulte devel-oped for the Concord Green project powered the first rotation of Pulte’s flywheel, enabling the company to reach an underserved market.
After receiving an overwhelm-ing response to the concept, Pulte expanded to other markets: Wash-ington, DC, in 1960, Chicago in 1961, and Atlanta in 1968. In this second turn of the flywheel, he broke the paradigm of construction as a lo-cal business. Under the old model, relevant scale occurred at the local level, through builders’ ability to get better pricing and scheduling pref-erences with local subcontractors and suppliers. The new paradigm of modular designs and selective customization applied across mar-kets, making national scale in home building meaningful.
Pulte’s national expansion en-abled him to invest in improving his company’s capabilities in developing design tools and customer under-standing—building more houses with more options while increas-ing scale by using national building
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between customization and cost that constrained other homebuilders.
Second, both companies identi-fied key capabilities that would en-able them to compete successfully, and targeted a customer or customer segment that could help them fur-ther develop those capabilities. Im-portantly, they targeted neither the largest customer segment nor the customer that could pay the most per unit. Rather, they sought out an underserved market that would help them learn and refine their alterna-tive business model. In some cases, they added capabilities and market access through M&A: Both compa-nies realized that a well-functioning flywheel is not only an engine for or-ganic growth, but can also provide the strategic logic for acquisitions.
Third, JCI and Pulte both had a “big-picture vision” for their com-pany’s growth, and simultaneously understood the need to work with a customer to learn the myriad small details that no amount of planning or conceptual thinking could un-cover. Toyota helped teach JCI how to implement lean manufacturing, and Concord Green provided the opportunity for Pulte to interact with hundreds of customers to build the design tools needed to change the customization–cost paradigm.
Finally, for both companies, the entire picture might not have been clear from the beginning. But each had a line of sight to the next fly-wheel revolution—that sense that this could be bigger than a single-customer initiative. They leveraged their growth to fund further invest-ment ahead of the competition. JCI used its scale to invest in consumer research and expand its interior port-folio, whereas Pulte used its consum-er knowledge to capture purchasing scale and enhance its design tools.
Each nurtured specific competitive advantages to add momentum to its flywheel.
These four characteristics—step change in value, clear target segment, scale in new capabilities, and line of sight to the next revo-lution—are also found in other fa-miliar flywheel businesses. Consider Walmart, which spent its early years targeting towns that then domi-nant Kmart had concluded were too small. The company recognized the possibility of a step change in value in towns where the existing alternatives were high-priced local stores with limited merchandise or a suburban mall a dozen miles away. By growing for more than a decade under the radar screen, Walmart achieved the scale to develop the IT systems and logistics network for which the company is now famous. Did Sam Walton foresee Walmart’s becoming the largest company in the world (by revenue)? Probably not, but he certainly did sense that his “everyday low price” model and the efficient supply chain behind it offered innovations to better serve millions of people in the type of middle American towns that he un-derstood so well.
There is great power in link-ing customers and capabilities this way to create a flywheel effect. But it is important to remember that flywheels can be deceptive, lead-ing to false confidence and hubris. We’re reminded of an article in a rural newspaper of our youth featur-ing the supposed inventor of a per-petual motion machine. Made of an intricate collection of hand cranks, gears, and chains connected within a menagerie of dozens of old oil drums, the device clearly powered a massive flywheel that would con-tinue to spin the cranks for a long
time once the operator had used the gearing to gradually build it up to top speed. Inevitably, the machine stopped as gravity and friction took their inescapable toll. But the inven-tor was undeterred, closing the in-terview with conviction: “I think I just need a couple more barrels.”
Flywheel business models do not achieve perpetual motion, but instead require continued tending to maintain the momentum. Times change, and flywheels are by defini-tion hard to adapt and difficult to control—leaving a business vulner-able to the entry of a disruptive tech-nology. In times like these, it can be tempting to revert to old habits, pursuing bottle rockets. Our advice: Don’t even try to course correct. Even companies with well-oiled ma-chines should continually look for the next flywheel business, always seeking step-function changes by linking a new set of capabilities and customers. The original flywheel inevitably winds down, but compa-nies that have planned ahead will have a new one up and running to take its place. +
Reprint No. 00180
Tim Laseter [email protected] is a professor of practice at the University of Virginia’s Darden School and other leading business schools. He is the author or coauthor of four books, including The Portable MBA (Wiley, 2010). Formerly a partner with Booz & Company, he has more than 25 years of business strategy experience.
Jeff Bennett [email protected] is the founder and managing partner of Amphora Consulting. Formerly a partner with Booz & Company, he is an expert at helping companies think strategi-cally about growth opportunities. He has facilitated discussions on strategy and or-ganization at university executive education programs and at more than three dozen leading corporations.
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by Jeff Schumacher, Simon
MacGibbon, and Sean Collins
W hat does it mean to be-come digital? Compa-nies in all industries are
building online businesses, enabling new customer experiences, experi-menting with “big data,” and seek-ing advantage in a digitally enabled business environment. They have tried reengineering their practices; they have set up new technological platforms for customer engagement and back-office efficiency. But these efforts have not yet had the impact that they should. Instead of reen-gineering, they need reimagining. They need to conceive of their busi-ness freshly, in line with the capabil-ities that digital and business tech-nologies can give them, connecting to customers in ways that have not
been possible before. Reimagining your business
means creating many of the condi-tions of a startup—the sense of free-dom, flexibility, and creativity—but at the scale and with the discipline of a large enterprise. You bring to-gether cross-functional teams who can ideate, bring to life, and execute a truly digital user experience. You take a customer-centric approach to everything your company does—in-cluding innovation, user experience (UX) design, marketing, promo-tions, sales, operations, and custom-er service. You convey a distinctive brand identity and emotional con-nection that’s present in storefronts, websites, smartphones, connected devices such as high-tech fitness wristbands—and forms of interac-tion still being conceived. You use big data and analytics in all their
forms to deploy insights from cus-tomers in real time, designing and marketing products and services that respond instantly after sens-ing and analyzing what people do online (and off). Reimagining your business also means continually measuring and testing the impact of these products and services, and learning from the results.
In the digital world, time really is money. Companies no longer have the luxury of carefully developing requirements for new products and services or for bureaucratic stage-gate approval processes. Nor can your digital presence be bolted onto your company’s current way of oper-ating. Instead, it must be a natural reinforcement of your company’s brand, its positioning in the market, its core value proposition, and the capabilities you already have. The digital presence must also be a viable contributor to the business, with sig-nificant revenues and profits accru-ing almost from Day One.
Admittedly, the first steps in this transition aren’t easy. Becom-ing digital requires a new way of thinking. Moreover, the exact set of capabilities needed to get there will vary from company to com-pany. Nike Inc.’s direct engagement of consumers, linked closely to the development of new apparel and fitness-related devices, involves a completely different approach from Aetna Inc.’s rethinking of its patient and customer experiences. But there are five basic principles of digitiza-tion that any company can follow to help reimagine its business and drive growth: Empathize with end-users, expand the brand and the value proposition, design for three years out (but build for today), build new structures and teams, and use digital technology to energize your culture.
MARKETING, MEDIA & SALES
Don’t Reengineer. Reimagine. To realize the digital potential of your business, bring the dynamics of a startup to scale.
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Empathize with End-UsersTo unlock the value enabled by digital technology, companies need to focus first on delivering great ex-periences to customers. Don’t just build connections between custom-ers and your company. Enable them
to engage with one another. In the process, habitually capture insights about what customers think of your products and services, what matters to them, and what consistently irri-tates and enthralls them. Then feed these insights back into your inno-vation practices as well as customer service, marketing, advertising, and promotions.
To see and understand your customers’ problems, you must be able to fully empathize with the end-users of your company’s sys-tems. Develop an ongoing sense of what your company’s products, services, and brand look like from their point of view. The word em-pathy derives from the Greek words for in and feeling. Digital technolo-gies give companies a way to empa-thize, or to adopt others’ feelings as their own. They can provide a much closer connection between you and your customers than the marketing methods of the past did. When con-sumers have problems that need to be solved, or aspirations that your company might satisfy, you are now equipped to meet that challenge proactively.
Esurance Inc., an online insur-
No one likes to buy insurance. The design of Esurance’s business and the technology that enables it are aimed at mitigating its pain points.
ance company backed by the Allstate Corporation, has taken the idea of customer empathy to heart. It uses digital technology to enhance the car insurance experience from quote to claim, reducing the customer’s stress while saving time and money.
No one likes to buy insurance. It’s expensive and often seems unneces-sary, and the process of obtaining it can be thoroughly confusing. Worse still, the moment of truth when it becomes valuable—when customers actually have to make a claim—may be fraught with pain, uncertainty, and the frustration of not knowing how long the repair process will take. The design of Es-urance’s business and the technol-ogy that enables it are aimed at miti-gating these pain points.
Esurance accomplishes this by increasing transparency and remov-ing confusion and ambiguity. The experience begins with getting a quote online in minutes; the com-pany displays its best offer as well as quotes from leading competitors. Esurance also makes its claims pro-cess user-friendly, with mobile apps that simplify the process and keep customers updated in real time. If an insurance holder is in a car ac-cident, he or she can file a claim from the scene with a smartphone, capturing the necessary details and uploading photographs of the colli-sion. The app also provides recom-mendations for vehicle repair shops.
Once the car is in the shop, the app sends customers daily photos of the repair process.
Thanks to its end-to-end focus on the customer experience through digital technology, Esurance is en-joying rapid growth, large gains in customer satisfaction, and improved financial results. It is also providing a learning lab for Allstate, which will apply the insights from Esurance’s experiments as it develops strategy for its core business.
Expand the Brand The second basic principle of digi-tization involves expansion of the brand. Companies that are expert at branding don’t simply incorporate a logo and visual identity into their physical products. They consciously run their business with their brand in mind. They know that every de-tail, from the design of their head-quarters to their products’ place-ment on a store shelf, helps define the way customers see them. That’s equally true of digital capabilities. The brand must guide not just the message, but also the ambiance, fea-tures, and emotional impact of your online and mobile touch points.
So put the meaning and value of your brand at the center of your digital design. In doing this, look across your entire value chain—from R&D to product design to manufacturing to marketing and sales—for digitally augmented op-portunities to relate the brand and its value proposition to every level of operations. Don’t think narrowly about traditional ways to market and sell products. You no longer merely advertise. You immerse people in the experiences you create.
Consider Nike, long considered among the world’s greatest brands. Several years ago, the sportswear
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company created a special unit, Digital Sport, using the company’s brand and innovation talent to re-imagine what it could do for its cus-tomers. Out of this came a strong investment in Nike-branded media, including sports-oriented videos, websites, and “zines.” Another key component was the Nike+ group of products and services—a digital
ecosystem of apps, sensors, and re-lated devices that track athletic per-formance. The Fuelband, for exam-ple, is a wristband that gathers data from motion detection, enabling people to maintain records of their “NikeFuel points,” tracking the benefits they gain from workouts, sports, and other physical activity. Millions of consumers have signed up with Nike+, giving the company a huge new source of data to mine, reinforcing its core footwear and ap-parel businesses, and creating a sub-stantial new revenue stream through a variety of new digital products.
Design for Three Years Out The third principle of digitization involves taking the long view, even as you build for today. You can no longer succeed with a digital strat-egy based only on today’s technol-ogy and competitive environment. Nor is it enough to merely ideate about future developments. Com-panies must take actions now that prepare them for the disruptive op-portunities and evolving platforms
of the next few years. What technol-ogies might be available then? How will customers be using digital in their lives? Where will your industry be, for example, in terms of respon-sive use of data, digital fabrication (parts and devices made on the fly), cloud-based interoperability, or new forms of supply chain coordination? Do you have the capabilities now to
make use of those technologies in creating new customer experiences? And what new capabilities will you need once those technologies be-come reality?
3M Company is already an-swering these questions. The com-pany—which makes a wide range of innovative products and materi-als, including tapes and adhesives, electronic devices, medical sup-plies, films and fabrics, cleaning and car-care products, and industrial components—is developing a road map of its future by building the world-class capabilities it will need over the next several years. The ef-fort began with a focus on combin-ing content, search optimization, and social media to capture data on consumers’ feelings about 3M prod-ucts. The company then developed the analytics needed to make use of that data. 3M maintains a Facebook “do-it-yourself” page, for instance, where woodworking aficionados post photos of the cribs they build for their grandchildren or the hand-made tables they sell on the Web.
Contributors are motivated, in some cases, by the chance to promote their own work, accompanied by comments like, “We are staying safe with [3M’s] goggles, gloves, masks, and using lots of sandpaper.”
Based on these kinds of experi-ences with its early adopters, 3M is building out its e-commerce capa-bilities for the future. The sales and marketing departments are creat-ing additional content. Customer service is using analytics and data to identify customer problems and solve them rapidly—for example, telling people how to recycle their Post-It notes (put them out with the office paper pickup; the recycling process removes the glue). And in general, the company is boosting in-novation by ramping up collabora-tion—including collaboration with outsiders.
New Structures and TeamsThe fourth principle recognizes that becoming digital isn’t just a matter of rearranging the lines and boxes on your org chart. It involves fos-tering a startup’s way of working through new structures and teams, and changing your incentives, rules, and decision rights accordingly. Just as important as these formal mecha-nisms are their informal counter-parts—the personal networks, com-munities of interest, information flows, and behavioral norms—that link the people in your company who can imagine and build new digital capabilities.
In a truly digital enterprise, you will often find that new cross-func-tional, multidisciplinary teams need to be formed and assigned solely to conceive and build successful digital customer experiences. These teams bring together specialists in strategy, R&D, UX design, industrial design,
Millions of consumers have signed up with Nike+, giving the company a huge new source of data to mine, reinforcing its core businesses.
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marketing and branding, sales, and IT to work collaboratively. The di-versity of talent and perspective is vital when it’s time for the team to move its digital DNA back to the main body of the company, chang-ing the culture from the inside out.
Health insurer Aetna recently created a new business unit called Healthagen. It has operations based in San Francisco, far from the company’s headquarters in Hart-ford, Conn. Essentially a startup, this new group was charged with a mission: to tackle the fundamen-tal issues of value and transparency in healthcare. The unit isn’t simply trying to address customers’ pain points. Instead, its goal is to empow-er consumers, improve the quality of care, and reduce overall costs. Aetna has identified digital capa-bilities and user experience as game changers. It is investing more than U$1 billion to acquire and build a comprehensive collection of health management and health IT solu-tions. Under one roof, Healthagen has assembled a multidisciplinary team of strategists, consumer insight specialists, digital product manag-ers, user experience and user inter-face designers, and IT architects. It is adopting distinctive innovation methodologies that rapidly bring new ideas to life and test them with users and stakeholders.
This new group is prototyping an application for parents of new-born infants that can help families bring their babies home as soon as possible. All too often, new parents don’t feel ready and armed with the right support to take their infant home. This app lets them leave the hospital sooner, because it provides educational content, support, and live video chat with nurses when needed.
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Energize the CultureTackling the culture is the final digitization principle. The toughest part of becoming digital is creating the cultural norms and ways of do-ing things that enable sustainable change, especially at very large com-panies. These changes are likely to be extreme. Thinking and behaving with an orientation toward custom-ers represents a major leap from the product- and channel-centric ap-proach on which most corporate cultures have been built.
The sporting-goods retailer Sports Authority took on this task in
2010 by redesigning the branded ex-perience from the consumer’s point of view and building the necessary digital “omni-channel” capabilities. The new behavior that went along with these capabilities then sparked a culture change. Rather than sim-ply letting its e-commerce efforts stand alone, the company focused on maximizing the entire business through digital capabilities—re-imagining its advertising, shopping, and delivery experiences. It was criti-cal to use digital capabilities to drive store traffic, not just online rev-enues. Sports Authority teamed up with Google to create virtual online inventories for customers of the mer-chandise in each store; it optimized store websites to gain better search response; and it experimented with digital partners such as Shopkick (a mobile app that provides rewards
and offers when customers walk into retail stores) and Foursquare (a location-based social networking app that helps people engage with nearby retailers). The company also deployed additional omni-channel capabilities in many stores, includ-ing ship-from-store systems (which turn stores into local distribution centers for pickup and delivery).
One key to changing Sports Authority’s culture was allowing customers to buy on any channel they preferred—whether digital or in-store—and then compensating store managers for all e-commerce
sales in the zip codes of their trade area. At the same time, the retail chain raised its revenue targets, and required units to report on the direct and indirect sales impact of every channel in weekly business reviews.
The new approach proved that a vibrant digital presence could re-vitalize all aspects of a company’s business, including its non-digital channels. It produced a shared sense of purpose among store-based and online staff, a willingness to experi-ment in order to boost sales across all channels, and a “fail fast” culture that is eager to learn from risks and experiments.
The ultimate goal of reimagin-ing your business is to transform it into a more customer-centric enter-prise. This is an exhilarating process for most companies, once it begins in earnest. It brings together busi-
ness and functional leaders, em-ployees and customers, global and local managers, and the seemingly disparate practices of analytics and creative ideation. Companies that move from reengineering to reimag-ining will be in a far better position to benefit from the new world of digitization. +
Reprint No. 00181
Jeff Schumacher [email protected] is the managing director of Booz Digital. Based in Los Angeles, he specializes in digital strategies for companies in con-sumer markets. Previously, he was executive vice president and chief market-ing officer of the Sports Authority.
Simon [email protected] a senior director with Booz Digital in San Francisco. He helps companies design and realize transformational customer experi-ences through digital capabilities and data analytics.
Sean Collins [email protected] a senior director with Booz Digital in Los Angeles. He helps CXOs define and execute digital growth strategies.
Also contributing to this article was Booz & Company partner and Booz Digital senior director Matthew Egol.
Booz Digital is a full-service team of strategists, designers, and technologists focused on the relationship among ideas, digital platforms, and transformational businesses.
One key to changing the culture at Sports Authority was compensating store managers for all e-commerce sales in the zip codes of their area.
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Sooner or later, every corporation will face disrup-tion. It may be the result of a decrease in its competi-tive advantage, a shift in the regulatory environment, or some catastrophic event that affects its ability to op-erate. No matter what the underlying cause, the chief executive is the person most accountable for managing the disruption. He or she must recognize its dynamics, anticipate its likely effect, develop a response, manage that response, and sustain the necessary changes. If the CEO is not directly involved in guiding his or her com-pany through the storm, the entire company is likely to suffer—and, in extreme cases, disappear entirely.
There is no single formula for managing a disrup-tion, because it can come in any number of forms. Any event that has the potential to adversely affect a com-
pany’s business model or ongoing operations is disrup-tive. Some disruptions involve shifts in the dynamics of competitive advantage for an industry, stemming from a variety of causes—technological breakthroughs that favor new rivals, global changes in labor arbitrage, shifts in cost structure, or new rivals entering markets from adjacent sectors. Some are instigated by regula-tory upheaval, such as the structural changes to the U.S. healthcare market set in motion by the Affordable Care Act. Virtually every CEO of a hospital system in the U.S. is confronting a major disruption to its business model as a result (see “Putting an I in Healthcare,” by Gil Irwin, Jack Topdjian, and Ashish Kaura, page 68). There are also event-specifi c disruptions, such as eco-nomic downturns, idiosyncratic geopolitical and natu-
CAPTAINS IN DISRUPTION
EVEN WHEN facing a crisis, some CEOs know how to anticipate the worst, plan a response, and navigate to advantage. You can do the same.
by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson
DISRUPTION
feature strategy & leadership
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Ken Favaro [email protected] is a senior partner with Booz & Company based in New York. He leads the firm’s work in en-terprise strategy and finance.
Per-Ola Karlsson [email protected] is a senior partner with Booz & Company based in Stock-holm. He serves clients across Europe and the Middle East on issues related to organization, change, and leadership.
Gary L. Neilson [email protected] is a senior partner with Booz & Company based in Chicago. He focuses on operating models and organizational transformation.
Also contributing to this article were Booz & Company senior partner Alan Gemes and senior manager Josselyn Simpson, and s+b contributing editor Edward H. Baker.
ral events, and unforeseen internal company events such as sudden major trading losses or public scandals.
The severity of these events can vary considerably, as can the duration. Some disruptions, like the rise of the Japanese auto industry in the 1970s that eventually crept up on U.S. and British carmakers, are so gradual that, like a frog in a pot of water, company leaders may never realize they are slowly boiling to death. Others are sudden and devastating, like the 2011 floods in Thai-land that crippled the country’s hard-drive manufactur-ing sector and revealed extreme vulnerabilities in the industry’s supply chain.
Since the mid-1990s, disruptive events have become increasingly difficult to deal with. Technological evolu-tion, ongoing globalization, two huge financial bubbles, the rapid pace of change in emerging economies, the de-regulation and re-regulation of a number of industries, and waves of political turbulence in some regions have made the world a more challenging place to do business. For example, banks and financial institutions have had to rethink their business models after the financial cri-sis. And retailers and many parts of the media industry have seen their revenue streams fall away with the rise of new, technologically enabled competitors.
Yet even in the worst disruptions, some companies do better than others. These companies have leaders who recognize the crisis and act accordingly, either in advance or in time to recover. Some of the most cele-brated cases are those of IBM, which shifted to business services before the rest of the computer industry did; BMW, which rebounded decisively from near-bank-ruptcy in the late 1950s; Ericsson, which reinvented it-self in 2002–03 after nearly being driven out of business by sudden competition from Asia; and Lego, which re-
built its supply chain and regained profitability after its retail channels dramatically changed.
In this article, based in part on our research on chief executive performance, we consider the steps that many CEOs are taking to become effective captains during disruption—captains who can not only manage through it, but turn it to their advantage. We have also directly observed CEOs managing disruption at a num-ber of companies, and have drawn on interviews with two people who understand the issues in depth. Antony Jenkins took over as CEO of Barclays PLC to manage the bank through its response to the LIBOR rate-fixing scandal that struck in the summer of 2012. Clayton M. Christensen, the professor and management author who first charted the dynamics of disruption in The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press, 1997), has explored a variety of disruption dimensions, including the personal impact in his new book, How Will You Measure Your Life? (with James Allworth and Karen Dillon; HarperBusiness, 2012).
To act effectively as captain of their company in a time of disruption, CEOs must lead in three ways. First is preparation: The CEO must make sure his or her company anticipates potential disruptions and puts in place the capabilities that will be needed when the time comes. Second is response: When a disruptive event occurs, leaders must develop the appropriate strategic and operational plans, which could include focusing on fewer products and services, engaging in large-scale business transformation, reorganizing the company’s structure, initiating mergers and acquisitions, launch-ing a new wave of innovation, or making a change in leadership. Finally, there is implementation: CEOs need
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inherent in the subprime mortgage market soon discov-ered that their confidence was overstated.
The key to the problem, says Clayton Christensen, lies in the nature of data itself. “How can you make sense of the future,” he asks, “when you only have data about the past? That’s the role of theory, to look into the future.” In other words, you have to think through the reasons that the pattern of behavior in the data in this case appears to be different. Christensen adds that in most companies, top executives do not have access to candid insights from people at all levels—perspectives that they need if they are to plan for future disruptions. “Data is heavy. It wants to go down, not up, in an or-ganization,” he says. “Information about problems thus sinks to the bottom, out of the eyesight and earshot of the senior managers.”
In Christensen’s view, chief executives (and other senior leaders) can compensate for these limitations only by learning to ask better questions. “Instead of looking at the data about today’s performance, I [need to] keep my attention on the questions I need to ask so I can catch the issues of the future…. For instance, if you’re concerned about disruption, you ask: ‘Which competi-tors are threatening me and which am I more likely to threaten?’ Disruption is a question about who’s going to kill whom.”
It falls to the CEO to ask questions this way, and to oversee the enterprise-wide thinking required to assess potential disruptions. Executives within business units and functional silos tend to focus on making progress toward their unit’s business objectives, and not to think deeply about longer-term threats to the whole company. Only the CEO can ensure that the company is taking a multifaceted approach to sensing and recognizing trou-ble. Chief executives must be willing to lead the effort directly, drawing on past methods of gauging risks and disruptions, while also admitting that the old ways of doing business are no longer adequate.
Plan and RespondOnce a potential disruption has been recognized as a real threat, it is time to develop a plan and initiate the first wave of reaction. The wake-up call will likely hap-pen in one of two ways: Either the company’s leaders will realize that it is vulnerable to a potential disruption and thus needs to be shaken up proactively or an event-driven disruption will occur, and the leaders will see that the company must respond immediately.
Sometimes a CEO must plan a response to a sud-
to set the response in motion and carry it out sustain-ably, ensuring that their company reaches the end goal.
Anticipate and PrepareFor every company in every industry, the first stage in managing disruptions is to learn to anticipate them and recognize their signs before they hit. You can’t predict every future challenge. But you can think about the kinds of disruptions that might be particularly devastat-ing to your company, and prepare accordingly, shaping the degree of preparation to the nature and likelihood of the risk. Even environmental and natural disasters can be—and must be—prepared for. It’s particularly important for companies to pay attention to risks that they feel shielded from because of their own compe-tence and capabilities. These can even include environ-mental and natural disasters. For example, though the earthquake that caused a tsunami to hit Japan in March 2011 was one of the strongest ever recorded anywhere, more than 75 deadly earthquakes have been recorded in Japan since 1900. Should Toyota have been able to an-ticipate and prepare for the effect an earthquake might have on its highly concentrated network of suppliers in northeast Japan? Perhaps the company’s confidence in its just-in-time manufacturing system blinded it to the vulnerability of its supply chain. Might your company be similarly vulnerable to the disruption of strengths that you have built up over time, and that you currently take for granted?
Anticipating disruption goes beyond the conven-tional practices of risk management. Virtually every company now employs a process to assess and address risk. These practices typically concentrate on day-to-day risks, those run in the ordinary course of business, including credit and foreign exchange risk, data secu-rity issues, and operational risks inherent in managing large-scale projects.
For truly disruptive events, many companies adopt a similar approach at a larger scale: They build analytic models assigning a probability and potential loss value to various kinds of risks, and then design preparations for each of them depending on their likelihood and potential for loss. Several recent events, however, have highlighted the limitations of this approach. Highly improbable events do occur, and failure to anticipate them—or even to imagine them—can be devastating. A further limitation lies in the relative strength of the risk models themselves. The financial firms that con-cluded in the mid-2000s that they had tamed the risks
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profi tability. We needed to think more broadly about the stakeholders we serve. The existential crisis helped me in this regard.”
Jenkins emphasizes the need to involve all stake-holders in asking the right questions and fi nding the right way forward. In managing the reaction to the LIBOR scandal, he spoke with politicians, the media, consumer groups, and regulators, in addition to bank employees. The day after the new strategy was made public, in February, he hosted a stakeholder breakfast. Some of the comments he heard were not easy to take, but it showed that he was willing to engage. “You have to meet stakeholders with humility, be prepared to lis-ten, and then lay out a clear plan,” he notes. “And be willing to talk to those who do not necessarily agree with you.”
According to Jenkins, the precepts for leading a large company through a highly disruptive crisis are straightforward: Make sure you have a clearly defi ned objective and a compelling reason for it, develop a vi-able and credible plan for reaching that objective, and relentlessly and authentically pursue it. So far, so good: The day after the announcement of the new strategy, Barclays’ stock price rose 9 percent.
When planning a response to disruptive events, all chief executives should bear in mind several principles:
1. The CEO is the single most critical player in craft-
ing and carrying out a response. The CEO must take immediate responsibility for the situation and be will-ing to hold him- or herself accountable for the ultimate success of the company’s response. For example, at Bar-clays, Jenkins knew he had to personally make clear his lack of tolerance for the kinds of activities that had led to the bank’s problems.
den, unexpected disruption. When the LIBOR rate-rigging scandal broke in mid-2012, Antony Jenkins was the very successful head of the retail and business banking division of Barclays, then the U.K.’s second-largest bank. After both the bank’s chairman and its CEO resigned, Jenkins took on the role of CEO. He knew that the entire organization had to confront the scandal along with the pain that executives and staff felt about how Barclays was being portrayed in the press. At the same time, the fi nancial-services industry as a whole was still navigating the collapse in trust that had fol-lowed the crisis of 2008–09—along with the reversal of globalization, heavier regulation, and a more adverse macroeconomic environment. This was a new and dif-fi cult situation for every bank.
Upon his appointment, Jenkins immediately made it clear to the bank’s 140,000 employees that short-term thinking and a focus on immediate profi ts—attitudes that had contributed to the LIBOR scandal and to aggressive tax practices in the structured capital markets division—would no longer be tolerated. (Barclays an-nounced the closure of the structured capital markets divi-sion in February 2013.) He carried out a strategic review of the bank’s business units, which numbered more than 70. He then developed an overall strategy and new direction for the bank called TRANSFORM (Turn-around; Return Acceptable Numbers; and Sustain For-ward Momentum).
“While there are many great things about Bar-clays,” Jenkins says, “the organization had had a cata-clysmic experience. As a result, people were prepared to listen. The staff recognized that the environment had fundamentally changed and that we needed to respond. We could no longer focus exclusively on short-term
In most companies, top executives do not have access to candid insights from people at all levels—perspectives they need if they are to plan for future disruptions.
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the organization, executives can waste time defending their past behavior and actions.
When communicating the need for change, CEOs should describe the path ahead as clearly as possible, including the specific steps that will get the company through to the other side. For example, a few of the U.S. healthcare companies facing the disruptive changes of healthcare reform have developed a strategic commu-nications process in which they explicitly lay out—for investors and employees alike—the decisions that must still be made in executing their strategy for managing disruption. On a regular basis, these executive leaders formally review the company’s choices and progress, ask their board to approve major changes, and reevaluate their components.
3. CEOs must make cogent decisions about the team
of top executives. They must give people a chance to come on board with the new system and remove those who resist. If anyone visibly resists the changes, it soon becomes evident—to them and everyone else—that they are now at the wrong company. This process can be designed in ways that treat everyone, including those who exit, with respect. Nokia CEO Stephen Elop kept the senior leadership team largely intact, but set up an initiative, called the Challenger Mind-Set, in which executives were given a chance to show how well they could adapt. It was clear that those who could not per-form would be better off elsewhere. Changes in top management must of course be made carefully, but even one or two visible changes can dramatically reinforce people’s awareness that the situation is serious.
4. It is often important to choose a small team of top
decision makers to lead the response. Paradoxically, the more profound the changes planned, the faster they need to take place. A small team of top leaders can ma-neuver more nimbly than a large group.
Implement and SustainAll too many companies, when faced with business cri-ses, have initiated appropriate responses but have then been unable or unwilling to carry them to comple-tion. When that happens, the issues that scuttled the response remain unaddressed, and the company will
Whether the cause of the disruption is internal or external, foreseeable or entirely unpredictable, it is up to the CEO to set the pace of change. Sometimes it is nec-essary to short-circuit things; to force action, decisions, and transparency. After the first swift reaction, things may slow down a bit as decision makers deal with the long-term consequences of the disruption, but the com-pany should still retain most of its momentum.
2. It is critical to begin breaking down human inertia.
Complacency in the face of change comes naturally to any large organization. The chief executive must explain the situation and describe the new agenda in simple, clear terms. He or she must find simple but compelling messages to show that the old ways of being successful won’t work anymore. The changed nature of the game must be communicated to all stakeholders, both inside and outside the company, in a way that galvanizes this particular culture.
When Stephen Elop became CEO of the Nokia Corporation in 2010, he wrote a note, now famous within the company, in which he likened Nokia’s situ-ation to standing on a blazing oil platform. The com-pany faced not just a fairly new competitor with Ap-ple’s iPhone, but a rapidly rising new product category, the smartphone, which Nokia had not found a way to counter. “We have to go faster, and harder, and more aggressively now than we’ve ever gone before,” he said. Employees, he added, have two choices: Either jump into the water, even if it’s 100 meters deep and freezing cold, or get burned. The note was controversial because some felt it pushed Nokia toward too much change, too quickly—but aggression was its point. It provided a clear statement that the company would be fearless in facing up to its dire competitive situation.
At the same time, a CEO should make clear that the company needs to be forward-looking, and declare a kind of amnesty for past activity. Decisions made and actions taken in previous years may have made sense at the time, but they must change as the situation chang-es. A new marketplace requires different ways of doing business, and it won’t work to simply carry on with leg-acy practices (and, in some cases, legacy products or ser-vices). If this requirement isn’t understood throughout
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ultimately be even less prepared to face the next crisis. Ultimately, to implement a plan and sustain a company during disruption means looking closely at both the or-ganizational design and the company’s culture. It’s up to the CEO to make sure that the structure and the cul-ture are ready for the necessary changes and set up to support the new strategies and each other.
Organizational redesign. In most cases, response to disruption necessitates a shift to a more nimble, focused, and strategically aligned organizational structure—one that encourages other people to change, rather than trapping them in outmoded processes or approval gates. The new structure must enable people to cooperate ful-ly across internal boundaries, even if that runs counter to long-standing patterns of communication or control.
One example of this type of redesign is Amedisys Inc., a provider of healthcare to patients in their homes. The Amedisys business model had long been built around payments from Medicare and other insurance companies. With pressure on Medicare prices squeezing profits considerably, Amedisys CEO Bill Borne, who founded the company and designed its original business model, decided that it would have to change. Amedi-sys should be paid for outcomes rather than offering a menu of narrowly defined services.
To pilot the new approach, Borne and the Amedi-sys top team created a “pirate ship”—an organizational unit kept separate from the mother ship, set up to pro-totype and offer a broader range of care for its clients. With any such skunkworks efforts, it is important to think through the separation in advance; how soon, and how thoroughly, can the insights and operations of the pirate ship be brought back to the main vessel?
Ultimately, the kind of organizational change typi-cally needed to respond to disruption must be an on-going effort. Says Barclays’ Jenkins, “It is about being continually dissatisfied with what you are doing. What is the next thing to drive for? There will always be a next phase. It is about constantly challenging and creat-ing an organization that is never satisfied.”
Culture change. As difficult as organizational rede-sign may be, truly changing a large company’s culture in response to a disruption can be even tougher. But it is no less important. In the case of one large car company facing declining sales and a weak cash position, top ex-ecutives had devised both a new strategy and a new op-erating model, but didn’t know what to do about their culture. They knew it had to be changed: It was slow and bureaucratic. The CEO set up a team of several of
his best executives, who started defining the company’s cultural priorities: speed, willingness to take risks, and greater accountability.
The CEO understood that the only real way to change a company’s culture is by changing behavior. He began by asking his top team to make decisions in days and weeks, not months or years. They didn’t announce the change; rather, they just practiced the new behav-ior themselves, and it spread. Because the top 50 or so senior executives had become very isolated—the com-pany had as many as 15 layers in its hierarchy—they began interacting informally with people lower down in the structure who actually knew what worked and what didn’t. The result was a much clearer picture of how the company operated, with the added benefit that the peo-ple involved became zealots about the need for change. The company made sure to act quickly on the best ideas generated through the process.
At Barclays, Antony Jenkins faced a tough task when he became CEO: to restore the bank’s public reputation and renew its internal culture. Though he had spent time at Citibank between 1989 and 2006, he began his career at Barclays in the early 1980s. Despite his time away, he considers himself an insider, which he feels has been a singular advantage since be-coming CEO. In his view, it would have been incred-ibly difficult to come in from the outside and try to change Barclays. As an insider, he was already familiar with the strategic and cultural challenges facing the organization, and having the opportunity to “road-test” different approaches in individual business units was a significant benefit in taking on the CEO role.
“I was able to prototype what I believed in, first at Barclaycard and then at retail and business banking,” he says. “This became the foundation for my thinking about how to change the larger organization.”
Using his earlier experience, Jenkins developed a vi-sion of a “go-to bank,” and turned it into action in the TRANSFORM program. The program was then ap-proved by the board of directors, and presented publicly in February 2013. Now the challenge will be to sustain momentum and to run the bank to serve the interests of all its stakeholders.
Promoting cultural change, in Jenkins’s view, is feasible. “Leadership drives culture, and culture drives organizational performance,” he says. “Organizations look at how you behave, not what you say, and you can’t do it if you are not authentic and relentless. Do what you believe is right and do not get distracted by all the
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CEO] Andy Grove really got the concept of disruption. His famous phrase, ‘Only the paranoid survive,’ was a statement about how to [anticipate and] respond to disruption.”
For any CEO who leads a company successfully through a disruption, that success will likely become his or her defi ning moment. If you are a chief executive, that’s the hidden opportunity disruptions provide. The next disruption to your company could be the event that most determines how you will be regarded and remembered as a leader. +
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voices outside commenting on your plan.”In this implementation phase of managing through
a disruption, what CEOs do is at least as important as what they say. Too many leaders in crisis simply send memos from on high, rather than determine a course to do things differently. There is also a risk in trying to frighten people into changing their ways—the burn-ing platform sometimes just scares them into freezing instead. Finally, CEOs confronting disruption need to reach out to people throughout the company who can help them cross-organizationally, and do so through informal interactions. Cross-organizational interaction is by far the biggest accelerator of change (see “Cul-ture and the Chief Executive,” by Jon Katzenbach and DeAnne Aguirre, page 22).
The Defi ning MomentThe Great Recession gave the CEO of virtually every company around the world a strong taste of the im-pact of a deeply disruptive crisis. Some chief executives thrived, making their company stronger than ever. Others simply muddled through. Still others watched as their company succumbed to the trauma.
The best CEOs understand that disruptions will hap-pen, and that no company can insulate itself completely from their effects. But they also know that in any crisis there can be an opportunity. Companies that survive major disruptions are likely to come out even stronger, and better able to anticipate and prepare for the next one. As Clayton Christensen notes, it’s diffi cult to think this way, because leaders are always tempted toward complacency. “Almost all of them,” he says, “probably including me, tend to stop asking good questions—or else their successors do. For example, [former Intel
Resources
Amy Bernstein, “Yossi Sheffi : The Thought Leader Interview,” s+b, Spring 2006: MIT’s leading supply chain expert says business leaders have to fi gure out how to bounce back from the unthinkable.
Christopher Dann, Matthew Le Merle, and Christopher Pencavel, “The Lesson of Lost Value,” s+b, Winter 2012: A study of companies with shrinking shareholder returns shows that strategic risk—self-induced disruption—is the number one cause.
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, “CEO Succession 2011: The New CEO’s First Year,” s+b, Summer 2012: Last year’s study focused on guidance for the incoming captain of the company.
Art Kleiner, “The Discipline of Managing Disruption,” s+b [online only], Mar. 11, 2013: The interview with Clayton M. Christensen where the quotes in this article fi rst appeared.
Gary Neilson and Julie M. Wulf, “How Many Direct Reports?” Harvard Business Review, Apr. 1, 2012: During the past 20 years, the CEO’s aver-age span of control has doubled, giving fresh relevance to the question, How much should the chief executive take on?
For more thought leadership on this topic, see the s+b website at:strategy-business.com/strategy_and_leadership.
For any CEO who leads a company successfully through a disruption, that success will likely become his or her defi ning moment.
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CEO TURNOVER is trending high, but in a more planned and stable manner.
by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson
“IT’S TIME FOR A CHANGE”
The past year was a busy one for companies looking for new leaders. Fully 15 percent of the world’s 2,500 largest public companies made a change at the top in 2012. This number, 375 companies, was the highest total since 2005, and the second highest in the 13 years’ worth of data we’ve gathered since 2000. Given all this turnover activity, you might expect higher levels of chaotic, reactive behavior. But almost three-quarters of the companies planned their succession events carefully, an increase of more than 50 percent since 2006.
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These numbers represent a sharp contrast to the succession activity during the depths of the Great Re-cession; in 2010, for example, the rate of turnover was only 11.6 percent (see Exhibit 1). In other words, these results suggest that companies have moved toward more overall leadership stability, not less, in the past few years. Companies in general may be more willing to make changes at the top deliberately, in a more systematical-ly planned fashion, in search of increased competitive advantage rather than recovery from a crisis. Whether these choices prove to be the right ones is harder to judge, of course, but if experience is any guide to future results, the attention to planned succession will pay off.
Insiders and OutsidersAnother indicator that companies were looking for real change in 2012 was the proportion of CEOs hired from outside the company. Overall, the 2012 crop of new CEOs included a larger percentage of outsider recruits than past years did. The share of new insider CEOs dropped considerably, from an average of 80 percent be-tween 2009 and 2011 to just 71 percent in 2012. A full 30 percent of companies that made a planned change in their CEO hired an outsider in 2012, compared with an
average of just 18 percent in the previous three years. Meanwhile, the number of outsiders brought in as a result of forced changes stayed about the same as in 2009–11, at just under 30 percent.
Clearly, more companies feel suffi ciently stable to take a risk on a leader they may not know well. But at the same time, they are carefully evaluating the potential risks that come with hiring someone from outside. And they may well be mitigating the risk by hiring outsid-ers from the same industry—just 44 percent of outsiders joined their new company from a different industry.
As in previous years, the size of the company cor-related with different CEO succession patterns. Among the 250 largest companies with new CEOs, just 17 per-cent of CEOs were hired from outside the company, compared with 31 percent of their counterparts among the 2,250 smaller companies. This suggests that smaller companies were more willing to take a risk than their larger brethren (see Exhibit 2). Larger companies had a higher proportion (25 percent) of CEOs who came from a country different from where their headquarters were located. Smaller companies still tended to choose leaders from close to home—only 18 percent came from another country. The largest global companies also favored more CEO recruits with international ex-perience (perhaps because of the opportunities a larger company can offer its insiders). Indeed, 52 percent of the new CEOs at large companies had experience in other regions, compared with only 44 percent from smaller fi rms.
Regional DifferencesSignifi cant differences in turnover rates were found de-pending on where companies were headquartered. The rates of CEO turnover among companies based in ma-ture economies around the world all hovered around the overall average of 15 percent in 2012 (see Exhibit 3). But only 8.1 percent of Chinese companies brought in new CEOs last year, whereas almost a quarter of companies based in Brazil, India, and Russia chose new leaders.
Unsurprisingly, fi nancial performance also plays a role in the nature of CEO turnover events. Among
Exhibit 1: Chief Executive Turnover, 2000–12CEO turnover in 2012 was higher than in all in other years except 2005, and planned turnovers were at the highest level we have seen.
Worldwide CEO Turnover by Succession Reason
4%
8%
12%
16%
20%
2000 2005 2010
Planned
Forced
Merger
Source: Booz & Company
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U.S./Canada
14.3%
Exhibit 3: Reason for Succession by RegionIn 2012, the succession rates varied by region; China showed the lowest turnover rate and Brazil, Russia, and India the highest.
ForcedPlanned
M&A
CEO Turnover Rate by Typeof Succession, 2012
2.6
2.7
9.0
WesternEurope
14.7%0.8
3.3
10.6
Japan
15.3%0.9
2.2
12.2
Other
16.0%
2.6
13.4
China
8.1%0.51.95.7
Brazil,Russia, India
23.9%
4.2
4.2
15.5
Other
16.2%0.42.5
13.3
MATURE ECONOMIES EMERGING ECONOMIES
1.4
2.8
10.8
15.0%
GLOBAL
Source: Booz & Company
Forced
Planned
Exhibit 4: Performance QuartilesCompanies with lower shareholder returns tend to hire outsiders more often on the whole and to have more forced turnovers.
InsiderOutsider
Second
78%
22%
Lowest
39%
61%
InsiderOutsider
PERFORMANCE QUARTILE, 2009–12
Incoming CEO
Incoming CEO
Highest
82%
18%
Third
86%
14%
Source: Booz & Company
Ken Favaro [email protected] a senior partner with Booz & Company based in New York. He leads the fi rm’s work in en-terprise strategy and fi nance.
Per-Ola Karlsson [email protected] is a senior partner with Booz & Company based in Stock-holm. He serves clients across Europe and the Middle East on issues related to organization, change, and leadership.
Gary L. Neilson [email protected] a senior partner with Booz & Company based in Chicago. He focuses on operating models and organizational transformation.
Also contributing to this article were Booz & Company senior manager Josselyn Simpson and specialist Jane Kim, and s+b contributing editor Edward H. Baker.
Exhibit 2: Incoming CEO Profiles by Company SizeThe 250 largest companies worldwide hired relatively large percentages of insiders, candidates with cross-regional experience, and CEOs who were not citizens of the country in which the company is headquartered.
TOP 250 BOTTOM 2,250
Percentageof 2012
incomingCEOs
Incoming CEOs of the largest companies (by market capitalization) are more often...
83%
TOP
69%
BO
TTO
M
INSIDERSHired from within
the company
25%18%
FOREIGNERSDifferent nationality
from where companyis headquartered
52%44%
GLOBALLY EXPERIENCEDWorked in a world region
other than that of HQ
68%
54%
INDUSTRY INSIDERSJoined the company
from the same industry
37%
24%
LIFERSNever worked at adifferent company
Source: Booz & Company
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companies that had a CEO turnover between 2009 and 2012 and were in the lowest quartile of performance as measured by total shareholder return over the outgoing CEO’s tenure, 39 percent had forced out their CEO, compared with just 18 percent among companies in the top quartile (see Exhibit 4 ). During the same period, companies in the bottom quartile also hired outsiders at signifi cantly higher rates than the top-performing com-panies—27 percent versus 19 percent—no matter the cause for the change in leadership. Other analysis cov-ering these years showed that in general, insider CEOs have led their companies to better overall returns.
All in all, our analysis of CEO turnover in 2012 among public companies makes clear two distinct and in some ways contradictory trends. On the one hand, companies in most geographies are more willing to make changes in their top leadership as they look for faster growth in a stabilizing economy and business environment. On the other hand, most companies, es-pecially the better-performing ones, are planning those changes carefully, and sticking with insiders in hopes of maintaining their strong results. +
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Methodology
B ooz & Company’s 2012 Chief
Executive Study identifi ed the
world’s 2,500 largest public compa-
nies, defi ned by their market capi-
talization according to Bloomberg on
January 1, 2012. Our research team
members then identifi ed the subset
of those companies that had made a
change at the top, and cross-checked
the data using a wide variety of print-
ed and electronic sources in many
languages. We also used Bloomberg
to determine which companies had
been acquired or merged in 2012.
We investigated each company
that appeared to have changed its
CEO for confi rmation that a change
had occurred in 2012, and sought
out additional details—title, tenure,
chairmanship, nationality, profes-
sional experience, and so on—for
both the outgoing and incoming chief
executives, as well as any interim
chief executives.
We accepted the information
provided by the companies them-
selves on most data elements, except
to confi rm the reason for an execu-
tive’s departure. For that, we turned
to outside press reports and other
independent sources. Finally, Booz
& Company staff around the world
separately validated each succession
event as part of the effort to learn the
reason for specifi c CEO changes in
their regions.
To distinguish between mature
and emerging economies, Booz &
Company followed the United
Nations Development Programme
2012 ranking.
For data on the companies’ total
shareholder returns during a CEO’s
tenure, we also turned to Bloomberg,
and included reinvestment of divi-
dends, if any. We then adjusted that
data to refl ect differences in regional
markets (measured as the difference
between the company’s return and
the return of the local regional index
over the same time period) and an-
nualized it.
13 Years of CEO Succession DataExplore CEO turnover rates by geography, industry, and year.VIEW MORE
INTERACTIVE GRAPHIC
The 2012 Chief Executive Study Overview VideoAdditional insights from the authors on this year’s unprecedented number of planned turnovers and on who the incoming CEOs are.
VIDEO FEATURE
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For the most part, they are familiar faces. The ma-jority of them were promoted from within the company they now run. Less than half of the new chief executives have spent any time at all working outside their com-pany’s home region. And almost all of them are middle-aged men.
This snapshot of the 2012 incoming class of chief executives puts to rest, at least for this year, the notion that the CEO candidate most likely to be hired is the one with the highest level of global diversity. The data also offers an indication of growing leadership stabil-ity at the top of large companies, and our conversations with CEOs have frequently confi rmed that point of view.
The most notable characteristic of the 2012 class members is their collection of resumes. Of the 300 new
CEOs at the world’s largest 2,500 companies, about 30 percent came from outside the companies that hired them. This is a signifi cant increase (45 percent) over the level of the previous three years, for which an average of 20 percent were outsiders. Interestingly, the entire in-crease is attributable to companies where the transition to a new CEO was planned, not forced (see Exhibit 1, page 54 ). This trend toward outsiders seems a bit para-doxical in light of another fi nding from our study: As in the past, insider CEOs typically lead their companies to better fi nancial returns than do outsiders.
Just because a larger portion of 2012’s class of CEOs come from outside the company, however, does not mean that they bring a different regional perspec-tive. Fully 81 percent of incoming chief executives, Ill
ustr
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Gér
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PORTRAIT OF THE INCOMING CLASS
THE NEWEST CEOS have neither the diversity nor the global backgrounds that you might expect.
by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson
CLASS
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both insiders and outsiders, are natives of the country in which the companies hiring them are headquartered (see Exhibit 2). As you might expect, that number var-ies depending on geography. For Chinese companies in 2012, all incoming CEOs came from China. For Japa-nese companies, they all came from Japan. For western European companies, just 58 percent of the new CEOs in 2012 came from the country where their companies are based. Another 33 percent came from another Euro-pean country.
A similar geographic insularity is indicated by CEO work experience. Less than half of incoming CEOs have ever worked in regions outside where their companies are headquartered, a proportion that declines to less
than 20 percent in both China and Japan (see Exhibit 3). At companies in the U.S. and Canada, the propor-tion of new CEOs with global experience was right at the global average, whereas western Europe had the highest proportion, at 60 percent. Given the critical im-portance of taking a global perspective on business in the 21st century, these numbers seem surprising. One cause may be the increasing levels of connectedness through global travel and telecommunications, which make it possible to be a global CEO without having to work around the world or live in more than one coun-try. In addition, at the C-suite level, the common “lan-guage” of business—the mutual understanding of en-terprise strategy and management—is always prevalent,
Ken Favaro [email protected] is a senior partner with Booz & Company based in New York. He leads the firm’s work in en-terprise strategy and finance.
Per-Ola Karlsson [email protected] is a senior partner with Booz & Company based in Stock-holm. He serves clients across Europe and the Middle East on issues related to organization, change, and leadership.
Gary L. Neilson [email protected] is a senior partner with Booz & Company based in Chicago. He focuses on operating models and organizational transformation.
Also contributing to this article were Booz & Company senior manager Josselyn Simpson and specialist Jane Kim, and s+b contributing editor Edward H. Baker.
Exhibit 1: More Outsiders
Insider
Outsider
Incoming CEOs inplanned successions
2012
70%
30%
2009–11
82%
18%
The proportion of new CEOs hired from inside dropped in 2012, because of a large increase of outsider CEOs in planned successions.
Source: Booz & Company
U.S./Canada
WesternEurope
Japan Other China Brazil,Russia, India
Other
MATURE ECONOMIES EMERGING ECONOMIES
Exhibit 2: Nationality and HQ LocationNew CEOs around the world are most often citizens of the country their company headquarters are in—and in Japan and China, they are all citizens of the country where they work.
Same CountryDifferent Country, Same World RegionDifferent Country, Different World Region
Nationality of incoming 2012 CEOs and location of company’s headquarters
100%
2%
100% 85% 89%
4% 4%
84%
9%
7%
58%
33%
9%
74%
24%11% 7%
Source: Booz & Company
2%
GLOBAL
81%
9%
10%
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U.S./Canada
WesternEurope
Japan Other China Brazil,Russia, India
Other
MATURE ECONOMIES EMERGING ECONOMIES
Exhibit 3: Global Experience
Only 45 percent of the incoming CEOs in 2012 had experience working in a region other than that of their company’s headquarters.
Incoming 2012 CEOs have had experience working in a world regionother than where company is headquartered
55%
45%
40%
60%
83%
17%
44%
56%
85%
15%
62%
38%
53%
47%
GLOBAL
45%
55%
YES
NO
Source: Booz & Company
fostering communication even when executives speak different languages.
The way that companies bring their new CEOs on board has changed signifi cantly over the years. In 2012, 29 percent of the companies in a planned chief executive transition followed an apprenticeship model, a model in which the outgoing CEO remains or becomes chairman and thus can help “apprentice” the incoming CEO. Of the companies that chose this model, 85 per-cent chose an insider as CEO, far higher than the num-ber that chose outsiders. The data suggests that these companies are seeking continuity through their chief executive transition.
The variation among companies from different re-gions choosing the apprenticeship model is noteworthy. In Japan, in keeping with the country’s tight-knit ways, and where 80 percent of turnover events in 2012 were
planned, 69 percent of new CEOs saw their predecessor stay on as chairman. By comparison, just 15 percent of new CEOs at companies in Europe were mentored by the previous CEO.
By the same token, the percentage of companies ap-pointing their new leader as both chairman and chief executive stood as high as 48 percent 10 years ago. Since then, however, the proportion has declined signifi cant-ly, leveling off at around 12 percent since 2009. As we have observed in past studies, the willingness to concen-trate power at the top appears to be more prevalent in North America. Fully 20 percent of new CEOs at com-panies in North America were also appointed chairman in 2012, a signifi cantly higher proportion than in any other region. In Japan, by contrast, no new CEO also held the chairmanship.
How Leaders Lead
Despite their widely varying backgrounds, nationalities, and career paths, virtually all new chief executives we have spoken to over the years agree on one thing: This job is different from all other executive posts. The sense of responsibility increases by an order of magnitude, and the decisions carry much more weight. Prepara-tion is key, but not every new CEO is given that luxury. In any case, whether or not the succession is planned, the new CEOs must lead—moving quickly to gather together the best team possible, making clear to all stakeholders his or her vision for the company’s future, and serving as a model for how he or she expects every-one to behave. +
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Infographic on the Incoming CEO Class of 2012One-page graphic highlighting data on the professional and educational backgrounds of new CEOs in 2012.VIEW MORE
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Research Perspectives on the New CEO Academic studies of the recruitment of chief executives suggest that those from outside the industry do relatively well, companies pay more for generalists than for specialists, and “shadow emperors” hamper performance.by Matt Palmquist
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Management researchers are taking note lately of factors affecting recruitment, selection, and perfor-mance of new CEOs. Since mid-2012, a number of academic papers have explored the impact and perfor-mance of different types of incoming chief executives. Three particularly intriguing reports shed light on some broad and significant questions:
•Whenrecruited fromoutsidecompaniesasnewCEOs, are industry specialists or broad-based general-ists more likely to be successful?
•Which new CEOs—specialists or generalists—tend to command higher salaries?
•Whatrole,ifany,shouldtheoldCEOplaywhena new CEO takes over?
Of course, there are no universal answers to any of these questions. Each successful company has its own unique circumstances. But the findings in these studies might prove particularly useful to those who make deci-sions about chief executives or have a stake in the out-come, such as boards, shareholders, sitting CEOs, and executives with aspirations for the top office.
A Premium for Cross-Industry Experience Most firms consider outside candidates for CEO even if there are strong internal contenders. But how far out-side? Should someone be brought in from another in-dustry? A new CEO with industry-specific knowledge would presumably have better-informed judgment, but someone from another sector could offer fresh ideas.
“Outsider CEO Succession and Firm Performance,” by Abu M. Jalal and Alexandros P. Prezas of Suffolk University in Boston, examines the impact of appoint-ing external candidates on a firm’s operating model and stock performance, and also on CEO compensation. The results suggest that many companies that look out-side would do better in the long term by hiring someone fromfaroutside—fromanotherindustry.
This finding, to be sure, applies to only about one-third of the large companies seeking CEOs. That is the percentage that, for planned transitions in 2012 at the 2,500 largest public companies in the world, chose an outsider as a new chief executive (see “Portrait of the Incoming Class,” by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, page 52). Even so, the number of CEO vacancies filled by outsiders, including those from other industries, has been increasing in recent decades.
No previous research had reached a conclusion about whether general managerial skills or specialized industry expertise has more value when leading a major
company, especially when coming in from the outside. Jalal and Prezas aimed to fill the gap by examining the stock market’s reaction to the arrival of the two types of outsiders. They also looked at other results: the com-pany’s stock performance, short-term profitability, and long-term growth potential during the five years that followed each new CEO’s arrival. Combining data from Compustat and the Center for Research in Security Prices, the authors analyzed outside CEO successions at 528 companies from 1993 through 2009; of these turn-overs, 216 hires came from the company’s industry and 312 were from other sectors. (The study did not include CEOs hired from inside the same company.)
On average, firms bringing in someone from within the same industry had higher overall returns than those with non-industry outsiders, at least during the first few months. But the picture soon began to change. By the third or fourth year following succession, firms that had reached beyond their own industry to appoint a CEO posted better stock returns, on average, than those hir-ing closer to home.
“It appears as if initially the market is not as favor-able about the prospects of firms hiring CEO successors from another industry, but once these firms introduce policy changes and demonstrate better performance un-der their new CEOs, the market turns and remains in their favor,” the authors write.
The companies that hired CEOs from a different industry also enjoyed other performance gains. On aver-age, they paid more dividends to shareholders, engaged in higher capital spending, and demonstrated better op-erating performance, as measured through profitability and Tobin’s Q (the ratio of a company’s market value to the total value of its assets).
The authors also looked for correlations to explain why companies made the hiring choices they did. The greater the number of similar firms there were in the hiring company’s industry, the more likely it was that the new CEO would be hired from that sector. By con-trast, firms that had smaller boards, more independent directors, or more members who were also sitting on other major company boards were more likely to ap-point a CEO from another industry.
Paying More for Generalists The Suffolk University study also found that CEOs brought in from another sector received more com-pensation than newcomers from the same sector. That finding jibes with another recent paper, “Generalists
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Matt Palmquist [email protected] is a freelance business journalist based in Oakland, Calif., and the author of s+b’s Recent Research column.
versusSpecialists:LifetimeWorkExperienceandCEOPay,” by Cláudia Custódio of Arizona State University, Miguel A. Ferreira of the Nova School of Business and Economics, and Pedro Matos of the University of Vir-ginia. This study finds that CEOs who have accumu-lated more general managerial skills during their career have been increasingly better paid during the past two decades than their counterparts who specialized in one industry or company.
The authors assembled a database of almost 4,500 resumes from CEOs at firms in the Standard & Poor’s 1500 list from 1993 through 2007. This collection of re-sumes listed some 32,500 previous jobs. After indexing these documents, the researchers created a list of general skills that could be accumulated and transferred across companies and industries.
After controlling for many characteristics of firms andexecutives—includingCEOage,tenure,andedu-cationalbackground—theauthors found thatgeneral-ists earned a significant pay premium compared with specialists. CEOs with more general abilities than the sample’s median received a premium of 19 percent in annual pay, on average, or almost US$1 million in extra compensation. Pay increased the most when the gener-alist CEO was also an industry outsider replacing an industry insider.
Pay was also higher than the median for generalist CEOs who were hired to oversee complicated projects such as restructuring or acquisitions. This implies that the labor market rewards CEOs who can guide their firm through a challenging business landscape. Indeed, the premium for generalists was higher at firms that were distressed, undergoing intense M&A activity, or operating in turbulent industries.
Although the premium for generalists was preva-lent across sectors, it was higher in segments that had gone through regulatory and technological shocks in the past two decades, the authors also found. As an example, they cited the telecom industry, which has experienced disruptive leaps in innovation, shifting consumer trends, and legislation that has reshaped business models.
The researchers point to the late Michael H. Jordan as a model of the versatility and increasing value of high-powered generalists. Jordan was the CEO of PepsiCofrom1986to1990;ofWestinghouseElectricfrom 1993 to 1998, overseeing the acquisition of the CBS television and radio network; and of Electronic Data Systems (EDS) from 2003 to 2007. His chief ex-ecutive experience thus encompassed consumer nondu-rables, electronics and industrial supplies, broadcasting, and business services.While he headed EDS, Jordanwas paid $10 million more a year than the average sin-gle-industry CEO was.
The Shadow Emperor Effect Another recent paper offers worrisome findings for any new chief executive whose predecessor is looking over his or her shoulder.The paper, “When the For-mer CEO Stays on as Board Chair: Effects on Succes-sor Discretion, Strategic Change, and Performance,” by Timothy J. Quigley of Lehigh University and Donald C. Hambrick of Pennsylvania State University, finds evidence that an ex-CEO who stays on as chairman can cramp his or her successor’s style and strategic initia-tives—tothefirm’sdetriment.
The authors of this paper cite Booz & Company’s 2009 study of chief executive trends, “CEO Succession 2000–2009: A Decade of Convergence and Compres-sion” (by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, s+b, Summer 2010), which indicated that more than half of incoming chief executives were as-suming office as their predecessor stepped up to the role of chairman. The percentage of companies with this dynamic was increasing worldwide, and it was particu-larly evident in North America.
Because lingering ex-CEOs can reasonably be ex-pected to support policies they enacted themselves and have power over their replacements, previous research-ers have referred to them as “shadow emperors.” It has been argued that they can blunt many of the desired effects of succession, such as breaking through inertia or increasing efficiency. But until now there has been a
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part ways with the predecessor completely, the research-ers conclude. But a departing CEO with valuable wis-dom and experience should perhaps be retained in a consulting role for six months or so, enough time for the successor to settle in and feel comfortable charting a new strategic direction.
Unconventional ThinkingCan we draw conclusions from these three papers, and from others like them, about the best CEO candidates for a successful company? The value of generalist skills, as described in the first two papers, seems clear. But per-haps the critical factor is not what it might appear to be. Rather than breadth of experience, boards and recruit-ers should look for a proven track record of challenging conventional wisdom and experimenting with uncon-ventionalideas—especiallythosethatpayoff.
The final paper is a warning to boards and recruit-ers not to hedge bets. If you hire a CEO to shift your company’s direction, don’t undermine that choice by keeping the old CEO around, at least not for more than a few months. Let him or her depart, ideally in friend-ship, but also in totality. +
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lack of quantitative evidence to show that these negative effects are actually occurring.
Quigley and Hambrick drew on the ExecuComp database to identify all 181 CEO successions between 1994 and 2006 in three industries: computer hardware, computer software, and electronics. These sectors were chosen because they are fast-moving industries with plenty of turnover at the top and a variety of leader-ship structures. Only companies that had been public for at least three years and that had annual revenues of more than $100 million at the time of succession were considered, in an attempt to eliminate the influence of younger companies that might face distinctive chal-lenges. Interim and short-term CEO appointments were also excluded from this study.
The researchers measured firms’ post-succession performance for up to five years or until the new CEO departed, comparing return on assets (ROA), share-holder dividends, and stock returns. Extensive controls were employed, including company size and resources, pre-succession performance, and typical indicators of a board’s desire for change (such as hiring an outsider, forcing a turnover, or promoting an heir apparent).
The analysis showed that shadow emperors do in-deed constrain their successors. The presence of a pre-decessor CEO significantly suppressed several types of strategic initiative: namely, resource reallocation, di-vestures, and the replacement of executives. Even more striking, as long as the predecessor stayed on as chair-man, company performance tended to be about the same as before succession.
“In allowing predecessors to stay on as chairs—perhaps as an honorific courtesy or because of institu-tionalized custom—boards need to be vigilant of thepossibility that their new CEOs may be explicitly or im-plicitly thwarted in their attempts to update their firms’ profiles,” the authors write. In a supplementary analy-sis, they discovered an abrupt increase in resource re-allocation, divestitures, and executive replacement once the predecessor relinquished the chairman’s position. Performance, as measured by ROA, also then tended to diverge significantly from pre-succession levels, sug-gesting a predecessor’s influence does not linger long after he or she actually departs. In this way, a prede-cessor’s retention as chairman can be termed a “quasi- succession,” say the authors, delaying many of the typi-cal after-effects of CEO turnover.
Whenaboardisrelativelyconfidentinanincom-ing CEO’s ability to exert influence, it should probably
Resources
Cláudia Custódio, Miguel A. Ferreira, and Pedro Matos, “Generalists versusSpecialists:LifetimeWorkExperienceandCEOPay,”DardenSchoolofBusinessWorkingPaperNo.2116525,July2012.The paper will also appear in a forthcoming issue of the Journal of Financial Economics.
Abu M. Jalal and Alexandros P. Prezas, “Outsider CEO Succession and Firm Performance” (subscription or fee required), Journal of Economics and Business, vol. 64, no. 6, Nov.–Dec. 2012.
TimothyJ.QuigleyandDonaldC.Hambrick,“WhentheFormerCEO Stays on as Board Chair: Effects on Successor Discretion, Strategic Change, and Performance” (subscription or fee required), Strategic Management Journal, vol. 33, no. 7, July 2012.
For more thought leadership on this topic, see the s+b website at: strategy-business.com/recent_research.
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Illus
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By the time people reach the most senior levels of a company, they are expected to have a degree of per-sonal competence and a strong gut feel for making good executive decisions. Otherwise, they wouldn’t be consid-ered for a top job. But how do they attain this acumen? At Procter & Gamble (P&G)—where we (A.G. Lafley and Roger Martin) served as chief executive and one of the senior advisors to the company, respectively—we de-veloped a systematic approach to cultivating that skill among emerging and senior executives. We found that business literature contains a great deal of advice for chief executives about strategy and execution, but much less is written about how to become the kind of person who can bring the right judgment to bear on business decisions, especially when facing a disruptive environ-
ment. Thus, many CEOs develop their own form of on-the-job training, quietly honing their own heuristics for strategic thinking. That makes it difficult to tease out and develop the personal attributes that separate suc-cessful leaders from less-successful ones.
In our view, leaders would do well to take a more systematic approach to developing their decision-mak-ing capabilities. The place to start is where we started at P&G: with intellectual integrity. In common usage, the word integrity means honorable or virtuous behav-ior. For our purposes, though, we draw a distinction be-tween exhibiting honorable behavior (moral integrity) and exhibiting discipline, clarity, and consistency so that all of one’s decisions fit together and reinforce one another (intellectual integrity).
Leading with Intellectual Integrity One skill distinguishes the effective CEO: the ability to make disciplined and integrated choices.
by a.g. lafley and roger martin, with jennifer riel
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A.G. Lafley [email protected] is coauthor, with Roger Martin, of Playing to Win: How Strategy Really Works (Harvard Business Review Press, 2013). He is the former chairman, president, and CEO of Procter & Gamble. He is a special advisor at the private equity partnership Clayton, Dubilier & Rice, and a director of General Electric.
Roger Martin [email protected] is dean and professor of strategic management at the Rotman School of Management at the University of Toronto. He is a well-known advisor on strategy and leadership development to CEOs.
Jennifer Riel [email protected] is associate director of the Desautels Centre for Integrative Thinking at the Rotman School of Manage-ment, University of Toronto.
In our work with companies, boards, and govern-ment agencies, we see people wrestle with the need to make tough choices—those critical decisions made in service of a relevant strategic goal for which there is no fully satisfactory option and every path seems to de-mand a trade-off. These are the kinds of decisions for which intellectual integrity is particularly vital.
Most people, including experienced executives, don’t like to make choices because it means giving up options. There is a clear temptation to hedge bets, to try to do everything, to attempt to keep all doors open at once by refusing to pick from among existing options or to work to create a better answer. Procter & Gamble was certainly not immune to this phenomenon. At cer-tain times in the 1990s and 2000s, for instance, it was tempting to compete in as many markets as possible, as quickly as possible. Internally, there was a good deal of concern that competitors would make inroads into important emerging economies that P&G had not yet entered. But P&G couldn’t be everywhere at once and succeed. Judgments had to be made about which mar-kets to enter, and in which ways. We explicitly chose to enter first those promising but underdeveloped markets where none of our global competitors had a preexisting advantage (for instance, China as it created special eco-nomic zones, Russia and eastern Europe after the fall of the Iron Curtain) and then to expand thoughtfully in other developing markets. For example, we entered many Asian countries with our baby-care products first, conscious that demographics suggested most of the world’s babies would be born in Asia for the foresee-able future. To fully engage in these countries, we had to defer or delay pursuit of other markets, in some cases indefinitely.
Intellectual integrity is the quality that enables a CEO (or any other organizational leader) to set these kinds of priorities, to articulate the rationale behind them, to stand behind them even when the outcomes are uncertain, and to provide the support that oth-ers need to stand behind those choices as well. Only a CEO with integrity can respond to the avoiding-choice temptation appropriately: “No, we can’t do everything. We must choose to do some things and not others. We just have to think harder and create the choice that is right for us.”
We’ve seen a lack of intellectual integrity, and its consequences, in many settings: in large and small businesses, startups, nonprofits, private equity turn-arounds, and government agencies. Conversely, we’ve seen integrity—on the part of a CEO or other execu-tive leader—ripple out and deeply affect the culture of an organization. When a leader has intellectual integrity, the people of the enterprise are less likely to be distracted by irrelevant considerations, and more likely to keep focused on the indicators that matter most: those related to customers and competitors. They are more likely to maintain a long-term view when making their decisions, and are less susceptible to the dangers of short-term decisions driven by quarterly fi-nancial reporting.
Integrity of this sort is like a muscle. In a healthy organization, it is exercised often. But if it is ignored by an organization, the muscle can atrophy, and the orga-nization becomes more scattered and vulnerable. Such an organization moves in different directions at the same time, subject to the parochial ideas and priorities of individual business units and functions. That is why by the time a CEO is appointed, he or she should have
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Exhibit: The Integrated Cascade of Strategic Choices
Where willwe play?
How will wewin in our chosen
markets?
What capabilitiesmust be in place
for us to win?
What managementsystems are
required?
Wh
What is ourwinning aspiration?
Going through a process that integrated these five strategic choices within a single system led to a higher level of intellectual integrity among the leaders of Procter & Gamble in the 2000s.
Source: Playing to Win: How Strategy Really Works
tion failed to address the real needs of emerging market consumers. When this became clear, we began to de-sign new kinds of products, specifi cally engineered for emerging market consumers—with consumers, and not the machines, in mind. This meant we had to reverse course on some very expensive manufacturing systems, and switch to different machines for different markets.
The Strategic Choice CascadeTo instill intellectual integrity throughout a company—as opposed to leaving its development to chance—some kind of explicit, ongoing decision-making process is needed. At Procter & Gamble, the method we used was known as the strategic choice cascade. Each year, we asked hundreds of company leaders, at all levels, to develop choices explicitly using this framework. The cascade consisted of fi ve interdependent choices (see Exhibit). We said explicitly that none of these choices should be treated as “silver bullets” to solve short-range problems. Nor could they be made in isolation from each other.
The fi rst choice is that of a winning aspiration. Winning matters. Without a competitive goal, it is easy to become complacent and settle for being “good enough.” Settling for good enough means failing to make the tough choices and do the hard work of build-ing outstanding capabilities. At P&G, we chose, at the
developed his or her intellectual integrity, and should be prepared to help develop it in others.
Coming to Grips with RealityMany company leaders think their situation is signifi -cantly better than it actually is, because they look only for data that confi rms their existing view of the world and listen only to those voices that agree with them. By contrast, intellectual integrity requires that one hold oneself and one’s company up to rigorous, challenging examination. That is the only way to learn to anticipate when reality is likely to fall short of expectations.
Failure to come to grips with the reality of the situ-ation led directly to several major competitive losses at Procter & Gamble in the 1990s. For our oral-care prod-ucts (including Crest toothpaste), we invested heavily in overseas distribution in emerging countries such as Brazil. We thought it would be easy for us to build a business there, on the basis of our strength in innova-tion and the brand equity we had developed in other markets. We didn’t fully recognize that our largest com-petitor (Colgate) had far more extensive global distribu-tion, spent twice as much on oral-care R&D as we did, and had already built up great brand loyalty in Brazil and other emerging markets.
Because we were distracted by our expectations, we lost millions of dollars on these investments before we realized that we needed to change our expansion strat-egy. We decided to retreat from Brazil and get our house in order before returning there. We also saw we needed a broad P&G strategy for scaling up in new markets, building a sustainable business one core brand at a time. In Brazil, this led us to focus on our strengths in laun-dry products and baby care. For oral care, we explicitly concentrated on winning in North America and China before turning our attention back to Brazil. When we demonstrated that integrity in our strategic decision making, things worked much better for us in Brazil and elsewhere.
Similarly, in our Pampers disposable diaper busi-ness, we held a strong belief that the best way to lever-age our global scale was to install a single, sophisticated manufacturing system, using state-of-the-art “convert-ers” that could produce all our diapers across all our different markets. To compete with lower-priced rivals in developing markets, we assumed, we needed only to switch to less-expensive materials and remove some of the features. Because, in effect, we let the machines dic-tate our strategy, we didn’t see that our technology solu-
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the active ingredient, transforming the packaging, and partnering with our mass retailers to create a “masstige” (mass-prestige) in-store experience that rivaled the pres-tige brands in department stores. The result was a fast-growing, high-profit brand that revitalized the category.
For household cleaning, we thought entirely differ-ently about cleaning hard surfaces. We determined that there might be new cleaning jobs around the home not served by existing products. Rather than continue to focus on well-served areas like countertops and sinks, we turned to floor cleaning. There, we pioneered an entirely new category, a new way to win in household cleaning, with the Swiffer electrostatic mop. Subse-quently, with our Mr. Clean brand, the key where-to-play area became stains on household surfaces. To win, we launched the “Magic Eraser,” an innovative line of products that remove scuffs and stains easily, taking some of the hard work out of cleaning. In short, with both Mr. Clean and Swiffer, we saw a need for quick-cleaning solutions, and rather than attempt to force-fit existing products to consumers’ needs, we pursued a path with more intellectual integrity. We devised entire-ly new-to-the-world products, designed specifically with a consumer need in mind.
In our fine fragrances business, intellectual integ-rity meant taking the long view. Fine fragrances can be an intensely competitive field, so we made an im-portant where-to-play choice to focus first on the male fragrances segment, which was considerably less com-petitive than the women’s market. To win in fragrances over the long term, we built on our existing expertise. P&G has long been the world’s largest purchaser of fra-grances, which go into laundry detergents, soaps, sham-poos, conditioners, deodorants, dish soaps, fabric soft-
company-wide level, to meaningfully improve the lives of the world’s consumers and, by doing so, drive con-sistent double-digit profit growth. Articulating a win-ning aspiration was not a major stretch for most P&G leaders, given the company’s long history of attempting to achieve decisive product leadership across its many categories. Nonetheless, it was a message that warranted reinforcement.
Next come the choices of “Where will we play?” and “How will we win in our chosen markets?” These are the core choices, the heart of any strategy. Choos-ing where to play means choosing in which markets, for which customers, in which product lines, in which geographies you will compete. Choosing how to win means figuring out how to create a sustainable competi-tive advantage on a specific playing field. These choices can have integrity only when they fit together consis-tently; that is, when the how-to-win choice is made in the context of the where-to-play choice. At P&G, our where-to-play choices focused on a core group of brands, customers, and geographic markets. We would start with market leadership in the home, beauty, health, and personal-care sectors, and position for long-term growth in emerging economies. Our how-to-win choice was to build powerful consumer-focused brands that took ad-vantage of ubiquitous distribution and global scale.
We rethought brand and product positioning in terms of where to play and how to win as well. For example, for the skin-care brand Olay, we shifted our where-to-play from women over 50 who were target-ing wrinkles, to women age 35 to 50 who were fight-ing the first signs of aging, which we successfully char-acterized as “the seven signs of aging.” How would we compete to win with this new segment? By upgrading
Choosing where to play means choosing in which markets, for which customers, in which product lines, in which geographies you will compete.
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At P&G, for instance, when it came to our brand-ing capability, we had traditionally done a poor job of systematically learning from our marketing successes and failures. Most institutional knowledge on brand building and marketing was captured in pithy one-page memos or passed down in anecdotal storytelling by managers who had lived through the experience. The implicit message was that if young brand managers and assistant brand managers hung around seasoned brand builders long enough, they would master all they had to learn about marketing in due course.
In 2000, for the first time in the company’s his- tory, we launched a project to codify P&G’s approach to brand building. The resulting “Brand-Building Frame-work” (BBF) laid out the company’s approach in one coherent document, which is still regularly updated. With the BBF frameworks in place, new P&G market-ers can learn the trade more quickly, and senior man-agers have an organized and written resource to guide their efforts. The BBF serves as a management system that nurtures and enhances the critical brand-building capacity of P&G. Organizational infrastructure like this was central to everything we did, and it enabled us to improve the overall integrity of decisions made throughout P&G.
It is important to emphasize that for every brand, these five choices must clearly fit together. As a strate-gist, you can start anywhere in the choice cascade, but you must make all five choices and they must all be co-ordinated. This is the truly challenging part of strategy. The choices themselves are not terribly complex or dif-ficult. But integrating them, and refusing to stop think-ing until they genuinely reinforce one another, takes true intellectual integrity.
Moreover, in a large company, the choices made at the category, function, and company-wide level must also fit together and reinforce one another. The choices made by the Bounty paper towel team, for instance, must have integrity with the overall P&G choices made by the CEO and senior team.
Sometimes, when the cohesion between choices isn’t strong enough, divestiture is the best answer. This was the case for P&G’s pharmaceuticals business. It was a strong and growing business, with important brands and products. But over time, it became clear that the kinds of choices, capabilities, and systems required to win in this business did not mesh well enough with the company’s core businesses. P&G is at its best when it can develop branded products through a standardized
eners, and other products. We put our deep experience in combining scents and formulating appealing fra-grances to work on licensed fragrance brands like Hugo Boss and Lacoste. As we expanded our fragrance lines, eventually turning to women’s brands as well, our scale enabled us to both purchase our ingredients and manu-facture our products very cost-effectively. Over time, we grew more sophisticated in understanding consumer reactions to fragrances. This further enhanced our for-mulation expertise. It enabled us to build a strong busi-ness in beauty care.
Cohesion and CascadesThese first three choices—our winning aspiration, where to play, and how to win—are closely tied to the fi-nal two choices on the cascade: “What capabilities must be in place for us to win?” and “What management sys-tems are required?”
Capabilities are those things you must do exceed-ingly well in order to deliver on your aspiration, where-to-play, and how-to-win choices. In thinking about our capabilities in light of our other choices, we came to see our core capabilities as deep consumer understanding, innovation, brand building, going to market with cus-tomers and suppliers, and global scale. In each of these areas, we had room to deepen and grow our expertise.
In terms of scale, we had tended to focus on scale within a brand or category, such as laundry detergent or beauty care. We had to work hard to expand our think-ing about scale to encompass the whole company—for example, by bringing our global business services (IT, HR, and other internal functions) together into one department. This encouraged the leaders of our global business services to ask how they could better serve their internal customers globally, and how they could smartly outsource their lower-value-added activities. Now, the real scale advantages began to accrue. We reduced costs across the company, worked more closely with custom-ers in ways that increased our importance to them, and managed our supplier relationships in new ways that made all of us better. These changes were possible only because of our growing intellectual integrity.
Finally, one must ask, “What internal management systems are required?” Select the ones that can best en-sure that your required capabilities add up to a platform for advantage. Systems and measures are essential to building capabilities and supporting the other strategic choices. But to have intellectual integrity, a leader must make an explicit choice to develop these systems.
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innovation process, sell through its best customers (such as Walmart and Walgreen Company), and develop a long-term relationship with its end consumers. In phar-maceuticals, there is a highly specialized and complex development process with many steps not in common with our standard approach—including blind trials and FDA approvals. The industry also has a different mar-keting model from that of consumer products. It sells directly to doctors and pharmacies; consumers don’t make the purchase decisions and may never know the brand name of the drug, or who makes it. In the end, we divested a profitable pharmaceutical business, be-lieving it could be more successful elsewhere.
In divesting this business, P&G walked away from billions of dollars of sales and profits, but it was the right decision. Walking away allowed the company to reinvest cash, human resources, and other assets in busi-nesses that did have integrity with its overall set of strat-egy choices: beauty, home, and personal care. When P&G acquired Gillette in 2002, it was as much for the sake of integrity—for its fit with the firm’s choices and competencies—as it was for the strength of its male grooming, personal-care, and oral-care brands.
Building Integrity at P&G The five cascading choices provide a structure within which to practice intellectual integrity. Participants are continually drawn back to the same crucial decisions: what to aspire to, where to play, how to win there, which capabilities to build, and which management systems to set up. This framework removes a great deal of fear and anxiety, especially among lower-level man-agers and those far from headquarters, about doing the right thing.
But, like any other system involving behavior change, the cascade process takes some time to learn and requires concerted attention. At P&G, once we recognized the importance of consistent, integrated decision making, we looked for other ways to foster it. We knew that integrity is not a fixed quality that people inherit at birth; it can be cultivated and devel-oped, in part through training but mostly through bet-ter business practice and by encouraging the right types of conversations.
We thus began to explicitly identify up-and-coming high-potential executives and coach them in strategy, inquiry, and the process of making integrated choices. We redesigned the strategic review process, turning it into a vehicle for building the strategic integrity muscles
of our entire leadership cadre. Previously, annual strat-egy reviews were like corporate theater—a setting that did not encourage integrity. The presidents of P&G’s businesses and their teams trooped in before the com-pany’s most senior executives with bulletproof Power-Point presentations. The presenters naturally wanted to show their results, defend their decisions, and get out of the room as rapidly as possible. They didn’t welcome critical probing of the logic of their choices. When se-nior leadership felt that resistance, they either kept their reservations private or piled on with attacks—in which case the presenting team had no choice but to take the criticism and then slink out, proverbial tails between their legs.
The old strategic review process had also been an impediment to collaboration among P&G’s businesses and functions. If the hair-care category president came into the review seeking only to defend his strategy and avoid any criticism, he would be less likely to talk open-ly about how the hair-care choice cascade fit with the choice cascade for skin care or home care. Nor would senior leadership be inclined to force the issue. Yet such discussions are vital. Without firsthand experience with just that type of dialogue—knitting together various choice cascades across a corporation—emerging leaders can’t develop their strategic integrity muscle, and senior leaders get less practice doing so as well.
To address these roadblocks, we fundamentally transformed the process and tone of our annual strategy reviews. We shifted the paradigm to one of candid con-versation and exploration. Teams still prepared a strat-egy presentation in advance of the meeting, but rather than take time in the meeting to review it, they provid-ed the work to the senior team several weeks in advance.
In divesting a profitable pharmaceutical business, P&G walked away from billions of dollars of sales and profits, but it was the right decision.
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an overarching, integrated strategy. This will pay off, but it won’t be easy. None of these
choices can be exercised through a rulebook or through top-down fiat. They can’t be made once, and then left for all time. Strategy choices have to be made thought-fully and organically with a good deal of organizational give and take. They must be revisited and reexamined regularly. Norms and assumptions must be challenged, and every attempt must be made to see the world as it is, not as it was or as you would wish it to be. It’s far, far easier to refuse to make these choices, to make them in isolation from each other, or to make them for only one part of the business without considering the impli-cations for the whole.
It takes intellectual integrity to insist upon the con-tinued practice of choice cascades throughout the orga-nization. It’s tough to answer the questions posed in this exercise, and tougher still to follow through with action. But the alternative—attempting to win in the market-place with no consistent company-wide strategy—is ul-timately far more difficult. +
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The senior team then issued to the category team a set of discussion topics for the meeting.
This enabled us to focus the meeting on construc-tive dialogue involving those specific strategic issues, and it helped shift the tone from defensiveness to a joint exploration of possibilities. We also initiated a continu-ous series of conversations on strategic matters, con-ducted at all levels: brand, category, sector, customer, channel, region, country. A common theme of these dis-cussions was how the choices knitted together, how they fit with the broader corporate strategy, and how the team planned to measure results moving ahead. These discussions were driven by a commitment to ask-ing tough questions, which brought issues to the sur-face that everyone was thinking privately but nobody felt ready to say out loud. Articulating these kinds of thoughts can create helpful tension and can lead to a true shared purpose.
Toward a World of IntegrityThroughout all the strategy discussions at P&G, the objective was to get leaders comfortable with collabo-rating on strategy, playing with ideas, and challenging their own thinking—and thus to build the integrity of the leadership of the company. By framing strategy as the answer to five integrated questions, we avoided fragmentation. Fragmentation is a trap that all organi-zations, whether in the for-profit, nonprofit, or govern-ment sectors, can fall into—to their own detriment.
In the U.S. government, for instance, right now, many groups are working in one way or another on en-ergy policies. But there is no comprehensive strategy, no single set of aspirations that guide an integrated set of cascading choices for the country’s energy future. In-stead of having an integrated aspiration, a sense of where to play, a sense of how to win there, and the right capa-bilities, the United States is lurching from the Canadian pipeline to alternative energy investments to shale-based oil and gas. Companies fall into the same trap, attempt-ing to do everything at once without a guiding principle to direct resources and drive action. The result is wasted resources, inaction, and disillusionment. It doesn’t have to be that way.
At P&G, every strategy document at every level of the organization had to specify clear where-to-play and how-to-win choices. Not every CEO will define the company’s choices in that explicit way, but every CEO should internalize the need to make every choice—from aspiration through management systems—part of
Resources
A.G. Lafley with Ram Charan, “P&G’s Innovation Culture,” s+b, Autumn 2008: The deliberate steps that enabled P&G’s company-wide embrace of game-changing activity.
A.G. Lafley and Roger Martin, Playing to Win: How Strategy Really Works (Harvard Business Review Press, 2013): Explicates the principles underly-ing the choice cascade.
A.G. Lafley, Roger L. Martin, Jan W. Rivkin, and Nicolaj Siggelkow, “Bringing Science to the Art of Strategy,” Harvard Business Review, Sept. 2012: Describes a choice cascade process.
Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011): How to develop a coherent strategy by integrating your value proposition (“way to play”) and capabilities.
Roger Martin, The Opposable Mind: Winning through Integrative Think-ing (Harvard Business Review Press, 2009): This view of complex, contradiction-embracing leadership resonates with intellectual integrity.
For more thought leadership on this topic, see the s+b website at: strategy-business.com/strategy_and_leadership.
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In a shopping center on the western outskirts of Har-risburg, Penn., sandwiched among a women’s clothing shop, a pet supply store, and a dental clinic, sits a win-dow into the future of healthcare in the United States: Highmark Direct. Open since 2009, it is part of a small chain of nine retail health insurance stores scattered across Pennsylvania owned and operated by Highmark Inc., the fourth-largest plan in the Blue Cross and Blue Shield Association, which serves 4.9 million members in Pennsylvania, West Virginia, and Delaware.
The retail stores run by Highmark, a US$14.8 bil-lion, diversified health-services company, are a direct channel into the growing market for individual health insurance created by a combination of reform and bud-get-strained employers, many of whom are off-loading
healthcare coverage decisions and costs to their em-ployees. Consumers walk in or make appointments for consultations with Highmark’s licensed agents, who help them navigate the often confusing world of health insurance and assist them in identifying and applying for coverage. Seniors attend informational seminars that explain their Medicare coverage and supplemental in-surance needs. Plan members learn how to better man-age their own health with Highmark’s wellness pro-grams, and can contact customer service via self-service kiosks and videoconferencing.
The last few years have seen a handful of other U.S. health insurers enter the bricks-and-mortar retail business, including Florida Blue (a licensee of the Blue Cross and Blue Shield Association), which operates a
Putting an Iin Healthcare
by Gil Irwin, Jack Topdjian, and Ashish Kaura
the days of the disengaged health consumer are numbered. Consumerization will transform healthcare systems, involving individuals as never before in the management of their own care.
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Gil Irwin [email protected] is a senior partner with Booz & Company based in New York. He specializes in business model and operating model transformations in the health-care industry, with a focus on technology and operations strategy.
Jack Topdjian [email protected] is a partner with Booz & Com-pany based in New York. He leads the firm’s North Ameri-can healthcare technology and operations practice and global healthcare consumerization practice. He specializes in large-scale transformation and capability building in the healthcare industry.
Ashish Kaura [email protected] is a partner with Booz & Company based in Chicago. He specializes in the development of growth strategies and new business models in response to market discontinuities for healthcare and health-services companies.
Also contributing to this article were Booz & Company senior partner Gary Ahlquist, partner Michael Ruhl, and senior associate Nate Holobinko.
chain of 11 stores stretching the length of its state, and United Healthcare, which opened 30 pop-up stores and more than 1,400 kiosks in shopping malls in October 2012. These companies are being driven by a nascent trend that is quickly becoming an industry imperative: the consumerization of healthcare.
Health insurance stores are only one of its manifes-tations—other consumerization initiatives are currently under way among insurers, care providers, and pharma-ceutical companies. Accountable care organizations, for example, are beginning to tie physician compensation to population health. Healthcare bundles combine medi-cal care, coverage, and support across a care episode or condition—such as a knee replacement or coronary by-pass surgery—at a fixed, risk-adjusted price. And capita-tion payment contracts pay providers an annual rate per patient, no matter how much care they require. These and other efforts skim the surface of a game-changing industry transition.
The word consumerization has several meanings, but we use it here to describe the transformation of an industry from a primarily business-to-business (B2B) enterprise to one that focuses on business-to-consumer (B2C) activities. In today’s B2B health marketplace, business is transacted among large employers, payors, providers, and pharmaceutical companies. The people being insured and treated have little involvement in or responsibility for their own care and cost choices. In the years ahead, healthcare will evolve into a B2C industry, in which consumers will take a much more active role in their healthcare decisions and expenditures. And, as a result, every healthcare company and organization will need to become more consumer-centric. The deck is be-ing reshuffled, and there will be new winners and new
losers, depending on how companies play their hand.This shift is both a reaction to and a result of the
state of healthcare systems around the world, which are characterized by high costs, lack of access, and unsat-isfactory outcomes. The U.S. system has been in the spotlight for years because of double-digit cost infla-tion, frustratingly complex patient experiences, and, most recently, the controversial Affordable Care Act. But the much-lauded, publicly funded healthcare sys-tems in nations such as Canada and the United King-dom are coming under pressure, too, as their founda-tion in fixed-budget, capitation-based care is strained by rising healthcare costs and demand. This is creating allocation challenges; for example, the benchmark tar-get wait time for a knee replacement in Canada was 182 days in 2011, and 25 percent of patients were not served within that period. It is also creating equity challenges: In the U.K., a secondary healthcare system is develop-ing, which calls into question the viability of universal healthcare. Private medical insurers, hospitals, and care providers are springing up to answer the demands of consumers who want more timely care and can afford to pay for it.
Meanwhile, in developing countries, the struggle to extend basic healthcare to large portions of the popu-lation has been intensified by an explosion of “devel-oped nation” diseases. A 2011 study by the World Eco-nomic Forum and the Harvard School of Public Health estimated that the cumulative costs of noncommunica-ble diseases—including cardiovascular disease, chronic respiratory disease, and cancer—in low- and middle-income countries would surpass $7 trillion by 2025. Diabetes is a case in point. Five of the 10 countries with the highest national prevalence of diabetes are in the
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has an outsized influence on the demand for care and care outcomes. In the United States, fully 40 percent of deaths are attributable to behavioral factors—more than factors such as genetics, environment, and socio-economics. And according to the American Medical Association, 25 percent of the United States’ total an-nual healthcare expenditures are the result of behaviors that could be changed, such as smoking, lack of exer-cise, and poor diet.
Furthermore, once people become ill, their behav-ior often exacerbates their condition, as many are un-willing or unable to complete their treatment. The lack of treatment adherence, such as failing to complete a medication regime or to cut fat or sugar from a diet, is the cause of approximately 125,000 deaths and 10 per-cent of hospitalizations in the U.S. each year, according to a study funded by the U.S. Department of Health & Human Services. In a recent analysis of the finan-cial effects of five chronic diseases (namely, hyperten-sion, asthma/chronic obstructive pulmonary disease, chronic back pain, depression, and rheumatoid arthri-tis) in Europe, Booz & Company and the Bertelsmann Foundation concluded that national productivity losses associated with a lack of treatment adherence were €10 billion to €20 billion ($13.5 billion to $27.1 billion) in Germany, �€8 billion to �€19 billion ($10.8 billion to $25.7 billion) in the U.K., and �€2 billion to �€4 bil-lion ($2.7 billion to $5.4 billion) in the Netherlands (see “Unleashing the Potential of Therapy Adherence: High- Leverage Changes in Patient Behavior for Improved Health and Productivity,” by Peter Behner, Ab Klink, and Sander Visser, Booz & Company, July 2012).
The ramifications of consumer behavior extend to choices regarding care options and healthcare insur-ance. A 2012 survey by health insurer Aetna Inc. found that Americans rank choosing a health plan as the second most difficult decision in their lives (choosing a retirement plan was first). The survey also revealed that 43 percent of consumers rarely or never track their out-of-pocket care costs. The Consumers Union stud-ied the ability of consumers to select a health insur-ance plan, reporting in January 2012, “Almost all par-ticipants were stymied in their desire to identify the best value plan among those offered. While their con-cept of value was sophisticated, participants had little ability to assess the overall coverage offered by a plan.” The Affordable Care Act is a first step in demystify-ing the healthcare process for consumers, but they will need sustained guidance and support.
Middle East. In Mexico, Type 2 diabetes is the leading cause of death among adults. And there are 92 million people with the disease in China and 63 million in In-dia, according to the International Diabetes Federation.
These global healthcare challenges have revealed the cracks in the industry’s current operating models, and they demand a new way of thinking. The idea of consumer-driven healthcare has been around for years, but now healthcare companies are being forced to act. The U.S. is the bellwether in this regard. The Supreme Court’s upholding of the Affordable Care Act and the reelection of President Barack Obama in 2012 have ef-fectively ended the debate on whether to pursue reform and turned the industry’s attention to how to achieve it. Thus, U.S. health insurers, care providers, and phar-maceutical companies are experimenting with a host of new models and technologies that should be replicable in the healthcare systems around the world.
Many of these innovative solutions are based on fundamentally sound ideas for cutting costs and improv-ing care outcomes. But unless and until the consumer is positioned at the center of the healthcare industry, it is highly unlikely that such concepts will deliver their full potential. Just look at the fate of HMOs (health maintenance organizations) in the United States. In the 1990s, HMOs produced lower costs and provided care comparable to that of other healthcare benefit models. But because HMOs disenfranchised their members by imposing constraints on where they could go to obtain care and placed limits on the amount of care they could receive, they created a consumer backlash, and many of them failed.
The lesson: To successfully cure the systemic ills of healthcare in the U.S. and elsewhere, the industry will have to promote and support more control, aware-ness, and responsibility on the part of the healthcare consumer. The digital enablers of consumerization—big data, cloud computing, telemedicine, and social media—are already at hand, and can be leveraged by forward-thinking executives. Eventually, as consumer-focused initiatives multiply and their effects reverber-ate throughout the industry, they could bring about a dramatic improvement in health and a transformational reduction in costs.
Influencing Consumer BehaviorA fundamental reframing of the consumer’s role on the part of healthcare companies is a prerequisite for sus-tainable healthcare systems, because consumer behavior
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will alter their lifestyles and behaviors to use them (for example, paying $4 for a cup of coffee).
Occasionally, such products and services are born of intuition. But in most cases, their genesis is found in insights that come from a deep study of what consumers need and desire, and how they act. As healthcare com-panies become more effective gatherers of insight, they will seek to study their consumer markets in increasing-ly sophisticated ways. They will segment them accord-ing to preferences, health status, care utilization levels and patterns, lifetime customer value, and propensity to purchase specific products and services, whether those offerings are insurance plans, medical care, or medica-tions and medical devices.
We are already seeing the glimmerings of this more sophisticated, consumer-centric approach to product and service innovation in the health insurance sector. In the absence of a clear value proposition, accessible lan-guage, and a full understanding of their own insurance needs, consumers are struggling to make sense of what kind of coverage to buy. In response, the industry has begun developing more insight-driven offerings, such as life stage–based products that are tailored to match consumers’ evolving health and financial needs as they enter the workforce, start families, or prepare to retire. For example, for budget-conscious young people, insur-ers are offering policies that feature low premiums and catastrophic coverage, while they offer a more compre-hensive set of benefits to pre-retirees who seek coverage for preexisting conditions and protection for their nest eggs. As insurers draw on ever-expanding data sources, we would expect to see more and more of these tailored products, perhaps including products that are co-brand-ed with hospitals or that give rewards for healthy be-
Influencing consumer behavior, whether through outright incentives or the design of the subtler, suppos-edly more effective changes in choice architecture advo-cated by economist Richard H. Thaler and legal scholar Cass R. Sunstein in Nudge: Improving Decisions about Health, Wealth, and Happiness (Yale University Press, 2008), is no trivial task. Certainly, it will require more than the estimated 4 percent of national healthcare ex-penditures in the U.S. currently devoted to behavioral change.
The Building Blocks of ConsumerizationThere is no fixed starting point or one-size-fits-all strat-egy for consumerization. The different healthcare sectors and the organizations within each sector will pursue it in their own ways. But three building blocks are essential to any successful adoption: (1) product and service port-folios based on insights that are derived from a nuanced understanding of consumers; (2) tools and programs that engage consumers in care delivery and influence their behavior, and enable service providers to optimize and coordinate patient-centric care; and (3) end-to-end cus-tomer experiences that produce consumer satisfaction, trust, and brand loyalty.
In developing these products and tools, healthcare companies will have to master new capabilities—with all the skills, knowledge, behaviors, processes, struc-tures, and technology inherent in those capabilities—or risk disintermediation.
1. Insight-powered products and services. As com-panies such as Starbucks and Facebook have demon-strated, if products and services are accessible and can be personalized in ways that make them highly rele-vant, consumers will do more than just buy them: They
Influencing consumer behavior will require more than the estimated 4 percent of national healthcare expenditures in the U.S. currently devoted to behavioral change.
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encourage competition among the providers that of-fer bundles. In a Booz & Company survey of roughly 1,000 U.S. healthcare consumers in October 2012, 78 percent of respondents found the concept of bundled care appealing. Among the benefits they would expect to reap from care bundles are lower prices, greater price clarity and transparency, more integrated care, the abil-ity to provide input in care processes, and simplified billing.
Healthcare bundles are starting to drive costs down by streamlining, standardizing, and coordinating what were formerly discrete and often highly variable process-es and procedures, transforming them into comprehen-sive, patient-centric delivery systems. In October 2012, Wal-Mart Stores Inc. announced agreements with six leading hospital systems, including Cleveland Clinic, Geisinger Health System, and Mayo Clinic, for exclu-sive, fixed-price care bundles for certain heart, spine, and transplant surgeries. This enables the company to provide incentives to employees who choose one of the six providers. If an employee who requires one of these procedures uses one of the fixed-price bundle providers, the employee’s out-of-pocket expenses are eliminated and other expenses related to receiving the care, such as travel, lodging, and food for the patient and a caregiver, are provided without charge.
As Walmart’s agreements suggest, employers can play a valuable role in encouraging consumer engage-ment. Whole Foods Market, which provides its own health insurance to its employees, is using several pro-grams to build healthy lifestyles into its corporate cul-ture. In CEO John Mackey’s new book, Conscious Capitalism: Liberating the Heroic Spirit of Business (with Raj Sisodia, Harvard Business Review Press, 2013), Mackey describes Whole Foods’ Team Member Healthy Discount Incentive Program. It is a voluntary program in which employees can go to a mobile lab that will measure basic biometrics, such as cholesterol levels, body mass index, and blood pressure. The healthier the employee, the higher Whole Foods will raise his or her store discount above the standard 10 percent. At the highest level, employees can obtain a 30 percent dis-count. “Within our culture,” writes Mackey, “it has be-
havior or offer money-saving coupons for health-related consumer products.
To enhance their ability to capture and utilize in-sights, healthcare organizations will need to integrate all the data they gather from customer touch points and meld it with external demographic, behavioral, and atti-tudinal consumer data. Then, they will need to artfully redesign their processes and systems to optimize their products and services and to affordably bring them to market. For instance, companies will have to adopt rap-id product design processes and create a tighter align-ment between the product development function and consumer-facing functions, such as marketing, sales, and customer service. In many healthcare companies, this will be easier said than done, requiring fundamen-tal shifts in how business is conducted, how success is measured, and how the corporate culture operates.
2. Engaging care delivery. Involving consumers in the care-delivery process will require the development of tools and programs that give people incentives to pursue healthier lifestyles and participate more active-ly in the medical treatment they receive, and enable a new clinical operating paradigm that coordinates care around the patient.
Consider the advent of healthcare bundles. As more and more bundles appear on the market, their cost and quality will become more transparent, enabling consumers to easily shop for them. In turn, this will
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come a matter of pride for team members to move up to higher levels.”
Whole Foods has also established the Total Health Immersion Program for its least healthy and most at-risk employees. This one-week, medically supervised pro-gram provides education about healthy eating and living. Mackey reports that more than 1,300 employees took advantage of the program in its first two years, prompt-ing the company to extend the program to spouses and partners. In 2013, Whole Foods plans to begin offering the program to the public. “It’s a win-win strategy for all stakeholders involved,” Mackey told us. “When we have healthy team members, they are happier, and happy team members provide better customer service to our shoppers. It also leads to the company needing to spend less on healthcare, which is better for investors.”
Consumer engagement is also an area where phar-maceutical companies can make an impact. For exam-ple, Biogen Idec and Merck Serono have been making impressive improvements in the treatment of multiple sclerosis. Using Web-based engagement tools and pa-tient services that add “beyond-the-pill” value, they show consumers how their behavior can maximize the effectiveness of therapies.
These consumerization pioneers are not seeking to change the behaviors of one patient at a time. Instead, they are integrating behavioral cues into a coherent ther-apeutic system that reinforces medical management and improves outcomes. To achieve truly engaging delivery, care will have to be coordinated among consumers, care providers, and insurers. Simplified and transparent pric-ing strategies will be needed to help consumers make more informed decisions. Tools and programs will be needed to help them participate in their own care. And, of course, the technology infrastructure, analytics, and devices that help them fully engage will need to be ubiquitous within healthcare systems.
3. Compelling end-to-end customer experiences. In healthcare today, customer experiences tend to be pas-sive and fragmented, as the consumer is passed from department to department and care provider to care provider. Thus, the quality of the customer experience can vary widely by touch point, and there is often little
or no coordination among the many touch points in the end-to-end process of purchasing insurance or receiving care. Unsurprisingly, this results in low levels of cus-tomer satisfaction, trust, and brand loyalty. According to the American Customer Satisfaction Index, an inde-pendent national benchmark based on surveys of more than 70,000 people, U.S. consumers rank hospitals low, just above the U.S. Postal Service in terms of customer satisfaction. They rank health insurers lower yet, in the company of utilities and wireless service providers.
In the health insurance sector, creating compelling customer experiences that bolster satisfaction, trust, and brand loyalty will require more personalized ap-proaches to selecting products, more transparent and comprehensible plan options and costs, and less oner-ous enrollment processes. Once customers sign on, plans need to support them in the quest to manage their own health through simplified claims processes and less complex billing.
In 2011, Cigna launched its largest brand campaign to date, “Go You,” a $25 million marketing effort de-signed to attract consumers with a more personalized customer experience. Go You is more than an ad cam-paign. Cigna is supporting it with 24/7 worldwide cus-tomer service; a Web portal, www.MyCignaforHealth .com; social media apps; tools, such as Intuit Inc.’s Quicken Health Expense Tracker, that help plan mem-bers better manage their medical care and costs; and mobile applications that help members locate nearby pharmacies and emergency rooms. Plan members are also provided access to health coaches for chronic con-ditions and wellness programs.
Hospitals have been on the forefront of the effort to create more compelling customer experiences. Many have sent teams to companies that are known for the world-class customer experiences they provide, such as Walt Disney Company and the Ritz-Carlton hotel chain, to become more adept at serving customers. One result is the addition of experiential elements such as valet services, streamlined admissions processes, more family-friendly policies, and the redesign of facilities to build in directional cues and create calmer, more attrac-tive settings.
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ers to employees. Its web-site includes a decision en-gine that asks employees a series of questions aimed at guiding them to the policy that best fits their needs, financial situation, and risk tolerance. In 2011, a trio of large insurers—WellPoint, Blue Cross Blue Shield of Michigan, and the Health Care Service Corpora-tion—purchased a 78 per-
cent stake in the company. The rationale: They wanted to learn how to better develop and market benefit plans that would appeal to consumers.
Cloud computing will be another key technologi-cal enabler of consumerization, providing, for example, the platform for long-overdue interoperable electronic health records that can provide seamless transitions for patients and better clinical decision support for physi-cians. Nimbus Health, a Seattle-based startup, is using Amazon’s cloud services as a host for its Breeze Medical System, software that allows doctors to share medical records with other doctors and patients. Of course, any mention of cloud computing may raise concerns about privacy among consumers, especially when it comes to their medical history. Although industry security stan-dards have made considerable headway, hospitals and other care providers will need to manage security re-quirements and risk carefully.
Telemedicine—remote monitoring and diagno-sis—is a third enabler of consumer-centric healthcare. It promises improved access and lower care-delivery costs. After a successful pilot project with 6,000 patients in 2011, U.K. health minister Jeremy Hunt announced plans to deliver remote care to 100,000 chronically ill patients in 2013, and as many as 3 million patients by 2017. Patient conditions are monitored with remote de-vices, and patients who have health concerns can text their doctors instead of making appointments and trav-eling to see them.
Finally, given their ability to engage people, it
Of course, before a customer experience can be improved, it must be un-derstood. This starts with a mapping of the current customer experience and a clear understanding of how consumers interact with the brand. Highmark, for example, used a variety of techniques and tools—in-cluding research, site visits, consumer interviews, con-sumer experience simulations, ethnography, and opera-tional data—to understand how consumers perceived their experience with the company. Health organiza-tions must then develop the skills and tools needed to enhance touch points and deliver information in ways that are accessible to consumers.
Enabled by TechnologyThe common thread in nearly all consumer-driven healthcare initiatives is digitization. “Big data” and new technologies will enable organizations to adopt new products and services by simultaneously support-ing personalization, superior clinical outcomes, and af-fordability. Although some technologies have yet to be widely adopted in healthcare, companies are already us-ing new platforms to engage with consumers.
Healthcare companies have access to untold amounts of clinical and financial data. But to make it actionable, they need to convert this data into readily understandable information. When this information is made available and accessible to the consumer through personalized channels, it will affect their behavior—whether the information is a treatment reminder, a lifestyle suggestion, or direction to an optimal site of care. Some healthcare payors are now using the insights gleaned from data to create products and services that align their benefit structure with the individual’s needs. For example, Bloom Health, a Minnesota-based private health insurance exchange, uses big data and analytics to transfer decisions about health benefits from employ-
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should come as no surprise that mobile health (m-health) and social media can support the transition to consumerization. During epidemics in the United States, the Centers for Disease Control and Prevention (CDC) has been a leader in using social media, such as Twitter, Facebook, and Wikipedia, to distribute infor-mation to the public across multiple channels, includ-ing smartphones. During the 2009 H1N1 swine flu pandemic, for example, the CDC used social media channels to disseminate information on behaviors for avoiding H1N1 and to teach people how to recognize its symptoms. The CDC is also tapping into the power
of crowds to encourage people to become “health advo-cates” who pass health information through their own networks. It is expected that m-health and social media use among healthcare companies will increase, engag-ing consumers more in their own health and wellness. For example, they could use their smartphone to moni-tor prescriptions, track weight maintenance, and get medical appointment reminders.
The digital tools are available and accessible, and organizations such as the National eHealth Collabora-tive (NeHC) are devising strategies and standards for integrating them into the U.S. healthcare landscape.
The Patient Engagement Framework
I n November 2012, the National
eHealth Collaborative, a pub-
lic–private partnership, developed a
five-phase road map for the digiti-
zation of healthcare. It begins with
“Inform Me,” an initial step during
which consumers are provided with
standardized forms and information
about advanced directives, privacy,
and specific conditions. The second
step, “Engage Me,” provides patients
with access to their electronic health
records, fitness trackers, and other
e-health tools. The third step, “Em-
power Me,” includes secure mes-
saging between patients and care
providers; the integration of patients’
personal data, such as genetic,
behavioral, and medical history
information, into the providers’ elec-
tronic records; and patient access to
the quality, safety, and experience
ratings of care providers.
Next, during the “Partner with
Me” step, the penultimate phase
of engagement, patients are given
condition-specific management
tools and access to care summaries
to support their personal health
maintenance efforts. Also, patient-
generated information, such as per-
sonal preferences and wellness and
home health device data, is added to
their electronic health records. In the
road map’s most advanced and final
phase, “Support My e-Community,”
patient engagement is enhanced with
a fully interoperable platform that
supports seamless information shar-
ing between a patient and the entire
care team.
Today, various players are at
different stages of the road map,
though most have yet to move be-
yond “Empower Me.” As companies
continue the evolution, they will not
only optimize individual outcomes,
but also enhance health through the
analysis of data and the identification
and dissemination of best practices.
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Resources
Gary Ahlquist, Minoo Javanmardian, Sanjay B. Saxena, and Brett Spencer, “Bundled Care: The Voice of the Consumer,” Booz & Company, Jan. 30, 2013: According to the results of a recent Booz & Company survey, U.S. consumers are ready for the advent of healthcare bundles.
Minoo Javanmardian, Ashish Kaura, Sanjay B. Saxena, and Brett Spencer, “Healthcare after the Ruling: Let the Work Continue,” Booz & Company, June 29, 2012: What the upholding of the Affordable Care Act will mean for insurers, care providers, pharmaceutical firms, and other healthcare companies.
Ashish Kaura, David S. Levy, and Minoo Javanmardian, “Health Insurance Gets Personal,” s+b, Autumn 2010: Earlier analysis of the health insurance market’s coming retail era.
Avi Kulkarni and Nelia Padilla McGreevy, “A Strategist’s Guide to Personalized Medicine,” s+b, Winter 2012: The tailoring of treatments to specific populations is changing the game for key industry stakeholders.
Ramez Shehadi, Walid Tohme, and Edward H. Baker, “IT and Health-care: Evolving Together at the Cleveland Clinic,” s+b (online only), Aug. 6, 2012: CIO Martin Harris on how information technology is transforming patient engagement.
For more thought leadership on this topic, see the s+b website at: strategy-business.com/health_care.
The NeHC has mapped out a five-phase framework for guiding the development of the technological in-frastructure that the industry will need to support consumer-centric healthcare. It suggests how the digi-tal components of healthcare may come together in the coming years (see “The Patient Engagement Framework,” page 76 ).
The Path to ConsumerizationAs consumer-driven healthcare spreads, the fundamen-tal nature of the industry will change—just as in other industries that have moved from B2B to B2C, such as banking and computers and electronics. The ultimate goal for insurers, care providers, and pharma companies alike is to drive initiatives forward until the industry reaches a tipping point. The new healthcare industry that results will be adept at influencing consumer be-haviors. It will use sophisticated attitudinal segmenta-tion to design and deliver personalized products and services, and its financial performance will be linked directly to care outcomes. Such an industry will mo-tivate consumers to pursue wellness, and will provide them with access to healthcare when they need it via the channels that they prefer.
Of course, this vision will not materialize over-night. It will take years, perhaps decades. And it will require a sustained effort across the healthcare industry, investment, and the willingness and ability to change. But healthcare companies around the world are realiz-ing that their current business models are insufficient to meet today’s challenges. As Aetna CEO Mark Bertolini told the participants at the HIMSS Conference in Las Vegas in 2012, “The end of insurance companies, the way we’ve run the business in the past, is here.” Con-
sumerization is the industry’s future. The work will be hard, but the rewards promise to far exceed the effort: a high-quality, cost-effective, and user-friendly system that continuously improves population health. +
Reprint No. 00167
Says Aetna CEO Mark Bertolini, “The end of insurance companies, the way we’ve run the business in the past, is here.”
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FLIGHT OF THE DRONE MAKER
by Lawrence M. Fisher
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FLIGHT OF THE DRONE MAKER
How a Small Firm Named AeroVironment Is Changing the Course of Airplanes, Automobiles, and Warfare
Many of AV’s small unmanned aircraft systems, including the Wasp, can be carried in a backpack and launched from almost anywhere.
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Lawrence M. Fisher [email protected] is a writer and consultant based near Seattle. A contrib-uting editor to s+b, he covered technology for the New York Times for 15 years.
The late Paul B. MacCready earned his reputation as an inventor, a pioneer in environmentally friendly tech-nologies, and a daredevil. In 1979, he oversaw a trium-phant flight over the English Channel in a seemingly impossible machine: a human-powered aircraft kept aloft by pedaling. He also left his adventurous mark on AeroVironment Inc. (AV), which has had a rich history of seemingly impossible innovations ever since Mac-Cready founded the company in 1971. Today, more than 40 years later, AeroVironment may be poised to lead the next wave of major change in the way people fuel their vehicles, go to war, and make use of flight.
AeroVironment holds dominant, market-leading positions in two seemingly unrelated technologies: un-manned aircraft (including those commonly known as drones) and charging systems for electric vehicles. These might seem like products for niche markets, but they are also the kinds of products that can gain broad im-pact when networked into a new and expanding infra-structure. Developments like these, because of the way they fit with other technologies, end up changing the way people live.
Indeed, the executives and researchers of AeroVi-ronment, who regard MacCready’s bold, experimental approach to life as a core cultural element of their com-pany, have deliberately set up their battery systems and unmanned aircraft to be quietly disruptive to conven-tional industry. They believe this disruption is similar to what occurred as personal computers forced change among a host of other technologies, from mainframes to typewriters to recorded music. AeroVironment’s in-ventions offer the prospect of a systemic transformation, potentially akin to the transition from sailing ships to steam, which spanned more than a century and led to
broad advances such as sweeping changes in military power and the globalization of the market for meat.
If roads full of electric cars and skies full of pilot-less aircraft seem like a relatively distant prospect, re-member that the substitution of steam for sailing ships once did as well.
AeroVironment’s first-mover status, its relatively large installed base (compared to those of its direct competitors), and the 85 to 90 percent share it claims in each of its markets allow it to define standards in both unmanned aircraft and electric-vehicle charging. But the path to more widespread adoption of AeroVi-ronment’s products is anything but clearly marked, and the twists promise to be as political as they are techni-cal. In addition, as a relatively small company that an-swers to shareholders, AV may struggle to scale its op-erations adequately to seize the opportunities inherent in its products.
And yet, the firm has some powerful assets to draw from. AeroVironment is a small, nimble company with a catalog of breakthrough innovations belying its size. It possesses a distinctive and systematic approach to R&D that extends deep into its customer relationships. It remains committed to a culture that promotes in-dividualism as a means of enhancing collaboration. It knows what to knit and sticks to it.
The AeroVironment story is not a playbook for other companies to follow wholesale—for one, its heritage cannot possibly be duplicated—but it’s a fas-cinating tale rich with lessons for any company. Most of all, AV shows how disruptive technologies can evolve and shake up their industries, even when mul-tiple market forces exist to hold them back. It also offers companies guidance about when to evolve to meet the needs of the future and when to stay true to their history.
Makers, Builders, and DreamersBy their own account, the engineers and executives who run AeroVironment are pragmatists. They are makers and builders, not TED talkers. In some respects, CEO and chairman Tim Conver and his fellow members of the company’s top leadership team resemble their company’s founder. But in other ways, they couldn’t be more different. For one thing, Paul MacCready was a dreamer.
MacCready, who died of metastatic melanoma in 2007, was a passionate environmentalist who loved airplanes, hence his company’s somewhat awkward A
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full name, which is often shortened to AV. As a boy, he built and flew model airplanes competitively. As a young man, he piloted gliders, winning soaring cham-pionships in the United States and Europe. Dyslexic, slight of stature, and physically uncoordinated, Paul MacCready was no one’s idea of a charismatic leader. Yet by the time of his death he had been called the poet laureate of flight. The National Aeronautics Association and the American Society of Mechanical Engineers in 1980 named him “Engineer of the Century,” and Time magazine called him one of the 20th century’s 100 most creative minds.
After earning a doctorate in aeronautics from the California Institute of Technology, MacCready started his first company in the then new field of weather modi-fication, and was the first to use small instrumented aircraft to study storm interiors. After selling the com-pany, he started AeroVironment in 1971. He intended it to be an environmental consulting firm, and it was for a while.
The first major shift in the company’s fate came in 1976. Deeply in debt after acting as cosigner for a bad loan, MacCready heard about a cash prize of £50,000 (US$87,700) being offered by British industrialist Henry Kremer for the first human-powered flight. And before he realized it, MacCready was setting himself and his company in an entirely new direction: upward.
On a cross-country trip with his family that year, MacCready had an aeronautical epiphany while watch-ing vultures circling above the desert. Although vultures are weak flyers relative to hawks and other birds, the shape and length of their wings allows them to stay aloft for long periods. In that vulture’s glide, MacCready saw what a person could do given the right wingspan. More specifically, he realized that if he could increase the wingspan of a plane without increasing its weight, a fit bicyclist could likely pedal fast enough to move the craft forward and generate lift. He would now test—and prove—that theory.
MacCready assembled a wonderfully heterogeneous team to build the Gossamer Condor, as his first human-powered plane was called. There were Ph.D. engineers and physicists like himself, but also a swell of self-taught enthusiasts and nerdy polymaths from the lively south-ern California hang-gliding scene. Several “recruited” themselves, drawn by MacCready’s reputation in inter-national glider competitions—and by the heroic nature of his quest.
The team rallied around a shared vision. They were
PAUL MACCREADY WAS NO ONE’S IDEA OF A CHARISMATIC LEADER. YET BY THE TIME OF HIS DEATH HE HAD BEEN CALLED THE POET LAUREATE OF FLIGHT.
Gossamer Albatross landing at Cap Gris-Nez, France, 1979
Paul MacCready
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out not to simply win the Kremer prize, but to break a barrier that had tantalized humankind at least since Leonardo da Vinci first penned drawings of human-powered airplanes. Many people in the group had al-ready achieved a high level of personal mastery in the design, building, and flying of gliders and ultralight powered airplanes. Human-powered flight was an irre-sistible next step.
Earlier runs at the Kremer prize had attempted to beat gravity through exquisitely elegant aerodynamic wing designs, which inevitably made the aircraft too heavy to fly very far. MacCready approached the prob-lem from the perspective of making the most of the human pilot’s limited power. Build the aircraft light enough, he reasoned, and at the slow flying speeds he projected, the aerodynamics would hardly matter. The Gossamer Condor was a crude assemblage of piano wire, aluminum tubes, bicycle parts, Mylar film, and a propeller. But it was light, efficient, and effective. It flew successfully just a year after work began; others had spent decades to no avail.
Three years later, the same team produced the Gos-samer Albatross, which became the first human-pow-ered aircraft to fly across the English Channel, captur-ing a second Kremer prize.
The Snaking Path of CommercializationHaving conquered human-powered flight, the Aero-Vironment team set its airborne sights even higher—on harnessing the power of the sun. For the flight of the Solar Challenger, which in July 1981 flew the 165-mile distance from Paris to London under solar power at an altitude of 11,000 feet, AV had the sponsorship of DuPont, which manufactured the Mylar material used to skin the fuselage and wings.
But the company’s market focus developed in fits and starts, and the link between its achievements and commercially viable products was still often tenu-ous. Indeed, a flapping-wing replica of a pterodactyl, produced for an Imax movie about creatures in flight, remained typical of projects the group took on—it was done as much for the sheer challenge and pleasure of producing cool things that fly as for commercial considerations.
“There is a value in some way-out impractical proj-ects that are done for prizes, symbolism, or the fun of it, where you don’t have to worry about production,” Mac-Cready told this reporter in 1990. “You can focus on ex-tremes; when you do that you’re able to go way beyond
“THERE IS A VALUE,” ACCORDING TO PAUL MACCREADY, “IN SOME WAY-OUT IMPRACTICAL PROJECTS THAT ARE DONE FOR PRIZES, SYMBOLISM, OR THE FUN OF IT.”
AeroVironment’s electric-vehicle chargers can be incorporated into parking garages.
AV technicians discussing the assembly of small, unmanned surveillance vehicles.
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of directors since 1988.) This meant maintaining a huge “battery room,” with three batteries for each vehicle, so two could always be charging while one was in use. “We convinced the industrial market that fast-charging wouldn’t destroy their batteries and could even increase their life.”
AeroVironment found its first believers at Ford Mo-tor Company and American Airlines. At Ford, the ap-plication for AV’s “smart” recharging systems was the forklifts used inside factories; for American, the target was the many support vehicles used to move aircraft and luggage around on the ground (which had been identified as a significant source of air pollution at air-ports). By adding a microprocessor to the battery that could communicate with the charger, AeroVironment’s systems were able to reduce charging time to minutes from hours, while increasing battery life and eliminat-ing the need for battery rooms. The company now has more than a 90 percent share of the market for airport support-vehicle charging. It is also the charger supplier for electric cars from Nissan, Renault, BMW, Ford, and Mitsubishi.
Just as it was developing its recharging business, AV was discovering new ways to put its substantial knowl-edge of low-powered flight to more profitable use. Re-mote piloted aircraft, for most of their nearly 100-year history, had been used for the lowest of low-level mis-sions, like target practice. But AeroVironment had a different idea: to develop an “unmanned tactical recon-naissance vehicle.” Resembling a large model airplane, the hand-launched Pointer climbs aloft on a small elec-tric motor and carries a video camera that relays images to an observer’s monitor on the ground. It is a lower-cost and less-observable surveillance vehicle than a pi-loted aircraft. Subsequent models such as the Raven, the Wasp, and the Puma have offered reduced size and in-creased capabilities. Some are even small enough to fit in a soldier’s backpack.
Although the firm doesn’t make the large lethal drones that get headline attention, such as General Atomics’ Predator and Reaper, its diminutive hand-launched planes—the Raven, for instance, which has a wingspan of just 55 inches and weighs a little more than 4 pounds—now account for 85 percent of the un-manned aircraft purchased by the Department of De-fense (DOD).
But AV has more than just military operations in its sights. The drones’ relatively low cost, compact size, and quiet operations are opening up all sorts of new pos-
prescribed limits to new frontiers.”MacCready and his team’s pie-in-the-sky thinking
came more firmly down to earth with the Sunraycer, a solar-powered race car commissioned by General Mo-tors (GM). Infused with the expertise that AeroViron-ment had developed in solar flight, the Sunraycer won first place in a 1,867-mile race across Australia in 1987, with an average speed of 42 miles per hour. While GM was still basking in its branded glory, MacCready per-suaded the company to let his team develop a prototype of an electric car that could possibly go into production.
GM showed the barely finished car, initially dubbed the Impact, at the January 1990 Los Angeles Auto Show. It was such a hit that by Earth Day, three months later, the company had decided to manufacture it under the production name EV1. In December 1996, GM provided a limited launch of the pure electric car for lease only. Powered by lead-acid batteries, the first-generation EV1 could travel 70 to 100 miles before re-charging. (A later version, using nickel-metal hydride cells, could travel up to 120 miles.) But then a shift in policy intervened: The California Air Resources Board agreed to delay implementation of the first phase of a zero-emissions vehicle mandate that had been sched-uled to go into effect in 1998, and whatever momentum had been building at GM for the EV1 died.
General Motors was inconsistent in its support for the EV1, and the oil companies did their best to un-dermine electric car development altogether. As shown in the documentary film Who Killed the Electric Car? (2006), when the automobile and oil industries joined forces to block the zero-emissions mandate, they sacri-ficed the prototype electric vehicles. Despite candlelight vigils by EV1 owners, GM recalled its leased cars and crushed all but a few, which were donated—minus their drivetrains—to museums. That decision left AeroVi-ronment with some painful lessons about the capricious effects of public policy and corporate influence, but also with some hard-won knowledge about electric vehicles, batteries, and fast-charging equipment.
The company now set out to find fresh commercial opportunities, and it wasn’t long before it succeeded—this time in the industrial sector. “We found out there was an installed base of over 1 million forklifts that were conventionally charging because everybody ‘knew’ you couldn’t fast-charge batteries without destroying them,” CEO and chairman Conver recalled. (Handpicked by MacCready, Conver has served as president since 1991, chief executive since 1993, and a member of the board P
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sibilities. Researchers with the U.S. Geological Survey (USGS) and the U.S. Fish and Wildlife Service have used ex-Army Ravens to count the number of sandhill cranes that visit the Monte Vista National Wildlife Ref-uge, for example. They have been deployed to examine the drainage infrastructure at a West Virginia surface mine. They have been used to monitor forest fires. “We expect that by 2020, unmanned aircraft will be the pri-mary platform [for data collection] for the Department of the Interior,” Mike Hutt, USGS’s unmanned aircraft project manager, told Air&Space.
AeroVironment also believes small drones will eventually be used to perform myriad other tasks for which autonomous mobility will be indispensable—such as delivering small, high-value payloads (pharma-ceuticals, for instance) to areas not served well by roads, or replacing bike messengers delivering documents in congested cities. As the company’s mission statement
proclaims, “The future is unmanned.”AV’s plans for the electric car are similarly ambi-
tious. It is already building the infrastructure required for the truly transformative vision of the electric car that MIT professor William J. Mitchell and GM ex-ecutives Christopher E. Borroni-Bird and Lawrence D. Burns offer in their book, Reinventing the Automobile: Personal Urban Mobility for the 21st Century (Massa-chusetts Institute of Technology, 2010).
The next generation of electric vehicles, according to Mitchell, Borroni-Bird, and Burns, will essentially be “consumer electronics devices—networked comput-ers on wheels—relying for their functionality far less on mechanical and structural components, and far more on electronics and software, than traditional automo-biles. Thus their costs can continually be driven down, and their performance improved, in the same ways as the costs and performances of computers.”
Factors beyond Their Control
A s with all technological change
(remember the Segway?), the
evolution of infrastructure and policy
is highly uncertain. In this case, the
way that commercial drones and
electric vehicles evolve depends on
public policy, market acceptance, and
many other factors beyond the direct
control and influence of AeroViron-
ment or any other single company.
Although the electric car mar-
ket is growing rapidly, just 10,000
battery-only electric vehicles (BEVs)
were sold in the United States last
year—and those sales were stimu-
lated in part by a US$7,500 federal tax
credit on each vehicle. Were electric
car sales to grow to 1 million units,
that would be a $7.5 billion cost to
taxpayers, which is clearly not sus-
tainable. For the industry to be viable
without subsidies, battery prices
would need to come down and capac-
ity would need to go up.
Safety regulations also loom
large. The cars hypothesized in Re-
inventing the Automobile are smaller
and lighter than today’s average auto,
and they achieve safety goals partly
through robotics. They can in some
cases drive themselves, and they
are designed to avoid crashes in the
first place, not to provide a rolling
fortress. If autonomous autos are to
share the roads with conventional
vehicles in any number, new regula-
tions will be essential. The autos’
safety in traffic must be proven,
and the kinds of bugs that exist in
software (where the only negative ef-
fect of a failure is the need to reboot)
must be eliminated (see “The Next
Autonomous Car Is a Truck,” by Peter
Conway, page 8).
Next, mass-market penetration
by electric cars is predicated upon
fossil fuel costs remaining high. If
fracking eventually produces vol-
umes of new oil at attractive prices,
or if hydrogen and natural gas costs
come down more rapidly than antici-
pated, the fully electric car could
be sidelined.
And although drone aircraft
are an increasingly common, albeit
controversial, feature in foreign war
theaters, their appearance in domes-
tic skies has prompted a multiyear
policymaking effort by the Federal
Aviation Administration and may
require involvement from the Federal
Communications Commission as
well. Most unmanned aircraft are
actually piloted remotely by human
beings, but AeroVironment’s systems
also have substantial autonomous
capability, such as the ability to fly a
preprogrammed GPS course. Both
Boeing and Airbus have talked about
unmanned cargo aircraft, and jetlin-
ers have actually been capable of
autonomous takeoffs and landings
since Lockheed’s L-1011 was intro-
duced in 1970. But that doesn’t mean
public sentiment or policy is ready for
large fleets of robotic planes.
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they can influence the future, they can’t control it. Many of the factors governing when their technologies reach their full potential—or determining whether they ever will—are well beyond AeroVironment’s reach (see “Factors beyond Their Control,” page 84 ). So they have built a company that can pursue multiple moon-shot prospects without putting its immediate survival at risk.
The firm has grown steadily and profitably, and is likely to continue doing so. It has no debt and has about $200 million in cash and investments. It finances its more outlandish projects with other people’s money, so the company is buffered should those projects fail, but reaps the upside when they succeed.
Wall Street is a believer—at least in the unmanned aircraft systems. “They have an enviable market posi-tion with high barriers to entry [and] extremely strong past performance with their military customers, and they also happen to be in an extremely well-defined niche in the military budget,” said Jeremy W. Devaney, a senior equity analyst with BB&T Capital Markets.
The electric vehicle charging business may be more difficult to defend. Although AV has had most of the market to itself for the last 20 years, if elec-tric cars are fully embraced in the mainstream, chargers will become more of a consumer electron-ics product. AeroVironment is adapting to new re-alities—it already offers one of its electric vehicle charging units on Amazon—but it is not clear that the company can compete effectively in a higher-volume, lower-profit-margin business. In addition to electronics giants like GE and Siemens, it faces com-petition from fast-moving, aggressive startups, such as Coulomb Technologies, which has already installed thousands of its ChargePoint public charging stations around the world.
An Innovation SystemAeroVironment’s two businesses look discrete, and in-deed Wall Street analysts treat the company as an un-manned aircraft system pure play, ignoring the charging business. But the two sides of its operations are, in fact, tightly linked, and the capabilities built in one strength-en the other.
Consider the firm’s use of lithium-ion batteries. First developed for laptop computers and cell phones, these batteries now provide power for the new genera-tion of electric cars, like the Nissan Leaf and Tesla’s Roadster and Model S. Although AeroVironment’s in-dustrial charging business has relied primarily on con-
The authors say much of the wireless communica-tions and sensor technology needed to implement their vision is available today. Indeed, much of it can already be purchased from AeroVironment. The future is also electric.
Think Big, Move Fast, Stay SmallSmall is a recurring theme with AeroVironment. With fiscal 2012 revenues of $325 million, it is dwarfed by competitors like Lockheed Martin, Boeing, and Northrop Grumman on the defense side, and by Gen-eral Electric and Siemens in electric vehicle charging. Although AV maintains a modest presence in Wash-ington, DC—and briefs lawmakers and staffers when it gets the chance—it has nothing like the resources of the large aerospace or technology companies. And it doesn’t intend to acquire them.
Instead, the firm plans to continue to use its orga-nizational compactness as a benefit—in much the same way that it has seized small product size as a competitive advantage in the drone market—while remaining agile and opportunistic. AeroVironment has established a way to play that is easy to describe, difficult to emulate, and nearly impossible to duplicate. It is a serial innova-tor, with a broad and deep portfolio of successful inven-tions and the intellectual property to back them up. It is also a value player, devoted, in its founder’s words, to doing “more with less.”
Central to AV’s strategy is its practice of fast pro-totyping, that is, building a full-scale working model of a proposed product as early as possible in the R&D phase. “We try to move into a customer dialogue sooner rather than later, as we’re trying to discern what’s [just] interesting and cute [versus] what’s going to change the world,” said Conver.
AeroVironment’s approach to outsourcing is a criti-cal component of its ability to scale the business without sacrificing agility. “In both of our businesses, we devel-op the products initially internally, and when we can’t buy things, we invent them,” Conver said. “But when we transition to production, we outsource everything, with internal quality control and testing. As the prod-uct matures and the market grows, we push even more of that out. We think of our strategic intent as market-leading growth doing important work. We’re arrogant enough to think we can be successful in lots of different things, so we choose to focus on things where we can achieve both of those goals simultaneously.”
Conver and his team understand that although
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ventional lead-acid batteries, the company uses lithium-ion cells in its unmanned aircraft, taking advantage of the new technology’s superior power-to-weight ratio. Because thousands of its airplanes are operating in war theaters around the globe, the company has developed an unmatched knowledge of how lithium-ion batteries respond to hard use and frequent recharging—intellec-tual assets it has now successfully leveraged in the con-sumer auto market.
But given the long stretch of hurdles that still block the path to widespread adoption of electric vehicles, superior charging technology alone is no guarantee of commercial success. The infrastructure to support it is every bit as essential. Indeed, what made the difference in AeroVironment’s win of the Nissan Leaf contract was the combination of AV’s field experience and the sys-tems approach it took to recharging. Its bid on the job not only specified the capacity and cost of its chargers, but also spelled out how the company would create a nationwide network of trained installers, so that Leaf customers would have a seamless purchase and delivery experience. Today, all the public and private chargers AV has installed are linked through the Internet to serv-ers that monitor the health of every battery in the field. In the future, they will communicate wirelessly with ev-ery electric vehicle, so finding a quick charge will be no more challenging than finding a gas station.
The casual observer may be tempted to find a dis-connect here. On the one hand, AV prays to the gods of high risk and fast experimentation. It is steeped in a tradition of jumping on challenges for challenges’ sake and of creating new technologies to meet needs yet to be defined. The company can appear downright whim-sical. On the other hand, it is winning business through a shrewd commercial mind-set, one that displays a deep understanding of the needs of its customers. In reality, however, these two seemingly disparate mind-sets are highly complementary. Great change starts with crazy ideas, but true disruption occurs only when there are ways to carry those ideas forward. This is not a revela-tion that emerged overnight, but what AeroVironment has learned is how to build a system for disruption.
That system is a way to innovate and a way to mar-ket. It is even a way to think and to talk. Semantics count for a lot at AV. Just as the company always speaks of efficient energy systems when referring to its chargers and battery analysis equipment, its aircraft are never referred to as drones, but as unmanned aircraft sys-tems. One system, the Raven, for example, is sold with
three aircraft, two ground stations, and varying levels of personal support, for a complete cost that ranges from $100,000 to $200,000. AV has support personnel on the ground in Afghanistan and other conflict sites around the globe. More than 10 percent of its employ-ees are veterans, and many have Special Operations ex-perience. As with the battery chargers, the customer is buying not just equipment, but also the framework that enables it.
“If you want an unmanned system, but for what-ever reason you’re not comfortable flying it yourself, or want to test it in another country, they’ll come out and deploy their team of former Navy Seals, and backpack in with your group and show you how it works, and be responsible for it,” said Gregory McNeal, a professor of law at Pepperdine University specializing in public policy and security issues. “They deploy demonstration teams with the military, and they’re certain that when they’re done, you’ll say ‘I wish we had those guys back.’”
“They have blocked out the larger primes by work-ing very closely with their customers,” said BB&T’s Devaney.
Where the DOD Meets Silicon Valley A walk through AeroVironment’s aircraft production facility in Simi Valley, Calif., brings to mind Kelly Johnson’s famous Lockheed Skunk Works. Several of AV’s historic aircraft hang from the ceiling; others are on permanent display at the Smithsonian National Air and Space Museum in Washington, DC. And it’s not unusual to spot a senior executive proudly wearing a badge from the AMA—not the American Medical As-sociation, but the Academy of Model Aeronautics, a nonprofit organization dedicated to the promotion of model aviation as a recognized sport as well as a recre-ational activity.
AV has the casual atmosphere of a Silicon Valley software company. Long before Google or Genentech empowered employees to pursue individual interests on company time, AV’s talented engineers were encour-aged, even expected, to engage in pet projects.
AeroVironment employees are also expected to speak their mind whenever they believe the company’s actions are at odds with its stated values of innovation, a great workplace, trust, and technological innova-tion. “We have an open invitation, and really an open requirement, for employees to speak out if they think the company is operating inconsistently with any one of those four,” said Conver. “Our intent is when that P
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happens, we’ll either change what we’re doing to comply with what we said we were going to do, or we’ll change what we’re saying to comply with how we’re operating.”
One development that prompted a company-wide forum was the introduction of the Switchblade, AV’s first lethal unmanned aircraft. Because the company’s previous models were non-weaponized and primarily used for reconnaissance, it could reasonably make the case that they were lifesaving devices.
The Switchblade, in contrast, launches from a tube, unfolds its wings, and converts into a guided missile, prompting some industry observers to dub it the kami-kaze drone. The rationale behind its development was that when an intelligence and surveillance team comes under hostile fire, they have little recourse but to hun-ker down and wait for helicopter support, which could take hours to arrive. “Our engineers said we could solve that, and conceived of a small tube-launched vehicle that (the team) could carry around in a rucksack,” said Conver. “In that scenario, it allows them to pull that out in a minute, go find the people who are firing at them, verify it on a streaming video, [and] designate the target. And then it turns into a munition that tracks that target down, and, in the vernacular, ‘services’ that target. That seemed like a good thing to do. We also realized that it was a real digression from the kind of work we’d been doing, and had the potential to be in-consistent with some of our employees’ view of what important work is.” In one all-hands meeting where there was heated dialogue on the topic, a much-decorat-ed Vietnam veteran told his story of having come un-der sniper fire and eventually leaving the field in a body bag, badly wounded and presumed dead. As he pointed out, a device like the Switchblade could have saved the lives of several of his comrades. His story quieted most objections to its development and launch.
Even as AV pursues new markets for its existing drones, its research and development team is pushing the unmanned aircraft design envelope with drones both really big and extremely small. Two current proj-ects in particular evoke the legacy of Paul MacCready while pointing the way to an exciting future.
On the big side, AeroVironment’s Global Observer calls to mind the company’s early experiments in hu-man-powered and solar-powered flight. With a wing-span equal to that of a Boeing 767 and a weight roughly equivalent to a typical SUV’s, the liquid hydrogen–powered plane is designed to stay aloft for seven days at up to 65,000 feet. The idea is that the Global Observer
AEROVIRONMENT EMPLOYEES ARE EXPECTED TO SPEAK THEIR MIND WHENEVER THEY BELIEVE THE COMPANY’S ACTIONS ARE AT ODDS WITH ITS STATED VALUES.
AV employees at a brainstorming session for a new charging device.
The Puma, like other unmanned aircraft, is used primarily as an intelligence, surveillance, and reconnaisance asset.
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Paul Ciotti, More with Less: Paul MacCready and the Dream of Efficient Flight (Encounter Books, 2002): A reporter’s take on the story of human-powered flight and the characters involved in it, along with the MacCready team’s accomplishments in solar-powered aircraft and flapping-wing ornithopters, including a life-sized pterodactyl replica.
Scott Corwin and Rob Norton, “The Thought Leader Interview: Lawrence Burns,” s+b, Autumn 2010: More insights from the coauthor of Reinventing the Automobile.
Morton Grosser, Gossamer Odyssey: The Triumph of Human-Powered Flight (Houghton Mifflin, 1981): An insider’s account of the development of human-powered flight, culminating in the launches of the Gossamer Condor and the Gossamer Albatross.
For more thought leadership on this topic, see the s+b website at: strategy-business.com/innovation.
could fill a gap between the capabilities of observation and communications satellites operating at low Earth orbit and the flexibility of airplanes flying in the lower atmosphere. One function would be as an alternative to cell-phone towers, but with a much greater range.
At the other end of the spectrum is the Nano Air Vehicle (NAV), which mimics a hummingbird in its size and flight characteristics. It can hover in place and fly backward and forward in restrictive areas, such as inside a building, that are inaccessible to conventional drones, at speeds of up to 15 miles per hour. It calls to mind flapping-wing ornithopters and pterodactyls—such as the one MacCready’s team built years ago—but actually uses the wing motion of real hummingbirds, a motion that has never been successfully modeled before. The NAV beats its tiny wings a remarkable 70 times per second, with the tips nearly touching, like a humming-bird, but unlike any other winged creature.
Either or both of these projects could reach the market within a few years. “We look at opportunities in a different way based on where they are in a continuum from idea to market launch, and getting through the wickets gets (increasingly) data-based and ROI-driven as you move from a zero point of ‘what about this idea,’ to a 10 point of ‘let’s launch this in the market,’” Con-ver said. “By the time we are allocating significant re-sources, whether human or capital, we’re getting more and more rigorous about the market and the value proposition and our ability to support that adoption.”
That’s systems thinking in full, and a long trip into the future for a company that has already made a lot of history. +
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The Nano in flight
The Nano employs biological mimicry at an extremely small scale.
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E very once in a while, you meet someone who really knows how to “read a room.”
This is the individual, often a sea-soned executive leader, who can walk into a tense meeting and sense why two would-be collaborators are butting heads, why a third manager hardly speaks, and why a fourth seems to be protecting some unspo-ken priority. Then, with a few words, the individual can defuse the prob-lem, get people back on track, and move the team to a new level of pro-ductivity. When this type of work is
done with an executive team, it can have invaluable impact, cascading out to the rest of the organization as people practice and share their newfound skills. At all levels, the ability to read a room is considered by many to be a rare and special gift, innate and not teachable. Many people who have this gift admit that they don’t know how to teach it to others.
But one man has built his career around trying to help people track their conversational interactions, understand the hidden dynamics in
them, and learn how to intervene ef-fectively. By codifying these pat-terns, he has shown that the skills of insight can be taught. David Kantor was a family therapist based in Cambridge, Mass., when, in the 1980s, he began meeting regularly with a group of noted organizational thinkers at MIT’s Sloan School of Management. Kantor had the idea that the patterns he had seen in fam-ilies—the recurring ways that peo-ple became stuck in groups, or fell into particular types of emotional turbulence when faced with a grave or urgent problem—might also ap-ply to executive teams in businesses and other organizations.
Kantor began explicitly study-ing and coaching senior leaders. He took extensive notes on every inter-action, trying to discover the combi-nation of factors, as varied as an individual’s emotional and family history and the dynamics in the or-ganization around him or her, that would lead some people to crack un-der pressure and others to thrive. Over the years, in part through working with such organizational learning experts as Peter Senge, Ed-gar Schein, and Chris Argyris, he’s become an influential theoretician of individual and group behavior.
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THOUGHT LEADER
The Thought Leader Interview: David Kantor An eminent systems therapist says that learning to recognize the hidden patterns in conversation is the first step toward more effective executive leadership.
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His book Reading the Room: Group Dynamics for Coaches and Leaders (Jossey-Bass, 2012) assem-bles 40-plus years of organizational research and practice into a guide to conversational cues and meanings, with particular relevance for man-agement interactions and executive teams. Kantor makes the case that being attuned to the signals of a con-versational system—an approach he calls “structural dynamics”—is the first step toward becoming a far more prescient and effective leader. (He is currently launching a series of empirical studies on measuring and changing leadership behavior with the Massachusetts School of Profes-sional Psychology.) He met with strategy+business at his Cambridge office to explain the way it works.
S+B: You suggest in your book that most leaders need a better model of human systems. Why is that?KANTOR: In any situation, unseen, unspoken connections among peo-ple influence everything that hap-pens. Leaders are typically not aware of these connections, and they can’t be, unless the right conceptual lens is available. The model I’ve devel-oped over the years is a schema for understanding how people talk while they are making decisions to-gether. It’s actually two models—one describing everyday situations, and one for high-stakes situations like crises and conflicts.
People behave differently under extreme conditions; there are break-downs in communications, and things can move forward only if people can overcome those break-downs. The decisions you make un-der that pressure are what define you as a leader.
The model is based on work I’ve done with groups—first with fami-
lies, couples, and teenagers, and then with organizational teams and companies. I’ve been able to observe and track enough conversations in enough contexts that I think I have discovered a universal theory of the structure of communication. The theory suggests that communication can be deliberate; that leaders can measure and understand their im-pact (and everyone else’s impact) in any context where people make de-cisions. They can also design their own conversations to generate suc-cess or failure.
S+B: What do you mean by designing a conversation?KANTOR: Every conversation is made up of individual acts of speech: statements and questions. The speech act is my basic unit of analy-sis. Every speech act can be catego-rized as having one of four types of action (being a mover, opposer, fol-lower, or bystander); one of three types of content (power, meaning, or affect); and one of three types of paradigms, or rules for establish-ing paradigmatic legitimacy (open, closed, or random). These categories combine into 36 kinds of speech acts, which are the building blocks of human interaction. They can be deliberately sequenced to set the di-rection of a conversation. Interven-ing with the right speech act at the right moment can catalyze a shift in thinking or action for everyone in the room.
I’ve worked with a number of organizational experts on this, and they’ve put the model under a lot of scrutiny during the past few years. There’s a basic skepticism, especially in the fields of economics and psy-chology, as to whether behavioral interventions actually produce re-sults. This model allows us to test
that question. You can train a team—let’s say a business executive and a group of direct reports—to explicitly shape their language ac-cording to this model. They can experiment with speech acts—de-liberately trying out particular se-quences—and see whether they pro-duce higher performance or a change in the right direction.
S+B: What’s the difference between, say, a mover, an opposer, and a bystander? KANTOR: First of all, they’re not cat-egories of people. Although every-one has speech acts that they use more frequently than others, no-body is completely a mover, opposer, bystander, or follower. These are de-scriptions of vocal actions. Change your vocal action, and you can change how people perceive you. Change what people perceive, and you’ll change how they respond with their own vocal acts.
Let’s start with a single speech act: a statement you make. There are four basic roles you can play in a conversation. (I also call them ac-tion stances.) You can make a move: Start something new, like saying, “We need to spend less time in these meetings.” You can follow someone else’s move, by agreeing with it: “Yes, I’ve been concerned about the same thing.” You can oppose the move, raising objections or trying to stop it: “I don’t think that’s right. We need time to cover every topic on the agenda.” And then you can step back from the situation and stand by (or as I call it, “bystand”), reflecting on the actions being made, without agreeing or disagreeing: “Ian wants shorter meetings, Ralph wants to keep them the same length. What does everybody else think?”
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how to sequence these into com-pound actions. So if you’re dealing with fierce opposers, you don’t start off by opposing them. You bystand first. “I see how concerned you are about this decision, and it’s having an effect on the group.” Then you follow. “I think you have reason to be concerned.” Only then do you move. “It seems to me that we’ve got to change our decision and address your concerns, but we can’t lose the momentum of the original plan ei-ther.” Three different actions: by-stand, follow, move.
The second dimension is called the communication domain; I also sometimes refer to it as the language people speak. Each domain is ori-ented toward a purpose, and you can see that purpose in the content of the speech act. Some acts of speech are in the affect domain; they in-volve words of feeling, seeking an increase in connection and intima-cy. “This decision seems pretty heartless. I wonder how people will feel about it.”
Other speech acts are in the power domain, using words about getting things done, and their pur-pose is increasing competence and efficacy. “Who’s going to make sure that there’s follow-through here?”
Finally, there is the meaning domain: words about truth and rea-soning, and content involving ana-lytics and philosophy, with the goal of a higher understanding. “It is critical that the results reflect our standards for accuracy.”
S+B: And when one person talks in power while the other one speaks in affect, they can misread each other’s intentions. KANTOR: That’s one of the most common reasons for breakdowns in communication. People also have preferences for specific communica-tion domains; they do not honor ways of speaking other than their own, and this increases the likeli-hood that they’re going to speak at cross-purposes.
A third dimension is the para-digm about the rule of order: People have different views of the best way for human conduct to be regu-lated. All the governance structures in the world can be boiled down to three types. The open system is consensual and unregulated until it hits a point of action, and then an authority, chosen by the group, decides. A representative democracy is an open system. In the closed system, authority rests with posi-
tion—the closer you are to the top of the hierarchy, the more authority you have. This system is highly regulated; a military regiment, for example, is a closed system. In a random system, authority remains with those who take and use it; the group continues to expand, experi-ment, and move.
Jazz bands are random systems, and so are most teams of innovators in an R&D department.
For most people, one of these three systems feels intuitively right. When a conversation doesn’t flow in the way they favor, they feel uncom-fortable. I first saw that in my work with families—people intuitively sought out an open, closed, or ran-dom family—but I didn’t really grasp the difference until I learned about feedback mechanisms in sys-tems theory. Closed systems rely on negative, or balancing, feedback; when something new happens, they instinctively move to regulate it and tamp it down. Random systems work through positive feedback; they reinforce novelty and make it stronger. Open systems combine the two forms of feedback; they are positive until they reach some point of dysfunction. Then the leader steps in….
Art Kleiner kleiner_art@ strategy-business.comis editor-in-chief of strategy+business.
VIDEO FEATURE
Structural Dynamics: Using Coversational Cues to Lead More EffectivelyDavid Kantor speaks with Booz & Company partner Rutger von Post about how leaders can tap into “structural dynamics” to create better-performing teams.
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S+B: “Let’s take a vote.” KANTOR: Or, “We have to reach consensus.” Everybody must have a voice in the open system, even if it’s disruptive, but then it comes to a de-cision, a vote, a consensus. It shifts from a positive to a negative feed-back loop.
S+B: How would I, as a leader, use all this to design a speech act? KANTOR: Everything you say can be framed as a combination of these el-ements. Suppose you’re in a cold room. You could say, “Close that window now.” That’s a closed-sys-tem move in power. You could change it to an open-system state-ment by saying, “It occurs to me that people are wrapping their scarves around their necks. Will somebody near the window step over there and close it?” This speech act is still a move in power, but now you’re open. You’re giving people a choice; you’re looking for a volun-teer. You could also switch it into affect, by saying, “It would be so much nicer if the room were warm-er, and people felt more comfort-able.” And you could move that into bystanding by saying, “I notice that people feel uncomfortable, but nobody seems to feel like closing the window.”
The goal of structural dynamics is to increase communicative com-petency, which means every mem-ber of the team becomes capable of reading the room. They know which interventions will improve the con-versations. They ideally have full knowledge of the limits of their own
repertoire so that when a speech ac-tion is called for, if they can’t do it themselves, they can call on some-one else who is capable of the act.
S+B: Is there a person alive who can speak eloquently in all 36 speech act combinations?KANTOR: I think so. And, by the way, this skill is the road to collec-tive intelligence. The theory says that when a team is capable of com-municative competency, there is an exponential leap to effectiveness. By becoming more competent, the team accelerates its ability to define new outcomes, new products, and so on.
It’s a bit like improvisational theater. In fact, when I first began
putting this theory together, I read a lot about how actors study their craft, and how they are taught to improvise. The theater is fascinat-ing, but it’s not effective by itself as a model for intervention, because it’s locked in to a very small group of activities.
S+B: In your book, you also describe a fourth dimension—the heroic modes, which come out only when there’s a crisis.
KANTOR: A perceived crisis. When the stakes are raised through stress or difficulty, people shift into more urgent, less thoughtful forms of con-versation. Someone prone to affect shifts to being an advocate: from “I feel” to “we should,” arguing for passion’s sake. A power-oriented per-son becomes like a prosecutor: from “let’s do” to “you must do,” forcing others to perform. And a meaning-oriented person becomes an adjudi-cator: from “I think” to “I decide,” imposing a framework of logic.
If the stakes get raised even higher, these stances become even more pronounced; they turn into what I call “heroic modes.” The ad-vocate is now a protector, doing whatever must be done to shield
others from harm. The power-ori-ented prosecutor becomes a fixer, out to conquer all enemies and win at all costs. And the adjudicator re-treats into being a survivor, intent only on manifesting the cause and getting through all the oppression and aggression.
Everyone unconsciously favors one of these heroic modes. They’re all morally neutral; none is more vir-tuous or vicious than the others. But they lead people, especially leaders,
“When a team is capable of communicative competency, there is an exponential leap to effectiveness.”
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crisis is often a manifestation of these shadows, and the enterprise and the industry will be threatened if the shadows are not contained. At that moment, a hero is called for: a leader who can find a way to tran-scend his or her own shadows, and also transcend the shadow-driven behavior of the systems around him or her.
Leaders are a special category, because what they do and say and the decisions they make affect many others. If shadow behavior is evident, and the leader is not willing to ac-knowledge it and take responsibility for it, he or she is a dangerous leader. He or she does not have control over the shadow side of the system.
On the other hand, if a leader becomes aware and conscious, in the moment, he or she can direct the system away from its shadow side, moving it in a far more powerful, and more beneficial, direction.
So, for example, a business team hits a crisis point, and the key mem-bers of the team are driving one another crazy. They are polar oppo-sites. One is a fixer: “We have to move fast and cut 30 percent, with no nonsense about the damage to morale.” The other is a protector: “My God, do you really believe that?
in directions that are counterpro-ductive. At the start of a crisis, peo-ple enter the heroic modes in mild form, but they can gradually become more extreme: Fixers become ag-gressive, protectors feel wronged, survivors withdraw and endure. When left unchecked, they lead to the same basic attitude: The ends justify the means. And then the cri-sis accelerates. The fixers discover they can’t win, or can’t solve every problem; the survivors discover they can’t really withdraw; and the pro-tectors find they can’t keep everyone from getting hurt. So they start to blame one another.
General George Patton was a classic fixer—and a hero until after World War II. Then all the stories about his vicious side emerged, about him slapping soldiers and so on.
S+B: What’s your advice for the leader—not the professional intervenor, but the person actually leading a group in a company? KANTOR: There’s always a shadow side to human behavior. These shad-ows come from people’s childhood stories—from ways in which they weren’t loved. Greed is one kind of shadow, especially when it involves lack of care about anyone else. The
We’ll lose our best people, and the larger culture is going to suffer.” And then the survivor chimes in: “I’m going to keep our morale up, even if I have to do it all myself. I’ll work twice as hard, 24 hours a day. And we’ll get it back.”
If the leader of the team can read these moves in a high-stakes situation, he or she knows how to be a competent bystander. “If we listen to ourselves,” the leader might be-gin, “It’s clear we all want the same thing, but we’re going after it from different directions. Let’s focus on what we want to have come out of this mess.”
Given enough skill and experi-ence at reading the room, a leader can make some moves that bridge the gap—that don’t just assuage the intuitive needs of the heroic modes of the individuals involved, but that make strategic sense. An individual who can do that well is obviously a superior leader. +
Reprint No. 00154
“If shadow behavior is evident, and the leader is not willing to acknowl-edge it and take responsibility for it, he or she is a dangerous leader.”
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Toward a Better- Informed Cynicism by Marvin Weisbord The Org: The Underlying Logic of the Office, by Ray Fisman and Tim Sullivan, Twelve, 2013
I n ancient China, a business experienced a 20 percent jump in sales, and the abacus man
could not keep up. So the business owner consulted the village sage, who advised him to have the abacus man grow a sixth finger on each hand—upping his capacity 20 per-cent. But the business owner hesi-tated, reluctant to challenge author-ity. “Oh, Wise One,” he said at last, “how am I to do that?”
“Ah,” came the reply, “my job is solving the problem. The implemen-tation is entirely up to you.”
I remembered this story while reading The Org: The Underlying Logic of the Office, a wonderfully en-tertaining rocket ride to what is for me a new galaxy called “organiza-tional economics.” I love this book. Unlike most management books, this one promises no advice and de-livers splendidly. It is eclectic, unpre-dictable, and idiosyncratic, and it is as factual and ambiguous and sane
and irrational as the diverse orgs it surveys. I even love the word org. One pithy, concrete syllable replaces five that make your eyes glaze over. On top of that, I find that the book’s myriad examples validate my experi-ences trying to fix orgs over the last 50 years. Everything works. Noth-ing works. Sometimes.
Noting that people spend a third of their lives working, authors Ray Fisman, a Columbia Business School professor, and Tim Sullivan, editorial director of Harvard Busi-ness Review Press, do not criticize, lament, praise, or pontificate. They simply describe in vivid detail “how and why orgs do what they do—
how the parts fit together, how the rules get made, and what happens when you change the rules.” In short, if org life tilts you toward cyn-icism regarding Dilbertian absurdi-ties and six-fingered abacus men, “a clearer understanding of how orgs work” enables you to “descend into better-informed cynicism.”
Toward that end, the writers seek to illuminate the workings of the black box that stands between input and output. They humanize the arcane math of economics with stories. They decode academic man-agement research to explain “why the highly imperfect office of today may nonetheless represent the least dysfunctional of all possible worlds, however depressing the idea of ‘least dysfunctional’ may be.” Organiza-tional economists recognize that orgs succeed or fail on “a set of com-promises that result from trade-offs among many competing interests and objectives.”
I support the authors in seeking to redefine cynicism and dysfunc-tion as normal, though retaining the pejorative terms strikes me as a mixed message. (I dropped “resis-tance” and “denial” from my org vocabulary long ago. Labels put no one in the mood to change.) Fisman Ill
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and Sullivan show that life in orgs can be heaven or hell, sequentially or simultaneously. Hence, they include many examples of effective work, creativity, and idealism that defy cost-benefit analysis. This stretches the boundaries of organizational economics to recognize that every-thing counts even when it can’t be counted. There are value-based bot-tom lines beyond net profit.
As I read, I would look up and say to my wife, “Did you know that Zappos offers new hires $2,000 to quit after one week?” Or, “These
guys have turned up an al Qaeda leader’s memo berating a subordi-nate for misusing his travel allow-ance!” I told her how a McDonald’s franchisee almost wrecked the mod-el by serving prime roast beef and that ministers can earn more money stealing souls from nearby congrega-tions than enrolling their own. I re-counted the story of how Digital Equipment (where I once consulted) parlayed its informal network of innovators to win a much-needed Kodak contract, only to abandon it when the financial folks left out of the proposal process found a fatal economic flaw.
“You really find that book inter-esting,” Dorothy said.
Indeed, this may be the most relentlessly realistic, wide-ranging book on orgs I have ever read. To re-veal the “underlying logic of the of-fice,” the authors visit Mumbai’s tex-tile mills, West Point’s classrooms, the Hewlett-Packard garage, Balti-
more’s mean streets, and a Carnegie Mellon computer lab. They use the word office as a metaphor for any set-ting where snowballing complexity propels people to make trade-offs (the least onerous selections from a menu of fraught options) and every choice conceals unforeseen out-comes. When competitors began poaching the best and brightest from employee-friendly Google, for example, the company refused to make counteroffers. After the brain drain became intolerable, however, Google reversed its stance. Problem
solved, right? Not quite. The com-pany “was also setting up clear sig-nals to its entire staff: if you want a big raise, get a Facebook offer and we’ll counter. Google was paying for trolling and disloyalty.”
It’s fitting that the authors con-clude the book with a variation on the Serenity Prayer. In org life, we need to accept what we cannot change, and to change what we can. The wisdom is in realizing that few changes will ever be wholly satisfy-ing because they always require trade-offs. +
Marvin [email protected] is codirector of Future Search Network and a visiting scholar in the University of Pennsylvania’s Organizational Dynamics program. He is the author of the 25th anniversary edition of Productive Workplaces: Dignity, Meaning, and Community in the 21st Century (Jossey-Bass, 2012), s+b’s pick for best business book on organizational culture in 2012.
The Practitioner’s Tale by David Warsh Doing Capitalism in the Innovation Economy: Markets, Speculation, and the State, by William H. Janeway, Cambridge University Press, 2012
A fter BEA Systems was qui-etly folded into Oracle during the financial crisis
of 2008 for US$8.5 billion, around five times its annual revenues, the business middleware firm became a dim memory, even in the software industry. But in December 2000, when its shares hit an all-time high of $85, BEA had been a poster child for the dot-com bubble. In a series of perfectly timed sales of founder’s shares, Warburg Pincus, the Wall Street private equity firm that had assembled BEA from several Unix-based spare parts a few years before, made approximately $6.4 billion on a $54 million investment.
The venture capitalist behind the deal was William H. Janeway. And in his book Doing Capitalism in the Innovation Economy: Markets, Speculation, and the State, he tells the story of how he did it. That’s fas-cinating in itself, but more interest-ing still is how he explains the eco-nomics that permitted the feat.
Janeway is not just another suc-cessful businessman. The valedic-torian of his class at Princeton Uni-versity, in 1965 he went off to Cambridge University as a Marshall Scholar. Janeway planned an aca-demic career in economics, but his literary dissertation (on the econom-ic policies of the U.K.’s Labor gov-ernment of 1929–31) placed him on the sidelines of a discipline that “was then accelerating its transition to formal methods, mathematical
The Org is as factual and ambiguous and sane and irrational as the diverse orgs it surveys.
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models, and quantitative tech-niques.” So after earning his Ph.D., Janeway joined a small Wall Street firm instead. Forty years later, with Doing Capitalism, he has returned to his first love.
The first half of Janeway’s book is semiautobiographical, a vivid tour of the transformations that he wit-nessed following the deregulation on Wall Street after May Day 1975. This was when traditional invest-ment banking, heavily influenced by the experience of the Great Depres-sion and protected from competi-tion, gave way to a period of pell-mell innovation that ultimately produced the financial crisis of 2008. It retraces Wall Street’s grad-ual discovery of the computer and the Internet, taking the reader to school on every deal, good and bad, until the story of BEA provides a thrilling climax—a $120 to $1 pay-out that is about as good as it gets in the venture capitalist’s world.
The second half of the book is a lucid meditation on the inevitability of financial bubbles and the large losses they entail. Over the years, Janeway spent his evenings reading Marx, Keynes, Schumpeter, and Fernand Braudel, a French histor-
ian. He became a board colleague and friend of Hyman Minsky, the Levy Institute guru whose financial instability hypothesis motivated Charles P. Kindleberger to write Manias, Panics, and Crashes: A His-tory of Financial Crises (Basic Books, 1978). Janeway also immersed him-self in the history of technology, es-pecially the work of Carlota Perez.
Out of this cauldron comes Janeway’s overarching argument, as reflected in the book’s subtitle, Mar-kets, Speculation, and the State : Eco-nomic growth over the past 250 years is best understood as the prod-uct of a “three-player game.” In this game, the market economy and the state compete to direct the alloca-
tion of resources to new technolo-gies—to canals and waterpower in one century, to steam and electricity in the next, and to computers after that. Financial capitalism, the third player, which includes bankers of ev-ery sort, exploits the discontinuities that inevitably arise from such fo-cused investment. Then investors pile in, bubbles occur, crashes ensue, and a new economy is assembled, partly from the detritus of the binge. Thus, according to Janeway, bubbles are the necessary drivers of econom-ic progress, and financiers are the nurturers of growth, providing not just capital but crucial know-how.
BEA is a perfect example of how Janeway’s three-player game un-folds. The U.S. Defense Depart-ment funded the basic research that brought the Internet into existence.
AT&T built the key technology, the Unix computer operating system, but was unable to take advantage of its single most valuable asset once its monopoly was broken up. IBM, un-willing to cannibalize its proprietary products in order to enter the new world of open systems, retreated at a key moment. So Warburg Pincus and its managers were able to enter the fray, cobbling together a new company to meet a demand at just the right time and selling it to inves-tors. Larry Ellison then picked up BEA after the bubble burst, and folded it into his company, Oracle.
This narrative may be the right way to think about the last 40 years, but Janeway acknowledges that the
three-player game is not standard economics. That isn’t stopping him from predicting that the “low-car-bon economy” will be the “next new economy.” Nor is it stopping him from seeking to inflate the bubble that new economy could create by positioning climate change as an ex-ternal threat equal to Communism in the 20th century, and by suggest-ing that we turn energy policy into “the economic equivalent of war.” And so the three-player game begins again. +
David [email protected] the proprietor of www.economic principals.com, an independent economics journalism site. He covered economics for the Boston Globe for 22 years and is a two-time winner of financial journalism’s Gerald Loeb Award.
Bubbles are the necessary drivers of economic progress, and financiers are the nurturers of growth.
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Many-to-Many Manufacturing by Tom Igoe Makers: The New Industrial Revolution, by Chris Anderson, Crown Business, 2012
I f you’re looking for the future of manufacturing, Chris An-derson, former editor-in-chief
of Wired, would have you check the garage. In his latest book, Makers: The New Industrial Revolution, An-derson describes how inexpensive and increasingly sophisticated digi-tal fabrication tools, a growing cul-ture of do-it-yourself enthusiasts raised on the Internet, and the spread of open intellectual property practices are ushering in a new in-dustrial revolution.
What will this revolution look like? If Anderson is right, manufac-turing is seeing the beginning of a change that is analogous to the change already well under way in the media sector, in which large broadcasters—few-to-many content providers—now share their markets with many-to-many content provid-ers, such as app designers and e-book publishers.
Makers builds on the premise of Anderson’s first book, The Long Tail: Why the Future of Business Is Selling Less of More (Hyperion, 2006). In The Long Tail, he argued that although the highly networked digital economy might appear to be dominated by a few large players, a wealth of opportunity exists for small players because such an econ-omy does not require distribution scale to reach the ends of the de-mand curve. These opportunities, Anderson contends in his new book, are supporting the rise of the “maker” movement and changing
the face of manufacturing.The maker movement is native
to the Internet, over which weekend tinkerers share plans and post tutori-als in online forums. Fueled by websites like Instructables.com and publications like Make magazine, makers are not only making things for themselves and for their friends and colleagues, but also starting businesses that sell components, kits, and finished products.
Several maker businesses have become multimillion-dollar compa-nies in recent years. Anderson cites SparkFun, an electronics compo-nent manufacturer with annual rev-enues around US$30 million; Mak-erBot, a 3D printer maker that has attracted $10 million from investors, including Amazon’s Jeff Bezos; and 3D Robotics, which was poised to achieve more than $5 million in sales by the end of 2012. He offers no growth predictions for the maker movement, but clearly he is betting on it: In November 2012, Anderson left his job at Wired to be the full-time CEO of 3D Robotics, which he cofounded.
What’s different about maker companies, says Anderson, is that
they regard their customers as par-ticipants in the business. For in-stance, they publish the plans for their products online, because they know that eager customers will offer improvements. Some companies, such as 3D Robotics, reward or hire these customers for their contribu-tions. Anderson’s description of how his company integrates customers’ work is one of the stronger chapters in the book, and a useful read for any executive who wants to make community more than a buzzword.
Distributed knowledge isn’t the only factor contributing to the growth of the maker movement. In-expensive digital fabrication tools have played a huge role, and now makers are beginning to make their own 3D printers, laser cutters, and robot mills (see “A Strategist’s Guide to Digital Fabrication,” by Tom Igoe and Catarina Mota, s+b, Autumn 2011). Of course, they’re sharing the plans for these new tools online as well.
The impact of these develop-ments on manufacturing could be significant. Launching a successful manufacturing company no longer requires reaching a mass market, as long as you can reach the right customers, wherever they are. Crowdfunding, through presales on such sites as Kickstarter.com and Launcht.com, is making it possible for manufacturing startups to raise their initial capital without selling ownership stakes to venture capital-ists. Online marketplaces—for ex-ample, Etsy.com and Fab.com—are giving unknown designers a greater ability to reach their target audienc-es, and supplier aggregators such as MFG.com and Alibaba.com make it possible for a garage shop to work with vendors around the world.
Anderson recognizes that the
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Skill or Luck? by David K. Hurst The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, by Michael J. Mauboussin, Harvard Business Review Press, 2012
H umans are compulsive makers of meaning. The notion that the universe
is random and that our activities might be insignificant is profoundly disturbing to us. So we construct webs of cause and effect to explain events and reassure ourselves that we are in charge of our lives. In doing so, says Michael J. Mauboussin, chief investment strategist at Legg Mason Capital Management, we of-ten confuse skill and luck, setting ourselves up for future failures.
Mauboussin’s new book, The Success Equation: Untangling Skill and Luck in Business, Sports, and In-vesting, aims to help us untangle the two. It offers this rough-and-ready
test for discerning the difference be-tween skill and luck in any given event: Ask yourself if you can lose on purpose. If you can, skill is involved; if you can’t, it’s pure luck. For a more mathematical assessment, figure out the correlation between a supposed cause and its effect. If the correlation is high, the cause is likely related to a skill, and a good process will usually
have a good outcome. If the correla-tion is low, luck plays a larger role in the outcome, and a good process will produce good results only over time—a feature of the investment field, where luck features promi-nently in short-term results.
Statistics play a large role in the book, but as its subtitle promises, Mauboussin illuminates the math with stories from business, sports, and investing. The first three chap-ters explain why even the most so-phisticated researchers can have a hard time distinguishing between luck and skill. The results of obser-vational studies in medical research, for example, are either false or sig-nificantly exaggerated more than 80 percent of the time. More rigorous, randomized studies prove to be more valid, but even their results are flawed 25 percent of the time.
In the next four chapters, Mau-boussin discusses the analytical tools required to distinguish skill from luck and to better understand the “arc of skill,” that is, how skill de-clines over time. He predicts that
outfielder Jayson Werth, who, in 2011 at age 31, received a US$126 million, seven-year contract from the Washington Nationals, will prove a poor investment: The per-formance of baseball players peaks when they are between the ages of 27 and 29, and declines thereafter. Similarly, statistical analysis offers clear evidence that corporate perfor-
world of makers isn’t a utopia. Yes, makers create jobs. But, he notes, “It’s actually more correct to say that small businesses destroy a lot of jobs that they create, since most small businesses fail before their third year.” A global network of small sup-pliers is likewise fragile. Its transport infrastructure is subject to the whims of an increasingly volatile cli-mate and political upheavals, and small companies don’t have the pull that large ones do to put pressure on their shippers when things go wrong. What makes this situation work for small businesses is not that it’s perfect, but that it’s good enough. If part of their infrastructure fails them, they innovate to get around it. It’s the momentum, not the stability, that Anderson is banking on to cre-ate growth.
To avoid disruptions, large manufacturers would do well to keep an eye on the maker move-ment. “General Motors and General Electric aren’t going away,” says Chris Anderson, “but then again, neither did AT&T and BT when the Web arose.” Telecommunica-tions companies are now platforms for many-to-many communication and for innovation. Small Internet service providers are their custom-ers, not their competitors. It’s a good lesson for manufacturers: Those companies that see themselves as platforms for innovation will do best in a many-to-many market. +
Tom Igoe [email protected] is an associate professor at New York University’s Interactive Telecommunica-tions Program (NYU-ITP) and is co-creator of Arduino LLC, an open source micro-controller development platform. He is the coauthor of Physical Computing: Sensing and Controlling the Physical World with Computers (with Dan O’Sullivan, Thomson, 2004) and author of Making Things Talk (O’Reilly Media, 2007).
Mauboussin’s new book offers this test: Ask yourself if you can lose on purpose. If you can, skill is involved; if you can’t, it’s pure luck.
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mance follows a predictable life cy-cle, falling prey to organizational rigidities as companies age.
In the book’s last four chapters, Mauboussin makes practical recom-mendations for business leaders. For example, managers should make sure that their statistics are reliable and valid. He notes that 70 percent of companies don’t know if their nonfinancial measures are stable and predictive of the outcomes they want. They should also be aware of reversion to the mean. When an ac-tivity is a mixture of luck and skill, extreme performances, either good or bad, tend to be followed by less extreme ones—hence, they tend to revert to the mean. So, if you praise someone for a good performance and his subsequent performance de-clines or if you criticize someone for a bad performance and he improves, you might conclude that your inter-vention had been counterproductive in the former case and beneficial in the latter. And you could be wrong in both cases!
Mauboussin goes on to advise leaders to match their improvement technique to the situation. When skill plays a large role in an activity, you can affect outcomes with delib-
erate practice and timely, specific feedback. When luck predominates, however, you should concentrate on the process to ensure acceptable re-sults over the long run. Use check-lists to help focus attention on the process and ensure that it is fol-lowed. Moreover, leaders should choose their competitive responses based on their strength relative to their opponent’s in a specific situa-tion. When you are stronger than your opponent, restrict the number and variety of encounters, and keep the game simple. When you are weaker, increase the number of en-counters and complicate the game.
These ideas may already be fa-miliar to some readers; indeed, there is little in The Success Equation that has not been said before in other works. (The book also gives no “equation” for success.) Neverthe-less, the clarity of Mauboussin’s writing and the quality of the ex-amples make the book a worthy ad-dition to the managerial library. +
David K. [email protected] is a contributing editor of s+b. His latest book is The New Ecology of Leadership: Business Mastery in a Chaotic World (Columbia Business School Publishing, 2012).
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Title: Bottom-Up Corporate GovernanceAuthors: Augustin Landier (Toulouse School of Economics), Julien Sauvagnat (Toulouse School of Economics), David Sraer (Princeton University), and David Thesmar (HEC Paris)Publisher: Review of Finance, vol. 17, no. 1Date Published: January 2013
Need new evidence on the value of speaking truth to power? According to a recent study, firms with more “independent” top executives—those appointed before the current CEO took over—exhibit superior decision making, see better returns following large acquisitions, and post higher profits. The study’s authors say the implication is clear: These leaders can act as a powerful counter-balance to and disciplining force on their CEO, irrespective of organiza-tion hierarchy.
Previous research has shown that in the absence of effective monitor-ing, CEOs often engage in self-inter-ested strategies that prove damaging to shareholders. The consensus rec-ommendation has been to install
strong boards of directors. But evi-dence that independent boards boost performance is lacking. Not so with independence in the executive suite, which this paper finds is a “strong predictor” of positive performance.
The authors looked at five data sets collected between 1992 and 2009 that covered some 1,850 of the largest U.S. corporations each year. They calculated how many high-ranking subordinates came aboard after the then current CEO’s ap-pointment, reasoning that these ex-ecutives would be more disposed to share their leader’s outlook, and less likely to challenge him or her, than those who worked under a predeces-sor. Controlling for a variety of fac-tors, they found that even the small-est uptick in the nonindependence of executives caused a decrease in the firm’s annual return on assets of be-tween 0.5 and 0.8 percentage points.
The authors also examined all acquisitions above US$300 million. Although acquisitions, on average, led to decreases in shareholder value for the companies in the study, firms with fewer independent top subordi-nates fared much worse, losing about 45 percent four years after they made
an acquisition, almost triple the 16 percent loss posted by firms with more of those executives.
The authors explain that CEOs typically interact with members of the executive suite daily, in contrast to their dealings with board mem-bers, who meet infrequently—mean-ing that CEOs must continually weigh their subordinates’ opinions. Through that steady connection, in-dependent subordinates can subtly affect their firm’s strategic direction.
Because of the value of such “bottom-up governance,” the au-thors write, “the human resource role of the board should not be limited to the usually emphasized CEO succession problem, but should also be concerned with the choice of key executives.”
Bottom Line: Having a high number of independent senior leaders is an effective way to keep the CEO on a tighter leash and produce better returns. +
The Power of “Independent” Senior Executives
Top leaders appointed by previous CEOs can help rein in the incumbent.
BY MATT PALMQUIST
s+b Recent Research Online
See more coverage of research papers— including our complete archive—at strategy-business.com/recent_research. Ill
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A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
REDEFINING CAPITAL: HOW GE CAPITAL SHARES GE INSIGHTS AND EXPERTISE TO HELP ITS CUSTOMERS BUILD BETTER BUSINESSES
The latest frontier in knowledge management is to not merely manage knowledge internally but externally as well. The best organizations share knowledge with their customers by providing the tools, processes, metrics, and other techniques they need to help grow their business. It seems counterintuitive, but these companies seek to give away some of their best ideas—unique and often proprietary insights—under the rationale that it’s not what you know that truly matters, it’s what your customer knows. That said, external knowledge management is a challenge. How do you share what you know with your customers? How do you step outside your role as a service provider and become an integral part of your
client’s business? GE Capital offers a case study in how to make it happen.
Access GE
Access GE is the company’s initiative in customer-oriented knowledge management. The program connects the customers of GE Capital—mostly fast-growing midsized companies—with the knowledge and expertise from all corners of GE. Essentially, GE Capital’s relationship managers sit down with their clients and say, “Here’s what we know—now how can that knowledge help your company? Or, What are your challenges to success so we can see how else we can help your business?” It’s part of GE Capital’s ongoing
The idea of knowledge management has been around for more than a decade, and like many ideas, it has morphed over time. However, the basic principle—that in an information economy, ideas and expertise are the real high-value assets—
becomes more valid with each passing year. GE is a pioneer in knowledge sharing, which is how a company that has operations spanning a range of sectors, from aviation to medical equipment to consumer goods and finance, can thrive. Similarly, career paths at GE often span business units, markets, and functions, as a way to ensure that the best ideas spread.
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A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
and the channels through which they want to receive that information. GE Capital provides a sampling of key content offerings from the portal and offers them on a free Access GE app, which is available on both the Apple and Android platforms. The Access GE portal includes several categories of content—all vetted by senior leaders within GE. The vetting process itself refl ects the commitment to this program at the highest levels of GE management. The fi rst content category contains internal material from GE, including intelligence and data on specifi c geographic markets and industries, along with white papers, case studies, diagnostic tools and assessments, Webinars, and videos. The second content category contains externally-sourced thought leadership material from GE Capital’s highly-valued partnerships including Booz & Company, Harvard Business Review, McKinsey & Company, Deloitte, the Economist Intelligence Unit, and others. All are indexed and fully searchable by topic. These
effort to be more than a fi nance provider for its clients. As the company puts it, “We’re not just bankers, we’re builders.” This has long happened within GE Capital on an informal level. The engagements were driven primarily by the GE Capital sales staff and designated leaders in specifi c markets, but there was no central, comprehensive database of experts encompassing all areas of GE. There also wasn’t a way for customers to access any of the information themselves. So a few years ago, the company began making this process far more systematic and formal, to allow for scale across GE businesses and geographies. After all, if internal knowledge management requires dedicated efforts and resources—along with specifi c mechanisms to foster collaboration—external knowledge management with customers should as well. The result is Access GE, which turns knowledge management around and considers business-critical insights from the customer’s perspective. What are the most salient issues that midsized companies wrestle with? For some organizations, it could be entering new markets, or segmenting customer prospects. For others, it could be hiring, retaining, and developing talent. For still others it could be reducing costs, improving manufacturing processes, or strengthening risk-management capabilities. Access GE organizes those topics into four broad areas where customer needs are greatest and GE can offer the most impactful expertise: growth and innovation, operational effectiveness, leadership development, and fi nance best practices. Channels are critical as well. GE still shares knowledge with its GE Capital customers over the phone or in face-to-face meetings, but advances in technology allow new ways to tap into this expertise, by offering access above and beyond the human component. The latest Access GE offering is a web portal, which gives clients access to more information than ever before, in various formats: externally sourced, internally sourced (i.e., material from experts within GE), and personal interactions. It’s a buffet of information, where GE Capital clients have multiple options both in the areas they need the most help with,
The Access GE App, at app.accessge.com
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A GE CAPITAL SPONSORED SECTION PRESENTED BY STRATEGY+BUSINESS
A Composites Horizons technician tests a component before it goes into the company’s high-temperature autoclave
fi rst two categories allow GE Capital customers to “self-serve” from the buffet, by tapping into the material that best addresses their needs. The portal also offers access to more than 400 GE experts, who work with GE Capital clients through one-on-one consultations, and also offer broader workshops or online community events. Last, the portal includes a social networking component, so that GE Capital clients can communicate directly with their peers—other mid-market companies—in order to share ideas, talk through specifi c issues, and brainstorm solutions. (In that way, the portal is a platform for fostering knowledge management among GE Capital’s customers.) Bottom line? Access GE represents a bold proposal that GE Capital can win in the marketplace by helping its clients win. Greater customer satisfaction among GE Capital clients—along with improved business results—will lead to stronger banking relationships, and a banking experience that is different from anything else out there in the mid-market space. Perhaps the best illustration of how Access GE works is to show how it has helped two specifi c companies.
Case Study: AIP Aerospace
AIP Aerospace is a mini-conglomerate of manufacturers: fi ve divisions spread across California, Michigan, and Texas, with about $210 million in annual sales. One of those divisions is Composites Horizons, a company in Covina, California, that supplies aviation components. As the name indicates, its specialty is composites, or lightweight, high-temperature, high-strength parts that have replaced metals in many areas of commercial and military gas turbine engines. These parts have extremely rigorous quality standards that match the demand of today’s highest performance engines. The temperature of the combustion chamber in modern jet engines can approach 2,000 degrees Celsius (or about 3,500 degrees Fahrenheit), and these engines are rated to last several thousand hours before requiring maintenance. High temperature composites have found their way into these engines both upstream of the combustor in the fan, and downstream in the bypass and external exhaust structures.
For the past 20 years, Composites Horizons has supplied GE’s aviation unit, where its products go into the engines for aircraft like the F/A-18 military jet, the Boeing 777, and the Boeing 787. About two years ago, Composites Horizons had an opportunity to expand that relationship. GE’s aviation unit was about to stop manufacturing a critical engine part internally, and it sought outside vendors to make the part instead. Composites Horizons won the bid, which was good news, but the contract also presented some challenges due to the complexity of the component, the variability of the materials involved, and the signifi cant demand for this part. To prepare for this program, Composites Horizons invested in new equipment, including an autoclave, akin to a giant oven that can “bake” components under high temperature and pressure, a necessary step when working with polymers and other advanced materials. The company used GE Capital to fi nance the equipment, and the GE senior relationship manager also realized that the expansion would require bringing more electrical power into the facility. Composites Horizons already had an order in place for the electrical distribution panel, but GE sold a similar unit (through its GE Energy division), which met the same specifi cations yet cost 30 percent less. Composites Horizons selected the GE product, which established immediate credibility for GE Capital.
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Access GE organizes knowledge by principal customer needs and sub-categories
CUSTOMER NEEDS ORGANIZATION FRAMEWORK
• Grow sales and explore new markets
• Manage costs
• Manage regulatory, market, and competitive dynamics
• Hire, develop, and retain talent
• Learn more about a market or industry
• Strengthen and grow my customer relationships
• Develop myself as a leader and build a strong team
• Plan and integrate a merger/acquisition
• Increase operational effectiveness and productivity
• Build a best-in-class finance function
GROWTHOPERATIONAL
EFFECTIVENESSLEADERSHIP
DEVELOPMENTFINANCE BEST
PRACTICES
Organization
People & Leadership
OperationsManagement
ProcessImprovement
Sourcing
InformationTechnology
Innovation
M&A
Sales &Marketing
Strategy
FinancialPlanning
InvestorRelations &Governance
RiskManagement& Compliance
Treasury &Investment
GLOBALIZATION
But the Access GE component was where the relationship really accelerated. First, GE conducted an energy audit, to ensure that Composites Horizons was being as effi cient as possible in its use of electricity, water, and other resources. GE calls the process an “Eco Treasure Hunt,” in that the goal is to identify areas of savings that collectively add up to real value. Some Eco Treasure Hunts have yielded millions in annual savings. Next, Composites Horizons needed some help with its manufacturing processes. The new component required advanced engineering and a series of complex manufacturing steps. Early on, Composites Horizons was having a hard time meeting demand. “We knew we had some bottlenecks,” said Jeff Hynes, president of Composites Horizons. “We were struggling to produce seven units a month.” Through the Access GE program, Composites Horizons requested some help from GE regarding lean manufacturing techniques, to identify and eliminate any ineffi ciencies in the production process. Composites Horizons had worked to implement
lean manufacturing in the past, dating all the way back to 1999, and while those efforts had generated some progress, they hadn’t really transformed the company’s operations. At GE, lean manufacturing is a major part of how the company functions on a day-to-day basis. It has 3,000 employees who have earned the highest possible lean certifi cation, and nearly 30 years of experience working with lean tools and techniques. As part of the Access GE engagement, several GE experts in lean manufacturing worked on-site with Composites Horizons to analyze the way the new part was being produced. The problem? Composites Horizons hadn’t yet standardized its manufacturing for the new part, which had some tricky aspects. The company still had factory workers shepherding the component through each production step. “There’s a thermal process, a vacuum process, and some other things, and it all has to happen in a very specifi c sequence,” said Hynes. “That meant we had a lot of dead time between steps.” To change that, the GE team helped Composites
Once Composites Horizons reoriented its production process, it quickly went from shipping seven units a month to 15, and downtime for the company’s new equipment was reduced by 45 percent, from 18 hours to 10 hours per month.
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Ashley has more than 400 retail furniture stores
corporate fi nance, and leader of two units—U.S. aerospace and defense specialty—puts it, “At GE, we have a $50 billion commitment to the aviation market. So I understand the needs of our clients. Customers don’t have to explain to me what composite material is. With other bankers, you’d have to start on page one, but I’m already with you on page 50.” These advantages have helped Composites Horizons—and all of AIP Aerospace—signifi cantly increase its operational prowess. “For any U.S.-based manufacturing company,” said Hynes, “if you cannot be smarter in how you do things, it’s only a matter of time before you’ll lose out to lower costs overseas.” Access GE has been a critical part of that improvement process.
Case Study: Ashley Furniture
Based in Arcadia, Wisconsin, Ashley Furniture has grown from a small manufacturer specializing in occasional tables and wall units to the number one furniture retailer in the United States and the world’s largest furniture manufacturer. With fi ve production facilities in the U.S., four overseas, and 470 owned and licensed retail stores, the company has about $4 billion in annual sales (up from just $900 million in 2000). For the past two years, GE Capital’s Retail Finance unit has been working with Ashley to help its
Horizons establish a standard work process for the component, similar to an assembly line. They identifi ed each step, how long it should take, and how the steps should be staggered to ensure that the facility was operating at maximum capacity. The team even implemented a Takt clock, a standard lean technique that calibrates ideal production to actual customer demand (instead of simply producing as many units as possible, or as fast as possible), and determines the right amount of time for each step. Once Composites Horizons reoriented its production process, the results showed up immediately. Instead of struggling to ship seven units a month, Composites Horizons quickly started shipping 15. And soon thereafter, the company was on track to ship 20. Not only is it now meeting its contract demands, it’s also producing buffer stock for the U.S. military. At the same time, downtime for the company’s new equipment was reduced by 45 percent, from 18 hours to 10 hours per month. Composites Horizons now has a full-time manager on staff who is solely responsible for lean manufacturing techniques, with the title of “director of continuous improvement.” That role has helped the company improve its operations. “It’s become part of the culture,” said Hynes. Through Access GE, several other divisions within AIP Aerospace tapped into GE’s institutional expertise as well. One sought advice on how to improve machine accuracy, through better calibration. GE Capital even set up a meeting between a divisional CEO and GE’s director of commercial aviation in China, to discuss potential joint ventures in that market; those conversations are still ongoing. In a way, the aviation market is one of many sweet spots for GE Capital, given the company’s expertise in that industry. GE developed the fi rst jet engine in the U.S., and its products propel commercial and military jets around the world. (One of its engines, the CF6, fi rst entered the market in 1971, and upgrades of that engine are still in the air today, in planes like the Airbus 330 and Boeing 767; in all, the CF6 family has more than 367 million fl ight hours.) As Gib Bosworth, senior vice president at GE Capital,
Ashley is poised for a major global growth phase, which requires that it develop current and future leaders to oversee the expansion. A key part of this is to benchmark with organizations that have a strong reputation for developing leaders.
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customers finance their purchases. Recently, GE launched several Access GE engagements with Ashley primarily in leadership development. Ashley is poised for a major global growth phase, which requires that it develop current and future leaders to oversee the expansion. A key part of this strategy is to benchmark with outside organizations that have a strong reputation for developing leaders. GE takes leadership seriously and knows how to cultivate those attributes in its people. Some 90 percent of the company’s top executives have been promoted from within the organization. It was voted one of the 20 Best Companies for Leadership (Business Week 2011) and No. 1 Company for Leaders (Forbes/Hay Group 2012). And its investments reflect this emphasis: GE makes a significant investment in employee training and development each year. In January 2013, Todd Wanek, Ashley’s owner and CEO, brought several executives from the company’s HR, strategic planning, and continuous improvement groups to GE’s Leadership Development Center in Crotonville, N.Y., for a day-long session. The session was led by Cynthia Tragge-Lakra, executive vice president, human resources, GE Capital Retail Finance, and it focused on GE’s leadership philosophy, the organizational structure that supports it, and the process that GE went through to make leadership development a top priority. The session was partly built around some existing materials that GE uses to communicate these ideas to its customers, but much of it was a closed-door, frank discussion about GE’s successes and failures in implementing similar measures. Overall, the experience gave Ashley critical insights and some clear first steps—develop an operational calendar that defines specific objectives by month, solidify organizational values, rebuild existing performance management and succession planning programs. Ashley prides itself on its heritage. Its mission statement is straightforward—“We want to be the best furniture company”—and its business model is built on four pillars: quality, style, selection, and service. By integrating these components into its performance management, Ashley is now realigning its organization
and management methods on the expectations of its customers: efficiency, speed, quality, and great service, all at a great price. Employee assessment was also a major part of the discussion. Until then, Ashley had been using relatively basic metrics to gauge performance—e.g., did the employee hit his or her operational goals for the year?—with no explicit links into its values. That approach worked at a basic level, as evidenced by the company’s sales growth over the past decade, but if Ashley was to succeed in the coming expansion phase, it would need to establish some clear strategic objectives and ensure that the entire organization was growing in the same direction. There was even an architectural component to the session. Because Ashley is adapting to the challenges of the 21st-century workforce, it is considering building its own internal training center. To that end, Ashley’s executives spent time studying the design of GE’s Crotonville facility, including the ceiling height, type of lighting, arrangement of desks around a central recess in classroom floors, and other aspects. The goal was to take away anything that would help create an environment that’s more conducive to collaborative learning, instead of the traditional lecture-style format. Several months later, Ashley planned to bring back a larger contingent to GE’s Crotonville facility—including some of its retail store owners and operators—for an expanded version of the session. Todd Wanek explained, “Access GE has been a great resource for us as we ramp up our own best practices in leadership development.”
Conclusion
There are many other customer success stories; Access GE completed more than 1,000 engagements with GE Capital clients in 2012 alone. While they range across the four main areas of expertise—operational effectiveness, growth and innovation, leadership development, and finance best practices—they’re all supported by a common foundation that is sharing GE’s expertise, tools, and insights to add value for GE Capital customers that goes far beyond financing.
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